Managerial Accounting Ch 8

Managerial Accounting, 3e (Braun/Tietz) Chapter 8 Relevant Costs for Short-Term Decisions 1) Irrelevant costs are costs that do not affect short-term decisions. Answer: TRUE Diff: 1 LO: 8-1 EOC: S8-1 AACSB: Reflective Thinking Learning Outcome: Distinguish between relevant and irrelevant costs 2) Relevant information is future data that do not differ among alternatives. Answer: FALSE Diff: 1 LO: 8-1 EOC: S8-1 AACSB: Reflective Thinking Learning Outcome: Distinguish between relevant and irrelevant costs 3) Management accountants gather and analyze relevant information to compare alternatives. Answer: TRUE Diff: 1 LO: 8-1 EOC: S8-1 AACSB: Reflective Thinking Learning Outcome: Use incremental analysis to make short-term decisions. Distinguish between relevant and irrelevant costs. 4) One key to analyzing short-term business decisions is to focus on relevant revenues, costs and profits. Answer: TRUE Diff: 1 LO: 8-1 EOC: S8-1 AACSB: Reflective Thinking Learning Outcome: Use incremental analysis to make short-term decisions. Distinguish between relevant and irrelevant costs. 5) One key to analyzing short-term business decisions is to use a contribution margin approach that separates variable costs from fixed costs. Answer: TRUE Diff: 1 LO: 8-1 EOC: S8-1 AACSB: Reflective Thinking Learning Outcome: Use incremental analysis to make short-term decisions 1 Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 6) Relevant information is expected future data that will not differ among alternatives. Answer: FALSE Diff: 1 LO: 8-1 EOC: S8-1 AACSB: Reflective Thinking Learning Outcome: Distinguish between relevant and irrelevant costs 7) Costs that differ between alternatives are irrelevant. Answer: FALSE Diff: 1 LO: 8-1 EOC: S8-1 AACSB: Reflective Thinking Learning Outcome: Distinguish between relevant and irrelevant costs 8) One cost that is irrelevant in decision making is a sunk cost. Answer: TRUE Diff: 1 LO: 8-1 EOC: E8-15 AACSB: Reflective Thinking Learning Outcome: Distinguish between relevant and irrelevant costs 9) Managers' decisions are based solely on quantitative factors. Answer: FALSE Diff: 1 LO: 8-1 EOC: E8-15 AACSB: Reflective Thinking Learning Outcome: Use incremental analysis to make short-term decisions. Distinguish between relevant and irrelevant costs. 10) Which of the following best describes a "sunk cost"? A) Costs that were incurred in the past and cannot be changed B) Benefits foregone by choosing a particular alternative course of action C) A factor that restricts the production or sale of a product D) Expected future data that differ among alternatives Answer: A Diff: 2 LO: 8-1 EOC: S8-1 AACSB: Reflective Thinking Learning Outcome: Distinguish between relevant and irrelevant costs 2 Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 11) An "opportunity cost" is best described by which of the following? A) Benefits foregone by choosing a particular alternative course of action B) Costs that were incurred in the past and cannot be changed C) The distribution of all products to be sold D) Expected future costs that differ among alternatives Answer: A Diff: 2 LO: 8-1 EOC: S8-1 AACSB: Reflective Thinking Learning Outcome: Distinguish between relevant and irrelevant costs 12) A "relevant cost" is best described by which of the following? A) A factor that restricts production or sales of a product B) Cost of developing, producing, and delivering a product or service C) Costs that were incurred in the past and can not be changed D) Expected future costs that differ among alternatives Answer: D Diff: 2 LO: 8-1 EOC: S8-1 AACSB: Reflective Thinking Learning Outcome: Distinguish between relevant and irrelevant costs 13) "Contribution margin per unit" is best described by which of the following? A) Sales price per unit minus fixed cost per unit B) Sales price per unit minus variable cost unit C) Sales price per unit minus fixed and variable costs per unit D) Units sold time contribution margin ratio Answer: B Diff: 2 LO: 8-1 EOC: S8-1 AACSB: Reflective Thinking Learning Outcome: Distinguish between relevant and irrelevant costs 14) Expected future data that differs among alternative courses of action are referred to as A) relevant information. B) historical information. C) predictable information. D) irrelevant information. Answer: A Diff: 1 LO: 8-1 EOC: E8-15 AACSB: Reflective Thinking Learning Outcome: Distinguish between relevant and irrelevant costs 3 Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall Answer: A Diff: 2 LO: 8-1 EOC: E8-15 AACSB: Reflective Thinking Learning Outcome: Distinguish between relevant and irrelevant costs 4 Copyright © 2013 Pearson Education. C) relevant to the decision. B) opportunity costs.15) Which of the following is irrelevant when making a decision? A) Fixed overhead costs that differ among alternatives B) The cost of an asset that the company is considering replacing C) The cost of further processing a product that could be sold as is D) The expected increase in contribution margin of one product line as a result of a decision to discontinue a separate unprofitable product line Answer: B Diff: 1 LO: 8-1 EOC: E8-15 AACSB: Reflective Thinking Learning Outcome: Distinguish between relevant and irrelevant costs 16) Fixed costs that do not differ between two alternatives are A) irrelevant to the decision. D) important only if they represent a material dollar amount. C) replacement costs. Inc. publishing as Prentice Hall . B) considered opportunity costs. D) sunk costs. Answer: A Diff: 1 LO: 8-1 EOC: E8-15 AACSB: Reflective Thinking Learning Outcome: Distinguish between relevant and irrelevant costs 17) Which of the following is a sunk cost? A) Operating costs for a new vehicle B) Trade in value of old vehicle C) Purchase price of vehicle to be traded in D) Purchase price of new vehicle Answer: C Diff: 1 LO: 8-1 EOC: E8-15 AACSB: Reflective Thinking Learning Outcome: Distinguish between relevant and irrelevant costs 18) Fixed costs that may be avoided in the future are referred to as A) relevant costs. Inc. publishing as Prentice Hall .19) A sunk cost is described as which of the following? A) One that is relevant to a decision because it changes depending on the alternative course of action selected B) A historical cost that is always irrelevant C) An outlay expected to be incurred in the future D) A historical cost that may be relevant Answer: B Diff: 1 LO: 8-1 EOC: E8-15 AACSB: Reflective Thinking Learning Outcome: Distinguish between relevant and irrelevant costs 20) The effect of a plant closing on employee morale is an example of which of the following? A) A qualitative factor B) A quantitative factor C) A sunk cost D) A variable cost Answer: A Diff: 1 LO: 8-1 EOC: E8-15 AACSB: Reflective Thinking Learning Outcome: Distinguish between relevant and irrelevant costs 21) The format of the income statement most useful in decision-making is which of the following? A) Absorption costing format B) Traditional format C) Contribution margin format D) Single-step format Answer: C Diff: 2 LO: 8-1 EOC: E8-15 AACSB: Reflective Thinking Learning Outcome: Distinguish between relevant and irrelevant costs 5 Copyright © 2013 Pearson Education. 000 5 0 $0 $4. B) selling price of old equipment. Inc.000 5 5 $25.000 Which of the information provided in the table is irrelevant to the replacement decision? A) The annual operating cost of the old machine B) The original cost of the old machine C) The current disposal value of the old machine D) Both A and C Answer: B Diff: 2 LO: 8-1 EOC: S8-1 AACSB: Analytical Thinking Learning Outcome: Distinguish between relevant and irrelevant costs 23) All of the following are relevant to the decision to replace equipment except the A) cost of old equipment.22) Ida Enterprises is considering replacing a machine that is presently used in its production process.000 $8.000 Replacement Machine $35. D) cost of new equipment. The following information is available: Original cost Remaining useful life in years Current age in years Book value Current disposal value in cash Future disposal value in cash (in 5 years) Annual cash operating costs Old Machine $60. publishing as Prentice Hall . C) future maintenance costs of old equipment.000 $0 $7. Answer: A Diff: 2 LO: 8-1 EOC: S8-1 AACSB: Reflective Thinking Learning Outcome: Distinguish between relevant and irrelevant costs 24) Which of the following is most important in making a short-term special decision? A) Focus on total costs B) Separate variable from fixed costs C) Use a conventional absorption costing approach D) Calculating the fixed cost per unit Answer: B Diff: 2 LO: 8-1 EOC: S8-1 AACSB: Reflective Thinking Learning Outcome: Distinguish between relevant and irrelevant costs 6 Copyright © 2013 Pearson Education. this information is relevant when deciding upon which car to purchase. model. Provide examples of each. Relevant information differs between alternatives and affects the future. Inc. Diff: 1 LO: 8-1 EOC: E8-15 AACSB: Analytical Thinking Learning Outcome: Distinguish between relevant and irrelevant costs 7 Copyright © 2013 Pearson Education. since it is the same regardless of the make.25) Managers should consider ________ when making any sort of decision. the cost of insurance for a car will differ depending upon the make. year. A) only fixed costs B) sunk costs C) only variable costs D) revenues that differ among alternatives Answer: D Diff: 2 LO: 8-1 EOC: S8-1 AACSB: Reflective Thinking Learning Outcome: Distinguish between relevant and irrelevant costs 26) Label each item below as relevant or irrelevant in making a decision. Answer: Relevant information affects a decision and irrelevant information does not. of car. For example. etc. year. a) Cost of roof repair made on rental property last year b) The cost of insurance on a new vehicle when deciding to buy a new vehicle c) Cost of new equipment under evaluation to replace used equipment d) Original cost of old equipment that is being evaluated for replacement e) Cost of previous year's insurance policy on old equipment being evaluated for replacement f) Accumulated depreciation on old equipment being evaluated for replacement Answer: a) irrelevant b) relevant c) relevant d) irrelevant e) irrelevant f) irrelevant Diff: 1 LO: 8-1 EOC: S8-1 AACSB: Analytical Thinking Learning Outcome: Distinguish between relevant and irrelevant costs 27) What is the difference between relevant and irrelevant information for making decisions. model. publishing as Prentice Hall . Therefore. etc of the car. The cost of a parking sticker to park in the school lot is not relevant. any fixed costs that would remain unchanged are considered relevant data. 31) Variable costs are irrelevant to a special decision when those variable costs differ between alternatives.28) A special order occurs when a customer requests a one-time order at an increased sales price. Distinguish between relevant and irrelevant costs. 32) Managers should consider the potential effect of a special order on long-run profits and operations. Answer: FALSE Diff: 1 LO: 8-2 EOC: S8-2 AACSB: Reflective Thinking Learning Outcome: Use incremental analysis to make short-term decisions 30) In deciding whether to accept a special sales order. publishing as Prentice Hall . Inc. Distinguish between relevant and irrelevant costs. Answer: FALSE Diff: 1 LO: 8-2 EOC: S8-2 AACSB: Reflective Thinking Learning Outcome: Use incremental analysis to make short-term decisions. Answer: FALSE Diff: 1 LO: 8-2 EOC: S8-2 AACSB: Reflective Thinking Learning Outcome: Use incremental analysis to make short-term decisions 29) Special orders increase income if the revenue from the order does not exceed the incremental variable and fixed costs incurred to fill the order. Answer: TRUE Diff: 1 LO: 8-2 EOC: S8-2 AACSB: Reflective Thinking Learning Outcome: Use incremental analysis to make short-term decisions 8 Copyright © 2013 Pearson Education. Answer: FALSE Diff: 1 LO: 8-2 EOC: S8-2 AACSB: Reflective Thinking Learning Outcome: Use incremental analysis to make short-term decisions. D) sunk costs. Distinguish between relevant and irrelevant costs. the special order must have ________. B) irrelevant to the decision. incremental fixed costs that will be incurred if the special order is accepted are considered to be A) opportunity costs. then the special order should be accepted. Answer: C Diff: 2 LO: 8-2 EOC: S8-2 AACSB: Reflective Thinking Learning Outcome: Use incremental analysis to make short-term decisions.33) When deciding whether to accept a special order. publishing as Prentice Hall . 9 Copyright © 2013 Pearson Education. A) sunk costs B) a positive contribution margin C) opportunity costs D) a negative contribution margin Answer: B Diff: 2 LO: 8-2 EOC: S8-2 AACSB: Reflective Thinking Learning Outcome: Use incremental analysis to make short-term decisions 36) In a special sales order decision. managers need to consider whether they have available excess capacity. C) relevant to the decision. In other words. Answer: TRUE Diff: 1 LO: 8-2 EOC: S8-2 AACSB: Reflective Thinking Learning Outcome: Use incremental analysis to make short-term decisions 35) In a special sales order decision. Answer: TRUE Diff: 1 LO: 8-2 EOC: S8-2 AACSB: Reflective Thinking Learning Outcome: Use incremental analysis to make short-term decisions 34) If the expected increase in revenues from a special order is greater than the expected increase in variable and fixed costs. Inc. the special price must exceed the variable cost of filling the order. Answer: A Diff: 2 LO: 8-1 EOC: S8-2 AACSB: Reflective Thinking Learning Outcome: Use incremental analysis to make short-term decisions 39) Which would be a consideration for making special orders? A) Available capacity to fill the order B) If price will cover incremental costs of filling the order C) If the order will affect regular sales in the long run D) All of the above Answer: D Diff: 2 LO: 8-2 EOC: S8-2 AACSB: Reflective Thinking Learning Outcome: Use incremental analysis to make short-term decisions 10 Copyright © 2013 Pearson Education. D) the special order will require variable nonmanufacturing expenses. publishing as Prentice Hall . except A) available excess capacity. C) the special order price is less than the regular sales price. B) the variable costs associated with the special order. B) there is available excess capacity.37) Managers should consider all of the following when deciding whether to accept a special order. C) the effect of the order on regular sales. Distinguish between relevant and irrelevant costs. Inc. D) fixed costs that will not be affected by the order. 38) A manager should always reject a special order if A) the special order price is less than the variable costs of the order. Answer: D Diff: 2 LO: 8-1 EOC: S8-2 AACSB: Reflective Thinking Learning Outcome: Use incremental analysis to make short-term decisions. publishing as Prentice Hall . Inc.40) A company should ________ when making a short-term special decision. A) focus on qualitative factors only B) focus on quantitative factors only C) separate variable costs from fixed costs D) use a traditional direct costing approach Answer: C Diff: 2 LO: 8-2 EOC: S8-2 AACSB: Reflective Thinking Learning Outcome: Use incremental analysis to make short-term decisions 11 Copyright © 2013 Pearson Education. how would operating income be affected? (NOTE: Assume regular sales are not affected by the special order. publishing as Prentice Hall .000 = Additional Profit $ 560. The following information relates to current production: Sale price per unit $400 Variable costs per unit: Manufacturing Marketing and administrative $220 $50 Total fixed costs: Manufacturing Marketing and administrative $750. Distinguish between relevant and irrelevant costs.000 Answer: A Explanation: A) Variable Mfg. The company has the capacity to produce 100.000.000 D) Increase by $8.000 C) Increase by $2.000 B) Decrease by $560. and fixed costs remain unchanged.41) Sky High Seats manufactures seats for airplanes. 12 Copyright © 2013 Pearson Education.000 seats per year.000 If a special sales order is accepted for 7.) A) Increase by $560.000 $200.000 Diff: 2 LO: 8-2 EOC: E8-18A AACSB: Analytical Thinking Learning Outcome: Use incremental analysis to make short-term decisions. but is currently producing and selling 75.450.000 seats per year. Cost $ 220 Variable Marketing $ 50 Total Variable $ 270 NOW Sales Price Less Total Variable Cost = Contribution Margin $ 350 270 $ 80 Times units sold × 7.000 seats at a price of $350 per unit. Inc. The following information relates to current production: Sale price per unit $400 Variable costs per unit: Manufacturing Marketing and administrative $220 $50 Total fixed costs: Manufacturing Marketing and administrative $750.000 seats per year.000 D) Decrease by $420. and no variable marketing and administrative costs will be incurred for this order. but is currently producing and selling 75.000 If a special sales order is accepted for 4.) A) Increase by $2.000 seats per year.42) Sky High Seats manufactures seats for airplanes.000 C) Increase by $220. Inc.000 seats at a price of $325 per unit.180.000 Diff: 2 LO: 8-2 EOC: E8-18A AACSB: Analytical Thinking Learning Outcome: Use incremental analysis to make short-term decisions. 13 Copyright © 2013 Pearson Education.000 Answer: B Explanation: B) Sales Price $ 325 Less Total Variable Cost 220 = Contribution Margin $ 105 Times units sold × 4. Distinguish between relevant and irrelevant costs. The company has the capacity to produce 100. publishing as Prentice Hall .000 B) Increase by $420.000 = Additional Profit $ 420.000 $200. fixed costs remain unchanged. how would operating income be affected? (NOTE: Assume regular sales are not affected by the special order. Inc.000 seats at a price of $300 per unit.000 $ (810. Distinguish between relevant and irrelevant costs.000 $200.000 B) Increase by $230.000 Total variable costs per unit Additional variable expenses from order $ 810.000 Additional revenue from order Additional variable expenses from order $ 900. The following information relates to current production: Sale price per unit $400 Variable costs per unit: Manufacturing Marketing and administrative $220 $50 Total fixed costs: Manufacturing Marketing and administrative $750.000 Special order price per unit Additional revenue from order Variable manufacturing costs per unit Variable marketing and administrative costs per unit Total variable costs per unit $ 900.000 $ 220. 14 Copyright © 2013 Pearson Education.000.00 $ 270.000 C) Increase by $90.000) Special order increase in fixed expense Change in operating income Diff: 2 LO: 8-2 EOC: E8-18A AACSB: Analytical Thinking Learning Outcome: Use incremental analysis to make short-term decisions.000 If a special sales order is accepted for 3.43) Sky High Seats manufactures seats for airplanes.000 Answer: D Explanation: D) Special sales order volume 3. and fixed costs increase by $10. The company has the capacity to produce 100.) A) Decrease by $80. but is currently producing and selling 75.000 seats per year.000 seats per year. publishing as Prentice Hall .000 D) Increase by $80. how would operating income be affected? (NOTE: Assume regular sales are not affected by the special order.00 Special sales order volume 3. 15 Copyright © 2013 Pearson Education.44) Sky High Seats manufactures seats for airplanes.000 seats per year.500 C) Increase by $182. and variable marketing and administrative costs for that order are $25 per unit.000 $200.000 If a special sales order is accepted for 2.) A) Increase by $187. Distinguish between relevant and irrelevant costs.500 = Contribution Margin $ 187. fixed costs increase by $5.500 D) Increase by $245. The following information relates to current production: Sale price per unit $400 Variable costs per unit: Manufacturing Marketing and administrative $220 $50 Total fixed costs: Manufacturing Marketing and administrative $750. how would operating income be affected? (NOTE: Assume regular sales are not affected by the special order.500 Less: add'l fixed cost 5. publishing as Prentice Hall .500 B) Decrease by $182.500 Diff: 2 LO: 8-2 EOC: E8-18A AACSB: Analytical Thinking Learning Outcome: Use incremental analysis to make short-term decisions. Cost $ 220 Variable Marketing $ 25 Total Variable $ 245 Now Sales Price $ 320 Less Total Variable Cost 245 = Contribution Margin $ 75 Times units sold × 2. Inc.000 = Add'l Profit $ 182.000 seats per year.000. but is currently producing and selling 75. The company has the capacity to produce 100.000 Answer: C Explanation: C) Variable Mfg.500 seats at a price of $320 per unit. ) A) Decrease by $357. and fixed costs remain unchanged.500 B) Increase by $357.45) Comfort Cloud manufactures seats for airplanes. The company has the capacity to produce 100. The following information relates to current production: Sale price per unit $400 Variable costs per unit: Manufacturing Marketing and administrative $220 $50 Total fixed costs: Manufacturing Marketing and administrative $750.500 seats at a price of $325 per unit.000 Answer: B Explanation: B) Variable Mfg.000 If a special sales order is accepted for 6.500 C) Increase by $2.500 D) Increase by $5.000 seats per year. Cost $ 220 Variable Marketing $ 50 Total Variable $ 270 NOW Sales Price Less Total Variable Cost = Contribution Margin $ 325 270 $ 55 Times units sold × 6. how would operating income be affected? (NOTE: Assume regular sales are not affected by the special order.500 = Additional Profit $ 357.500 Diff: 2 LO: 8-2 EOC: E8-18A AACSB: Analytical Thinking Learning Outcome: Use incremental analysis to make short-term decisions.112.000 seats per year. but is currently producing and selling 75.500. Distinguish between relevant and irrelevant costs. publishing as Prentice Hall .000 $200. Inc. 16 Copyright © 2013 Pearson Education. 000 seats per year.997.000 If a special sales order is accepted for 5. but is currently producing and selling 75.500 D) Decrease by $577. The company has the capacity to prroduce 100.) A) Increase by $2.000 $200.000 seats per year.500 B) Increase by $302. The following information relates to current production: Sale price per unit $400 Variable costs per unit: Manufacturing Marketing and administrative $220 $50 Total fixed costs: Manufacturing Marketing and administrative $750.500 C) Increase by $577.500 Answer: C Explanation: C) Sales Price $ 325 Less Total Variable Cost 220 = Contribution Margin $ 105 Times units sold × 5. how would operating income be affected? (NOTE: Assume regular sales are not affected by the special order.500 seats at a price of $325 per unit.500 = Additional Profit $ 577. fixed costs remain unchanged.500 Diff: 2 LO: 8-2 EOC: E8-18A AACSB: Analytical Thinking Learning Outcome: Use incremental analysis to make short-term decisions. Distinguish between relevant and irrelevant costs. publishing as Prentice Hall . Inc. 17 Copyright © 2013 Pearson Education. and no variable marketing and administrative costs will be incurred for this order.46) Comfort Cloud manufactures seats for airplanes. 00 Special sales order volume 3.000 If a special sales order is accepted for 3.200 seats at a price of $350 per unit.200 Special order price per unit Additional revenue from order Variable manufacturing costs per unit Variable marketing and administrative costs per unit Total variable costs per unit $ 1.) A) Decrease by $244. The company has the capacity to produce 100.47) Comfort Cloud manufactures seats for airplanes. 18 Copyright © 2013 Pearson Education.000 Answer: D Explanation: D) Special sales order volume 3.000 D) Increase by $244.000.00 $ 270.000) Special order increase in fixed expenses Change in operating income Diff: 2 LO: 8-2 EOC: E8-18A AACSB: Analytical Thinking Learning Outcome: Use incremental analysis to make short-term decisions. publishing as Prentice Hall . Inc.000 seats per year.000 $200. how would operating income be affected? (NOTE: Assume regular sales are not affected by the special order. Distinguish between relevant and irrelevant costs.120.000 B) Increase by $404. and fixed costs increase by $12.000 seats per year.200 Total variable costs per unit Additional variable expenses from order $ 864.000 C) Increase by $256. but is currently producing and selling 75.000 $ (864.000 Additional revenue from order Additional variable expenses from order $ 1.000 $ 220. The following information relates to current production: Sale price per unit $400 Variable costs per unit: Manufacturing Marketing and administrative $220 $50 Total fixed costs: Manufacturing Marketing and administrative $750.120. 500 = Add'l Profit $ 156. The following information relates to current production: Sale price per unit $400 Variable costs per unit: Manufacturing Marketing and administrative $220 $50 Total fixed costs: Manufacturing Marketing and administrative $750.) A) Increase by $218.500 B) Decrease by $156.500. 19 Copyright © 2013 Pearson Education. fixed costs increase by $6. Cost Variable Marketing Total Variable Now Sales Price Less Total Variable Cost = Contribution Margin $ 220 $ 25 $ 245 $ 310 245 $ 65 Times units sold × 2.000 Diff: 2 LO: 8-2 EOC: E8-18A AACSB: Analytical Thinking Learning Outcome: Use incremental analysis to make short-term decisions. The company has the capacity to produce 100. publishing as Prentice Hall .500 seats at a price of $310 per unit.000 $200.000 C) Increase by $162.500 D) Increase by $156.000 seats per year. how would operating income be affected? (NOTE: Assume regular sales are not affected by the special order. Distinguish between relevant and irrelevant costs.500 Less: add'l fixed cost 6.000 seats per year.48) Comfort Cloud manufactures seats for airplanes. and variable marketing and administrative costs for that order are $25 per unit.000 Answer: D Explanation: D) Variable Mfg.500 = Contribution Margin $ 162.000 If a special sales order is accepted for 2. Inc. but is currently producing and selling 75. 000 Total Mfg.75 Mfg.250 B) Increase by $66.25 Times units sold × 5. what would be the effect on operating income of accepting a special order for 5. Distinguish between relevant and irrelevant costs. 20 Copyright © 2013 Pearson Education.000 $120.000 $70.250 C) Increase by $200. O/H 120. Cost $ 535.000 $185.000 = $ 26.000 Variable Mfg.75 = Contribution Margin $ 13.000 units at a sale price of $40 per product? (NOTE: Assume regular sales are not affected by the special order. publishing as Prentice Hall .000 Variable Selling 70.000 Assume no beginning inventory Assuming there is excess capacity. Inc.250 Diff: 2 LO: 8-2 EOC: E8-18A AACSB: Analytical Thinking Learning Outcome: Use incremental analysis to make short-term decisions.750 Answer: B Explanation: B) Direct Materials $ 160.000 Profit = $66.000 D) Increase by $333.000 $65.000 Direct Labor 185.) A) Decrease by $66.49) Samson Incorporated provided the following information regarding its only product: Sale price per unit Direct materials used Direct labor incurred Variable manufacturing overhead Variable selling and administrative expenses Fixed manufacturing overhead Fixed selling and administrative expenses Units produced and sold $50.000 $12.00 $160. cost per unit Then Sales Price $ 40 Less Mfg cost per Unit 26.000 / units produced 20.000 20. what would be the effect on operating income of accepting a special order for 3.750 D) Increase by $54.75 = Contribution Margin $ 18.25 Times units sold × 3.00 Less Mfg cost per Unit 26.00 $160.50) Samson Incorporated provided the following information regarding its only product: Sale price per unit Direct materials used Direct labor incurred Variable manufacturing overhead Variable selling and administrative expenses Fixed manufacturing overhead Fixed selling and administrative expenses Units produced and sold $50.750 Answer: C Explanation: C) Direct Materials $ 160.000 Total Mfg. Inc.000 $120.000 / units produced 20. publishing as Prentice Hall .000 units at a sale price of $45 per product assuming additional fixed manufacturing overhead costs of $5. 21 Copyright © 2013 Pearson Education.5.000 = $ 26. Distinguish between relevant and irrelevant costs.000 Variable Selling 70.000 Variable Mfg.000 $12.75 Mfg.000 20.000 $70. cost per unit Then Sales Price $ 45.000 $65.750 C) Increase by $49.000 Direct Labor 185. O/H 120.000 Add'l Profit 49.750 Diff: 3 LO: 8-2 EOC: E8-18A AACSB: Analytical Thinking Learning Outcome: Use incremental analysis to make short-term decisions.000 $185.000 Assume no beginning inventory Assuming there is excess capacity.000 B) Decrease by $49.750 Less Add'l Fixed cost .000 Total Contribution Margin = $54. Cost $ 535.000 is incurred? (NOTE: Assume regular sales are not affected by the special order.) A) Increase by $135. 000 20.300 B) Decrease by $28.000 Assume no beginning inventory Assuming there is excess capacity.000 / units produced 20.000 120.200 Profit = $28.000 $65.000 = $ 23.500 Answer: D Explanation: D) Direct Materials Direct Labor Variable Mfg. what would be the effect on operating income of accepting a special order for 1.51) Samson Incorporated provided the following information regarding its only product: Sale price per unit Direct materials used Direct labor incurred Variable manufacturing overhead Variable selling and administrative expenses Fixed manufacturing overhead Fixed selling and administrative expenses Units produced and sold $50.500 C) Increase by $24.75 Times units sold × 1. O/H Variable Selling Total Mfg. publishing as Prentice Hall .200 units would not require any variable selling and administrative expenses.300 D) Increase by $28.000 $70. Cost $ 160. Distinguish between relevant and irrelevant costs. (NOTE: Assume regular sales are not affected by the special order. 22 Copyright © 2013 Pearson Education.500 Diff: 2 LO: 8-2 EOC: E8-18A AACSB: Analytical Thinking Learning Outcome: Use incremental analysis to make short-term decisions.200 units at a sale price of $47 per product? The 1.000 185. cost per unit Then Sales Price $ 47 Less Mfg cost per Unit 23.25 Mfg. Inc.00 $160.000 $ 465.000 $120.) A) Increase by $84.000 $185.000 70.25 = Contribution Margin $ 23.000 $12. because operating income would increase $360.000.000.000. publishing as Prentice Hall .000 B) Expected increase in revenues $220.000. Great Products Company has offered Blue Technologies $22 per DVD player for 10.000 DVD players.000. because operating income would decrease $160. 53) Blue Technologies manufactures and sells DVD players.000 Add'l Revenue $ 14 × 10.) How much are the expected increase (decrease) in revenues and expenses from the special sales order? A) Expected increase in revenues $220. 23 Copyright © 2013 Pearson Education. Answer: C Explanation: C) $ 22 × 10.000.) Should Blue Technologies accept or reject the special sales order? A) Accept. Blue Technologies' normal selling price is $30 per DVD player. expected increase in expenses $140.000 Answer: A Explanation: A) $ 22 × 10. Great Products Company has offered Blue Technologies $22 per DVD player for 10. Distinguish between relevant and irrelevant costs. Blue Technologies' normal selling price is $30 per DVD player.000 DVD players.000 = $ 220.000.000 Add'l Expense Diff: 2 LO: 8-2 EOC: E8-18A AACSB: Analytical Thinking Learning Outcome: Use incremental analysis to make short-term decisions. The total manufacturing cost per DVD player is $12 and consists of variable costs of $14 per DVD player and fixed overhead costs of $4 per DVD player.000 Add'l Expense = $ 80. C) Accept. B) Reject.000 = 140. (NOTE: Assume excess capacity and no effect on regular sales.000.000 C) Expected increase in revenues $300. because operating income would decrease $80. expected increase in expenses $140. Inc. expected increase in expenses $120.000 Add'l Revenue Less $ 14 × 10. D) Reject. Distinguish between relevant and irrelevant costs. (NOTE: Assume excess capacity and no effect on regular sales.000 D) Expected increase in revenues $220.000 Operating Income Diff: 2 LO: 8-2 EOC: E8-18A AACSB: Analytical Thinking Learning Outcome: Use incremental analysis to make short-term decisions.000 = $ 140. expected increase in expenses $40. The total manufacturing cost per DVD player is $12 and consists of variable costs of $14 per DVD player and fixed overhead costs of $4 per DVD player.000 = $ 220.52) Blue Technologies manufactures and sells DVD players. because operating income would increase $80. 25.25 Contribution Margin Diff: 2 LO: 8-2 EOC: E8-18A AACSB: Analytical Thinking Learning Outcome: Use incremental analysis to make short-term decisions.000 toys if it can receive a special price.25.000 A retailer is interested in purchasing the excess capacity of 5.000 Total Cost $ 145. ABC Toys' profits would increase from this special order if the special order price per toy is greater than A) $8. This special order would not affect ABC Toys' regular sales or its cost structure. Answer: C Explanation: C) Variable Mfg Cost $ 70. The company currently is incurring the following costs at its current production level of 20. B) $5.000 $ 50. but is currently producing and selling 20. Inc.000 $ 90.000 toys per year.000 produced = $ 7.000 toys: Variable manufacturing costs Fixed manufacturing costs Variable selling and administrative costs Fixed selling and administrative costs $ 70.54) ABC Toys manufactures and sells wooden toys for $15 each.80.000 Variable Selling Cost + 75. publishing as Prentice Hall .000 $ 75.000/ 20. D) $14. Distinguish between relevant and irrelevant costs. 24 Copyright © 2013 Pearson Education. The company has the capacity to produce 25.00.000 toys in a year. C) $7. 000 for the molds required for the extra large trees.00 per unit associated with having a white tree. 25 Copyright © 2013 Pearson Education.100 decrease. D) $13. An accountant at Apex Company provides an estimate of the unit product cost as follows: Direct materials Direct labor (variable) Variable manufacturing overhead Fixed manufacturing overhead Total unit cost $ 50. Answer: C Explanation: C) Direct materials $ 50.100 increase.50 Contribution Margin $ 60. B) $13.00 Mfg cost 59.00 $ 4. C) $2.50 Now Selling Price $ 120.000 Add'l Fixed = $ 2.00 Total Mfg cost $ 59. This special order would not have any effect on the company's other sales. If the special order is accepted.100 Diff: 2 LO: 8-2 EOC: E8-18A AACSB: Analytical Thinking Learning Outcome: Use incremental analysis to make short-term decisions.50 Variable MOH 1. the company has the excess capacity to handle this special order.10.00 Add'l variable cost 5.00 $ 3.50 × 200 units = 12. Apex Company is currently producing and selling 20.100 increase. the company's operating income would increase (decrease) by A) $2. These molds would have no other purpose and would have no salvage value. The shopping mall has offered to pay $120 for each tree. A local shopping mall recently made a special order offer.00 Direct Labor 3. The special order trees would also have an additional variable cost of $5.00 $ 14.50 $ 1. publishing as Prentice Hall . Distinguish between relevant and irrelevant costs. the shopping mall would like to purchase 200 extra large white trees.55) Apex Company produces artificial Christmas trees. Inc.100 .50 This special order would require an investment of $10.300 decrease.000 trees. 600 D) Decrease by $270. Regular sales will not be affected by the special order. publishing as Prentice Hall . Distinguish between relevant and irrelevant costs. how would operating income be affected? A) Increase by $270.00 $ 132.400 Additional revenue from order $ 270.200 Special order price per unit Additional revenue from order Variable manufacturing costs per unit Variable marketing and administrative costs per unit Total variable costs per unit $ 270. The company is analyzing the opportunity to accept a special sales order for 1.200 chaise lounges at a price of $225.000 $ 30.000 chaise lounges per year. 26 Copyright © 2013 Pearson Education.56) The following information relates to current production of outdoor chaise lounges at Backyard Posh: Variable manufacturing costs per unit Total fixed manufacturing costs Variable marketing and administrative costs per unit Total fixed marketing and administrative costs $ 102.000 chaise lounges per year. Fixed costs would remain unchanged.00.000 $ 102.000 Answer: B Explanation: B) Special sales order volume 1.00 $ 250.200 Total variable costs per unit Additional expenses from order $ 158.000 B) Increase by $111.00 Special sales order volume 1.00 per unit.00 $ 525. but is currently producing and selling 10.000 The regular selling price per chaise lounge is $300. If the company were to accept this special order. The company has the capacity to produce 15.000 Additional expenses from order Change in operating income Diff: 2 LO: 8-2 EOC: E8-18A AACSB: Analytical Thinking Learning Outcome: Use incremental analysis to make short-term decisions.600 C) Decrease by $111. Inc. publishing as Prentice Hall . but is currently producing and selling 10.00 per unit. If the company were to accept this special order. Fixed costs would remain unchanged.000 Special sales order volume 800 Variable manufacturing costs per unit Additional expenses from order $ Additional revenue from order $ 200.000 chaise lounges per year.000 81.400 C) Increase by $94.400 Answer: D Explanation: D) Special sales order volume 800 Special order price per unit Additional revenue from order $ 200.600 Additional expenses from order Change in operating income Diff: 2 LO: 8-2 EOC: E8-18A AACSB: Analytical Thinking Learning Outcome: Use incremental analysis to make short-term decisions.000 The regular selling price per chaise lounge is $300. Inc. The company is analyzing the opportunity to accept a special sales order for 800 chaise lounge at a price of $250.57) The following information relates to current production of outdoor chaise lounges at Backyard Posh: Variable manufacturing costs per unit Total fixed manufacturing costs Variable marketing and administrative costs per unit Total fixed marketing and administrative costs $ 102. The company has the capacity to produce 15.000 chaise lounges per year.00. Regular sales will not be affected by the special order. how would operating income be affected? A) Decrease by $94.00 $ 250.000 $ 30.00 $ 525.400 D) Increase by $118. 27 Copyright © 2013 Pearson Education. Distinguish between relevant and irrelevant costs.400 B) Decrease by $118. 400) Special order increase in fixed expenses Change in operating income Diff: 2 LO: 8-2 EOC: E8-18A AACSB: Analytical Thinking Learning Outcome: Use incremental analysis to make short-term decisions.000.400 Answer: A Explanation: A) Special sales order volume 200 Special order price per unit Additional revenue from order Variable manufacturing costs per unit Variable marketing and administrative costs per unit Total variable costs per unit $ 40.000 $ 30.400 B) Increase by $13.00 Special sales order volume Total variable costs per unit Additional variable expenses from order Additional revenue from order Additional variable expenses from order 200 $ 26.000 chaise lounges per year.000 chaise lounges per year. 28 Copyright © 2013 Pearson Education. Inc.000 $ 102. but is currently producing and selling 10. publishing as Prentice Hall .000 $ (26.400 $ 40. how would operating income be affected? A) Decrease by $6. If the company were to accept this special order.00 $ 250.00 $ 132. Regular sales will not be affected by the special order.00. Distinguish between relevant and irrelevant costs. Fixed costs would increase by $20. The company has the capacity to produce 15. The company is analyzing the opportunity to accept a special sales order for 200 chaise lounges at a price of $200.600 D) Increase by $6.00 $ 525.58) The following information relates to current production of outdoor chaise lounges Backyard Posh: Variable manufacturing costs per unit Total fixed manufacturing costs Variable marketing and administrative costs per unit Total fixed marketing and administrative costs $ 102.000 The regular selling price per chaise lounge is $300.600 C) Decrease by $13.00 per unit. 000 (61.000) Special order increase in fixed expenses Change in operating income Diff: 2 LO: 8-2 EOC: E8-18A AACSB: Analytical Thinking Learning Outcome: Use incremental analysis to make short-term decisions.000 chaise lounges per year. Inc. Variable marketing and administrative costs would be $10 per unit lower than on regular sales. Fixed costs would increase by $15. publishing as Prentice Hall .00 Special sales order volume 500 Total variable costs per unit Additional variable expenses from order $ 61.00 $ 250.000. how would operating income be affected? A) Decrease by $39.000 The regular selling price per chaise lounge is $300. but is currently producing and selling 10.00 per unit. Regular sales will not be affected by the special order.000 D) Increase by $24.00 $ 525.000 B) Decrease by $24.000 Answer: D Explanation: D) Special sales order volume Special order price per unit Additional revenue from order Variable manufacturing costs per unit Variable marketing and administrative costs per unit Total variable costs per unit 500 $ 100. Distinguish between relevant and irrelevant costs.000 chaise lounges per year.00 $ 122.59) The following information relates to current production of outdoor chaise lounges at Backyard Posh: Variable manufacturing costs per unit Total fixed manufacturing costs Variable marketing and administrative costs per unit Total fixed marketing and administrative costs $ 102.000 $ 30. The company has the capacity to produce 15.00. 29 Copyright © 2013 Pearson Education.000 C) Increase by $39. The company is analyzing the opportunity to accept a special sales order for 500 chaise lounges at a price of $200.000 $ 102.000 Additional revenue from order Additional variable expenses from order $ $ 100. If the company were to accept this special order. 000 $ 60. What would be the effect on operating income of accepting a special order for 3.000 units (the costs above relate to the 40.000 units production level).500 B) Increase by $269.000 $ 20.000 The regular selling price for the product is $80.00 Selling Price Less cost per unit Contribution Margin × units sold Operating Income $ 55. 30 Copyright © 2013 Pearson Education.500 units at a sale price of $55 per product? A) Increase by $115.500 Answer: A Explanation: A) Direct Materials $ 240.500 C) Decrease by $115.000 Total $ 880.000 $ 100.000 Total Divided by production Cost per unit $880. The company has excess capacity and regular sales will not be affected by this special order.000 Direct Labor 420. There was no beginning inventory.500 Diff: 2 LO: 8-2 EOC: E8-18A AACSB: Analytical Thinking Learning Outcome: Use incremental analysis to make short-term decisions.000 $ 22.000 Variable Overhead 160. publishing as Prentice Hall . Inc.00 22.500 D) Decrease by $269.000 Variable Selling 60.00 $ 33.000 40.500 $ 115.00 × 3. Distinguish between relevant and irrelevant costs. The annual quantity of units produced and sold is 40.60) Pluto Incorporated provided the following information regarding its single product: Direct materials used Direct labor incurred Variable manufacturing overhead Fixed manufacturing overhead Variable selling and administrative expenses Fixed selling and administrative expenses $ 240.000 $ 160.000 $ 420. 000 160.000 are incurred? A) Decrease by $42.000 units (the costs above relate to the 40.000 $ 22.500 units at a sale price of $50 per product assuming additional fixed manufacturing overhead costs of $10.000 The regular selling price for the product is $80.000 $ 20.000 Answer: C Explanation: C) Direct Materials Direct Labor Variable Overhead Variable Selling Total $ 240. There was no beginning inventory.000 $32.000 units production level).000 Total Divided by production Cost per unit $880.000 60.000 $ 880.500 $ 42.000 420.00 $ 28. The annual quantity of units produced and sold is 40.000 10.000 $ 60. Distinguish between relevant and irrelevant costs. 31 Copyright © 2013 Pearson Education.000 C) Increase by $32. The company has excess capacity and regular sales will not be affected by this special order.000 Diff: 2 LO: 8-2 EOC: E8-18A AACSB: Analytical Thinking Learning Outcome: Use incremental analysis to make short-term decisions.00 Selling Price Less cost per unit Contribution Margin × units sold Operating Income Less Add’d Fixed Cost Operating (loss) $ 50. publishing as Prentice Hall .00 22. Inc.000 $ 420.000 $ 100. What would be the effect on operating income of accepting a special order for 1.61) Pluto Incorporated provided the following information regarding its single product: Direct materials used Direct labor incurred Variable manufacturing overhead Fixed manufacturing overhead Variable selling and administrative expenses Fixed selling and administrative expenses $ 240.000 40.000 D) Increase by $42.000 $ 160.000 B) Decrease by $32.00 × 1. There was no beginning inventory. What would be the effect on operating income of accepting a special order for 1.62) Pluto Incorporated provided the following information regarding its single product: Direct materials used Direct labor incurred Variable manufacturing overhead Fixed manufacturing overhead Variable selling and administrative expenses Fixed selling and administrative expenses $ 240.000 The regular selling price for the product is $80. publishing as Prentice Hall .500 Answer: D 32 Copyright © 2013 Pearson Education. Inc.000 units (the costs above relate to the 40. A) Decrease by $18.000 $ 20.000 units at a sale price of $40 per product? The special order units would not require any variable selling and administrative expenses.000 units production level). The company has excess capacity and regular sales will not be affected by this special order.500 C) Increase by $18.000 $ 60. The annual quantity of units produced and sold is 40.000 $ 420.000 $ 160.000 D) Increase by $19.000 $ 100.000 B) Decrease by $19. 500 Additional revenue from order $ 40.000 Divide by Units produced and sold Variable manufacturing overhead cost per unit $ 4.50 $ 160.000 Special order sales price per unit Additional revenue from order $ 20.00 10.000 Divide by Units produced and sold Direct materials cost per unit Direct labor incurred Divide by $ 6. 33 Copyright © 2013 Pearson Education.00 $ 420.50 Variable manufacturing overhead per unit Total variable costs per unit $ 20.000 Divide by Units produced and sold Direct labor costs per unit Variable manufacturing overhead Divide by $ 10. publishing as Prentice Hall . Inc. Distinguish between relevant and irrelevant costs.50 Special order volume 1.000 Special order volume 1.00 Direct materials cost per unit Direct labor costs per unit $ $ 6.000 Additional variable costs per unit Change in operating income Diff: 2 LO: 8-2 EOC: E8-18A AACSB: Analytical Thinking Learning Outcome: Use incremental analysis to make short-term decisions.Explanation: D) Direct materials used Divide by $ 240.000 Special order sales price per unit Additional revenue from order $ 40. 63) Indicate whether each item below is a characteristic of a price-taker or a price-setter. publishing as Prentice Hall . Inc. a) Cost-plus pricing b) Product lacks uniqueness c) Less competition d) Target pricing e) Heavy competition Answer: a) PS b) PT c) PS d) PT e) PT Diff: 1 LO: 8-2 EOC: E8-17A AACSB: Reflective Thinking Learning Outcome: Use incremental analysis to make short-term decisions 34 Copyright © 2013 Pearson Education. Use PT for pricetaker and PS for price-setter. Variable costs are about $8 per golfer. About 400. Inc.000 Investors' return (% of assets) 12% Total assets Desired profit $ 6.200.200. Investors would like to earn a 12% return on the company's $50 million of assets.000 for the golfing season.000 Desired profit Target revenue Divide by $ 34.000 Total assets Total costs $ 28.000 golfers are expected each year.00 Expected volume Total variable costs $ 3. Using a cost-plus approach. The Mountaintop golf course has a favorable reputation in the area and therefore.000. Fixed costs are projected to be $25.200. The company primarily incurs fixed costs to groom the greens and fairways.000 Total fixed costs $ 25. publishing as Prentice Hall .000. has some control over the price of a round of golf.64) Mountaintop golf course is planning for the coming season.000 Divide by Expected volume Cost-plus price per round of golf Diff: 3 LO: 8-2 EOC: E8-17A AACSB: Analytical Thinking Learning Outcome: Use incremental analysis to make short-term decisions 35 Copyright © 2013 Pearson Education. what price should Mountaintop charge for a round of golf? Answer: Variable costs per unit $ 8.000. 200. Will investors be happy with the profit level? Answer: Market price per unit $ 75.000 for the golfing season. They wanted 12% ROI.000 $ (25.000.000 golfers are expected each year.000.00 Expected volume Total variable costs $ 3. Fixed costs are projected to be $25.000 Variable costs per unit $ 8. publishing as Prentice Hall .200.000. investors will not be happy. The Mountaintop golf course is a price-taker and won't be able to charge more than its competitors who charge $75 per round of golf.000 Divide by Profit expectation shortfall Divide by Total assets Percent of assets No. Inc.000 Operating income Profit expectation shortfall $ 4. What profit will it earn? State your answer in dollars and as a percent of assets.00 Expected volume Revenue at market price $ 30.000 $ 4.200.000) total variable costs Operating income Investors' return (% of ssets) 12% Total assets Desired profit $ 6. Investors would like to earn a 12% return on the company's $50 million of assets. The company primarily incurs fixed costs to groom the greens and fairways.000.65) Mountaintop golf course is planning for the coming season.000 Revenue at market price Less: total fixed costs $ 30. About 400. Variable costs are about $8 per golfer.000. Diff: 3 LO: 8-2 EOC: E8-17A AACSB: Analytical Thinking Learning Outcome: Use incremental analysis to make short-term decisions 36 Copyright © 2013 Pearson Education. 00 $ 50.00 $ 250. $14. A) List the relevant costs.66) Extreme Sports received a special order for 1.00 $ 14.00 1. Distinguish between relevant and irrelevant costs. Extreme Sports should accept the order.00 B) Special offer volume Special offer price Additional revenue from order 1. $2. fixed manufacturing overhead.00 $ 14. B) What will be the change in operating income if Extreme Sports accepts the special order? C) Should Extreme Sports accept the special order? Answer: A) Relevant costs: Direct material Direct labor Variable manufacturing overhead Total relevant costs $ 100.00 $ 50. variable manufacturing overhead.000) $ 86. $10.000 $ 164. Extreme Sports has enough extra capacity to accept the order. and variable selling costs. Unit costs to make and sell this product are as follows: Direct materials. publishing as Prentice Hall .000 units of its extreme motorbike at a selling price of $250 per motorbike.000 Additional revenue from order Additional expenses from order Change in operating income $ 250.000 C) Yes.000 $ (164.00 $ 164. $50. No additional selling costs will be incurred. 37 Copyright © 2013 Pearson Education. Inc.000 $ 250.00 $ 164. direct labor. $100.000 Relevant costs: Direct material Direct labor Variable manufacturing overhead Total relevant costs Special offer volume Additional expenses from order $ 100. Diff: 2 LO: 8-2 EOC: S8-2 AACSB: Analytical Thinking Learning Outcome: Use incremental analysis to make short-term decisions. Accepting this special sales order will put idle manufacturing capacity to use and will not affect regular sales.200) The company should accept the special order since total operating income would increase if the special order were to be accepted. The unit costs associated with this part are as follows: Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead Total cost $.80 $ 16. Total fixed costs will not change.30 $ 0. Determine whether or not the special order should be accepted.14 $ 0.64 20. Answer: Special offer volume Special offer price Additional revenue from order 20.000 $ 12.800 Additional revenue from order Additional expenses from order Change in operating income $ 16.69 Saturn Company has approached Jeff's Widget Corporation with an offer to purchase 20. publishing as Prentice Hall .000 $ (12.67) Jeff's Widget Corporation produces and sells a part used in the production of bicycles.14 . Justify your conclusion.20 .000 $ 0.000 units of this part at a price of $. Distinguish between relevant and irrelevant costs.000 Direct material Direct labor Variable manufacturing overhead Total costs Special offer volume Additional expenses from order $ 0.05 $.80.800) $ (3.30 .20 $ 0. Inc. Diff: 2 LO: 8-2 EOC: E8-18A AACSB: Analytical Thinking Learning Outcome: Use incremental analysis to make short-term decisions. 38 Copyright © 2013 Pearson Education. 000 cars are produced. If Sarah accepts the offer.00 1. Relevant costs to manufacture the part include direct materials.75 Sam's Associates has offered to sell Revved Up Toys 6. or: Direct materials Direct labor Variable manufacturing overhead Traceable fixed cost per unit Relevant cost to produce each unit $2.50 $1.68) Revved Up Toys manufactures a computer chip used in the production of remote control cars. Direct materials Direct labor Variable manufacturing overhead Traceable fixed cost per unit Relevant cost to produce each unit Offer price by supplier Savings per unit if bought Production level Total increase in operating income if bought $2.00 $1. $1. 39 Copyright © 2013 Pearson Education.00 $(5.75 each. Which alternative is best for Revved Up Toys and by how much? Answer: a.75 $6.00 b.000 $1.50 1.00 of the fixed manufacturing overhead costs can be eliminated. a. Inc.25 6.75) $0.50 $1.00 $1. When 6. Distinguish between relevant and irrelevant costs.50 $1.50 1.500 Diff: 2 LO: 8-2 EOC: P8-43A AACSB: Analytical Thinking Learning Outcome: Use incremental analysis to make short-term decisions.00 $6. What is the relevant per unit cost to manufacture the part? b.50 $1. direct labor.00 $6. variable manufacturing overhead.000 parts for $5. the costs per part are: Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead Total $2. and fixed manufacturing overhead that can be eliminated. publishing as Prentice Hall . Variable Manufacturing Overhead $6. Unit costs to make and sell this product are as follows: Direct Materials $45. Direct Labor $19. publishing as Prentice Hall . Fixed Manufacturing Overhead $12. Elite Office Furniture has enough capacity to accept the order.00 Direct labor $ 19.00 Variable manufacturing overhead $ 6.00 Total relevant costs $ 70. Distinguish between relevant and irrelevant costs. 40 Copyright © 2013 Pearson Education. List the relevant costs (and amount) to Elite Office Furniture for this special order. and Variable Selling Costs $5.00 Diff: 2 LO: 8-2 EOC: S8-2 AACSB: Analytical Thinking Learning Outcome: Use incremental analysis to make short-term decisions. Answer: Direct material $ 45. Inc. No additional selling costs will be incurred.69) Elite Office Furniture received a special order for 1.200 units of its executive chair at a selling price of $90 per chair. 200 units of its executive chairs at a selling price of $90 per chair. Unit costs to make and sell this product are as follows: Direct Materials $45.00 1. Elite Office Furniture has enough capacity to accept the order.00 Additional revenue from order $ 108. Direct Labor $19.00 $ 19.00 $ 6. Fixed Manufacturing Overhead $12.000 Direct material Direct labor Variable manufacturing overhead Total relevant costs Special offer volume Additional expenses from order $ 45. publishing as Prentice Hall . No additional selling costs will be incurred.000) $ 24.000 Additional revenue from order Additional expenses from order Increase in operating income $ 108. Inc. Distinguish between relevant and irrelevant costs.000 $ (84. they should accept the order as it results in additional operating income since the company has the additional capacity.000 Yes.00 $ 70.200 Special offer price $ 90. Diff: 2 LO: 8-2 EOC: P8-43A AACSB: Analytical Thinking Learning Outcome: Use incremental analysis to make short-term decisions.70) Elite Office Furniture received a special order for 1.200 $ 84. What will be Elite Office Furniture's change in operating income if they accept the special order? Should Elite Office Furniture accept the order? Explain why or why not. 41 Copyright © 2013 Pearson Education. Answer: Special offer volume 1. and Variable Selling Costs $5. Variable Manufacturing Overhead $6. 42 Copyright © 2013 Pearson Education.000 Product Q selling price $ 15.200. What would be the operating income for Item Q? Answer: Production volume 100.500. publishing as Prentice Hall . Additional fixed manufacturing overhead costs of $4.500 would be incurred if Item QR is produced. A normal production run includes 100. Distinguish between relevant and irrelevant costs.71) Heinz Manufacturing produces Item Q with variable manufacturing costs of $12/unit. The fixed manufacturing overhead cost is $72.000 $ 1.00 Product Q revenue $ 1.200.000 $ (1. Inc.00 $ 1. There would be no change in the number of units produced.000.000 Diff: 2 LO: 8-2 EOC: P8-43A AACSB: Analytical Thinking Learning Outcome: Use incremental analysis to make short-term decisions. The selling price of Item Q is $15/unit.000) $ (72.000 Production volume Product Q variable costs Product Q total variable costs Product Q revenue Product Q total variable costs Fixed manufacturing overhead for product Q Operating income for Q 100.000) $ 228. Heinz Manufacturing has discovered an additional process to change Item Q into Item QR.500.000 $ 12. Additional costs are estimated at $7/unit.000 units. Item QR would sell for $24/unit. Additional costs are estimated at $7/unit.500 would be incurred if Item QR is produced.500 would be incurred if Item QR is produced. By what percent would Heinz Manufacturing's operating income improve if the change is made? 43 Copyright © 2013 Pearson Education.00 100.400.000) $ (76.000.500 Diff: 2 LO: 8-2 EOC: P8-43A AACSB: Analytical Thinking Learning Outcome: Use incremental analysis to make short-term decisions. What would be the operating income for Item QR? Answer: Production volume 100. Item QR would sell for $24/unit. A normal production run includes 100.000 $ 4.000 Product QR selling price $ 24. There would be no change in the number of units produced.72) Heinz Manufacturing produces Item Q with variable manufacturing costs of $12/unit. Heinz Manufacturing has discovered an additional process to change Item Q into Item QR.000 $ 1.900.00 $ 7. Item QR would sell for $24/unit. The selling price of Item Q is $15/unit.00 $ 19.000 Product Q variable costs Product QR additional costs Product QR variable costs Production volume Product QR total variable costs Fixed manufacturing overhead for product Q Additional fixed manufacturing overhead Fixed manufacturing overhead for product QR Product QR revenue Product QR total variable costs Fixed manufacturing overhead for product QR Operating income for QR $ 12.000 units.500) $ 423. The selling price of Item Q is $15/unit. 73) Heinz Manufacturing produces Item Q with variable manufacturing costs of $12/unit. Heinz Manufacturing has discovered an additional process to change Item Q into Item QR. The fixed manufacturing overhead cost is $72.00 Product QR revenue $ 2. Additional fixed manufacturing overhead costs of $4.500 $ 76. Additional costs are estimated at $7/unit. The fixed manufacturing overhead cost is $72.400.900. There would be no change in the number of units produced. Inc.000. publishing as Prentice Hall .000 $ (1.000 units.000 $ 72. A normal production run includes 100.500 $ 2. Distinguish between relevant and irrelevant costs. Additional fixed manufacturing overhead costs of $4. 200.000) $ (76.400.000 $ 15.857 (1) 85.000 1.500. Inc.000 $(1. publishing as Prentice Hall .900.500 $ 76.00 $ 1.000 Production volume Product Q variable costs Product Q total variable costs 100.500) $ 423.000 Fixed manufacturing overhead for product Q Additional fixed manufacturing overhead Fixed manufacturing overhead for product QR $ 72.000 $ 4.500 Divide by $ 228.00 $ 7.500 Operating income for QR Divide by Operating income for Q $ 423.000 $ 24.00 $ 19.500.000) $ (72000) $ 228.400.000 $(1.000 Product Q variable costs Product QR additional costs Product QR variable costs Production volume Product QR total variable costs $ 12.200.000 Product Q revenue Product Q total variable costs Fixed manufacturing overhead for product Q Operating income for Q $ 1.00 100.Answer: Production volume Product Q selling price Product Q revenue 100.900.00 $ 1.00 $ 2.000 $ 12.75% Subtract Increase in income Diff: 2 LO: 8-2 EOC: P8-43A 44 Copyright © 2013 Pearson Education.000 Product QR: Production volume Product QR selling price Product QR revenue 100.500 Product QR revenue Product QR total variable costs Fixed manufacturing overhead for product QR Operating income for QR $ 2.000 $ 1. Answer: TRUE Diff: 1 LO: 8-3 EOC: S8-3 AACSB: Reflective Thinking Learning Outcome: Use incremental analysis to make short-term decisions 77) For a product. Distinguish between relevant and irrelevant costs. Answer: FALSE Diff: 1 LO: 8-3 EOC: S8-4 AACSB: Reflective Thinking Learning Outcome: Use incremental analysis to make short-term decisions 78) When a company is a price-setter. publishing as Prentice Hall . a company need not consider whether it is a price-taker or a price-setter for each product that it sells. it emphasizes a target costing approach to pricing. Answer: FALSE Diff: 1 LO: 8-3 EOC: S8-3 AACSB: Reflective Thinking Learning Outcome: Use incremental analysis to make short-term decisions 75) When setting prices. Inc. 74) Companies operating in highly competitive industries are generally price-setters. Answer: FALSE Diff: 1 LO: 8-3 EOC: S8-4 AACSB: Reflective Thinking Learning Outcome: Use incremental analysis to make short-term decisions 45 Copyright © 2013 Pearson Education. Answer: FALSE Diff: 1 LO: 8-3 EOC: S8-3 AACSB: Reflective Thinking Learning Outcome: Use incremental analysis to make short-term decisions 76) A price-setter company emphasizes a cost-plus approach to pricing. revenue at market price plus desired operating profit equals target total cost.AACSB: Analytical Thinking Learning Outcome: Use incremental analysis to make short-term decisions. Answer: TRUE Diff: 2 LO: 8-3 EOC: S8-4 AACSB: Reflective Thinking Learning Outcome: Use incremental analysis to make short-term decisions 82) Companies often try to gain more control over pricing by attempting to differentiate their products. Answer: TRUE Diff: 2 LO: 8-3 EOC: S8-4 AACSB: Reflective Thinking Learning Outcome: Use incremental analysis to make short-term decisions 81) When using a target costing approach. Answer: TRUE Diff: 2 LO: 8-3 EOC: S8-4 AACSB: Reflective Thinking Learning Outcome: Use incremental analysis to make short-term decisions 83) Product differentiation allows companies to become more of a price-setter.79) When making a pricing decision. and then subtracts its desired profit. publishing as Prentice Hall . Answer: TRUE Diff: 2 LO: 8-3 EOC: S8-4 AACSB: Reflective Thinking Learning Outcome: Use incremental analysis to make short-term decisions 46 Copyright © 2013 Pearson Education. managers need to consider all costs. Answer: TRUE Diff: 2 LO: 8-3 EOC: S8-4 AACSB: Reflective Thinking Learning Outcome: Use incremental analysis to make short-term decisions 84) When setting prices. to yield the target total cost. the company starts with revenue at market price. Answer: FALSE Diff: 1 LO: 8-3 EOC: S8-4 AACSB: Reflective Thinking Learning Outcome: Use incremental analysis to make short-term decisions 80) Cost-plus price minus desired profit equals total cost. Inc. and less of a price-taker. it is not necessary to separate costs into fixed and variable. Answer: TRUE Diff: 2 LO: 8-3 EOC: S8-4 AACSB: Reflective Thinking Learning Outcome: Use incremental analysis to make short-term decisions 87) Which of the following best describes "target costing"? A) An approach to pricing that begins with revenue at market price and subtracts desired profit to arrive at target total cost B) A factor that restricts production or sales of a product C) All costs incurred along the value chain in connection with the product or service D) An approach to pricing that begins with the product's total cost and adds desired profit Answer: A Diff: 2 LO: 8-3 EOC: S8-3 AACSB: Reflective Thinking Learning Outcome: Use incremental analysis to make short-term decisions 88) "Total cost of product or service" is best described as which of the following? A) Benefits foregone by choosing a particular alternative course of action B) A factor that restricts production or sales of a product C) Costs that were incurred in the past and can not be changed D) All costs incurred along the value chain in connection with the product or service Answer: D Diff: 2 LO: 8-3 EOC: S8-3 AACSB: Reflective Thinking Learning Outcome: Use incremental analysis to make short-term decisions 47 Copyright © 2013 Pearson Education. Answer: TRUE Diff: 2 LO: 8-3 EOC: S8-4 AACSB: Reflective Thinking Learning Outcome: Use incremental analysis to make short-term decisions 86) Cost-plus pricing is essentially the opposite of target-costing.85) Managers need to consider variable costs. inventoriable product costs and period costs when setting prices. Inc. fixed costs. publishing as Prentice Hall . 89) Which of the following describes the products and services of companies that are price-setters? A) They tend to be unique. D) They tend to be commodities. C) They tend to have a lot of competitors. Inc. publishing as Prentice Hall . B) They are priced by managers using a target-costing emphasis. Answer: A Diff: 2 LO: 8-3 EOC: S8-3 AACSB: Reflective Thinking Learning Outcome: Use incremental analysis to make short-term decisions 90) Stockholders' expectations of company profits are affected by which of the following? A) Industry risk B) Historical company earnings C) General economic conditions D) All of the above Answer: D Diff: 2 LO: 8-3 EOC: S8-3 AACSB: Reflective Thinking Learning Outcome: Use incremental analysis to make short-term decisions 91) The cost-plus price is described by which of the following? A) Target total cost plus desired profit B) Total cost plus desired profit C) Revenue at market price plus desired profit D) Variable cost plus desired profit Answer: B Diff: 2 LO: 8-3 EOC: S8-3 AACSB: Reflective Thinking Learning Outcome: Use incremental analysis to make short-term decisions 92) Target total cost is described by which of the following? A) Total cost plus desired profit B) Revenue at market price plus desired profit C) Revenue at market price minus desired profit D) Total cost minus actual cost Answer: C Diff: 2 LO: 8-3 EOC: S8-3 AACSB: Reflective Thinking Learning Outcome: Use incremental analysis to make short-term decisions 48 Copyright © 2013 Pearson Education. Inc. Answer: A Diff: 2 LO: 8-3 EOC: S8-3 AACSB: Reflective Thinking Learning Outcome: Use incremental analysis to make short-term decisions 49 Copyright © 2013 Pearson Education. publishing as Prentice Hall .93) Managers must consider which of the following when pricing a product or service? A) All costs B) Only period costs C) Only manufacturing costs D) Only variable costs Answer: A Diff: 2 LO: 8-3 EOC: S8-3 AACSB: Reflective Thinking Learning Outcome: Use incremental analysis to make short-term decisions 94) Which of the following pairs are characteristics of price-takers? A) Less competition and target pricing B) Cost-plus pricing and less competition C) Target costing and heavy competition D) Cost-plus pricing and lack of product uniqueness Answer: C Diff: 2 LO: 8-3 EOC: S8-3 AACSB: Reflective Thinking Learning Outcome: Use incremental analysis to make short-term decisions 95) Which of the following pairs are characteristics of price-setters? A) Less competition and target costing B) Cost-plus pricing and less competition C) Lack of product uniqueness and heavy competition D) Less competition and lack of product uniqueness Answer: B Diff: 2 LO: 8-3 EOC: S8-3 AACSB: Reflective Thinking Learning Outcome: Use incremental analysis to make short-term decisions 96) Big-box retailers such as Lowe's are considered price-takers because A) their products are not unique. D) they emphasize cost-plus pricing. C) their products are unique. B) there is less competition in the home improvement retail sector. managers should consider which of the following? A) Only fixed costs B) Only variable costs C) Only period costs D) None of the above Answer: D Diff: 2 LO: 8-3 EOC: S8-3 AACSB: Reflective Thinking Learning Outcome: Use incremental analysis to make short-term decisions. B) revenue at market price less desired profit. D) revenue at market price less fixed costs. 50 Copyright © 2013 Pearson Education. cut variable costs C) Cut fixed costs D) Any of the above Answer: D Diff: 2 LO: 8-3 EOC: S8-3 AACSB: Reflective Thinking Learning Outcome: Use incremental analysis to make short-term decisions 99) In pricing a product. Inc. Distinguish between relevant and irrelevant costs.97) Target total cost is defined as A) cost of goods sold less desired profit. publishing as Prentice Hall . Answer: B Diff: 2 LO: 8-3 EOC: S8-3 AACSB: Reflective Thinking Learning Outcome: Use incremental analysis to make short-term decisions 98) Methods for a company to meet target total cost and the profit goals if the current cost of the product is higher than the target cost include which of the following? A) Accept a lower profit B) Cut fixed costs. C) revenue at market price less variable costs. 000.000.000 Divide by 400.000 $31. Investors would like to earn a 12% return on the company's $45 million of assets.100) All of the following factors affect the amount a customer is willing to pay for a product. Distinguish between relevant and irrelevant costs. Variable costs are about $15 per golfer.000. 51 Copyright © 2013 Pearson Education.000 Total fixed costs Total variable costs Total costs Desired profit Target revenue Divide by Expected volume Cost-plus price per round of golf $20.000 for the golfing season. B) the competition's price. D) general economic conditions.400. C) the product's uniqueness.000 Investors' return (% of assets) Total assets Desired profit 12% $45. Answer: A Diff: 2 LO: 8-3 EOC: S8-3 AACSB: Reflective Thinking Learning Outcome: Use incremental analysis to make short-term decisions 101) Mountaintop golf course is planning for the coming season.000 $ 5. Inc.400.50 D) $ 0.000 golfers are expected each year.50 Diff: 3 LO: 8-3 EOC: S8-4 AACSB: Analytical Thinking Learning Outcome: Use incremental analysis to make short-term decisions. publishing as Prentice Hall . The company primarily incurs fixed costs to groom the greens and fairways.000.50 B) $71.000. About 400. what price should Mountaintop charge for a round of golf? A) $51.400.21 Answer: C Explanation: C) Variable costs per unit $ 15.000 $ 5. Using a cost-plus approach.000 $ 78.00 C) $78. has some control over the price of a round of golf. Fixed costs are projected to be $20.000 Total variable costs $ 6. Mountaintop golf course has a favorable reputation in the area and therefore.00 Expected volume 400.000.000 $ 6. except A) the selling company's costs.000 $26. The company primarily incurs fixed costs to groom the greens and fairways.000 Variable costs per unit Total variable costs $ 6.000. Distinguish between relevant and irrelevant costs.000.000.000.000 Total fixed costs $ 20. Variable costs are about $15 per golfer. About 400. publishing as Prentice Hall .000 Expected volume 400. 52 Copyright © 2013 Pearson Education.00 Expected volume Revenue $ 30. Inc. The Mountaintop golf course is a price-taker and won't be able to charge more than its competitors who charge $75 per round of golf. What profit will it earn in terms of dollars? A) $16. Investors would like to earn a 12% return on the company's $45 million of assets.000.000 Total variable costs Total product costs $ 26.000.000.000. Fixed costs are projected to be $20.000 Revenue $ 30.000) Answer: C Explanation: C) Market price per unit $ 75.102) Mountaintop golf course is planning for the coming season.000) C) $ 4.000.000 D) $(20.000 Total product costs Expected profit Diff: 3 LO: 8-3 EOC: E8-19A AACSB: Analytical Thinking Learning Outcome: Use incremental analysis to make short-term decisions.000.000 B) $(4.000 for the golfing season.000 golfers are expected each year. 000 Variable costs per unit Total variable costs $ 6.000 Total variable costs Total product costs $ 26. publishing as Prentice Hall .000. About 400.000 Divide by Expected profit Divide by Total assets Expected profit as a percent of assets Diff: 3 LO: 8-3 EOC: E8-19A AACSB: Analytical Thinking Learning Outcome: Use incremental analysis to make short-term decisions.000 Revenue $ 30. Mountaintop golf course is a pricetaker and won't be able to charge more than its competitors who charge $75 per round of golf.000. What profit will it earn as a percent of assets? A) Loss of 8. Fixed costs are projected to be $20. Distinguish between relevant and irrelevant costs.000.000.000 Expected volume 400.000.000.89% B) Profit of 35.67% Answer: C Explanation: C) Market price per unit $ Expected volume Revenue $ 75.000 Total fixed costs $ 20.00 30. 53 Copyright © 2013 Pearson Education. Variable costs are about $15 per golfer.103) Mountaintop golf course is planning for the coming season. The company primarily incurs fixed costs to groom the greens and fairways. Investors would like to earn a 12% return on the company's $45 million of assets.000.56% C) Profit of 8.000 Total product costs Expected profit $ 4.000 for the golfing season.89% D) Loss of 57.000 $ 4. Inc.000 golfers are expected each year.000. 00 D) $ 0.000 $ 3.00 Expected volume 500.17 Answer: A Explanation: A) Variable costs per unit $ 10.000 $17.500.50 C) $29.00 Diff: 3 LO: 8-3 EOC: E8-19A AACSB: Analytical Thinking Learning Outcome: Use incremental analysis to make short-term decisions.500.00 B) $37.000. Distinguish between relevant and irrelevant costs. Using a cost-plus approach. what price should Philadelphia Swim Club charge for a membership? A) $41.000 $ 3.000 Divide by 500.000 Total variable costs $ 5. 54 Copyright © 2013 Pearson Education.000.000 members are expected to swim each year. Variable costs are about $10 per swimmer.000.500. About 500. Investors would like to earn a 10% return on the company's $30 million of assets.104) Philadelphia Swim Club is planning for the coming year.000 Investors' return (% of assets) Total assets Desired profit 10% $30.000 $ 41.000.000 $ 5.000 $20. publishing as Prentice Hall . The Philadelphia Swim Club has a favorable reputation in the area and therefore. The company primarily incurs fixed costs to maintain the swimming pool. has some control over the membership price.000. Fixed costs are projected to be $12.000 for the year.000 Total fixed costs Total variable costs Total costs Desired profit Target revenue Divide by Expected volume Cost-plus price per round of golf $12. Inc.500. 500.000 D) $(1.000.000 B) $(12.000) C) $1.500.000. What profit will it earn in terms of dollars? A) $11.000) Answer: C Explanation: C) Market price per unit $ 37.000 Total variable costs Total product costs $ 17.000 Total product costs Expected profit Diff: 3 LO: 8-3 EOC: E8-19A AACSB: Analytical Thinking Learning Outcome: Use incremental analysis to make short-term decisions.500.00 for a membership. Distinguish between relevant and irrelevant costs. 55 Copyright © 2013 Pearson Education.000 Total fixed costs $ 12.00 Expected volume Revenue $ 18.000 for the year. publishing as Prentice Hall .000 Expected volume 500.500.500.000 members are expected to swim each year. Variable costs are about $10 per swimmer. Investors would like to earn a 10% return on the company's $30 million of assets.000.500. About 500.000 Revenue $ 18. The company primarily incurs fixed costs to maintain the swimming pools.000 Variable costs per unit Total variable costs $ 5.000. Philadelphia Swim Club is a price-taker and won't be able to charge more than its competitors who charge $37. Inc. Fixed costs are projected to be $12.105) Philadelphia Swim Club is planning for the coming year. 500.33% C) Loss of 58. What profit will it earn as a percent of assets? A) Profit of 3.000 Revenue $ 18. Philadelphia Swim Club is a price-taker and won't be able to charge more than its competitors who charge $37.500. The company primarily incurs fixed costs to maintain the swimming pools.500.000.000 Total variable costs Total product costs $ 17.000.17% D) Profit of 36.000 Divide by Expected profit Divide by Total assets Expected profit as a percent of assets Diff: 3 LO: 8-3 EOC: E8-19A AACSB: Analytical Thinking Learning Outcome: Use incremental analysis to make short-term decisions.00 18.67% Answer: A Explanation: A) Market price per unit $ Expected volume Revenue $ 37. Inc.000 Total fixed costs $ 12.000 Total product costs Expected profit $ 1.000 members are expected to swim each year.000 for the year.00 per hour of court time.500.000. publishing as Prentice Hall .000 $ 1.500.33% B) Loss of 3. Variable costs are about $10 per swimmer. About 500.106) Philadelphia Swim Club is planning for the coming year. Distinguish between relevant and irrelevant costs. Investors would like to earn a 10% return on the company's $30 million of assets.000 Expected volume 500.000 Variable costs per unit Total variable costs $ 5. Fixed costs are projected to be $12. 56 Copyright © 2013 Pearson Education. 000 in fixed costs + (500.000 golfers × $60/round = $30. The Green Pastures course has a favorable reputation in the area and therefore. has some control over the price of a round of golf.000 golfers × $12 variable cost/golfer) = $26.000 golfers × $12 variable cost/golfer) = $26. E8-19A AACSB: Analytical Thinking Learning Outcome: Use incremental analysis to make short-term decisions 108) Green Pastures golf course is planning for the coming season. what is Green Pasture's target revenue? Answer: $20. The company primarily incurs fixed costs to groom the greens and fairways. About 500. The Green Pastures course has a favorable reputation in the area and therefore. Fixed costs are projected to be $20 million for the golfing season. Investors would like to earn a 12% return on the company's $40 million of assets. Variable costs are about $12 per golfer. 000 in total costs + ($40.000.000 × 12% return) = $30. has some control over the price of a round of golf.000 Diff: 2 LO: 8-3 EOC: S8-4. What will Green Pasture's revenue be at a market price of $60/round? Answer: 500. publishing as Prentice Hall .000 Diff: 2 LO: 8-3 EOC: E8-19A AACSB: Analytical Thinking Learning Outcome: Use incremental analysis to make short-term decisions 57 Copyright © 2013 Pearson Education.000. The company primarily incurs fixed costs to groom the greens and fairways.107) Green Pastures golf course is planning for the coming season. Variable costs are about $12 per golfer. Based on these numbers. Fixed costs are projected to be $20 million for the golfing season. Fixed costs are projected to be $20 million for the golfing season. Inc. Green Pastures golf course is a price-taker and won't be able to charge more than $60 per round because of local competition.000. Investors would like to earn a 12% return on the company's $40 million of assets. Based on these numbers.000.000. what are Green Pasture's total costs? Answer: $20.000. 000 in fixed costs + (500. The company primarily incurs fixed costs to groom the greens and fairways.000.800.000 golfers are expected each year. Variable costs are about $12 per golfer.000 golfers are expected each year. About 500.000 Diff: 2 LO: 8-3 EOC: E8-19A AACSB: Analytical Thinking Learning Outcome: Use incremental analysis to make short-term decisions 109) Green Pastures golf course is planning for the coming season. Investors would like to earn a 12% return on the company's $40 million of assets. About 500.000 golfers are expected each year.000 $26. 800.000 $30. About 500.800.000 in total costs + ($40.000 = 4.000.000. Answer: TRUE Diff: 2 LO: 8-4 EOC: S8-5 AACSB: Reflective Thinking Learning Outcome: Use incremental analysis to make short-term decisions 58 Copyright © 2013 Pearson Education. Answer: TRUE Diff: 1 LO: 8-4 EOC: S8-5 AACSB: Reflective Thinking Learning Outcome: Use incremental analysis to make short-term decisions 112) If the cost savings from discontinuing a product exceed the lost revenues from discontinuing the product. Green Pastures golf course is a price-taker and won't be able to charge more than $60 per round because of local competition. the product line should be discontinued.000 $26. Investors would like to earn a 12% return on the company's $40 million of assets.000 operating income at $60/round equals a shortfall of $800.000 $4. The company primarily incurs fixed costs to groom the greens and fairways. the product is not covering its fixed costs and should be discontinued.26. Fixed costs are projected to be $20 million for the golfing season.$4.000.000 golfers are expected each year.000 desired operating income . Inc.000. Variable costs are about $12 per golfer.000. publishing as Prentice Hall .000 × 12% return) = $30.110) Green Pastures golf course is planning for the coming season. if a product line has a negative contribution margin. What will Green Pasture's expected profit shortfall be if it charges $60/round? Answer: $20.000.000 in fixed costs + (500. it should be retained.000 golfers × $12 variable cost/golfer) = $26.000 .000. Answer: FALSE Diff: 1 LO: 8-4 EOC: S8-5 AACSB: Reflective Thinking Learning Outcome: Use incremental analysis to make short-term decisions 113) From a purely financial standpoint.000.000 Diff: 2 LO: 8-3 EOC: E8-19A AACSB: Analytical Thinking Learning Outcome: Use incremental analysis to make short-term decisions 111) If a product line has a negative contribution margin. Answer: FALSE Diff: 2 LO: 8-4 EOC: S8-5 AACSB: Reflective Thinking Learning Outcome: Use incremental analysis to make short-term decisions. 115) When deciding whether to discontinue a product. Distinguish between relevant and irrelevant costs. it should not be discontinued. Answer: TRUE Diff: 2 LO: 8-4 EOC: S8-5 AACSB: Reflective Thinking Learning Outcome: Use incremental analysis to make short-term decisions. Answer: FALSE Diff: 2 LO: 8-4 EOC: S8-5 AACSB: Reflective Thinking Learning Outcome: Use incremental analysis to make short-term decisions 117) Fixed costs that will continue to exist if a product is discontinued are relevant. Answer: FALSE Diff: 2 LO: 8-4 EOC: S8-5 AACSB: Reflective Thinking Learning Outcome: Use incremental analysis to make short-term decisions. Inc. managers should only consider the costs that will be saved. Distinguish between relevant and irrelevant costs. 59 Copyright © 2013 Pearson Education. publishing as Prentice Hall . Distinguish between relevant and irrelevant costs.114) Fixed costs that exist even after a product is discontinued are called unavoidable fixed costs. 116) If a product has a negative contribution margin. publishing as Prentice Hall . Answer: D Diff: 2 LO: 8-4 EOC: S8-5 AACSB: Reflective Thinking Learning Outcome: Use incremental analysis to make short-term decisions. B) relevant to the decision of whether to discontinue the department. Answer: C Diff: 2 LO: 8-4 EOC: S8-5 AACSB: Reflective Thinking Learning Outcome: Use incremental analysis to make short-term decisions. B) relevant fixed costs. Inc. D) none of the above. Answer: C Diff: 2 LO: 8-4 EOC: S8-5 AACSB: Reflective Thinking Learning Outcome: Use incremental analysis to make short-term decisions. 120) Fixed costs that are allocated among all departments are known as A) direct fixed costs. Distinguish between relevant and irrelevant costs. D) direct fixed costs of other departments. Distinguish between relevant and irrelevant costs. D) common fixed costs. B) relevant to the decision of whether to discontinue the department. 60 Copyright © 2013 Pearson Education. C) general fixed costs.118) Unavoidable fixed costs are A) irrelevant to the decision of whether to discontinue a product line because they will differ between alternatives. Distinguish between relevant and irrelevant costs. C) irrelevant to the decision of whether to discontinue a product line because they will not differ between alternatives. C) irrelevant to the decision of whether to discontinue the department. 119) Common fixed costs that are allocated between departments are generally A) direct fixed costs of the department. except A) whether the product has a positive or negative contribution margin. D) determining if direct fixed costs could be avoided if the product or product line is discontinued. D) none of the above. publishing as Prentice Hall .121) A company's manager would consider which of the following in deciding whether to discontinue its electronics product line? A) The costs it could save by discontinuing the product line B) The revenues it would lose from discontinuing the product line C) How discontinuing the electronics product line would affect sales of its other products (like CDs) D) All of the above Answer: D Diff: 2 LO: 8-4 EOC: S8-5 AACSB: Reflective Thinking Learning Outcome: Use incremental analysis to make short-term decisions. B) not having any free capacity. Answer: B Diff: 2 LO: 8-4 EOC: S8-5 AACSB: Reflective Thinking Learning Outcome: Use incremental analysis to make short-term decisions. 122) All of the following are considerations for discontinuing a product or product line. 123) A drug store decides to discontinue its health and beauty section of products because it has been unprofitable. Inc. C) if discontinuing the product or product line will affect sales of remaining products. Distinguish between relevant and irrelevant costs. Distinguish between relevant and irrelevant costs. This strategy could backfire because A) the store can readily fill the available space. Answer: B Diff: 2 LO: 8-4 EOC: S8-5 AACSB: Reflective Thinking Learning Outcome: Use incremental analysis to make short-term decisions 61 Copyright © 2013 Pearson Education. C) it has automatically saved that department's fixed costs. B) the store's sales may suffer by not having this convenience category of products. 00. it is appropriate to consider the A) new fixed cost per unit of $6. C) difference between the offered price and the variable cost per unit. A special sales order is received for 200 units of the product at a price of $20 per unit. Answer: A Diff: 2 LO: 8-4 EOC: S8-5 AACSB: Reflective Thinking Learning Outcome: Use incremental analysis to make short-term decisions. In deciding to accept or reject the special sales order.25. Distinguish between relevant and irrelevant costs. Distinguish between relevant and irrelevant costs. D) difference between the two fixed costs per unit. Answer: C Diff: 2 LO: 8-4 EOC: S8-5 AACSB: Analytical Thinking Learning Outcome: Use incremental analysis to make short-term decisions. B) avoidable fixed costs. Burrel Incorporated produces 500 units of a product that has unit variable costs of $17.124) Fixed costs that continue to exist even after a product line is discontinued are called A) unavoidable fixed costs. C) variable fixed costs.50. or $2. B) current fixed cost per unit of $8.75. publishing as Prentice Hall . Inc. 62 Copyright © 2013 Pearson Education. Total fixed costs for the month are $4. D) relevant fixed costs.375. 125) Each month. 000 355.000 120.126) Boots Plus has two product lines: Hiking boots and Fashion boots.000 C) Decrease in total operating income of $78.000 38.000 20.000 B) Increase in total operating income of $132.000 76.000 235.000 $(18.000 $49. how would discontinuing the Fashion line affect operating income? A) Increase in total operating income of $29.000 105.000 D) Decrease in total operating income of $20.000 Answer: D Diff: 3 LO: 8-4 EOC: E8-20A AACSB: Analytical Thinking Learning Outcome: Use incremental analysis to make short-term decisions. Inc.000 125.000 Hiking $340.000 38.000 Fashion $140.000 $67. Distinguish between relevant and irrelevant costs.000) Assuming fixed costs remain unchanged. 63 Copyright © 2013 Pearson Education. publishing as Prentice Hall . Income statement data for the most recent year follow: Sales revenue Variable expenses Contribution margin Fixed expenses Operating income (loss) Total $480. 000 $67. Income statement data for the most recent year follow: Sales revenue Variable expenses Contribution margin Fixed expenses Operating income (loss) Total $480.000 Answer: A Explanation: A) Contribution Margin $ 105.127) Boots Plus has two product lines: Hiking boots and Fashion boots. publishing as Prentice Hall .000 Fashion $140.000 Less original OI 49.000 of fixed costs will be eliminated by discontinuing the Fashion line.000 $(18.000 B) Decrease $45.000 38.000 105.000 120. how will operating income be affected? A) Increase $5.000 20.000 New Net income 54.000 Hiking $340. Inc.000 C) Increase $54. 64 Copyright © 2013 Pearson Education.000 355.000 Less Fixed Expenses 51.000 Diff: 3 LO: 8-4 EOC: E8-20A AACSB: Analytical Thinking Learning Outcome: Use incremental analysis to make short-term decisions.000 D) Increase $103. Distinguish between relevant and irrelevant costs.000 38.000 76.000 125.000 $49.000 235.000 Increase in OI $ 5.000) If $25. 128) Boots Plus has two product lines: Hiking boots and Fashion boots. Income statement data for the most recent year follow: Sales revenue Variable expenses Contribution margin Fixed expenses Operating income (loss) Total $480,000 355,000 125,000 76,000 $49,000 Hiking $340,000 235,000 105,000 38,000 $67,000 Fashion $140,000 120,000 20,000 38,000 $(18,000) Assuming the Fashion line is discontinued, total fixed costs remain unchanged, and the space formerly used to produce the line is rented for $30,000 per year, how will operating income be affected? A) Decrease $10,000 B) Increase $59,000 C) Increase $10,000 D) Increase $162,000 Answer: C Explanation: C) Sales Revenue 340,000 Plus Additional Revenue 30,000 Total Revenu 370,000 Less Variable Expenses (235,000) Contribution Margin 135,000 Less Fixed Expenses (76,000) New Net OI 59,000 Less original OI (49,000) Increase in OI $ 10,000 Diff: 3 LO: 8-4 EOC: E8-20A AACSB: Analytical Thinking Learning Outcome: Use incremental analysis to make short-term decisions. Distinguish between relevant and irrelevant costs. 65 Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 129) Boots Plus has two product lines: Hiking boots and Fashion boots. Income statement data for the most recent year follow: Sales revenue Variable expenses Contribution margin Fixed expenses Operating income (loss) Total $480,000 355,000 125,000 76,000 $49,000 Hiking $340,000 235,000 105,000 38,000 $67,000 Fashion $140,000 120,000 20,000 38,000 $(18,000) Assuming the Fashion line is discontinued, total fixed costs remain unchanged, and the space formerly used to produce the Fashion line is used to increase the production of Hiking boots by 250%, how will operating income be affected? A) Increase $137,500 B) Increase $235,500 C) Increase $186,500 D) Decrease $137,500 Answer: A Explanation: A) Add'l Hiking Revenue$ 340,000 × 2.5 = $ 850,000 Less Hiking Variable Expenses $ 235,000 × 2.5 = (587,500) Contribution Margin 262,500 Less: Fixed Expense (76,000) Operating Income 186,500 Less old OI 49,000 Difference $ 137,500 Diff: 3 LO: 8-4 EOC: E8-20A AACSB: Analytical Thinking Learning Outcome: Use incremental analysis to make short-term decisions. Distinguish between relevant and irrelevant costs. 66 Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 130) Westfall Watches has two product lines: Luxury watches and Sporty watches. Income statement data for the most recent year follow: Sales revenue Variable expenses Contribution margin Fixed expenses Operating income (loss) Total $490,000 355,000 135,000 76,000 $59,000 Luxury $360,000 235,000 125,000 38,000 $87,000 Sporty $130,000 120,000 10,000 38,000 $(28,000) Assuming fixed costs remain unchanged, how would discontinuing the Sporty line affect operating income? A) Increase in total operating income of $49,000 B) Increase in total operating income of $142,000 C) Decrease in total operating income of $10,000 D) Decrease in total operating income of $108,000 Answer: C Diff: 3 LO: 8-4 EOC: E8-20A AACSB: Analytical Thinking Learning Outcome: Use incremental analysis to make short-term decisions. Distinguish between relevant and irrelevant costs. 67 Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 000 Diff: 3 LO: 8-4 EOC: E8-20A AACSB: Analytical Thinking Learning Outcome: Use incremental analysis to make short-term decisions.000 135.000 Answer: B Explanation: B) Contribution Margin $ 125.000 Sporty $130. how will operating income be affected? A) Decrease $30.000 Less original OI 59. 68 Copyright © 2013 Pearson Education.000 $87. publishing as Prentice Hall .000 Increase in OI $ 10.000 10.000 38.000) If $20. Income statement data for the most recent year follow: Sales revenue Variable expenses Contribution margin Fixed expenses Operating income (loss) Total $490.000 $(28.000 C) Increase $69.000 New Net income 69. Inc.000 $59.000 Less Fixed Expenses 56.000 D) Increase $128.000 120.000 355.131) Westfall Watches has two product lines: Luxury watches and Sporty watches.000 76. Distinguish between relevant and irrelevant costs.000 125.000 38.000 Luxury $360.000 B) Increase $10.000 of fixed costs will be eliminated by discontinuing the Sporty line.000 235. 000) Assuming the Sporty line is discontinued.000 B) Increase $174.000 135.132) Westfall Watches has two product lines: Luxury watches and Sporty watches.000 Luxury $360.000) Contribution Margin 157.000 $87.000 38.000 D) Increase $81. how will operating income be affected? A) Increase $22.000 125. publishing as Prentice Hall . total fixed costs remain unchanged.000 235.000 $59.000 Sporty $130.000 38.000 120.000 C) Decrease $22.000 Plus Additional Revenue 32.000) New Net OI 81. Income statement data for the most recent year follow: Sales revenue Variable expenses Contribution margin Fixed expenses Operating income (loss) Total $490. Inc. and the space formerly used to produce the line is rented for $32.000 Total Revenue 392.000 Answer: A Explanation: A) Sales Revenue 360.000 Less Fixed Expenses (76.000 10.000 Diff: 3 LO: 8-4 EOC: E8-20A AACSB: Analytical Thinking Learning Outcome: Use incremental analysis to make short-term decisions.000 $(28.000 per year.000 76. 69 Copyright © 2013 Pearson Education.000 Less Variable Expenses (235.000 Less original OI (59. Distinguish between relevant and irrelevant costs.000) Increase in OI $ 22.000 355. how will operating income be affected? A) Increase $299.000 $59. Income statement data for the most recent year follow: Sales revenue Variable expenses Contribution margin Fixed expenses Operating income (loss) Total $490.500 Less: Fixed Expense (76. and the space formerly used to produce the Sporty line is used to increase the production of Luxury watches by 250%.000 125.000 $87.500) Contribution Margin 312.000 $(28.000 120.5 = $ 900.500 Answer: B Explanation: B) Add'l Hiking Revenue $ 360.000 10.000 Less Hiking Variable Expenses $ 235.5 = (587.500 Diff: 3 LO: 8-4 EOC: E8-20A AACSB: Analytical Thinking Learning Outcome: Use incremental analysis to make short-term decisions. publishing as Prentice Hall .000 Difference $ 177.000) Assuming the Sporty line is discontinued. Inc.000 Luxury $360. 70 Copyright © 2013 Pearson Education.500 D) Decrease $177. Distinguish between relevant and irrelevant costs.000) Operating Income 236.000 355.500 C) Increase $236.133) Westfall Watches has two product lines: Luxury watches and Sporty watches.000 × 2.000 38.000 Sporty $130.000 × 2.500 Less old OI 59.000 76.000 38. total fixed costs remain unchanged.500 B) Increase $177.000 235.000 135. 000 $21.000 $ 8.134) Jim Bean Company has three product lines: D. and F.000 $15.000 $21.000 28. All fixed expenses are unavoidable.000 D) Decrease $8.000 $17.000 12.000 40. what affect will this have on operating income? A) Increase $9.000 40. E. Assuming Jim Bean Company discontinues product line F and does not replace it.000 F $20.000 B) Increase $17. publishing as Prentice Hall .000 $(9.000 Answer: D 71 Copyright © 2013 Pearson Education.000 $12. Inc.000) Jim Bean Company is thinking of discontinuing product line F because it is reporting an operating loss.000 E $42.000 C) Increase $8. The following information is available: Sales revenue Variable expenses Contribution margin Fixed expenses Operating income (loss) $ $ $ $ $ D 80.000 $46. 000 Operating income (loss). E $ $ 12. D $ 80.000 Fixed expenses. D Fixed expenses. E $ $ 28.000 Variable expenses.000 Fixed expenses. 72 Copyright © 2013 Pearson Education.000 Sales revenue from D and E $ 122.000 Sales revenue.000 Fixed expenses for all products Operating income (loss) from D and E $ 17.000 15. D Operating income (loss).000 Variable expenses from D and E Contribution margin from D and E $ 61. Distinguish between relevant and irrelevant costs.000 $ 17.000 Variable expenses. publishing as Prentice Hall .Explanation: D) Sales revenue.000 Operating income (loss) from D and E Operating income (loss) from all products Difference in operating income Diff: 2 LO: 8-4 EOC: E8-34A AACSB: Analytical Thinking Learning Outcome: Use incremental analysis to make short-term decisions. E Sales revenue from D and E $ 122. Inc.000 6. F Operating income (loss) from all products $ 25. E Variable expenses from D and E $ 61.000 Operating income (loss). F Fixed expenses for all products $ 44. D 40. 000 $12. Jim Bean Company discontinues product line F and rents the space formerly used to produce product F for $20. The following information is available: Sales revenue Variable expenses Contribution margin Fixed expenses Operating income (loss) $ $ $ $ $ D 80.000 F $20. publishing as Prentice Hall .000 $46.000 Answer: B 73 Copyright © 2013 Pearson Education.000 28. E.000 E $42.000 per year.000 $(9.000 D) Increase $37.000 40.000 B) Increase $12. All fixed costs are unavoidable.135) Jim Bean Company has three product lines: D.000 $21. what affect will this have on operating income? A) Increase $29.000 $21.000 $17.000 C) Decrease $12. and F.000 12.000 $ 8.000 $15.000 40. Inc.000) Jim Bean Company is thinking of discontinuing product line F because it is reporting an operating loss. 000 Rental revenue from discontinuing F Revenue from D and E only $ 142.000 $ 37. F Operating income (loss) from all products $ 25.000 Operating income (loss). F Fixed expenses for all products $ 44. Distinguish between relevant and irrelevant costs.000 6.000 Fixed expenses. publishing as Prentice Hall . E $ $ 28. D 40.000 Revenue from D and E only $ 142.000 15. D Sales revenue. D Operating income (loss). D Fixed expenses.000 Fixed expenses. 74 Copyright © 2013 Pearson Education.000 Variable expenses from D and E Contribution margin from D and E $ 81.000 Operating income (loss).Explanation: B) Sales revenue.000 Variable expenses. Inc. E $ $ 12. E Variable expenses from D and E $ 61. E $ $ 80.000 Variable expenses.000 Fixed expenses for all products Operating income (loss) from D and E $ 37.000 Operating income (loss) from D and E Operating income (loss) from all products Difference in operating income Diff: 3 LO: 8-4 EOC: E8-34A AACSB: Analytical Thinking Learning Outcome: Use incremental analysis to make short-term decisions.000 42. Inc. E.000 E $42.000 F $20.000 Answer: B 75 Copyright © 2013 Pearson Education.000 $12. All fixed costs are unavoidable. Assuming Jim Bean Company discontinues line F and is able to double the production and sales of product line E without increasing fixed costs. What affect will this have on operating income? A) Decrease $13. The following information is available: Sales revenue Variable expenses Contribution margin Fixed expenses Operating income (loss) $ $ $ $ $ D 80.136) Jim Bean Company has three product lines: D.000 $46.000 28.000 40.000 $ 8. publishing as Prentice Hall .000 $(9.000 $21.000 B) Increase $13.000 C) Increase $30.000) Jim Bean Company is thinking of discontinuing product line F because it is reporting an operating loss.000 $17.000 40.000 D) Increase $34.000 $21.000 $15. and F.000 12. 000 Variable expenses.000 Sales revenue. E Discontinue F.000 $ 21.000 Fixed expenses.000 $ 38.000 E New variable expenses for E $ 42. 76 Copyright © 2013 Pearson Education. E $ $ 28. Distinguish between relevant and irrelevant costs. increase in production of $ 42. Inc.000 Operating income (loss). F Operating income (loss) from all products $ 25. D Variable expenses from D and E $ 82. E Discontinue F. E $ $ 12.000 Fixed expenses.000 Operating income (loss).Explanation: B) Sales revenue. F Fixed expenses for all products $ 44.000 Variable expenses from D and E Contribution margin from D and E $ 82.000 Fixed expenses for all products Operating income (loss) from D and E $ 38.000 6. increase in production of Operating income (loss) from D and E Operating income (loss) from all products Difference in operating income Diff: 3 LO: 8-4 EOC: E8-34A AACSB: Analytical Thinking Learning Outcome: Use incremental analysis to make short-term decisions.000 15.000 Variable expenses. D Operating income (loss). D Sales revenue from D and E $ 164. D Fixed expenses.000 E New sales revenue for E $ 84.000 Sales revenue from D and E $ 164. publishing as Prentice Hall . and F.000 F $20.000 40. The following information is available: Sales revenue Variable expenses Contribution margin Fixed expenses Operating income (loss) $ $ $ $ $ D 80.000 D) Decrease $20.000 $12.000 $(9.000 $15.000 $46.000 C) Decrease $12. publishing as Prentice Hall .000) Jim Bean Company is thinking of discontinuing product line F because it is reporting an operating loss.000 $21.000 12.000 E $42.137) Jim Bean Company has three product lines: D. All fixed costs are unavoidable. Assume Jim Bean Company is able to increase the sale price of product F to $32. Inc. E.000 28.000 $ 8.000 B) Increase $12.000 $21.000 40.000 with no change in volume of units sold and no change in variable costs or fixed costs. What affect will this have on operating income? A) Increase $37.000 $17.000 Answer: B 77 Copyright © 2013 Pearson Education. 000 Fixed expenses.000 15. 78 Copyright © 2013 Pearson Education. D Sales revenue. D Fixed expenses.000 Fixed expenses for all products New operating income (loss) for all products $ 37.000 6. D Operating income (loss).000 Variable expenses for all products Contribution margin for all products $ 81.000 Operating income (loss). F Variable expenses for all products $ 73. E $ $ 28. D Variable expenses. publishing as Prentice Hall . E $ $ 80.000 Operating income (loss).000 Variable expenses. F Original operating income (loss) from all products $ 25. Inc.000 Variable expenses. E $ $ 12.000 Fixed expenses.000 New revenue for F Sales revenue for all products $ 154. F Fixed expenses for all products $ 44. Distinguish between relevant and irrelevant costs.000 New operating income (loss) for all products Original operating income (loss) from all products Difference in operating income Diff: 3 LO: 8-4 EOC: E8-34A AACSB: Analytical Thinking Learning Outcome: Use incremental analysis to make short-term decisions.000 21.000 $ 37.000 42.000 Sales revenue for all products $ 154. E $ $ 40.Explanation: B) Sales revenue. 138) The income statement for Germain Appliances is divided by its two product lines, Toasters and Microwaves, as follows: Sales revenue Variable expenses Contribution margin Fixed expenses Operating income (loss) Toaster $600,000 $450,000 $150,000 $75,000 $75,000 Microwave $255,000 $210,000 $45,000 $75,000 $(30,000) Total $855,000 $660,000 $195,000 $150,000 $45,000 If fixed costs remain unchanged and Germain Appliances discontinues the Microwave line, how will operating income change? A) Will decrease by $150,000 B) Will increase by $45,000 C) Will decrease by $45,000 D) Will increase by $150,000 Answer: C Explanation: C) Sales revenue, Toasters $ 600,000 Variable expenses, Toasters Contribution margin for Toasters only $ 150,000 Total fixed expenses for both products Operating income (loss) for Toasters only $ 0 Operating income (loss) for Toasters only $ 0 Operating income (loss) for both products Difference in operating income Diff: 3 LO: 8-4 EOC: P8-45A AACSB: Analytical Thinking Learning Outcome: Use incremental analysis to make short-term decisions. Distinguish between relevant and irrelevant costs. 79 Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 139) The income statement for Germain Appliances is divided by its two product lines, Toasters and Microwaves, as follows: Sales revenue Variable expenses Contribution margin Fixed expenses Operating income (loss) Toaster $600,000 $450,000 $150,000 $75,000 $75,000 Microwave $255,000 $210,000 $45,000 $75,000 $(30,000) Total $855,000 $660,000 $195,000 $150,000 $145,000 If Germain Appliances can eliminate fixed costs of $32,000 by discontinuing the Microwave line, then discontinuing it should result in which of the following? A) Increase in total operating income of $45,000 B) Increase in total operating income of $13,000 C) Decrease in total operating income of $13,000 D) Decrease in total operating income of $45,000 Answer: C Explanation: C) Total fixed expenses for both products $ 150,000 Avoided fixed costs Unavoidable fixed costs $ 118,000 Sales revenue, Toasters $ 600,000 Variable expenses, Toasters Contribution margin for Toasters only $ 150,000 Unavoidable fixed costs Operating income (loss) from Toasters only $ 32,000 Operating income (loss) from Toasters only $ 32,000 Operating income (loss) for both products Difference in operating income Diff: 3 LO: 8-4 EOC: P8-45A AACSB: Analytical Thinking Learning Outcome: Use incremental analysis to make short-term decisions. Distinguish between relevant and irrelevant costs. 80 Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 140) The income statement for Germain Appliances is divided by its two product lines, Toasters and Microwaves, as follows: Sales revenue Variable expenses Contribution margin Fixed expenses Operating income (loss) Toaster $600,000 $450,000 $150,000 $75,000 $75,000 Microwave $255,000 $210,000 $45,000 $75,000 $(30,000) Total $855,000 $660,000 $195,000 $150,000 $45,000 If Germain Appliances can eliminate fixed costs of $32,000 and increase the sale of Toasters by 6,000 units at a selling price of $30 per unit and a contribution margin of $8 per unit, then discontinuing the Microwaves should result in which of the following? A) Increase in total operating income of $35,000 B) Increase in total operating income of $3,000 C) Decrease in total operating income of $35,000 D) Decrease in total operating income of $3,000 Answer: A 81 Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 000 Total fixed expenses for both products $ 150.000 Uavoidable fixed costs Operating income (loss) from Toasters only $ 80.000 Total sales revenue for Toasters $ 780.000 Sale price per unit of new volume Additional revenue $ 180.000 Operating income (loss) from Toasters only $ 80.000 Sales revenue. Distinguish between relevant and irrelevant costs.00 Increased volume of Toasters Additional variable expenses $ 132. publishing as Prentice Hall .000 $ 30. Inc.Explanation: A) Increased volume of Toasters $ 6. Toasters Total sales revenue fot Toasters $ 780.000 Variable expenses. 82 Copyright © 2013 Pearson Education.000 Avoidable fixed costs Unavoidable fixed costs $ 118. Toasters Total variable expenses for Toasters $ 582.00 unit Variable expense per unit for new volume $ 22.000 Sale price per unit of new volume Contribution margin for each new volume Operating income (loss) for both products Difference in operating income Diff: 3 LO: 8-4 EOC: P8-45A AACSB: Analytical Thinking Learning Outcome: Use incremental analysis to make short-term decisions.000 Total variable expenses for Toasters Contribution margin for Toasters only $ 198. 000 $75. how will operating income change? A) Will decrease by $150.000 $(25.000 $75.000 $50.000 $210.000 $150.000 $50. Distinguish between relevant and irrelevant costs. Curling Irons and Straighteners.000 $660.000 $450.000 C) Will increase by $150.000 D) Will decrease by $50. publishing as Prentice Hall .000 Variable expenses.000) Total $860.000 If fixed costs remain unchanged and Lovely Locks discontinues the Straightener line.000 Straighteners $260.141) The income statement for Lovely Locks is divided by its two product lines. Curling Irons $ 600. Curling Irons Contribution margin for Curling Irons only $ 150.000 Total fixed expenses for both products Operating income (loss) for Curling Irons only $ 0 Operating income (loss) for Curling Irons only $ 0 Operating income (loss) for both products Difference in operating income Diff: 3 LO: 8-4 EOC: P8-45A AACSB: Analytical Thinking Learning Outcome: Use incremental analysis to make short-term decisions.000 Answer: D Explanation: D) Sales revenue.000 $150.000 $200. Inc.000 B) Will increase by $50. 83 Copyright © 2013 Pearson Education.000 $75. as follows: Sales revenue Variable expenses Contribution margin Fixed expenses Operating income (loss) Curling Irons $600. 000 Variable expenses.000 by discontinuing the Straightener line.142) The income statement for Lovely Locks is divided by its two product lines.000 $210.000 $660.000 $75.000 C) Increase in total operating income of $18.000 Answer: B Explanation: B) Total fixed expenses for both products $ 150. as follows: Sales revenue Variable expenses Contribution margin Fixed expenses Operating income (loss) Curling Irons $600.000 $75.000 Sales revenue. Inc.000 Unavoidable fixes costs Operating income (loss) for Curling Irons only $ 32. Curling Irons Contribution margin for Curling Irons only $ 150.000 $150.000 $50. then discontinuing it should result in which of the following? A) Increase in total operating income of $50. Distinguish between relevant and irrelevant costs. publishing as Prentice Hall .000 Straighteners $260.000 $75.000 Operating income (loss) for Curling Irons only $ 32.000 Avoidable fixed costs Unavoidable fixed costs $ 118.000 If Lovely Locks can eliminate fixed costs of $32.000 $450.000 $200.000 $(25.000) Total $860. 84 Copyright © 2013 Pearson Education.000 $150.000 B) Decrease in total operating income of $18. Curling Irons and Straighteners.000 D) Decrease in total operating income of $50.000 $50.000 Operating income (loss) for both products Difference in operating income Diff: 3 LO: 8-4 EOC: P8-45A AACSB: Analytical Thinking Learning Outcome: Use incremental analysis to make short-term decisions. Curling Irons $ 600. 143) The income statement for Lovely Locks is divided by its two product lines, Curling Irons and Straighteners, as follows: Sales revenue Variable expenses Contribution margin Fixed expenses Operating income (loss) Curling Irons $600,000 $450,000 $150,000 $75,000 $75,000 Straighteners $260,000 $210,000 $50,000 $75,000 $(25,000) Total $860,000 $660,000 $200,000 $150,000 $50,000 If Lovely Locks can eliminate fixed costs of $32,000 and increase the sale of Curling Irons by 6,000 units at a selling price of $30 per unit and a contribution margin of $8 per unit, then discontinuing the Straighteners should result in which of the following? A) Decrease in total operating income of $30,000 B) Increase in total operating income of $2,000 C) Increase in total operating income of $30,000 D) Decrease in total operating income of $2,000 Answer: C 85 Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall Explanation: C) Increased volume of Curling Irons $ 6,000 Sale price per unit of new volume Additional revenue $ 180,000 Sales revenue, Curling Irons Total sales revenue for Curling Irons $ 780,000 $ 30.00 unit Variable expense per unit for new volume $ 22.00 Increased volume of Curling Irons Additional variable expenses $ 132,000 Variable expenses, Curling Irons Total variable expenses for Curling Irons $ 582,000 Total fixed expenses for both products $ 150,000 Avoidable fixed costs Unavoidable fixed costs $ 118,000 Total sales revenue for Curling Irons $ 780,000 Total variable expenses for Curling Irons Contribution margin for Curling Irons only $ 198,000 Uavoidable fixed costs Operating income (loss) from Curling Irons only $ 80,000 Operating income (loss) from Curling Irons only $ 80,000 Sale price per unit of new volume Contribution margin for each new volume Operating income (loss) for both products Difference in operating income Diff: 3 LO: 8-4 EOC: P8-45A AACSB: Analytical Thinking Learning Outcome: Use incremental analysis to make short-term decisions. Distinguish between relevant and irrelevant costs. 86 Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 144) The internal financial statements of Vera Incorporated show that their beaded purses incurred an operating loss in the most recent year. There were 25,000 purses sold in that year. Selected financial information about the purse line follows. Total sales revenue Variable costs Contribution margin Fixed costs Net operating loss $ 190,000 $ 100,000 $ 90,000 $ 100,000 $ (10,000) If the line of purses were to be discontinued, the company would avoid $16,000 in fixed costs per year. If Vera Incorporated were to discontinue the line of purses, the change in annual operating income would be a(n): A) increase in total operating income of $74,000. B) decrease in total operating income of $10,000. C) increase in total operating income of $10,000. D) decrease in total operating income of $74,000. Answer: D Explanation: D) Contribution Margin $ 90,000 Less Fixed exp. Avoided 16,000 Decrease in OI $ 74,000 Diff: 2 LO: 8-4 EOC: P8-45A AACSB: Analytical Thinking Learning Outcome: Use incremental analysis to make short-term decisions. Distinguish between relevant and irrelevant costs. 87 Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 145) Simpson Corporation operates two divisions with the following operating results from last year: Sales Variable costs Contribution margin Avoidable fixed costs Allocated common fixed costs Operating income (loss) Western Division $ 620,000 $ 310,000 $ 310,000 $ 110,000 $ 90,000 $ 100,000 Eastern Division $ 290,000 $ 200,000 $ 90,000 $ 70,000 $ 45,000 $ (25,000) Total $ 900,000 $ 510,000 $ 390,000 $ 180,000 $ 135,000 $ 75,000 Management is considering whether the Eastern Division should be discontinued since it incurred an operating loss last year. Allocated common fixed costs would continue for Simpson Corporation whether the division is discontinued or not. If the Eastern Division had been discontinued at the beginning of last year, what would the total operating income for Simpson Corporation have been for the year? A) $55,000 B) $20,000 C) $25,000 D) $110,000 Answer: A Explanation: A) SOLUTION Eastern Division Sales $ 290,000 Variable costs Contribution margin $ 90,000 $ 75,000 Less avoidable fixed costs Segment margin for division Original total operating income Less segment margin for discontinued division Operating income if division discontinued Diff: 2 LO: 8-4 EOC: P8-45A AACSB: Analytical Thinking Learning Outcome: Use incremental analysis to make short-term decisions. Distinguish between relevant and irrelevant costs. 88 Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall If Benace Parts and Supply discontinues the A90 product line.000 of fixed manufacturing overhead costs would be avoided.000 A90 parts each year.000 Unit contribution margin Total contribution margin $ 12. 89 Copyright © 2013 Pearson Education. C) increase in total operating income of $47.000 Total contribution margin $ 65. $16.000 per year. Each A90 sells for $7 and has a contribution margin of $2. the effect on the company's operating income would be a(n): A) increase in total operating income of $33. B) decrease in total operating income of $33.000 Avoidable fixed manufacturing overhead Division segment margin income (loss) Diff: 2 LO: 8-4 EOC: P8-45A AACSB: Analytical Thinking Learning Outcome: Use incremental analysis to make short-term decisions.146) Benace Parts and Supply makes a variety of car parts. The company produces 6.000 is unavoidable.000. Fixed manufacturing overhead allocated to this division is $50. 147) Jerry Enterprises is considering whether to discontinue a division that generates a total contribution margin of $65. Inc. $7.000.000.000 Answer: B Explanation: B) Number of units produced 6.000 Avoidable fixed costs Decrease (increase) in operating income if product discontinued Diff: 2 LO: 8-4 EOC: P8-45A AACSB: Analytical Thinking Learning Outcome: Use incremental analysis to make short-term decisions. Distinguish between relevant and irrelevant costs.000 of fixed manufacturing overhead is allocated to the A90 product line.000. of which 18. publishing as Prentice Hall .000 C) Increase in total operating income of $4. Distinguish between relevant and irrelevant costs. Answer: B Explanation: B) SOLUTION Fixed manufacturing overhead of division $ 50. If Jerry Enterprises were to eliminate this division.000 B) Decrease in total operating income of $5. What would be the impact on total operating income if the A90 product line were to be discontinued? A) Increase in total operating income of $5. Currently. D) decrease in total operating income of $47.000 D) Decrease in total operating income of $4.000 Portion of fixed MOH which is unavoidable Avoidable fixed manufacturing overhead $ 32.000. 000 Answer: C Explanation: C) Sales revenue.000 B) Increase in total operating income of $159.000 Operating income (loss) from Cat food only $ 33.000) Assuming total fixed costs remain unchanged. Distinguish between relevant and irrelevant costs.000 $135.148) All About Animals has two product lines: Cat food and Dog food.000 C) Decrease in total operating income of $45. Cat food Contribution margin for Cat food $ 135.000 $85. publishing as Prentice Hall .000 $52.000 $180.000 $50.000 Variable expenses.000 $45. Inc.000 $102.000 Dog Food $85. Cat food $ 300.000 $165.000 Cat Food $300.000 $205.000 D) Decrease in total operating income of $111.000 $(7.000 $40.000 Total fixed expenses Operating income (loss) from Cat food only $ 33. Contribution margin income statement data for the most recent year follow: Sales revenue Variable expenses Contribution margin Fixed expenses Operating income (loss) Total $385. how would discontinuing the Dog food line affect operating income? A) Increase in total operating income of $33.000 $78. 90 Copyright © 2013 Pearson Education.000 Total operating income (loss) Difference in operating income Diff: 3 LO: 8-4 EOC: P8-45A AACSB: Analytical Thinking Learning Outcome: Use incremental analysis to make short-term decisions. 000 $45. publishing as Prentice Hall .000 Operating income (loss) from Cat food only $ 135.000 $78.000 D) Decrease $57.000 $180. Cat food Contribution margin for Cat food $ Fixed expenses $ 102.000 $165.000 Contribution margin for Cat food $ 135.000 B) Increase $45.000) If $12.000 $135.000 of fixed costs will be eliminated by discontinuing the Dog food line.149) All About Animals has two product lines: Cat food and Dog food. how will operating income be affected? A) Increase $123.000 $102.000 Variable expenses. Inc.000 45.000 $52. Contribution margin income statement data for the most recent year follow: Sales revenue Variable expenses Contribution margin Fixed expenses Operating income (loss) Total $385.000 $(7. 91 Copyright © 2013 Pearson Education.000 Answer: C Explanation: C) Sales revenue.000 Dog Food $85.000 $40.000 Unavoidable fixed costs Operating income (loss) from Cat food only $ 45.000 Avoidable fixed costs Unavoidable fixed costs $ 90. Cat food $ 300.000 Total operating income (loss) Difference in operating income Diff: 3 LO: 8-4 EOC: P8-45A AACSB: Analytical Thinking Learning Outcome: Use incremental analysis to make short-term decisions.000 $50.000 $205.000 $85.000 Cat Food $300. Distinguish between relevant and irrelevant costs.000 C) Decrease $33. 150) Contribution margin income statement data for the most recent year follow: Sales revenue Variable expenses Contribution margin Fixed expenses Operating income (loss) Total $385.000 58. how will operating income be affected? A) Increase $58.000 Fixed expenses Operating income (loss) from Cat food only $ Operating income (loss) from Cat food only $ 58.000 $85.000 Variable expenses.000 $205.000 $50.000 Dog Food $85. 92 Copyright © 2013 Pearson Education. Cat food $ 300.000 $102.000 B) Increase $184.000 C) Decrease $20.000 $165.000 $180.000 Cat Food $300.000 $52.000 Answer: C Explanation: C) Sales revenue. total fixed costs remain unchanged. Inc.000 Additional revenue if Dog food discontinued Total sales revenue for Cat food only $ 325.000 $(7.000 $135. Distinguish between relevant and irrelevant costs.000 $45.000 $40. Cat food Contribution margin for Cat food $ 160.000 Total operating income (loss) Difference in operating income Diff: 3 LO: 8-4 EOC: P8-45A AACSB: Analytical Thinking Learning Outcome: Use incremental analysis to make short-term decisions.000 per year.000 $78.000) Assuming the Dog food is discontinued. publishing as Prentice Hall . and the space formerly used to produce the line is rented for $25.000 D) Increase $20. 93 Copyright © 2013 Pearson Education.000 $78.000) Assuming the Dog food line is discontinued. Distinguish between relevant and irrelevant costs.000 $40.000 $50. publishing as Prentice Hall .000 $52. how will operating income be affected? A) Increase $90. total fixed costs remain unchanged.000 $45.000 B) Increase $246.000 $205.000 $180.000 Answer: A Diff: 3 LO: 8-4 EOC: P8-45A AACSB: Analytical Thinking Learning Outcome: Use incremental analysis to make short-term decisions.000 Dog Food $85.000 $165.000 C) Increase $168.151) Contribution margin income statement data for the most recent year follow: Sales revenue Variable expenses Contribution margin Fixed expenses Operating income (loss) Total $385.000 D) Decrease $90.000 $(7.000 $85. and the space formerly used to produce the Dog food line is used to double the production of Cat food. Inc.000 $135.000 $102.000 Cat Food $300. 000 B) Increase $10. Inc.000 Diff: 2 LO: 8-4 EOC: P8-45A AACSB: Analytical Thinking Learning Outcome: Use incremental analysis to make short-term decisions.000 $16.000 Prior operating income 15. Assuming Black Productions discontinues model F and does not replace it.000 + 20.000 $17. E.000 $33.000 D) Decrease $6. 94 Copyright © 2013 Pearson Education.000 $16.000 Fixed Exp 16.000 $32.000 × 3 Operating Income $53.000 $(6.000 C) Increase $6. Distinguish between relevant and irrelevant costs.000 $4. publishing as Prentice Hall . and F.152) Black Productions has three models: D.000) Black Productions is thinking of discontinuing model F because it is reporting an operating loss. All fixed expenses are unavoidable.000 $10. The following information is available: Sales revenue Variable expenses Contribution margin Fixed expenses Operating income (loss) Model D $65. what effect will this have on operating income? A) Decrease $10.000 $20.000 48.000 5.000 $14.000 Model E $33.000 Decrease 10.000 Answer: A Explanation: A) Contribution Margin 33.000 Model F $24.000 $13.000 $16. 000 $10.000) Black Productions is thinking of discontinuing model F because it is reporting an operating loss.153) Black Productions has three models: D. The following information is available: Sales revenue Variable expenses Contribution margin Fixed expenses Operating income (loss) Model D $65. and F.000 Answer: B Explanation: B) Contribution Margin 33.000 Model F $24.000 Fixed Exp 16.000 $32. 95 Copyright © 2013 Pearson Education. Inc.000 D) Decrease $5.000 $53. Distinguish between relevant and irrelevant costs.000 $33.000 per year.000 $(6.000 Model E $33. what effect will this have on operating income? A) Increase $21.000 C) Decrease $21.000 $4.000 Prior operating income Rent income Increase -15.000 Diff: 3 LO: 8-4 EOC: P8-45A AACSB: Analytical Thinking Learning Outcome: Use incremental analysis to make short-term decisions.000 B) Increase $5.000 Operating Income 5.000 $14.000 $16.000 × 3 48. All fixed costs are unavoidable.000 $13.000 +15.000 + 20.000 5. E.000 $20. Black Productions discontinues model F and rents the space formerly used to produce product F for $15.000 $17. publishing as Prentice Hall .000 $16.000 $16. 000 Answer: A 96 Copyright © 2013 Pearson Education.000 $13. The following information is available: Sales revenue Variable expenses Contribution margin Fixed expenses Operating income (loss) Model D $65.000 $20.000 $33. E.000 $16.000 $17.000 $16.000 Model E $33.000 B) Decrease $10.000 C) Increase $26.000 Model F $24. and F.000 D) Decrease $26.154) Black Productions has three models: D.000) Black Productions is thinking of discontinuing model F because it is reporting an operating loss.000 $14.000 $32. All fixed costs are unavoidable. publishing as Prentice Hall .000 $10.000 $(6.000 $4. Inc. What effect will this have on operating income? A) Increase $10. Assuming Black Productions discontinues line F and is able to double the production and sales of model E without increasing fixed costs.000 $16. D Sales revenue from D and E $ 131.000 Sales revenue from D and E $ 131.000 Variable expenses. E $ $ 17.000 Fixed expenses. 97 Copyright © 2013 Pearson Education.Explanation: A) Sales revenue. E Discontinue F.000 Fixed expenses for all products Operating income (loss) from D and E $ 25.000 Operating income (loss).000 E New sales revenue for E $ 26. E Discontinue F.000 4. increase in production of $ 33. Distinguish between relevant and irrelevant costs.000 products Difference in operating income Diff: 3 LO: 8-4 EOC: P8-45A AACSB: Analytical Thinking Learning Outcome: Use incremental analysis to make short-term decisions. Inc. F Operating income (loss) from all products $ 15.000 Sales revenue. publishing as Prentice Hall . D Operating income (loss).000 E New sales revenue for E $ 66.000 $ 13.000 Operating income (loss).000 16.000 Variable expenses from D and E Contribution margin from D and E $ 73. increase in production of Operating income (loss) from D and E Operating income (loss) from all $ 25. F Fixed expenses for all products $ 48. D Fixed expenses.000 Fixed expenses. E $ $ 16.000 Variable expenses for E Variable expenses from D and E $ 58. 000 $17.000 $14. All fixed costs are unavoidable.000 $20.000 $10.155) Black Productions has three models: D. The following information is available: Sales revenue Variable expenses Contribution margin Fixed expenses Operating income (loss) Model D $65. Inc.000 Model F $24.000 $33.000 C) Decrease $11. E.000 $(6.000 with no change in volume of units sold and no change in variable costs or fixed costs. publishing as Prentice Hall .000 B) Increase $24. Assume Black Productions is able to increase the sale price of product F to $35. What effect will this have on operating income? A) Increase $11.000 $16.000 $13.000) Black Productions is thinking of discontinuing model F because it is reporting an operating loss.000 $16.000 $4.000 $16.000 Answer: A 98 Copyright © 2013 Pearson Education.000 D) Decrease $24.000 Model E $33. and F.000 $32. D Sales revenue. E $ $ 32.000 Original operating income (loss) from all products Difference in operating income Diff: 3 LO: 8-4 EOC: P8-45A AACSB: Analytical Thinking Learning Outcome: Use incremental analysis to make short-term decisions.000 Fixed expenses.000 Variable expenses.000 New revenue for F Sales revenue for all products $ 133.000 Variable expenses.000 13.000 4. D Variable expenses. E $ $ 16. 99 Copyright © 2013 Pearson Education. Inc.Explanation: A) Sales revenue. F Original operating income (loss) from all products $ 15.000 33.000 16. D Fixed expenses. publishing as Prentice Hall . F Variable expenses for all products $ 59. Distinguish between relevant and irrelevant costs.000 New operating income (loss) for all products $ 26. E $ $ 17.000 Fixed expenses for all products New operating income (loss) for all products $ 26. E $ $ 65.000 Fixed expenses.000 Variable expenses for all products Contribution margin for all products $ 74.000 Sales revenue for all products $ 133.000 Operating income (loss).000 Operating income (loss). F Fixed expenses for all products $ 48. D Operating income (loss). 000 $19. Prepare an analysis supporting your opinion about whether or not the Video Recorder product line should be discontinued.000 $75.000 $47.000 Management is considering discontinuing the Video Recorder product line.000 $51.000 $32. Accountants for the company estimate that discontinuing the Video Recorder line will decrease fixed cost of goods sold by $10. Inc.000 $(24.000 $25.000 $234.000 $77.156) Totally Technology manufactures Cameras and Video Recorders.000 $104.000 $124.000 $86.000) $53.000 $28.000.000 $110. The company's product line income statement follows: Sales revenue Cost of goods sold Variable Fixed Total cost of goods sold Gross profit Marketing and administrative expenses Variable Fixed Total marketing and administrative expenses Operating income (loss) Camera Video Recorder $300.000 $28.000 $49.000 $57. publishing as Prentice Hall .000 $157.000 $100.000 $143. 100 Copyright © 2013 Pearson Education.000 $82.000 Total $400.000 $166.000 $23.000 $62.000 and fixed marketing and administrative expenses by $4. 000) $ 47.000 $ 62.000) $ 100.000 $ 200. Diff: 3 LO: 8-4 EOC: P8-45A AACSB: Analytical Thinking Learning Outcome: Use incremental analysis to make short-term decisions. Inc.000 $ (4.000) $ (47. Distinguish between relevant and irrelevant costs.000 $ (75. publishing as Prentice Hall .000) $ 53.000 $ 53.000 $(100.000) $ 200.000 The company should keep producing and selling Video Recorders since operating income will decrease by $9.000 $ 110.Answer: Contribution margin income statement for DVDs: If Video Recorders discontinued: Sales revenue from Cameras Variable cost of goods sold from Cameras Variable marketing and administrative expenses from Cameras Contribution margin from Cameras only Total fixed costs of goods sold Decrease in fixed costs of goods sold if Video Recorders discontinued Fixed costs of goods sold if Video Recorders discontinued Total fixed marketing and administrative expenses Decrease in fixed marketing and administrative if Video Recorders discontinued Fixed marketing and administrative expenses if Video Recorders discontinued Contribution margin from Cameras only Fixed costs of goods sold if Video Recorders discontinued Fixed marketing and administrative expenses if Video Recorders discontinued Operating income (loss) Operating income (loss) from Cameras only Operating income (loss) with both products Decrease in operating income if Video Recorders discontinued $ 300.000) $ (25.000 $ 51.000 $ (10. 101 Copyright © 2013 Pearson Education.000 if the product line is discontinued.000 $ 9. Answer: TRUE Diff: 1 LO: 8-5 EOC: S8-8 AACSB: Reflective Thinking Learning Outcome: Use incremental analysis to make short-term decisions 102 Copyright © 2013 Pearson Education. since discontinuing the product will result in a $100. Inc.000 loss. publishing as Prentice Hall . Distinguish between relevant and irrelevant costs.000 Operating loss $ (100. the primary constraint may be cubic feet of display space. Determine if Cornell Enterprises should discontinue Model L78. Answer: If product discontinued: Lost sales $(480. You have been hired by Cornell Enterprises to help analyze the decision as to whether to eliminate Model L78. Upon investigation.000) Cornell Enterprises should not discontinue L78. Diff: 2 LO: 8-4 EOC: P8-45A AACSB: Analytical Thinking Learning Outcome: Use incremental analysis to make short-term decisions.157) Cornell Enterprises currently produces several products.000) Savings in variable costs $ 360. Model L78 is showing a net operating loss as indicated by the following condensed income statement prepared for the year ended December 31. The rest of the fixed costs allocated to Model L78 are common fixed costs that will be allocated to the remaining two products produced by Cornell Enterprises. 158) For some merchandisers.000 of the fixed costs shown on the above condensed income statement can be eliminated. you discover that if Model L78 is eliminated.000 Savings in avoidable fixed costs $ 20. $20. Answer: TRUE Diff: 1 LO: 8-5 EOC: S8-8 AACSB: Reflective Thinking Learning Outcome: Use incremental analysis to make short-term decisions 160) Fixed costs affect product mix considerations. produce the product with the lowest contribution margin per unit of the constraint.159) A constraint is a factor that restricts production or sale of a product. Inc. publishing as Prentice Hall . companies are most profitable when they maximize production of the product with the greatest sales demand. Answer: FALSE Diff: 1 LO: 8-5 EOC: S8-8 AACSB: Reflective Thinking Learning Outcome: Use incremental analysis to make short-term decisions 103 Copyright © 2013 Pearson Education. Answer: FALSE Diff: 1 LO: 8-5 EOC: S8-8 AACSB: Reflective Thinking Learning Outcome: Use incremental analysis to make short-term decisions 163) When making product mix decisions. Answer: TRUE Diff: 1 LO: 8-5 EOC: S8-8 AACSB: Reflective Thinking Learning Outcome: Use incremental analysis to make short-term decisions 161) An example of an expansion constraint would be the size of the available labor pool. Answer: TRUE Diff: 1 LO: 8-5 EOC: S8-8 AACSB: Reflective Thinking Learning Outcome: Use incremental analysis to make short-term decisions 162) To maximize profits. B) demand for the product.164) When making product mix decisions. Answer: C Diff: 1 LO: 8-5 EOC: S8-8 AACSB: Reflective Thinking Learning Outcome: Use incremental analysis to make short-term decisions 104 Copyright © 2013 Pearson Education. D) contribution margin per unit. C) contribution margin per unit ÷ units per constraint. D) contribution margin per unit + constraint per unit. B) contribution margin per unit × units per constraint. Answer: B Diff: 1 LO: 8-5 EOC: S8-8 AACSB: Reflective Thinking Learning Outcome: Use incremental analysis to make short-term decisions 167) Companies with production constraints and irrelevant fixed costs will be most profitable when they maximize production of the product with the highest A) sales price. Inc. companies are most profitable when they maximize production of the product with the greatest sales price. publishing as Prentice Hall . C) contribution margin per unit of the constraint. Answer: FALSE Diff: 1 LO: 8-5 EOC: S8-8 AACSB: Reflective Thinking Learning Outcome: Use incremental analysis to make short-term decisions 165) All of the following are product mix considerations except A) What constraint(s) stops us from making (or displaying) all of the units we can sell? B) Which products offer the highest contribution margin per unit of the constraint? C) Would emphasizing one product over another affect fixed costs? D) Which product has the most sunk costs? Answer: D Diff: 1 LO: 8-5 EOC: S8-8 AACSB: Reflective Thinking Learning Outcome: Use incremental analysis to make short-term decisions 166) The contribution margin per unit of constraint is calculated as A) contribution margin per unit × constraint per unit. publishing as Prentice Hall . Answer: D Diff: 1 LO: 8-5 EOC: S8-8 AACSB: Reflective Thinking Learning Outcome: Use incremental analysis to make short-term decisions 105 Copyright © 2013 Pearson Education. Inc.168) The factor that restricts production or sale of a product is which of the following? A) Demanding factor B) Constraint C) Sunk factor D) Relevant factor Answer: B Diff: 1 LO: 8-5 EOC: S8-8 AACSB: Reflective Thinking Learning Outcome: Use incremental analysis to make short-term decisions 169) A "constraint" is best described by which of the following? A) The distribution of all products to be sold B) A factor that restricts production or sales of a product C) Benefits foregone by choosing a particular alternative course of action D) Expected future costs that differ among alternatives Answer: B Diff: 1 LO: 8-5 EOC: S8-8 AACSB: Reflective Thinking Learning Outcome: Use incremental analysis to make short-term decisions 170) A "sales mix" is best described by which of the following? A) A factor that restricts production or sales of a product B) Costs that were incurred in the past and cannot be changed C) Expected future costs that differ among alternatives D) The relative number of all products to be sold Answer: D Diff: 1 LO: 8-5 EOC: S8-8 AACSB: Reflective Thinking Learning Outcome: Use incremental analysis to make short-term decisions 171) Which of the following could be a constraint for selling a product? A) Store hours B) Available labor hours for employees C) Shelf space D) All of the above could be constraints. publishing as Prentice Hall . Inc. except A) deciding which product offers the lowest contribution margin per unit. C) deciding upon any and all constraints associated with the product/sale mix. 173) Changing the product mix emphasis in the short run will usually not affect A) total variable costs. B) deciding whether fixed costs would change as a result of the product sales mix. Answer: A Diff: 2 LO: 8-5 EOC: S8-8 AACSB: Reflective Thinking Learning Outcome: Use incremental analysis to make short-term decisions. D) total contribution margin. Answer: C Diff: 2 LO: 8-5 EOC: S8-8 AACSB: Reflective Thinking Learning Outcome: Use incremental analysis to make short-term decisions 106 Copyright © 2013 Pearson Education. C) total fixed costs.172) All of the following would be considered in evaluating product or sales mix allocations. D) deciding which products will contribute the highest contribution margin per unit. Distinguish between relevant and irrelevant costs. B) both total variable and total fixed costs. 174) Mama's Favorite Appliances manufactures two products: Food Processors and Espresso Makers.00% D) 33.200 machine hours per month.33% Answer: A Explanation: A) Sales price. publishing as Prentice Hall .00 Divide by Sales price. food processors $ 125. The company's production capacity is 1. food processors Contribution margin ratio for food processors Diff: 2 LO: 8-5 EOC: E8-22A AACSB: Analytical Thinking Learning Outcome: Use incremental analysis to make short-term decisions 107 Copyright © 2013 Pearson Education.00% C) 140. Inc. food processors Contribution margin per food processor Divide by $ 75. The following data are available: Food Processors $125 $50 Sales price Variable costs Espresso Makers $225 $150 The company can manufacture two food processors per machine hour and three espresso machines per machine hour.00 Variable costs. What is the contribution margin ratio for food processors? A) 60.00% B) 150. espresso machines $ 225. publishing as Prentice Hall . Inc.00 Variable costs. espresso machines Contribution margin per espresso machine $ 75.175) Mama's Favorite Appliances manufactures two products: Food Processors and Espresso Machines.00 Espresso machines per hour Contribution margin per hour for espresso machines Diff: 3 LO: 8-5 EOC: E8-22A AACSB: Analytical Thinking Learning Outcome: Use incremental analysis to make short-term decisions 108 Copyright © 2013 Pearson Education. The following data are available: Sales price Variable costs Food Processors $125 $50 Espresso Machines $225 $150 The company can manufacture two food processors per machine hour and three espresso machines per machine hour. The company's production capacity is 1.200 machine hours per month. What is the contribution margin per machine hour for espresso machines? A) $1.125 B) $225 C) $150 D) $75 Answer: B Explanation: B) Sales price. 00 Food processors per hour Contribution margin per hour for food processors Diff: 3 LO: 8-5 EOC: E8-22A AACSB: Analytical Thinking Learning Outcome: Use incremental analysis to make short-term decisions 109 Copyright © 2013 Pearson Education. food processors Contribution margin per food processor $ 75. publishing as Prentice Hall .200 machine hours per month. Inc.00 Variable costs. What is the contribution margin per machine hour for food processors? A) $350 B) $225 C) $75 D) $150 Answer: D Explanation: D) Sales price. food processors $ 125. The company's production capacity is 1. The following data are available: Sales price Variable costs Food Processors $125 $50 Espresso Machines $225 $150 The company can manufacture two food processors per machine hour and three espresso machines per machine hour.176) Mama's Favorite Appliances manufactures two products: Food Processors and Espresso Machines. food processors $ 125.200 Espresso machines per hour Number to produce Diff: 3 LO: 8-5 EOC: E8-22A AACSB: Analytical Thinking Learning Outcome: Use incremental analysis to make short-term decisions 110 Copyright © 2013 Pearson Education. Inc. food processors Contribution margin per food processor $ 75.600 Espresso Machines and 0 Food Processors Answer: D Explanation: D) Sales price. The company's production capacity is 1. publishing as Prentice Hall .400 Food Processors and 3.00 Food processors per hour Contribution margin per hour for food processors $ Sales price.600 Espresso Machines D) 3.00 Espresso Machines Production capacity (hours) 1. To maximize profits.00 Product to emphasize 150.00 Variable costs. espresso machines $ 225.00 Variable costs.177) Mama's Favorite Appliances manufactures two products: Food Processors and Espresso Machines.200 machine hours per month. what product and how many units should the company produce in a month? A) 2.400 Food Processors and 0 Espresso Machines B) 300 Food Processors and 675 Espresso Machines C) 2. The following data are available: Food Processors $125 $50 Sales price Variable costs Espresso Machines $225 $150 The company can manufacture two food processors per machine hour and three espresso machines per machine hour. espresso machines Contribution margin per espresso machine $ 75.00 Espresso machiness per hour Contribution margin per hour for espresso machines $ 225. 200 machine hours per month. waffle maker Contribution margin per waffle maker Divide by $ 75. waffle makers $ 120. Inc. waffle makers Contribution margin ratio for waffle makers Diff: 2 LO: 8-5 EOC: E8-22A AACSB: Analytical Thinking Learning Outcome: Use incremental analysis to make short-term decisions 111 Copyright © 2013 Pearson Education.00 Variable costs.50% C) 166. The following data are available: Waffle Makers $120 $45 Sales price Variable cost Coffee Makers $215 $150 The company can manufacture two waffle makers per machine hour and three coffee makers per machine hour.00 Divide by Sales price.178) Brigg's Breakfast Appliances manufactures two products: Waffle Makers and Coffee Makers.23%B) 62.50% Answer: B Explanation: B) Sales price.67% D) 137. publishing as Prentice Hall . The company's production capacity is 1. What is the contribution margin ratio for waffle makers? A) 30. The following data are available: Waffle Makers $120 $45 Sales price Variable cost Coffee Makers $215 $150 The company can manufacture two waffle makers per machine hour and three coffee makers per machine hour.095 C) $130 D) $65 Answer: A Explanation: A) Sales price. publishing as Prentice Hall . The company's production capacity is 1. What is the contribution margin per machine hour for coffee makers? A) $195 B) $1.00 Variable costs. coffee makers $ 215.179) Brigg's Breakfast Appliances manufactures two products: Waffle Makers and Coffee Makers.00 Coffee makers per hour Contribution margin per hour for coffee makers Diff: 3 LO: 8-5 EOC: E8-22A AACSB: Analytical Thinking Learning Outcome: Use incremental analysis to make short-term decisions 112 Copyright © 2013 Pearson Education. coffee makers Contribution margin per coffee maker $ 65.200 machine hours per month. Inc. waffle makers Contribution margin per waffle maker $ 75.180) Brigg's Breakfast Appliances manufactures two products: Waffle Makers and Coffee Makers.200 machine hours per month. Inc. The following data are available: Waffle Makers $120 $45 Sales price Variable cost Coffee Makers $215 $150 The company can manufacture two waffle makers per machine hour and three coffee makers per machine hour.00 Variable costs. The company's production capacity is 1. publishing as Prentice Hall . What is the contribution margin per machine hour for waffle makers? A) $75 B) $225 C) $150 D) $330 Answer: C Explanation: C) Sales price.00 Waffle makers per hour Contribution margin per hour for waffle makers Diff: 3 LO: 8-5 EOC: E8-22A AACSB: Analytical Thinking Learning Outcome: Use incremental analysis to make short-term decisions 113 Copyright © 2013 Pearson Education. waffle makers $ 120. 00 Variable costs.400 Waffle Makers and 0 Coffee Makers Answer: A Explanation: A) Sales price. The following data are available: Waffle Makers $120 $45 Sales price Variable cost Coffee Makers $215 $150 The company can manufacture two waffle makers per machine hour and three coffee makers per machine hour.00 Sales price.200 Coffee makers per hour Number to produce Diff: 3 LO: 8-5 EOC: E8-22A AACSB: Analytical Thinking Learning Outcome: Use incremental analysis to make short-term decisions 114 Copyright © 2013 Pearson Education. what product and how many units should the company produce in a month? A) 3.00 Variable costs.00 Coffee makers per hour Contribution margin per hour for coffee makers $ 195.600 Coffee Makers and 0 Waffle Makers B) 300 Waffle Makers and 675 Coffee Makers C) 2.200 machine hours per month. To maximize profits. Inc. The company's production capacity is 1. waffle makers Contribution margin per waffle maker $ 75.00 Waffle makers per hour Contribution margin per hour for waffle makers $ 150. waffle makers $ 120. publishing as Prentice Hall . coffee makers $ 215.400 Waffle Makers and 3.181) Brigg's Breakfast Appliances manufactures two products: Waffle Makers and Coffee Makers.00 Product to emphasize Coffee Makers Production capacity (hours) $ 1. coffee makers Contribution margin per coffee maker $ 65.600 Coffee Makers D) 2. 00 $11.182) Silvio Enterprises produces three products. Model F5. Inc. Model D7. Model D7 requires 2 minutes of drill press time. Model F5 B) Model B3. There is only one drill press available so it is the constraint for this product. with costs and selling prices as follows: Each product requires a certain number of minutes on the drill press.00 Diff: 3 LO: 8-5 EOC: E8-22A AACSB: Analytical Thinking Learning Outcome: Use incremental analysis to make short-term decisions 115 Copyright © 2013 Pearson Education. Model D7. Model F5 D) Model F5. Model B3 Answer: A Explanation: A) Selling Price Variable Cost Contribution Margin Divided by Minutes to Produce Contribution Margin per minute Product B3 $42 18 24 1 Product D7 $34 12 22 2 Product F5 $50 36 14 7 $24.) A) Model B3. publishing as Prentice Hall . Model B3. and Model F5 requires 7 minutes of drill press time.00 $2. In what order should Silvio Enterprises emphasize its products to maximize its contribution margin? (Rank the products in order from most profitable to least profitable. Model D7 C) Model D7. Model B3 requires 1 minute of drill press time. Product B. Inc.00 15 Product B $60.00 $45.) A) Product B.00 $80. Product A. Product A Answer: C Explanation: C) Diff: 3 LO: 8-5 EOC: E8-22A AACSB: Analytical Thinking Learning Outcome: Use incremental analysis to make short-term decisions 116 Copyright © 2013 Pearson Education. Product C. Product C.00 $35. The lathe is only available for 60 hours per week and is the constraint for all of the products. publishing as Prentice Hall .183) Alamo Corporation processes all of its products through a lathe machine.00 20 Product C $90. Product B C) Product A.00 10 In what order should Alamo Corporation emphasize its products to maximize its contribution margin? (Rank the products in order from most profitable to least profitable. Product C D) Product B. Data regarding Alamo Corporation's three products follows: Selling price per unit Variable cost per unit Minutes of lathe time required per unit Product A $75. Product C B) Product A. 00 150. The following data are available: Couches $500.0% B) 42.00 $350. Couches Contribution margin per Couch Divide by $ 500. Inc. Couches $ Variable costs.86% C) 170. Couches Contribution margin ratio for Couches Diff: 1 LO: 8-5 EOC: E8-22A AACSB: Analytical Thinking Learning Outcome: Use incremental analysis to make short-term decisions 117 Copyright © 2013 Pearson Education.00% D) 23.00 Sales price Variable costs Beds $700.184) Brittany Furniture manufactures two products: Couches and Beds. The company's production capacity is 900 machine hours per month.00 Divide by Sales price.00 $375.00 The company can manufacture two couches per machine hour and one bed per machine hour. What is the contribution margin ratio for Couches? A) 30. publishing as Prentice Hall .08% Answer: A Explanation: A) Sales price. What is the contribution margin per machine hour for beds? A) $325 B) $1. Beds Contribution margin per Bed $ 325. Beds $ 700. Inc. The following data are available: Couches $500.185) Brittany Furniture manufactures two products: Couches and Beds.00 Sales price Variable costs Beds $700.00 Variable costs.00 $350. publishing as Prentice Hall .00 $375.075 C) $650 D) $975 Answer: A Explanation: A) Sales price.00 Beds per hour Contribution margin per hour for Beds Diff: 3 LO: 8-5 EOC: E8-22A AACSB: Analytical Thinking Learning Outcome: Use incremental analysis to make short-term decisions 118 Copyright © 2013 Pearson Education.00 The company can manufacture two couches per machine hour and one bed per machine hour. The company's production capacity is 900 machine hours per month. The company's production capacity is 900 machine hours per month.00 Sales price Variable costs Beds $700. What is the contribution margin per machine hour for couches? A) $1.700 B) $300 C) $150 D) $250 Answer: B Explanation: B) Sales price. Inc.00 Variable costs.186) Brittany Furniture manufactures two products: Couches and Beds.00 Couches per hour Contribution margin per hour for Couches Diff: 2 LO: 8-5 EOC: E8-22A AACSB: Analytical Thinking Learning Outcome: Use incremental analysis to make short-term decisions 119 Copyright © 2013 Pearson Education.00 $350. Couches Contribution margin per Couche $ 150.00 $375. The following data are available: Couches $500. publishing as Prentice Hall . Couches $ 500.00 The company can manufacture two couches per machine hour and one bed per machine hour. 00 Sales price.00 The company can manufacture two couches per machine hour and one bed per machine hour.00 700.00 Sales price Variable costs Bed $700. Beds Contribution margin per Bed $ 325.800 couches D) 600 couches and 325 beds Answer: B Explanation: B) Sales price. publishing as Prentice Hall . Inc. Beds $ Variable costs.187) Brittany Furniture manufactures two products: Couches and Beds.800 couches and 900 beds B) 900 beds C) 1.00 Couches per hour Contribution margin per hour for Couches $ 300. To maximize profits. The company's production capacity is 900 machine hours per month.00 Beds per hour Contribution margin per hour for Beds $ 325. The following data are available: Couch $500.00 $350. Couches Contribution margin per Couch $ 150.00 $375.00 Variable costs.00 Product to emphasize Production capacity (hours) Beds $ 900 Beds per hour Number to produce Diff: 3 LO: 8-5 EOC: E8-22A AACSB: Analytical Thinking Learning Outcome: Use incremental analysis to make short-term decisions 120 Copyright © 2013 Pearson Education. what product and how many units should the company produce in a month? A) 1. Couches $ 500. 00 175.00% Answer: D Explanation: D) Sales price. Futons Contribution margin ratio for Futons Diff: 1 LO: 8-5 EOC: E8-22A AACSB: Analytical Thinking Learning Outcome: Use incremental analysis to make short-term decisions 121 Copyright © 2013 Pearson Education. Inc.00 Divide by Sales price. publishing as Prentice Hall .85% B) 37.00 Sales price Variable costs Recliners $480.00 The company can manufacture two futons per machine hour and one recliner per machine hour. Futons Contribution margin per Futons Divide by $ 500.50% C) 165.00 $120.00% D) 35.188) Brittany Furniture manufactures two products: Futons and Recliners. The following data are available: Futons $500. The company's production capacity is 900 machine hours per month. Futons $ Variable costs. What is the contribution margin ratio for futons? A) 53.00 $325. 189) Brittany Furniture manufactures two products: Futons and Recliners. The following data are available: Futons $500.00 Variable costs. Inc. The company's production capacity is 900 machine hours per month. Recliners $ 480.00 Recliners per hour Contribution margin per hour for Recliners Diff: 3 LO: 8-5 EOC: E8-22A AACSB: Analytical Thinking Learning Outcome: Use incremental analysis to make short-term decisions 122 Copyright © 2013 Pearson Education.00 $325.00 The company can manufacture two futons per machine hour and one recliner per machine hour. What is the contribution margin per machine hour for recliners? A) $1.00 Sales price Variable costs Recliners $480. publishing as Prentice Hall .080 B) $720 C) $600 D) $360 Answer: D Explanation: D) Sales price.00 $120. Recliners Contribution margin per Recliner $ 360. 00 $325. publishing as Prentice Hall . Inc.650 C) $175 D) $180 Answer: A Explanation: A) Sales price. The company's production capacity is 900 machine hours per month.00 Variable costs. What is the contribution margin per machine hour for futons? A) $350 B) $1.00 $120. Futons Contribution margin per Futon $ 175.00 Futons per hour Contribution margin per hour for Futons Diff: 2 LO: 8-5 EOC: E8-22A AACSB: Analytical Thinking Learning Outcome: Use incremental analysis to make short-term decisions 123 Copyright © 2013 Pearson Education.00 The company can manufacture two futons per machine hour and one recliner per machine hour.190) Brittany Furniture manufactures two products: Futons and Recliners. The following data are available: Futons $500. Futons $ 500.00 Sales price Variable costs Recliners $480. Futons Contribution margin per Futon $ 175. Recliners $ Variable costs. The following data are available: Futons $500.00 Sales price. Inc.00 480. what product and how many units should the company produce in a month? A) 900 recliners B) 1. Recliners Contribution margin per Recliner $ 360.00 $120. The company's production capacity is 900 machine hours per month.00 Futons per hour Contribution margin per hour for Futons $ 350. To maximize profits.191) Brittany Furniture manufactures two products: Futons and Recliners. Futons $ 500.800 futons and 900 recliners C) 1.800 futons D) 700 futons and 360 recliners Answer: A Explanation: A) Sales price.00 Product to emphasize Production capacity (hours) Beds $ 900 Recliners per hour Number to produce Diff: 3 LO: 8-5 EOC: E8-22A AACSB: Analytical Thinking Learning Outcome: Use incremental analysis to make short-term decisions 124 Copyright © 2013 Pearson Education. publishing as Prentice Hall .00 The company can manufacture two futons per machine hour and one recliner per machine hour.00 Variable costs.00 $325.00 Sales price Variable costs Recliners $480.00 Recliners per hour Contribution margin per hour for Recliners $ 360. 000 units of each type of vase annually. A. 125 Copyright © 2013 Pearson Education. Determine the contribution margin per machine hour for each type of vase. Determine the contribution margin per unit for each type of vase. Machine hour capacity is 50.000 hours per year. C. What is the dollar amount of the maximum operating income as calculated in C above? Answer: A. The following per unit data are available: Sale price Variable costs Machine hours required for 1 vase Small Vase $60 $35 1 Large Vase $100 $60 2 Total fixed costs are $600. B. Determine the number of units of each style of vase that Rose Incorporated should produce to maximize operating income.000 and Rose Incorporated can sell a maximum of 25. B.192) Rose Incorporated manufactures two types of vases. C. publishing as Prentice Hall . Inc. small and large. D. D. publishing as Prentice Hall . Diff: 2 LO: 8-5 EOC: P8-46A AACSB: Analytical Thinking Learning Outcome: Use incremental analysis to make short-term decisions 126 Copyright © 2013 Pearson Education. Inc. 00) Contribution margin per unit $ 8.600 $ 4. The total number of products produced if only that product is produced each month. There are 3.00 C.00) $ 4.000) $ 11.00 Divide by 2 $ 2.00.200 Divide by 5 1.600 $ 12. Variable costs for cakes and pies are respectively.200 Divide by 2 1.800 $ (1. Income for a month if only one product is produced and total production is sold. publishing as Prentice Hall .00 $ 10. Becky's Bakery sells each cake for $15.600 $ 6. cake and pie. Contribution margin per unit for each product. Cakes Production capacity (hours) Divide by Hours taken for each Maximum to produce Pies 3.00) $ 8.00.400 127 Copyright © 2013 Pearson Education.200 Divide by 2 1.00) $ (6.193) Becky's Bakery produces two products.000) $ 5.600 D.00 B. Each cake and pie require 2 direct labor hours. Inc.00 1. B.600 3. C. $7. Cakes Production capacity (hours) Divide by Hours taken for each Maximum to produce Contribution margin per unit Maximum to produce Total fixed costs Income Pies 3. Answer: A.00 Divide by 2 $ 4. D.00 and $6.200 Divide by 2 1. Compute the following: A.800 3. Fixed manufacturing overhead cost is allocated at $1.00 $ (6. Contribution margin per direct labor hour for each product.00 $ 4.00 1.600 $ 8.00 $ (7.00 $ 10.400 $ (1. Cakes Selling price each Variable costs Contribution margin per unit Divide by Hours taken for each Contribution margin per hour Pies $ 15.00 Variable costs $ (7.200 direct labor hours per month available for producing one of the two products. Cakes Pies Selling price each $ 15.000 per month.00 and each pie for $10. the focus is on how best to use available resources.Diff: 3 LO: 8-5 EOC: P8-46A AACSB: Analytical Thinking Learning Outcome: Use incremental analysis to make short-term decisions 194) When making outsourcing (make-or-buy) decisions. publishing as Prentice Hall . Answer: FALSE Diff: 1 LO: 8-6 EOC: S8-10 AACSB: Reflective Thinking Learning Outcome: Use incremental analysis to make short-term decisions 197) In most circumstances. it should be outsourced. Answer: TRUE Diff: 1 LO: 8-6 EOC: S8-10 AACSB: Reflective Thinking Learning Outcome: Use incremental analysis to make short-term decisions 195) Make or buy decisions are often referred to as outsourcing decisions. Answer: TRUE Diff: 1 LO: 8-6 EOC: S8-10 AACSB: Reflective Thinking Learning Outcome: Use incremental analysis to make short-term decisions 196) All other things being equal. all fixed costs can be eliminated by outsourcing a product. if the incremental costs of outsourcing a product exceed the incremental costs of making a product. Inc. Answer: FALSE Diff: 1 LO: 8-6 EOC: S8-11 AACSB: Reflective Thinking Learning Outcome: Use incremental analysis to make short-term decisions 128 Copyright © 2013 Pearson Education. Answer: FALSE Diff: 1 LO: 8-6 EOC: S8-10 AACSB: Reflective Thinking Learning Outcome: Use incremental analysis to make short-term decisions 198) An opportunity cost is a past cost. publishing as Prentice Hall . 203) Companies often consider outsourcing so they can focus on their core competencies. Answer: FALSE Diff: 1 LO: 8-6 EOC: S8-10 AACSB: Reflective Thinking Learning Outcome: Use incremental analysis to make short-term decisions 201) The maximum outsourcing price a company is willing to pay can be found by solving for the company's indifference point. Answer: TRUE Diff: 1 LO: 8-6 EOC: S8-10 AACSB: Reflective Thinking Learning Outcome: Use incremental analysis to make short-term decisions 200) Outsourcing decisions are best made by comparing the total manufacturing costs. Inc. Answer: TRUE Diff: 1 LO: 8-6 EOC: S8-10 AACSB: Reflective Thinking Learning Outcome: Use incremental analysis to make short-term decisions. Answer: TRUE Diff: 1 LO: 8-6 EOC: S8-10 AACSB: Reflective Thinking Learning Outcome: Use incremental analysis to make short-term decisions 202) Opportunity costs should be factored into outsourcing decisions. Distinguish between relevant and irrelevant costs. allocated to the product versus the total unit cost charged by the outsourcing company. Answer: TRUE Diff: 1 LO: 8-6 EOC: S8-10 AACSB: Reflective Thinking Learning Outcome: Use incremental analysis to make short-term decisions 129 Copyright © 2013 Pearson Education.199) Qualitative factors play an important part in make or buy decisions. both fixed and variable. C) only variable costs.204) In deciding whether to outsource. C) buy decisions. D) none of the above. B) make decisions. except A) Are any fixed costs avoidable if we outsource? B) How do our fixed costs compare to the outsourcing cost? C) What could we do with the freed capacity? D) How do our variable costs compare to the outsourcing cost? Answer: B Diff: 1 LO: 8-6 EOC: S8-10 AACSB: Reflective Thinking Learning Outcome: Use incremental analysis to make short-term decisions 130 Copyright © 2013 Pearson Education. managers must consider A) relevant fixed and variable components. Inc. Answer: A Diff: 1 LO: 8-6 EOC: S8-10 AACSB: Reflective Thinking Learning Outcome: Use incremental analysis to make short-term decisions 206) All of the following are outsourcing considerations. D) none of the above. B) sunk costs. Answer: A Diff: 1 LO: 8-6 EOC: S8-10 AACSB: Reflective Thinking Learning Outcome: Use incremental analysis to make short-term decisions 205) Outsourcing decisions are sometimes referred to as A) make-or-buy decisions. publishing as Prentice Hall . C) unavoidable fixed costs. 208) Managers should consider which of the following when deciding whether to outsource a product or service? A) Quality of the product or service B) Delivery schedule of the product or service C) Cost charged for the product or service D) All of the above Answer: D Diff: 2 LO: 8-6 EOC: S8-10 AACSB: Reflective Thinking Learning Outcome: Use incremental analysis to make short-term decisions 131 Copyright © 2013 Pearson Education. B) opportunity costs. Answer: B Diff: 2 LO: 8-6 EOC: S8-10 AACSB: Reflective Thinking Learning Outcome: Use incremental analysis to make short-term decisions.207) If a company decides to outsource and then has freed capacity. Distinguish between relevant and irrelevant costs. publishing as Prentice Hall . D) none of the above. the decision on what to do with that freed capacity would be based upon A) avoidable fixed costs. Inc. The cost of producing 40.000. If Harvey Automobiles makes the part.000 Fixed costs $ 60.000 greater than if the company bought the part D) $78.000 Avoidable fixed costs Unavoidable fixed costs $ 42. and avoid 30% of the fixed costs.000 greater than if the company bought the part B) $42. Inc.000 and variable costs of $60.000 parts is $120. 132 Copyright © 2013 Pearson Education.000 Unavoidable fixed costs Cost if bought $ 162.000 less than if the company bought the part Answer: A Explanation: A) Outside supplier price $ 3.000 Purchase price $ 120. publishing as Prentice Hall . The company can buy the part from an outside supplier for $3. which includes fixed costs of $60.00 per unit. Distinguish between relevant and irrelevant costs. how much will its operating income be? A) $42.000 less than if the company bought the part C) $78.000 Avoidable percentage of fixed costs Avoidable fixed costs $ 18.209) Harvey Automobiles uses a standard part in the manufacture of several of its trucks.000.000 Total cost to produce Income difference if produced Diff: 2 LO: 8-6 EOC: E8-25A AACSB: Analytical Thinking Learning Outcome: Use incremental analysis to make short-term decisions.000 Fixed costs $ 60.00 Parts produced Purchase price $ 120. the company can avoid 30% of the fixed costs.30 B) $1.000.000 Fixed Costs 60.000 Divided by 40.000 and variable costs of $60.000. The cost of producing 40.05 D) $2.000 Total $ 120.210) Harvey Automobiles uses a standard part in the manufacture of several of its trucks. what is the most Harvey Automobiles can spend per unit so that operating income equals the operating income from making the part? A) $1. which includes fixed costs of $60.000 = $ 1.33 Answer: B Explanation: B) Cost to Build Variable Costs $60.95 Diff: 2 LO: 8-6 EOC: E8-25A AACSB: Analytical Thinking Learning Outcome: Use incremental analysis to make short-term decisions.000 Adjusted Cost of part 78. publishing as Prentice Hall . Inc. Distinguish between relevant and irrelevant costs. If Harvey Automobiles buys the part. By outsourcing the part.95 C) $4.000 Less Unavoidable Fixed Cost 42.000 parts is $120. 133 Copyright © 2013 Pearson Education. 000 Purchase price Unavoidable fixed costs Profit from free space if part is Total cost to produce Income difference if produced Diff: 2 LO: 8-6 EOC: E8-25A AACSB: Analytical Thinking Learning Outcome: Use incremental analysis to make short-term decisions. and avoid 30% of the fixed costs.000 bought Cost if bought $ 150.000 Cost if bought $ 150.000.000 Avoidable fixed costs Unavoidable fixed costs $ 42.000 greater than if the company bought the part Answer: C Explanation: C) Outside supplier price $ 3. Assume that factory space freed up by purchasing the part from an outside source can be used to manufacture another product that can be sold for $12.000 Avoidable percentage of fixed costs Avoidable fixed costs $ 18.000 42. publishing as Prentice Hall .000 greater than if the company bought the part D) $150.000 profit.000 and variable costs of $60.000 $ $ 120. If Harvey Automobiles makes the part. Inc.000 Fixed costs $ 60. 134 Copyright © 2013 Pearson Education. Distinguish between relevant and irrelevant costs. The cost of producing 40. The company can buy the part from an outside supplier for $3. which includes fixed costs of $60. what will its operating income be? A) $54.000 parts is $120.000 less than if the company bought the part C) $30.211) Harvey Automobiles uses a standard part in the manufacture of several of its trucks.00 Parts produced Purchase price $ 120.000 greater than if the company bought the part B) $30.000 Fixed costs $ 60.00 per unit.000. 600 Purchase price $ 140. and avoid 30% of the fixed costs.000 Fixed costs $ 68.400 Fixed costs $ 68.000 Avoidable fixed costs Unavoidable fixed costs $ 47. The cost of producing 40. 135 Copyright © 2013 Pearson Education. which includes fixed costs of $68.000. Inc. The company can buy the part from an outside supplier for $3.212) Cuyahoga Valley Bicycles uses a standard part in the manufacture of several of its bikes.000 Avoidable percentage of fixed costs Avoidable fixed costs $ 20.600 less than if the company bought the part C) $47. publishing as Prentice Hall . If Cuyahoga Valley Bicycles makes the part.50 per unit.000 and variable costs of $70. how much will its operating income be? A) $90.600 Total cost to produce Income difference if produced Diff: 2 LO: 8-6 EOC: E8-25A AACSB: Analytical Thinking Learning Outcome: Use incremental analysis to make short-term decisions.000 parts is $138.600 greater than if the company bought the part D) $49.50 Parts produced Purchase price $ 140. Distinguish between relevant and irrelevant costs.000 Unavoidable fixed costs Cost if bought $ 187.000.600 greater than if the company bought the part Answer: D Explanation: D) Outside supplier price $ 3.400 less than if the company bought the part B) $45. 000. 136 Copyright © 2013 Pearson Education.600 Adjusted Cost of part 90. By outsourcing the part.400 Divided by 40.000 and variable costs of $70.33 Answer: B Explanation: B) Cost to Build Variable Costs $70. Inc. If Cuyahoga Valley Bicycles buys the part.000 Fixed Costs 68. publishing as Prentice Hall .213) Cuyahoga Valley Bicycles uses a standard part in the manufacture of several of its bikes.33 B) $2.26 Diff: 2 LO: 8-6 EOC: E8-25A AACSB: Analytical Thinking Learning Outcome: Use incremental analysis to make short-term decisions.000 Less Unavoidable Fixed Cost 47. Distinguish between relevant and irrelevant costs.000 Total $ 138. the company can avoid 30% of the fixed costs.000. what is the most Cuyahoga Valley Bicycles can spend per unit so that operating income equals the operating income from making the part? A) $1.26 C) $4. which includes fixed costs of $68. The cost of producing 40.64 D) $2.000 parts is $138.000 = $ 2. Distinguish between relevant and irrelevant costs.600 less than if the company bought the part C) $61.000 profit.600 greater than if the company bought the part B) $37.600 bought Cost if bought $ 175. 137 Copyright © 2013 Pearson Education.000.400 Fixed costs $ 68.600 $ $ 140. publishing as Prentice Hall . If Cuyahoga Valley Bicycles makes the part.000 47. The company can buy the part from an outside supplier for $3.000 Fixed costs $ 68.214) Cuyahoga Valley Bicycles uses a standard part in the manufacture of several of its bikes.000 and variable costs of $70. what will its operating income be? A) $37.000 Avoidable percentage of fixed costs Avoidable fixed costs $ 20.50 per unit. which includes fixed costs of $68.600 greater than if the company bought the part Answer: A Explanation: A) Outside supplier price $ 3.600 Cost if bought $ 175.000.50 Parts produced Purchase price $ 140. Assume that factory space freed up by purchasing the part from an outside source can be used to manufacture another product that can be sold for $12.600 greater than if the company bought the part D) $175.600 Purchase price Unavoidable fixed costs Profit from free space if part is Total cost to produce Income difference if produced Diff: 2 LO: 8-6 EOC: E8-25A AACSB: Analytical Thinking Learning Outcome: Use incremental analysis to make short-term decisions. Inc.000 parts is $138. and avoid 30% of the fixed costs.000 Avoidable fixed costs Unavoidable fixed costs $ 47. The cost of producing 40. 00 $3.00 Cost to Purchase 14. what should Cruise Company do? A) Make the part and save $3 per unit. 138 Copyright © 2013 Pearson Education. The unit manufacturing costs of this part.00 Var.00 $4. C) Buy from Suri and save $2 per unit. Distinguish between relevant and irrelevant costs. publishing as Prentice Hall . are as follows: Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead Total cost The fixed overhead costs are unavoidable. Assuming the company has no other use for its facilities.00 $1.00 Direct Labor 4.000 units of the same part to Cruise Company for $14 per unit.00 Savings to build $ 3.215) Cruise Company produces a part that is used in the manufacture of one of its products. Answer: A Explanation: A) Cost to produce: Direct Materials $4. mfg 3. D) Make the part and save $10 per unit. B) Make the part and save $6 per unit.00 Total Cost to build 11.00 Diff: 2 LO: 8-6 EOC: E8-25A AACSB: Analytical Thinking Learning Outcome: Use incremental analysis to make short-term decisions.00 Suri Company has offered to sell 6.000 units. Inc. assuming a production level of 6. $4.00 $12. 00 The fixed overhead costs are unavoidable.00 Var. publishing as Prentice Hall . 139 Copyright © 2013 Pearson Education. assuming a production level of 6.00 Total Cost to build 11.00 $4.00 $3.000 units. Assuming no other use for its facilities. The unit manufacturing costs of this part.00 $1. what is the highest price per unit that Cruise Company should be willing to pay for the part? A) $12 B) $11 C) $8 D) $5 Answer: B Explanation: B) Cost to produce: Direct Materials $4.00 Direct Labor 4. mfg 3. Distinguish between relevant and irrelevant costs.00 Diff: 2 LO: 8-6 EOC: E8-25A AACSB: Analytical Thinking Learning Outcome: Use incremental analysis to make short-term decisions. Inc. are as follows: Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead Total cost $4.00 $12.216) Cruise Company produces a part that is used in the manufacture of one of its products. Distinguish between relevant and irrelevant costs.00 4.00 Additional rental revenue per unit Cost per unit if bought $ 10.00 $1. C) Buy the part and save $2.00 per unit.000 units of the part from Suri Company for $14 each.00 per unit.00 $4. what should Cruise Company do? A) Make the part and save $6. B) Make the part and save $2.217) Cruise Company produces a part that is used in the manufacture of one of its products. and the facilities currently used to make the part could be rented out to another manufacturer for $24.00 Price to buy from supplier $ 14.000 units.00 Cost to produce $ 11.00 per unit.00 Rental revenue from unused space Divide by Cost per unit if bought Savings if buy from supplier Diff: 2 LO: 8-6 EOC: E8-26A AACSB: Analytical Thinking Learning Outcome: Use incremental analysis to make short-term decisions.00 per unit.00 $ 24. are as follows: Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead Total cost $4. The unit manufacturing costs of this part.00 The fixed overhead costs are unavoidable. Answer: D Explanation: D) Direct materials Direct labor $ $ 4. 140 Copyright © 2013 Pearson Education. publishing as Prentice Hall . assuming a production level of 6.00 $3.000 a year. Inc.00 $12. Assuming Cruise Company can purchase 6.000 Divide by Production level Additional rental revenue per unit $ 4.00 Variable manufacturing overhead Cost to produce $ 11. D) Buy the part and save $1. 00 per unit contribution to profit.00 4. Distinguish between relevant and irrelevant costs.00 per unit contribution to profit.00 each.00 $12. and the facilities currently used to make the part could be used to manufacture 6. The unit manufacturing costs of this part. Assume Cruise Company can purchase 6. B) Make the new product and buy the part to earn an extra $6. If no additional fixed costs would be incurred.00 per unit contribution to profit. C) Continue to make the part to earn an extra $2.00 Contribution margin per unit of new product Net cost to buy $ 6. publishing as Prentice Hall .00 Variable manufacturing overhead Cost to produce $ 11.00 Cost to produce $ 11.00 The fixed overhead costs are unavoidable.00 4.00 per unit contribution to profit. D) Continue to make the part to earn an extra $4.000 units of the part from Suri Company for $14. assuming a production level of 6.00 Price to buy from supplier $ 14. Inc. are as follows: Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead Total cost $4. what should Cruise Company do? A) Make the new product and buy the part to earn an extra $5.00 Net cost to buy Savings if new product made and part bought Diff: 2 LO: 8-6 EOC: E8-26A AACSB: Analytical Thinking Learning Outcome: Use incremental analysis to make short-term decisions.000 units of another product that would have an $8 per unit contribution margin. Answer: A Explanation: A) Direct materials Direct labor $ $ 4.00 3.00 1.000 units.218) Cruise Company produces a part that is used in the manufacture of one of its products. 141 Copyright © 2013 Pearson Education. 500 greater than if the company bought the part B) $20. publishing as Prentice Hall . If they purchase from the outside supplier.500 Less Cost to build 106.500 less than if the company bought the part Answer: C Explanation: C) Purchase cost 22. 50% of the fixed costs would be avoided.500 greater than if the company bought the part D) $32.000 $ 40. The following costs and data relate to the production of Part P40: Number of parts produced annually Fixed costs Variable costs Total cost to produce 22.500 Diff: 2 LO: 8-6 EOC: E8-26A AACSB: Analytical Thinking Learning Outcome: Use incremental analysis to make short-term decisions.000 $ 66.000 Add'l cost to buy the part 7.000 greater than if the company bought the part C) $7. 142 Copyright © 2013 Pearson Education.000 Total Cost to purchase 113. how much will its operating income be? A) $47. Inc.000 Jackson Corporation can purchase the part from an outside supplier for $4.000 × 50% 20. Distinguish between relevant and irrelevant costs.500 Plus unavoidable fixed cost 40.000 × $ 4.25 per unit.000 $ 106.219) Part P40 is a part used in the production of air conditioners at Jackson Corporation.25 = $ 93. If Jackson Corporation makes the part. If Jackson Corporation buys the part. Inc.93 D) $1.000 units = $ 3.000 Equals Maximum cost of part 77.000 Less Unavoidable Fixed Cost 50% × $40.25 per unit.220) Part P40 is a part used in the production of air conditioners at Jackson Corporation.000? A) $5. publishing as Prentice Hall . The following costs and data relate to the production of Part P40: Number of parts produced annually Fixed costs Variable costs Total cost to produce 22. 143 Copyright © 2013 Pearson Education.000 / 22.32 B) $3.000 $ 106.000 20.000 Jackson Corporation can purchase the part from an outside supplier for $4.000 $ 40.50 Diff: 2 LO: 8-6 EOC: E8-25A AACSB: Analytical Thinking Learning Outcome: Use incremental analysis to make short-term decisions.50 C) $1. If they purchase from the outside supplier. Distinguish between relevant and irrelevant costs. 50% of the fixed costs would be avoided.00 Answer: B Explanation: B) Desired Income $ 97.000 $ 66. what is the most Jackson Corporation can spend per unit so that operating income is equal to $97. what will its operating income be? A) $5. If Jackson Corporation makes the part.221) Part P40 is a part used in the production of air conditioners at Jackson Corporation.500 Diff: 2 LO: 8-6 EOC: E8-25A AACSB: Analytical Thinking Learning Outcome: Use incremental analysis to make short-term decisions.000 = $ 93. If they purchase from the outside supplier.000 Difference 5.000 $ 66.500 greater than if the company bought the part C) 9.000 Less lost profit from new product (2. Assume that factory space freed up by purchasing the part from an outside source can be used to manufacture another product that can be sold for $2.500 Current cost to produce 106.000 profit.000 20.000 Jackson Corporation can purchase the part from an outside supplier for $4. The following costs and data relate to the production of Part P40: Number of parts produced annually Fixed costs Variable costs Total cost to produce 22.500 greater than if the company bought the part Answer: B Explanation: B) Purchase price $ 4.500 less than if the company bought the part B) $5.000 $ 40. 144 Copyright © 2013 Pearson Education. publishing as Prentice Hall . Distinguish between relevant and irrelevant costs.000 $ 106.25 per unit.500 greater than if the company bought the part D) $111. 50% of the fixed costs would be avoided.500 Unavoidable Fixed Cost 50% × $40.25 × 22. Inc.000) Cost to buy $ 111. D) Make the part and save $13 per unit.00 $ 3.00 Add fixed cost 3.00 Savings $ 5. Answer: B Explanation: B) Purchase part $ 20. What should Moon Appliance do? A) Make the part and save $9 per unit. Distinguish between relevant and irrelevant costs. B) Make the part and save $5 per unit.222) Moon Appliance manufactures a variety of appliances which all use Part B89. publishing as Prentice Hall .00 $ 8.00 Total cost 23.00 $ 4. Nadal Parts Company has offered to sell 9.00 Diff: 2 LO: 8-6 EOC: E8-25A AACSB: Analytical Thinking Learning Outcome: Use incremental analysis to make short-term decisions.000 units of Part B89 to Moon Appliance for $20.00 All of the fixed manufacturing overhead costs would continue whether Part B89 is made internally or purchased from an outside supplier. It has been producing 9. Moon Appliance has no alternative use for the manufacturing facilities.00 Less build cost 18. The annual costs of producing Part B89 at the level of 9. 145 Copyright © 2013 Pearson Education. Inc. Moon Appliance manufactures Part B89 itself.000 units of Part B89 annually.000 units include: Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead Total cost $ 3. C) Buy from Nadal Parts Company and lose $2 per unit. Currently.00 $ 18.00 per unit. publishing as Prentice Hall .223) Moon Appliance manufactures a variety of appliances which all use Part B89. Moon Appliance has no alternative use for the manufacturing facilities. Currently. Moon Appliance manufactures Part B89 itself.000 units include: Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead Total cost $ 3.00 per unit. 146 Copyright © 2013 Pearson Education. Nadal Parts Company has offered to sell 9. Inc. What is the highest price per unit that Moon Appliance should be willing to pay for the part? A) $7 B) $15 C) $11 D) $18 Answer: B Explanation: B) Direct Materials $ 3. The annual costs of producing Part B89 at the level of 9. Distinguish between relevant and irrelevant costs. It has been producing 9.00 $ 8.00 Diff: 2 LO: 8-6 EOC: E8-25A AACSB: Analytical Thinking Learning Outcome: Use incremental analysis to make short-term decisions.00 $ 4.00 $ 3.00 Direct Labor 8.00 Total Variable Cost $15.000 units of Part B89 annually.00 All of the fixed manufacturing overhead costs would continue whether Part B89 is made internally or purchased from an outside supplier.00 $ 18.000 units of Part B89 to Moon Appliance for $20.00 Variable MOH 4. 00 $ 3.00 Less Rental Revenue (2.00 All of the fixed manufacturing overhead costs would continue whether Part B89 is made internally or purchased from an outside supplier.00 per unit. Currently. It has been producing 9. and the facilities currently used to make the part could be rented out to another manufacturer for $18.00 Less Cost to Buy (18. 147 Copyright © 2013 Pearson Education.00 4.00 8. Answer: B Explanation: B) Direct Materials Direct Labor Variable Expenses Cost to Produce 3.00 per unit. what should Moon Appliance do? A) Make the part and save $7. Moon Appliance manufactures Part B89 itself.00) Net Cost to Buy 18.000 units of Part B89 annually.00 $ 4. publishing as Prentice Hall .224) Moon Appliance manufactures a variety of appliances which all use Part B89.00 Cost to Produce 15. D) Buy the part and save $3. The annual costs of producing Part B89 at the level of 9.000 units = $ 2.000 a year.000 / 9. Distinguish between relevant and irrelevant costs.000 units of the part from the Nadal Parts Company for $20. B) Make the part and save $3.00 per unit.00 $ 18.00 $ 8.00 each.00 15.00) Savings if Buy (3.00 per unit. C) Buy the part and save $7.000 units include: Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead Total cost $ 3. Inc. Assuming Moon Appliance can purchase 9.00) Diff: 2 LO: 8-6 EOC: E8-25A AACSB: Analytical Thinking Learning Outcome: Use incremental analysis to make short-term decisions.00 Potential income $ 18.00 additional revenue per unit Price to buy from Supplier 20. 00 per unit contribution to profit.00 per unit contribution to profit. Answer: A Explanation: A) Direct Materials $ 3.00 each.00 Total add'l contribution to profit $ 1. publishing as Prentice Hall . If no additional fixed costs would be incurred.000 units include: Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead Total cost $ 3. and the facilities currently used to make the part could be used to manufacture 7. Inc. what should Moon Appliance do? A) Make the new product and buy the part to earn an extra $1.000 units of the part from the Nadal Parts Company for $20.00 $ 3. Distinguish between relevant and irrelevant costs.00 Variable MOH 4.00 Total Variable Cost $15. C) Continue to make the part to earn an extra $3.00) Plus CM from new product 6.00 All of the fixed manufacturing overhead costs would continue whether Part B89 is made internally or purchased from an outside supplier. Assume Moon Appliance can purchase 9. 148 Copyright © 2013 Pearson Education.00 $ 4.000 units of Part B89 annually.00 per unit contribution to profit.00 Direct Labor 8.225) Moon Appliance manufactures a variety of appliances which all use Part B89.00 per unit contribution to profit. B) Make the new product and buy the part to earn an extra $4.000 units of another product that would have a $6 per unit contribution margin. Moon Appliance manufactures Part B89 itself. The annual costs of producing Part B89 at the level of 9. Currently.00 Diff: 3 LO: 8-6 EOC: E8-25A AACSB: Analytical Thinking Learning Outcome: Use incremental analysis to make short-term decisions.00 Less cost to buy 20.00 $ 8.00 $ 18. It has been producing 9. D) Continue to make the part to earn an extra $8.00 Savings (5. Victoria Technologies' factory space freed up by purchasing the part from an outside supplier could be used to manufacture another product with a contribution margin of $70.226) Victoria Technologies makes a part used in the manufacture of digital cameras.0000 If Victoria Technologies buys the part.000 600.525.000 525. Purchasing the part from an outside source would enable the company to avoid 50% of fixed manufacturing overhead costs.00 per part.000 750. The cost of manufacturing 60. Victoria Technologies needs 60. or to buy the part from an outside source at a cost of $24. publishing as Prentice Hall .60 per unit to transport the parts to its manufacturing plant. it would pay $. Management is considering whether to continue manufacturing the part. Inc.000 parts per year. Prepare an analysis to show which alternative makes the best use of Victoria Technologies' factory space: 1) Make the part 2) Buy the part and leave facilities idle 3) Buy the part and use facilities to make another product 149 Copyright © 2013 Pearson Education.000 parts is computed as follows: Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead Total manufacturing costs $ 750.000 $2.000. 781. Inc. 150 Copyright © 2013 Pearson Education.000 Fixed manufacturing overhead $ 750.000 under this option versus total costs of $2. Diff: 3 LO: 8-6 EOC: P8-47A AACSB: Analytical Thinking Learning Outcome: Use incremental analysis to make short-term decisions.000 Fixed manufacturing overhead $ 750. publishing as Prentice Hall .60 Number of parts needed Total variable transportation $ 36.000 Avoidable percentage of fixed costs Avoidable fixed manufacturing overhead $ 375.000 to make the part.000 Avoidable fixed manufacturing overhead Unavoidable fixed manufacturing overhead $ 375.440.Answer: Transport cost per unit (if bought) $ 0.000 Total purchase price Total cost to buy parts and leave facilities idle of space Total cost to buy parts and use facilities to make another product Total manufacturing costs to make parts #3: Victoria Technologies should buy the part and use facilities to make another product since their total costs will be $1.000 Total variable transportation Unavoidable fixed manufacturing overhead $ $ 36.000 375.000 1. Distinguish between relevant and irrelevant costs.625.000 Total variable transportation $ Unavoidable fixed manufacturing overhead $ Total purchase price $ Contribution margin provided by alternate use 36.000 375. 227) Define the term constraints and give an example. machine hours. The deluxe mailbox would sell for $35. There would be no change in the number of units produced. the primary constraint is cubic feet of display space. 151 Copyright © 2013 Pearson Education. Additional costs are estimated at $4 per unit. Patty's Mailbox Company has discovered an additional process to change the standard mailbox into a deluxe mailbox.000. publishing as Prentice Hall . Additional fixed manufacturing overhead cost of $23. Diff: 2 LO: 8-6 EOC: P8-47A AACSB: Reflective Thinking Learning Outcome: Use incremental analysis to make short-term decisions 228) Patty's Mailbox Company produces a standard mailbox with variable manufacturing costs of $18 per unit.000 units. and they vary from company to company. When resource constraints exist. The fixed manufacturing overhead cost is $67. the company should focus on selling the products with the highest contribution margin per unit of the constraint. Make an analysis to determine if Patty's Mailbox Company should continue producing and selling the standard mailbox or change the standard mailbox into a deluxe mailbox. For a merchandiser.000 would be incurred if the deluxe mailbox is produced. For a manufacturer. What product should be made first when resource constraints exist? Answer: Constraints are the limited resources that restrict production or sale of a product. production may be constrained by labor hours. The selling price of the standard mailbox is $25 per unit. Inc. or available materials. A normal production run includes 100. 00 100.000 Revenue Variable costs Fixed manufacturing overhead Operating income for Standard mailbox $ 2.800.000) $ 1.00 $ 4.000 $ 90.200.000 Change the standard mailbox into the deluxe mailbox for $577.000 $ 23.500.500.Answer: Standard mailbox: Standard mailbox selling price Production volume Revenue $ 25.000 increase in operating income.000) $ 633.000 $ (633.800.000 Fixed manufacturing overhead Additional fixed manufacturing overhead Fixed costs $ 67.000 $ 3.000) $ 577. Diff: 2 LO: 8-6 EOC: P8-47A AACSB: Analytical Thinking Learning Outcome: Use incremental analysis to make short-term decisions 152 Copyright © 2013 Pearson Education.000 Standard mailbox variable costs Deluxe mailbox additional costs Total costs Production volume Variable costs $ 18.000) $ (67. publishing as Prentice Hall .500.000 Operating income for Deluxe mailbox Operating income for Standard mailbox Increase in income $ 1.000 Standard mailbox variable costs Production volume Variable costs $ 18.000 $ 2.000) $ (90.000 Deluxe mailbox: Deluxe mailbox selling price Production volume Revenue $ 35.000 $(1.000 $(2.500.000 $ 2.000 Revenue Variable costs Fixed costs Operating income for Deluxe mailbox $ 3.200.000 $ 1.210.00 $ 22.00 100.210.00 100. Inc.00 100. Inc. 232) When the extra revenue from processing further is less than the extra cost of processing further. 230) A decision must be made at the point in a process where a product can either be sold as is or processed further. the best decision would be to A) process further.229) Sunk costs should be considered when deciding whether to sell a product as is or process it further. Answer: TRUE Diff: 2 LO: 8-7 EOC: S8-13 AACSB: Reflective Thinking Learning Outcome: Use incremental analysis to make short-term decisions 231) A sunk cost is a past cost that can be changed regardless of which future action is taken. publishing as Prentice Hall . Answer: FALSE Diff: 1 LO: 8-7 EOC: S8-13 AACSB: Reflective Thinking Learning Outcome: Use incremental analysis to make short-term decisions. Distinguish between relevant and irrelevant costs. C) not process further. Answer: C Diff: 1 LO: 8-7 EOC: E8-28A AACSB: Reflective Thinking Learning Outcome: Use incremental analysis to make short-term decisions 153 Copyright © 2013 Pearson Education. D) start over. Distinguish between relevant and irrelevant costs. B) develop a new product. Answer: FALSE Diff: 2 LO: 8-7 EOC: S8-13 AACSB: Reflective Thinking Learning Outcome: Use incremental analysis to make short-term decisions. the company should process further if A) the extra cost of processing further is the same as the extra revenue. D) incremental cost. Answer: D Diff: 2 LO: 8-7 EOC: E8-28A AACSB: Reflective Thinking Learning Outcome: Use incremental analysis to make short-term decisions 154 Copyright © 2013 Pearson Education. Answer: B Diff: 1 LO: 8-7 EOC: E8-28A AACSB: Reflective Thinking Learning Outcome: Use incremental analysis to make short-term decisions. C) variable cost. D) the extra cost of processing further is less than the extra revenue. C) the extra cost of processing further is greater than the extra revenue. 234) In making the decision whether to sell a product as is or process the product further. B) the extra revenue from processing further is less than the extra cost. Distinguish between relevant and irrelevant costs. Inc. publishing as Prentice Hall . the expected income from selling the product as is may be defined as which of the following? A) The opportunity cost of processing the product further B) A sunk cost of processing the product further C) The opportunity cost of selling the product as is D) A limiting factor in processing the product further Answer: A Diff: 2 LO: 8-7 EOC: E8-28A AACSB: Reflective Thinking Learning Outcome: Use incremental analysis to make short-term decisions 235) In a sell or process further decision.233) The benefit foregone by choosing a particular alternative course of action is referred to as a(n) A) sunk cost. B) opportunity cost. C) the cost of further processing the regular granola into premium granola.000 C) $33. B) the cost of refining the regular granola. It already sells regular for $6.000 Cost to repair Opportunity cost to sell in current condition Diff: 2 LO: 8-7 EOC: P8-48A AACSB: Reflective Thinking Learning Outcome: Use incremental analysis to make short-term decisions.236) Which of the following would be a consideration for "sell as is or process further" decisions? A) Revenue generated if sold "as is" B) Revenue generated if "further processed" C) Costs involved in further processing D) All of the above Answer: D Diff: 2 LO: 8-7 EOC: S8-13 AACSB: Reflective Thinking Learning Outcome: Use incremental analysis to make short-term decisions.000.75/pound and would sell premium granola for $9.000 B) $119. A cost that would not be considered in this decision would be A) the extra revenue generated by selling premium.000. Distinguish between relevant and irrelevant costs.000 D) $75.000 and sold for $76. or repaired at a cost of $43. D) any of the above would be considered.000. Distinguish between relevant and irrelevant costs. 155 Copyright © 2013 Pearson Education.000 Answer: C Explanation: C) Selling price after repair $ 76. The televisions can be sold in their present condition for $32. 237) Bear Country Granola is considering selling premium granola. 238) Four Guys Company has in its inventory 5. Distinguish between relevant and irrelevant costs. Inc. The cost for organic grains for the premium granola would be $1.50/pound.15/pound. Answer: B Diff: 2 LO: 8-7 EOC: S8-13 AACSB: Reflective Thinking Learning Outcome: Use incremental analysis to make short-term decisions. publishing as Prentice Hall . What is the opportunity cost of selling the televisions in their present condition? A) $82.000 damaged televisions that cost $50. 000 Expenses 67.000 and expenses of $67.000 C) $45.000 versus total revenues of $100.000 versus total revenues of $120.000 D) $75.000 D) $167. How much is the opportunity cost associated with staying at his current job? A) $75.000 B) $120. Inc.000 Potential income $ 33.000) C) $33. publishing as Prentice Hall .000 Answer: C Explanation: C) Revenues $ 100.000 Diff: 2 LO: 8-7 EOC: P8-48A AACSB: Analytical Thinking Learning Outcome: Use incremental analysis to make short-term decisions 156 Copyright © 2013 Pearson Education.000 and expenses of $75.000 from starting a new business.000 from starting a new business.239) Paula has the following information to evaluate–her current salary of $55.000 B) $(8. How much is the opportunity cost associated with starting the new business? A) $55.000 Answer: A Diff: 2 LO: 8-7 EOC: P8-48A AACSB: Analytical Thinking Learning Outcome: Use incremental analysis to make short-term decisions 240) Zach has the following information to evaluate–his current salary of $75. 000.000 net increase in operating income. or they can be processed further into a deluxe pillow for additional processing costs of $8. Salad plates are allocated $7.000 of the total joint costs of $25.500 = $40.600 Less split-off point sales $ 12 × 3. B) $2.000 net decrease in operating income.000 net decrease in operating income.500 of the total joint costs of $25. If the pillows are processed further and made into deluxe pillows. C) $2.000 Net increase $2. Distinguish between relevant and irrelevant costs. Pillows can be sold at the split-off point for $12 per unit. B) $3.241) Brittany Furniture manufactures two products.000 net increase in operating income. There are 3.00 × 3000 = $48. or they can be hand painted for additional processing costs of $8. 242) Upscale Dishwear manufactures two products.500 cushions produced each year.600 Diff: 3 LO: 8-7 EOC: P8-48A AACSB: Analytical Thinking Learning Outcome: Use incremental analysis to make short-term decisions 157 Copyright © 2013 Pearson Education.000.000 less Additional cost 8. If the salad plates are processed further and made into deluxe plates. from a joint process. pillows and cushions.000 Net increase $3. Salad plates can be sold at the split-off point for $12 per unit.600 net increase in operating income.000 salad plates produced and 3.00 × 2. D) $3. the effect on operating income would be: A) $30.500 = 30. There are 2.500 pillows produced and 2. Answer: D Explanation: D) Selling Price × Units $ 16.000 Profit 32.600 net decrease in operating income.400 and sold for $16 for each deluxe salad plate.000 Diff: 3 LO: 8-7 EOC: P8-48A AACSB: Analytical Thinking Learning Outcome: Use incremental analysis to make short-term decisions. Pillows are allocated $7. from a joint process.000 Less split-off point sales $ 12 × 2. Inc. D) $30. the effect on operating income would be: A) $36.000 net decrease in operating income.000 = 36.000 and sold for $16 for each deluxe pillow.000 platters produced each year. Answer: C Explanation: C) Selling Price × Units $ 16. publishing as Prentice Hall .400 Profit 39. salad plates and platters. C) $36.000 less Additional cost 8.000 net increase in operating income. 50 3.75 $ 2.750 Equals increase in Operating Income $ 1.50 per unit.50 $ 5. what would be the overall effect on operating income? A) $1.750 net decrease in operating income C) $3.00 per unit. publishing as Prentice Hall .00 = $ 7. blackberry syrup and blackberry jam.750 net increase in operating income B) $1.750 net decrease in operating income Answer: A Explanation: A) Selling Price after further processing 1500 × $ 5.500 × $ 2.000 Net Income 5.243) A joint production process at Happy Days Farms results in two products.750 Diff: 3 LO: 8-7 EOC: P8-48A AACSB: Analytical Thinking Learning Outcome: Use incremental analysis to make short-term decisions 158 Copyright © 2013 Pearson Education.500 Less Income if sold at split-off point 1. If blackberry syrup is processed further into the specialty blackberry juice.000 Cost of processing further Blackberry syrup can be sold as-is (at the split-off point) for $2. or it can be processed further into a specialty blackberry juice and then sold for $5.500 Additional Processing cost 2.750 net increase in operating income D) $3.000 $ 2.500 Selling price at split-off point Selling price after processing further $ 2. The following cost and activity data relate to these two products: Blackberry syrup Blackberry jam $ 10.00 $ 2. Inc.000 Joint costs allocated Number of units produced from joint process 1.000 $ 12.00 $ 1.500 1. publishing as Prentice Hall .000 net decrease in operating income C) $5.50 5.50 $ 5. or it can be processed further into a specialty cherry smoothie and then sold for $5.200 Net Income 7.200 $ 2.800 net decrease in operating income B) $5.000 Cherry jam $ 12. Inc.75 $ 2.800 net increase in operating income Answer: D Explanation: D) Selling Price after further processing 2000 × $ 5.000 Joint costs allocated Cost of processing further Cherry jelly can be sold as-is (at the split-off point) for $2.00 per unit. cherry jelly and cherry jam.800 Less Income if sold at split-off point 2.000 net increase in operating income D) $2.50 per unit.00 = $ 10.00 $ 1. If cherry jelly is processed further into the specialty cherry smoothie.00 $ 2.244) A joint production process at Sunny Brooks Dairy results in two products.000 Equals increase in Operating Income $ 2.000 × $ 2.800 Diff: 3 LO: 8-7 EOC: P8-48A AACSB: Analytical Thinking Learning Outcome: Use incremental analysis to make short-term decisions 159 Copyright © 2013 Pearson Education. The following cost and activity data relate to these two products: Cherry jelly $ 10.000 Additional Processing cost 2.000 Selling price at split-off point Selling price after processing further $ 2. what would be the overall effect on operating income? A) $2.000 Number of units produced from joint process 2.000 2. Inc.000 D) $22.00 $ 30.000 damaged baskets that cost $20.000 Answer: D Explanation: D) Selling price after repair $ 35.000 net increase in operating income if the ceiling fans are sold as is. The baskets can be sold in their present condition for $12. or they can be processed further for a cost of $40 each and then sold for the normal selling price. Stoog Enterprises would be better off by a A) $21.00 Number of defective units Total incremental income from further processing Diff: 3 LO: 8-7 EOC: P8-48A AACSB: Analytical Thinking Learning Outcome: Use incremental analysis to make short-term decisions 246) Longview Baskets has in its inventory 2.000 net increase in operating income if the ceiling fans are repaired.000.000 and sold for $35. What is the opportunity cost of selling the baskets in their present condition? A) $32. These defective units can be sold as is for $20 each. There are 300 defective fans in inventory. which cost $55 each to manufacture.000 net increase in operating income if the ceiling fans are sold as is.00 Sold "as is" price per unit Incremental revenue per unit $ Cost to repair each unit Incremental income per unit from further processing 70.000 Cost to repair Opportunity cost to sell in current condition Diff: 2 LO: 8-7 EOC: P8-48A AACSB: Analytical Thinking Learning Outcome: Use incremental analysis to make short-term decisions 160 Copyright © 2013 Pearson Education.000 C) $48. Answer: C Explanation: C) Normal selling price $ 90. C) $9.000 B) $25. publishing as Prentice Hall .000.000 net increase in operating income if the ceiling fans are repaired.245) Stoog Enterprises manufactures ceiling fans that normally sell for $90 each. D) $21. B) $9.000. or repaired at a cost of $13. 000 Costs to start a business Opportunity cost of staying at current job Diff: 2 LO: 8-7 EOC: P8-48A AACSB: Analytical Thinking Learning Outcome: Use incremental analysis to make short-term decisions.000 B) $15.000 Answer: C Diff: 2 LO: 8-7 EOC: P8-48A AACSB: Analytical Thinking Learning Outcome: Use incremental analysis to make short-term decisions. publishing as Prentice Hall . 248) Jackie has the following information to evaluate–her current salary of $74. Distinguish between relevant and irrelevant costs.000 and expenses of $65.000 D) $47.247) Molly has the following information to evaluate–her current salary of $57.000 and expenses of $47.000 from starting a new business.000 C) $57.000 D) $(9.000) Answer: A Explanation: A) Revenues from the new business $ 100.000 C) $74. How much is the opportunity cost associated with starting the new business? A) $62.000 B) $165. 161 Copyright © 2013 Pearson Education.000 versus total revenues of $100. Distinguish between relevant and irrelevant costs.000 versus total revenues of $62. How much is the opportunity cost associated with staying at her current job? A) $35.000 from starting a new business. Inc. 162 Copyright © 2013 Pearson Education. B. Inc. A. opportunity costs full cost of product or service sales mix variable costing ____ Costs that were incurred in the past and cannot be changed ____ Benefits foregone by choosing a particular alternative course of action ____ Expected future costs that differs among alternatives ____ Costs of developing. F. Distinguish between relevant and irrelevant costs. publishing as Prentice Hall . enter the letter corresponding to the term that best fits that statement. An item may be used more than once or not at all. C. G. producing and delivering a product or service ____ A factor that restricts production or sales of a product Answer: B. A. relevant costs sunk costs constraint contribution margin E. D. F.249) On the line in front of each statement. E. C Diff: 2 LO: 8-7 EOC: E8-28A AACSB: Analytical Thinking Learning Outcome: Use incremental analysis to make short-term decisions. H.