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Chapter 10

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0% found this document useful (0 votes)

13 views44 pages

Chapter 10

Uploaded by

Leila Jane Llaban

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Chapter 10—Relevant Information for Decision Making

TRUE/FALSE

1. Information that is related to past events is relevant in the decision-making process.

ANS: F PTS: 1 DIF: Difficulty: Easy

OBJ: LO: 10-1 NAT: BUSPROG: Reflective Thinking
STA: AICPA-FN: Decision Modeling| ACBSP: APC 33-Incremental analysis| AACSB: Reflective
Thinking| IMA: Decision Analysis KEY: Bloom's: Knowledge

2. Information that has a bearing on future events is relevant in the decision-making process.

ANS: T PTS: 1 DIF: Difficulty: Easy

OBJ: LO: 10-1 NAT: BUSPROG: Reflective Thinking
STA: AICPA-FN: Decision Modeling| ACBSP: APC 33-Incremental analysis| AACSB: Reflective
Thinking| IMA: Decision Analysis KEY: Bloom's: Knowledge

3. In evaluating alternative courses of action, a manager should select the alternative that provides the
highest incremental benefit to the company.

ANS: T PTS: 1 DIF: Difficulty: Easy

OBJ: LO: 10-2 NAT: BUSPROG: Reflective Thinking
STA: AICPA-FN: Decision Modeling| ACBSP: APC 33-Incremental analysis| AACSB: Reflective
Thinking| IMA: Decision Analysis KEY: Bloom's: Knowledge

4. The outsourcing decision is also referred to as a “make-or-buy” decision.

ANS: T PTS: 1 DIF: Difficulty: Easy

OBJ: LO: 10-3 NAT: BUSPROG: Reflective Thinking
STA: AICPA-FN: Decision Modeling| ACBSP: APC 33-Incremental analysis| AACSB: Reflective
Thinking| IMA: Decision Analysis KEY: Bloom's: Knowledge

5. A company may outsource some of its production in order to focus on core competencies.

ANS: T PTS: 1 DIF: Difficulty: Easy

OBJ: LO: 10-3 NAT: BUSPROG: Reflective Thinking
STA: AICPA-FN: Decision Modeling| ACBSP: APC 33-Incremental analysis| AACSB: Reflective
Thinking| IMA: Decision Analysis KEY: Bloom's: Knowledge

6. In an outsourcing decision, unavoidable fixed costs are irrelevant.

ANS: T PTS: 1 DIF: Difficulty: Moderate

OBJ: LO: 10-3 NAT: BUSPROG: Reflective Thinking
STA: AICPA-FN: Decision Modeling| ACBSP: APC 33-Incremental analysis| AACSB: Reflective
Thinking| IMA: Decision Analysis KEY: Bloom's: Knowledge

7. In an outsourcing decision, avoidable fixed costs are irrelevant.

ANS: F PTS: 1 DIF: Difficulty: Moderate

OBJ: LO: 10-3 NAT: BUSPROG: Reflective Thinking

8. In an outsourcing decision, variable costs of production are relevant.

ANS: T PTS: 1 DIF: Difficulty: Moderate

OBJ: LO: 10-3 NAT: BUSPROG: Reflective Thinking
STA: AICPA-FN: Decision Modeling| ACBSP: APC 33-Incremental analysis| AACSB: Reflective
Thinking| IMA: Decision Analysis KEY: Bloom's: Knowledge

9. In an outsourcing decision, rent received from an outside party for facility use is a relevant cash
inflow.

ANS: T PTS: 1 DIF: Difficulty: Moderate

OBJ: LO: 10-3 NAT: BUSPROG: Reflective Thinking
STA: AICPA-FN: Decision Modeling| ACBSP: APC 33-Incremental analysis| AACSB: Reflective
Thinking| IMA: Decision Analysis KEY: Bloom's: Knowledge

10. When multiple products are produced and sold, a change in the sales price of one product may cause a
change in the sales mix of the firm.

ANS: T PTS: 1 DIF: Difficulty: Moderate

OBJ: LO: 10-5 NAT: BUSPROG: Reflective Thinking
STA: AICPA-FN: Decision Modeling| ACBSP: APC 33-Incremental analysis| AACSB: Reflective
Thinking| IMA: Decision Analysis KEY: Bloom's: Knowledge

11. In setting compensation structures, fixed salary expense is normally not considered.

ANS: T PTS: 1 DIF: Difficulty: Moderate

OBJ: LO: 10-5 NAT: BUSPROG: Reflective Thinking
STA: AICPA-FN: Decision Modeling| ACBSP: APC 33-Incremental analysis| AACSB: Reflective
Thinking| IMA: Decision Analysis KEY: Bloom's: Knowledge

12. In a special order decision, unavoidable current fixed costs are taken into consideration in setting a
sales price.

ANS: F PTS: 1 DIF: Difficulty: Moderate

OBJ: LO: 10-6 NAT: BUSPROG: Reflective Thinking
STA: AICPA-FN: Decision Modeling| ACBSP: APC 33-Incremental analysis| AACSB: Reflective
Thinking| IMA: Decision Analysis KEY: Bloom's: Knowledge

13. In a special order decision, the sales price should be sufficient to cover a job’s variable costs,
incremental fixed costs, and generate a profit.

ANS: T PTS: 1 DIF: Difficulty: Moderate

OBJ: LO: 10-6 NAT: BUSPROG: Reflective Thinking
STA: AICPA-FN: Decision Modeling| ACBSP: APC 33-Incremental analysis| AACSB: Reflective
Thinking| IMA: Decision Analysis KEY: Bloom's: Knowledge

ANS: T PTS: 1 DIF: Difficulty: Easy

OBJ: LO: 10-6 NAT: BUSPROG: Reflective Thinking
STA: AICPA-FN: Decision Modeling| ACBSP: APC 33-Incremental analysis| AACSB: Reflective
Thinking| IMA: Decision Analysis KEY: Bloom's: Knowledge

15. When making a decision to discontinue an operating segment, allocated common costs are not
considered.

ANS: T PTS: 1 DIF: Difficulty: Easy

OBJ: LO: 10-7 NAT: BUSPROG: Reflective Thinking
STA: AICPA-FN: Decision Modeling| ACBSP: APC 33-Incremental analysis| AACSB: Reflective
Thinking| IMA: Decision Analysis KEY: Bloom's: Knowledge

16. When making a decision to discontinue an operating segment, avoidable fixed costs are not
considered.

ANS: F PTS: 1 DIF: Difficulty: Easy

OBJ: LO: 10-7 NAT: BUSPROG: Reflective Thinking
STA: AICPA-FN: Decision Modeling| ACBSP: APC 33-Incremental analysis| AACSB: Reflective
Thinking| IMA: Decision Analysis KEY: Bloom's: Knowledge

17. Segment margin measures a segment’s contribution to the coverage of indirect expenses.

ANS: T PTS: 1 DIF: Difficulty: Moderate

OBJ: LO: 10-7 NAT: BUSPROG: Reflective Thinking
STA: AICPA-FN: Decision Modeling| ACBSP: APC 33-Incremental analysis| AACSB: Reflective
Thinking| IMA: Decision Analysis KEY: Bloom's: Knowledge

18. Depreciation on factory equipment is normally a relevant cost in product line decisions.

ANS: F PTS: 1 DIF: Difficulty: Moderate

OBJ: LO: 10-7 NAT: BUSPROG: Reflective Thinking
STA: AICPA-FN: Decision Modeling| ACBSP: APC 33-Incremental analysis| AACSB: Reflective
Thinking| IMA: Decision Analysis KEY: Bloom's: Knowledge

COMPLETION

1. The amount of revenue that differs across decision choices is referred to as

______________________________.

ANS: incremental revenue

PTS: 1 DIF: Difficulty: Easy OBJ: LO: 10-1

NAT: BUSPROG: Reflective Thinking
STA: AICPA-FN: Decision Modeling| ACBSP: APC 33-Incremental analysis| AACSB: Reflective
Thinking| IMA: Decision Analysis KEY: Bloom's: Knowledge

2. The amount of cost that differs across decision choices is referred to as

_________________________.
© 2013 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different
from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.
ANS: incremental cost

PTS: 1 DIF: Difficulty: Easy OBJ: LO: 10-1

NAT: BUSPROG: Reflective Thinking
STA: AICPA-FN: Decision Modeling| ACBSP: APC 33-Incremental analysis| AACSB: Reflective
Thinking| IMA: Decision Analysis KEY: Bloom's: Knowledge

3. The benefits foregone when one course of action is chosen over another are referred to as
______________________________.

ANS: opportunity costs

PTS: 1 DIF: Difficulty: Easy OBJ: LO: 10-1

NAT: BUSPROG: Reflective Thinking
STA: AICPA-FN: Decision Modeling| ACBSP: APC 33-Incremental analysis| AACSB: Reflective
Thinking| IMA: Decision Analysis KEY: Bloom's: Knowledge

4. Costs incurred in the past to acquire an asset are referred to as _________________________.

ANS: sunk costs

PTS: 1 DIF: Difficulty: Easy OBJ: LO: 10-2

NAT: BUSPROG: Reflective Thinking
STA: AICPA-FN: Decision Modeling| ACBSP: APC 33-Incremental analysis| AACSB: Reflective
Thinking| IMA: Decision Analysis KEY: Bloom's: Knowledge

5. When a company has work performed by an external supplier, it is engaging in

____________________.

ANS: outsourcing

PTS: 1 DIF: Difficulty: Easy OBJ: LO: 10-3

NAT: BUSPROG: Reflective Thinking
STA: AICPA-FN: Decision Modeling| ACBSP: APC 33-Incremental analysis| AACSB: Reflective
Thinking| IMA: Decision Analysis KEY: Bloom's: Knowledge

6. The relative product quantities composing a company’s total sales is referred to as a company’s
_________________________.

ANS: sales mix

PTS: 1 DIF: Difficulty: Easy OBJ: LO: 10-5

NAT: BUSPROG: Reflective Thinking
STA: AICPA-FN: Decision Modeling| ACBSP: APC 33-Incremental analysis| AACSB: Reflective
Thinking| IMA: Decision Analysis KEY: Bloom's: Knowledge

ANS: segment margin

PTS: 1 DIF: Difficulty: Easy OBJ: LO: 10-7

NAT: BUSPROG: Reflective Thinking
STA: AICPA-FN: Decision Modeling| ACBSP: APC 33-Incremental analysis| AACSB: Reflective
Thinking| IMA: Decision Analysis KEY: Bloom's: Knowledge

MULTIPLE CHOICE

1. Costs forgone when an individual or organization chooses one option over another are
a. budgeted costs.
b. sunk costs.
c. historical costs.
d. opportunity costs.

ANS: D PTS: 1 DIF: Difficulty: Easy

OBJ: LO: 10-1 NAT: BUSPROG: Reflective Thinking
STA: AICPA-FN: Decision Modeling| ACBSP: APC 33-Incremental analysis| AACSB: Reflective
Thinking| IMA: Decision Analysis KEY: Bloom's: Knowledge

2. Which of the following costs would not be accounted for in a company's recordkeeping system?
a. an unexpired cost
b. an expired cost
c. a product cost
d. an opportunity cost

ANS: D PTS: 1 DIF: Difficulty: Easy

OBJ: LO: 10-1 NAT: BUSPROG: Reflective Thinking
STA: AICPA-FN: Decision Modeling| ACBSP: APC 33-Incremental analysis| AACSB: Reflective
Thinking| IMA: Decision Analysis KEY: Bloom's: Knowledge

3. Which of the following is not a characteristic of relevant costing information? It is

a. associated with the decision under consideration.
b. significant to the decision maker.
c. readily determined from financial records.
d. related to a future endeavor.

ANS: C PTS: 1 DIF: Difficulty: Easy

OBJ: LO: 10-1 NAT: BUSPROG: Reflective Thinking
STA: AICPA-FN: Decision Modeling| ACBSP: APC 33-Incremental analysis| AACSB: Reflective
Thinking| IMA: Decision Analysis KEY: Bloom's: Knowledge

4. A fixed cost is relevant if it is

a. uncontrollable.
b. avoidable.
© 2013 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different
from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.
c. sunk.
d. a product cost.

ANS: B PTS: 1 DIF: Difficulty: Easy

OBJ: LO: 10-1 NAT: BUSPROG: Reflective Thinking
STA: AICPA-FN: Decision Modeling| ACBSP: APC 33-Incremental analysis| AACSB: Reflective
Thinking| IMA: Decision Analysis KEY: Bloom's: Knowledge

5. Relevant costs are

a. all fixed and variable costs.
b. all costs that would be incurred within the relevant range of production.
c. past costs that are expected to be different in the future.
d. anticipated future costs that will differ among various alternatives.

ANS: D PTS: 1 DIF: Difficulty: Easy

OBJ: LO: 10-1 NAT: BUSPROG: Reflective Thinking
STA: AICPA-FN: Decision Modeling| ACBSP: APC 33-Incremental analysis| AACSB: Reflective
Thinking| IMA: Decision Analysis KEY: Bloom's: Knowledge

6. Which of the following is the least likely to be a relevant item in deciding whether to replace an old
machine?
a. acquisition cost of the old machine
b. outlay to be made for the new machine
c. annual savings to be enjoyed on the new machine
d. life of the new machine

ANS: A PTS: 1 DIF: Difficulty: Easy

OBJ: LO: 10-2 NAT: BUSPROG: Reflective Thinking
STA: AICPA-FN: Decision Modeling| ACBSP: APC 33-Incremental analysis| AACSB: Reflective
Thinking| IMA: Decision Analysis KEY: Bloom's: Knowledge

7. If a cost is irrelevant to a decision, the cost could not be

a. a sunk cost.
b. a future cost.
c. a variable cost.
d. an incremental cost.

ANS: D PTS: 1 DIF: Difficulty: Easy

OBJ: LO: 10-2 NAT: BUSPROG: Reflective Thinking
STA: AICPA-FN: Decision Modeling| ACBSP: APC 33-Incremental analysis| AACSB: Reflective
Thinking| IMA: Decision Analysis KEY: Bloom's: Knowledge

8. Which of the following costs would be relevant in short-term decision making?

a. incremental fixed costs
b. all costs of inventory
c. total variable costs that are the same in the considered alternatives
d. the cost of a fixed asset that could be used in all the considered alternatives
© 2013 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different
from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.
ANS: A PTS: 1 DIF: Difficulty: Easy
OBJ: LO: 10-2 NAT: BUSPROG: Reflective Thinking
STA: AICPA-FN: Decision Modeling| ACBSP: APC 33-Incremental analysis| AACSB: Reflective
Thinking| IMA: Decision Analysis KEY: Bloom's: Knowledge

9. The term incremental cost refers to

a. the profit foregone by selecting one choice instead of another.
b. the additional cost of producing or selling another product or service.
c. a cost that continues to be incurred in the absence of activity.
d. a cost common to all choices in question and not clearly or feasibly allocable to any of
them.

ANS: B PTS: 1 DIF: Difficulty: Easy

OBJ: LO: 10-2 NAT: BUSPROG: Reflective Thinking
STA: AICPA-FN: Decision Modeling| ACBSP: APC 33-Incremental analysis| AACSB: Reflective
Thinking| IMA: Decision Analysis KEY: Bloom's: Knowledge

10. A cost is sunk if it

a. is not an incremental cost.
b. is unavoidable.
c. has already been incurred.
d. is irrelevant to the decision at hand.

ANS: C PTS: 1 DIF: Difficulty: Easy

OBJ: LO: 10-2 NAT: BUSPROG: Reflective Thinking
STA: AICPA-FN: Decision Modeling| ACBSP: APC 33-Incremental analysis| AACSB: Reflective
Thinking| IMA: Decision Analysis KEY: Bloom's: Knowledge

11. Most ____ are relevant to decisions to acquire capacity, but not to short-run decisions involving the
use of that capacity.
a. sunk costs
b. incremental costs
c. fixed costs
d. prime costs

ANS: C PTS: 1 DIF: Difficulty: Easy

OBJ: LO: 10-2 NAT: BUSPROG: Reflective Thinking
STA: AICPA-FN: Decision Modeling| ACBSP: APC 33-Incremental analysis| AACSB: Reflective
Thinking| IMA: Decision Analysis KEY: Bloom's: Knowledge

12. Irrelevant costs generally include

Sunk costs Historical costs Allocated costs

a. yes yes no
b. yes no no
© 2013 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different
from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.
c. no no yes
d. yes yes yes

ANS: D PTS: 1 DIF: Difficulty: Easy

OBJ: LO: 10-2 NAT: BUSPROG: Reflective Thinking
STA: AICPA-FN: Decision Modeling| ACBSP: APC 33-Incremental analysis| AACSB: Reflective
Thinking| IMA: Decision Analysis KEY: Bloom's: Knowledge

13. In deciding whether an organization will keep an old machine or purchase a new machine, a manager
would ignore the
a. estimated disposal value of the old machine.
b. acquisition cost of the old machine.
c. operating costs of the new machine.
d. estimated disposal value of the new machine.

ANS: B PTS: 1 DIF: Difficulty: Easy

OBJ: LO: 10-2 NAT: BUSPROG: Reflective Thinking
STA: AICPA-FN: Decision Modeling| ACBSP: APC 33-Incremental analysis| AACSB: Reflective
Thinking| IMA: Decision Analysis KEY: Bloom's: Knowledge

14. The potential rental value of space used for production activities
a. is a variable cost of production.
b. represents an opportunity cost of production.
c. is an unavoidable cost.
d. is a sunk cost of production.

ANS: B PTS: 1 DIF: Difficulty: Easy

OBJ: LO: 10-3 NAT: BUSPROG: Reflective Thinking
STA: AICPA-FN: Decision Modeling| ACBSP: APC 33-Incremental analysis| AACSB: Reflective
Thinking| IMA: Decision Analysis KEY: Bloom's: Knowledge

15. The opportunity cost of making a component part in a factory with excess capacity for which there is
no alternative use is
a. the total manufacturing cost of the component.
b. the total variable cost of the component.
c. the fixed manufacturing cost of the component.
d. zero.

ANS: D PTS: 1 DIF: Difficulty: Easy

OBJ: LO: 10-3 NAT: BUSPROG: Reflective Thinking
STA: AICPA-FN: Decision Modeling| ACBSP: APC 33-Incremental analysis| AACSB: Reflective
Thinking| IMA: Decision Analysis KEY: Bloom's: Knowledge

16. Which of the following are relevant in a make or buy decision?

Variable Avoidable fixed Unavoidable fixed

costs costs costs
© 2013 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different
from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.
a. no yes yes
b. yes no yes
c. no no yes
d. yes yes no

ANS: D PTS: 1 DIF: Difficulty: Easy

OBJ: LO: 10-3 NAT: BUSPROG: Reflective Thinking
STA: AICPA-FN: Decision Modeling| ACBSP: APC 33-Incremental analysis| AACSB: Reflective
Thinking| IMA: Decision Analysis KEY: Bloom's: Knowledge

17. In a make or buy decision, the opportunity cost of capacity could

a. be considered to decrease the price of units purchased from suppliers.
b. be considered to decrease the cost of units manufactured by the company.
c. be considered to increase the price of units purchased from suppliers.
d. not be considered since opportunity costs are not part of the accounting records.

ANS: A PTS: 1 DIF: Difficulty: Easy

OBJ: LO: 10-3 NAT: BUSPROG: Reflective Thinking
STA: AICPA-FN: Decision Modeling| ACBSP: APC 33-Incremental analysis| AACSB: Reflective
Thinking| IMA: Decision Analysis KEY: Bloom's: Knowledge

18. Which of the following are relevant in a make or buy decision?

Prime costs Sunk costs Incremental costs

a. yes yes yes

b. yes no yes
c. yes no no
d. no no yes

ANS: B PTS: 1 DIF: Difficulty: Easy

OBJ: LO: 10-3 NAT: BUSPROG: Reflective Thinking
STA: AICPA-FN: Decision Modeling| ACBSP: APC 33-Incremental analysis| AACSB: Reflective
Thinking| IMA: Decision Analysis KEY: Bloom's: Knowledge

19. In a make or buy decision, the reliability of a potential supplier is

a. an irrelevant decision factor.
b. relevant information if it can be quantified.
c. an opportunity cost of continued production.
d. a qualitative decision factor.

ANS: D PTS: 1 DIF: Difficulty: Easy

OBJ: LO: 10-3 NAT: BUSPROG: Reflective Thinking
STA: AICPA-FN: Decision Modeling| ACBSP: APC 33-Incremental analysis| AACSB: Reflective
Thinking| IMA: Decision Analysis KEY: Bloom's: Knowledge

© 2013 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different
from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.
20. Which of the following qualitative factors favors the buy choice in a make or buy decision for a part?
a. maintaining a long-term relationship with suppliers
b. quality control is critical
c. utilization of idle capacity
d. part is critical to product

ANS: A PTS: 1 DIF: Difficulty: Easy

OBJ: LO: 10-3 NAT: BUSPROG: Reflective Thinking
STA: AICPA-FN: Decision Modeling| ACBSP: APC 33-Incremental analysis| AACSB: Reflective
Thinking| IMA: Decision Analysis KEY: Bloom's: Knowledge

21. When a scarce resource, such as space, exists in an organization, the criterion that should be used to
determine production is
a. contribution margin per unit.
b. selling price per unit.
c. contribution margin per unit of scarce resource.
d. total variable costs of production.

ANS: C PTS: 1 DIF: Difficulty: Easy

OBJ: LO: 10-4 NAT: BUSPROG: Reflective Thinking
STA: AICPA-FN: Decision Modeling| ACBSP: APC 33-Incremental analysis| AACSB: Reflective
Thinking| IMA: Decision Analysis KEY: Bloom's: Knowledge

22. Contracting with vendors outside the organization to obtain or acquire goods and/or services is called
a. target costing.
b. insourcing.
c. outsourcing.
d. product harvesting.

ANS: C PTS: 1 DIF: Difficulty: Easy

OBJ: LO: 10-3 NAT: BUSPROG: Reflective Thinking
STA: AICPA-FN: Decision Modeling| ACBSP: APC 33-Incremental analysis| AACSB: Reflective
Thinking| IMA: Decision Analysis KEY: Bloom's: Knowledge

23. Which of the following activities within an organization would be least likely to be outsourced?
a. accounting
b. data processing
c. transportation
d. product design

ANS: D PTS: 1 DIF: Difficulty: Easy

OBJ: LO: 10-3 NAT: BUSPROG: Reflective Thinking
STA: AICPA-FN: Decision Modeling| ACBSP: APC 33-Incremental analysis| AACSB: Reflective
Thinking| IMA: Decision Analysis KEY: Bloom's: Knowledge

24. An outside firm selected to provide services to an organization is called a

a. contract vendor.
© 2013 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different
from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.
b. lessee.
c. network organization.
d. centralized insourcer.

ANS: A PTS: 1 DIF: Difficulty: Easy

OBJ: LO: 10-3 NAT: BUSPROG: Reflective Thinking
STA: AICPA-FN: Decision Modeling| ACBSP: APC 33-Incremental analysis| AACSB: Reflective
Thinking| IMA: Decision Analysis KEY: Bloom's: Knowledge

25. Fixed costs are ignored in allocating scarce resources because

a. they are sunk.
b. they are unaffected by the allocation of scarce resources.
c. there are no fixed costs associated with scarce resources.
d. fixed costs only apply to long-run decisions.

ANS: B PTS: 1 DIF: Difficulty: Easy

OBJ: LO: 10-4 NAT: BUSPROG: Reflective Thinking
STA: AICPA-FN: Decision Modeling| ACBSP: APC 33-Incremental analysis| AACSB: Reflective
Thinking| IMA: Decision Analysis KEY: Bloom's: Knowledge

26. The minimum selling price that should be acceptable in a special order situation is equal to total
a. production cost.
b. variable production cost.
c. variable costs and avoidable fixed costs.
d. production cost plus a normal profit margin.

ANS: C PTS: 1 DIF: Difficulty: Easy

OBJ: LO: 10-6 NAT: BUSPROG: Reflective Thinking
STA: AICPA-FN: Decision Modeling| ACBSP: APC 33-Incremental analysis| AACSB: Reflective
Thinking| IMA: Decision Analysis KEY: Bloom's: Knowledge

© 2013 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different
from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.
27. Which of the following costs is irrelevant in making a decision about a special order price if some of
the company facilities are currently idle?
a. direct labor
b. equipment depreciation
c. variable cost of utilities
d. opportunity cost of production

ANS: B PTS: 1 DIF: Difficulty: Easy

OBJ: LO: 10-6 NAT: BUSPROG: Reflective Thinking
STA: AICPA-FN: Decision Modeling| ACBSP: APC 33-Incremental analysis| AACSB: Reflective
Thinking| IMA: Decision Analysis KEY: Bloom's: Knowledge

28. The ____ prohibits companies from pricing products at different amounts unless these differences
reflect differences in the cost to manufacture, sell, or distribute the products.
a. Internal Revenue Service
b. Governmental Accounting Office
c. Sherman Antitrust Act
d. Robinson-Patman Act

ANS: D PTS: 1 DIF: Difficulty: Easy

OBJ: LO: 10-6 NAT: BUSPROG: Reflective Thinking
STA: AICPA-FN: Decision Modeling| ACBSP: APC 33-Incremental analysis| AACSB: Reflective
Thinking| IMA: Decision Analysis KEY: Bloom's: Knowledge

29. An ad hoc sales discount is

a. an allowance for an inferior quality of marketed goods.
b. a discount that an ad hoc committee must decide on.
c. brought about by competitive pressures.
d. none of the above.

ANS: C PTS: 1 DIF: Difficulty: Moderate

OBJ: LO: 10-6 NAT: BUSPROG: Reflective Thinking
STA: AICPA-FN: Decision Modeling| ACBSP: APC 33-Incremental analysis| AACSB: Reflective
Thinking| IMA: Decision Analysis KEY: Bloom's: Knowledge

30. A manager is attempting to determine whether a segment of the business should be eliminated. The
focus of attention for this decision should be on
a. the net income shown on the segment's income statement.
b. sales minus total expenses of the segment.
c. sales minus total direct expenses of the segment.
d. sales minus total variable expenses and avoidable fixed expenses of the segment.

ANS: D PTS: 1 DIF: Difficulty: Easy

OBJ: LO: 10-7 NAT: BUSPROG: Reflective Thinking
STA: AICPA-FN: Decision Modeling| ACBSP: APC 33-Incremental analysis| AACSB: Reflective
Thinking| IMA: Decision Analysis KEY: Bloom's: Knowledge

© 2013 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different
from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.
31. Assume a company produces three products: A, B, and C. It can only sell up to 3,000 units of each
product. Production capacity is unlimited. The company should produce the product (or products) that
has (have) the highest
a. contribution margin per hour of machine time.
b. gross margin per unit.
c. contribution margin per unit.
d. sales price per unit.

ANS: C PTS: 1 DIF: Difficulty: Easy

OBJ: LO: 10-7 NAT: BUSPROG: Reflective Thinking
STA: AICPA-FN: Decision Modeling| ACBSP: APC 33-Incremental analysis| AACSB: Reflective
Thinking| IMA: Decision Analysis KEY: Bloom's: Knowledge

32. For a particular product in high demand, a company decreases the sales price and increases the sales
commission. These changes will not increase
a. sales volume.
b. total selling expenses for the product.
c. the product contribution margin.
d. the total variable cost per unit.

ANS: C PTS: 1 DIF: Difficulty: Easy

OBJ: LO: 10-7 NAT: BUSPROG: Reflective Thinking
STA: AICPA-FN: Decision Modeling| ACBSP: APC 33-Incremental analysis| AACSB: Reflective
Thinking| IMA: Decision Analysis KEY: Bloom's: Knowledge

33. An increase in direct fixed costs could reduce all of the following except
a. product line contribution margin.
b. product line segment margin.
c. product line operating income.
d. corporate net income.

ANS: A PTS: 1 DIF: Difficulty: Easy

OBJ: LO: 10-7 NAT: BUSPROG: Reflective Thinking
STA: AICPA-FN: Decision Modeling| ACBSP: APC 33-Incremental analysis| AACSB: Reflective
Thinking| IMA: Decision Analysis KEY: Bloom's: Knowledge

34. When a company discontinues a segment, total corporate costs may decrease in all of the following
categories except
a. variable production costs.
b. allocated common costs.
c. direct fixed costs.
d. variable period costs.

ANS: B PTS: 1 DIF: Difficulty: Easy

OBJ: LO: 10-7 NAT: BUSPROG: Reflective Thinking
STA: AICPA-FN: Decision Modeling| ACBSP: APC 33-Incremental analysis| AACSB: Reflective
Thinking| IMA: Decision Analysis KEY: Bloom's: Knowledge
© 2013 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different
from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.
35. In evaluating the profitability of a specific organizational segment, all ____ would be ignored.
a. segment variable costs
b. segment fixed costs
c. costs allocated to the segment
d. period costs

ANS: C PTS: 1 DIF: Difficulty: Easy

OBJ: LO: 10-7 NAT: BUSPROG: Reflective Thinking
STA: AICPA-FN: Decision Modeling| ACBSP: APC 33-Incremental analysis| AACSB: Reflective
Thinking| IMA: Decision Analysis KEY: Bloom's: Knowledge

36. Eichholtz Company uses 10,000 units of a part in its production process. The costs to make a part are:
direct material, $12; direct labor, $25; variable overhead, $13; and applied fixed overhead, $30.
Eichholtz has received a quote of $55 from a potential supplier for this part. If Eichholtz buys the part,
70 percent of the applied fixed overhead would continue. Eichholtz Company would be better off by
a. $50,000 to manufacture the part.
b. $150,000 to buy the part.
c. $40,000 to buy the part.
d. $160,000 to manufacture the part.

ANS: C
Cost to buy: $55/unit * 10,000 units = $550,000
Cost to manufacture: $(12+25+13+9)= $59/unit
Incremental difference in favor of buying: $4/unit * 10,000 units = $40,000

PTS: 1 DIF: Difficulty: Moderate OBJ: LO: 10-3

NAT: BUSPROG: Analytic
STA: AICPA-FN: Decision Modeling| ACBSP: APC 33-Incremental analysis| AACSB: Analytical
Thinking| IMA: Decision Analysis KEY: Bloom's: Comprehension

37. Collins Company uses 12,000 units of a part in its production process. The costs to make a part are:
direct material, $15; direct labor, $27; variable overhead, $15; and applied fixed overhead, $32.
Eichholtz has received a quote of $60 from a potential supplier for this part. If Collins buys the part, 75
percent of the applied fixed overhead would continue. Collins Company would be better off by
a. $30,000 to manufacture the part.
b. $348,000 to buy the part.
c. $60,000 to buy the part.
d. $216,000 to manufacture the part.

ANS: C
Cost to buy: $60/unit * 12,000 units = $720,000
Cost to manufacture: $(15+27+15+8)= $65/unit
Incremental difference in favor of buying: $5/unit * 12,000 units = $60,000

PTS: 1 DIF: Difficulty: Moderate OBJ: LO: 10-3

© 2013 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different
from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.
NAT: BUSPROG: Analytic
STA: AICPA-FN: Decision Modeling| ACBSP: APC 33-Incremental analysis| AACSB: Analytical
Thinking| IMA: Decision Analysis KEY: Bloom's: Comprehension

38. Lewis Company has only 25,000 hours of machine time each month to manufacture its two products.
Product X has a contribution margin of $50, and Product Y has a contribution margin of $64. Product
X requires 5 hours of machine time, and Product Y requires 8 hours of machine time. If Lewis
Company wants to dedicate 80 percent of its machine time to the product that will provide the most
income, the company will have a total contribution margin of
a. $250,000.
b. $240,000.
c. $210,000.
d. $200,000.

X: 20,000 hrs/5 hrs per unit 4,000 units * $50 CM/unit $200,000
Y: 5,000 hrs/8 hrs per unit 625 units * $64 CM/unit 40,000
Total $240,000
======

PTS: 1 DIF: Difficulty: Challenging OBJ: LO: 10-7

NAT: BUSPROG: Analytic
STA: AICPA-FN: Decision Modeling| ACBSP: APC 33-Incremental analysis| AACSB: Analytical
Thinking| IMA: Decision Analysis KEY: Bloom's: Comprehension

39. Marshall Company has only 30,000 hours of machine time each month to manufacture its two
products. Product X has a contribution margin of $60, and Product Y has a contribution margin of $72.
Product X requires 6 hours of machine time, and Product Y requires 10 hours of machine time. If
Marshall Company wants to dedicate 85 percent of its machine time to the product that will provide
the most income, the company will have a total contribution margin of
a. $216,000
b. $228,600.
c. $287,400
d. $300,000

ANS: C
Assume 85% of capacity applied to Product X

X: 25,500 hrs/6 hrs per unit 4,250 units * $60 CM/unit $255,000
Y: 4,500 hrs/10 hrs per unit 450 units * $72 CM/unit 32,400
Total $287,400
======

PTS: 1 DIF: Difficulty: Challenging OBJ: LO: 10-7

NAT: BUSPROG: Analytic
STA: AICPA-FN: Decision Modeling| ACBSP: APC 33-Incremental analysis| AACSB: Analytical
Thinking| IMA: Decision Analysis KEY: Bloom's: Comprehension

40. Phillips Company has 3 divisions: X, Y, and Z. Division X's income statement shows the following for
the year ended December 31:

Sales $1,000,000
Cost of goods sold (800,000)
Gross profit $ 200,000
Selling expenses $100,000
Administrative expenses 250,000 (350,000)
Net loss $ (150,000)

© 2013 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different
from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.
Cost of goods sold is 75 percent variable and 25 percent fixed. Of the fixed costs, 60 percent are
avoidable if the division is closed. All of the selling expenses relate to the division and would be
eliminated if Division X were eliminated. Of the administrative expenses, 90 percent are applied from
corporate costs. If Division X were eliminated, Phillips’s income would
a. increase by $150,000.
b. decrease by $ 75,000.
c. decrease by $155,000.
d. decrease by $215,000.

ANS: C
Sales foregone $(1,000,000)
COGS avoided
Variable $600,000
Fixed 120,000 720,000
Selling Expense Avoided 100,000
Administrative Expense Avoided 25,000
Decrease in income $( 155,000)
=========

PTS: 1 DIF: Difficulty: Moderate OBJ: LO: 10-7

NAT: BUSPROG: Analytic
STA: AICPA-FN: Decision Modeling| ACBSP: APC 33-Incremental analysis| AACSB: Analytical
Thinking| IMA: Decision Analysis KEY: Bloom's: Comprehension

41. Engel Company has 3 divisions: A, B, and C. Division A's income statement shows the following for
the year ended December 31:

Sales $1,500,000
Cost of goods sold (1,125,000)
Gross profit $ 375,000
Selling expenses $125,000
Administrative expenses 350,000 (475,000)
Net loss $ (100,000)

Cost of goods sold is 80 percent variable and 20 percent fixed. Of the fixed costs, 50 percent are
avoidable if the division is closed. All of the selling expenses relate to the division and would be
eliminated if Division A were eliminated. Of the administrative expenses, 85 percent are applied from
corporate costs. If Division A were eliminated, Engel’s income would
a. increase by $100,000.
b. decrease by $197,500.
c. decrease by $310,000.
d. decrease by $422,500.

ANS: C
Sales foregone $(1,500,000)
COGS avoided
Variable $900,000
© 2013 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different
from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.
Fixed 112,500 1,012,500
Selling Expense Avoided 125,000
Administrative Expense Avoided 52,500
Decrease in income $( 310,000)
=========

PTS: 1 DIF: Difficulty: Moderate OBJ: LO: 10-7

NAT: BUSPROG: Analytic
STA: AICPA-FN: Decision Modeling| ACBSP: APC 33-Incremental analysis| AACSB: Analytical
Thinking| IMA: Decision Analysis KEY: Bloom's: Comprehension

42. Buxton Company is currently operating at a loss of $15,000. The sales manager has received a special
order for 5,000 units of product, which normally sells for $35 per unit. Costs associated with the
product are: direct material, $6; direct labor, $10; variable overhead, $3; applied fixed overhead, $4;
and variable selling expenses, $2. The special order would allow the use of a slightly lower grade of
direct material, thereby lowering the price per unit by $1.50 and selling expenses would be decreased
by $1. If Buxton wants this special order to increase the total net income for the firm to $10,000, what
sales price must be quoted for each of the 5,000 units?
a. $23.50
b. $24.50
c. $27.50
d. $34.00

ANS: A
In order to increase income to $10,000, there must be an increase of $25,000 or $5 per unit.

Direct materials $ 4.50

Direct Labor 10.00
Variable Overhead 3.00
Variable Selling Exp 1.00
Production Costs $18.50
Additional profit per unit
5.00
Sales price/unit $23.50
=====

PTS: 1 DIF: Difficulty: Moderate OBJ: LO: 10-6

NAT: BUSPROG: Analytic
STA: AICPA-FN: Decision Modeling| ACBSP: APC 33-Incremental analysis| AACSB: Analytical
Thinking| IMA: Decision Analysis KEY: Bloom's: Comprehension

43. Gallagher Company produces a part that has the following costs per unit:

Direct material $ 8
Direct labor 3
Variable overhead 1
Fixed overhead 5

Homeland Corporation can provide the part to Gallagher for $19 per unit. Gallagher Company has
determined that 60 percent of its fixed overhead would continue if it purchased the part. However, if
Gallagher no longer produces the part, it can rent that portion of the plant facilities for $60,000 per
year. Gallagher Company currently produces 10,000 parts per year. Which alternative is preferable and
by what margin?
a. Make-$20,000
b. Make-$50,000
c. Buy-$10,000
d. Buy-$40,000

PTS: 1 DIF: Difficulty: Moderate OBJ: LO: 10-3

NAT: BUSPROG: Analytic
STA: AICPA-FN: Decision Modeling| ACBSP: APC 33-Incremental analysis| AACSB: Analytical
Thinking| IMA: Decision Analysis KEY: Bloom's: Comprehension

44. Glover Company produces a part that has the following costs per unit:

Direct material $ 9
Direct labor 4
Variable overhead 2
Fixed overhead 6
Total $21

London Corporation can provide the part to Glover for $23 per unit. Glover Company has determined
that 50 percent of its fixed overhead would continue if it purchased the part. However, if Glover no
longer produces the part, it can rent that portion of the plant facilities for $70,000 per year. Glover
Company currently produces 12,000 parts per year. Which alternative is preferable and by what
margin?
a. Make-$24,000
b. Make-$60,000
c. Buy-$10,000
d. Buy-$46,000

ANS: C
Purchase price from Homeland $(276,000)
Rent Revenue Received 70,000
Variable Costs Avoided 180,000
Fixed Overhead Avoided 36,000
Difference in Favor of Buying $ 10,000
=======

PTS: 1 DIF: Difficulty: Moderate OBJ: LO: 10-3

NAT: BUSPROG: Analytic
STA: AICPA-FN: Decision Modeling| ACBSP: APC 33-Incremental analysis| AACSB: Analytical
Thinking| IMA: Decision Analysis KEY: Bloom's: Comprehension

45. Graham Company has 15,000 units in inventory that had a production cost of $3 per unit. These units
cannot be sold through normal channels due to a significant technology change. These units could be
reworked at a total cost of $23,000 and sold for $28,000. Another alternative is to sell the units to a
junk dealer for $8,500. The relevant cost for Graham to consider in making its decision is
© 2013 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different
from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.
a. $45,000 of original product costs.
b. $23,000 for reworking the units.
c. $68,000 for reworking the units.
d. $28,000 for selling the units to the junk dealer.

ANS: B
Only the actual reworking costs are relevant. Original purchase costs are irrelevant.

PTS: 1 DIF: Difficulty: Easy OBJ: LO: 10-3

NAT: BUSPROG: Analytic
STA: AICPA-FN: Decision Modeling| ACBSP: APC 33-Incremental analysis| AACSB: Analytical
Thinking| IMA: Decision Analysis KEY: Bloom's: Comprehension

46. Kelly Company has 20,000 units in inventory that had a production cost of $4 per unit. These units
cannot be sold through normal channels due to a significant technology change. These units could be
reworked at a total cost of $30,000 and sold for $35,000. Another alternative is to sell the units to a
junk dealer for $10,500. The relevant cost for Kelly to consider in making its decision is
a. $80,000 of original product costs.
b. $30,000 for reworking the units.
c. $110,000 for reworking the units.
d. $35,000 for selling the units to the junk dealer.

ANS: B
Only the actual reworking costs are relevant. Original purchase costs are irrelevant.

PTS: 1 DIF: Difficulty: Easy OBJ: LO: 10-3

NAT: BUSPROG: Analytic
STA: AICPA-FN: Decision Modeling| ACBSP: APC 33-Incremental analysis| AACSB: Analytical
Thinking| IMA: Decision Analysis KEY: Bloom's: Comprehension

Athmer Corporation

Athmer Corporation sells a product for $18 per unit, and the standard cost card for the product shows
the following costs:

Direct material $ 1
Direct labor 2
Overhead (80% fixed) 7
Total $10

47. Refer to Athmer Corporation. Athmer received a special order for 1,000 units of the product. The only
additional cost to Athmer would be foreign import taxes of $1 per unit. If Athmer is able to sell all of
the current production domestically, what would be the minimum sales price that Athmer would
consider for this special order?
a. $18.00
b. $11.00
© 2013 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different
from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.
c. $5.40
d. $19.00

ANS: D
The company would increase its minimum sales price to reflect the foreign import tax of $1
per unit.

PTS: 1 DIF: Difficulty: Easy OBJ: LO: 10-6

NAT: BUSPROG: Analytic
STA: AICPA-FN: Decision Modeling| ACBSP: APC 33-Incremental analysis| AACSB: Analytical
Thinking| IMA: Decision Analysis KEY: Bloom's: Comprehension

48. Refer to Athmer Corporation. Assume that Athmer has sufficient idle capacity to produce the 1,000
units. If Athmer wants to increase its operating profit by $5,600, what would it charge as a per-unit
selling price?
a. $18.00
b. $10.00
c. $11.00
d. $16.60

ANS: C
The company would want to charge a price equal to a per unit profit of $5.60 plus variable
costs per unit of $4.40 and the import tax per unit of $1.00. The total price is $11.00.

PTS: 1 DIF: Difficulty: Moderate OBJ: LO: 10-3

NAT: BUSPROG: Analytic
STA: AICPA-FN: Decision Modeling| ACBSP: APC 33-Incremental analysis| AACSB: Analytical
Thinking| IMA: Decision Analysis KEY: Bloom's: Comprehension

McCoy Corporation

McCoy Corporation sells a product for $21 per unit, and the standard cost card for the product shows
the following costs:

Direct material $ 2
Direct labor 3
Overhead (70% fixed) 10
Total $15

49. Refer to McCoy Corporation. McCoy received a special order for 1,200 units of the product. The only
additional cost to McCoy would be foreign import taxes of $2 per unit. If McCoy is able to sell all of
the current production domestically, what would be the minimum sales price that McCoy would
consider for this special order?
a. $10.00
b. $15.00
c. $21.00
© 2013 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different
from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.
d. $23.00

ANS: D
The company would increase its minimum sales price to reflect the foreign import tax of $2
per unit.

PTS: 1 DIF: Difficulty: Easy OBJ: LO: 10-6

NAT: BUSPROG: Analytic
STA: AICPA-FN: Decision Modeling| ACBSP: APC 33-Incremental analysis| AACSB: Analytical
Thinking| IMA: Decision Analysis KEY: Bloom's: Comprehension

50. Refer to McCoy Corporation. Assume that McCoy has sufficient idle capacity to produce the 1,200
units. If McCoy wants to increase its operating profit by $6,000, what would it charge as a per-unit
selling price?
a. $15.00
b. $17.00
c. $21.00
d. $23.00

ANS: A
The company would want to charge a price equal to a per unit profit of $5.00 plus variable
costs per unit of $8.00 and the import tax per unit of $2.00. The total price is $15.00.

PTS: 1 DIF: Difficulty: Moderate OBJ: LO: 10-3

NAT: BUSPROG: Analytic
STA: AICPA-FN: Decision Modeling| ACBSP: APC 33-Incremental analysis| AACSB: Analytical
Thinking| IMA: Decision Analysis KEY: Bloom's: Comprehension

51. Beauty Tools Corporation makes and sells brushes and combs. It can sell all of either product it can
make. The following data are pertinent to each respective product:

Brushes Combs
Units of output per machine hour 8 20
Selling price per unit $12.00 $4.00
Product cost per unit
Direct material $1.00 $1.20
Direct labor 2.00 0.10
Variable overhead 0.50 0.05

Total fixed overhead is $380,000.

The company has 40,000 machine hours available for production. What sales mix will maximize
profits?
a. 320,000 brushes and 0 combs
b. 0 brushes and 800,000 combs
c. 160,000 brushes and 600,000 combs
d. 252,630 brushes and 252,630 combs
© 2013 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different
from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.
ANS: A
Brushes have a contribution margin of $8.50 per unit; combs have a contribution margin of
$2.65 per unit.

The combination of 320,000 brushes and 0 combs provides a net profit of $2,720,000 and
does not violate the machine hours constraint.

PTS: 1 DIF: Difficulty: Easy OBJ: LO: 10-5

NAT: BUSPROG: Analytic
STA: AICPA-FN: Decision Modeling| ACBSP: APC 33-Incremental analysis| AACSB: Analytical
Thinking| IMA: Decision Analysis KEY: Bloom's: Comprehension

52. Denver Boot Corporation has been asked to submit a bid on supplying 1,000 pairs of military combat
boots to the Armed Forces Training Center. The company's costs per pair of boots are as follows:

Direct material $8
Direct labor 6
Variable overhead 3
Variable selling cost (commission) 3
Fixed overhead (allocated) 2
Fixed selling and administrative cost 1

Assuming that there would be no commission on this potential sale, the lowest price the firm can bid is
some price greater than
a. $23.
b. $20.
c. $17.
d. $14.

ANS: C
The lowest price would have to be greater than the sum of all variable manufacturing costs.
Variable manufacturing costs total $17; therefore the price would have to be greater than $17
per pair.

PTS: 1 DIF: Difficulty: Easy OBJ: LO: 10-5

NAT: BUSPROG: Analytic
STA: AICPA-FN: Decision Modeling| ACBSP: APC 33-Incremental analysis| AACSB: Analytical
Thinking| IMA: Decision Analysis KEY: Bloom's: Comprehension

53. Wightman Industries has two sales territories-East and West. Financial information for the two
territories is presented below:

East West
Sales $980,000 $750,000
Direct costs:
Variable (343,000) (225,000)
© 2013 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different
from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.
Fixed (450,000) (325,000)
Allocated common costs (275,000) (175,000)
Net income (loss) $(88,000) $ 25,000

Because the company is in a start-up stage, corporate management feels that the East sales territory is
creating too much of a cash drain on the company and it should be eliminated. If the East territory is
discontinued, one sales manager (whose salary is $40,000 per year) will be relocated to the West
territory. By how much would Wightman's income change if the East territory is eliminated?
a. increase by $88,000
b. increase by $48,000
c. decrease by $267,000
d. decrease by $227,000

ANS: D
Sales foregone in East $(980,000)
Variable costs avoided 343,000
Fixed costs avoided 410,000
Decrease in income from $(227,000)
eliminating East territory ========

PTS: 1 DIF: Difficulty: Moderate OBJ: LO: 10-7

NAT: BUSPROG: Analytic
STA: AICPA-FN: Decision Modeling| ACBSP: APC 33-Incremental analysis| AACSB: Analytical
Thinking| IMA: Decision Analysis KEY: Bloom's: Comprehension

Savannah Motors

Savannah Motors is trying to decide whether it should keep its existing car washing machine or
purchase a new one that has technological advantages (which translate into cost savings) over the
existing machine. Information on each machine follows:

Old machine New machine

Original cost $9,000 $20,000
Accumulated depreciation 5,000 0
Annual cash operating costs 9,000 4,000
Current salvage value of old machine 2,000
Salvage value in 10 years 500 1,000
Remaining life 10 yrs. 10 yrs.

54. Refer to Savannah Motors. The $4,000 of annual operating costs that are common to both the old and
the new machine are an example of a(n)
a. sunk cost.
b. irrelevant cost.
c. future avoidable cost.
d. opportunity cost.

ANS: B PTS: 1 DIF: Difficulty: Easy

55. Refer to Savannah Motors. The $20,000 cost of the new machine represents a(n)
a. sunk cost.
b. future relevant cost.
c. future irrelevant cost.
d. opportunity cost.

ANS: B PTS: 1 DIF: Difficulty: Easy

OBJ: LO: 10-3 NAT: BUSPROG: Analytic
STA: AICPA-FN: Decision Modeling| ACBSP: APC 33-Incremental analysis| AACSB: Analytical
Thinking| IMA: Decision Analysis KEY: Bloom's: Comprehension

56. Refer to Savannah Motors. The estimated $500 salvage value of the existing machine in 10 years
represents a(n)
a. sunk cost.
b. opportunity cost of selling the existing machine now.
c. opportunity cost of keeping the existing machine for 10 years.
d. opportunity cost of keeping the existing machine and buying the new machine.

ANS: B PTS: 1 DIF: Difficulty: Easy

OBJ: LO: 10-3 NAT: BUSPROG: Analytic
STA: AICPA-FN: Decision Modeling| ACBSP: APC 33-Incremental analysis| AACSB: Analytical
Thinking| IMA: Decision Analysis KEY: Bloom's: Comprehension

57. Refer to Savannah Motors. The incremental cost to purchase the new machine is
a. $11,000
b. $13,000.
c. $18,000.
d. $20,000.

ANS: C
Incremental cost = Purchase price of new machine - Current salvage value
Incremental cost = $(20,000 - 2,000)
Incremental cost = $18,000

PTS: 1 DIF: Difficulty: Easy OBJ: LO: 10-3

NAT: BUSPROG: Analytic
STA: AICPA-FN: Decision Modeling| ACBSP: APC 33-Incremental analysis| AACSB: Analytical
Thinking| IMA: Decision Analysis KEY: Bloom's: Comprehension

Boston Bakers

Old machine New machine

Original cost $10,000 $25,000
Accumulated depreciation 6,000 0
Annual cash operating costs 9,500 5,000
Current salvage value of old machine 2,500
Salvage value in 10 years 650 1,200
Remaining life 12 yrs. 12 yrs.

58. Refer to Boston Bakers. The $5,000 of annual operating costs that are common to both the old and the
new machine are an example of a(n)
a. sunk cost.
b. irrelevant cost.
c. future avoidable cost.
d. opportunity cost.

ANS: B PTS: 1 DIF: Difficulty: Easy

OBJ: LO: 10-1 NAT: BUSPROG: Analytic
STA: AICPA-FN: Decision Modeling| ACBSP: APC 33-Incremental analysis| AACSB: Analytical
Thinking| IMA: Decision Analysis KEY: Bloom's: Comprehension

59. Refer to Boston Bakers. The $10,000 cost of the original machine represents a(n)
a. sunk cost.
b. future relevant cost.
c. historical relevant cost.
d. opportunity cost.

ANS: A PTS: 1 DIF: Difficulty: Easy

OBJ: LO: 10-2 NAT: BUSPROG: Analytic
STA: AICPA-FN: Decision Modeling| ACBSP: APC 33-Incremental analysis| AACSB: Analytical
Thinking| IMA: Decision Analysis KEY: Bloom's: Comprehension

60. Refer to Boston Bakers. The estimated $650 salvage value of the existing machine in 10 years
represents a(n)
a. sunk cost.
b. opportunity cost of selling the existing machine now.
c. opportunity cost of keeping the existing machine for 10 years.
d. opportunity cost of keeping the existing machine and buying the new machine.

ANS: B PTS: 1 DIF: Difficulty: Easy

OBJ: LO: 10-3 NAT: BUSPROG: Analytic
STA: AICPA-FN: Decision Modeling| ACBSP: APC 33-Incremental analysis| AACSB: Analytical
Thinking| IMA: Decision Analysis KEY: Bloom's: Comprehension

ANS: C
Incremental cost = Purchase price of new machine - Current salvage value
Incremental cost = $(25,000 - 2,500)
Incremental cost = $22,500

PTS: 1 DIF: Difficulty: Easy OBJ: LO: 10-3

NAT: BUSPROG: Analytic
STA: AICPA-FN: Decision Modeling| ACBSP: APC 33-Incremental analysis| AACSB: Analytical
Thinking| IMA: Decision Analysis KEY: Bloom's: Comprehension

Ultralinear Electronics Corporation

Ultralinear Electronics Corporation manufactures and sells FM radios. Information on the prior year's
operations (sales and production Model A1) is presented below:

Sales price per unit $30

Costs per unit:
Direct material 7
Direct labor 4
Overhead (50% variable) 6
Selling costs (40% variable) 10
Production in units 10,000
Sales in units 9,500

62. Refer to Ultralinear Electronics Corporation. The Model B2 radio is currently in production and it
renders the Model A1 radio obsolete. If the remaining 500 units of the Model A1 radio are to be sold
through regular channels, what is the minimum price the company would accept for the radios?
a. $30
b. $27
c. $18
d. $4

ANS: D
$4 would cover the variable selling expenses.

PTS: 1 DIF: Difficulty: Moderate OBJ: LO: 10-5

NAT: BUSPROG: Analytic
STA: AICPA-FN: Decision Modeling| ACBSP: APC 33-Incremental analysis| AACSB: Analytical
Thinking| IMA: Decision Analysis KEY: Bloom's: Comprehension

© 2013 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different
from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.
63. Refer to Ultralinear Electronics Corporation. Assume that the remaining Model A1 radios can be sold
through normal channels or to a foreign buyer for $6 per unit. If sold through regular channels, the
minimum acceptable price will be
a. $30.
b. $33.
c. $10.
d. $4.

ANS: C
$10 will cover the price to the foreign buyer plus the $4 in variable selling expenses.

PTS: 1 DIF: Difficulty: Moderate OBJ: LO: 10-5

NAT: BUSPROG: Analytic
STA: AICPA-FN: Decision Modeling| ACBSP: APC 33-Incremental analysis| AACSB: Analytical
Thinking| IMA: Decision Analysis KEY: Bloom's: Comprehension

Southern Digital, Inc.

The Southern Digital, Inc. produces a high-quality computer chip. Unit production costs (based on
capacity production of 100,000 units per year) follow:

Direct material $50

Direct labor 20
Overhead (20% variable) 10
Other information:
Sales price 100
SG&A costs (40% variable) 15

64. Refer to Southern Digital, Inc. Assume, for this question only, that the Memory Division is producing
and selling at capacity. What is the minimum selling price that the division would consider on a
"special order" of 1,000 chips on which no variable period costs would be incurred?
a. $100
b. $72
c. $81
d. $94

ANS: D
Variable period costs are $6 ($15 * 40% variable)
The minimum selling price would have to be greater than the current sales price less the
avoidable SG&A costs.
$(100 - 6) = $94 per unit

PTS: 1 DIF: Difficulty: Moderate OBJ: LO: 10-6

NAT: BUSPROG: Analytic
STA: AICPA-FN: Decision Modeling| ACBSP: APC 33-Incremental analysis| AACSB: Analytical
Thinking| IMA: Decision Analysis KEY: Bloom's: Comprehension
© 2013 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different
from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.
65. Refer to Southern Digital, Inc. Assume, for this question only, that the Memory Division is operating
at a level of 70,000 chips per year. What is the minimum price that the division would consider on a
"special order" of 1,000 chips to be distributed through normal channels?
a. $78
b. $95
c. $100
d. $81

ANS: A
The price would have to cover all variable costs.
$(50 + 20 + 2 + 6) = $78 per unit

PTS: 1 DIF: Difficulty: Moderate OBJ: LO: 10-6

NAT: BUSPROG: Analytic
STA: AICPA-FN: Decision Modeling| ACBSP: APC 33-Incremental analysis| AACSB: Analytical
Thinking| IMA: Decision Analysis KEY: Bloom's: Comprehension

66. Refer to Southern Digital, Inc. Assume, for this question only, that the Memory Division is presently
operating at a level of 80,000 chips per year. Accepting a "special order" on 2,000 chips at $88 will
a. increase total corporate profits by $4,000.
b. increase total corporate profits by $20,000.
c. decrease total corporate profits by $14,000.
d. decrease total corporate profits by $24,000.

ANS: B
$(88 - 78) = $10 profit per unit * 2,000 units = $20,000 profit increase

PTS: 1 DIF: Difficulty: Moderate OBJ: LO: 10-6

NAT: BUSPROG: Analytic
STA: AICPA-FN: Decision Modeling| ACBSP: APC 33-Incremental analysis| AACSB: Analytical
Thinking| IMA: Decision Analysis KEY: Bloom's: Comprehension

Brazosport Pipe Corporation

The capital budgeting committee of the Brazosport Pipe Corporation is evaluating the possibility of
replacing its old pipe-bending machine with a more advanced model. Information on the existing
machine and the new model follows:

Existing machine New machine

Original cost $200,000 $400,000
Market value now 80,000
Market value in year 5 0 20,000
Annual cash operating costs 40,000 10,000
Remaining life 5 yrs. 5 yrs.

© 2013 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different
from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.
67. Refer to Brazosport Pipe Corporation. The major opportunity cost associated with the continued use of
the existing machine is
a. $30,000 of annual savings in operating costs.
b. $20,000 of salvage in 5 years on the new machine.
c. lost sales resulting from the inefficient existing machine.
d. $400,000 cost of the new machine.

ANS: A PTS: 1 DIF: Difficulty: Easy

OBJ: LO: 10-1 NAT: BUSPROG: Analytic
STA: AICPA-FN: Decision Modeling| ACBSP: APC 33-Incremental analysis| AACSB: Analytical
Thinking| IMA: Decision Analysis KEY: Bloom's: Comprehension

68. Refer to Brazosport Pipe Corporation. The $80,000 market value of the existing machine is
a. a sunk cost.
b. an opportunity cost of selling the old machine.
c. irrelevant to the equipment replacement decision.
d. a historical cost.

ANS: B PTS: 1 DIF: Difficulty: Easy

OBJ: LO: 10-1 NAT: BUSPROG: Analytic
STA: AICPA-FN: Decision Modeling| ACBSP: APC 33-Incremental analysis| AACSB: Analytical
Thinking| IMA: Decision Analysis KEY: Bloom's: Comprehension

69. Refer to Brazosport Pipe Corporation. If the company buys the new machine and disposes of the
existing machine, corporate profit over the five-year life of the new machine will be ____ than the
profit that would have been generated had the existing machine been retained for five years.
a. $150,000 lower
b. $170,000 lower
c. $230,000 lower
d. $150,000 higher

ANS: A
Annual savings in operating costs $ 150,000
Purchase of new machine (400,000)
Disposal of existing machine 80,000
Disposal of new machine in 5 years 20,000
Difference in profit $(150,000)
========

PTS: 1 DIF: Difficulty: Moderate OBJ: LO: 10-1

NAT: BUSPROG: Analytic
STA: AICPA-FN: Decision Modeling| ACBSP: APC 33-Incremental analysis| AACSB: Analytical
Thinking| IMA: Decision Analysis KEY: Bloom's: Comprehension

70. Seminole Corporation has been manufacturing 5,000 units of Part 10541, which is used in the
manufacture of one of its products. At this level of production, the cost per unit of manufacturing Part
10541 is as follows:
© 2013 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different
from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.
Direct material $ 2
Direct labor 8
Variable overhead 4
Fixed overhead applied 6
Total $20

Luther Company has offered to sell Seminole 5,000 units of Part 10541 for $19 a unit. Seminole has
determined that it could use the facilities currently used to manufacture Part 10541 to manufacture Part
RAC and generate an operating profit of $4,000. Seminole has also determined that two-thirds of the
fixed overhead applied will continue even if Part 10541 is purchased from Luther. To determine
whether to accept Luther’s offer, the net relevant costs to make are
a. $70,000.
b. $84,000.
c. $90,000.
d. $95,000.

ANS: B
The relevant costs are the variable costs per unit as well as the portion of fixed overhead that
will be avoided for Part 10541.
Variable costs = $14 per unit
Fixed overhead = $ 2 per unit
5,000 units * $16 per unit = $80,000 + Profit from RAC = $ 4,000
Total Relevant Costs $84,000

PTS: 1 DIF: Difficulty: Moderate OBJ: LO: 10-3

NAT: BUSPROG: Analytic
STA: AICPA-FN: Decision Modeling| ACBSP: APC 33-Incremental analysis| AACSB: Analytical
Thinking| IMA: Decision Analysis KEY: Bloom's: Comprehension

71. Birmingham Corporation manufactures batons. Birmingham can manufacture 300,000 batons a year at
a variable cost of $750,000 and a fixed cost of $450,000. Based on Birmingham's predictions, 240,000
batons will be sold at the regular price of $5.00 each. In addition, a special order was placed for 60,000
batons to be sold at a 40 percent discount off the regular price. The unit relevant cost per unit for
Birmingham's decision is
a. $1.50.
b. $2.50.
c. $3.00.
d. $4.00.

ANS: B
The relevant costs will be the variable costs per unit.
$750,000/300,000 units = $2.50/unit

PTS: 1 DIF: Difficulty: Moderate OBJ: LO: 10-6

NAT: BUSPROG: Analytic
STA: AICPA-FN: Decision Modeling| ACBSP: APC 33-Incremental analysis| AACSB: Analytical
© 2013 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different
from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.
Thinking| IMA: Decision Analysis KEY: Bloom's: Comprehension

SHORT ANSWER

1. What is an opportunity cost and why is it a relevant cost?

ANS:
An opportunity cost is not a "cost" in the traditional out-of-pocket sense. Opportunity costs are benefits
that are sacrificed to pursue one alternative rather than another. Once an alternative is selected, the
opportunity costs associated with that alternative will not appear directly in the accounting records of
the firm as other costs of that alternative will. These costs are, however, relevant because the company
is giving up one set of benefits to accept a second set. Rational decision making assumes that the
chosen alternative provides the greater benefit.

PTS: 1 DIF: Difficulty: Moderate OBJ: LO: 10-1

NAT: BUSPROG: Reflective Thinking
STA: AICPA-FN: Decision Modeling| ACBSP: APC 33-Incremental analysis| AACSB: Reflective
Thinking| IMA: Decision Analysis KEY: Bloom's: Knowledge

2. What are three characteristics of relevant information?

ANS:
Relevant information must be: (1) associated with the decision under consideration; (2) be important to
the decision maker; and (3) have a connection to or bearing on some future endeavor.

PTS: 1 DIF: Difficulty: Easy OBJ: LO: 10-1

NAT: BUSPROG: Reflective Thinking
STA: AICPA-FN: Decision Modeling| ACBSP: APC 33-Incremental analysis| AACSB: Reflective
Thinking| IMA: Decision Analysis KEY: Bloom's: Knowledge

3. Why are fixed costs generally more relevant in long-run decisions than short-run decisions?

ANS:
In the long run, all costs are relevant. In the short run, many costs that apply to the existing production
technology are sunk. In particular, depreciation charges and lease payments on long-term assets are
unavoidable. In the long run, these assets are replaced and, thus their associated costs are relevant in
the replacement decision.

PTS: 1 DIF: Difficulty: Moderate OBJ: LO: 10-2

NAT: BUSPROG: Reflective Thinking
STA: AICPA-FN: Decision Modeling| ACBSP: APC 33-Incremental analysis| AACSB: Reflective
Thinking| IMA: Decision Analysis KEY: Bloom's: Knowledge

4. Why is depreciation expense irrelevant to most managerial decisions, even when it is a future cost?

ANS:
Depreciation expense is simply the systematic write-off of a sunk cost (the cost of a long-lived asset).
Depreciation expense is therefore always irrelevant unless it pertains to an asset that is not yet
acquired.

PTS: 1 DIF: Difficulty: Moderate OBJ: LO: 10-2

NAT: BUSPROG: Reflective Thinking
© 2013 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different
from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.
STA: AICPA-FN: Decision Modeling| ACBSP: APC 33-Incremental analysis| AACSB: Reflective
Thinking| IMA: Decision Analysis KEY: Bloom's: Knowledge

5. Define and discuss outsourcing.

ANS:
Outsourcing occurs when an organization "farms out" some of its normal business activities or
processes. Several areas that are most frequently outsourced by an organization include payroll,
accounting, transportation, and possibly legal. When a company outsources some of its functions, it is
able to divert more energy to those areas that produce a firm's core competencies or have the ability to
create revenues for the firm.

PTS: 1 DIF: Difficulty: Moderate OBJ: LO: 10-3

NAT: BUSPROG: Reflective Thinking
STA: AICPA-FN: Decision Modeling| ACBSP: APC 33-Incremental analysis| AACSB: Reflective
Thinking| IMA: Decision Analysis KEY: Bloom's: Knowledge

6. What is the relationship between scarce resources and an organization's production capacity?

ANS:
In the long run, capacity is likely to be constrained by two fundamental resources: labor and
machinery. However, in the short run, additional constraints can push capacity to levels below labor
and machine capacity. Constraints can be induced by raw material shortages, interruptions in
distribution channels, labor strikes in the plants of suppliers of important components, or governmental
restrictions on markets (gas rationing, quotas).

PTS: 1 DIF: Difficulty: Moderate OBJ: LO: 10-4

NAT: BUSPROG: Reflective Thinking
STA: AICPA-FN: Decision Modeling| ACBSP: APC 33-Incremental analysis| AACSB: Reflective
Thinking| IMA: Decision Analysis KEY: Bloom's: Knowledge

7. What are some factors that a company must consider when deciding to raise or lower sales prices on
products?

ANS:
Quantitative factors include the new contribution margin per unit of the product, short-term and long-
term changes in demand and production volume because of the price change, and the best use of a
company’s scarce resources.

Qualitative factors include the impact of changes on customer goodwill toward the company, customer
loyalty toward company products, and competitors’ responses to the firm’s new pricing structure.

PTS: 1 DIF: Difficulty: Moderate OBJ: LO: 10-5

NAT: BUSPROG: Reflective Thinking
STA: AICPA-FN: Decision Modeling| ACBSP: APC 33-Incremental analysis| AACSB: Reflective
Thinking| IMA: Decision Analysis KEY: Bloom's: Knowledge

8. Under what circumstances is the sum of variable production and selling costs the appropriate
minimum price for special orders?

ANS:

© 2013 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different
from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.
Variable costs would serve as the bottom price for a special order only if the special order could be
produced on production capacity that would otherwise be idle. Whenever presently employed capacity
is partially or wholly surrendered to produce a special order, the special order price would be based on
both variable costs and the profit sacrificed on the best alternative use of the capacity.

PTS: 1 DIF: Difficulty: Moderate OBJ: LO: 10-6

NAT: BUSPROG: Reflective Thinking
STA: AICPA-FN: Decision Modeling| ACBSP: APC 33-Incremental analysis| AACSB: Reflective
Thinking| IMA: Decision Analysis KEY: Bloom's: Knowledge

9. Define segment margin and explain why it is a relevant measure of a segment's contribution to overall
organizational profitability.

ANS:
Segment margin is the amount of income that remains after deducting all avoidable (both variable and
fixed) costs from sales. This measure is the appropriate gauge of a segment's viability because it is a
direct measure of how total organizational profits would change if the segment was discontinued.

PTS: 1 DIF: Difficulty: Moderate OBJ: LO: 10-7

NAT: BUSPROG: Reflective Thinking
STA: AICPA-FN: Decision Modeling| ACBSP: APC 33-Incremental analysis| AACSB: Reflective
Thinking| IMA: Decision Analysis KEY: Bloom's: Knowledge

PROBLEM

Wholesome Wheat Corporation

Wholesome Wheat Corporation grows grain in rural areas of the South. The corporation’s costs per
bushel of grain (based on an average yield of 130 bushels per acre) follow:

Direct material $1.10

Direct labor 0.40
Variable overhead 0.30
Fixed overhead 0.60
Variable selling costs 0.10
Fixed selling costs 0

Wholesome Wheat Corporation defines direct material costs as seed, fertilizer, water, and other
chemicals. The variable overhead costs represent maintenance and repair costs of machinery. The
fixed overhead costs are completely comprised of depreciation expense on machinery and real estate
taxes.

1. Refer to Wholesome Wheat Corporation. Assume that the current date is March 15. On this date, the
corporation must make a decision as to whether it is financially better off to plant a certain farm with
grain or leave the land idle (no income is derived from idle land). Grain prices have been severely
depressed in recent years and Wholesome Wheat’s best guess is that grain prices will be around $2.00
per bushel at the time the crop is ready for harvest. Should the company plant grain or leave the land
idle? Explain.

ANS:

© 2013 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different
from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.
The company should make their decision by comparing the incremental income from planting the
grain crop to the incremental expenses that would be incurred to grow, harvest, and market the crop.
The incremental revenue is simply the $2.00 per bushel and the incremental costs are all variable costs
($1.10 + $0.40 + $0.30 + $0.10 = $1.90). Based on this comparison, the company would be $13 per
acre better off to plant than to let the land remain idle.

PTS: 1 DIF: Difficulty: Moderate OBJ: LO: 10-3

NAT: BUSPROG: Analytic
STA: AICPA-FN: Decision Modeling| ACBSP: APC 33-Incremental analysis| AACSB: Analytical
Thinking| IMA: Decision Analysis KEY: Bloom's: Comprehension

2. Refer to Wholesome Wheat Corporation. Assume for this question only that the company decided to
plant the grain. A local oil refiner has approached the company about converting the crop to grain
alcohol (used to make gasohol) rather than selling the grain to the local grain elevator. If Wholesome
Wheat converts the grain to alcohol, it will incur additional costs of $0.60 per bushel, and the company
will be able to sell the crop to the oil refiner for the equivalent of $2.60 per bushel. Otherwise, the
company can sell the grain crop to the local grain elevator for $1.85 per bushel. If Wholesome Wheat
elects to sell the grain to the refinery, the company will not incur the variable selling costs. What
should the company do? Support your answer with calculations.

ANS:
The company’s alternatives are to sell the harvest as a grain or as alcohol. This decision can be made
by comparing the incremental costs to convert the grain to alcohol to the increase in price he can
receive for marketing the crop as alcohol rather than grain. By converting the crop to alcohol, the
company increases total revenue by $0.75 per bushel ($2.60 - $1.85) and it incurs additional costs of
$0.50 ($0.60 for the additional processing, less the $0.10 savings on the variable grain marketing
costs). Thus, by converting the grain to alcohol, the company could increase net income by $0.25 per
bushel.

PTS: 1 DIF: Difficulty: Moderate OBJ: LO: 10-5

NAT: BUSPROG: Analytic
STA: AICPA-FN: Decision Modeling| ACBSP: APC 33-Incremental analysis| AACSB: Analytical
Thinking| IMA: Decision Analysis KEY: Bloom's: Comprehension

3. Refer to Wholesome Wheat Corporation. Assume that the current date is March 15. On this date,
Wholesome Wheat Corporation must make a decision as to whether it is financially better off to plant
a certain farm to grain, leave the land idle (no income is derived from idle land), or rent the land to
another farmer for $50 per acre. Grain prices have been severely depressed in recent years and
Wholesome Wheat Corporation's best guess is that grain prices will be around $2.00 per bushel at the
time the crop is ready for harvest. What should the company do? Show calculations.

ANS:
It has already been determined (answer to Problem #1) that planting grain is preferred to leaving the
land idle (by $13 per acre). By renting the land, Wholesome Wheat Corporation is even better off.
Under the rental alternative, Wholesome Wheat Corporation is $37 per acre better off than if it plants
grain ($50 - $13). By renting the land, the company avoids all costs except the fixed production costs
($0.60 per bushel or $78 per acre).

PTS: 1 DIF: Difficulty: Moderate OBJ: LO: 10-5

NAT: BUSPROG: Analytic
STA: AICPA-FN: Decision Modeling| ACBSP: APC 33-Incremental analysis| AACSB: Analytical
Thinking| IMA: Decision Analysis KEY: Bloom's: Comprehension
© 2013 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different
from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.
4. Albuquerque Corporation makes and sells the "Desert Icon”, a wall hanging depicting a magical cactus
plant. The Desert Icons are sold at specialty shops for $50 each. The capacity of the plant is 15,000
Icons. Costs to manufacture and sell each wall hanging are as follows:

Direct material $ 5.00

Direct labor 6.00
Variable overhead 8.00
Fixed overhead 10.00
Variable selling expenses 2.50

Albuquerque Corporation has been approached by a Utah company about purchasing 2,500 Desert
Icons. The company is currently making and selling 15,000 per year. The Utah company wants to
attach its own state label, which increases costs by $.50 each. No selling expenses would be incurred
on this order. The corporation believes that it must make an additional $1 on each Desert Icon to
accept this offer.

a. What is the opportunity cost per unit of selling to the Utah company?
b. What is the minimum selling price that should be set?

ANS:
a. Opportunity cost = Selling price minus total variable costs $50 - ($5 + $6 + $8 + $2.50) =
$28.50

b. Direct material ($5.00 + $.50) $ 5.50

Direct labor 6.00
Variable overhead 8.00
Fixed overhead 10.00
Variable selling 0
Opportunity cost [from (a)
less
fixed overhead included] 18.50
Extra amount required to 1.00
accept offer
Minimum price $49.00

PTS: 1 DIF: Difficulty: Moderate OBJ: LO: 10-1

NAT: BUSPROG: Analytic
STA: AICPA-FN: Decision Modeling| ACBSP: APC 33-Incremental analysis| AACSB: Analytical
Thinking| IMA: Decision Analysis KEY: Bloom's: Comprehension

5. Terrell and Associates, CPA’s provides two types of services: audit and tax. All company personnel
can perform either service. In efforts to market its services, the company relies on radio and billboards
for advertising. Information on the company’s projected operations for the coming year follows:

Audit Taxes
Revenue per billable hour $35 $30
Variable cost of professional labor 25 20
Material cost per billable hour 2 3
© 2013 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different
from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.
Allocated fixed costs per year 100,000 200,000
Projected billable hours 14,000 10,000

a. What is the company’s projected profit or (loss)?

b. If $1 spent on advertising could increase either audit services billable time by 1 hour
or tax services billable time by 1 hour, on which service should the advertising dollar
be spent?

© 2013 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different
from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.
ANS:
a. Audit Tax Total
Revenue:
14,000 × $35 $490,000 $ 490,000
10,000 × $30 $ 300,000 300,000
Variable Costs:
Labor:
14,000 × $25 (350,000) (350,000)
10,000 × $20 (200,000) (200,000)
Material:
14,000 × $2 (28,000) (28,000)
10,000 × $3 __________ (30,000) (30,000)
Contribution margin $112,000 $ 70,000 $ 182,000
Fixed costs (100,000) (200,000) (300,000)
Profit (loss) $ 12,000 $(130,000) $(118,000)

b. Each billable hour of audit services generates $8 of contribution margin

($35 - $25 - $2), tax services generates $7 of contribution margin
($30 - $20 - $3). The advertising should be spent on the audit services.

PTS: 1 DIF: Difficulty: Moderate OBJ: LO: 10-5 | LO: 10-7

NAT: BUSPROG: Analytic
STA: AICPA-FN: Decision Modeling| ACBSP: APC 33-Incremental analysis| AACSB: Analytical
Thinking| IMA: Decision Analysis KEY: Bloom's: Comprehension

6. The management of Freeman Industries has been evaluating whether the company should continue
manufacturing a component or buy it from an outside supplier. A $100 cost per component was
determined as follows:

Direct material $ 15
Direct labor 40
Variable manufacturing overhead 10
Fixed manufacturing overhead 35
$100

Freeman Industries uses 4,000 components per year. After Noel Corporation submitted a bid of $80
per component, some members of management felt they could reduce costs by buying from outside
and discontinuing production of the component. If the component is obtained from Noel Corporation,
Freeman Industries' unused production facilities could be leased to another company for $50,000 per
year.

Required:
a. Determine the maximum amount per unit Freeman Industries could pay an outside
supplier.

b. Indicate if the company should make or buy the component and the total dollar
difference in favor of that alternative.

c. Assume the company could eliminate one production supervisor with a salary of
© 2013 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different
from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.
$30,000 if the component is purchased from an outside supplier. Indicate if the
company should make or buy the component and the total dollar difference in favor
of that alternative.

ANS:
a. Cost to make = incremental manufacturing cost and opportunity cost
= DM + DL + VOH - FOH + OP COST
$77.50 = $15 + $40 + $10 + ($50,000/4,000 units)

b. Make: Save ($80.00 - $77.50) × 4,000 = $10,000

c. Incremental mfg. = $65 + ($30,000/4,000) = $72.50

+ opportunity cost $50,000/4,000 = 12.50
To make $85.00

Buy: Save ($85 - $80) × 4,000 units = $20,000

PTS: 1 DIF: Difficulty: Moderate OBJ: LO: 10-3

NAT: BUSPROG: Analytic
STA: AICPA-FN: Decision Modeling| ACBSP: APC 33-Incremental analysis| AACSB: Analytical
Thinking| IMA: Decision Analysis KEY: Bloom's: Comprehension

7. Goodall Corporation is working at full production capacity producing 10,000 units of a unique
product, RST. Manufacturing costs per unit for RST follow:

Direct material $ 2
Direct manufacturing labor 3
Manufacturing overhead 5
$10

The unit manufacturing overhead cost is based on a variable cost per unit of $2 and fixed costs of
$30,000 (at full capacity of 10,000 units). The non-manufacturing costs, all variable, are $4 per unit,
and the selling price is $20 per unit. A customer, Hendricks Company, has asked Goodall to produce
2,000 units of a modification of RST to be called XYZ. XYZ would require the same manufacturing
processes as RST. Hendricks Company has offered to share equally the non-manufacturing costs with
Goodall. XYZ will sell at $15 per unit.

Required:
a. What is the opportunity cost to Goodall of producing the 2,000 units of XYZ
(assume that no overtime is worked)?

b. The Winters Company has offered to produce 2,000 units of RST for Goodall, so
Goodall can accept the Hendricks offer. Winters Company would charge Goodall
$14 per unit for the RST. Should Goodall accept the Winters Company offer?

c. Suppose Goodall had been working at less than full capacity producing 8,000 units
of RST at the time the XYZ offer was made. What is the minimum price Goodall
should accept for XYZ under these conditions (ignoring the $15 price mentioned
previously)?
© 2013 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different
from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.
© 2013 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different
from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.
ANS:
a. RST
SP $20
- VC (11) ($2 + $3 + $2 + $4)
= CM $ 9 × 2,000 units = $18,000

RST
SP $15
- VC (9) ($2 + $3 + $2 + $2)
= CM $ 6 x 2,000 units = 12,000
Opportunity cost $ 6,000

b. Make ($15 - $14) = $1 × 2,000 units = $2,000 without giving up any current
production = DO IT.

c. The variable cost to make and sell = $11 ($2 + $3 + $2 + $4) would be the minimum.
Any price over $11 would increase the contribution margin.

PTS: 1 DIF: Difficulty: Moderate OBJ: LO: 10-3

NAT: BUSPROG: Analytic
STA: AICPA-FN: Decision Modeling| ACBSP: APC 33-Incremental analysis| AACSB: Analytical
Thinking| IMA: Decision Analysis KEY: Bloom's: Comprehension

8. The Hanks Company normally produces 150,000 units of Product AB per year. Due to an economic
downturn, the company has some idle capacity. Product AB sells for $15 per unit.

The firm's production, marketing, and administration costs at its normal capacity are:

Per Unit
Direct material $1.00
Direct labor 2.00
Variable overhead 1.50
Fixed overhead
($450,000/150,000 units) 3.00
Variable marketing costs 1.05
Fixed marketing and administrative costs
($210,000/150,000 units) 1.40
Total $9.95

Required:
a. Compute the firm's operating income before income taxes if the firm produced and
sold 110,000 units.

b. For the current year, the firm expects to sell the same number of units as it sold in the
prior year. However, in a trade newspaper, the firm noticed an invitation to bid on
selling Product AB to a state government. There are no marketing costs associated
with the order if Hanks is awarded the contract. The company wishes to prepare a bid
for 40,000 units at its full manufacturing cost plus $ 0.25 per unit. How much should
it bid? If Hanks is successful at getting the contract, what would be its effect on
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operating income?

c. Assume that the company is awarded the contract on January 2, and in addition it
also receives an order from a foreign vendor for 40,000 units at the regular price of
$15 per unit. The foreign shipment will require the firm to incur its normal marketing
costs. The government contract contains a 10-day escape clause (i.e., the firm can
reject the contract within 10 days without any penalty). If the firm accepts the
government contract, overtime pay at 1 1/2 times the straight time rate will be paid
on the 40,000 units. In addition, fixed overhead will increase by $60,000 and
variable overhead will behave in its normal pattern. The company has the capacity to
produce both orders. Decide the following:

1. Should the firm accept the foreign offer? Show the effect on operating income of
accepting the order.

2. Assuming the foreign order is accepted, should the firm accept the government order?
Show the effect on operating income of accepting the government order.

ANS:
a. Sales (110,000 × $15) $1,650,000
- VC (110,000 × $5.55) (610,500)
= CM $1,039,500
- FC ($450,000 + $210,000) (660,000)
= Operating Income $ 379,500

b. Full cost to manufacture = $7.50

+ profit .25
Bid $7.75

SP $7.75
- VC (4.50)
CM $3.25 × 40,000 units = $130,000 increase in
operating income.

c. 1. SP $15.00
- VC (6.55) ($1 + $3 + $1.50 + $1.05)
CM $ 8.45 × 40,000 = $338,000
- FC (60,000)
Increase in
Operating $278,000
Income

2. Both orders can be accepted even if the increased costs of $40,000 for labor and
$60,000 for fixed overhead are assigned to the government order.

PTS: 1 DIF: Difficulty: Challenging OBJ: LO: 10-3

NAT: BUSPROG: Analytic
STA: AICPA-FN: Decision Modeling| ACBSP: APC 33-Incremental analysis| AACSB: Analytical

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