Ch13 Relevant Cost

http://www.docuter.com/viewer.asp?

document=7768522164c02a6db18df01275242203&Ch13%20Relevant%20cost

True/False Questions

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

Ans: False AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Decision Making; Reporting LO: 1 Level: Medium

2. All costs are avoidable in a decision except sunk costs and future costs that do not differ between the alternatives at hand.

Ans: True AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Decision Making; Reporting LO: 1 Level: Easy

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

Ans: False AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making; Reporting LO: 1 Level: Medium

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


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


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


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

Ans: False AACSB: Analytic AICPA BB: Critical Thinking

http://www.docuter.com/viewer.asp?document=7768522164c02a6db18df01275242203&Ch13%20Relevant%20cost

http://www.docuter.com/viewer.asp?document=7768522164c02a6db18df01275242203&Ch13%20Relevant%20cost

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

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

Ans: False AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Decision Making; Reporting LO: 2 Level: Easy

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

Ans: False AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making; Reporting LO: 4 Level: Medium

10. When a company has a production constraint, total contribution margin will be maximized by emphasizing the products with the highest contribution margin per unit of the constrained resource.


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

Ans: True AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making; Reporting LO: 5 Level: Medium

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


13. As a general guide, it is profitable to continue processing joint products after the split-off point if their total revenues exceed the joint costs.

Ans: False AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Decision Making; Reporting LO: 6 Level: Medium

14. Joint costs are irrelevant in the decision of whether to sell a joint product at the split-off point or process it further and then sell it.


15. A key advantage of using activity-based costing is that any cost that is assigned to a product is also a relevant cost in any decision involving that product.

Ans: False AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Decision Making; Reporting LO: 1 Level: Easy

Multiple Choice Questions

16. Costs which can be eliminated in whole or in part if a particular business segment is discontinued are called:A) sunk costs.B) opportunity costs.C) avoidable costs.D) irrelevant costs.

Ans: C AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Decision Making; Reporting LO: 1 Level: Easy

17. Consider the following statements:

I. Assemble all costs associated with each alternative being considered.II. Eliminate those costs that are sunk.III. Eliminate those costs that differ between alternatives.

Which of the above statements does not represent a step in identifying the relevant costs in a decision problem?A) Only IB) Only IIC) Only IIID) Only I and III

Ans: C AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Decision Making; Reporting LO: 1 Level: Easy

18. Which of the following cash flows is relevant in a decision about accepting Alternative X or Alternative Y?A) a cash inflow for Alternative X that is not a cash inflow for Alternative Y.B) a cash inflow that is lost if Alternative X is accepted and is not lost if

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

Alternative Y is accepted.D) all of the above.

Ans: D AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Decision Making; Reporting LO: 1 Level: Medium

19. Which of the following best describes an opportunity cost:A) it is a relevant cost in decision making, but is not part of the traditional

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

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

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

accounting records.

Ans: A AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Decision Making; Reporting LO: 1 Level: Medium Source: CPA, adapted

20. Consider the following statements:

I. A division's net operating income, after deducting both traceable and allocated common corporate costs, is negative.

II. The division's avoidable fixed costs exceed its contribution margin.III. The division's traceable fixed costs plus its allocated common corporate costs

exceed its contribution margin.

Which of the above statements give an economic reason for eliminating the division?A) Only IB) Only IIC) Only IIID) Only I and II

Ans: B AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making; Reporting LO: 2 Level: Easy

21. The Jabba Company manufactures the “Snack Buster” which consists of a wooden snack chip bowl with an attached porcelain dip bowl. Which of the following would be relevant in Jabba's decision to make the dip bowls or buy them from an outside supplier?

Fixed overhead cost The variablethat can be eliminated if sellingthe bowls are purchased cost of thefrom the outside supplier Snack Buster

A) Yes YesB) Yes NoC) No YesD) No No

Ans: B AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making; Reporting LO: 3 Level: Medium

22. The acceptance of a special order will improve overall net operating income so long as the revenue from the special order exceeds:A) the contribution margin on the order.B) the incremental costs associated with the order.C) the variable costs associated with the order.D) the sunk costs associated with the order.


23. Kinsi Corporation manufactures five different products. All five of these products must pass through a stamping machine in its fabrication department. This machine is Kinsi's constrained resource. Kinsi would make the most profit if it produces the product that:A) uses the lowest number of stamping machine hours.B) generates the highest contribution margin per unit.C) generates the highest contribution margin ratio.D) generates the highest contribution margin per stamping machine hour.

Ans: D AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making; Reporting LO: 5 Level: Medium

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

I. A variable production cost incurred prior to split-off.II. A variable production cost incurred after split-off.III. An avoidable fixed production cost incurred after split-off.

Which of the above costs is (are) not relevant in a decision regarding whether the product should be processed further?A) Only IB) Only IIIC) Only I and IID) Only I and III

Ans: A AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making; Reporting LO: 6 Level: Easy

25. Gandy Company has 5,000 obsolete desk lamps that are carried in inventory at a manufacturing cost of $50,000. If the lamps are reworked for $20,000, they could be sold for $35,000. Alternatively, the lamps could be sold for $8,000 for scrap. In a decision model analyzing these alternatives, the sunk cost would be:A) $8,000B) $15,000C) $20,000D) $50,000

Ans: D AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making; Reporting LO: 1 Level: Easy Source: CPA, adapted

26. Hodge Inc. has some material that originally cost $74,600. The material has a scrap value of $57,400 as is, but if reworked at a cost of $1,500, it could be sold for $54,400. What would be the incremental effect on the company's overall profit of reworking and selling the material rather than selling it as is as scrap?A) -$79,100B) -$21,700C) -$4,500D) $52,900

Ans: C AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making; Reporting LO: 1 Level: Medium Source: CIMA, adapted

Solution:

Incremental revenue from reworking ($54,400 − $1,500). $52,900Less incremental revenue from selling as scrap................ 57,400Net loss from reworking.................................................... ($ 4,500)

27. Milford Corporation has in stock 16,100 kilograms of material R that it bought five years ago for $5.75 per kilogram. This raw material was purchased to use in a product line that has been discontinued. Material R can be sold as is for scrap for $3.91 per kilogram. An alternative would be to use material R in one of the company's current products, S88Y, which currently requires 2 kilograms of a raw material that is available for $7.60 per kilogram. Material R can be modified at a cost of $0.77 per kilogram so that it can be used as a substitute for this material in the production of product S88Y. However, after modification, 4 kilograms of material R is required for every unit of product S88Y that is produced. Milford Corporation has now received a request from a company that could use material R in its production process. Assuming that Milford Corporation could use all of its stock of material R to make product S88Y or the company could sell all of its stock of the material at the current scrap price of $3.91 per kilogram, what is the minimum acceptable selling price of material R to the company that could use material R in its own production process?A) $0.88B) $3.03C) $4.57D) $3.91

Ans: D AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making; Reporting LO: 1 Level: Hard Source: CIMA, adapted

Solution:

Product S88Y:Current cost (2 kg @ $7.60): $15.20If material R were used, 4 kilograms would be needed. It currently costs $15.20 for Product S88Y; to maintain this same cost, material R would need to cost $3.03 per kilogram [($15.20 ÷ 4 kg) − $0.77]. The company should sell material R for $3.91 per kilogram.

28. Otool Inc. is considering using stocks of an old raw material in a special project. The special project would require all 240 kilograms of the raw material that are in stock and that originally cost the company $2,112 in total. If the company were to buy new supplies of this raw material on the open market, it would cost $9.25 per kilogram. However, the company has no other use for this raw material and would sell it at the discounted price of $8.35 per kilogram if it were not used in the special project. The sale of the raw material would involve delivery to the purchaser at a total cost of $71.00 for all 240 kilograms. What is the relevant cost of the 240 kilograms of the raw material when deciding whether to proceed with the special project?A) $1,933B) $2,004C) $2,220D) $2,112

Ans: A AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making; Reporting LO: 1 Level: Hard Source: CIMA, adapted

Solution:

Opportunity cost of sales foregone if special project is undertaken ($8.35 × 240)............................................... $2,004

Less: delivery cost.............................................................. 71Relevant cost of 240 kilograms of raw material................ $1,933

29. Hamby Corporation is preparing a bid for a special order that would require 780 liters of material W34C. The company already has 640 liters of this raw material in stock that originally cost $8.30 per liter. Material W34C is used in the company's main product and is replenished on a periodic basis. The resale value of the existing stock of the material is $7.60 per liter. New stocks of the material can be readily purchased for $8.35 per liter. What is the relevant cost of the 780 liters of the raw material when deciding how much to bid on the special order?A) $6,481B) $6,376C) $6,513D) $5,928

Ans: C AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making; Reporting LO: 1 Level: Hard Source: CIMA, adapted

Solution:

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

30. Schickel Inc. regularly uses material B39U and currently has in stock 460 liters of the material for which it paid $3,128 several weeks ago. If this were to be sold as is on the open market as surplus material, it would fetch $5.95 per liter. New stocks of the material can be purchased on the open market for $6.45 per liter, but it must be purchased in lots of 1,000 liters. You have been asked to determine the relevant cost of 760 liters of the material to be used in a job for a customer. The relevant cost of the 760 liters of material B39U is:A) $4,902B) $4,672C) $4,522D) $6,450


Solution:

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

31. Munafo Corporation is a specialty component manufacturer with idle capacity. Management would like to use its extra capacity to generate additional profits. A potential customer has offered to buy 6,500 units of component VGI. Each unit of VGI requires 1 unit of material I57 and 5 units of material M97. Data concerning these two materials follow:

MaterialUnits in Stock

Original Cost Per

Unit

Current Market Price

Per Unit

Disposal Value

Per UnitI57........ 2,400 $9.10 $9.40 $8.95M97...... 33,960 $4.70 $4.70 $3.50

Material I57 is in use in many of the company's products and is routinely replenished. Material M97 is no longer used by the company in any of its normal products and existing stocks would not be replenished once they are used up.

What would be the relevant cost of the materials, in total, for purposes of determining a minimum acceptable price for the order for product VGI?A) $174,850B) $213,130C) $213,850D) $171,925


Solution:

Material# Required

per unitRelevant

price TotalI57................ 1 × $9.40 = $ 9.40M97.............. 5 × $3.50 = 17.50Total per unit relevant cost...................... $26.90

Minimum acceptable price for 6,500 units of VGI =$26.90 per unit × 6,500 units = $174,850

32. Winder Corporation is a specialty component manufacturer with idle capacity. Management would like to use its extra capacity to generate additional profits. A potential customer has offered to buy 3,000 units of component QEA. Each unit of QEA requires 5 units of material F85 and 5 units of material E71. Data concerning these two materials follow:

MaterialUnits in Stock

Original Cost Per

Unit

Current Market Price

Per Unit

Disposal Value Per

UnitF85............. 740 $4.90 $4.75 $4.20E71............. 13,680 $5.00 $4.70 $3.60

Material F85 is in use in many of the company's products and is routinely replenished. Material E71 is no longer used by the company in any of its normal products and existing stocks would not be replenished once they are used up.

What would be the relevant cost of the materials, in total, for purposes of determining a minimum acceptable price for the order for product QEA?A) $126,702B) $141,750C) $126,295D) $145,965


Solution:

Total needed Inventory

# of units to purchase on

marketRelevant

price Total cost

F85.............(3,000 × 5) =

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

E71.............(3,000 × 5) =

15,000(15,000 −

13,680) = 1,320 $4.70 6,20413,680 $3.60 49,248

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

33. Rice Corporation currently operates two divisions which had operating results last year as follows:

West TroyDivision Division

Sales........................................................... $600,000 $300,000Variable costs............................................. 310,000 200,000 Contribution margin................................... 290,000 100,000Traceable fixed costs.................................. 110,000 70,000Allocated common corporate costs............ 90,000 45,000 Net operating income (loss)....................... $ 90,000 ($ 15,000)

Since the Troy Division also sustained an operating loss in the prior year, Rice's president is considering the elimination of this division. Troy Division's traceable fixed costs could be avoided if the division were eliminated. The total common corporate costs would be unaffected by the decision. If the Troy Division had been eliminated at the beginning of last year, Rice Corporation's operating income for last year would have been:A) $15,000 higherB) $30,000 lowerC) $45,000 lowerD) $60,000 higher

Ans: B AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making; Reporting LO: 2 Level: Medium Source: CPA, adapted

Solution:

Troy Division:Contribution margin........................................................... $100,000Less: traceable fixed costs................................................. 70,000Segment margin of Troy Division..................................... $ 30,000

Rice Corporation’s operating income would have been $30,000 less without the segment margin contributed by the Troy Division.

34. Beaver Company (a multi-product firm) produces 5,000 units of Product X each year. Each unit of Product X sells for $8 and has a contribution margin of $5. If Product X is discontinued, $18,000 of fixed overhead would be eliminated. As a result of discontinuing Product X, the company's overall operating income would:A) decrease by $25,000B) increase by $43,000C) decrease by $7,000D) increase by $7,000

Ans: C AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making; Reporting LO: 2 Level: Medium

Solution:

Fixed overhead savings if Product X is eliminated........... $18,000Less: contribution margin lost if Product X is

discontinued ($5 × 5,000)............................................... 25,000Decrease in overall operating income if Product X is

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

35. Milli Company plans to discontinue a division that generates a total contribution margin of $20,000 per year. Fixed overhead associated with this division is $50,000, of which $5,000 cannot be eliminated. The effect of this discontinuance on Milli's operating income would be an increase of:A) $5,000B) $20,000C) $25,000D) $30,000

Ans: C AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making; Reporting LO: 2 Level: Medium Source: CPA, adapted

Solution:

Fixed overhead savings if division is discontinued........... $45,000Less: contribution margin lost if division is eliminated..... 20,000Increase in operating income if division is eliminated...... $25,000

36. ABD Realty manages five apartment complexes in its region. Shown below are summary income statements for each apartment complex:

U V W X Y

Rental income...........$1,00

0 $1,210 $2,347 $1,878 $1,065Expenses................... 800 1,300 2,600 2,400 1,300 Operating income...... $ 200 ($ 90) ($ 253) ($ 522) ($ 235)

Included in the expenses is $1,200 of common corporate expenses that have been allocated to the apartment complexes based on rental income. These common corporate expenses would have to be incurred regardless of how many apartment complexes ABD Realty manages. The apartment complex(es) that ABD Realty should consider dropping is (are):A) V, W, X, YB) W, X, YC) X, YD) X

Ans: C AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making; Reporting LO: 2 Level: Hard Source: CMA, adapted

Solution:

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

U V W X Y

Rental income...........$1,00

0 $1,210 $2,347 $1,878 $1,065Less expenses............ 800 1,300 2,600 2,400 1,300Add back proportional

share of common expenses [(Rental income in each column ÷ Total rental income of $7,500) × $1,200]* 160 194 376 300 170

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

*expenses rounded to nearest whole dollar

Since complexes X and Y have negative margins, ABD Realty should consider dropping those two divisions.

37. The following information relates to next year's projected operating results of the Children's Division of Grunge Clothing Corporation:

Contribution margin........... $200,000Fixed expenses................... 500,000 Net operating loss.............. ($300,000)

If Children's Division is dropped, half of the fixed costs above can be eliminated. What will be the effect on Grunge's profit next year if Children's Division is dropped instead of being kept?A) $50,000 increaseB) $250,000 increaseC) $250,000 decreaseD) $550,000 increase

Ans: A AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making; Reporting LO: 2 Level: Medium

Solution:Keep the Division

Drop the Division Difference

Contribution margin....................... $200,000 $ 0 ($200,000)Fixed expenses............................... 500,000 250,000 250,000 Net operating income (loss)........... ($300,000) ($250,000) ($ 50,000 )

Net operating income would increase by $50,000 if the Children’s Division were dropped. Therefore, the division should be dropped.

38. The management of Furrow Corporation is considering dropping product L07E. Data from the company's accounting system appear below:

Sales....................................................................... $830,000Variable expenses.................................................. $365,000Fixed manufacturing expenses............................... $291,000Fixed selling and administrative expenses............. $166,000

In the company's accounting system all fixed expenses of the company are fully allocated to products. Further investigation has revealed that $186,000 of the fixed manufacturing expenses and $106,000 of the fixed selling and administrative expenses are avoidable if product L07E is discontinued. What would be the effect on the company's overall net operating income if product L07E were dropped?A) Overall net operating income would increase by $8,000.B) Overall net operating income would decrease by $173,000.C) Overall net operating income would decrease by $8,000.D) Overall net operating income would increase by $173,000.


Solution:Keep the Product

Drop the Product Difference

Sales............................................... $830,000 $ 0 ($830,000)Variable expenses.......................... 365,000 0 365,000 Contribution margin....................... 465,000 0 (465,000)Fixed expenses:

Fixed manufacturing expenses.... 291,000 *105,000 186,000 Fixed selling and administrative

expenses.................................. 166,000 **60,000 106,000 Total fixed expenses...................... 457,000 165,000 292,000 Net operating income (loss)........... $ 8,000 ($165,000) ($173,000)

Net operating income would decline by $173,000 if product L07E were dropped. Therefore, the product should not be dropped.

*$291,000 − $186,000 = $105,000**$166,000 − $106,000 = $60,000

39. Product U23N has been considered a drag on profits at Jinkerson Corporation for some time and management is considering discontinuing the product altogether. Data from the company's accounting system appear below:


In the company's accounting system all fixed expenses of the company are fully allocated to products. Further investigation has revealed that $144,000 of the fixed manufacturing expenses and $93,000 of the fixed selling and administrative expenses are avoidable if product U23N is discontinued. What would be the effect on the company's overall net operating income if product U23N were dropped?A) Overall net operating income would increase by $15,000.B) Overall net operating income would increase by $143,000.C) Overall net operating income would decrease by $143,000.D) Overall net operating income would decrease by $15,000.

Ans: C AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making; Reporting LO: 2 Level: Easy



Sales............................................... $730,000 $ 0 ($730,000)Variable expenses.......................... 350,000 0 350,000 Contribution margin....................... 380,000 0 ( 380,000 )Fixed expenses:

Fixed manufacturing expenses.... 234,000 *90,000 144,000Fixed selling and administrative

expenses.................................. 161,000 **68,000 93,000 Total fixed expenses...................... 395,000 158,000 237,000 Net operating income (loss)........... ($ 15,000 ) ($ 158,000) ($143,000)

Net operating income would decline by $143,000 if product U23N were dropped. Therefore, the product should not be dropped.

*$234,000 − $144,000 = $90,000**$161,000 − $93,000 = $68,000

40. Supler Company produces a part used in the manufacture of one of its products. The unit product cost is $18, computed as follows:

Direct materials.......................................... $ 8Direct labor................................................ 4Variable manufacturing overhead.............. 1Fixed manufacturing overhead.................. 5 Unit product cost........................................ $18

An outside supplier has offered to provide the annual requirement of 4,000 of the parts for only $14 each. It is estimated that 60 percent of the fixed overhead cost above could be eliminated if the parts are purchased from the outside supplier. Based on these data, the per-unit dollar advantage or disadvantage of purchasing from the outside supplier would be:A) $1 disadvantageB) $1 advantageC) $2 advantageD) $4 disadvantage


Solution:

Relevant cost per unit:Direct materials................................................ $ 8Direct labor...................................................... 4Variable manufacturing overhead.................... 1Fixed manufacturing overhead ($5 × 0.60)..... 3 Relevant manufacturing cost........................... $16

Net advantage (disadvantage):Relevant manufacturing cost savings......... $16Less: cost from outside supplier................ 14Net advantage............................................. $ 2

41. Sharp Company produces 8,000 parts each year, which are used in the production of one of its products. The unit product cost of a part is $36, computed as follows:

Variable production costs........ $16Fixed production costs............. 20 Unit product cost...................... $36

The parts can be purchased from an outside supplier for only $28 each. The space in which the parts are now produced would be idle and fixed production costs would be reduced by one-fourth. If the parts are purchased from the outside supplier, the annual impact on the company's operating income will be:A) $24,000 increaseB) $24,000 decreaseC) $56,000 increaseD) $56,000 decrease


Solution:

Relevant cost per unit:Variable production costs................................ $16Fixed manufacturing overhead ($20 × 0.25). . . 5 Relevant manufacturing cost........................... $21

Relevant manufacturing cost savings ($21 × 8,000)............ $168,000Less: cost to purchase from outside supplier ($28 × 8,000). 224,000Net disadvantage of purchasing from outside supplier......... ($ 56,000)

42. Motor Company manufactures 10,000 units of Part M-l each year for use in its production. The following total costs were reported last year:

Direct materials.......................................... $ 20,000Direct labor................................................ 55,000Variable manufacturing overhead.............. 45,000Fixed manufacturing overhead.................. 70,000 Total manufacturing cost........................... $190,000

Valve Company has offered to sell Motor 10,000 units of Part M-l for $18 per unit. If Motor accepts the offer, some of the facilities presently used to manufacture Part M-l could be rented to a third party at an annual rental of $15,000. Additionally, $4 per unit of the fixed overhead applied to Part M-l would be totally eliminated. Should Motor Company accept Valve Company's offer, and why?A) No, because it would be $5,000 cheaper to make the part.B) Yes, because it would be $10,000 cheaper to buy the part.C) No, because it would be $15,000 cheaper to make the part.D) Yes, because it would be $25,000 cheaper to buy the part.

Ans: A AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making; Reporting LO: 3 Level: Hard Source: CPA, adapted

Solution:

Relevant cost of manufacturing:Direct materials...................................................... $ 20,000Direct labor............................................................ 55,000Variable manufacturing overhead.......................... 45,000Fixed manufacturing overhead ($4 × 10,000)....... 40,000Relevant manufacturing cost................................. $160,000

Net advantage (disadvantage):Relevant manufacturing cost savings............ $160,000Annual rental of manufacturing facilities

given up if manufacture Part M-1............. 15,000Cost of purchasing the part ($18 × 10,000). . ( 180,000)Net disadvantage of purchasing part M-1..... ($ 5,000 )

43. Kingston Company needs 10,000 units of a certain part to be used in its production cycle. The following information is available concerning Kingston's unit product cost:

Direct materials.......................................... $ 6Direct labor................................................ 24Variable manufacturing overhead.............. 12Fixed manufacturing overhead.................. 15 Unit product cost........................................ $57

Utica Company has offered to supply Kingston's entire annual requirements of the part for $53 each. If Kingston buys the part from Utica instead of making it, Kingston would have no other use for the facilities and 60 percent of the fixed manufacturing overhead would continue. In deciding whether to make or buy the part, the total relevant costs to make the part internally are:A) $342,000B) $480,000C) $530,000D) $570,000


Solution:

Relevant cost per unit:Direct materials................................................ $ 6Direct labor...................................................... 24Variable manufacturing overhead.................... 12Fixed manufacturing overhead ($15 × 0.40).... 6 Relevant manufacturing cost............................ $48

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

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

Direct materials........................ $ 4Direct labor.............................. 10Manufacturing overhead.......... 40 Standard cost per unit............... $54

An outside supplier has offered to supply all of the parts needed by Bor Company for $50 each. The 60% of the manufacturing overhead cost that is fixed would be unaffected by this decision. In the decision to “make or buy,” what is the relevant unit cost to make the part internally?A) $54B) $38C) $30D) $5

Ans: C AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making; Reporting LO: 3 Level: Medium Source: CPA, adapted

Solution:

Relevant cost per unit:Direct materials.......................................... $ 4Direct labor................................................ 10Manufacturing overhead ($40 × 0.40)....... 16Relevant manufacturing cost...................... $30

45. Gordon Company produces 1,000 units of a part per year which are used in the assembly of one of its products. The unit cost of producing these parts is:

Variable manufacturing cost.......... $15Fixed manufacturing cost............... 12 Total manufacturing cost............... $27

The part can be purchased from an outside supplier at $20 per unit. If the part is purchased from the outside supplier, two thirds of the total fixed costs incurred in producing the part can be eliminated. The annual increase or decrease on the company's operating incomes as a result of buying the part from the outside supplier would be:A) $3,000 increaseB) $1,000 decreaseC) $7,000 increaseD) $5,000 decrease


Solution:

Relevant cost per unit:Variable production costs................................ $15Fixed manufacturing overhead ($12 × 2/3)..... 8 Relevant manufacturing cost........................... $23

Net advantage (disadvantage) per unit:Manufacturing cost savings....................... $23Cost of purchasing the part........................ 20Net advantage (disadvantage).................... $ 3

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

46. Quikcook Microwave Company currently manufactures the doors that it uses for its microwave ovens. The annual costs to manufacture the 40,000 doors needed each year are as follows:

Total CostDirect material.................................. $200,000Direct labor....................................... 40,000Variable manufacturing overhead..... 80,000Fixed manufacturing overhead......... 320,000 Total.................................................. $640,000

Delilah Glass Corporation has offered to provide Quikcook with all of its annual door needs for $14 per door. If Quikcook accepts this offer, only 40% of the fixed overhead above could be totally eliminated. Also, Quikcook has no alternative use for the idle facilities if the decision was made to go with Delilah's offer. Based on this information, would Quikcook be better off to make the doors or buy the doors and by how much?A) $48,000 better to buyB) $48,000 better to makeC) $112,000 better to buyD) $112,000 better to make


Solution:

Relevant cost:Direct materials....................................................... $200,000Direct labor.............................................................. 40,000Variable manufacturing overhead........................... 80,000Fixed manufacturing overhead ($320,000 × 0.40). . 128,000Relevant manufacturing cost................................... $448,000

Net advantage (disadvantage):Manufacturing cost savings..................................... $448,000Cost of purchasing the part ($14 × 40,000)............. ( 560,000)Net advantage (disadvantage) of buying................. ($ 112,000 )

47. Sardi Inc. is considering whether to continue to make a component or to buy it from an outside supplier. The company uses 17,000 of the components each year. The unit product cost of the component according to the company's cost accounting system is given as follows:

Direct materials.......................................... $ 8.20Direct labor................................................ 8.30Variable manufacturing overhead.............. 1.20Fixed manufacturing overhead.................. 4.30 Unit product cost........................................ $22.00

Assume that direct labor is a variable cost. Of the fixed manufacturing overhead, 70% is avoidable if the component were bought from the outside supplier. In addition, making the component uses 2 minutes on the machine that is the company's current constraint. If the component were bought, this machine time would be freed up for use on another product that requires 4 minutes on the constraining machine and that has a contribution margin of $7.00 per unit.When deciding whether to make or buy the component, what cost of making the component should be compared to the price of buying the component?A) $24.21B) $25.50C) $20.71D) $22.00


Solution:

Relevant cost per unit:Direct materials................................................... $ 8.20Direct labor......................................................... 8.30Variable manufacturing overhead....................... 1.20Fixed manufacturing overhead ($4.30 × 0.70). . . 3.01 Relevant manufacturing cost.............................. $20.71Add contribution margin lost*............................ 3.50

$24.21

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

48. Part S51 is used in one of Haberkorn Corporation's products. The company makes 12,000 units of this part each year. The company's Accounting Department reports the following costs of producing the part at this level of activity:

Per UnitDirect materials.......................................... $6.30Direct labor................................................ $5.70Variable manufacturing overhead.............. $4.80Supervisor’s salary..................................... $7.00Depreciation of special equipment............. $8.60Allocated general overhead........................ $7.20

An outside supplier has offered to produce this part and sell it to the company for $37.70 each. If this offer is accepted, the supervisor's salary and all of the variable costs, including direct labor, can be avoided. The special equipment used to make the part was purchased many years ago and has no salvage value or other use. The allocated general overhead represents fixed costs of the entire company. If the outside supplier's offer were accepted, only $17,000 of these allocated general overhead costs would be avoided.

If management decides to buy part S51 from the outside supplier rather than to continue making the part, what would be the annual impact on the company's overall net operating income?A) Net operating income would decline by $5,800 per year.B) Net operating income would decline by $22,800 per year.C) Net operating income would decline by $149,800 per year.D) Net operating income would decline by $39,800 per year.


Solution:

Make BuyDirect materials (12,000 units @ $6.30 per unit)..... $ 75,600Direct labor (12,000 units @ $5.70 per unit)............ 68,400Variable overhead (12,000 units @ $4.80 per unit).. 57,600Supervisor’s salary (12,000 units @ $7.00 per unit) 84,000Depreciation of special equipment (not relevant)..... 0Allocated general overhead (avoidable only)........... 17,000Outside purchase price (12,000 units @ $37.70 per

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

The total cost of the make alternative is lower by $149,800 ($302,600 − $452,400). Thus, net operating income would decline by $149,800 if the offer from the supplier were accepted. Therefore, the company should continue to make the part itself.

49. Norgaard Corporation makes 8,000 units of part G25 each year. This part is used in one of the company's products. The company's Accounting Department reports the following costs of producing the part at this level of activity:


An outside supplier has offered to make and sell the part to the company for $21.20 each. If this offer is accepted, the supervisor's salary and all of the variable costs, including direct labor, can be avoided. The special equipment used to make the part was purchased many years ago and has no salvage value or other use. The allocated general overhead represents fixed costs of the entire company. If the outside supplier's offer were accepted, only $2,000 of these allocated general overhead costs would be avoided. In addition, the space used to produce part G25 would be used to make more of one of the company's other products, generating an additional segment margin of $16,000 per year for that product.

What would be the impact on the company's overall net operating income of buying part G25 from the outside supplier?A) Net operating income would decline by $8,400 per year.B) Net operating income would increase by $16,000 per year.C) Net operating income would decline by $8,000 per year.D) Net operating income would decline by $40,000 per year.


Solution:

Make BuyDirect materials (8,000 units @ $6.70 per unit)....... $ 53,600Direct labor (8,000 units @ $8.10 per unit).............. 64,800Variable overhead (8,000 units @ $1.10 per unit).... 8,800Supervisor’s salary (8,000 units @ $2.00 per unit). . 16,000Depreciation of special equipment (not relevant)..... 0Allocated general overhead (avoidable only)........... 2,000Outside purchase price (8,000 units @ $21.20 per

unit)....................................................................... $169,600Opportunity cost........................................................ ( 16,000 )Total cost................................................................... $145,200 $153,600


50. Rebelo Corporation is presently making part E07 that is used in one of its products. A total of 17,000 units of this part are produced and used every year. The company's Accounting Department reports the following costs of producing the part at this level of activity:


An outside supplier has offered to make and sell the part to the company for $20.80 each. If this offer is accepted, the supervisor's salary and all of the variable costs can be avoided. The special equipment used to make the part was purchased many years ago and has no salvage value or other use. The allocated general overhead represents fixed costs of the entire company, none of which would be avoided if the part were purchased instead of produced internally. If management decides to buy part E07 from the outside supplier rather than to continue making the part, what would be the annual impact on the company's overall net operating income?A) Net operating income would decline by $6,800 per year.B) Net operating income would decline by $163,200 per year.C) Net operating income would increase by $163,200 per year.D) Net operating income would increase by $6,800 per year.


Solution:

Make BuyDirect materials (17,000 units @ $3.80 per unit)....... $ 64,600Direct labor (17,000 units @ $3.80 per unit)............. 64,600Variable overhead (17,000 units @ $1.10 per unit). . . 18,700Supervisor’s salary (17,000 units @ $2.50 per unit). . 42,500Depreciation of special equipment (not relevant)...... 0Allocated general overhead (not relevant)................. 0Outside purchase price (17,000 units @ $20.80 per

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


51. Part U16 is used by Mcvean Corporation to make one of its products. A total of 13,000 units of this part are produced and used every year. The company's Accounting Department reports the following costs of producing the part at this level of activity:


An outside supplier has offered to make the part and sell it to the company for $29.80 each. If this offer is accepted, the supervisor's salary and all of the variable costs, including the direct labor, can be avoided. The special equipment used to make the part was purchased many years ago and has no salvage value or other use. The allocated general overhead represents fixed costs of the entire company, none of which would be avoided if the part were purchased instead of produced internally. In addition, the space used to make part U16 could be used to make more of one of the company's other products, generating an additional segment margin of $25,000 per year for that product. What would be the impact on the company's overall net operating income of buying part U16 from the outside supplier?A) Net operating income would increase by $25,000 per year.B) Net operating income would decline by $79,000 per year.C) Net operating income would decline by $35,400 per year.D) Net operating income would increase by $14,600 per year.


Solution:

Make BuyDirect materials (13,000 units @ $2.90 per unit)..... $ 37,700Direct labor (13,000 units @ $7.50 per unit)............ 97,500Variable overhead (13,000 units @ $8.00 per unit).. 104,000Supervisor’s salary (13,000 units @ $3.40 per unit) 44,200Depreciation of special equipment (not relevant)..... 0Allocated general overhead (not relevant)................ 0Outside purchase price (13,000 units @ $29.80 per

unit)....................................................................... $387,400Opportunity cost (segment margin).......................... ( 25,000 )Total cost................................................................... $283,400 $362,400


52. Landor Appliance Company makes and sells electric fans. Each fan regularly sells for $42. The following cost data per fan is based on a full capacity of 150,000 fans produced each period.

Direct materials............................................................... $8Direct labor..................................................................... $9Manufacturing overhead

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

A special order has been received by Landor for a sale of 25,000 fans to an overseas customer. The only selling costs that would be incurred on this order would be $4 per fan for shipping. Landor is now selling 120,000 fans through regular channels each period. What should Landor use as a minimum selling price per fan in negotiating a price for this special order?A) $28B) $27C) $31D) $24


Solution:

Direct materials................................................. $ 8Direct labor........................................................ 9Variable manufacturing overhead ($10 × 0.70) 7Variable selling cost.......................................... 4 Minimum selling price...................................... $28

53. Ignace Timekeepers, Inc. manufactures and sells wrist watches. Ignace has the capacity to manufacture and sell 20,000 watches each year but is currently only manufacturing and selling 15,000. The following costs relate to annual operations at 15,000 watches:

Total CostVariable manufacturing cost...................... $150,000Fixed manufacturing cost........................... $120,000Variable selling and administrative cost.... $90,000Fixed selling and administrative cost......... $180,000

Ignace normally sells its watches for $42 each. A discount chain is interesting in purchasing Ignace's excess capacity of 5,000 watches. This special order would not affect regular sales or the cost structure above. Ignace's profits for the year will increase as long as the price on this special order exceeds:A) $12.00B) $13.50C) $16.00D) $31.00


Solution:

Total relevant costs:Variable manufacturing cost............................... $150,000Variable selling and administrative cost............. 90,000

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

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

15,000Minimum selling price for special order................ $16

54. Gallerani Corporation has received a request for a special order of 6,000 units of product A90 for $21.20 each. Product A90's unit product cost is $16.20, determined as follows:


Direct labor is a variable cost. The special order would have no effect on the company's total fixed manufacturing overhead costs. The customer would like modifications made to product A90 that would increase the variable costs by $4.20 per unit and that would require an investment of $21,000 in special molds that would have no salvage value.This special order would have no effect on the company's other sales. The company has ample spare capacity for producing the special order. If the special order is accepted, the company's overall net operating income would increase (decrease) by:A) ($18,600)B) ($16,200)C) $30,000D) $5,400

Answer:D

Ans: D AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making; Reporting LO: 4 Level: Easy

Solution:

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

Direct materials (6,000 units @ $6.10 per unit)............................ 36,600Direct labor (6,000 units @ $4.20 per unit)................................... 25,200Variable manufacturing overhead (6,000 units @ $2.30 per unit) 13,800Modifications (6,000 units @ $4.20 per unit)................................ 25,200Special molds................................................................................. 21,000

Total incremental cost....................................................................... 121,800 Incremental net operating income..................................................... $ 5,400

55. A customer has requested that Lewelling Corporation fill a special order for 9,000 units of product S47 for $20.50 a unit. While the product would be modified slightly for the special order, product S47's normal unit product cost is $14.40:


Direct labor is a variable cost. The special order would have no effect on the company's total fixed manufacturing overhead costs. The customer would like modifications made to product S47 that would increase the variable costs by $5.00 per unit and that would require an investment of $36,000 in special molds that would have no salvage value.This special order would have no effect on the company's other sales. The company has ample spare capacity for producing the special order. If the special order is accepted, the company's overall net operating income would increase (decrease) by:A) ($9,900)B) $4,500C) $54,900D) ($26,100)


Solution:


Direct materials (9,000 units @ $3.10 per unit)............................ 27,900Direct labor (9,000 units @ $1.50 per unit)................................... 13,500Variable manufacturing overhead (9,000 units @ $6.40 per unit) 57,600Modifications (9,000 units @ $5.00 per unit)................................ 45,000Special molds................................................................................. 36,000


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

Product A Product B Product CSelling price per unit................ $30 100% $20 100% $15 100%Variable costs per unit............. 18 60% 15 75% 6 40%Contribution margin per unit. . . $12 40% $ 5 25% $ 9 60%

A particular machine is a bottleneck. On that machine, 3 machine hours are required to produce each unit of Product A, 1 hour is required to produce each unit of Product B, and 2 hours are required to produce each unit of Product C. In which order should it produce its products?A) C, A, BB) A, C, BC) B, C, AD) The order of production doesn't matter.


Solution:

Product A Product B Product CContribution margin per unit............... $12 $5 $9Machine-hours per unit........................ 3 1 2Contribution margin per hour.............. $4.00 $5.00 $4.50

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

57. Wood Carving Corporation manufactures three products. Because of a recent lack of skilled wood carvers, the corporation has had a shortage of available labor hours. The following per unit data relates to the three products of the corporation:

Letter Openers Elvis Statues Candle Holders

Sales price.................... $30 $80 $42Variable costs............... $20 $40 $20Labor hours required.... 1 6 2

Assume that Wood Carving only has 1,800 labor hours available next month. Also assume that Wood Carving can only sell 800 units of each product in a given month. What is the maximum amount of contribution margin that Wood Carving can generate next month given this labor hour shortage?A) $12,000B) $19,000C) $19,600D) $19,800

Ans: C AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making; Reporting LO: 5 Level: Hard

Solution:

Demand for wood carvers:Letter Openers Elvis Statues Candle Holders

Labor-hours per unit.......... 1 6 2Monthly demand in units. . . 800 800 800Total hours required........... 800 4,800 1,600

Total time required for all products: 7,200

Optimal production plan:Letter Openers Elvis Statues Candle Holders

Selling price per unit............................ $30.00 $80.00 $42.00Variable cost per unit........................... $20.00 $40.00 $20.00Contribution margin per unit............... $10.00 $40.00 $22.00Labor-hours per unit............................ 1 6 2Contribution margin per hour.............. $10.00 $6.67 $11.00


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

Total hours available......................................................................... 1,800Less: hours required for 800 Candle Holders (800 × 2)................... 1,600Hours remaining................................................................................ 200Divided by hours required per Letter Opener................................... ÷ 1Number of Letter Openers to produce.............................................. 200

Maximum contribution margin:Candle Holders (800 × $22).......................................................... $17,600Letter Openers (200 × $10)........................................................... 2,000

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

58. Banfield Corporation makes three products that use compound W, the current constrained resource. Data concerning those products appear below:

VP YI WX

Selling price per unit...................... $248.04$230.6

6 $505.44

Variable cost per unit..................... $190.71$172.1

4 $388.80Centiliters of compound W............ 3.90 3.80 8.10

Rank the products in order of their current profitability from most profitable to least profitable. In other words, rank the products in the order in which they should be emphasized.A) WX, VP, YIB) YI, VP, WXC) WX, YI, VPD) VP, WX, YI


Solution:

Optimal production plan:VP YI WX

Selling price per unit............................ $248.04 $230.66 $505.44Variable cost per unit........................... 190.71 172.14 388.80Contribution margin per unit............... $57.33 $58.52 $116.64Centiliters per unit................................ 3.90 3.80 8.10Contribution margin per centiliter....... $14.70 $15.40 $14.40


59. An automated turning machine is the current constraint at Jordison Corporation. Three products use this constrained resource. Data concerning those products appear below:

LN JQ RQ


1 $494.52


1 $381.42Minutes on the constraint............... 2.60 4.90 7.80

Rank the products in order of their current profitability from most profitable to least profitable. In other words, rank the products in the order in which they should be emphasized.A) LN, JQ, RQB) RQ, LN, JQC) RQ, JQ, LND) JQ, RQ, LN


Solution:

Optimal production plan:LN JQ RQ

Selling price per unit............................ $165.88 $313.11 $494.52Variable selling cost per unit............... 118.30 239.61 381.42Contribution margin per unit............... $47.58 $73.50 $113.10Machine minutes per unit..................... 2.60 4.90 7.80Contribution margin per minute........... $18.30 $15.00 $14.50


60. The constraint at Rauchwerger Corporation is time on a particular machine. The company makes three products that use this machine. Data concerning those products appear below:

WX KD FS


6 $222.84


4 $167.76Minutes on the constraint............... 3.20 8.60 3.60

Assume that sufficient time is available on the constrained machine to satisfy demand for all but the least profitable product. Up to how much should the company be willing to pay to acquire more of the constrained resource?A) $33.28 per unitB) $10.40 per minuteC) $122.12 per unitD) $15.30 per minute


Solution:

WX KD FSSelling price per unit............................ $192.00 $542.66 $222.84Variable cost per unit........................... 158.72 420.54 167.76Contribution margin per unit............... $33.28 $122.12 $55.08Machine minutes per unit..................... 3.20 8.60 3.60Contribution margin per minute........... $10.40 $14.20 $15.30


The company should be willing to pay up to the contribution margin per minute for the least profitable job, which is $10.40.

61. The Freed Company produces three products, X, Y, Z, from a single raw material input. Product Y can be sold at the splitoff point for total revenues of $50,000, or it can be processed further at a total cost of $16,000 and then sold for $68,000. Product Y:A) should be sold at the split-off point, rather than processed further.B) would increase the company's overall net operating income by $18,000 if

processed further and then sold.C) would increase the company's overall net operating income by $68,000 if

processed further and then sold.D) would increase the company's overall net operating income by $2,000 if

processed further and then sold.


Solution:

Product YSales value after further processing........... $68,000Costs of further processing........................ 16,000Benefit of further processing..................... 52,000Less: Sales value at split-off point............. 50,000 Net advantage............................................. $ 2,000

62. Pendall Company manufactures products Dee and Eff from a joint process. Product Dee has been allocated $2,500 of the $20,000 in total joint costs associated with the production of 1,000 units each of Dee and Eff each year. Dee can be sold at the split-off point for $3 per unit, or it can be processed further with additional costs of $1,000 and sold for $5 per unit. If Dee is processed further and sold, the result would be:A) A break-even situation.B) An additional gain of $1,000 from further processing.C) A loss of $1,000 from further processing.D) An additional gain of $2,000 from further processing.


Solution:

DeeSales value after further processing ($5 × 1,000).. $5,000Costs of further processing.................................... 1,000Benefit of further processing................................. 4,000Less: Sales value at split-off point ($3 × 1,000).... 3,000 Net advantage........................................................ $1,000

63. Faustina Chemical Company manufactures three chemicals (TX14, NJ35, and KS63) from a joint process. The three chemicals are in industrial grade form at the split-off point. They can either be sold at that point or processed further into premium grade. Costs related to each batch of this chemical process is as follows:

TX14 NJ35 KS63

Sales value at split-off point...................... $16,000$12,00

0 $5,000Allocated joint costs................................... $6,000 $6,000 $6,000

Sales value after further processing........... $20,000$18,00

0 $9,000Cost of further processing.......................... $5,000 $3,000 $2,000

For which product(s) above would it be more profitable for Faustina to sell at the split-off point rather than process further?A) TX14 onlyB) KS63 onlyC) TX14 and KS63 onlyD) NJ35 and KS63 only

Ans: A AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making; Reporting LO: 6 Level: Hard

Solution:

TX14 NJ35 KS63Sales value after further processing..... $20,000 $18,000 $9,000Sales value at split-off.......................... 16,000 12,000 5,000Incremental revenue............................. 4,000 6,000 4,000Further processing costs....................... 5,000 3,000 2,000 Incremental income (loss).................... ($1,000) $ 3,000 $2,000

Product TX14 should be sold at the split-off point without any further processing. Products NJ35 and KS63 should be sold after further processing beyond the split-off point.

64. Khiem, Inc. manufactures baseball gloves that normally sell for $55 each. Khiem currently has 400 defective gloves in inventory that have $35 of materials, labor, and overhead assigned to each glove. The defective gloves can either be completely repaired at a cost of $25 per glove or sold as is at a reduced price of $18 per glove. Khiem would be better off by:A) $2,000 to sell the gloves at the reduced price.B) $2,800 to sell the gloves at the reduced price.C) $4,800 to repair the gloves and sell them at the normal price.D) $5,200 to sell the gloves at the reduced price.


Solution:

Sales value after repairing ($55 × 400).................. $22,000Sales value at split-off ($18 × 400)........................ 7,200Incremental revenue............................................... 14,800Repair costs ($25 × 400)........................................ 10,000Incremental income from further processing......... $ 4,800

65. Two products, QI and VH, emerge from a joint process. Product QI has been allocated $9,600 of the total joint costs of $12,000. A total of 9,000 units of product QI are produced from the joint process. Product QI can be sold at the split-off point for $13 per unit, or it can be processed further for an additional total cost of $54,000 and then sold for $18 per unit. If product QI is processed further and sold, what would be the effect on the overall profit of the company compared with sale in its unprocessed form directly after the split-off point?A) $18,600 less profitB) $108,000 more profitC) $600 more profitD) $9,000 less profit

Ans: D AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making; Reporting LO: 6 Level: Medium Source: CIMA, adapted

Solution:

Product QISales value after further processing ($18 × 9,000).... $162,000Costs of further processing........................................ 54,000Benefit of further processing..................................... 108,000Less: Sales value at split-off point ($13 × 9,000)...... 117,000Net advantage (disadvantage).................................... ($ 9,000)

66. Two products, UG and BC, emerge from a joint process. Product UG has been allocated $29,400 of the total joint costs of $42,000. A total of 9,000 units of product UG are produced from the joint process. Product UG can be sold at the split-off point for $15 per unit, or it can be processed further for an additional total cost of $63,000 and then sold for $17 per unit. If product UG is processed further and sold, what would be the effect on the overall profit of the company compared with sale in its unprocessed form directly after the split-off point?A) $74,400 less profitB) $15,600 less profitC) $45,000 less profitD) $90,000 more profit

Ans: C AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making; Reporting LO: 6 Level: Medium Source: CIMA, adapted

Solution:

Product HGSales value after further processing ($17 × 9,000)... $153,000Costs of further processing....................................... 63,000Benefit of further processing.................................... 90,000Less: Sales value at split-off point ($15 × 9,000)..... 135,000Net advantage (disadvantage).................................. ($ 45,000)

67. Priddy Corporation processes sugar cane in batches. The company purchases a batch of sugar cane for $62 from farmers and then crushes the cane in the company's plant at the cost of $18. Two intermediate products, cane fiber and cane juice, emerge from the crushing process. The cane fiber can be sold as is for $28 or processed further for $13 to make the end product industrial fiber that is sold for $36. The cane juice can be sold as is for $43 or processed further for $23 to make the end product molasses that is sold for $85. Which of the intermediate products should be processed further?A) Cane fiber should NOT be processed into industrial fiber; Cane juice should be

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

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

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

NOT be processed into molasses


Solution:

Cane Fiber Cane JuiceSales value after further processing........... $36 $85Costs of further processing........................ 13 23Benefit of further processing..................... 23 62Less: Sales value at split-off point............. 28 43Net advantage (disadvantage).................... ($ 5) $19

68. Vannorman Corporation processes sugar beets in batches. A batch of sugar beets costs $78 to buy from farmers and $18 to crush in the company's plant. Two intermediate products, beet fiber and beet juice, emerge from the crushing process. The beet fiber can be sold as is for $25 or processed further for $16 to make the end product industrial fiber that is sold for $57. The beet juice can be sold as is for $39 or processed further for $22 to make the end product refined sugar that is sold for $84. How much profit (loss) does the company make by processing one batch of sugar beets into the end products industrial fiber and refined sugar?A) ($134)B) ($32)C) $7D) $39


Solution:

Beet Fiber Beet JuiceSales value after further processing........... $57 $84Costs of further processing........................ 16 22Benefit of further processing..................... 41 62Less: Sales value at split-off point............. 25 39Net advantage (disadvantage).................... $16 $23

Revenue:Industrial fiber................................................. $57Refined sugar.................................................. 84

Total revenue...................................................... $141Less expenses:

Purchase from farmers.................................... 78Crushing costs................................................. 18Processing fiber further................................... 16Processing juice further.................................. 22

Total expenses.................................................... 134Net profit from one batch................................... $ 7

69. Stinehelfer Beet Processors, Inc., processes sugar beets in batches. A batch of sugar beets costs $56 to buy from farmers and $13 to crush in the company's plant. Two intermediate products, beet fiber and beet juice, emerge from the crushing process. The beet fiber can be sold as is for $24 or processed further for $12 to make the end product industrial fiber that is sold for $31. The beet juice can be sold as is for $43 or processed further for $29 to make the end product refined sugar that is sold for $91. How much profit (loss) does the company make by processing the intermediate product beet juice into refined sugar rather than selling it as is?A) $19B) $6C) ($50)D) ($16)


Solution:

Beet JuiceSales value after further processing........... $91Costs of further processing........................ 29Benefit of further processing..................... 62Less: Sales value at split-off point............. 43Net advantage (disadvantage).................... $19

70. Paine Corporation processes sugar beets in batches that it purchases from farmers for $72 a batch. A batch of sugar beets costs $11 to crush in the company's plant. Two intermediate products, beet fiber and beet juice, emerge from the crushing process. The beet fiber can be sold as is for $27 or processed further for $16 to make the end product industrial fiber that is sold for $40. The beet juice can be sold as is for $43 or processed further for $28 to make the end product refined sugar that is sold for $100. Which of the intermediate products should be processed further?A) beet fiber should NOT be processed into industrial fiber; beet juice should be

processed into refined sugarB) beet fiber should NOT be processed into industrial fiber; beet juice should NOT

be processed into refined sugarC) beet fiber should be processed into industrial fiber; beet juice should NOT be

processed into refined sugarD) beet fiber should be processed into industrial fiber; beet juice should be

processed into refined sugar


Solution:

Beet Fiber Beet JuiceSales value after further processing........... $40 $100Costs of further processing........................ 16 28 Benefit of further processing..................... 24 72Less: Sales value at split-off point............. 27 43Net advantage (disadvantage).................... ($ 3) $ 29

Use the following to answer questions 71-72:

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

Alternative A Alternative BMaterials costs................... $40,000 $56,000Processing costs................. $37,000 $37,000Equipment rental................ $13,000 $13,000Occupancy costs................. $15,000 $22,000

71. Are the materials costs and processing costs relevant in the choice between alternatives A and B? (Ignore the equipment rental and occupancy costs in this question.)A) Both materials costs and processing costs are relevantB) Neither materials costs nor processing costs are relevantC) Only processing costs are relevantD) Only materials costs are relevant


72. What is the differential cost of Alternative B over Alternative A, including all of the relevant costs?A) $105,000B) $23,000C) $128,000D) $116,500


Solution:

Alternative AAlternative

BDifferential

CostsMaterials costs................... $40,000 $56,000 $16,000Occupancy costs................. $15,000 $22,000 7,000

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


Two alternatives, code-named X and Y, are under consideration at Guyer Corporation. Costs associated with the alternatives are listed below.

Alternative X Alternative YMaterials costs................... $41,000 $59,000Processing costs................. $45,000 $45,000Equipment rental................ $17,000 $17,000Occupancy costs................. $16,000 $24,000

73. Are the materials costs and processing costs relevant in the choice between alternatives X and Y? (Ignore the equipment rental and occupancy costs in this question.)A) Neither materials costs nor processing costs are relevantB) Only processing costs are relevantC) Only materials costs are relevantD) Both materials costs and processing costs are relevant


74. What is the differential cost of Alternative Y over Alternative X, including all of the relevant costs?A) $132,000B) $119,000C) $145,000D) $26,000


Solution:

Alternative X Alternative YDifferential

CostsMaterials costs................... $41,000 $59,000 $18,000Occupancy costs................. $16,000 $24,000 8,000

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


The Draper Company is considering dropping its Doombug toy due to continuing losses. Revenue and cost data on the toy for the past year follow:

Sales of 15,000 units.......... $150,000Variable expenses.............. 120,000 Contribution margin........... 30,000Fixed expenses................... 40,000 Net operating loss.............. ($ 10,000 )

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

75. Under the given conditions, the change in annual operating income from discontinuing the production and sale of Doombugs would be:A) $30,000 decreaseB) $10,000 increaseC) $22,000 decreaseD) $18,000 increase


Solution:

Keep Doombugs Drop Doombugs DifferenceSales............................................... $150,000 $ 0 ($150,000)Variable expenses.......................... 120,000 0 120,000Contribution margin....................... 30,000 0 ( 30,000)Avoidable fixed expenses.............. 40,000 32,000 8,000 Product margin............................... ($ 10,000 ) ($32,000) ($ 22,000)

Net operating income would decline by $22,000 if Doombugs were dropped. Therefore, Doombugs should not be dropped.

76. Assuming all other conditions stay the same, at what level of annual sales of Doombugs (in units) should Draper be indifferent to discontinuing Doombugs or continuing the production and sale of Doombugs?A) 20,000 unitsB) 18,000 unitsC) 6,000 unitsD) 4,000 units


Solution:

Total contribution margin............. $30,000Divided by 15,000 units............... ÷15,000Contribution margin per unit........ $2

Breakeven point in units = Avoidable fixed expenses ÷ Unit contribution margin= $8,000 ÷ $2 = 4,000 units

77. Suppose that if the Doombug toy is dropped, the production and sale of other Draper toys would increase so as to generate a $16,000 increase in the contribution margin received from these other toys. If all other conditions are the same, the change in annual operating income from discontinuing the production and sale of Doombugs would be:A) $6,000 decreaseB) $14,000 increaseC) $2,000 decreaseD) $28,000 increase


Solution:

Sales................................... $150,000Variable expenses.............. 120,000 Contribution margin........... 30,000Avoidable fixed expenses. . 8,000 Doombug product margin. . ($ 22,000 )

Additional contribution margin....... $16,000Less Doombug product margin....... ( 22,000)Decrease in net operating income.... ($ 6,000)

78. Suppose again that if the Doombug toy is dropped, the production and sale of other Draper toys would increase so as to generate a $16,000 increase in the contribution margin received from these other toys. At what selling price per Doombug should Draper be indifferent (on economic grounds) between dropping the Doombug or continuing its production and sale? (All other conditions remain the same, including annual sales of 15,000 units of the Doombug toy.)A) $8.33B) $9.25C) $9.60D) $10.70


Solution:

Total variable expenses................ $120,000Divided by 15,000 units............... ÷ 15,000Variable expense per unit............. $8

Total contribution margin = Fixed expenses plus increase in contribution margin from other toysTotal contribution margin = 15,000 × (Selling price − Variable expense per unit)15,000 × (Selling price − $8) = $8,000 + $16,00015,000 × Selling price − $120,000 = $24,00015,000 × Selling price = $144,000Selling price = $9.60


The management of Bonga Corporation is considering dropping product D74F. Data from the company's accounting system appear below:


All fixed expenses of the company are fully allocated to products in the company's accounting system. Further investigation has revealed that $111,000 of the fixed manufacturing expenses and $103,000 of the fixed selling and administrative expenses are avoidable if product D74F is discontinued.

79. According to the company's accounting system, what is the net operating income earned by product D74F?A) ($58,000)B) ($440,000)C) $58,000D) $440,000

Ans: A AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 2 Level: Easy

Solution:

Sales................................................................... $830,000 Variable expenses.............................................. 390,000 Contribution margin.......................................... 440,000 Fixed expenses:

Fixed manufacturing expenses....................... 266,000 Fixed selling and administrative expenses..... 232,000

Total fixed expenses.......................................... 498,000 Net operating income (loss)............................... ($ 58,000 )

80. What would be the effect on the company's overall net operating income if product D74F were dropped?A) Overall net operating income would increase by $226,000.B) Overall net operating income would increase by $58,000.C) Overall net operating income would decrease by $226,000.D) Overall net operating income would decrease by $58,000.




Sales..................................................... $830,000 $ 0 ($830,000)Variable expenses................................ 390,000 0 390,000 Contribution margin............................. 440,000 0 ( 440,000 )Fixed expenses:

Fixed manufacturing expenses.......... 266,000 155,000 111,000 Fixed selling and administrative

expenses........................................ 232,000 129,000 103,000 Total fixed expenses............................ 498,000 284,000 214,000 Net operating income (loss)................. ($ 58,000 ) ($284,000) ($226,000)

Net operating income would decline by $226,000 if product D74F were dropped. Therefore, the product should not be dropped.


The management of Woznick Corporation has been concerned for some time with the financial performance of its product V86O and has considered discontinuing it on several occasions. Data from the company's accounting system appear below:

Sales................................................................. $150,000Variable expenses............................................ $72,000Fixed manufacturing expenses......................... $50,000Fixed selling and administrative expenses....... $33,000

In the company's accounting system all fixed expenses of the company are fully allocated to products. Further investigation has revealed that $30,000 of the fixed manufacturing expenses and $13,000 of the fixed selling and administrative expenses are avoidable if product V86O is discontinued.

81. According to the company's accounting system, what is the net operating income earned by product V86O?A) $78,000B) ($5,000)C) ($78,000)D) $5,000

Ans: B AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 2 Level: Easy

Solution:

Sales................................................................. $150,000 Variable expenses............................................ 72,000 Contribution margin......................................... 78,000 Fixed expenses:

Fixed manufacturing expenses...................... 50,000 Fixed selling and administrative expenses.... 33,000

Total fixed expenses........................................ 83,000

Net operating income (loss).............................($

5,000)

82. What would be the effect on the company's overall net operating income if product V86O were dropped?A) Overall net operating income would decrease by $35,000.B) Overall net operating income would decrease by $5,000.C) Overall net operating income would increase by $35,000.D) Overall net operating income would increase by $5,000.





Fixed manufacturing expenses.... 50,000 20,000 30,000 Fixed selling and administrative

expenses.................................. 33,000 20,000 13,000 Total fixed expenses...................... 83,000 40,000 43,000 Net operating income (loss)........... ($ 5,000 ) ($ 40,000) ($ 35,000)

Net operating income would decline by $35,000 if product V86O were dropped. Therefore, the product should not be dropped.


Smithtone Company uses 8,000 units of a certain part in production each year. Presently, this part is purchased from an outside supplier at $12 per unit. For some time now there has been idle capacity in the factory that could be utilized to make this part. The following information has been assembled on the unit costs of making this part internally:

Direct materials.......................................... $3.25Direct labor................................................ $2.75Variable manufacturing overhead.............. $2.00Fixed manufacturing overhead.................. $5.00

The fixed manufacturing overhead listed above represents an allocation of existing costs to this part. However, there would be an increase of $12,000 in fixed manufacturing overhead costs for the salary of a new supervisor.

83. If Smithtone chooses to make the part instead of buying it outside, the change in the company's operating income per year would be:A) $20,000 decrease.B) $20,000 increase.C) $8,000 decrease.D) $8,000 increase.


Solution:

Relevant cost of manufacturing:Direct materials ($3.25 × 8,000)............................... $26,000Direct labor ($2.75 × 8,000)..................................... 22,000Variable manufacturing overhead ($2.00 × 8,000)... 16,000Fixed manufacturing overhead................................. 12,000Total cost to make..................................................... $76,000

Net advantage (disadvantage):Cost of purchasing part ($12 × 8,000)....... $96,000Total cost to make...................................... 76,000Net savings from making part ................... $20,000

84. Assuming other things stay the same, at what price per unit from the outside supplier should Smithtone be indifferent (on economic grounds) to buying or making the part?A) $8.00B) $8.50C) $9.00D) $9.50


Solution:

Relevant cost of manufacturing:Direct materials ($3.25 × 8,000)................................ $26,000Direct labor ($2.75 × 8,000)....................................... 22,000Variable manufacturing overhead ($2.00 × 8,000).... 16,000Fixed manufacturing overhead................................... 12,000Total cost to make...................................................... $76,000

Total cost to make.............................. $76,000Divided by 8,000 units....................... ÷ 8,000Price per unit from outside supplier. . . $9.50

85. Suppose that the idle capacity (floor space and machinery) is presently being rented to another company for $32,000 per year. All the other conditions are still the same. If Smithtone chooses to make the part instead of buying it outside, the net advantage or disadvantage (per year) would be:A) $15,000 disadvantage.B) $4,000 advantage.C) $12,000 disadvantage.D) $10,000 advantage.


Solution:

Relevant cost of manufacturing:Direct materials ($3.25 × 8,000)............................. $26,000Direct labor ($2.75 × 8,000).................................... 22,000Variable manufacturing overhead ($2.00 × 8,000). 16,000Fixed manufacturing overhead................................ 12,000Total cost to make................................................... $76,000

Net advantage (disadvantage):Cost of purchasing part ($12 × 8,000)....... $96,000Total cost to make...................................... ( 76,000)Opportunity cost of rental income............. ( 32,000)Net disadvantage of making part............... $12,000


Elly Industries is a multi-product company that currently manufactures 30,000 units of Part MR24 each month for use in production. The facilities now being used to produce Part MR24 have a fixed monthly cost of $150,000 and a capacity to produce 35,000 units per month. If Elly were to buy part MR24 from an outside supplier, the facilities would be idle, but its fixed costs would continue at 40% of their present amount. The variable production costs of Part MR24 are $11 per unit.

86. If Elly Industries continues to use 30,000 units of Part MR24 each month, it would realize a net benefit by purchasing Part MR24 from an outside supplier only if the supplier's unit price is less than:A) $14.00B) $11.00C) $16.00D) $13.00

Ans: A AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making; Reporting LO: 3 Level: Hard Source: CMA, adapted

Solution:

Avoidable fixed costs ($150,000 × 0.60)... $90,000Divided by 30,000 units............................. ÷30,000Relevant fixed cost per unit....................... $ 3Add variable production costs per unit...... 11Outside supplier price................................ $14

87. If Elly industries is able to obtain Part MR24 from an outside supplier at a unit purchase price of $15, the monthly usage at which it will be indifferent between purchasing and making Part MR24 is:A) 30,000 unitsB) 32,000 unitsC) 35,000 unitsD) 22,500 units

Ans: D AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making; Reporting LO: 3 Level: Hard Source: CMA, adapted

Solution:

A company will be indifferent between purchasing and making a part when the outside purchase price is equal to the total relevant cost per unit of making the part. The total relevant cost per unit of making the part is composed of the variable production cost per unit ($11) plus the fixed cost per unit. Since the total cost must be equal to $15, then the fixed cost per unit must be $4 ($15 − $11).

The fixed cost per unit is calculated as:Fixed cost per unit = Total relevant fixed costs ÷ Units to be produced

Substituting:$4 = $90,000 ÷ Units to be producedUnits to be produced = 22,500


Ahron Company makes 80,000 units per year of a part it uses in the products it manufactures. The unit product cost of this part is computed as follows:

Direct materials.......................................... $14.90Direct labor................................................ 17.50Variable manufacturing overhead.............. 1.90Fixed manufacturing overhead.................. 21.10 Unit product cost........................................ $55.40

An outside supplier has offered to sell the company all of these parts it needs for $46.60 a unit. If the company accepts this offer, the facilities now being used to make the part could be used to make more units of a product that is in high demand. The additional contribution margin on this other product would be $560,000 per year.

If the part were purchased from the outside supplier, all of the direct labor cost of the part would be avoided. However, $13.60 of the fixed manufacturing overhead cost being applied to the part would continue even if the part were purchased from the outside supplier. This fixed manufacturing overhead cost would be applied to the company's remaining products.

88. How much of the unit product cost of $55.40 is relevant in the decision of whether to make or buy the part?A) $34.30B) $17.50C) $55.40D) $41.80


Solution:

Relevant cost per unit:Direct materials......................................................... $14.90Direct labor............................................................... 17.50Variable manufacturing overhead............................. 1.90Fixed manufacturing overhead ($21.10 − $13.60). . . 7.50 Relevant manufacturing cost.................................... $41.80

89. What is the net total dollar advantage (disadvantage) of purchasing the part rather than making it?A) $560,000B) $704,000C) $176,000D) ($384,000)


Solution:

Relevant cost per unit:Direct materials...................................................... $14.90Direct labor............................................................ 17.50Variable manufacturing overhead.......................... 1.90Fixed manufacturing overhead ($21.10 − $13.60) 7.50 Relevant manufacturing cost................................. $41.80

Net advantage (disadvantage):Manufacturing cost savings ($41.80 × 80,000)........ $3,344,000Additional contribution margin................................ 560,000Cost of purchasing the part ($46.60 × 80,000)......... ( 3,728,000)Net advantage (disadvantage)................................... $ 176,000

90. What is the maximum amount the company should be willing to pay an outside supplier per unit for the part if the supplier commits to supplying all 80,000 units required each year?A) $7.00B) $62.40C) $48.80D) $55.40


Solution:

Relevant cost per unit:Direct materials...................................................... $14.90Direct labor............................................................ 17.50Variable manufacturing overhead.......................... 1.90Fixed manufacturing overhead ($21.10 − $13.60) 7.50 Relevant manufacturing cost................................. $41.80

Maximum acceptable purchase price:Manufacturing cost savings ($41.80 × 80,000)..... $3,344,000Additional contribution margin............................. 560,000Total benefit........................................................... $3,904,000Number of units..................................................... 80,000Benefit per unit...................................................... $48.80


Penagos Corporation is presently making part Z43 that is used in one of its products. A total of 5,000 units of this part are produced and used every year. The company's Accounting Department reports the following costs of producing the part at this level of activity:

Per UnitDirect materials.......................................... $1.10Direct labor................................................ $3.10Variable overhead...................................... $6.90Supervisor’s salary..................................... $5.80Depreciation of special equipment............. $5.20Allocated general overhead........................ $5.60

An outside supplier has offered to produce and sell the part to the company for $20.80 each. If this offer is accepted, the supervisor's salary and all of the variable costs, including direct labor, can be avoided. The special equipment used to make the part was purchased many years ago and has no salvage value or other use. The allocated general overhead represents fixed costs of the entire company. If the outside supplier's offer were accepted, only $4,000 of these allocated general overhead costs would be avoided.

91. If management decides to buy part Z43 from the outside supplier rather than to continue making the part, what would be the annual impact on the company's overall net operating income?A) Net operating income would decline by $34,500 per year.B) Net operating income would decline by $30,500 per year.C) Net operating income would decline by $15,500 per year.D) Net operating income would decline by $38,500 per year.


Solution:Make Buy

Direct materials (5,000 units @ $1.10 per unit).......... $ 5,500Direct labor (5,000 units @ $3.10 per unit)................. 15,500Variable overhead (5,000 units @ $6.90 per unit)...... 34,500Supervisor’s salary (5,000 units @ $5.80 per unit)..... 29,000Depreciation of special equipment (not relevant)........ 0Allocated general overhead (avoidable only).............. 4,000Outside purchase price (5,000 units @ $20.80 per

unit).......................................................................... $104,000Total cost..................................................................... $88,500 $104,000

The total cost of the make alternative is lower by $15,500. Thus, net operating income would decline by $15,500 if the offer from the supplier were accepted.

92. In addition to the facts given above, assume that the space used to produce part Z43 could be used to make more of one of the company's other products, generating an additional segment margin of $24,000 per year for that product. What would be the impact on the company's overall net operating income of buying part Z43 from the outside supplier and using the freed space to make more of the other product?A) Net operating income would decline by $10,500 per year.B) Net operating income would decline by $58,500 per year.C) Net operating income would increase by $24,000 per year.D) Net operating income would increase by $8,500 per year.


Solution:Make Buy

Direct materials (5,000 units @ $1.10 per unit).. . . $ 5,500Direct labor (5,000 units @ $3.10 per unit)........... 15,500Variable overhead (5,000 units @ $6.90 per unit). 34,500Supervisor’s salary (5,000 units @ $5.80 per unit) 29,000Depreciation of special equipment (not relevant). . 0Allocated general overhead (avoidable only)........ 4,000Outside purchase price (5,000 units @ $20.80 per

unit).................................................................... $104,000Opportunity cost..................................................... ( 24,000 )Total cost................................................................ $88,500 $ 80,000

The total cost of the make alternative is higher by $8,500. Thus, net operating income would increase by $8,500 if the offer from the supplier were accepted.


Mcfarlain Corporation is presently making part U98 that is used in one of its products. A total of 7,000 units of this part are produced and used every year. The company's Accounting Department reports the following costs of producing the part at this level of activity:


An outside supplier has offered to produce and sell the part to the company for $17.10 each. If this offer is accepted, the supervisor's salary and all of the variable costs, including direct labor, can be avoided. The special equipment used to make the part was purchased many years ago and has no salvage value or other use. The allocated general overhead represents fixed costs of the entire company, none of which would be avoided if the part were purchased instead of produced internally.

93. If management decides to buy part U98 from the outside supplier rather than to continue making the part, what would be the annual impact on the company's overall net operating income?A) Net operating income would decline by $30,800 per year.B) Net operating income would increase by $25,200 per year.C) Net operating income would increase by $30,800 per year.D) Net operating income would decline by $25,200 per year.


Solution:Make Buy

Direct materials (7,000 units @ $3.70 per unit).. . . $ 25,900Direct labor (7,000 units @ $3.60 per unit)........... 25,200Variable overhead (7,000 units @ $1.40 per unit). 9,800Supervisor’s salary (7,000 units @ $4.00 per unit) 28,000Depreciation of special equipment (not relevant). . 0Allocated general overhead (not relevant)............. 0Outside purchase price (7,000 units @ $17.10 per

unit).................................................................... $119,700Total cost................................................................ $88,900 $119,700

The total cost of the make alternative is lower by $30,800. Thus, net operating income would decline by $30,800 if the offer from the supplier were accepted.

94. In addition to the facts given above, assume that the space used to produce part U98 could be used to make more of one of the company's other products, generating an additional segment margin of $24,000 per year for that product. What would be the impact on the company's overall net operating income of buying part U98 from the outside supplier and using the freed space to make more of the other product?A) Net operating income would decline by $6,800 per year.B) Net operating income would decline by $1,200 per year.C) Net operating income would increase by $24,000 per year.D) Net operating income would decline by $49,200 per year.


Solution:Make Buy

Direct materials (7,000 units @ $3.70 per unit).. . . $ 25,900Direct labor (7,000 units @ $3.60 per unit)........... 25,200Variable overhead (7,000 units @ $1.40 per unit). 9,800Supervisor’s salary (7,000 units @ $4.00 per unit) 28,000Depreciation of special equipment (not relevant). . 0Allocated general overhead (not relevant)............. 0Outside purchase price (7,000 units @ $17.10 per

unit).................................................................... $119,700Opportunity cost..................................................... ( 24,000 )Total cost................................................................ $88,900 $95,700

The total cost of the make alternative is less by $6,800. Thus, net operating income would decline by $6,800 if the offer from the supplier were accepted.


Younes Inc. manufactures industrial components. One of its products, which is used in the construction of industrial air conditioners, is known as P06. Data concerning this product are given below:

Per UnitSelling price..................................................... $220Direct materials................................................ $38Direct labor...................................................... $1Variable manufacturing overhead.................... $8Fixed manufacturing overhead........................ $16Variable selling expense.................................. $4Fixed selling and administrative expense........ $16

The above per unit data are based on annual production of 4,000 units of the component. Direct labor can be considered to be a variable cost.

95. The company has received a special, one-time-only order for 400 units of component P06. There would be no variable selling expense on this special order and the total fixed manufacturing overhead and fixed selling and administrative expenses of the company would not be affected by the order. Assuming that Younes has excess capacity and can fill the order without cutting back on the production of any product, what is the minimum price per unit on the special order below which the company should not go?A) $47B) $83C) $63D) $220

Ans: A AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making; Reporting LO: 4 Level: Medium Source: CMA, adapted

Solution:

Variable cost per unit on normal sales:Direct materials...................................................... $38Direct labor............................................................ 1Variable manufacturing overhead.......................... 8Variable selling expense........................................ 4 Variable cost per unit on normal sales................... $51

Variable cost per unit on special order:Normal variable cost per unit................................. $51Reduction in variable selling expense.................... ( 4 )Variable cost per unit on special order.................. $47

96. The company has received a special, one-time-only order for 500 units of component P06. There would be no variable selling expense on this special order and the total fixed manufacturing overhead and fixed selling and administrative expenses of the company would not be affected by the order. However, assume that Younes has no excess capacity and this special order would require 30 minutes of the constraining resource, which could be used instead to produce products with a total contribution margin of $10,000. What is the minimum price per unit on the special order below which the company should not go?A) $67B) $103C) $20D) $83

Ans: A AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making; Reporting LO: 4,5 Level: Hard Source: CMA, adapted

Solution:

Variable cost per unit on normal sales:Direct materials............................................................. $38Direct labor.................................................................... 1Variable manufacturing overhead................................. 8Variable selling expense................................................ 4 Variable cost per unit on normal sales.......................... $51

Variable cost per unit on special order:Normal variable cost per unit........................................ $51Reduction in variable selling expense........................... ( 4)Opportunity cost of sales given up $10,000 ÷ 500)....... 20Variable cost per unit on special order.......................... $67

97. Refer to the original data in the problem. What is the current contribution margin per unit for component P06 based on its selling price of $220 and its annual production of 4,000 units?A) $51B) $137C) $169D) $173

Ans: C AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 4 Level: Easy Source: CMA, adapted

Solution:

Variable cost per unit:Direct materials...................................................... $38Direct labor............................................................ 1Variable manufacturing overhead.......................... 8Variable selling expense........................................ 4 Variable cost per unit............................................. $51

Contribution margin per unit:Selling price........................................................... $220Variable cost per unit............................................. 51Contribution margin............................................... $169


The following are Silver Company's unit costs of making and selling an item at a volume of 8,000 units per month (which represents the company's capacity):

Manufacturing:Direct materials........................... $4Direct labor................................. $5Variable overhead....................... $2Fixed overhead............................ $8

Selling and administrative:Variable....................................... $1Fixed........................................... $6

Present sales amount to 7,000 units per month. An order has been received from a customer in a foreign market for 1,000 units at a price of $20 per unit. The order would not affect regular sales. Fixed costs, both manufacturing and selling and administrative, are constant within the relevant range between 6,000 and 8,000 units per month. The variable selling and administrative costs would have to be incurred for this special order as well as all other sales.

98. If the company accepts the special order, the effect on total operating income will be a:A) $1,000 increaseB) $9,000 increaseC) $6,000 decreaseD) $8,000 increase


Solution:

Variable cost per unit on normal sales:Direct materials...................................................... $ 4Direct labor............................................................ 5Variable manufacturing overhead.......................... 2Variable selling & administrative expense............ 1 Variable cost per unit on normal sales................... $12

Selling price for special order................................ $20Variable cost per unit on special order.................. 12 Unit contribution margin on special order............. $ 8Number of units in special order............................ 1,000Increase (decrease) in net operating income.......... $8,000

99. The company has 100 defective units of Product X left over from last year which will have to be sold as scrap at reduced prices. The sale of these units would have no effect on the company's other sales. The cost figure that is relevant as a guide for setting a minimum price on these units is:A) $7B) $1C) $19D) $12

Ans: B AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making; Reporting LO: 4 Level: Hard

Solution:

Except for variable selling and administrative expenses ($1), all other expenses associated with theses 100 defective units are sunk (already incurred) and therefore irrelevant.


Elfving Company produces a single product. The cost of producing and selling a single unit of this product at the company's normal activity level of 80,000 units per month is as follows:

Direct materials...................................................... $37.50Direct labor............................................................ $6.00Variable manufacturing overhead.......................... $1.00Fixed manufacturing overhead.............................. $11.50Variable selling & administrative expense............ $1.80Fixed selling & administrative expense................. $8.00

The normal selling price of the product is $71.10 per unit.

An order has been received from an overseas customer for 1,000 units to be delivered this month at a special discounted price. This order would have no effect on the company's normal sales and would not change the total amount of the company's fixed costs. The variable selling and administrative expense would be $1.50 less per unit on this order than on normal sales.

Direct labor is a variable cost in this company.

100. Suppose there is ample idle capacity to produce the units required by the overseas customer and the special discounted price on the special order is $63.70 per unit. By how much would this special order increase (decrease) the company's net operating income for the month?A) $7,400B) ($5,900)C) $18,900D) ($2,100)


Solution:

Variable cost per unit on normal sales:Direct materials...................................................... $37.50Direct labor............................................................ 6.00Variable manufacturing overhead.......................... 1.00Variable selling & administrative expense............ 1.80 Variable cost per unit on normal sales................... $46.30

Variable cost per unit on special order:Normal variable cost per unit................................. $46.30Reduction in variable selling and administrative

expense............................................................... ( 1.50) Variable cost per unit on special order.................. $44.80

Selling price for special order................................ $63.70Variable cost per unit on special order.................. 44.80 Unit contribution margin on special order............. $18.90Number of units in special order............................ 1,000Increase (decrease) in net operating income.......... $18,900

101. Suppose the company is already operating at capacity when the special order is received from the overseas customer. What would be the opportunity cost of each unit delivered to the overseas customer?A) $24.80B) $6.80C) $7.40D) $5.30

Ans: A AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making; Reporting LO: 4 Level: Hard

Solution:


Selling price for normal sales................................ $71.10Variable cost per unit............................................. 46.30Unit contribution margin........................................ $24.80

102. Suppose there is not enough idle capacity to produce all of the units for the overseas customer and accepting the special order would require cutting back on production of 400 units for regular customers. The minimum acceptable price per unit for the special order is closest to:A) $56.00B) $65.80C) $71.10D) $54.72

Ans: D AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making; Reporting LO: 4 Level: Hard

Solution:


Lost contribution margin:Selling price for normal sales............................. $71.10Variable cost per unit on normal sales............... 46.30Contribution margin per unit.............................. $24.80Number of units cut back in production............. 400Total lost contribution margin............................ $9,920Number of units in special order........................ 1,000

Lost contribution margin per unit.......................... $9.92

Variable cost per unit on special order:Normal variable cost per unit................................................ $46.30Add opportunity cost for lost contribution margin............... 9.92Reduction in variable selling and administrative expense.... (1.50) Variable cost per unit on special order................................. $54.72


The Bharu Violin Company has the capacity to manufacture and sell 5,000 violins each year but is currently only manufacturing and selling 4,800. The following per unit numbers relate to annual operations at 4,800 units:

Per ViolinSelling price............................................... $600Manufacturing costs:

Variable................................................... $130Fixed....................................................... $270

Selling and administrative costs:Variable................................................... $20Fixed....................................................... $40

Woolgar Symphony Orchestra is interested in purchasing Bharu's excess capacity of 200 units but only if they can get the violins for $350 each. This special order would not affect regular sales or the cost structure above.

103. If the special order from Woolgar Symphony Orchestra is accepted, Bharu's profits for the year will:A) increase by $40,000B) decrease by $10,000C) decrease by $22,000D) decrease by $28,000


Solution:

Incremental revenues (200 units @ $350)............. $70,000Less incremental costs:

Variable manufacturing (200 units @ $130)...... ( 26,000)Variable selling (200 units @ $20)..................... ( 4,000 )

Net advantage of accepting the order..................... $ 40,000

104. Assume that Bharu is manufacturing and selling at capacity (5,000 units). Any special order will mean a loss of regular sales. Under these conditions if the special order from Woolgar Symphony Orchestra is accepted, Bharu's profits for the year will decrease by:A) $20,000B) $22,000C) $28,000D) $50,000


Solution:

Contribution margin per unit of regular sales:Selling price........................................................ $600Variable manufacturing costs............................. 130Variable selling costs.......................................... 20Contribution margin per unit.............................. $450Number of units of lost sales.............................. 200

Total lost contribution margin............................... $90,000

Incremental revenues (200 units @ $350)............. $70,000Less incremental costs:

Variable manufacturing (200 units @ $130)...... ( 26,000)Variable selling (200 units @ $20)..................... ( 4,000)

Less lost contribution margin................................. ( 90,000)Net disadvantage of accepting special order.......... ($50,000)


Browning Company makes four products in a single facility. These products have the following unit product costs:

Product A

Product B

Product C

Product D

Direct materials................................. $10.60 $7.90 $6.10 $3.80Direct labor....................................... 11.40 16.80 8.70 11.40Variable manufacturing overhead..... 3.70 4.10 5.40 6.10Fixed manufacturing overhead......... 24.60 34.40 21.50 19.30 Unit product cost............................... $50.30 $63.20 $41.70 $40.60

Additional data concerning these products are listed below.

Product A

Product B

Product C

Product D

Grinding minutes per unit................. 2.60 1.80 2.50 1.40Selling price per unit......................... $69.50 $74.80 $59.50 $59.60Variable selling cost per unit............ $1.60 $1.50 $2.60 $3.40Monthly demand in units.................. 4,000 2,000 3,000 4,000

The grinding machines are potentially the constraint in the production facility. A total of 24,500 minutes are available per month on these machines.


105. How many minutes of grinding machine time would be required to satisfy demand for all four products?A) 21,500B) 27,100C) 13,000D) 24,500


Solution:

Demand on the grinding machine:Product

AProduct

BProduct

CProduct

DGrinding minutes per unit................. 2.60 1.80 2.50 1.40Monthly demand in units.................. 4,000 2,000 3,000 4,000Total minutes required...................... 10,400 3,600 7,500 5,600

Total time required for all products = 10,400 + 3,600 + 7,500 + 5,600 = 27,100

106. Which product makes the LEAST profitable use of the grinding machines?A) Product AB) Product BC) Product CD) Product D


Solution:

Optimal production plan:Product

AProduct

BProduct

CProduct

DSelling price per unit............................ $69.50 $74.80 $59.50 $59.60Direct materials per unit....................... 10.60 7.90 6.10 3.80Direct labor per unit............................. 11.40 16.80 8.70 11.40Variable manufacturing overhead per unit 3.70 4.10 5.40 6.10Variable selling cost per unit............... 1.60 1.50 2.60 3.40 Contribution margin per unit............... $42.20 $44.50 $36.70 $34.90

Grinding minutes per unit.................... 2.60 1.80 2.50 1.40Contribution margin per minute........... $16.23 $24.72 $14.68 $24.93

Rank in terms of profitability............... 3 2 4 1

107. Which product makes the MOST profitable use of the grinding machines?A) Product AB) Product BC) Product CD) Product D

Ans: D AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making; Reporting LO: 5 Level: Hard

Solution:


AProduct

BProduct

CProduct

DSelling price per unit.................... $69.50 $74.80 $59.50 $59.60Direct materials per unit............... 10.60 7.90 6.10 3.80Direct labor per unit...................... 11.40 16.80 8.70 11.40Variable manufacturing overhead per unit 3.70 4.10 5.40 6.10Variable selling cost per unit........ 1.60 1.50 2.60 3.40 Contribution margin per unit........ $42.20 $44.50 $36.70 $34.90

Grinding minutes per unit............. 2.60 1.80 2.50 1.40Contribution margin per minute... $16.23 $24.72 $14.68 $24.93

Rank in terms of profitability....... 3 2 4 1

108. Up to how much should the company be willing to pay for one additional minute of grinding machine time if the company has made the best use of the existing grinding machine capacity? (Round off to the nearest whole cent.)A) $0.00B) $14.68C) $34.90D) $11.60

Ans: B AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making; Reporting LO: 5 Level: Hard

Solution:


AProduct

BProduct

CProduct

DSelling price per unit............................ $69.50 $74.80 $59.50 $59.60Direct materials per unit....................... 10.60 7.90 6.10 3.80Direct labor per unit............................. 11.40 16.80 8.70 11.40Variable manufacturing overhead per unit 3.70 4.10 5.40 6.10Variable selling cost per unit............... 1.60 1.50 2.60 3.40 Contribution margin per unit............... $42.20 $44.50 $36.70 $34.90

Grinding minutes per unit.................... 2.60 1.80 2.50 1.40Contribution margin per minute........... $16.23 $24.72 $14.68 $24.93


The company should be willing to pay up to the contribution margin per minute for the marginal job, which is $14.68.


Crawshan Company makes four products in a single facility. Data concerning these products appear below:

Product A

Product B

Product C

Product D

Selling price per unit............................ $38.50 $33.80 $37.70 $38.60Variable manufacturing cost per unit... $22.10 $19.50 $23.20 $25.70Variable selling cost per unit............... $3.00 $2.90 $3.50 $1.10Milling machine minutes per unit........ 3.20 3.00 2.50 3.00Monthly demand in units..................... 2,000 1,000 3,000 1,000

The milling machines are potentially the constraint in the production facility. A total of 17,000 minutes are available per month on these machines.

109. How many minutes of milling machine time would be required to satisfy demand for all four products?A) 19,900B) 17,000C) 14,600D) 7,000


Solution:

Demand on the milling machine:Product

AProduct

BProduct

CProduct

DMilling machine minutes per unit........ 3.20 3.00 2.50 3.00Monthly demand in units..................... 2,000 1,000 3,000 1,000Total minutes required 6,400 3,000 7,500 3,000

Total time required for all products = 6,400 + 3,000 + 7,500 + 3,000 = 19,900

110. Which product makes the LEAST profitable use of the milling machines?A) Product AB) Product BC) Product CD) Product D


Solution:


AProduct

BProduct

CProduct

DSelling price per unit............................ $38.50 $33.80 $37.70 $38.60Variable manufacturing cost per unit... 22.10 19.50 23.20 25.70Variable selling cost per unit............... 3.00 2.90 3.50 1.10 Contribution margin per unit............... $13.40 $11.40 $11.00 $11.80Milling machine minutes per unit........ 3.20 3.00 2.50 3.00Contribution margin per minute........... $4.19 $3.80 $4.40 $3.93


111. Which product makes the MOST profitable use of the milling machines?A) Product AB) Product BC) Product CD) Product D


Solution:


AProduct

BProduct

CProduct



112. Up to how much should the company be willing to pay for one additional minute of milling machine time if the company has made the best use of the existing milling machine capacity? (Round off to the nearest whole cent.)A) $11.00B) $0.00C) $3.80D) $13.40


Solution:


AProduct

BProduct

CProduct



The company should be willing to pay up to the contribution margin per minute for the least profitable job, which is $3.80.


Bertucci Corporation makes three products that use the current constraint-a particular type of machine. Data concerning those products appear below:

TC GL NGSelling price per unit............. $494.40 $449.43 $469.68Variable cost per unit............ $395.20 $320.21 $373.92Minutes on the constraint...... 8.00 7.10 7.60

113. Rank the products in order of their current profitability from most profitable to least profitable. In other words, rank the products in the order in which they should be emphasized.A) TC, NG, GLB) GL, NG, TCC) GL, TC, NGD) TC, GL, NG


Solution:

TC GL NGSelling price per unit.................................. $494.40 $449.43 $469.68Variable cost per unit................................. 395.20 320.21 373.92 Contribution margin per unit..................... $ 99.20 $129.22 $ 95.76Minutes on the constraint........................... 8.00 7.10 7.60Contribution margin per unit of the

constrained resource............................... $12.40 $18.20 $12.60

Ranking...................................................... 3 1 2

Resulting ranking of products: GL, NG, TC

114. Assume that sufficient constraint time is available to satisfy demand for all but the least profitable product. Up to how much should the company be willing to pay to acquire more of the constrained resource?A) $12.40 per minuteB) $18.20 per minuteC) $129.22 per unitD) $95.76 per unit


Solution:TC GL NG

Selling price per unit............. $494.40 $449.43 $469.68Variable cost per unit............ 395.20 320.21 373.92 Contribution margin per unit $ 99.20 $129.22 $ 95.76Minutes on the constraint...... 8.00 7.10 7.60Contribution margin per unit

of the constrained resource $12.40 $18.20 $12.60

Ranking................................. 3 1 2

The company should be willing to pay up to $12.40 per minute to obtain more of the constrained resource because this is the value to the company of using this constrained resource to make more of product TC. By assumption, the other products will already have been produced up to demand.


The constraint at Pickrel Corporation is time on a particular machine. The company makes three products that use this machine. Data concerning those products appear below:

VD JT SMSelling price per unit............. $344.85 $415.40 $119.32Variable cost per unit............ $270.18 $310.88 $91.96Minutes on the constraint...... 5.70 6.70 1.90

115. Rank the products in order of their current profitability from most profitable to least profitable. In other words, rank the products in the order in which they should be emphasized.A) JT, SM, VDB) JT, VD, SMC) VD, SM, JTD) SM, VD, JT


Solution:VD JT SM

Selling price per unit.........................$344.8

5 $415.40 $119.32

Variable cost per unit......................... 270.1

8 310.88 91.96

Contribution margin per unit.............$ 74.6

7 $104.52 $ 27.36Time on the constraint (minutes)....... 5.70 6.70 1.90Contribution margin per unit of the

constrained resource....................... $13.10 $15.60 $14.40Ranking.............................................. 3 1 2

116. Assume that sufficient time is available on the constrained machine to satisfy demand for all but the least profitable product. Up to how much should the company be willing to pay to acquire more of this constrained resource?A) $15.60 per minuteB) $13.10 per minuteC) $104.52 per unitD) $27.36 per unit


Solution:VD JT SM


5 $415.40 $119.32

Variable cost per unit......................... 270.1

8 310.88 91.96


7 $104.52 $ 27.36Time on the constraint (minutes)....... 5.70 6.70 1.90Contribution margin per unit of the


Resulting ranking of products: JT, SM, VD

The company should be willing to pay up to $13.10 per minute to obtain more of the constrained resource because this is the value to the company of using this constrained resource to make more of product VD. By assumption, the other products will already have been produced up to demand.


The Anthony Company makes two products, X and Y, in a joint process. At the split-off point, 60,000 units of product X and 70,000 units of product Y are available each month. Monthly joint production costs total $200,000. Product X can be sold at the split-off point for $3.20 per unit. Product Y can be either sold at the split-off point for $2.60 per unit or it can be processed further and sold for $5.80 per unit. If product Y is processed further, additional processing costs of $2.30 per unit will be incurred.

117. If product Y is processed further, rather than being sold at the split-off point, the impact on monthly operating income should be:A) $137,000 decreaseB) $245,000 increaseC) $63,000 increaseD) $244,000 increase


Solution:

Analysis of sell or process further:Product Y

Final sales value after further processing............ $5.80Less sales value at split-off point........................ 2.60Incremental revenue from further processing..... 3.20Less cost of further processing........................... 2.30 Profit (loss) from further processing................... $ 0.90

Total increase in monthly operating income: 70,000 units × $0.90 = $63,000

118. What would the unit selling price of product Y need to be at the split-off point in order for Anthony to be economically indifferent between selling Y at split-off or processing Y further before sale?A) $3.80B) $3.50C) $3.20D) $2.90


Solution:

For Anthony to be economically indifferent between selling Y at the split-off or processing Y further, the incremental revenue from further processing would need to be equal to the cost of further processing, or:$5.80 − Sales value at split-off point = $2.30Sales value at split-off point = $3.50


Dodd Company makes two products from a common input. Joint processing costs up to the split-off point total $35,000 a year. The company allocates these costs to the joint products on the basis of their total sales values at the split-off point. Each product may be sold at the split-off point or processed further. Data concerning these products appear below:

Product XProduct

Y TotalAllocated joint processing costs................. $14,000 $21,000 $35,000Sales value at split-off point...................... $20,000 $30,000 $50,000Costs of further processing........................ $23,500 $16,900 $40,400Sales value after further processing........... $45,500 $47,500 $93,000

119. What is the net monetary advantage (disadvantage) of processing Product X beyond the split-off point?A) $22,000B) $8,000C) $28,000D) $2,000


Solution:Product X

Sales value after further processing........... $45,500Costs of further processing........................ 23,500Benefit of further processing..................... 22,000Less: Sales value at split-off point............. 20,000 Net advantage (disadvantage).................... $ 2,000

120. What is the net monetary advantage (disadvantage) of processing Product Y beyond the split-off point?A) $30,600B) $9,600C) $39,600D) $600


Solution:Product Y

Sales value after further processing........... $47,500Costs of further processing........................ 16,900 Benefit of further processing..................... 30,600Less: Sales value at split-off point............. 30,000 Net advantage (disadvantage).................... $ 600

121. What is the minimum amount the company should accept for Product X if it is to be sold at the split-off point?A) $45,500B) $14,000C) $22,000D) $37,500


Solution:Product X

Sales value after further processing........... $45,500Costs of further processing........................ 23,500Benefit of processing Product X further.... $22,000

Since the company could earn $22,000 in incremental benefits from processing Product X further, the $22,000 represents the minimum that the company should accept for Product X if it is sold at the split-off point.


Mae Refiners, Inc., processes sugar cane that it purchases from farmers. Sugar cane is processed in batches. A batch of sugar cane costs $60 to buy from farmers and $13 to crush in the company's plant. Two intermediate products, cane fiber and cane juice, emerge from the crushing process. The cane fiber can be sold as is for $29 or processed further for $13 to make the end product industrial fiber that is sold for $61. The cane juice can be sold as is for $40 or processed further for $28 to make the end product molasses that is sold for $67.

122. How much profit (loss) does the company make by processing one batch of sugar cane into the end products industrial fiber and molasses?A) ($4)B) ($114)C) $18D) $14


Solution:Cane Fiber Cane Juice

Sales value after further processing........... $61 $67Costs of further processing........................ 13 28Benefit of further processing..................... 48 39Less: Sales value at split-off point............. 29 40Net advantage (disadvantage).................... $19 ($1)

Revenue:Industrial fiber.................... $61Refined sugar...................... 67

Total revenue......................... $128Less expenses:

Purchase from farmers....... 60Crushing costs.................... 13Processing fiber further...... 13Processing juice further...... 28

Total expenses........................ 114Net profit from one batch....... $ 14

123. How much profit (loss) does the company make by processing the intermediate product cane juice into molasses rather than selling it as is?A) ($74)B) ($14)C) ($1)D) ($38)


Solution:Cane Juice

Sales value after further processing........... $67Costs of further processing........................ 28Benefit of further processing..................... 39Less: Sales value at split-off point............. 40Net advantage (disadvantage).................... ($1)

124. Which of the intermediate products should be processed further?A) Cane fiber should be processed into industrial fiber; Cane juice should be

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

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

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

processed into molasses


Solution:Cane Fiber Cane Juice

Sales value after further processing........... $61 $67Costs of further processing........................ 13 28Benefit of further processing..................... 48 39Less: Sales value at split-off point............. 29 40Net advantage (disadvantage).................... $19 ($1)


Boney Corporation processes sugar beets that it purchases from farmers. Sugar beets are processed in batches. A batch of sugar beets costs $53 to buy from farmers and $18 to crush in the company's plant. Two intermediate products, beet fiber and beet juice, emerge from the crushing process. The beet fiber can be sold as is for $25 or processed further for $18 to make the end product industrial fiber that is sold for $39. The beet juice can be sold as is for $32 or processed further for $28 to make the end product refined sugar that is sold for $79.

125. How much profit (loss) does the company make by processing one batch of sugar beets into the end products industrial fiber and refined sugar?A) $15B) ($14)C) ($117)D) $1


Solution:Beet Fiber Beet Juice

Sales value after further processing........... $39 $79Costs of further processing........................ 18 28Benefit of further processing..................... 21 51Less: Sales value at split-off point............. 25 32Net advantage (disadvantage).................... ($4) $19

Revenue:Industrial fiber................................ $39Refined sugar.................................. 79

Total revenue..................................... $118Less expenses:

Purchase from farmers................... 53Crushing costs................................ 18Processing fiber further.................. 18Processing juice further.................. 28

Total expenses.................................... 117Net profit from one batch................... $ 1

126. How much profit (loss) does the company make by processing the intermediate product beet juice into refined sugar rather than selling it as is?A) $1B) ($17)C) $19D) ($52)


Solution:Beet Juice

Sales value after further processing........... $79Costs of further processing........................ 28Benefit of further processing..................... 51Less: Sales value at split-off point............. 32Net advantage (disadvantage).................... $19

127. Which of the intermediate products should be processed further?A) beet fiber should be processed into industrial fiber; beet juice should be

processed into refined sugarB) beet fiber should NOT be processed into industrial fiber; beet juice should NOT

be processed into refined sugarC) beet fiber should NOT be processed into industrial fiber; beet juice should be

processed into refined sugarD) beet fiber should be processed into industrial fiber; beet juice should NOT be

processed into refined sugar


Solution:Beet Fiber Beet Juice

Sales value after further processing........... $39 $79Costs of further processing........................ 18 28Benefit of further processing..................... 21 51Less: Sales value at split-off point............. 25 32Net advantage (disadvantage).................... ($4) $19

Essay Questions

128. Saalfrank Corporation is considering two alternatives that are code-named M and N. Costs associated with the alternatives are listed below:

Alternative M Alternative N

Supplies costs......... $43,000 $53,000Assembly costs....... $43,000 $56,000Power costs............ $26,000 $26,000Inspection costs...... $19,000 $26,000

Required:

a. Which costs are relevant and which are not relevant in the choice between these two alternatives?

b. What is the differential cost between the two alternatives?

Ans:

a.Supplies costs Relevant, since costs differ between alternativesAssembly costs Relevant, since costs differ between alternativesPower costs Not relevant since the costs do not differ between alternativesInspection costs Relevant, since costs differ between alternatives

b.Alternative M Alternative N Differential

Supplies costs......... $ 43,000 $ 53,000 $10,000Assembly costs....... 43,000 56,000 13,000Power costs............ 26,000 26,000 0Inspection costs...... 19,000 26,000 7,000 Total....................... $131,000 $161,000 $30,000

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making; Reporting LO: 1 Level: Easy

129. Costs associated with two alternatives, code-named Q and R, being considered by Albiston Corporation are listed below:

Alternative Q Alternative R

Supplies costs......... $65,000 $65,000Power costs............ $30,000 $29,000Inspection costs...... $18,000 $29,000Assembly costs....... $33,000 $33,000

Required:

a. Which costs are relevant and which are not relevant in the choice between these two alternatives?

b. What is the differential cost between the two alternatives?

Ans:

a.Supplies costs Not relevant since the costs do not differ between alternativesPower costs Relevant, since costs differ between alternativesInspection costs Relevant, since costs differ between alternativesAssembly costs Not relevant since the costs do not differ between alternatives

b.Alternative Q Alternative R Differential

Supplies costs......... $ 65,000 $ 65,000 $ 0Power costs............ 30,000 29,000 (1,000)Inspection costs...... 18,000 29,000 11,000Assembly costs....... 33,000 33,000 0 Total....................... $146,000 $156,000 $10,000


130. The most recent monthly income statement for Benner Stores is given below:

Total Store A Store BSales................................... $1,000,000 $400,000 $600,000Variable expenses.............. 580,000 160,000 420,000 Contribution margin........... 420,000 240,000 180,000Traceable fixed expenses.. . 300,000 100,000 200,000 Store segment margin........ 120,000 140,000 (20,000)Common fixed expenses.... 50,000 20,000 30,000 Net operating income......... $ 70,000 $120,000 ($ 50,000 )

Due to its poor showing, consideration is being given to closing Store B. Studies show that if Store B is closed, one-fourth of its traceable fixed expenses will continue unchanged. The studies also show that closing Store B would result in a 10 percent decrease in sales in Store A. The company allocates common fixed expenses to the stores on the basis of sales dollars.

Required:

Compute the overall increase or decrease in the company's operating income if Store B is closed.

Ans:

Loss in contribution margin if Store B is closed:Store B loss........................................................................... ($180,000)Store A loss (10% × $240,000)............................................. ( 24,000 )Total lost contribution margin.............................................. ( 204,000)Fixed costs avoided if Store B is closed (75% × $200,000). 150,000 Net disadvantage of closing Store B..................................... ($ 54,000 )

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making; Reporting LO: 2 Level: Medium

131. Companies often allocate common fixed costs among segments. For example, common fixed corporate costs are often allocated to divisions and appear as part of the divisional performance reports.

Required:

What dangers are there in allocating common fixed costs to segments when involved in a decision to possibly drop a segment such as a product or a division?

Ans:

A segment such as a product or a division may show a net loss only because of the allocated common fixed cost. However, if the segment is dropped, the common fixed expense will continue. A segment should be dropped only if its contribution margin does not cover its own avoidable fixed costs. And even in cases where a segment does not cover its own costs, it may be beneficial to retain the segment if it has positive effects on other segments. For example, a “losing” product may be important in luring customers into a store where they will buy other products.


132. The management of Schmader Corporation is considering dropping product M12C. Data from the company's accounting system appear below:


All fixed expenses of the company are fully allocated to products in the company's accounting system. Further investigation has revealed that $137,000 of the fixed manufacturing expenses and $79,000 of the fixed selling and administrative expenses are avoidable if product M12C is discontinued.

Required:

a. What is the net operating income earned by product M12C according to the company's accounting system? Show your work!

b. What would be the effect on the company's overall net operating income of dropping product M12C? Should the product be dropped? Show your work!

Ans:Keep the Product



Fixed manufacturing expenses.... 215,000 78,000 137,000 Fixed selling and administrative

expenses.................................. 132,000 53,000 79,000 Total fixed expenses...................... 347,000 131,000 216,000 Net operating income (loss)........... ($ 39,000 ) ($131,000) ($92,000)

a. According to the company’s accounting system, the product’s net operating loss is $39,000.

b. Net operating income would decline by $92,000 if product M12C were dropped. Therefore, the product should not be dropped.


133. Suire Corporation is considering dropping product D14E. Data from the company's accounting system appear below:


All fixed expenses of the company are fully allocated to products in the company's accounting system. Further investigation has revealed that $72,000 of the fixed manufacturing expenses and $48,000 of the fixed selling and administrative expenses are avoidable if product D14E is discontinued.

Required:

a. According to the company's accounting system, what is the net operating income earned by product D14E? Show your work!

b. What would be the effect on the company's overall net operating income of dropping product D14E? Should the product be dropped? Show your work!



Sales................................................ $340,000 $ 0 ($340,000)Variable expenses........................... 156,000 0 156,000 Contribution margin........................ 184,000 0 ( 184,000 )Fixed expenses:Fixed manufacturing expenses........ 116,000 44,000 72,000Fixed selling and administrative

expenses...................................... 75,000 27,000 48,000 Total fixed expenses....................... 191,000 71,000 120,000 Net operating income (loss)............ ($ 7,000 ) ($71,000) ($ 64,000 )

a. According to the company’s accounting system, the product’s net operating loss is $7,000.

b. Net operating income would decline by $64,000 if product D14E were dropped. Therefore, the product should not be dropped.


134. The management of Wengel Corporation is considering dropping product B90D. Data from the company's accounting system appear below:


All fixed expenses of the company are fully allocated to products in the company's accounting system. Further investigation has revealed that $173,000 of the fixed manufacturing expenses and $150,000 of the fixed selling and administrative expenses are avoidable if product B90D is discontinued.

Required:

What would be the effect on the company's overall net operating income if product B90D were dropped? Should the product be dropped? Show your work!



Sales................................................ $720,000 $ 0 ($720,000)Variable expenses........................... 374,000 0 374,000 Contribution margin........................ 346,000 0 ( 346,000 )Fixed expenses:Fixed manufacturing expenses........ 245,000 72,000 173,000Fixed selling and administrative

expenses...................................... 209,000 59,000 150,000 Total fixed expenses....................... 454,000 131,000 323,000 Net operating income (loss)............ ($108,000) ($131,000) ($ 23,000 )

Net operating income would decline by $23,000 if product B90D were dropped. Therefore, the product should not be dropped.


135. Foubert Company makes 40,000 units per year of a part it uses in the products it manufactures. The unit product cost of this part is computed as follows:

Direct materials.................................... $13.80Direct labor.......................................... 18.10Variable manufacturing overhead........ 4.30Fixed manufacturing overhead............ 24.60 Unit product cost.................................. $60.80

An outside supplier has offered to sell the company all of these parts it needs for $51.80 a unit. If the company accepts this offer, the facilities now being used to make the part could be used to make more units of a product that is in high demand. The additional contribution margin on this other product would be $268,000 per year.If the part were purchased from the outside supplier, all of the direct labor cost of the part would be avoided. However, $17.00 of the fixed manufacturing overhead cost being applied to the part would continue even if the part were purchased from the outside supplier. This fixed manufacturing overhead cost would be applied to the company's remaining products.

Required:

a. How much of the unit product cost of $60.80 is relevant in the decision of whether to make or buy the part?

b. What is the net total dollar advantage (disadvantage) of purchasing the part rather than making it?

c. What is the maximum amount the company should be willing to pay an outside supplier per unit for the part if the supplier commits to supplying all 40,000 units required each year?

Ans:

a. Relevant cost per unit:Direct materials.......................................... $13.80Direct labor................................................ 18.10Variable manufacturing overhead.............. 4.30Fixed manufacturing overhead.................. 7.60 Relevant manufacturing cost...................... $43.80

b. Net advantage (disadvantage):Manufacturing cost savings....................... $1,752,000Additional contribution margin.................. 268,000Cost of purchasing the part........................ ( 2,072,000)Net advantage (disadvantage).................... ($ 52,000 )

c. Maximum acceptable purchase price:Manufacturing cost savings....................... $1,752,000Additional contribution margin.................. 268,000 Total benefit............................................... $2,020,000Number of units......................................... 40,000Benefit per unit.......................................... $50.50

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making; Reporting LO: 3 Level: Hard

136. Kirsten Corporation makes 100,000 units per year of a part called a B345 gasket for use in one of its products. Data concerning the unit production costs of the B345 gasket follow:

Direct materials.................................... $0.15Direct labor.......................................... 0.10Variable manufacturing overhead........ 0.13Fixed manufacturing overhead............ 0.24 Total manufacturing cost per unit........ $0.62

An outside supplier has offered to sell Kirsten Corporation all of the B345 gaskets it requires. If Kirsten Corporation decided to discontinue making the B345 gaskets, 25% of the above fixed manufacturing overhead costs could be avoided.

Required:

a. Assume Kirsten Corporation has no alternative use for the facilities presently devoted to production of the B345 gaskets. If the outside supplier offers to sell the gaskets for $0.46 each, should Kirsten Corporation accept the offer? Fully support your answer with appropriate calculations.

b. Assume that Kirsten Corporation could use the facilities presently devoted to production of the B345 gaskets to expand production of another product that would yield an additional contribution margin of $10,000 annually. What is the maximum price Kirsten Corporation should be willing to pay the outside supplier for B345 gaskets?

Ans:

a. The analysis of the alternatives follows below:Make Buy

Purchase cost..................................... $0.46Direct materials................................. $0.15Direct labor....................................... 0.10Variable manufacturing overhead..... 0.13Fixed manufacturing overhead*....... 0.06 Total cost........................................... $0.44 $0.46

*25% × $0.24

The company should make the part rather than buy it from the outside supplier since it costs $0.02 less under that alternative.

b. The maximum acceptable price is $0.54 since that is the cost to the company of making the part itself when the opportunity cost is included:

Total cost of making the part internally................. $0.44Opportunity cost per unit ($10,000 ÷ 100,000)..... 0.10 Total....................................................................... $0.54


137. McGraw Company uses 5,000 units of Part X each year as a component in the assembly of one of its products. The company is presently producing Part X internally at a total cost of $100,000, computed as follows:

Direct materials.................................... $ 15,000Direct labor.......................................... 30,000Variable manufacturing overhead........ 10,000Fixed manufacturing overhead............ 45,000 Total costs............................................ $100,000

An outside supplier has offered to provide Part X at a price of $18 per unit. If McGraw Company stops producing the part internally, one-third of the fixed manufacturing overhead would be eliminated.

Required:

Prepare an analysis showing the annual dollar advantage or disadvantage of accepting the outside supplier's offer.

Ans:Cost of Cost ofMaking Buying

Outside purchase.................................. $90,000Direct materials.................................... $15,000Direct labor.......................................... 30,000Variable manufacturing overhead........ 10,000Fixed manufacturing overhead*.......... 15,000 Total cost.............................................. $70,000 $90,000

*1/3 × $45,000 = $15,000

Therefore, the annual advantage to make the parts is $20,000.


138. Gottshall Inc. makes a range of products. The company's predetermined overhead rate is $19 per direct labor-hour, which was calculated using the following budgeted data:

Variable manufacturing overhead........ $225,000Fixed manufacturing overhead............ $630,000Direct labor-hours................................ 45,000

Component P0 is used in one of the company’s products. The unit cost of the component according to the company’s cost accounting system is determined as follows:

Direct materials.......................................... $21.00Direct labor................................................ 40.80Manufacturing overhead applied............... 32.30 Unit product cost........................................ $94.10

An outside supplier has offered to supply component P0 for $78 each. The outside supplier is known for quality and reliability. Assume that direct labor is a variable cost, variable manufacturing overhead is really driven by direct labor-hours, and total fixed manufacturing overhead would not be affected by this decision. Gottshall chronically has idle capacity.

Required:

Is the offer from the outside supplier financially attractive? Why?

Ans:

Direct materials, direct labor, and variable manufacturing overhead are relevant in this decision. Fixed manufacturing overhead is not relevant since it would not be affected by the decision. The variable portion of the manufacturing overhead rate is computed as follows:

Variable portion of the predetermined overhead rate = Variable manufacturing overhead ÷ Direct labor-hours = $225,000 ÷ 45,000 DLHs = $5.00 per DLH

The direct-labor hours per unit for the special order can be determined as follows:

Direct labor-hours = Manufacturing overhead applied ÷ Predetermined overhead rate = $32.30 ÷ $19.00 per DLH = 1.70 DLHs

Consequently, the variable manufacturing overhead for the special order would be:

Variable manufacturing overhead = Variable portion of the predetermined overhead rate × Direct labor-hours = $5.00 per DLH × 1.70 DLHs = $8.50

Putting this all together:

Direct materials.......................................... $21.00Direct labor................................................ 40.80Variable manufacturing overhead.............. 8.50 Total variable cost...................................... $70.30

Since the outside supplier has offered to sell the component for $78.00 each, but it only costs the company $70.30 to make the component internally, this is not a financially attractive offer.

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making; Reporting LO: 3 Level: Hard Source: CIMA, adapted

139. Recher Corporation uses part Q89 in one of its products. The company's Accounting Department reports the following costs of producing the 8,000 units of the part that are needed every year.


An outside supplier has offered to make the part and sell it to the company for $27.60 each. If this offer is accepted, the supervisor's salary and all of the variable costs, including direct labor, can be avoided. The special equipment used to make the part was purchased many years ago and has no salvage value or other use. The allocated general overhead represents fixed costs of the entire company. If the outside supplier's offer were accepted, only $3,000 of these allocated general overhead costs would be avoided. In addition, the space used to produce part Q89 could be used to make more of one of the company's other products, generating an additional segment margin of $16,000 per year for that product.

Required:

a. Prepare a report that shows the effect on the company's total net operating income of buying part Q89 from the supplier rather than continuing to make it inside the company.

b. Which alternative should the company choose?

Ans:

a.Make Buy

Direct materials (8,000 units @ $8.10 per unit).. . . $ 64,800Direct labor (8,000 units @ $4.40 per unit)........... 35,200Variable overhead (8,000 units @ $8.60 per unit). 68,800Supervisor’s salary (8,000 units @ $3.20 per unit) 25,600Depreciation of special equipment (not relevant). . 0Allocated general overhead (avoidable only)........ 3,000Outside purchase price (8,000 units @ $27.60 per

unit).................................................................... $220,800Opportunity cost..................................................... ( 16,000 )

Total cost................................................................$197,40

0 $204,800

b. The total cost of the make alternative is lower by $7,400. Thus, net operating income would decline by $7,400 if the offer from the supplier were accepted. Therefore, the company should continue to make the part itself.


140. Part U67 is used in one of Broce Corporation's products. The company's Accounting Department reports the following costs of producing the 7,000 units of the part that are needed every year.


An outside supplier has offered to make the part and sell it to the company for $21.40 each. If this offer is accepted, the supervisor's salary and all of the variable costs, including direct labor, can be avoided. The special equipment used to make the part was purchased many years ago and has no salvage value or other use. The allocated general overhead represents fixed costs of the entire company. If the outside supplier's offer were accepted, only $6,000 of these allocated general overhead costs would be avoided.

Required:

a. Prepare a report that shows the effect on the company's total net operating income of buying part U67 from the supplier rather than continuing to make it inside the company.

b. Which alternative should the company choose?

Ans:a.

Make BuyDirect materials (7,000 units @ $8.70 per unit)............. $ 60,900Direct labor (7,000 units @ $2.70 per unit).................... 18,900Variable overhead (7,000 units @ $3.30 per unit).......... 23,100Supervisor’s salary (7,000 units @ $1.90 per unit)........ 13,300Depreciation of special equipment (not relevant)........... 0Allocated general overhead (avoidable only)................. 6,000Outside purchase price (7,000 units @ $21.40 per unit) $149,800Total cost......................................................................... $122,200 $149,800

b. The total cost of the make alternative is lower by $27,600. Thus, net operating income would decline by $27,600 if the offer from the supplier were accepted. Therefore, the company should continue to make the part itself.


141. Juline Company produces a single product. The cost of producing and selling a single unit of this product at the company's normal activity level of 40,000 units per month is as follows:

Direct materials...................................................... $53.60Direct labor............................................................ $5.30Variable manufacturing overhead.......................... $1.40Fixed manufacturing overhead.............................. $13.20Variable selling and administrative expense.......... $1.60Fixed selling and administrative expense.............. $9.10

The normal selling price of the product is $91.60 per unit.An order has been received from an overseas customer for 3,000 units to be delivered this month at a special discounted price. This order would have no effect on the company's normal sales and would not change the total amount of the company's fixed costs. The variable selling and administrative expense would be $1.00 less per unit on this order than on normal sales.Direct labor is a variable cost in this company.

Required:

a. Suppose there is ample idle capacity to produce the units required by the overseas customer and the special discounted price on the special order is $81.90 per unit. By how much would this special order increase (decrease) the company's net operating income for the month?

b. Suppose the company is already operating at capacity when the special order is received from the overseas customer. What would be the opportunity cost of each unit delivered to the overseas customer?

c. Suppose there is not enough idle capacity to produce all of the units for the overseas customer and accepting the special order would require cutting back on production of 2,100 units for regular customers. What would be the minimum acceptable price per unit for the special order?

Ans:

b. Variable cost per unit on normal sales:Direct materials...................................................... $53.60Direct labor............................................................ 5.30Variable manufacturing overhead.......................... 1.40Variable selling & administrative expense............ 1.60 Variable cost per unit on normal sales................... $61.90

Variable cost per unit on special order:Normal variable cost per unit................................. $61.90Reduction in variable selling and administrative

expense............................................................... 1.00 Variable cost per unit on special order.................. $60.90

Selling price for special order................................ $81.90Variable cost per unit on special order.................. 60.90Unit contribution margin on special order............. 21.00Number of units in special order............................ 3,000Increase (decrease) in net operating income.......... $63,000

b. The opportunity cost is just the contribution margin on normal sales:Normal selling price per unit................................. $91.60Variable cost per unit on normal sales................... 61.90 Unit contribution margin on normal sales............. $29.70

c. Minimum acceptable price:Unit contribution margin on normal sales............. $29.70Displaced normal sales.......................................... 2,100Lost contribution margin displaced sales............... $ 62,370Total variable cost on special order....................... 182,700

$245,070Number of units in special order............................ 3,000Minimum acceptable price on special order.......... $81.69


142. Marsdon Company has an annual production capacity of 15,000 units. The costs associated with production and sale of the company's product are given below:

Manufacturing costs:Variable................................................... $12 per unitFixed (annual cost).................................. $90,000

Selling and administrative costs:Variable (sales commissions)................. $3 per unitFixed (annual cost).................................. $60,000

The company presently is selling 12,000 units annually at a selling price of $28 each. A special order has been received from a distributor who wants to purchase 3,000 units at a special price of $20 each. Regular sales would not be affected by this order and the order could be filled without any impact on total fixed costs. Sales commissions on the special order would be reduced by one-third.

Required:

Determine whether the company should accept the special order.

Ans:

Incremental revenues (3,000 units @ $20)............ $60,000Less incremental costs:

Variable manufacturing (3,000 units @ $12)..... ( 36,000)Variable selling (3,000 units @ $2).................... ( 6,000 )

Net advantage of accepting the order..................... $ 18,000

Yes, the order should be accepted.


143. Mcniff Corporation makes a range of products. The company's predetermined overhead rate is $28 per direct labor-hour, which was calculated using the following budgeted data:

Variable manufacturing overhead.............. $180,000Fixed manufacturing overhead.................. $380,000Direct labor-hours...................................... 20,000

Management is considering a special order for 200 units of product O96S at $122 each. The normal selling price of product O96S is $149 and the unit product cost is determined as follows:

Direct materials.......................................... $ 67.00Direct labor................................................ 32.00Manufacturing overhead applied............... 44.80 Unit product cost........................................ $143.80

If the special order were accepted, normal sales of this and other products would not be affected. The company has ample excess capacity to produce the additional units. Assume that direct labor is a variable cost, variable manufacturing overhead is really driven by direct labor-hours, and total fixed manufacturing overhead would not be affected by the special order.

Required:

If the special order were accepted, what would be the impact on the company's overall profit?

Ans:

Direct materials, direct labor, and variable manufacturing overhead are relevant in this decision. Fixed manufacturing overhead is not relevant since it would not be affected by the decision. The variable portion of the manufacturing overhead rate is computed as follows:

Variable portion of the predetermined overhead rate = Variable manufacturing overhead ÷ Direct labor-hours = $180,000 ÷ 20,000 direct labor-hours = $9.00 per direct labor-hour

The direct-labor hours per unit for the special order can be determined as follows:

Direct labor-hours = Manufacturing overhead applied ÷ Predetermined overhead rate = $44.80 ÷ $28.00 per direct labor-hour = 1.60 direct labor-hours

Consequently, the variable manufacturing overhead for the special order would be:

Variable manufacturing overhead = Variable portion of the predetermined overhead rate × Direct labor-hours = $9.00 per direct labor-hour × 1.60 direct labor-hours = $14.40

Putting this all together:

Special order price.......................................................... $122.00Variable costs:

Direct materials............................................................ 67.00Direct labor.................................................................. 32.00Variable manufacturing overhead................................ 14.40

Total variable cost........................................................... 113.40 Contribution margin........................................................ $ 8.60 × Units ordered............................................................... 200= Total increase in profit from the special order............. $1,720

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making; Reporting LO: 4 Level: Hard Source: CIMA, adapted

144. Kneller Co. manufactures and sells medals for winners of athletic and other events. Its manufacturing plant has the capacity to produce 12,000 medals each month; current monthly production is 9,600 medals. The company normally charges $99 per medal. Cost data for the current level of production are shown below:

Variable costs:Direct materials........................... $480,000Direct labor................................. $153,600Selling and administrative.......... $24,960

Fixed costs:Manufacturing............................. $144,000Selling and administrative.......... $78,720

The company has just received a special one-time order for 500 medals at $89 each. For this particular order, no variable selling and administrative costs would be incurred. This order would also have no effect on fixed costs.

Required:

Should the company accept this special order? Why?

Ans:

Only the direct materials and direct labor costs are relevant in this decision. To make the decision, we must compute the average direct materials and direct labor cost per unit.

Direct materials............................................................... $480,000Direct labor..................................................................... 153,600 Total................................................................................ $633,600Current monthly production............................................ 9,600Average direct materials and direct labor cost per unit. . $66

Since price on the special order is $89 per medal and the relevant cost is only $66, the company would earn a profit of $23 per medal. Therefore, the special order should be accepted.

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making; Reporting LO: 4 Level: Medium Source: CMA, adapted

145. Anglen Co. manufactures and sells trophies for winners of athletic and other events. Its manufacturing plant has the capacity to produce 18,000 trophies each month; current monthly production is 14,400 trophies. The company normally charges $103 per trophy. Cost data for the current level of production are shown below:

Variable costs:Direct materials........................... $460,800Direct labor................................. $316,800Selling and administrative.......... $15,840

Fixed costs:Manufacturing............................. $404,640Selling and administrative.......... $74,880

The company has just received a special one-time order for 900 trophies at $48 each. For this particular order, no variable selling and administrative costs would be incurred. This order would also have no effect on fixed costs.

Required:

Should the company accept this special order? Why?

Ans:

Only the direct materials and direct labor costs are relevant in this decision. To make the decision, we must compute the average direct materials and direct labor cost per unit.

Direct materials............................................................... $460,800Direct labor..................................................................... 316,800 Total................................................................................ $777,600Current monthly production............................................ 14,400Average direct materials and direct labor cost per unit. . $54

Because price on the special order is $48 per trophy and the relevant cost is $54, the company would suffer a loss of $6 per trophy. Therefore, the special order should not be accepted.

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Decision Making; Reporting LO: 4 Level: Medium Source: CMA, adapted

146. Wehrs Corporation has received a request for a special order of 6,000 units of product K19 for $32.30 each. The normal selling price of this product is $33.45 each, but the units would need to be modified slightly for the customer. The normal unit product cost of product K19 is computed as follows:


Direct labor is a variable cost. The special order would have no effect on the company's total fixed manufacturing overhead costs. The customer would like some modifications made to product K19 that would increase the variable costs by $4.90 per unit and that would require a one-time investment of $23,000 in special molds that would have no salvage value. This special order would have no effect on the company's other sales. The company has ample spare capacity for producing the special order.

Required:

Determine the effect on the company's total net operating income of accepting the special order. Show your work!

Ans:


Direct materials (6,000 units @ $15.00 per unit).......................... 90,000Direct labor (6,000 units @ $3.80 per unit)................................... 22,800Variable manufacturing overhead (6,000 units @ $1.40 per unit) 8,400Modifications (6,000 units @ $4.90 per unit)................................ 29,400Special molds................................................................................. 23,000



147. A customer has asked Lalka Corporation to supply 3,000 units of product H60, with some modifications, for $34.70 each. The normal selling price of this product is $46.35 each. The normal unit product cost of product H60 is computed as follows:


Direct labor is a variable cost. The special order would have no effect on the company's total fixed manufacturing overhead costs. The customer would like some modifications made to product H60 that would increase the variable costs by $3.80 per unit and that would require a one-time investment of $24,000 in special molds that would have no salvage value. This special order would have no effect on the company's other sales. The company has ample spare capacity for producing the special order.

Required:

Determine the effect on the company's total net operating income of accepting the special order. Show your work!

Ans:

Incremental revenue (3,000 units @ $34.70 per unit)....... $104,100Less incremental costs:

Direct materials (3,000 units @ $14.70 per unit)........... 44,100Direct labor (3,000 units @ $1.30 per unit).................... 3,900Variable manufacturing overhead (3,000 units @ $7.00

per unit)....................................................................... 21,000Modifications (3,000 units @ $3.80 per unit)................. 11,400Special molds.................................................................. 24,000

Total incremental cost........................................................ 104,400 Incremental net operating income...................................... ($ 300 )


148. Gloddy Company makes three products in a single facility. These products have the following unit product costs:

Product A Product B Product C

Direct materials................................. $24.90 $25.70 $26.60Direct labor....................................... 13.30 17.10 15.70Variable manufacturing overhead..... 2.50 2.80 3.10Fixed manufacturing overhead......... 19.80 27.70 21.00 Unit product cost............................... $60.50 $73.30 $66.40

Additional data concerning these products are listed below.


Mixing minutes per unit.................... 2.50 1.70 1.60Selling price per unit......................... $71.50 $87.90 $83.00Variable selling cost per unit............ $2.30 $1.90 $3.80Monthly demand in units.................. 1,000 3,000 3,000

The mixing machines are potentially the constraint in the production facility. A total of 10,800 minutes are available per month on these machines.


Required:

a. How many minutes of mixing machine time would be required to satisfy demand for all four products?

b. How much of each product should be produced to maximize net operating income? (Round off to the nearest whole unit.)

c. Up to how much should the company be willing to pay for one additional hour of mixing machine time if the company has made the best use of the existing mixing machine capacity? (Round off to the nearest whole cent.)

Ans:

a. Demand on the mixing machine:Product A Product B Product C

Mixing minutes per unit..... 2.50 1.70 1.60Monthly demand in units. . . 1,000 3,000 3,000Total minutes required....... 2,500 5,100 4,800

Total time required for all products: 12,400

b. Optimal production plan:

Product AProduct

B Product CSelling price per unit............................ $71.50 $87.90 $83.00

Direct materials.................................... $24.90 $25.70 $26.60Direct labor.......................................... 13.30 17.10 15.70Variable manufacturing overhead........ 2.50 2.80 3.10Variable selling cost per unit............... 2.30 1.90 3.80 Total variable cost per unit.................. $43.00 $47.50 $49.20

Contribution margin per unit............... $28.50 $40.40 $33.80Mixing minutes per unit....................... 2.50 1.70 1.60Contribution margin per minute........... $11.40 $23.76 $21.13


Optimal production.............................. 360 3,000 3,000

c. The company should be willing to pay up to the contribution margin per minute for the marginal job, which is $11.40.


149. Holzmeyer Company makes three products in a single facility. Data concerning these products follow:


Selling price per unit......................... $64.50 $64.80 $63.30Direct materials................................. $20.90 $14.50 $18.30Direct labor....................................... $30.80 $33.40 $26.00Variable manufacturing overhead..... $1.60 $1.90 $2.10Variable selling cost per unit............ $1.00 $3.40 $1.50Mixing minutes per unit.................... 3.50 3.10 3.50Monthly demand in units.................. 4,000 2,000 4,000

The mixing machines are potentially the constraint in the production facility. A total of 32,400 minutes are available per month on these machines.


Required:

a. How many minutes of mixing machine time would be required to satisfy demand for all four products?

b. How much of each product should be produced to maximize net operating income? (Round off to the nearest whole unit.)

c. Up to how much should the company be willing to pay for one additional hour of mixing machine time if the company has made the best use of the existing mixing machine capacity? (Round off to the nearest whole cent.)

Ans:

a. Demand on the mixing machine:

Product A Product BProduct

C TotalMixing minutes per unit..... 3.50 3.10 3.50Monthly demand in units. . . 4,000 2,000 4,000Total minutes required....... 14,000 6,200 14,000 34,200

b. Optimal production plan:Product

A Product B Product CSelling price per unit......................... $ 64.50 $ 64.80 $ 63.30

Direct materials................................. $20.90 $14.50 $18.30Direct labor....................................... 30.80 33.40 26.00Variable manufacturing overhead..... 1.60 1.90 2.10Variable selling cost per unit............ 1.00 3.40 1.50 Total variable cost per unit............... $54.30 $53.20 $47.90

Contribution margin per unit............ $10.20 $11.60 $15.40Mixing minutes per unit.................... 3.50 3.10 3.50Contribution margin per minute........ $2.91 $3.74 $4.40

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

Optimal production........................... 3,486 2,000 4,000

c. The company should be willing to pay up to the contribution margin per minute for the marginal job, which is $2.91.


150. Garson, Inc. produces three products. Data concerning the selling prices and unit costs of the three products appear below:

Product F Product G Product HSelling price................................... $50 $80 $70Variable costs................................. $40 $50 $55Fixed costs..................................... $15 $20 $12Milling machine time (minutes)..... 4 2 5

Fixed costs are applied to the products on the basis of direct labor hours.

Demand for the three products exceeds the company's productive capacity. The milling machine is the constraint, with only 2,400 minutes of milling machine time available this week.

Required:

a. Given the milling machine constraint, which product should be emphasized? Support your answer with appropriate calculations.

b. Assuming that there is still unfilled demand for the product that the company should emphasize in part (a) above, up to how much should the company be willing to pay for an additional hour of milling machine time?

Ans:

a. The product to emphasize can be determined by computing the contribution margin per unit of the scarce resource, which in this case is milling machine time.

Product F Product G Product HSelling price................................... $50 $80 $70Variable costs................................. 40 50 55 Contribution margin....................... $10 $30 $15Milling machine time (minutes)..... 4 2 5Contribution margin per minute..... $2.50 $15.00 $3.00

Product G should be emphasized because it has the greatest contribution margin per unit of the scarce resource.

b. If additional milling machine time would be used to produce more of Product G, the time would be worth 60 minutes per hour × $15 per minute = $900 per hour.


151. Brissett Corporation makes three products that use the current constraint, which is a particular type of machine. Data concerning those products appear below:

GK LQ XK


7 $228.96


6 $178.92Time on the constraint (minutes).. . 1.90 3.70 3.60

Required:

a. Rank the products in order of their current profitability from the most profitable to the least profitable. In other words, rank the products in the order in which they should be emphasized. Show your work!

b. Assume that sufficient constraint time is available to satisfy demand for all but the least profitable product. Up to how much should the company be willing to pay to acquire more of the constrained resource?

Ans:

a. GK LQ XK


1 $226.07 $228.96Variable cost per unit......................... 89.87 176.86 178.92


4 $ 49.21 $ 50.04Time on the constraint (minutes)....... 1.90 3.70 3.60Contribution margin per unit of the


Resulting ranking of products: GK, XK, LQ

b. The company should be willing to pay up to $13.30 per minute to obtain more of the constrained resource because this is the value to the company of using this constrained resource to make more of product LQ. By assumption, the other products will already have been produced up to demand.


152. The constraint at Dreyfus Inc. is an expensive milling machine. The three products listed below use this constrained resource.

VY QX AMSelling price per unit......................... $78.65 $421.59 $145.92Variable cost per unit........................ $62.40 $331.20 $113.28Time on the constraint (minutes)...... 1.30 6.90 2.40

Required:

a. Rank the products in order of their current profitability from the most profitable to the least profitable. In other words, rank the products in the order in which they should be emphasized. Show your work!

b. Assume that sufficient constraint time is available to satisfy demand for all but the least profitable product. Up to how much should the company be willing to pay to acquire more of the constrained resource?

Ans:

a. VY QX AM

Selling price per unit...............................$78.6

5 $421.59 $145.92Variable cost per unit............................... 62.40 331.20 113.28

Contribution margin per unit...................$16.2

5 $ 90.39 $ 32.64Time on the constraint (minutes)............. 1.30 6.90 2.40Contribution margin per unit of the

constrained resource.............................$12.5

0 $13.10 $13.60Ranking.................................................... 3 2 1

Resulting ranking of products: AM, QX, VY

b. The company should be willing to pay up to $12.50 per minute to obtain more of the constrained resource because this is the value to the company of using this constrained resource to make more of product VY. By assumption, enough of the other two products will already have been produced to fully satisfy demand.


153. Iaria Corporation makes two products from a common input. Joint processing costs up to the split-off point total $33,600 a year. The company allocates these costs to the joint products on the basis of their total sales values at the split-off point. Each product may be sold at the split-off point or processed further. Data concerning these products appear below:

Product X Product YAllocated joint processing costs........... $19,600 $14,000Sales value at split-off point................ $28,000 $20,000Costs of further processing.................. $22,400 $15,700Sales value after further processing..... $53,500 $33,500

Required:

a. What is the net monetary advantage (disadvantage) of processing Product X beyond the split-off point?

b. What is the net monetary advantage (disadvantage) of processing Product Y beyond the split-off point?

c. What is the minimum amount the company should accept for Product X if it is to be sold at the split-off point?

d. What is the minimum amount the company should accept for Product Y if it is to be sold at the split-off point?

Ans:

a. & b.Product X Product Y

Sales value after further processing........... $53,500 $33,500Costs of further processing........................ 22,400 15,700Benefit of further processing..................... 31,100 17,800Less: Sales value at split-off point............. 28,000 20,000 Net advantage (disadvantage).................... $ 3,100 ($ 2,200 )

c. & d.Product X Product Y

Minimum selling price at split-off............. $31,100 $17,800


154. Prosner Corp. manufactures three products from a common input in a joint processing operation. Joint processing costs up to the split-off point total $500,000 per year. The company allocates these costs to the joint products on the basis of their total sales value at the split-off point.

Each product may be sold at the split-off point or processed further. The additional processing costs and sales value after further processing for each product (on an annual basis) are:

Sales Value at Split-Off

Further Processing

Costs

Sales Value After Further Processing

Product D...... $300,000 $125,000 $534,000Product F....... $275,000 $210,000 $450,000Product G...... $195,000 $135,000 $360,000

The “Further Processing Costs” consist of variable and avoidable fixed costs.

Required:

Which product or products should be sold at the split-off point, and which product or products should be processed further? Show computations.

Ans:

Product D Product F Product GSales value after further processing..... $534,000 $450,000 $360,000Sales value at split-off.......................... 300,000 275,000 195,000Incremental revenue............................. 234,000 175,000 165,000Further processing costs....................... 125,000 210,000 135,000 Incremental income (loss).................... $109,000 ($ 35,000 ) $ 30,000

Products D and G should be sold after further processing beyond the split-off point. Product F should be sold at the split-off point without any further processing.


155. Swagger Corporation purchases potatoes from farmers. The potatoes are then peeled, producing two intermediate products-peels and depeeled spuds. The peels can then be processed further to make a cocktail of organic nutrients. And the depeeled spuds can be processed further to make frozen french fries. A batch of potatoes costs $63 to buy from farmers and $12 to peel in the company's plant. The peels produced from a batch can be sold as is for animal feed for $29 or processed further for $15 to make the cocktail of nutrients that are sold for $41. The depeeled spuds can be sold as is for $40 or processed further for $22 to make frozen french fries that are sold for $77.

Required:

a. Assuming that no other costs are involved in processing potatoes or in selling products, how much money does the company make from processing one batch of potatoes into the cocktail of organic nutrients and frozen french fries? Show your work!

b. Should each of the intermediate products, peels and depeeled spuds, be sold as is or processed further into an end product? Explain.

Ans:

a. Analysis of the profitability of the overall operation:Combined final sales value ($41 + $77).......... $118Less costs of producing the end products:

Cost of potatoes............................................ $63Cost of peeling.............................................. 12Cost of further processing peels.................... 15Cost of further processing depeeled spuds. . . 22 112

Profit (loss)....................................................... $ 6

b. Analysis of sell or process further:Cocktail of

Organic Nutrients

Frozen French Fries

Final sales value after further processing......... $41 $77Less sales value at split-off point..................... 29 40Incremental revenue from further processing. . 12 37Less cost of further processing........................ 15 22 Profit (loss) from further processing................ ($ 3 ) $15

Don’t process further

Process further


156. Farrugia Corporation produces two intermediate products, A and B, from a common input. Intermediate product A can be further processed into end product X. Intermediate product B can be further processed into end product Y. The common input is purchased in batches that cost $36 each and the cost of processing a batch to produce intermediate products A and B is $15. Intermediate product A can be sold as is for $21 or processed further for $14 to make end product X that is sold for $32. Intermediate product B can be sold as is for $44 or processed further for $28 to make end product Y that is sold for $64.

Required:

a. Assuming that no other costs are involved in processing potatoes or in selling products, how much money does the company make from processing one batch of the common input into the end products X and Y? Show your work!

b. Should each of the intermediate products, A and B, be sold as is or processed further into an end product? Explain.

Ans:

a. Analysis of the profitability of the overall operation:Combined final sales value ($32 + $64).......... $96Less costs of producing the end products:

Cost of common input................................... $36Cost of processing common input................ 15Cost of further processing product A............ 14Cost of further processing product B............ 28 93

Profit (loss)....................................................... $ 3

b. Analysis of sell or process further:Product X Product Y

Final sales value after further processing............ $32 $64Less sales value at split-off point........................ 21 44Incremental revenue from further processing..... 11 20Less cost of further processing........................... 14 28 Profit (loss) from further processing................... ($ 3 ) ($ 8 )




Ch13 Relevant Cost

Documents

critical thinking aicpa

reflective thinking

reflective thinking

easy aicpa bb

analytic aicpa bb

decision problem

true aacsb

false aacsb