Managerial Accounting Tools For Business And Decision Making 7th Edition by Jerry J. Weygandt -Kimmel – Test Bank A+

$35.00
Managerial Accounting Tools For Business And Decision Making 7th Edition by Jerry J. Weygandt -Kimmel – Test Bank A+

Managerial Accounting Tools For Business And Decision Making 7th Edition by Jerry J. Weygandt -Kimmel – Test Bank A+

$35.00
Managerial Accounting Tools For Business And Decision Making 7th Edition by Jerry J. Weygandt -Kimmel – Test Bank A+

CHAPTER 6

COST-volume-profit analysis: Additional Issues

Summary of Questions by Learning Objectives and Bloom’s Taxonomy

ItemLOBTItemLOBTItemLOBTItemLOBTItemLOBT

True-False Statements

1.1K7.2K13.3C19.4Ca25.5C
2.1K8.2AP14.3C20.4Ka26.5K
3.1K9.2AP15.3Ka21.5Ka27.5K
4.1K10.2K16.4Ka22.5Ka28.5K
5.2K11.2K17.4Ka23.5Ka29.5K
6.2K12.3K18.4Ka24.5APa30.5K

Multiple Choice Questions

31.1K50.1AP69.2AP88.4Ca107.5AP
32.1K51.1K70.2AP89.4Ka108.5K
33.1K52.1AP71.2C90.4Ka109.5K
34.1AP53.1AP72.2C91.4Ka110.5C
35.1AP54.1AP73.2AP92.4Ka111.5K
36.1AP55.1K74.2APa93.5Ka112.5K
37.1AP56.1K75.2APa94.5Ka113.5K
38.1K57.1AP76.3Ca95.5Ka114.5AP
39.1K58.1AP77.3Ca96.5Ka115.5AP
40.1AP59.1AP78.3Ka97.5Ka116.5AP
41.1AP60.2K79.3APa98.5Ka117.5AP
42.1AP61.2C80.3APa99.5Ka118.5C
43.1K62.2AP81.4Ka100.5Ka119.5C
44.1AP63.2AP82.4Ca101.5Ka120.5C
45.1AP64.2AP83.4Ca102.5Ka121.5K
46.1AP65.2AP84.4Ka103.5APa122.5K
47.1AP66.2AP85.4APa104.5APa123.5C
48.1AP67.2AP86.4APa105.5APa124.5K
49.1AP68.2AP87.4Ca106.5APa125.5K

Brief Exercises

126.2AP128.3AP130.4APa132.5APa134.5AP
127.2AP129.3AP131.4APa133.5APa135.5AP

Exercises

136.1, 4AP140.2AP144.4ANa148.5APa152.5AP
137.2AP141.3AN145.4APa149.5APa153.5AP
138.2AP142.3AN146.4APa150.5AP
139.2AP143.3ANa147.5Ka151.5AP

Completion Statements

154.1K157.2K160.4Ka163.5K
155.1K158.3Ka161.5Ka164.5K
156.2K159.4Ka162.5Ka165.5K

aThis topic is dealt with in an Appendix to the chapter.

SUMMARY OF Learning OBJECTIVES BY QUESTION TYPE

ItemTypeItemTypeItemTypeItemTypeItemTypeItemTypeItemType
Learning Objective 1
1.TF33.MC39.MC45.MC51.MC57.MC
2.TF34.MC40.MC46.MC52.MC58.MC
3.TF35.MC41.MC47.MC53.MC59.MC
4.TF36.MC42.MC48.MC54.MC136.Ex
31.MC37.MC43.MC49.MC55.MC154.C
32.MC38.MC44.MC50.MC56.MC155.C
Learning Objective 2
5.TF10.TF63.MC68.MC73.MC137.Ex157.C
6.TF11.TF64.MC69.MC74.MC138.Ex
7.TF60.MC65.MC70.MC75.MC139.Ex
8.TF61.MC66.MC71.MC126.BE140.Ex
9.TF62.MC67.MC72.MC127.BE156.C
Learning Objective 3
12.TF15.TF78.MC128.BE142.Ex
13.TF76.MC79.MC129.BE143.Ex
14.TF77.MC80.MC141.Ex158.C
Learning Objective 4
16.TF20.TF84.MC88.MC92.MC144.Ex160.C
17.TF81.MC85.MC89.MC130.BE145.Ex
18.TF82.MC86.MC90.MC131.BEa146.Ex
19.TF83.MC87.MC91.MC136.Ex159.C
Learning Objective 5a
21.TF30.TF101.MC110.MC119.MC134.BE161.C
22.TF93.MC102.MC111.MC120.MC135.BE162.C
23.TF94.MC103.MC112.MC121.MC147.Ex163.C
24.TF95.MC104.MC113.MC122.MC148.Ex164.C
25.TF96.MC105.MC114.MC123.MC149.Ex165.C
26.TF97.MC106.MC115.MC124.MC150.Ex
27.TF98.MC107.MC116.MC125.MC151.Ex
28.TF99.MC108.MC117.MC132.BE152.Ex
29.TF100.MC109.MC118.MC133.BE153.Ex

Note: TF = True-False C = Completion Ex = Exercise

MC = Multiple Choice BE = Brief Exercise

The chapter also contains four Short-Answer Essay questions.

CHAPTER LEARNING OBJECTIVES

  1. Apply basic CVP concepts. The CVP income statement classifies costs and expenses as variable or fixed and reports contribution margin in the body of the statement. Contribution margin is the amount of revenue remaining after deducting variable costs. It can be expressed as a per unit amount or as a ratio. The break-even point in units is fixed costs divided by unit contribution margin. The break-even point in dollars is fixed costs divided by the contribution margin ratio. These formulas can also be used to determine units or sales dollars needed to achieve target net income, simply by adding target net income to fixed costs before dividing by the contribution margin. Margin of safety indicates how much sales can decline before the company is operating at a loss. It can be expressed in dollar terms or as a percentage.
  2. Explain the term sales mix and its effects on break-even sales. Sales mix is the relative proportion in which each product is sold when a company sells more than one product. For a company with a small number of products, break-even sales in units is determined by using the weighted-average unit contribution margin of all the products. If the company sells many different products, then calculating the break-even point using unit information is not practical. Instead, in a company with many products, break-even sales in dollars is calculated using the weighted-average contribution margin ratio.

3 Determine sales mix when a company has limited resources. When a company has limited resources, it is necessary to find the contribution margin per unit of limited resource. This amount is then multiplied by the units of limited resource to determine which product maximizes net income.

  1. Indicate how operating leverage affects profitability. Operating leverage refers to the degree to which a company’s net income reacts to a change in sales. Operating leverage is determined by a company’s relative use of fixed versus variable costs. Companies with high fixed costs relative to variable costs have high operating leverage. A company with high operating leverage will experience a sharp increase (decrease) in net income with a given increase (decrease) in sales. The degree of operating leverage can be measured by dividing contribution margin by net income.

a5. Explain the difference between absorption costing and variable costing. Under absorption costing, fixed manufacturing costs are product costs. Under variable costing, fixed manufacturing costs are period costs. If production volume exceeds sales volume, net income under absorption costing will exceed net income under variable costing by the amount of fixed manufacturing costs included in ending inventory that results from units produced but not sold during the period. If production volume is less than sales volume, net income under absorption costing will be less than under variable costing by the amount of fixed manufacturing costs included in the units sold during the period that were not produced during the period. The use of variable costing is consistent with cost-volume-profit analysis. Net income under variable costing is unaffected by changes in production levels. Instead, it is closely tied to changes in sales. The presentation of fixed costs in the variable costing approach makes it easier to identify fixed costs and to evaluate their impact on the company’s profitability.

TRUE-FALSE STATEMENTS

  1. The CVP income statement classifies costs as variable or fixed and computes a contribution margin.

Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving/Decision Making, IMA: Reporting

  1. In CVP analysis, cost includes manufacturing costs but not selling and administrative expenses.

Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Strategic/Critical Thinking, AICPA FN: Risk Analysis, AICPA PC: Problem Solving/Decision Making, IMA: Cost Management

  1. When a company is in its early stages of operation, its primary goal is to generate a target net income.

Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Strategic/Critical Thinking, AICPA FN: Decision Modeling, AICPA PC: Project Management, IMA: Business Economics

  1. The margin of safety tells a company how far sales can drop before it will be operating at a loss.

Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Marketing/Client Focus, AICPA FN: Risk Analysis, AICPA PC: Project Management, IMA: Business Economics

  1. Sales mix is a measure of the percentage increase in sales from period to period.

Ans: F, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: Project Management, IMA: Reporting

  1. Sales mix is not important to managers when different products have substantially different contribution margins.

Ans: F, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: Project Management, IMA: Reporting

  1. The weighted-average contribution margin of all the products is computed when determining the break-even sales for a multi-product firm.

Ans: T, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Marketing/Client Focus, AICPA FN: Measurement, AICPA PC: Project Management, IMA: Business Economics

  1. If Buttercup, Inc. sells two products with a sales mix of 75% : 25%, and the respective contribution margins are $80 and $240, then weighted-average unit contribution margin is $120.

Ans: T, LO: 2, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Marketing/Client Focus, AICPA FN: Measurement, AICPA PC: Project Management, IMA: Business Economics

  1. If fixed costs are $100,000 and weighted-average unit contribution margin is $50, then the break-even point in units is 2,000 units.

Ans: T, LO: 2, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics

  1. Net income can be increased or decreased by changing the sales mix.

Ans: T, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Marketing/Client Focus, AICPA FN: Measurement, AICPA PC: Project Management, IMA: Business Economics

  1. The break-even point in dollars is variable costs divided by the weighted-average contribution margin ratio.

Ans: F, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Marketing/Client Focus, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics

  1. When a company has limited resources, management must decide which products to make and sell in order to maximize net income.

Ans: T, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Marketing/Client Focus, AICPA FN: Decision Modeling, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics

  1. When a company has limited resources to manufacture products, it should manufacture those products which have the highest unit contribution margin.

Ans: F, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Decision Modeling, AICPA PC: Project Management, IMA: Business Economics

  1. If a company has limited machine hours available for production, it is generally more profitable to produce and sell the product with the highest contribution margin per machine hour.

Ans: T, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Decision Modeling, AICPA PC: Project Management, IMA: Business Economics

  1. According to the theory of constraints, a company must identify its constraints and find ways to reduce or eliminate them.

Ans: T, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Strategic/Critical Thinking, AICPA FN: Decision Modeling, AICPA PC: Project Management, IMA: Business Economics

  1. Cost structure refers to the relative proportion of fixed versus variable costs that a company incurs.

Ans: T, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Project Management, IMA: Business Economics

  1. Operating leverage refers to the extent to which a company’s net income reacts to a given change in fixed costs.

Ans: F, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Project Management, IMA: Business Economics

  1. The degree of operating leverage provides a measure of a company’s earnings volatility.

Ans: T, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Project Management, IMA: Business Economics

  1. If Sprinkle Industries has a margin of safety ratio of .60, it could sustain a 60 percent decline in sales before it would be operating at a loss.

Ans: T, LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics

  1. A company with low operating leverage will experience a sharp increase in net income with a given increase in sales.

Ans: F, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Risk Analysis, AICPA PC: Project Management, IMA: Business Economics

a21. Variable costing is the approach used for external reporting under generally accepted accounting principles.

Ans: F, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Project Management, IMA: Reporting

a22. The difference between absorption costing and variable costing is the treatment of fixed manufacturing overhead.

Ans: T, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: Project Management, IMA: Reporting

a23. Selling and administrative costs are period costs under both absorption and variable costing.

Ans: T, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: Project Management, IMA: Reporting

a24. Manufacturing cost per unit will be higher under variable costing than under absorption costing.

Ans: F, LO: 5, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Project Management, IMA: Business Economics

a25. Some fixed manufacturing costs of the current period are deferred to future periods through ending inventory under variable costing.

Ans: F, LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Project Management, IMA: Reporting

a26. When units produced exceed units sold, income under absorption costing is higher than income under variable costing.

Ans: T, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Project Management, IMA: Business Economics

a27. When units sold exceed units produced, income under absorption costing is higher than income under variable costing.

Ans: F, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving/Decision Making, IMA: Reporting

a28. When absorption costing is used for external reporting, variable costing can still be used for internal reporting purposes.

Ans: T, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Project Management, IMA: Reporting

a29. When absorption costing is used, management may be tempted to overproduce in a given period in order to increase net income.

Ans: T, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Risk Analysis, AICPA PC: Project Management, IMA: Business Economics

a30. The use of absorption costing facilitates cost-volume-profit analysis.

Ans: F, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Strategic/Critical Thinking, AICPA FN: Risk Analysis, AICPA PC: Project Management, IMA: Business Economics

Answers to True-False Statements
ItemAns.ItemAns.ItemAns.ItemAns.ItemAns.ItemAns.
1.T6.F11.F16.Ta21.Fa26.T
2.F7.T12.T17.Fa22.Ta27.F
3.F8.T13.F18.Ta23.Ta28.T
4.T9.T14.T19.Ta24.Fa29.T
5.F10.T15.T20.Fa25.Fa30.F

MULTIPLE CHOICE QUESTIONS

  1. Cost-volume-profit analysis is the study of the effects of
  2. changes in costs and volume on a company’s profit.
  3. cost, volume, and profit on the cash budget.
  4. cost, volume, and profit on various ratios.
  5. changes in costs and volume on a company’s profitability ratios.

Ans: a, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Risk Analysis, AICPA PC: Project Management, IMA: Business Economics

  1. The CVP income statement classifies costs
  2. as variable or fixed and computes contribution margin.
  3. by function and computes a contribution margin.
  4. as variable or fixed and computes gross margin.
  5. by function and computes a gross margin.

Ans: a, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: Project Management, IMA: Reporting

  1. Contribution margin is the amount of revenue remaining after deducting
  2. cost of goods sold.
  3. fixed costs.
  4. variable costs.
  5. contra-revenue.

Ans: c, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Project Management, IMA: Business Economics

  1. Moonwalker’s CVP income statement included sales of 5,000 units, a selling price of $100, variable expenses of $60 per unit, and fixed expenses of $110,000. Contribution margin is
  2. $500,000.
  3. $300,000.
  4. $200,000.
  5. $90,000.

Ans: c, LO: 1, Bloom: AP, Difficulty: Easy, Min: 2, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics

  1. Moonwalker’s CVP income statement included sales of 5,000 units, a selling price of $100, variable expenses of $60 per unit, and fixed expenses of $110,000. Net income is
  2. $500,000.
  3. $200,000.
  4. $190,000.
  5. $90,000.

Ans: d, LO: 1, Bloom: AP, Difficulty: Easy, Min: 2, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving/Decision Making, IMA: Reporting

  1. For Buffalo Co., at a sales level of 4,000 units, sales is $75,000, variable expenses total $50,000, and fixed expenses are $21,000. What is the contribution margin per unit?
  2. $5.25
  3. $6.25
  4. $12.50
  5. $18.75

Ans: b, LO: 1, Bloom: AP, Difficulty: Easy, Min: 2, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics

  1. If contribution margin is $140,000, sales is $300,000, and net income is $40,000, then variable and fixed expenses are

Variable Fixed

  1. $160,000 $260,000
  2. $160,000 $100,000
  3. $100,000 $160,000
  4. $440,000 $260,000

Ans: b, LO: 1, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics

  1. In a CVP income statement, cost of goods sold is generally
  2. completely a variable cost.
  3. completely a fixed cost.
  4. neither a variable cost nor a fixed cost.
  5. partly a variable cost and partly a fixed cost.

Ans: d, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: Project Management, IMA: Reporting

  1. In a CVP income statement, a selling expense is generally
  2. completely a variable cost.
  3. completely a fixed cost.
  4. neither a variable cost nor a fixed cost.
  5. partly a variable cost and partly a fixed cost.

Ans: d, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: Project Management, IMA: Reporting

  1. Hinge Manufacturing’s cost of goods sold is $420,000 variable and $240,000 fixed. The company’s selling and administrative expenses are $300,000 variable and $360,000 fixed. If the company’s sales is $1,580,000, what is its contribution margin?
  2. $260,000
  3. $860,000
  4. $920,000
  5. $980,000

Ans: b, LO: 1, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: FSA

  1. Hinge Manufacturing’s cost of goods sold is $420,000 variable and $240,000 fixed. The company’s selling and administrative expenses are $300,000 variable and $360,000 fixed. If the company’s sales is $1,580,000, what is its net income?
  2. $260,000
  3. $860,000
  4. $920,000
  5. $980,000

Ans: a, LO: 1, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving/Decision Making, IMA: Reporting

  1. Woolford’s CVP income statement included sales of 5,000 units, a selling price of $50, variable expenses of $30 per unit, and net income of $25,000. Fixed expenses are
  2. $75,000.
  3. $100,000.
  4. $150,000.
  5. $250,000.

Ans: a, LO: 1, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving/Decision Making, IMA: Reporting

  1. The contribution margin ratio is
  2. sales divided by contribution margin.
  3. sales divided by fixed expenses.
  4. sales divided by variable expenses.
  5. contribution margin divided by sales.

Ans: d, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Project Management, IMA: Business Economics

  1. For Pierce Company, sales is $500,000, variable expenses are $340,000, and fixed expenses are $140,000. Pierce’s contribution margin ratio is
  2. 4%.
  3. 28%.
  4. 32%.
  5. 68%.

Ans: c, LO: 1, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics

  1. For Sanborn Co., sales is $1,000,000, fixed expenses are $300,000, and the contribution margin per unit is $60. What is the break-even point?
  2. $1,666,667 sales dollars
  3. $500,000 sales dollars
  4. 16,667 units
  5. 5,000 units

Ans: d, LO: 1, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics

  1. For Franklin, Inc., sales is $2,000,000, fixed expenses are $600,000, and the contribution margin ratio is 36%. What is net income?
  2. $120,000
  3. $216,000
  4. $504,000
  5. $720,000

Ans: a, LO: 1, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving/Decision Making, IMA: Reporting

  1. For Franklin, Inc., sales is $2,000,000, fixed expenses are $600,000, and the contribution margin ratio is 36%. What are the total variable expenses?
  2. $384,000
  3. $720,000
  4. $1,280,000
  5. $2,000,000

Ans: c, LO: 1, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics

  1. In 2016, Teller Company sold 3,000 units at $600 each. Variable expenses were $420 per unit, and fixed expenses were $240,000. What was Teller’s 2016 net income?
  2. $300,000
  3. $540,000
  4. $1,260,000
  5. $1,800,000

Ans: a, LO: 1, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving/Decision Making, IMA: Reporting

  1. In 2016, Teller Company sold 3,000 units at $600 each. Variable expenses were $420 per unit, and fixed expenses were $270,000. The same selling price, variable expenses, and fixed expenses are expected for 2017. What is Teller’s break-even point in sales dollars for 2017?
  2. $900,000
  3. $2,700,000
  4. $1,800,000
  5. $2,571,429

Ans: a, LO: 1, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics

  1. In 2016, Teller Company sold 3,000 units at $600 each. Variable expenses were $420 per unit, and fixed expenses were $270,000. The same selling price, variable expenses, and fixed expenses are expected for 2017. What is Teller’s break-even point in units for 2017?
  2. 1,500
  3. 643
  4. 450
  5. 750

Ans: a, LO: 1, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics

  1. The required sales in units to achieve a target net income is
  2. (sales + target net income) divided by contribution margin per unit.
  3. (sales + target net income) divided by contribution margin ratio.
  4. (fixed cost + target net income) divided by contribution margin per unit.
  5. (fixed cost + target net income) divided by contribution margin ratio.

Ans: c, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Risk Analysis, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics

  1. For Wickham Co., sales is $3,000,000, fixed expenses are $900,000, and the contribution margin ratio is 36%. What is required sales in dollars to earn a target net income of $600,000?
  2. $1,666,667
  3. $2,500,000
  4. $4,166,667
  5. $8,333,333

Ans: c, LO: 1, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Risk Analysis, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics

  1. Warner Manufacturing reported sales of $2,000,000 last year (100,000 units at $20 each), when the break-even point was 80,000 units. Warner’s margin of safety ratio is
  2. 20%.
  3. 25%.
  4. 80%.
  5. 120%.

Ans: a, LO: 1, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Risk Analysis, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics

  1. For Wilder Corporation, sales is $1,600,000 (8,000 units), fixed expenses are $480,000, and the contribution margin per unit is $80. What is the margin of safety in dollars?
  2. $80,000
  3. $400,000
  4. $720,000
  5. $1,120,000

Ans: b, LO: 1, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Risk Analysis, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics

  1. Margin of safety in dollars is
  2. expected sales divided by break-even sales.
  3. expected sales less break-even sales.
  4. actual sales less expected sales.
  5. expected sales less actual sales.

Ans: b, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Risk Analysis, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics

  1. The margin of safety ratio is
  2. expected sales divided by break-even sales.
  3. expected sales less break-even sales.
  4. margin of safety in dollars divided by expected sales.
  5. margin of safety in dollars divided by break-even sales.

Ans: c, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Risk Analysis, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics

  1. In 2016, Hagar Corp. sold 3,000 units at $500 each. Variable expenses were $350 per unit, and fixed expenses were $780,000. The same variable expenses per unit and fixed expenses are expected for 2017. If Hagar cuts selling price by 4%, what is Hagar’s break-even point in units for 2017?
  2. 5,200
  3. 5,416
  4. 5,760
  5. 6,000

Ans: d, LO: 1, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Risk Analysis, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics

  1. In 2016, Carow sold 3,000 units at $500 each. Variable expenses were $250 per unit, and fixed expenses were $500,000. The same selling price is expected for 2017. Carow is tentatively planning to invest in equipment that would increase fixed costs by 20%, while decreasing variable costs per unit by 20%. What is Carow’s break-even point in units for 2017?
  2. 2,000
  3. 2,400
  4. 2,500
  5. 3,000

Ans: a, LO: 1, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Risk Analysis, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics

  1. In 2016, Raleigh sold 1,000 units at $500 each, and earned net income of $40,000. Variable expenses were $300 per unit, and fixed expenses were $160,000. The same selling price is expected for 2017. Raleigh’s variable cost per unit will rise by 10% in 2017 due to increasing material costs, so they are tentatively planning to cut fixed costs by $10,000. How many units must Raleigh sell in 2017 to maintain the same income level as 2016?
  2. 882
  3. 1,000
  4. 1,056
  5. 1,118

Ans: d, LO: 1, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics

  1. Sales mix is
  2. the relative percentage in which a company sells its multiple products.
  3. the trend of sales over recent periods.
  4. the mix of variable and fixed expenses in relation to sales.
  5. a measure of leverage used by the company.

Ans: a, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics

  1. In a sales mix situation, at any level of units sold, net income will be higher if
  2. more higher contribution margin units are sold than lower contribution margin units.
  3. more lower contribution margin units are sold than higher contribution margin units.
  4. more fixed expenses are incurred.
  5. weighted-average unit contribution margin decreases.

Ans: a, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics

  1. Ramirez Corporation sells two types of computer hard drives. The sales mix is 30% (Q-Drive) and 70% (Q-Drive Plus). Q-Drive has variable costs per unit of $90 and a selling price of $150. Q-Drive Plus has variable costs per unit of $105 and a selling price of $195. The weighted-average unit contribution margin for Ramirez is
  2. $69.
  3. $75.
  4. $81.
  5. $150.

Ans: c, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics

  1. Capitol Manufacturing sells 4,000 units of Product A annually, and 6,000 units of Product B annually. The sales mix for Product A is
  2. 40%.
  3. 60%.
  4. 67%.
  5. Cannot determine from information given.

Ans: a, LO: 2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics

  1. Ramirez Corporation sells two types of computer hard drives. The sales mix is 30% (Q-Drive) and 70% (Q-Drive Plus). Q-Drive has variable costs per unit of $90 and a selling price of $150. Q-Drive Plus has variable costs per unit of $105 and a selling price of $195. Ramirez’s fixed costs are $891,000. How many units of Q-Drive would be sold at the break-even point?
  2. 3,300
  3. 4,455
  4. 11,000
  5. 7,700

Ans: a, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Risk Analysis, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics

Use the following information for questions 65 and 66.

Roosevelt Corporation has a weighted-average unit contribution margin of $30 for its two products, Standard and Supreme. Expected sales for Roosevelt are 40,000 Standard and 60,000 Supreme. Fixed expenses are $1,800,000.

  1. How many Standards would Roosevelt sell at the break-even point?
  2. 24,000
  3. 36,000
  4. 40,000
  5. 60,000

Ans: a, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics

  1. At the expected sales level, Roosevelt’s net income will be
  2. $(300,000).
  3. $ – 0 -.
  4. $1,200,000.
  5. $3,000,000.

Ans: c, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving/Decision Making, IMA: Reporting

Use the following information for questions 67–70.

Swanson Company has two divisions; Sporting Goods and Sports Gear. The sales mix is 65% for Sporting Goods and 35% for Sports Gear. Swanson incurs $6,660,000 in fixed costs. The contribution margin ratio for Sporting Goods is 30%, while for Sports Gear it is 50%.

  1. The weighted-average contribution margin ratio is
  2. 37%.
  3. 40%.
  4. 43%.
  5. 50%.

Ans: a, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics

  1. The break-even point in dollars is
  2. $2,464,200.
  3. $15,488,373.
  4. $16,650,000.
  5. $18,000,000.

Ans: d, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics

  1. What will sales be for the Sporting Goods Division at the break-even point?
  2. $5,400,000
  3. $6,300,000
  4. $10,067,442
  5. $11,700,000

Ans: d, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics

  1. What will be the total contribution margin at the break-even point?
  2. $5,730,699
  3. $6,660,000
  4. $6,720,000
  5. $7,740,000

Ans: b, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics

  1. A shift from low-margin sales to high-margin sales
  2. may increase net income, even though there is a decline in total units sold.
  3. will always increase net income.
  4. will always decrease net income.
  5. will always decrease units sold.

Ans: a, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Project Management, IMA: Business Economics

  1. A shift from high-margin sales to low-margin sales
  2. may decrease net income, even though there is an increase in total units sold.
  3. will always decrease net income.
  4. will always increase net income.
  5. will always increase units sold.

Ans: a, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Project Management, IMA: Business Economics

Use the following information for questions 73 and 74.

MacCloud Industries has two divisions—Standard and Premium. Each division has hundreds of different types of tennis racquets and tennis products. The following information is available:

Standard Division Premium Division Total

Sales $400,000 $600,000 $1,000,000

Variable costs 280,000 360,000

Contribution margin $120,000 $240,000

Total fixed costs $300,000

  1. What is the weighted-average contribution margin ratio?
  2. 34%
  3. 35%
  4. 36%
  5. 50%

Ans: c, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics

  1. What is the break-even point in dollars?
  2. $108,000
  3. $833,333
  4. $857,143
  5. $882,353

Ans: b, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics

  1. The sales mix percentages for Novotna’s Boston and Seattle Divisions are 70% and 30%. The contribution margin ratios are: Boston (40%) and Seattle (30%). Fixed costs are $2,220,000. What is Novotna’s break-even point in dollars?
  2. $777,000
  3. $6,000,000
  4. $6,342,856
  5. $6,727,272

Ans: b, LO: 2, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics

  1. A company can sell all the units it can produce of either Product A or Product B but not both. Product A has a unit contribution margin of $16 and takes two machine hours to make and Product B has a unit contribution margin of $30 and takes three machine hours to make. If there are 5,000 machine hours available to manufacture a product, income will be
  2. $10,000 more if Product A is made.
  3. $10,000 less if Product B is made.
  4. $10,000 less if Product A is made.
  5. the same if either product is made.

Ans: c, LO: 3, Bloom: C, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving/Decision Making, IMA: Reporting

  1. Brooks Corporation can sell all the units it can produce of either Plain or Fancy but not both. Plain has a unit contribution margin of $72 and takes two machine hours to make and Fancy has a unit contribution margin of $90 and takes three machine hours to make. There are 2,400 machine hours available to manufacture a product. What should Brooks do?
  2. Make Fancy which creates $18 more profit per unit than Plain does.
  3. Make Plain which creates $6 more profit per machine hour than Fancy does.
  4. Make Plain because more units can be made and sold than Fancy.
  5. The same total profits exist regardless of which product is made.

Ans: b, LO: 3, Bloom: C, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics

  1. What is the key factor in determining sales mix if a company has limited resources?
  2. Contribution margin per unit of limited resource
  3. The amount of fixed costs per unit
  4. Total contribution margin
  5. The cost of limited resources

Ans: a, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Risk Analysis, AICPA PC: Project Management, IMA: Business Economics

  1. Greg’s Breads can produce and sell only one of the following two products:

Oven Contribution

Hours Required Margin Per Unit

Muffins 0.2 $3

Coffee Cakes 0.3 $4

The company has oven capacity of 1,500 hours. How much will contribution margin be if it produces only the most profitable product?

  1. $15,000
  2. $20,000
  3. $22,500
  4. $30,000

Ans: c, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics

  1. Curtis Corporation’s contribution margin is $25 per unit for Product A and $30 for Product B. Product A requires 2 machine hours and Product B requires 4 machine hours. How much is the contribution margin per unit of limited resource for each product?

A B

  1. $12.50 $7.50
  2. $12.50 $8.33
  3. $10.00 $7.50
  4. $10.00 $8.33

Ans: a, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics

  1. Cost structure
  2. refers to the relative proportion of fixed versus variable costs that a company incurs.
  3. generally has little impact on profitability.
  4. cannot be significantly changed by companies.
  5. refers to the relative proportion of operating versus nonoperating costs that a company incurs.

Ans: a, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Cost Management

  1. Outsourcing production will
  2. reduce fixed costs and increase variable costs.
  3. reduce variable costs and increase fixed costs.
  4. have no effect on the relative proportion of fixed and variable costs.
  5. make the company more susceptible to economic swings.

Ans: a, LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Risk Analysis, AICPA PC: Project Management, IMA: Business Economics

  1. Reducing reliance on human workers and instead investing heavily in computers and online technology will
  2. reduce fixed costs and increase variable costs.
  3. reduce variable costs and increase fixed costs.
  4. have no effect on the relative proportion of fixed and variable costs.
  5. make the company less susceptible to economic swings.

Ans: b, LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Risk Analysis, AICPA PC: Project Management, IMA: Business Economics

  1. Cost structure refers to the relative proportion of
  2. selling expenses versus administrative expenses.
  3. selling and administrative expenses versus cost of goods sold.
  4. contribution margin versus sales.
  5. none of the above.

Ans: d, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Project Management, IMA: Cost Management

Use the following information for questions 85 and 86.

Mercantile Corporation has sales of $2,000,000, variable costs of $800,000, and fixed costs of $900,000.

  1. Mercantile’s degree of operating leverage is
  2. 1.33.
  3. 1.67.
  4. 1.50.
  5. 4.00.

Ans: d, LO: 4, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics

  1. Mercantile’s margin of safety ratio is
  2. .15.
  3. .25.
  4. .33.
  5. .75.

Ans: b, LO: 4, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics

  1. Which of the following statements is not true?
  2. Operating leverage refers to the extent to which a company’s net income reacts to a given change in sales.
  3. Companies that have higher fixed costs relative to variable costs have higher operating leverage.
  4. When a company’s sales revenue is increasing, high operating leverage is good because it means that profits will increase rapidly.
  5. When a company’s sales revenue is decreasing, high operating leverage is good because it means that profits will decrease at a slower pace than revenues decrease.

Ans: d, LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Project Management, IMA: Business Economics

  1. Miller Manufacturing’s degree of operating leverage is 1.5. Warren Corporation’s degree of operating leverage is 3. Warren’s earnings would go up (or down) by ________ as much as Miller’s with an equal increase (or decrease) in sales.
  2. 1/2
  3. 1.5 times
  4. 2 times
  5. 4.5 times

Ans: c, LO: 4, Bloom: C, Difficulty: Medium, Min: 1, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Risk Analysis, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics

  1. The margin of safety ratio
  2. is computed as actual sales divided by break-even sales.
  3. indicates what percent decline in sales could be sustained before the company would operate at a loss.
  4. measures the ratio of fixed costs to variable costs.
  5. is used to determine the break-even point.

Ans: b, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Project Management, IMA: Business Economics

  1. A cost structure which relies more heavily on fixed costs makes the company
  2. more sensitive to changes in sales revenue.
  3. less sensitive to changes in sales revenue.
  4. either more or less sensitive to changes in sales revenue, depending on other factors.
  5. have a lower break-even point.

Ans: a, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Risk Analysis, AICPA PC: Project Management, IMA: Business Economics

  1. A company with a higher contribution margin ratio is
  2. more sensitive to changes in sales revenue.
  3. less sensitive to changes in sales revenue.
  4. either more or less sensitive to changes in sales revenue, depending on other factors.
  5. likely to have a lower breakeven point.

Ans: a, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Risk Analysis, AICPA PC: Project Management, IMA: Business Economics

  1. The degree of operating leverage
  2. does not provide a reliable measure of a company’s earnings volatility.
  3. cannot be used to compare companies.
  4. is computed by dividing total contribution margin by net income.
  5. measures how much of each sales dollar is available to cover fixed expenses.

Ans: c, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Project Management, IMA: Business Economics

a93. Only direct materials, direct labor, and variable manufacturing overhead costs are considered product costs when using

  1. full costing.
  2. absorption costing.
  3. variable costing.
  4. product costing.

Ans: c, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Project Management, IMA: Business Economics

a94. When a company assigns the costs of direct materials, direct labor, and both variable and fixed manufacturing overhead to products, that company is using

  1. operations costing.
  2. absorption costing.
  3. variable costing.
  4. product costing.

Ans: b, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: Project Management, IMA: Reporting

a95. Companies recognize fixed manufacturing overhead costs as period costs (expenses) when incurred when using

  1. full costing.
  2. absorption costing.
  3. product costing.
  4. variable costing.

Ans: d, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: Project Management, IMA: Reporting

a96. Under absorption costing and variable costing, how are fixed manufacturing costs treated?

Absorption Variable

  1. Product Cost Product Cost
  2. Product Cost Period Cost
  3. Period Cost Product Cost
  4. Period Cost Period Cost

Ans: b, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics

a97. Under absorption costing and variable costing, how are variable manufacturing costs treated?

Absorption Variable

  1. Product Cost Product Cost
  2. Product Cost Period Cost
  3. Period Cost Product Cost
  4. Period Cost Period Cost

Ans: a, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics

a98. Under absorption costing and variable costing, how are direct labor costs treated?

Absorption Variable

  1. Product Cost Product Cost
  2. Product Cost Period Cost
  3. Period Cost Product Cost
  4. Period Cost Period Cost

Ans: a, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics

a99. Fixed selling expenses are period costs

  1. under both absorption and variable costing.
  2. under neither absorption nor variable costing.
  3. under absorption costing, but not under variable costing.
  4. under variable costing, but not under absorption costing.

Ans: a, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Project Management, IMA: Reporting

a100. Which cost is not charged to the product under variable costing?

  1. Direct materials
  2. Direct labor
  3. Variable manufacturing overhead
  4. Fixed manufacturing overhead

Ans: d, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: Project Management, IMA: Reporting

a101. Which cost is charged to the product under variable costing?

  1. Variable manufacturing overhead
  2. Fixed manufacturing overhead
  3. Variable administrative expenses
  4. Fixed administrative expenses

Ans: a, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: Project Management, IMA: Reporting

a102. Variable costing

  1. is used for external reporting purposes.
  2. is required under GAAP.
  3. treats fixed manufacturing overhead as a period cost.
  4. is also known as full costing.

Ans: c, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: Project Management, IMA: Reporting

Use the following information for questions 103–107.

Sprinkle Co. sells its product for $60 per unit. During 2016, it produced 60,000 units and sold 50,000 units (there was no beginning inventory). Costs per unit are: direct materials $15, direct labor $9, and variable overhead $3. Fixed costs are: $720,000 manufacturing overhead, and $90,000 selling and administrative expenses.

a103. The per unit manufacturing cost under absorption costing is

  1. $24.
  2. $27.
  3. $39.
  4. $40.

Ans: c, LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Cost Management

a104. The per unit manufacturing cost under variable costing is

  1. $24.
  2. $27.
  3. $39.
  4. $40.

Ans: b, LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Cost Management

a105. Cost of goods sold under absorption costing is

  1. $1,350,000.
  2. $1,620,000.
  3. $1,950,000.
  4. $1,560,000.

Ans: c, LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving/Decision Making, IMA: Reporting

a106. Ending inventory under variable costing is

  1. $270,000.
  2. $390,000.
  3. $600,000.
  4. $1,350,000.

Ans: a, LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving/Decision Making, IMA: Reporting

a107. Under absorption costing, what amount of fixed overhead is deferred to a future period?

  1. $30,000
  2. $120,000
  3. $150,000
  4. $720,000

Ans: b, LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics

a108. Net income under absorption costing is gross profit less

  1. cost of goods sold.
  2. fixed manufacturing overhead and fixed selling and administrative expenses.
  3. fixed manufacturing overhead and variable manufacturing overhead.
  4. variable selling and administrative expenses and fixed selling and administrative expenses.

Ans: d, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: Project Management, IMA: Business Economics

a109. Net income under variable costing is contribution margin less

  1. cost of goods sold.
  2. fixed manufacturing overhead and fixed selling and administrative expenses.
  3. fixed manufacturing overhead and variable manufacturing overhead.
  4. variable selling and administrative expenses and fixed selling and administrative expenses.

Ans: b, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: Project Management, IMA: Business Economics

a110. The manufacturing cost per unit for absorption costing is

  1. usually, but not always, higher than manufacturing cost per unit for variable costing.
  2. usually, but not always, lower than manufacturing cost per unit for variable costing.
  3. always higher than manufacturing cost per unit for variable costing.
  4. always lower than manufacturing cost per unit for variable costing.

Ans: c, LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Project Management, IMA: Business Economics

a111. The one primary difference between variable and absorption costing is that under

  1. variable costing, companies charge the fixed manufacturing overhead as an expense in the current period.
  2. absorption costing, companies charge the fixed manufacturing overhead as an expense in the current period.
  3. variable costing, companies charge the variable manufacturing overhead as an expense in the current period.
  4. absorption costing, companies charge the variable manufacturing overhead as an expense in the current period.

Ans: a, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Project Management, IMA: Business Economics

a112. Net income under absorption costing is higher than net income under variable costing

  1. when units produced exceed units sold.
  2. when units produced equal units sold.
  3. when units produced are less than units sold.
  4. regardless of the relationship between units produced and units sold.

Ans: a, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: Project Management, IMA: Reporting

a113. Some fixed manufacturing overhead costs of the current period are deferred to future periods under

  1. absorption costing.
  2. variable costing.
  3. both absorption and variable costing.
  4. neither absorption nor variable costing.

Ans: a, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: Project Management, IMA: Reporting

Use the following information for questions 114–118.

Nielson Corp. sells its product for $6,600 per unit. Variable costs per unit are: manufacturing, $3,600, and selling and administrative, $75. Fixed costs are: $18,000 manufacturing overhead, and $24,000 selling and administrative. There was no beginning inventory at 1/1/15. Production was 20 units per year in 2015–2017. Sales were 20 units in 2015, 16 units in 2016, and 24 units in 2017.

a114. Income under absorption costing for 2016 is

  1. $4,800.
  2. $8,400.
  3. $9,600.
  4. $13,200.

Ans: b, LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving/Decision Making, IMA: Reporting

a115. Income under absorption costing for 2017 is

  1. $19,800.
  2. $23,400.
  3. $24,600.
  4. $28,200.

Ans: c, LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving/Decision Making, IMA: Reporting

a116. Income under variable costing for 2016 is

  1. $4,800.
  2. $8,400.
  3. $9,600.
  4. $13,200.

Ans: a, LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving/Decision Making, IMA: Reporting

a 117. Income under variable costing for 2017 is

  1. $19,800.
  2. $23,400.
  3. $24,600.
  4. $28,200.

Ans: d, LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving/Decision Making, IMA: Reporting

a118. For the three years 2015–2017,

  1. absorption costing income exceeds variable costing income by $8,000.
  2. absorption costing income equals variable costing income.
  3. variable costing income exceeds absorption costing income by $8,000.
  4. absorption costing income may be greater than, equal to, or less than variable costing income, depending on the situation.

Ans: b, LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: Project Management, IMA: Reporting

a119. When production exceeds sales,

  1. some fixed manufacturing overhead costs are deferred until a future period under absorption costing.
  2. some fixed manufacturing overhead costs are deferred until a future period under variable costing.
  3. variable and fixed manufacturing overhead costs are deferred until a future period under absorption costing.
  4. variable and fixed manufacturing overhead costs are deferred until a future period under variable costing.

Ans: a, LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: Project Management, IMA: Reporting

a120. When production exceeds sales,

  1. ending inventory under variable costing will exceed ending inventory under absorption costing.
  2. ending inventory under absorption costing will exceed ending inventory under variable costing.
  3. ending inventory under absorption costing will be equal to ending inventory under variable costing.
  4. ending inventory under absorption costing may exceed, be equal to, or be less than ending inventory under variable costing.

Ans: b, LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: Project Management, IMA: Reporting

a121. Management may be tempted to overproduce when using

  1. variable costing, in order to increase net income.
  2. variable costing, in order to decrease net income.
  3. absorption costing, in order to increase net income.
  4. absorption costing, in order to decrease net income.

Ans: c, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Ethics, AICPA BB: Industry/Sector Perspective, AICPA FN: Decision Modeling, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics

a122. If a division manager’s compensation is based upon the division’s net income, the manager may decide to meet the net income targets by increasing production when using

  1. variable costing, in order to increase net income.
  2. variable costing, in order to decrease net income.
  3. absorption costing, in order to increase net income.
  4. absorption costing, in order to decrease net income.

Ans: c, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Ethics, AICPA BB: Industry/Sector Perspective, AICPA FN: Decision Modeling, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics

a123. Expected sales for next year for the Beresford Company is 150,000 units. Curt Planters, manager of the Beresford Division, is under pressure to improve the performance of the Division. As he plans for next year, he has to decide whether to produce 150,000 units or 170,000 units. The Beresford Company will have higher net income if Curt Planters decides to produce

  1. 170,000 units if income is measured under absorption costing.
  2. 170,000 units if income is measured under variable costing.
  3. 150,000 units if income is measured under absorption costing.
  4. 150,000 units if income is measured under variable costing.

Ans: a, LO: 5, Bloom: C, Difficulty: Medium, Min: 3, AACSB: Ethics, AICPA BB: Industry/Sector Perspective, AICPA FN: Decision Modeling, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics

a124. Which of the following is a potential advantage of variable costing relative to absorption costing?

  1. Net income is affected by changes in production levels.
  2. The use of variable costing is consistent with cost-volume-profit analysis.
  3. Net income computed under variable costing is not closely tied to changes in sales levels.
  4. More than one of the above.

Ans: b, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Decision Modeling, AICPA PC: Project Management, IMA: Business Economics

a125. Companies that use just-in-time processing techniques will

  1. have greater differences between absorption and variable costing net income.
  2. have smaller differences between absorption and variable costing net income.
  3. not be able to use absorption costing.
  4. not be able to use variable costing.

Ans: b, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Leverage Technology, AICPA FN: Leverage Technology, AICPA PC: Project Management, IMA: Business Applications

Answers to Multiple Choice Questions
ItemAns.ItemAns.ItemAns.ItemAns.ItemAns.ItemAns.ItemAns.
31.a45.d59.d73.c87.da101.aa115.c
32.a46.a60.a74.b88.ca102.ca116.a
33.c47.c61.a75.b89.ba103.ca117.d
34.c48.a62.c76.c90.aa104.ba118.b
35.d49.a63.a77.b91.aa105.ca119.a
36.b50.a64.a78.a92.ca106.aa120.b
37.b51.c65.a79.ca93.ca107.ba121.c
38.d52.c66.c80.aa94.ba108.da122.c
39.d53.a67.a81.aa95.da109.ba123.a
40.b54.b68.d82.aa96.ba110.ca124.b
41.a55.b69.d83.ba97.aa111.aa125.b
42.a56.c70.b84.da98.aa112.a
43.d57.d71.a85.da99.aa113.a
44.c58.a72.a86.ba100.da114.b

BRIEF Exercises

BE 126

Archer Industries sells three different sets of sportswear. Sleek sells for $30 and has variable costs of $18; Smooth sells for $50 and has variable costs of $30; Potent sells for $70 and has variable costs of $45. The sales mix of the three sets is: Sleek, 50%; Smooth, 30%; and Potent, 20%.

Instructions

What is the weighted-average unit contribution margin?

Ans: N/A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 6, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics

Solution 126 (6–8 min.)

Sleek: 50% × ($30 – $18) = $ 6

Smooth: 30% × ($50 – $30) = 6

Potent: 20% × ($70 – $45) = 5

Weighted-average unit contribution margin $17

BE 127

Lazaro Inc. sells two product lines. The sales mix of the product lines is: Standard, 60%; and Deluxe, 40%. The contribution margin ratio of each line is: Standard, 40%; and Deluxe, 45%. Lazaro’s fixed costs are $1,575,000.

Instructions

What is the dollar amount of Deluxe sales at the break-even point?

Ans: N/A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 6, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics

Solution 127 (6–8 min.)

Standard: 60% × 40% = 24%

Deluxe: 40% × 45% = 18%

Weighted-average contribution margin ratio 42%

$1,575,000 ÷ 42% = $3,750,000 break-even point in dollars

Dollar amount of Deluxe sales at the break-even point: $3,750,000 × 40% = $1,500,000.

BE 128

Hunt, Inc. provided the following information concerning two products:

Product 12 Product 43

Contribution margin per unit $22 $18

Machine hours required for one unit 2 hours 1.5 hours

Instructions

Compute the contribution margin per unit of limited resource for each product. Which product should Hunt tell its sales personnel to “push” to customers?

Ans: N/A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Decision Modeling, AICPA PC: Project Management, IMA: Business Economics

Solution 128 (3–5 min.)

Product 12: $22 ÷ 2.0 hours = $11

Product 43: $18 ÷ 1.5 hours = $12

Sales personnel should push Product 43.

BE 129

Gallery Corporation makes two products, footballs and baseballs. Additional information follows:

Footballs Baseballs

Units 2,000 2,500

Sales $60,000 $25,000

Variable costs 24,000 13,750

Fixed costs 10,000 5,250

Net income $26,000 $ 6,000

Yards of leather per unit 1.25 0.30

Profit per unit $13.00 $2.40

Contribution margin per unit $18.00 $4.50

Assume that Gallery is able to order an additional 2,500 yards of leather and wishes to maximize its income. Of the additional units it produces, at least 500 of each product are necessary for sales.

Instructions

How many units of each must be produced?

Ans: N/A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Decision Modeling, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics

Solution 129 (5–7 min.)

Footballs Baseballs

Contribution margin per yard $18 ÷ 1.25 = $14.40 $4.50 ÷ .30 = $15

Produce more baseballs since CM per constraint is more.

Minimum for footballs: 500 × 1.25 yd. = 625 yd.

Material remaining for baseballs: 2,500 – 625 = 1,875 yd.

# of baseballs: 1,875 ÷ .30 = 6,250 baseballs

BE 130

Marina Manufacturing is considering buying new equipment for its factory. The new equipment will reduce variable labor costs but increase depreciation expense. Contribution margin is expected to increase from $250,000 to $300,000. Net income is expected to remain the same at $100,000.

Instructions

Compute the degree of operating leverage before and after the purchase of the new equipment and interpret your results.

Ans: N/A, LO: 4, Bloom: AP, Difficulty: Medium, Min: 4, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Risk Analysis, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics

Solution 130 (4–6 min.)

Contribution margin ÷ Net Income = Degree of operating leverage

Before: $250,000 ÷ $100,000 = 2.50

After $300,000 ÷ $100,000 = 3.00

After the new equipment is purchased, Marina’s earnings would go up (or down) by 1.2 times (3.00 ÷ 2.50) as much as it would have before the purchase, with an equal increase (or decrease) in sales.

BE 131

The degree of operating leverage for Gurney, Inc. and Dough Company are 2.4 and 5.6 respectively. Both have net incomes of $75,000. Determine their respective contribution margins.

Ans: N/A, LO: 4, Bloom: AP, Difficulty: Easy, Min: 4, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Risk Analysis, AICPA PC: Problem Solving/Decision Making, IMA: Performance Measurement

Solution 131 (4–6 min.)

Degree of operating leverage = Contribution margin ÷ Net Income

Gurney Inc. 2.4 = Contribution margin ÷ $75,000

Contribution margin = $75,000 ´ 2.4 = $180,000

Dough Company 5.6 = Contribution margin ÷ 75,000

Contribution margin = $75,000 ´ 5.6 = $420,000

aBE 132

Swift Co. produces footballs. It incurred the following costs this year:

Direct materials $35,000

Direct labor 31,000

Fixed manufacturing overhead 22,000

Variable manufacturing overhead 38,000

Fixed selling and administrative expenses 23,000

Variable selling and administrative expenses 14,000

Instructions

What are the total product costs for the company under variable costing?

Ans: N/A, LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Cost Management

aSolution 132 (3–5 min.)

Direct materials $ 35,000

Direct labor 31,000

Variable manufacturing overhead 38,000

Total product costs under variable costing $104,000

aBE 133

Swift Co. produces footballs. It incurred the following costs this year:

Direct materials $40,000

Direct labor 31,000

Fixed manufacturing overhead 22,000

Variable manufacturing overhead 38,000

Fixed selling and administrative expenses 23,000

Variable selling and administrative expenses 14,000

Instructions

What are the total product costs for the company under absorption costing?

Ans: N/A, LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Cost Management

aSolution 133 (3–5 min.)

Direct materials $ 40,000

Direct labor 31,000

Fixed manufacturing overhead 22,000

Variable manufacturing overhead 38,000

Total product costs under absorption costing $131,000

aBE 134

During 2016, Basler Manufacturing produced 60,000 units and sold 55,000 for $10 per unit. Variable manufacturing costs were $4 per unit. Annual fixed manufacturing overhead was $120,000 ($2 per unit). Variable selling and administrative costs were $1 per unit sold, and fixed selling and administrative costs were $30,000.

Instructions

Prepare a variable costing income statement.

Ans: N/A, LO: 5, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving/Decision Making, IMA: Reporting

aSolution 134 (5–7 min.)

Sales (55,000 × $10) $550,000

Variable cost of goods sold (55,000 × $4) $220,000

Variable selling and administrative expenses (55,000 × $1) 55,000 275,000

Contribution margin 275,000

Fixed manufacturing overhead 120,000

Fixed selling and administrative expenses 30,000 150,000

Net income $125,000

aBE 135

During 2016, Basler Manufacturing produced 60,000 units and sold 55,000 for $10 per unit. Variable manufacturing costs were $5 per unit. Annual fixed manufacturing overhead was $120,000 ($2 per unit). Variable selling and administrative costs were $1 per unit sold, and fixed selling and administrative costs were $30,000.

Instructions

Prepare an absorption costing income statement.

Ans: N/A, LO: 5, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving/Decision Making, IMA: Reporting

aSolution 135 (5–7 min.)

Sales (55,000 × $10) $550,000

Cost of goods sold (55,000 × $7) 385,000

Gross margin 165,000

Variable selling and administrative expenses (55,000 × $1) $55,000

Fixed selling and administrative expenses 30,000 85,000

Net income $ 80,000

Exercises

Ex. 136

Kindle, Inc. manufactures cosmetic products that are sold through a network of sales agents. The agents are paid a commission of 12.5% of sales. The income statement for the year ending December 31, 2016, is as follow.

KINDLE, INC.

Income Statement

Year Ending December 31, 2016

Sales $130,000

Cost of goods sold

Variable $58,500

Fixed 14,350 72,850

Gross margin 57,150

Selling and marketing expenses

Commissions $16,250

Fixed costs 17,100 33,350

Operating income $ 23,800

The company is considering hiring its own sales staff to replace the network of agents. It will pay its salespeople a commission of 10% and incur additional fixed costs of $13 million.

Instructions

(a) Under the current policy of using a network of sales agents, calculate Kindle, Inc.’s break-even point in sales dollars for the year 2016.

(b) Calculate the company’s break-even point in sales dollars for the year 2016 if it hires its own sales force to replace the network of agents.

(c) Calculate the degree of operating leverage at sales of $130 million if (1) Kindle, Inc. uses sales agents, and (2) Kindle, Inc. employs its own sales staff.

Ans: N/A, LO: 1, 4, Bloom: AP, Difficulty: Hard, Min: 15, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving/Decision Making, IMA: Reporting

aSolution 136 (15–18 min.)

(a) Reformat the income statement to CVP format. All amounts are in $000s.

Sales…………………………………………………………………… $130,000

Variable costs ($58,500 + $16,250)………………………… 74,750

Contribution margin………………………………………………. 55,250

Less: Fixed costs ($14,350 + $17,100)……………………. 31,450

Operating income…………………………………………………. 23,800

Contribution margin ratio = $55,250 + $130,000 = 42.5%

Break-even point = $31,450 ¸ 42.5% = $74,000

(b) If a hired workforce replaces sales agents, commissions will be reduced to 10% of sales, or $13,000, but fixed costs will increase by $13,000.

Sales…………………………………………………………………… $130,000

Variable costs ($58,500 + $13,000)………………………… 71,500

Contribution margin………………………………………………. 58,500

Less: Fixed costs ($31,450 + $13,000)……………………. 44,450

Operating income…………………………………………………. $ 14,050

Contribution margin ratio = $58,500 ¸ $130,000 = 45%

Break-even point = $44,450 ¸ 45% = $98,778

(c) Operating leverage = contribution margin ¸ operating income

Current situation: from part (a)

$55,250 ¸ $23,800 = 2.32

Proposed situation: from part (b)

$58,500 ¸ $14,050 = 4.16

Ex. 137

Qwik Service has over 200 auto-maintenance service outlets nationwide. It provides primarily two lines of service: oil changes and brake repair. Oil change-related services represent 75% of its sales and provide a contribution margin ratio of 20%. Brake repair represents 25% of its sales and provides a 60% contribution margin ratio. The company’s fixed costs are $15,000,000 (that is, $75,000 per service outlet).

Instructions

(a) Calculate the dollar amount of each type of service that the company must provide in order to break even.

(b) The company has a desired net income of $45,000 per service outlet. What is the dollar amount of each type of service that must be provided by each service outlet to meet its target net income per outlet?

Ans: N/A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 12, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics

Solution 137 (12–15 min.)

(a)

Weighted-Average

Sales Mix Contribution Contribution

Percentage Margin Ratio Margin Ratio

Oil changes 75% × 20% .15

Brake repair 25% × 60% .15

.30

Total break-even sales in dollars = $15,000,000 ¸ .30 = $50,000,000

Total Sales Dollars

Sales Mix Break-even Sales Needed

Percentage in Dollars Per Product

Oil changes 75% × $50,000,000 $37,500,000

Brake repair 25% × $50,000,000 $12,500,000

Total sales $50,000,000

(b)

Sales to achieve target net income = ($75,000 + $45,000) ¸ .30 = $400,000

Sales Dollars

Sales Mix Total Needed Per Product

Percentage Sales Needed Per Store

Oil changes 75% × $400,000 $300,000

Brake repair 25% × $400,000 $100,000

Total sales $400,000

Ex. 138

Seaver Corporation manufactures mountain bikes. It has fixed costs of $4,140,000. Seaver’s sales mix and contribution margin per unit is shown as follows:

Sales Mix Contribution Margin

Green 25% $120

Brown 45% $ 60

Blue 30% $ 40

Instructions

Compute the number of each type of bike that the company would need to sell in order to break even under this product mix.

Ans: N/A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 8, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Decision Modeling, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics

Solution 138 (8–12 min.)

Weighted-Average

Sales Mix × Contribution Margin Contribution Margin

Green 25% × $120 $30

Brown 45% × $ 60 $27

Blue 30% × $ 40 $12

$69

Total break-even sales = $4,140,000 ÷ $69 = 60,000 bikes

Ex 138 (cont.)

Sales Mix

Green 25% × 60,000 = 15,000 bikes

Brown 45% × 60,000 = 27,000 bikes

Blue 30% × 60,000 = 18,000 bikes

Ex. 139

DeMont Tax Services provides primarily two lines of service: accounting and tax. Accounting-related services represent 60% of its revenue and provide a contribution margin ratio of 30%. Tax services represent 40% of its revenue and provide a 40% contribution margin ratio. The company’s fixed costs are $4,590,000.

Instructions

(a) Calculate the revenue from each type of service that the company must achieve to break even.

(b) The company has a desired net income of $1,700,000. What amount of revenue would DeMont earn from tax services if it achieves this goal with the current sales mix?

Ans: N/A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving/Decision Making, IMA: Reporting

Solution 139 (10–15 min.)

(a) Contribution Weighted-Average

Sales Mix Margin Ratio Contribution Margin Ratio

Accounting 60% 30% 18%

Tax 40% 40% 16%

34%

Total break-even sales = $4,590,000 ÷ .34 = $13,500,000

Sales Mix

Accounting 60% × $13,500,000 = $8,100,000

Tax 40% × $13,500,000 = $5,400,000

(b) Sales to achieve target net income = ($4,590,000 + $1,700,000) ÷ .34 = $18,500,000

Sales Mix

Tax 40% × $18,500,000 = $7,400,000

Ex. 140

Blue Chance Co. sells computers and video game systems. The business is divided into two divisions along product lines. Variable costing income statements for the current year are presented below:

Computers VG Systems Total

Sales $700,000 $300,000 $1,000,000

Variable costs 420,000 210,000 630,000

Contribution margin $280,000 $ 90,000 370,000

Fixed costs 296,000

Net income $ 74,000

Ex 140 (cont.)

Instructions

(a) Determine the sales mix and contribution margin ratio for each division.

(b) Calculate the company’s weighted-average contribution margin ratio.

(c) Calculate the company’s break-even point in dollars.

(d) Determine the sales level, in dollars, for each division at the break-even point.

Ans: N/A, LO: 2, Bloom: AP, Difficulty: Hard, Min: 15, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Decision Modeling, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics

Solution 140 (15–20 min.)

(a) Sales mix:

Computers: $700,000 ÷ ($700,000 + $300,000) = 70%

VG Systems $300,000 ÷ ($700,000 + $300,000) = 30%

Contribution margin ratio:

Computers: $280,000 ÷ $700,000 = 40%

VG Systems: $ 90,000 ÷ $300,000 = 30%

(b) Weighted-average contribution margin ratio = (70% × 40%) + (30% × 30%) = 37%

(c) Break-even point in dollars = $296,000 ÷ .37 = $800,000

(d) Sales dollars at break-even point:

Computers: $800,000 × .70 = $560,000

VG Systems: $800,000 × .30 = $240,000

Ex. 141

Hewitt Co. has 4,000 machine hours available to produce either Product 22 or Product 44. The cost accounting department developed the following unit information for each product:

Product 22 Product 44

Sales price $27 $50

Direct materials 6 8

Direct labor 3 2

Variable manufacturing overhead 4 5

Fixed manufacturing overhead 3 5

Machine time required 20 minutes 60 minutes

Instructions

Management wants to know which product to produce in order to maximize the company’s income. Taking into consideration the constraints under which the company operates, prepare a report to show which product should be produced and sold.

Ans: N/A, LO: 3, Bloom: AN, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Decision Modeling, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics

Solution 141 (10–12 min.)

Contribution margin per unit Product 22 Product 44

Sales price $27 $50

Variable costs

Direct materials $6 $8

Direct labor 3 2

Variable overhead 4 13 5 15

Contribution margin $ 14 $35

Machine hours required: 1/3 hr 1 hr

Contribution margin per unit of limited resource:

($14 ÷ .33) $ 42

($35 ÷ 1) $ 35

Machine hours available × 4,000 × 4,000

Contribution margin $168,000 $140,000

The company should produce and sell Product 22.

Ex. 142

Reynolds, Inc. manufactures and sells two products. Relevant per unit data concerning each product are given below:

Product

Standard Deluxe

Selling price $50 $75

Variable costs $26 $33

Machine hours 2 3

Instructions

(a) Compute the contribution margin per unit of limited resource for each product.

(b) If 1,000 additional machine hours are available, which product should be manufactured?

Ans: N/A, LO: 3, Bloom: AN, Difficulty: Medium, Min: 6, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics

Solution 142 (6–8 min.)

(a) Product

Standard Deluxe

Contribution margin per unit $24 $42

Machine hours required ÷ 2 ÷ 3

Contribution margin per unit of limited resource $12 $14

(b) The Deluxe product should be manufactured because it results in the highest contribution margin per machine hour: $14 × 1,000 = $14,000.

Ex. 143

Oscar Corporation produces and sells three products. Unit data concerning each product is shown below.

Product

X Y Z

Selling price $200 $300 $250

Direct labor costs 45 75 60

Other variable costs 110 130 102

Ex 143 (cont.)

The company has 2,000 hours of labor available to build inventory in anticipation of the company’s peak season. Management is trying to decide which product should be produced. The direct labor hourly rate is $15.

Instructions

(a) Determine the number of direct labor hours per unit.

(b) Determine the contribution margin per direct labor hour.

(c) Determine which product should be produced and the total contribution margin for that product.

Ans: N/A, LO: 3, Bloom: AN, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics

Solution 143 (10–12 min.)

(a) Product X: $45 ¸ $15 = 3 hours per unit

Product Y: $75 ¸ $15 = 5 hours per unit

Product Z: $60 ¸ $15 = 4 hours per unit

(b) Product

X Y Z

Selling price $200 $300 $250

Variable costs 155 205 162

Contribution margin 45 95 88

Direct labor hours per unit ¸ 3 ¸ 5 ¸ 4

Contribution margin per direct labor hour $ 15 $ 19 $ 22

(c) Product Z should be produced because it generates the highest contribution margin per direct labor hour.

Product X

Total direct labor hours available 2,000

Contribution margin per direct labor hour 22

Total contribution margin $44,000

Ex. 144

Shanahan Co. of Dublin, Ireland is contemplating a major change in its cost structure. Currently, all of its drafting work is performed by skilled draftsmen. Mike Shanahan the owner, is considering replacing the draftsmen with a computerized drafting system.

However, before making the change, Mike would like to know the consequences of the change, since the volume of business varies significantly from year to year. Shown below are CVP income statements for each alternative.

Manual System Computerized System

Sales $1,500,000 $1,500,000

Variable costs 1,200,000 900,000

Contribution margin 300,000 600,000

Fixed costs 150,000 450,000

Net income $150,000 $150,000

Ex. 144 (cont.)

Instructions

(a) Determine the degree of operating leverage for each alternative.

(b) Which alternative would produce the higher net income if sales increased by $300,000?

Ans: N/A, LO: 4, Bloom: AN, Difficulty: Hard, Min: 10, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics

Solution 144 (10–12 min.)

(a) Contribution Margin ÷ Net Income = Degree of

Operating Leverage

Manual system $300,000 ÷ $150,000 = 2.0

Computerized system $600,000 ÷ $150,000 = 4.0

(b) The computerized system would produce profits that are 2.0 times (4.0 ÷ 2.0) as much as the manual system. With a $300,000 increase in sales, net income would increase $60,000 ($210,000 – $150,000) under the manual system and $120,000 ($270,000 – $150,000) under the computerized system

Manual System Computerized System

Sales $1,800,000 $1,800,000

Variable costs 1,440,000* 1,080,000**

Contribution margin 360,000 720,000

Fixed costs 150,000 450,000

Net income $210,000 $270,000

*($1,200,000 ÷ $1,500,000) × $1,800,000

**($900,000 ÷ $1,500,000) × $1,800,000

Ex. 145

The following CVP income statements are available for Chantal Corp. and Mantle, Inc.

Chantal Corp. Mantle, Inc.

Sales revenue $700,000 $700,000

Variable costs 350,000 210,000

Contribution margin 350,000 490,000

Fixed costs 225,000 365,000

Net income $125,000 $125,000

Instructions

(a) Compute the degree of operating leverage for each company.

(b) Assume that sales revenue decreases by 20%. Prepare a CVP income statement for each company.

Ans: N/A, LO: 4, Bloom: AP, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics

Solution 145 (15–20 min.)

(a) Contribution Margin ÷ Net Income = Degree of Operating Leverage

Chantal $350,000 ÷ $125,000 = 2.8

Mantle $490,000 ÷ $125,000 = 3.9

Solution 145 (cont.)

(b) Chantal Corp. Mantle, Inc.

Sales revenue $560,000* $560,000*

Variable costs 280,000** 168,000***

Contribution margin 280,000 392,000

Fixed costs 225,000 365,000

Net income $ 55,000 $27,000

*$700,000 × .8

**($350,000 ÷ $700,000) × $560,000

***($210,000 ÷ $700,000) × $560,000

Ex. 146

An investment banker is analyzing two companies that specialize in the production and sale of gourmet cappuccino and chai mixes. Roasted Beans Co. uses a labor-intensive approach and Monat Industries uses a mechanized system. Variable costing income statements for the two companies are shown below:

Roasted Beans Monat Industries

Sales $1,000,000 $1,000,000

Variable costs 650,000 300,000

Contribution margin 350,000 700,000

Fixed costs 175,000 525,000

Net Income $ 175,000 $ 175,000

The investment banker is interested in acquiring one of these companies. However, she is concerned about the impact that each company’s cost structure might have on its profitability.

Instructions

(a) Calculate each company’s degree of operating leverage.

(b) Determine the effect on each company’s net income if sales decrease by 10% and if sales increase by 15%. Do not prepare income statements.

Ans: N/A, LO: 4, Bloom: AP, Difficulty: Medium, Min: 8, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics

Solution 146 (8–10 min.)

(a) Contribution Margin ÷ Net Income = Degree of Operating Leverage

Roasted Beans $350,000 ÷ $175,000 = 2.0

Monat $700,000 ÷ $175,000 = 4.0

(b) Degree of % Change in

% Change in Sales × Operating Leverage = Net Income

Roasted Beans (10%) × 2.0 = (20)%

Monat (10%) × 4.0 = (40)%

Roasted Beans 15% × 2.0 = 30%

Monat 15% × 4.0 = 60%

aEx. 147

Indicate with a check mark whether each of the following would be a product cost or a period cost under an absorption or a variable system for Sour Industries.

Absorption Variable

Product Period Product Period

  1. Direct materials _________ _________ _________ ________
  2. Direct labor _________ _________ _________ ________
  3. Factory utilities _________ _________ _________ ________
  4. Factory rent _________ _________ _________ ________
  5. Indirect labor _________ _________ _________ ________
  6. Factory supervisor salaries _________ _________ _________ ________
  7. Factory maintenance (variable) _________ _________ _________ ________
  8. Factory depreciation _________ _________ _________ ________
  9. Sales salaries _________ _________ _________ ________
  10. Sales commissions _________ _________ _________ ________

Ans: N/A, LO: 5, Bloom: K, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving/Decision Making, IMA: Cost Management

aSolution 147 (10–15 min.)

Absorption Variable

Product Period Product Period

  1. Direct materials ___ P___ _________ ___ P___ ________
  2. Direct labor ___ P___ _________ ___ P___ ________
  3. Factory utilities ___ P___ _________ ___ P___ ________
  4. Factory rent ___ P___ _________ _________ ___ P___
  5. Indirect labor ___ P___ _________ ___ P___ ________
  6. Factory supervisor salaries ___ P___ _________ _________ ___ P___
  7. Factory maintenance (variable) ___ P___ _________ ___ P___ ________
  8. Factory depreciation ___ P___ _________ _________ ___ P___
  9. Sales salaries _________ ___ P___ _________ ___ P___
  10. Sales commissions _________ ___ P___ _________ ___ P___

aEx. 148

Nimble Corp. manufactures and sells a variety of camping products. Recently the company opened a new plant to manufacture a deluxe portable cooking unit. Cost and sales data for the first month of operations are shown below:

Manufacturing Costs

Fixed Overhead $140,000

Variable overhead $3 per unit

Direct labor $12 per unit

Direct material $30 per unit

Beginning inventory 0 units

Units produced 10,000

Units sold 9,000

Selling and Administrative Costs

Fixed $200,000

Variable $4 per unit sold

The portable cooking unit sells for $110. Management is interested in the opening month’s results and has asked for an income statement.

Instructions

Assume the company uses absorption costing. Calculate the production cost per unit and prepare an income statement for the month of June, 2016.

Ans: N/A, LO: 5, Bloom: AP, Difficulty: Medium, Min: 8, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving/Decision Making, IMA: Reporting

aSolution 148 (8–12 min.)

Per Unit

Direct materials $30

Direct labor 12

Variable overhead 3

Fixed overhead ($140,000 ÷ 10,000) 14

Total cost $59

Nimble Corp.

Income Statement (Absorption Costing)

For the Month Ending June 30, 2016

Sales (9,000 × $110) $990,000

Less: Cost of goods sold (9,000 × $59) 531,000

Gross profit 459,000

Less: Selling and administrative costs

Variable (9,000 × $4) $ 36,000

Fixed 200,000 236,000

Net income $ 223,000

aEx. 149

On-Road Wheels, Inc. manufactures a basic road bicycle. Production and sales data for the most recent year are as follows (no beginning inventory):

Variable production costs $100 per bike

Fixed production costs $400,000

Variable selling and administrative costs $22 per bike

Fixed selling and administrative costs $550,000

Selling price $200 per bike

Production 20,000 bikes

Sales 18,000 bikes

Instructions

(a) Prepare a brief income statement using absorption costing.

(b) Compute the amount to be reported for inventory in the year-end absorption costing balance sheet.

Ans: N/A, LO: 5, Bloom: AP, Difficulty: Medium, Min: 8, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving/Decision Making, IMA: Reporting

aSolution 149 (8–12 min.)

(a) Sales (18,000 × $200) $3,600,000

Less: Cost of goods sold (18,000 × $120*) 2,160,000

Gross profit 1,440,000

Less: selling and administrative costs

[(18,000 × $22) + $550,000] 946,000

Net income $ 494,000

*Variable production costs $100 per bike

Fixed production costs ($400,000 ÷ 20,000) 20 per bike

Total cost of goods sold per unit $120 per bike

(b) (20,000 – 18,000) × $120 = $240,000

aEx. 150

On-Road Wheels, Inc. manufactures a basic road bicycle. Production and sales data for the most recent year are as follows (no beginning inventory):

Variable production costs $95 per bike

Fixed production costs $400,000

Variable selling and administrative costs $22 per bike

Fixed selling and administrative costs $550,000

Selling price $200 per bike

Production 20,000 bikes

Sales 16,000 bikes

Instructions

(a) Prepare a brief income statement using variable costing.

(b) Compute the amount to be reported for inventory in the year-end variable costing balance sheet.

Ans: N/A, LO: 5, Bloom: AP, Difficulty: Medium, Min: 8, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving/Decision Making, IMA: Reporting

aSolution 150 (8–12 min.)

(a) Sales (16,000 × $200) $3,200,000

Less: Variable costs

Variable cost of goods sold (16,000 × $95) $1,520,000

Variable selling and admin. costs (16,000 × $22) 352,000 1,872,000

Contribution margin 1,328,000

Less: Fixed costs

Fixed production costs 400,000

Fixed selling and administrative costs 550,000 950,000

Net income $ 378,000

(b) (20,000 – 16,000) × $95 = $380,000

aEx. 151

Cutting Edge Corp. produces sporting equipment. In 2015, the first year of operations, Cutting Edge produced 25,000 units and sold 22,000 units. In 2016, the production and sales results were exactly reversed. In each year, selling price was $100, variable manufacturing costs were $40 per unit, variable selling expenses were $8 per unit, fixed manufacturing costs were $550,000, and fixed administrative expenses were $200,000.

Instructions

(a) Compute the net income under variable costing for each year.

(b) Compute the net income under absorption costing for each year.

(c) Reconcile the differences each year in income from operations under the two costing approaches.

Ans: N/A, LO: 5, Bloom: AP, Difficulty: Medium, Min: 20, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving/Decision Making, IMA: Reporting

aSolution 151 (20–25 min.)

(a) 2015: [22,000 × ($100 – $40 – $8)] – ($550,000 + $200,000)] = $394,000

2016: [25,000 × ($100 – $40 – $8)] – ($550,000 + $200,000)] = $550,000

(b) 2015: [22,000 × ($100 – $40 – $22)] – ($200,000 + ($22,000 × $8)] = $460,000

2016: {[25,000 × $100) – [3,000 × ($40 + $22)] – [(22,000 × $40) + (22,000 × $550,000/22,000)]} – [$200,000 + (25,000 × $8)] = $484,000

(c) The variable costing and the absorption costing income can be recorded as follows:

2015 variable costing income $394,000

Fixed manufacturing costs deferred at 12/31/15

under absorption costing (3,000 × $22) 66,000

2015 absorption costing income $460,000

2016 variable costing income $550,000

Fixed manufacturing costs expensed in 2016

under absorption costing 3,000 × $22) (66,000)

2016 absorption costing income $484,000

aEx. 152

Graham is a division of Flynn, Inc. The division manufactures and sells a pump that is used in a wide variety of applications. During the coming year, it expects to sell 30,000 units for $25 per unit. Steve Moss, division manager, is considering producing either 30,000 or 35,000 units during the period. Other information is presented in the schedule below:

Division Information – 2016

Beginning inventory 0

Expected sales in units 30,000

Selling price per unit $25

Variable manufacturing cost per unit $7

Fixed manufacturing overhead costs (total) $420,000

Fixed manufacturing overhead costs per unit

Based on 30,000 units ($420,000 ÷ 30,000) $14

Based on 35,000 units ($420,000 ÷ 35,000) $12

Manufacturing cost per unit

Based on 30,000 units ($7 variable + $14 fixed) $21

Based on 35,000 units ($7 variable + $12 fixed) $19

Selling and administrative expenses (all fixed) $25,000

Instructions

(a) Prepare an absorption costing income statement with one column showing the results if 30,000 units are produced and one column showing the results if 35,000 units are produced.

(b) Why is income different for the two production levels when sales is 30,000 units either way?

Ans: N/A, LO: 5, Bloom: AP, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving/Decision Making, IMA: Reporting

aSolution 152 (15–20 min.)

(a) Graham Division

Income Statement (Absorption Costing)

For the Year Ended 2016

30,000 Produced 35,000 Produced

Sales (30,000 units × $25) $750,000 $750,000

Cost of goods sold 630,000 (30,000 × $21) 570,000 (30,000 × $19)

Gross profit 120,000 180,000

Fixed selling and admin. expenses 25,000 25,000

Net income $ 95,000 $155,000

(b) Net income is $60,000 higher when 35,000 units are produced because under absorption costing, $60,000 of fixed manufacturing costs (5,000 × $12) are deferred to the next year.

aEx. 153

Graham is a division of Flynn, Inc. The division manufactures and sells a pump that is used in a wide variety of applications. During the coming year, it expects to sell 30,000 units for $25 per unit. Steve Moss, division manager, is considering producing either 30,000 or 40,000 units during the period. Other information is presented in the schedule below:

Division Information – 2016

Beginning inventory 0

Expected sales in units 30,000

Selling price per unit $25

Variable manufacturing cost per unit $7

Fixed manufacturing overhead costs (total) $480,000

Fixed manufacturing overhead costs per unit

Based on 30,000 units ($480,000 ÷ 30,000) $16

Based on 40,000 units ($480,000 ÷ 40,000) $12

Manufacturing cost per unit

Based on 30,000 units ($7 variable + $16 fixed) $23

Based on 40,000 units ($7 variable + $12 fixed) $19

Selling and administrative expenses (all fixed) $25,000

Instructions

Prepare a variable costing income statement with one column showing the results if 30,000 units are produced and one column showing the results if 40,000 units are produced.

Ans: N/A, LO: 5, Bloom: AP, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving/Decision Making, IMA: Reporting

aSolution 153 (15–20 min.)

Graham Division

Income Statement (Variable Costing)

For the Year Ended 2016

30,000 Produced 40,000 Produced

Sales (30,000 units × $25) $750,000 $750,000

Variable cost of goods sold (30,000 × $7) 210,000 210,000

Contribution margin 540,000 540,000

Fixed manufacturing overhead 480,000 480,000

Fixed selling and administrative expenses 25,000 25,000

Net income $ 35,000 $ 35,000

COMPLETION STATEMENTS

  1. The ______________ income statement classifies cost as variable or fixed and computes a contribution margin.

Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving/Decision Making, IMA: Reporting

  1. _________________ tells a company how far sales can drop before it will be operating at a loss.

Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Cost Management

  1. ___________________ is the relative percentage in which a company sells its multiple products.

Ans: N/A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics

  1. When more than one product is sold, the break-even point can be determined by dividing fixed expenses by _______________________.

Ans: N/A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics

  1. When a company has ________________, management must decide which products to make and sell in order to maximize net income.

Ans: N/A, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Decision Modeling, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics

  1. ___________________ refers to the relative proportion of fixed versus variable costs that a company incurs.

Ans: N/A, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Cost Management

  1. The _________________________ provides a measure of a company’s earnings volatility and can be used to compare companies.

Ans: N/A, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Risk Analysis, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics

a161. Under _____________________ all manufacturing costs are charged to, or absorbed by, the product.

Ans: N/A, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Cost Management

a162. Fixed manufacturing costs are treated as period costs under ______________________.

Ans: N/A, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Cost Management

a163. When production exceeds sales, a portion of the _____________________ is deferred to a future period as part of the cost of ending inventory under absorption costing, but not under variable costing.

Ans: N/A, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics

a164. When units produced exceed units sold, income under absorption costing is ___________ than income under variable costing.

Ans: N/A, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics

a 165. Management may be tempted to overproduce in a given period in order to increase net income if _______________ is used for internal decision making.

Ans: N/A, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Ethics, AICPA BB: Industry/Sector Perspective, AICPA FN: Decision Modeling, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics

Answers to Completion Statements
  1. CVP 160. degree of operating leverage
  2. Margin of safety a161. absorption costing
  3. Sales mix a162. variable costing
  4. weighted-average unit contribution margin a163. fixed manufacturing overhead
  5. limited resources a164. higher
  6. Cost structure a165. absorption costing

SHORT-ANSWER ESSAY QUESTIONS

S-A E 166

A CVP income statement is frequently prepared for internal use by management. Describe the features of the CVP income statement that make it more useful for management decision-making than the traditional income statement that is prepared for external users.

Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 2, AACSB: Communications, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: Communication, IMA: Reporting

Solution 166

Several features of the CVP income statement make it more useful for internal decision-making. The CVP income statement classifies costs as either fixed or variable, rather than by function. Being able to identify the behavior of costs in this manner can aid management in controlling those costs.

Also, the CVP income statement shows the contribution margin, rather than a gross profit. This helps management establish the extent to which their sales are able to cover their fixed costs, and to analyze the impact on net income of changes in sales or costs.

S-A E 167

Nancy Sound, president of Crosley Corp., has heard about operating leverage and asks you to explain this term. What is operating leverage? How does a company increase its operating leverage?

Ans: N/A, LO: 4, Bloom: K, Difficulty: Easy, Min: 2, AACSB: Communications, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Communication, IMA: Business Economics

Solution 167

Operating leverage refers to the change in net income that a company experiences when there is a change in net sales revenue. Companies that have higher fixed costs relative to variable costs have higher operating leverage. In that case, the company’s profits will increase rapidly when sales revenue increases, but decrease rapidly when sales revenue decreases. A company can increase its operating leverage by increasing its reliance on fixed costs, with a corresponding decrease in variable costs.

aS-A E 168

Define variable costing and absorption costing. What are some of the benefits to a manager from using variable costing instead of absorption costing for internal decision making?

Ans: N/A, LO: 5, Bloom: K, Difficulty: Easy, Min: 2, AACSB: Communications, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Communication, IMA: Cost Management

aSolution 168

Variable costing is a system for determining product costs that is used primarily for making managerial decisions. This system determines product costs by considering only direct materials, direct labor, and variable manufacturing overhead. In contrast, absorption costing is used by some managers and also for external reporting. Under absorption costing, product costs include direct materials, direct labor, and both fixed and variable manufacturing overhead costs.

Some of the benefits to a manager from using variable costing instead of absorption costing for internal decision-making include: variable costing already has to be used when constructing a contribution margin income statement, variable costing puts greater focus on cost behaviors, fixed expenses do not get tied up in inventory under variable costing, variable costing is better suited for cost-volume-profit analysis, variable costing produces income statements that are closer to net cash flows than absorption costing, and the method ties in with standard costing and flexible budgeting more effectively.

aS-A E 169

How do differences in production and sales levels affect income under absorption and variable costing?

Ans: N/A, LO: 5, Bloom: K, Difficulty: Easy, Min: 2, AACSB: Communications, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: Communication, IMA: Business Economics

aSolution 169

If production equals sales in any given period, the net incomes under both absorption and variable costing will be equal. Under this scenario, fixed manufacturing overhead will not differ, because the direct cost expense under variable costing will be equal to the product cost component of fixed overhead under absorption costing.

If production exceeds sales, absorption costing net income will be greater than variable costing net income. Absorption costing net income is higher because some fixed manufacturing overhead costs will be deferred in the inventory account until the products are sold, whereas under variable costing, all fixed manufacturing overhead costs will be expensed.

If sales exceed production, absorption costing net income will be less than variable costing net income. Absorption costing net income is less because some fixed manufacturing overhead costs from the previous period will now be expensed when the older product is sold, whereas under variable costing, only fixed manufacturing overhead costs of the current period will be expensed.

CHAPTER 7

INCREMENTAL ANALYSIS

Summary of Questions by LEARNING Objectives and Bloom’s Taxonomy

ItemLOBTItemLOBTItemLOBTItemLOBTItemLOBT

True-False Statements

1.1K7.1C13.3C19.5C25.6C
2.1K8.2C14.3K20.5C26.1K
3.1C9.2C15.3C21.5C27.1K
4.1K10.2C16.4C22.5C28.2C
5.1K11.2C17.4C23.6C29.4K
6.1C12.3C18.4K24.6C30.6C

Multiple Choice Questions

31.1K59.2C87.3AN115.4C143.5C
32.1K60.2C88.3AN116.4AN144.5C
33.1K61.2AP89.3AN117.4AP145.5C
34.1K62.2AP90.3AN118.4C146.5C
35.1K63.2C91.3AN119.4AN147.5C
36.1K64.2C92.3AN120.4AP148.5AP
37.1K65.2C93.3K121.4K149.5AP
38.1K66.2AP94.3K122.4K150.6AN
39.1AP67.2K95.3C123.4K151.6AN
40.1K68.2C96.3C124.4K152.6C
41.1K69.2AP97.3C125.4AP153.6AN
42.1K70.2AP98.3C126.4K154.6C
43.1C71.2AP99.3AN127.4AP155.6AN
44.1K72.2AP100.3AN128.4K156.6AN
45.1C73.2C101.3AN129.4K157.6AN
46.1C74.3K102.3AN130.4AP158.6C
47.1K75.3C103.3AN131.4AP159.6C
48.1K76.3AP104.3AN132.5Cst160.1K
49.1C77.3AP105.3AN133.5K161.2AN
50.1C78.3AP106.3AN134.5Cst162.3K
51.1C79.3AP107.3AN135.5AP163.3C
52.1C80.3AP108.3AP136.5AP164.5K
53.2AN81.3K109.4AN137.5C165.6C
54.2AN82.3AP110.4AN138.5Cst166.6K
55.2C83.3AN111.4AN139.5C
56.2C84.3C112.4AN140.5C
57.2C85.3C113.4AP141.5C
58.2C86.3AN114.4AN142.5C

Brief Exercises

167.1AP170.3AP173.3AP176.6AP179.6AN
168.2AP171.3AP174.4AN177.6AP
169.3AP172.3AP175.5AN178.6AP

st This question also appears in a self-test at the student companion website.

Summary of Questions by LEARNING Objectives and Bloom’s Taxonomy

Exercises

180.1, 6AN184.2E188.3AN192.4AP196.6AP
181.2AN185.2, 3AP189.3AN193.4E197.6E
182.2AN186.3E190.4AN194.5AN198.6AP
183.2E187.3AP191.4E195.5E199.6E

Completion Statements

200.1K202.2K204.4K
201.1K203.3K205.5K
Matching
206.5K
Short-Answer Essay
207.3K208.3K209.5K

SUMMARY OF LEARNING OBJECTIVES BY QUESTION TYPE

ItemTypeItemTypeItemTypeItemTypeItemTypeItemTypeItemType
Learning Objective 1
1.TF7.TF34.MC40.MC46.MC52.MC
2.TF26.TF35.MC41.MC47.MC160.MC
3.TF27.TF36.MC42.MC48.MC167.BE
4.TF31.MC37.MC43.MC49.MC180.Ex
5.TF32.MC38.MC44.MC50.MC200.C
6.TF33.MC39.MC45.MC51.MC201.C
Learning Objective 2
8.TF53.MC58.MC63.MC68.MC73.MC183.Ex
9.TF54.MC59.MC64.MC69.MC161.MC184.Ex
10.TF55.MC60.MC65.MC70.MC168.BE185.Ex
11.TF56.MC61.MC66.MC71.MC181.Ex202.C
28.TF57.MC62.MC67.MC72.MC182.Ex
Learning Objective 3
12.TF78.MC86.MC94.MC102.MC163.MC187.Ex
13.TF79.MC87.MC95.MC103.MC169.BE188.Ex
14.TF80.MC88.MC96.MC104.MC170.BE189.Ex
15.TF81.MC89.MC97.MC105.MC171.BE203.C
74.MC82.MC90.MC98.MC106.MC172.BE207.SA
75.MC83.MC91.MC99.MC107.MC173.BE208.SA
76.MC84.MC92.MC100.MC108.MC185.Ex
77.MC85.MC93.MC101.MC162.MC186.Ex
Learning Objective 4
16.TF110.MC115.MC120.MC125.MC130.MC192.Ex
17.TF111.MC116.MC121.MC126.MC131.MC193.Ex
18.TF112.MC117.MC122.MC127.MC174.BE204.C
29.TF113.MC118.MC123.MC128.MC190.Ex
109.MC114.MC119.MC124.MC129.MC191.Ex

Learning Objective 5
19.TF133.MC138.MC143.MC148.MC195.Ex
20.TF134.MC139.MC144.MC149.MC205.C
21.TF135.MC140.MC145.MC164.MC206.MA
22.TF136.MC141.MC146.MC175.BE209.SA
132.MC137.MC142.MC147.MC194.Ex
Learning Objective 6
23.TF150.MC154.MC158.MC176.BE196.Ex
24.TF151.MC155.MC159.MC177.BE197.Ex
25.TF152.MC156.MC165.MC178.BE198.Ex
30.TF153.MC157.MC166.MC179.BE199.Ex

Note: TF = True-False BE = Brief Exercise C = Completion

MC = Multiple Choice Ex = Exercise SA = Short-Answer

MA = Matching

CHAPTER LEARNING OBJECTIVES

  1. Describe management’s decision-making process, and incremental analysis. Management’s decision-making process consists of (a) identifying the problem and assigning responsibility for the decision, (b) determining and evaluating possible courses of action, (c) making the decision, and (d) reviewing the results of the decision. Incremental analysis identifies financial data that change under alternative courses of action. These data are relevant to the decision because they will vary in the future among the possible alternatives.
  2. Analyze the relevant costs in accepting an order at a special price. The relevant costs are those that change if the order is accepted. The relevant information in accepting an order at a special price is the difference between the variable manufacturing costs to produce the special order and expected revenues. Any changes in fixed costs, opportunity costs, or other incremental costs or savings (such as additional shipping) should be considered.
  3. Analyze the relevant costs in a make-or-buy decision. In a make-or-buy decision, the relevant costs are (a) the variable manufacturing costs that will be saved as well as changes to fixed manufacturing costs, (b) the purchase price, and (c) opportunity costs.
  4. Analyze the relevant costs in determining whether to sell or process materials further. The decision rule for whether to sell or process materials further is: Process further as long as the incremental revenue from processing exceeds the incremental processing costs.
  5. Analyze the relevant costs to be considered in repairing, retaining, or replacing equipment. The relevant costs to be considered in determining whether equipment should be retained, or replaced are the effects on variable costs and the cost of the new equipment. Also, any disposal value of the existing asset must be considered.
  6. Analyze the relevant costs in deciding whether to eliminate an unprofitable segment or product. In deciding whether to eliminate an unprofitable segment or product, the relevant costs are the variable costs that drive the contribution margin, if any, produced by the segment or product. Disposition of the segment’s or product’s fixed expenses and opportunity costs must also be considered.

TRUE-FALSE STATEMENTS

  1. An important step in management’s decision-making process is to determine and evaluate possible courses of action.

Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Strategic/Critical Thinking, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Strategic Planning

  1. In making decisions, management ordinarily considers both financial and nonfinancial information.

Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Strategic/Critical Thinking, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Strategic Planning

  1. In incremental analysis, total variable costs will always change under alternative courses of action, and total fixed costs will always remain constant.

Ans: F, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Strategic/Critical Thinking, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods

  1. Accountants are mainly involved in developing nonfinancial information for management’s consideration in choosing among alternatives.

Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Decision Modeling, AICPA PC: Interaction, IMA: Decision Analysis

  1. Decision-making involves choosing among alternative courses of action.

Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Strategic/Critical Thinking, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Decision Analysis

  1. Financial data are developed for a course of action under an incremental basis and then compared to data developed under a differential basis before a decision is made.

Ans: F, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Strategic/Critical Thinking, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Decision Analysis

  1. In incremental analysis, total fixed costs will always remain constant under alternative courses of action.

Ans: F, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Strategic/Critical Thinking, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Decision Analysis

  1. A special one-time order should never be accepted if the unit sales price is less than the unit variable cost.

Ans: T, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Strategic/Critical Thinking, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics

  1. If a company has excess capacity and present markets will not be affected, it would be profitable to accept an order at a special unit price even though the price is less than the unit variable cost to manufacture the item.

Ans: F, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Strategic/Critical Thinking, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics

  1. A company should never accept an order for its product at less than its regular sales price.

Ans: F, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Strategic/Critical Thinking, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics

  1. If a company is operating at less than capacity, the incremental costs of a special order will likely include variable manufacturing costs, but not fixed costs.

Ans: T, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Strategic/Critical Thinking, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics

  1. An incremental make-or-buy decision depends solely on which alternative is the lowest cost alternative.

Ans: F, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Strategic/Critical Thinking, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics

  1. A decision whether to continue to make a product or buy it externally depends on the external price and the amount of variable and fixed costs that can be eliminated assuming no alternative uses of resources.

Ans: T, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Strategic/Critical Thinking, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Quantitative Methods

  1. An opportunity cost is the potential benefit obtained by using resources in an alternative course of action.

Ans: T, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Strategic/Critical Thinking, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics

  1. If an incremental make or buy analysis indicates that it is cheaper to buy rather than make an item, management should always make the decision to choose the lowest cost alternative.

Ans: F, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Strategic/Critical Thinking, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics

  1. In a sell or process further decision, management should process further as long as the incremental revenues from additional processing exceed the incremental variable costs.

Ans: F, LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Strategic/Critical Thinking, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics

  1. It is always better to sell now rather than process further because of the time value of money.

Ans: F, LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Strategic/Critical Thinking, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics

  1. The basic decision rule in a sell or process further decision is: process further if the incremental revenue from processing exceeds the incremental processing costs.

Ans: T, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Strategic/Critical Thinking, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics

  1. In a decision concerning replacing old equipment with new equipment, the book value of the old equipment can be considered an opportunity cost.

Ans: F, LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Strategic/Critical Thinking, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics

  1. In a decision concerning replacing old equipment with new equipment, the book value of the old equipment can be considered a sunk cost.

Ans: T, LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Strategic/Critical Thinking, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics

  1. In a decision to retain or replace old equipment, the salvage value of the old equipment is relevant in incremental analysis.

Ans: T, LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Strategic/Critical Thinking, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics

  1. It is better not to replace old equipment if it is not fully depreciated.

Ans: F, LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Strategic/Critical Thinking, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics

  1. From a quantitative standpoint, a segment should be eliminated if its contribution margin is less than the fixed costs that can be eliminated.

Ans: T, LO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Strategic/Critical Thinking, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics

  1. The elimination of an unprofitable product line may adversely affect the remaining product lines.

Ans: T, LO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Strategic/Critical Thinking, AICPA FN: Risk Analysis, AICPA PC: Problem Solving, IMA: Business Economics

  1. Many of the decisions involving incremental analysis have qualitative features, but since they are not easily measured they should be ignored.

Ans: F, LO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Strategic/Critical Thinking, AICPA FN: Risk Analysis, AICPA PC: Problem Solving, IMA: Business Economics

  1. Accounting contributes to management’s decision-making process through internal reports that review the actual impact of the decision.

Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Strategic/Critical Thinking, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Decision Analysis

  1. The process used to identify the financial data that change under alternative courses of action is called allocation of limited resources.

Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Risk Analysis, AICPA PC: Problem Solving, IMA: Decision Analysis

  1. If a company is operating at full capacity, the incremental costs of a special order will likely include fixed manufacturing costs.

Ans: T, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Risk Analysis, AICPA PC: Problem Solving, IMA: Business Economics

  1. The basic decision rule in a sell or process further decision is: sell without further processing as long as the incremental revenue from processing exceeds the incremental processing costs.

Ans: F, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Strategic/Critical Thinking, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics

  1. In deciding on the future status of an unprofitable segment, management should recognize that net income could decrease by eliminating the unprofitable segment.

Ans: T, LO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics

Answers to True-False Statements

ItemAns.ItemAns.ItemAns.ItemAns.ItemAns.ItemAns.ItemAns.
1.T6.F11.T16.F21.T26.T
2.T7.F12.F17.F22.F27.F
3.F8.T13.T18.T23.T28.T
4.F9.F14.T19.F24.T29.F
5.T10.F15.F20.T25.F30.T

MULTIPLE CHOICE QUESTIONS

  1. A major accounting contribution to the managerial decision-making process in evaluating possible courses of action is to
  2. assign responsibility for the decision.
  3. provide relevant revenue and cost data about each course of action.
  4. determine the amount of money that should be spent on a project.
  5. decide which actions that management should consider.

Ans: B, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Decision Analysis

  1. Which of the following stages of the management decision-making process is improperly sequenced?
  2. Evaluate possible courses of action à Make decision.
  3. Assign responsibility for the decision à Identify the problem.
  4. Identify the problem à Determine possible courses of action.
  5. Assign responsibility for decision à Determine possible courses of action.

Ans: B, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Strategic/Critical Thinking, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Decision Analysis

  1. Internal reports that review the actual impact of decisions are prepared by
  2. department heads.
  3. the controller.
  4. management accountants.
  5. factory workers.

Ans: C, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Performance Measurement

  1. 3 Which of the following steps in the management decision-making process does not generally involve the managerial accountant?
  2. Determine possible courses of action
  3. Make the appropriate decision based on relevant data
  4. Prepare internal reports that review the impact of decisions
  5. None of these answers are correct.

Ans: B, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Decision Analysis

  1. 3 Which is the first step in the management decision-making process?
  2. Determine and evaluate possible courses of action.
  3. Review results of the decision.
  4. Identify the problem and assign responsibility.
  5. Make a decision.

Ans: C, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Decision Analysis

  1. 36. Which of the following will always be a relevant cost?
  2. Sunk cost
  3. Fixed cost
  4. Variable cost
  5. Opportunity cost

Ans: D, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Decision Analysis

  1. 37. Costs that will differ between alternatives and influence the outcome of a decision are
  2. sunk costs.
  3. unavoidable costs.
  4. relevant costs.
  5. product costs.

Ans: C, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Decision Analysis

  1. 38. A revenue that differs between alternatives and makes a difference in decision-making is called a(n)
  2. sales revenue.
  3. incremental revenue.
  4. unavoidable revenue.
  5. irrelevant revenue.

Ans: B, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Decision Analysis

  1. 39. Alvarez Company is considering the following alternatives:

Alternative A Alternative B

Revenues $50,000 $60,000

Variable costs 30,000 30,000

Fixed costs 10,000 16,000

What is the incremental profit?

  1. $10,000
  2. $0
  3. $6,000
  4. $4,000

Ans: D, LO: 1, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Decision Analysis

  1. Which of the following is an irrelevant cost?
  2. An avoidable cost
  3. An incremental cost
  4. A sunk cost
  5. An opportunity cost

Ans: C, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Decision Analysis

  1. Relevant costs are always
  2. fixed costs.
  3. variable costs.
  4. avoidable costs.
  5. sunk costs.

Ans: C, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Decision Analysis

  1. The process of evaluating financial data that change under alternative courses of action is called
  2. double entry analysis.
  3. contribution margin analysis.
  4. incremental analysis.
  5. cost-benefit analysis.

Ans: C, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Risk Analysis, AICPA PC: Problem Solving, IMA: Decision Analysis

  1. Nonfinancial information that management might evaluate in making a decision would not include
  2. employee turnover.
  3. contribution margin.
  4. the environment.
  5. the corporate profile in the community.

Ans: B, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics

  1. Incremental analysis is synonymous with
  2. difficult analysis.
  3. differential analysis.
  4. gross profit analysis.
  5. derivative analysis.

Ans: B, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Decision Analysis

  1. In incremental analysis,
  2. only costs are analyzed.
  3. only revenues are analyzed.
  4. both costs and revenues may be analyzed.
  5. both costs and revenues that stay the same between alternate courses of action will be analyzed.

Ans: C, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Decision Analysis

  1. Incremental analysis is most useful
  2. in developing relevant information for management decisions.
  3. in choosing between capital budgeting methods.
  4. in evaluating the master budget.
  5. as a replacement technique for variance analysis.

Ans: A, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Decision Analysis

  1. The source of data to serve as inputs in incremental analysis is generated by
  2. market analysts.
  3. engineers.
  4. accountants.
  5. All of these answers are correct.

Ans: D, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Information Management

  1. Which of the following is not a true statement?
  2. Incremental analysis might also be referred to as differential analysis.
  3. Incremental analysis is the same as CVP analysis.
  4. Incremental analysis is useful in making decisions.
  5. Incremental analysis focuses on decisions that involve a choice among alternative courses of action.

Ans: B, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Decision Analysis

  1. Incremental analysis would not be appropriate for
  2. a make or buy decision.
  3. an allocation of limited resource decision.
  4. elimination of an unprofitable segment.
  5. analysis of manufacturing variances.

Ans: D, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Decision Analysis

  1. Incremental analysis would be appropriate for
  2. acceptance of an order at a special price.
  3. a retain or replace equipment decision.
  4. a sell or process further decision.
  5. All of these answers are correct.

Ans: D, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Decision Analysis

  1. Which of the following is a true statement about cost behaviors in incremental analysis?
  2. Fixed costs will not change between alternatives.
  3. Fixed costs may change between alternatives.
  4. Variable costs will always change between alternatives.
  5. 1
  6. 2
  7. 3
  8. 2 and 3

Ans: B, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Decision Analysis

  1. A company is considering the following alternatives:

Alternative 1 Alternative 2

Revenues $120,000 $120,000

Variable costs 60,000 70,000

Fixed costs 35,000 35,000

Which of the following are relevant in choosing between the alternatives?

  1. Variable costs
  2. Revenues
  3. Fixed costs
  4. Variable costs and fixed costs

Ans: A, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Decision Analysis

  1. It costs Garner Company $12 of variable and $5 of fixed costs to produce one bathroom scale which normally sells for $35. A foreign wholesaler offers to purchase 3,000 scales at $15 each. Garner would incur special shipping costs of $1 per scale if the order were accepted. Garner has sufficient unused capacity to produce the 3,000 scales. If the special order is accepted, what will be the effect on net income?
  2. $6,000 increase
  3. $6,000 decrease
  4. $9,000 decrease
  5. $45,000 increase

Ans: A, LO: 2, Bloom: AN, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Decision Analysis

  1. Baden Company manufactures a product with a unit variable cost of $100 and a unit sales price of $176. Fixed manufacturing costs were $480,000 when 10,000 units were produced and sold. The company has a one-time opportunity to sell an additional 1,000 units at $140 each in a foreign market which would not affect its present sales. If the company has sufficient capacity to produce the additional units, acceptance of the special order would affect net income as follows:
  2. Income would decrease by $8,000.
  3. Income would increase by $8,000.
  4. Income would increase by $140,000.
  5. Income would increase by $40,000.

Ans: D, LO: 2, Bloom: AN, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Decision Analysis

  1. In incremental analysis,
  2. costs are not relevant if they change between alternatives.
  3. all costs are relevant if they change between alternatives.
  4. only fixed costs are relevant.
  5. only variable costs are relevant.

Ans: B, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Decision Analysis

  1. If a plant is operating at full capacity and receives a one-time opportunity to accept an order at a special price below its usual price, then
  2. only variable costs are relevant.
  3. fixed costs are not relevant.
  4. the order will likely be accepted.
  5. the order will likely be rejected.

Ans: D, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics

  1. Miley, Inc. has excess capacity. Under what situations should the company accept a special order for less than the current selling price?
  2. Never
  3. When additional fixed costs must be incurred to accommodate the order
  4. When the company thinks it can use the cheaper materials without the customer’s knowledge
  5. When incremental revenues exceed incremental costs

Ans: D, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics

  1. If a company must expand capacity to accept a special order, it is likely that there will be
  2. an increase in unit variable costs.
  3. no increase in fixed costs.
  4. an increase in variable and fixed costs per unit.
  5. an increase in fixed costs.

Ans: D, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics

  1. Which of the following is true if a company can accept a special order without affecting its regular sales and is within plant capacity?
  2. Net income will not be affected.
  3. Net income will increase if the special sales price per unit exceeds the unit variable costs.
  4. Net income will decrease.
  5. Additional fixed costs will probably be incurred.

Ans: B, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics

  1. If a company anticipates that other sales will be affected by the acceptance of a special order, then
  2. lost sales should be considered in the incremental analysis.
  3. lost sales should not be considered in the incremental analysis.
  4. the order should not be accepted.
  5. the order will only be accepted if the plant is below capacity.

Ans: A, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics

  1. Martin Company incurred the following costs for 70,000 units:

Variable costs $420,000

Fixed costs 392,000

Martin has received a special order from a foreign company for 3,000 units. There is sufficient capacity to fill the order without jeopardizing regular sales. Filling the order will require spending an additional $6,300 for shipping.

If Martin wants to break even on the order, what should the unit sales price be?

  1. $6.00
  2. $8.10
  3. $11.60
  4. $13.70

Ans: B, LO: 2, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics

  1. Martin Company incurred the following costs for 70,000 units:

Variable costs $420,000

Fixed costs 392,000

Martin has received a special order from a foreign company for 3,000 units. There is sufficient capacity to fill the order without jeopardizing regular sales. Filling the order will require spending an additional $6,300 for shipping.

If Martin wants to earn $6,000 on the order, what should the unit price be?

  1. $9.70
  2. $15.70
  3. $8.00
  4. $10.10

Ans: D, LO: 2, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics

  1. Canosta, Inc. determined that it must expand its capacity to accept a special order. Which situation is likely?
  2. Unit variable costs will increase.
  3. Fixed costs will not be relevant.
  4. Both variable and fixed costs will be relevant.
  5. The company should accept the order.

Ans: C, LO: 2, Bloom: C, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics

  1. A company is within plant capacity. It is contemplating whether a special order should be accepted. The order will not impact regular sales. If the company accepts the special order, what will occur?
  2. Incremental costs will not be affected.
  3. Net income will increase if the special sales price per unit exceeds the unit variable costs.
  4. There are no incremental revenues.
  5. Both fixed and variable costs will increase.

Ans: B, LO: 2, Bloom: C, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics

  1. Argus Company anticipates that other sales will be affected by the acceptance of a special order. What should the company do?
  2. Reject the order.
  3. Consider the opportunity cost of lost sales in the incremental analysis.
  4. Accept the order.
  5. Accept the order if the plant is below capacity.

Ans: B, LO: 2, Bloom: C, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics

  1. It costs Lannon Fields $28 of variable costs and $12 of allocated fixed costs to produce an industrial trash can that sells for $60. A buyer in Mexico offers to purchase 3,000 units at $36 each. Lannon Fields has excess capacity and can handle the additional production. What effect will acceptance of the offer have on net income?
  2. Decrease $12,000
  3. Increase $12,000
  4. Increase $108,000
  5. Increase $24,000

Ans: D, LO: 2, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics

  1. A factory is operating at less than 100% capacity. Potential additional business will not use up the remainder of the plant capacity. Given the following list of costs, which one should be ignored in a decision to produce additional units of product?
  2. Variable selling expenses
  3. Fixed factory overhead
  4. Direct labor
  5. Contribution margin of additional units

Ans: B, LO: 2, Bloom: K, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics

  1. A company is contemplating the acceptance of a special order. The order would not affect regular sales and could be filled without exceeding plant capacity. However, a new stamping machine would have to be purchased in order to stamp the customer’s name on the product. Which of the following is likely?
  2. Total variable costs will be irrelevant.
  3. Only variable costs will be relevant.
  4. Only fixed costs will be relevant.
  5. Both variable and fixed costs will be relevant.

Ans: D, LO: 2, Bloom: C, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics

  1. A company contemplating the acceptance of a special order has the following unit cost behavior, based on 10,000 units:

Direct materials $ 4

Direct labor 10

Variable overhead 8

Fixed overhead 6

A foreign company wants to purchase 2,000 units at a special unit price of $25. The normal price per unit is $40. In addition, a special stamping machine will have to be purchased for $4,000 in order to stamp the foreign company’s name on the product. The incremental income (loss) from accepting the order is

  1. $6,000.
  2. $2,000.
  3. $(6,000).
  4. $(2,000).

Ans: B, LO: 2, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics

Use the following information for questions 70 and 71.

A company’s unit costs based on 100,000 units are:

Variable costs $75

Fixed costs 30

The normal unit sales price per unit is $165. A special order from a foreign company has been received for 5,000 units at $135 a unit. In order to fulfill the order, 3,000 units of regular sales would have to be foregone.

  1. The opportunity cost associated with this order is
  2. $225,000.
  3. $495,000.
  4. $270,000.
  5. $405,000.

Ans: C, LO: 2, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics

  1. The incremental profit (loss) from accepting the order would be
  2. $30,000.
  3. $(150,000).
  4. $180,000.
  5. $(90,000).

Ans: A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics

  1. Able Company’s unit manufacturing cost is:

Variable Costs $50

Fixed Costs 25

A special order for 2,000 units has been received from a foreign company. The unit price requested is $55. The normal unit price is $80. If the order is accepted, unit variable costs will increase by $2 for additional freight costs. If the order is accepted, incremental profit (loss) will be

  1. $(46,000).
  2. $6,000.
  3. $(40,000).
  4. $10,000.

Ans: B, LO: 2, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics

  1. In the analysis concerning the acceptance or rejection of a special order, which items are relevant?
  2. Variable costs only
  3. Fixed costs only
  4. Variable costs and fixed costs
  5. Variable costs and avoidable costs

Ans: D, LO: 2, Bloom: C, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics

  1. What of the following would not be relevant in a make-or-buy decision?
  2. Unavoidable variable costs
  3. Incremental fixed costs
  4. Opportunity costs
  5. Avoidable fixed cost

Ans: A, LO: 3, Bloom: K, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics

  1. Which of the following is not a qualitative factor to be considered in a make-or-buy decision?
  2. Possible lost jobs from buying outside
  3. Supplier’s ability to satisfy quality standards
  4. Incremental benefit from buying outside
  5. Supplier’s ability to meet production schedule

Ans: C, LO: 3, Bloom: C, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics

Use the following information for questions 76–78.

Clemente Inc. incurs the following costs to produce 10,000 units of a subcomponent:

Direct materials $8,400

Direct labor 11,250

Variable overhead 12,600

Fixed overhead 16,200

An outside supplier has offered to sell Clemente the subcomponent for $2.85 a unit.

  1. If Clemente accepts the offer, by how much will net income increase (decrease)?
  2. $3,750
  3. $19,950
  4. $(8,850)
  5. $(2,850)

Ans: A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics

  1. If Clemente could avoid $3,000 of fixed overhead by accepting the offer, net income would increase (decrease) by
  2. $750.
  3. $(5,850).
  4. $(3,150).
  5. $6,750.

Ans: D, LO: 3, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics

  1. If Clemente accepts the offer, it could use the production capacity to produce another product that would generate additional income of $3,600. The increase (decrease) in net income from accepting the offer would be
  2. $150.
  3. $7,350.
  4. $(150).
  5. $(3,600).

Ans: B, LO: 3, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics

Use the following information for questions 79 and 80.

Ortiz Co. produces 5,000 units of part A12E. The following costs were incurred for that level of production:

Direct materials $ 55,000

Direct labor 160,000

Variable overhead 75,000

Fixed overhead 175,000

If Ortiz buys the part from an outside supplier, $40,000 of the fixed overhead is avoidable.

  1. What is the relevant cost per unit of part A12E?
  2. $58
  3. $85
  4. $93
  5. $66

Ans: D, LO: 3, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics

  1. If the outside supplier offers a unit price of $68, net income will increase (decrease) by
  2. $(10,000).
  3. $125,000.
  4. $(50,000).
  5. $85,000.

Ans: A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics

  1. In a make-or-buy decision, which costs can be considered relevant?
  2. Unavoidable variable costs, incremental fixed costs, and sunk costs
  3. Incremental variable costs, unavoidable fixed costs, and opportunity costs
  4. Incremental variable costs, incremental fixed costs, and sunk costs
  5. Incremental variable costs, incremental fixed costs, and opportunity costs

Ans: D, LO: 3, Bloom: K, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics

  1. Billings Company has the following costs when producing 100,000 units:

Variable costs $600,000

Fixed costs 900,000

An outside supplier has offered to make the item at $4.50 a unit. If the decision is made to purchase the item outside, current production facilities could be leased to another company for $165,000. The net increase (decrease) in the net income of accepting the supplier’s offer is

  1. $285,000.
  2. $315,000.
  3. $(15,000).
  4. $840,000.

Ans: B, LO: 3, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics

  1. Sandusky Inc. has the following costs when producing 100,000 units:

Variable costs $600,000

Fixed costs 900,000

An outside supplier is interested in producing the item for Sandusky. If the item is produced outside, Sandusky could use the released production facilities to make another item that would generate $150,000 of net income. At what unit price would Sandusky accept the outside supplier’s offer if Sandusky wanted to increase net income by $120,000?

  1. $8.70
  2. $6.30
  3. $7.50
  4. $5.70

Ans: B, LO: 3, Bloom: AN, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics

  1. Which statement is true concerning the decision rule on whether to make or buy?
  2. The company should buy if the cost of buying is less than the cost of producing.
  3. The company should buy if the incremental revenue exceeds the incremental costs.
  4. The company should buy as long as total revenue exceeds present revenues.
  5. The company should buy assuming no additional fixed costs are incurred.

Ans: A, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics

  1. Which one of the following does not affect a make-or-buy decision?
  2. Variable manufacturing costs
  3. Opportunity costs
  4. Incremental revenue
  5. Direct labor

Ans: C, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics

  1. During 2016, it cost Westa, Inc. $18 per unit to produce part T5. During 2017, it has increased to $21 per unit. In 2017, Southside Company has offered to provide Part T5 for $16 per unit to Westa. As it pertains to the make-or-buy decision, which statement is true?
  2. Differential costs are $5 per unit.
  3. Incremental costs are $2 per unit.
  4. Net relevant costs are $2 per unit.
  5. Incremental revenues are $3 per unit.

Ans: A, LO: 3, Bloom: AN, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics

  1. Chapman Company manufactures widgets. Embree Company has approached Chapman with a proposal to sell the company widgets at a price of $125,000 for 100,000 units. Chapman is currently making these components in its own factory. The following costs are associated with this part of the process when 100,000 units are produced:

Direct materials $ 46,500

Direct labor 43,500

Manufacturing overhead 60,000

Total $150,000

The manufacturing overhead consists of $24,000 of costs that will be eliminated if the components are no longer produced by Chapman. From Chapman’s point of view, how much is the incremental cost or savings if the widgets are bought instead of made?

  1. $25,000 incremental savings
  2. $11,000 incremental cost
  3. $11,000 incremental savings
  4. $25,000 incremental cost

Ans: B, LO: 3, Bloom: AN, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics

  1. The cost to produce Part A was $20 per unit in 2016. During 2017, it has increased to $23 per unit. In 2017, Supplier Company has offered to supply Part A for $18 per unit. For the make-or-buy decision,
  2. incremental revenues are $5 per unit.
  3. incremental costs are $3 per unit.
  4. net relevant costs are $3 per unit.
  5. differential costs are $5 per unit.

Ans: D, LO: 3, Bloom: AN, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics

  1. Max Company uses 20,000 units of Part A in producing its products. A supplier offers to make Part A for $7. Max Company has relevant costs of $8 a unit to manufacture Part A. If there is excess capacity, the opportunity cost of not buying Part A from the supplier is
  2. $0.
  3. $20,000.
  4. $140,000.
  5. $160,000.

Ans: B, LO: 3, Bloom: AN, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics

Use the following information for questions 90 and 91.

Truckel, Inc. currently manufactures a wicket as its main product. The costs per unit are as follows:

Direct materials and direct labor $11

Variable overhead 5

Fixed overhead 8

Total $24

  1. The fixed overhead is an allocated common cost. How much is the relevant cost of the wicket?
  2. $36
  3. $24
  4. $19
  5. $16

Ans: B, LO: 3, Bloom: AN, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics

  1. Saran Company has contacted Truckel with an offer to sell it 5,000 of the wickets for $18 each. If Truckel makes the wickets, variable costs are $16 per unit. Fixed costs are $8 per unit; however, $5 per unit is unavoidable. Should Truckel make or buy the wickets?
  2. Buy; savings = $15,000
  3. Buy; savings = $5,000
  4. Make; savings = $10,000
  5. Make; savings = $5,000

Ans: B, LO: 3, Bloom: AN, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics

  1. Galley Industries can produce 100 units of a necessary component part with the following costs:

Direct Materials $20,000

Direct Labor 9,000

Variable Overhead 21,000

Fixed Overhead 8,000

If Galley Industries purchases the component externally, $2,000 of the fixed costs can be avoided. Below what external price for the 100 units would Galley choose to buy instead of make?

  1. $50,000
  2. $56,000
  3. $44,000
  4. $52,000

Ans: D, LO: 3, Bloom: AN, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics

  1. Which decision will involve no incremental revenues?
  2. Make or buy decision
  3. Drop a product line
  4. Accept a special order
  5. Additional processing decision

Ans: A, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics

  1. An opportunity cost
  2. should be initially recorded as an asset.
  3. is the cost of a new product proposal.
  4. is the potential benefit that may be obtained by following an alternative course of action.
  5. is classified as manufacturing overhead.

Ans: C, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics

  1. Opportunity cost must be considered in decisions involving
  2. budgeting.
  3. financial accounting.
  4. CVP analysis.
  5. resources that have alternative uses.

Ans: D, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics

  1. The opportunity cost of an alternate course of action that is relevant to a make-or-buy decision is
  2. subtracted from the “Make” costs.
  3. added to the “Make” costs.
  4. added to the “Buy” costs.
  5. None of these answers are correct.

Ans: B, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics

  1. Opportunity cost is usually
  2. a standard cost.
  3. a potential benefit.
  4. a sunk cost.
  5. included as part of cost of goods sold.

Ans: B, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics

  1. Each of the following is a disadvantage of buying rather than making a component of a company’s product except that
  2. quality control specifications may not be met.
  3. the outside supplier could increase prices significantly in the future.
  4. profitable product lines may be dropped.
  5. the supplier may not deliver on time.

Ans: C, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics

  1. Tex’s Manufacturing Company can make 100 units of a necessary component part with the following costs:

Direct Materials $120,000

Direct Labor 25,000

Variable Overhead 45,000

Fixed Overhead 30,000

If Tex’s Manufacturing Company purchases the component externally, $20,000 of the fixed costs can be avoided. At what external price for the 100 units is the company indifferent between making or buying?

  1. $190,000
  2. $200,000
  3. $210,000
  4. $220,000

Ans: C, LO: 3, Bloom: AN, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Cost Management

  1. Tex’s Manufacturing Company can make 100 units of a necessary component part with the following costs:

Direct Materials $120,000

Direct Labor 25,000

Variable Overhead 45,000

Fixed Overhead 30,000

If Tex’s Manufacturing Company can purchase the component externally for $190,000 and only $5,000 of the fixed costs can be avoided, what is the correct make-or-buy decision?

  1. Buy and save $5,000
  2. Make and save $5,000
  3. Make and save $15,000
  4. Buy and save $15,000

Ans: A, LO: 3, Bloom: AN, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Cost Management

  1. Bell’s Shop can make 1,000 units of a necessary component with the following costs:

Direct Materials $24,000

Direct Labor 6,000

Variable Overhead 3,000

Fixed Overhead ?

The company can purchase the 1,000 units externally for $39,000. The unavoidable fixed costs are $2,000 if the units are purchased externally. An analysis shows that at this external price, the company is indifferent between making or buying the part. What are the fixed overhead costs of making the component?

  1. $8,000
  2. $6,000
  3. $4,000
  4. Cannot be determined.

Ans: A, LO: 3, Bloom: AN, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Cost Management

  1. Ruth Company produces 1,000 units of a necessary component with the following costs:

Direct Materials $34,000

Direct Labor 15,000

Variable Overhead 9,000

Fixed Overhead 10,000

Ruth Company could avoid $6,000 in fixed overhead costs if it acquires the components externally. If cost minimization is the major consideration and the company would prefer to buy the components, what is the maximum external price that Ruth Company would accept to acquire the 1,000 units externally?

  1. $58,000
  2. $64,000
  3. $59,000
  4. $62,000

Ans: B, LO: 3, Bloom: AN, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Cost Management

  1. Ruth Company produces 1,000 units of a necessary component with the following costs:

Direct Materials $27,000

Direct Labor 16,000

Variable Overhead 4,000

Fixed Overhead 7,000

None of Ruth Company‘s fixed overhead costs can be reduced, but another product could be made that would increase profit contribution by $8,000 if the components were acquired externally. If cost minimization is the major consideration and the company would prefer to buy the components, what is the maximum external price that Ruth Company would be willing to accept to acquire the 1,000 units externally?

  1. $46,000
  2. $58,000
  3. $51,000
  4. $55,000

Ans: D, LO: 3, Bloom: AN, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Cost Management

  1. Fornelli, Inc. can produce 100 units of a component part with the following costs:

Direct Materials $15,000

Direct Labor 6,500

Variable Overhead 16,000

Fixed Overhead 11,000

If Fornelli, Inc. can purchase the units externally for $40,000, by what amount will its total costs change?

  1. An increase of $40,000
  2. An increase of $2,500
  3. An increase of $8,500
  4. A decrease of $11,000

Ans: B, LO: 3, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Cost Management

  1. Fornelli, Inc. can produce 100 units of a component part with the following costs:

Direct Materials $15,000

Direct Labor 6,500

Variable Overhead 16,000

Fixed Overhead 11,000

If Fornelli, Inc. can purchase the component part externally for $44,000 and only $4,000 of the fixed costs can be avoided, what is the correct make-or-buy decision?

  1. Make and save $500
  2. Buy and save $500
  3. Make and save $2,500
  4. Buy and save $6,500

Ans: C, LO: 3, Bloom: AN, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Cost Management

  1. Crigui Music produces 60,000 CDs on which to record music. The CDs have the following costs:

Direct Materials $13,000

Direct Labor 15,000

Variable Overhead 3,000

Fixed Overhead 7,000

Crigui could avoid $4,000 in fixed overhead costs if it acquires the CDs externally. If cost minimization is the major consideration and the company would prefer to buy the 60,000 units externally, what is the maximum external price that Crigui would expect to pay for the units?

  1. $34,000
  2. $31,000
  3. $38,000
  4. $35,000

Ans: D, LO: 3, Bloom: AN, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Cost Management

  1. Crigui Music produces 60,000 CDs on which to record music. The CDs have the following costs:

Direct Materials $13,000

Direct Labor 15,000

Variable Overhead 3,000

Fixed Overhead 7,000

None of Crigui’s fixed overhead costs can be reduced, but another product could be made that would increase profit contribution by $4,000 if the CDs were acquired externally. If cost minimization is the major consideration and the company would prefer to buy the CDs, what is the maximum external price that Crigui would be willing to accept to acquire the 60,000 units externally?

  1. $38,000
  2. $34,000
  3. $35,000
  4. $42,000

Ans: C, LO: 3, Bloom: AN, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Cost Management

  1. Tasty Bites produces corn chips. The cost of one batch is below:

Direct materials $18

Direct labor 13

Variable overhead 11

Fixed overhead 14

An outside supplier has offered to produce the corn chips for $30 per batch. How much will Tasty Bites save if it accepts the offer?

  1. $15 per batch
  2. $12 per batch
  3. $26 per batch
  4. $1 per batch

Ans: B, LO: 3, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Cost Management

  1. NF Toy Company is unsure of whether to sell its product assembled or unassembled. The unit cost of the unassembled product is $24 and NF Toy would sell it for $52. The cost to assemble the product is estimated at $17 per unit and the company believes the market would support a price of $68 on the assembled unit. What decision should NF Toy make?
  2. Sell before assembly, the company will be better off by $1 per unit.
  3. Sell before assembly, the company will be better off by $16 per unit.
  4. Process further, the company will be better off by $23 per unit.
  5. Process further, the company will be better off by $11 per unit.

Ans: A, LO: 4, Bloom: AN, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Cost Management

  1. Moreland Clean Company spent $8,000 to produce Product 89, which can be sold as is for $10,000, or processed further incurring additional costs of $3,000 and then be sold for $14,000. Which amounts are relevant to the decision about Product 89?
  2. $8,000, $10,000, and $14,000
  3. $8,000, $3,000, and $14,000
  4. $10,000, $3,000, and $14,000
  5. $8,000, $10,000, $3,000 and $14,000

Ans: C, LO: 4, Bloom: AN, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Cost Management

  1. Pratt Company has old inventory on hand that cost $15,000. Its scrap value is $20,000. The inventory could be sold for $50,000 if manufactured further at an additional cost of $15,000. What should Pratt do?
  2. Sell the inventory for $20,000 scrap value
  3. Dispose of the inventory to avoid any further decline in value
  4. Hold the inventory at its $15,000 cost
  5. Manufacture further and sell it for $50,000

Ans: D, LO: 4, Bloom: AN, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Cost Management

  1. New Age Makeup produces face cream. Each bottle of face cream costs $10 to produce and can be sold for $13. The bottles can be sold as is, or processed further into sunscreen at a cost of $14 each. New Age Makeup could sell the sunscreen bottles for $23 each.
  2. Face cream must be processed further because its profit is $9 each.
  3. Face cream must not be processed further because costs increase more than revenue.
  4. Face cream must not be processed further because it decreases profit by $1 each.
  5. Face cream must be processed further because it increases profit by $3 each.

Ans: B, LO: 4, Bloom: AN, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Cost Management

  1. Janssen Company has old inventory on hand that cost $24,000. Its scrap value is $32,000. The inventory could be sold for $80,000 if manufactured further at an additional cost of $24,000. What should Janssen do?
  2. Sell the inventory for $32,000 scrap value
  3. Dispose of the inventory to avoid any further decline in value
  4. Hold the inventory at its $24,000 cost
  5. Manufacture further and sell it for $80,000.

Ans: D, LO: 4, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Cost Management

  1. A company has a process that results in 24,000 pounds of Product A that can be sold for $8 per pound. An alternative would be to process Product A further at a cost of $160,000 and then sell it for $14 per pound. Should management sell Product A now or should Product A be processed further and then sold? What is the effect of the action?
  2. Process further, the company will be better off by $16,000.
  3. Sell now, the company will be better off by $16,000.
  4. Process further, the company will be better off by $144,000.
  5. Sell now, the company will be better off by $160,000.

Ans: B, LO: 4, Bloom: AN, Difficulty: Hard, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Cost Management

  1. The decision rule on whether to sell or process further
  2. varies from situation to situation.
  3. is process further as long as total revenue exceeds present revenues.
  4. is process further if incremental revenue from such processing exceeds incremental fixed costs.
  5. is process further if incremental revenue from such processing exceeds the incremental processing costs.

Ans: D, LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Strategic/Critical Thinking, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Cost Management

  1. Eddy Company is starting business and is unsure of whether to sell its product assembled or unassembled. The unit cost of the unassembled product is $60 and Eddy Company would sell it for $135. The cost to assemble the product is estimated at $27 per unit and Eddy Company believes the market would support a price of $174 on the assembled unit. What is the correct decision using the sell or process further decision rule?
  2. Sell before assembly, the company will be better off by $27 per unit.
  3. Sell before assembly, the company will be better off by $39 per unit.
  4. Process further, the company will be better off by $39 per unit.
  5. Process further, the company will be better off by $12 per unit.

Ans: D, LO: 4, Bloom: AN, Difficulty: Hard, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Cost Management

  1. Mallory Company manufactures widgets. Bowden Company has approached Mallory with a proposal to sell the company widgets at a price of $82,000 for 100,000 units. Mallory is currently making these components in its own factory. The following costs are associated with this part of the process when 100,000 units are produced:

Direct material $ 31,000

Direct labor 29,000

Manufacturing overhead 40,000

Total $100,000

The manufacturing overhead consists of $16,000 of costs that will be eliminated if the components are no longer produced by Mallory. From Mallory’s point of view, how much is the incremental cost or savings if the widgets are bought instead of made?

  1. $18,000 incremental savings
  2. $6,000 incremental cost
  3. $2,000 incremental savings
  4. $18,000 incremental cost

Ans: B, LO: 4, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Cost Management

  1. 1 The focus of a sell or process further decision is
  2. incremental revenue.
  3. incremental cost.
  4. both incremental revenue and incremental cost.
  5. neither incremental revenue nor incremental cost.

Ans: C, LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Strategic/Critical Thinking, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics

  1. Marcus Company gathered the following data about the three products that it produces:

Present Estimated Additional Estimated Sales

Product Sales Value Processing Costs if Processed Further

A $12,000 $8,000 $21,000

B 14,000 5,000 18,000

C 11,000 3,000 16,000

Which of the products should not be processed further?

  1. Product A
  2. Product B
  3. Product C
  4. Products A and C

Ans: B, LO: 4, Bloom: AN, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Cost Management

  1. Serene Dairy has four product lines: sour cream, ice cream, yogurt, and butter. The total cost of producing the milk base for the products is $45,000, which has been allocated based on the gallons of milk base used by each product. Results for July follow:

Sour Cream Ice Cream Yogurt Butter Total

Units sold 2,000 500 400 2,000 4,900

Revenue $10,000 $20,000 $10,000 $20,000 $60,000

Variable departmental costs 6,000 13,000 4,200 4,800 28,000

Fixed costs 5,000 2,000 3,000 7,000 17,000

Net income (loss) $ (1,000) $ 5,000 $ 2,800 $ 8,200 $15,000

How much are total joint costs of the products?

  1. $28,000
  2. $17,000
  3. $45,000
  4. $15,000

Ans: C, LO: 4, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Cost Management

  1. Which of the following is not involved in the sell or process further decision?
  2. Revenues
  3. Variable costs
  4. Opportunity costs
  5. Fixed costs

Ans: D, LO: 4, Bloom: K, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Cost Management

  1. All of the following are relevant to the sell or process further decision except
  2. costs incurred beyond the split-off point.
  3. revenues at the split-off point.
  4. costs incurred before the split-off point.
  5. revenues beyond the split-off point.

Ans: C, LO: 4, Bloom: K, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Cost Management

  1. Costs incurred before the split-off point are
  2. sunk costs.
  3. incremental costs.
  4. relevant costs.
  5. opportunity costs.

Ans: A, LO: 4, Bloom: K, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Cost Management

  1. Which of the following terms are synonymous?
  2. Avoidable costs and irrelevant costs
  3. Unavoidable costs and incremental costs
  4. Sunk costs and relevant costs
  5. Joint costs and sunk costs

Ans: D, LO: 4, Bloom: K, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Cost Management

Use the following information for questions 125–127.

Paul Bunyon Lumber Co. produces several products that can be sold at the split-off point or processed further and then sold. The following results are from a recent period:

Sales Value Additional Sales Value after

Product at Split-off Variable Costs Further Processing

Green lumber $159,600 $24,000 $178,000

Rough lumber 124,000 28,200 173,600

Sawdust 102,000 19,600 130,000

  1. The additional profit that would result from processing rough lumber further is
  2. $21,400.
  3. $49,600.
  4. $145,400.
  5. $95,800.

Ans: A, LO: 4, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Cost Management

  1. Which products should be processed further?
  2. Green lumber and rough lumber
  3. Green lumber and sawdust
  4. Rough lumber and sawdust
  5. All three products

Ans: C, LO: 4, Bloom: K, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Cost Management

  1. What is the increase in profit if the appropriate products are processed further?
  2. $24,200
  3. $29,800
  4. $96,000
  5. $255,800

Ans: B, LO: 4, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Cost Management

  1. The point in the production process when joint products are readily identifiable is the
  2. separation point.
  3. split-off point.
  4. common point.
  5. break-even point.

Ans: B, LO: 4, Bloom: K, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Cost Management

  1. The costs incurred prior to the split-off point are referred to as
  2. separable costs.
  3. split-off costs.
  4. joint product costs.
  5. joint costs.

Ans: D, LO: 4, Bloom: K, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Cost Management

Use the following information for questions 130–131.

Hi-Tech Inc. has several outdated computers that cost a total of $17,800 and could be sold as scrap for $4,600. They could be updated for an additional $2,400 and sold. If Hi-Tech updates the computers and sells them, net income will increase by $9,000.

  1. At what price were the updated versions sold?
  2. $26,800
  3. $13,200
  4. $13,600
  5. $16,000

Ans: D, LO: 4, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Cost Management

  1. What amount would be considered sunk costs?
  2. $2,400
  3. $9,000
  4. $17,800
  5. $20,200

Ans: C, LO: 4, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Cost Management

  1. When deciding whether or not to replace old equipment with new equipment, the overriding consideration is the
  2. book value of the old equipment.
  3. cost of replacing the old equipment.
  4. salvage value of the old equipment.
  5. difference between future cost savings and the new equipment’s costs.

Ans: D, LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Strategic/Critical Thinking, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics

  1. In an equipment replacement decision, the cost of the old equipment is a(n)
  2. incremental cost.
  3. sunk cost.
  4. relevant cost.
  5. opportunity cost.

Ans: B, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Strategic/Critical Thinking, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics

Use the following information for questions 134–136.

Chung Inc. is considering the replacement of a piece of equipment with a newer model. The following data has been collected:

Old Equipment New Equipment

Purchase price $225,000 $375,000

Accumulated depreciation 90,000 – 0 –

Annual operating costs 300,000 240,000

If the old equipment is replaced now, it can be sold for $60,000. Both the old equipment’s remaining useful life and the new equipment’s useful life is 5 years.

  1. Which of the following amounts is irrelevant to the replacement decision?
  2. $375,000
  3. $135,000
  4. $315,000
  5. $60,000

Ans: B, LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Strategic/Critical Thinking, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics

  1. What is the net cost of the new equipment?
  2. $375,000
  3. $315,000
  4. $150,000
  5. $75,000

Ans: B, LO: 5, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Strategic/Critical Thinking, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics

  1. The net advantage (disadvantage) of replacing the old equipment with the new equipment is
  2. $60,000
  3. $(15,000)
  4. $(75,000)
  5. $90,000

Ans: B, LO: 5, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Strategic/Critical Thinking, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics

  1. Which of the following is relevant information in a decision whether old equipment presently being used should be replaced by new equipment?
  2. The cost of the old equipment
  3. The salvage value of the old equipment
  4. The book value of the old equipment
  5. The accumulated depreciation of the old equipment

Ans: B, LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Strategic/Critical Thinking, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics

  1. A company is deciding whether or not to replace some old equipment with new equipment. Which of the following is not considered in the incremental analysis?
  2. Annual operating cost of the new equipment
  3. Annual operating cost of the old equipment
  4. Net cost of the new equipment
  5. Book value of the old equipment

Ans: D, LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Strategic/Critical Thinking, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics

  1. What role does a trade-in allowance on old equipment play in a decision to retain or replace equipment?
  2. It is relevant since it increases the cost of the new equipment.
  3. It is not relevant since it reduces the cost of the old equipment.
  4. It is not relevant to the decision since it does not impact the cost of the new equipment.
  5. It is relevant since it reduces the cost of the new equipment.

Ans: D, LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Strategic/Critical Thinking, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics

  1. A company decided to replace an old machine with a new machine. Which of the following is considered a relevant cost?
  2. The book value of the old equipment
  3. Depreciation expense of the old equipment
  4. The loss on disposal of the old equipment
  5. The current disposal price of the old equipment

Ans: D, LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Strategic/Critical Thinking, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics

  1. The cash disposal value of old equipment is considered to be a (an)
  2. irrelevant cost.
  3. avoidable cost.
  4. sunk cost.
  5. relevant cost.

Ans: D, LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Strategic/Critical Thinking, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics

  1. Which of the following is not relevant information in a decision whether old equipment presently being used should be replaced by new equipment?
  2. The cash price of the new equipment
  3. The salvage value of the old equipment
  4. The book value of the old equipment
  5. The cost savings if the new equipment is purchased

Ans: C, LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Strategic/Critical Thinking, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics

  1. Book value of old equipment is considered to be a
  2. relevant cost.
  3. semi-relevant cost.
  4. sunk cost.
  5. cost that can be changed by a present or future decision.

Ans: C, LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Strategic/Critical Thinking, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics

  1. A company is deciding on whether to replace some old equipment with new equipment. Which of the following is not a relevant cost for incremental analysis?
  2. Annual operating cost of the new equipment
  3. Annual operating cost of the old equipment
  4. Net cost of the new equipment
  5. Accumulated depreciation on the old equipment

Ans: D, LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Strategic/Critical Thinking, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics

  1. A company is considering replacing old equipment with new equipment. Which of the following is a relevant cost for incremental analysis?
  2. Annual depreciation charge on the old equipment
  3. Book value of the old equipment
  4. Estimated annual depreciation of the new equipment
  5. Cost of the new equipment

Ans: D, LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Strategic/Critical Thinking, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics

  1. In a retain or replace equipment decision, trade-in allowance available on old equipment
  2. increases the cost of the new equipment.
  3. is relevant because it will not be realized if the old equipment is retained.
  4. is not relevant to the decision.
  5. reduces the cost of the old equipment.

Ans: B, LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Strategic/Critical Thinking, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics

  1. Sala Co. is contemplating the replacement of an old machine with a new one. The following information has been gathered:

Old Machine New Machine

Price $300,000 $600,000

Accumulated Depreciation 90,000 -0-

Remaining useful life 10 years -0-

Useful life -0- 10 years

Annual operating costs $240,000 $180,600

If the old machine is replaced, it can be sold for $24,000.

Which of the following amounts is a sunk cost?

  1. $240,000
  2. $180,600
  3. $600,000
  4. $210,000

Ans: D, LO: 5, Bloom: C, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Cost Management

  1. Sala Co. is contemplating the replacement of an old machine with a new one. The following information has been gathered:

Old Machine New Machine

Price $300,000 $600,000

Accumulated Depreciation 90,000 -0-

Remaining useful life 10 years -0-

Useful life -0- 10 years

Annual operating costs $240,000 $180,600

If the old machine is replaced, it can be sold for $24,000.

Which of the following amounts is relevant to the replacement decision?

  1. $210,000
  2. $300,000
  3. $59,400
  4. $90,000

Ans: C, LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Cost Management

  1. Sala Co. is contemplating the replacement of an old machine with a new one. The following information has been gathered:

Old Machine New Machine

Price $300,000 $600,000

Accumulated Depreciation 90,000 -0-

Remaining useful life 10 years -0-

Useful life -0- 10 years

Annual operating costs $240,000 $180,600

If the old machine is replaced, it can be sold for $24,000.

The net advantage (disadvantage) of replacing the old machine is

  1. $18,000
  2. $24,000
  3. $(6,000)
  4. $(60,000)

Ans: A, LO: 5, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Cost Management

  1. Abel Company produces three versions of baseball bats: wood, aluminum, and hard rubber. A condensed segmented income statement for a recent period follows:

Wood Aluminum Hard Rubber Total

Sales $500,000 $200,000 $65,000 $765,000

Variable expenses 325,000 140,000 58,000 523,000

Contribution margin 175,000 60,000 7,000 242,000

Fixed expenses 75,000 35,000 22,000 132,000

Net income (loss) $100,000 $ 25,000 $(15,000) $110,000

Assume none of the fixed expenses for the hard rubber line are avoidable. What will be total net income if the line is dropped?

  1. $125,000
  2. $103,000
  3. $105,000
  4. $140,000

Ans: B, LO: 6, Bloom: AN, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Cost Management

  1. Abel Company produces three versions of baseball bats: wood, aluminum, and hard rubber. A condensed segmented income statement for a recent period follows:

Wood Aluminum Hard Rubber Total

Sales $500,000 $200,000 $65,000 $765,000

Variable expenses 325,000 140,000 58,000 523,000

Contribution margin 175,000 60,000 7,000 242,000

Fixed expenses 75,000 35,000 22,000 132,000

Net income (loss) $100,000 $ 25,000 $(15,000) $110,000

Assume all of the fixed expenses for the hard rubber line are avoidable. What will be total net income if the line is dropped?

  1. $125,000
  2. $103,000
  3. $105,000
  4. $140,000

Ans: A, LO: 6, Bloom: AN, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Cost Management

  1. What will most likely occur if a company eliminates an unprofitable segment when a portion of fixed costs are unavoidable?
  2. All expenses of the eliminated segment will be eliminated.
  3. Net income will decrease.
  4. Net income will increase.
  5. The company’s variable costs will increase.

Ans: B, LO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Cost Management

  1. A company has three product lines, one of which reflects the following results:

Sales $215,000

Variable expenses 125,000

Contribution margin 90,000

Fixed expenses 130,000

Net loss $ (40,000)

If this product line is eliminated, 60% of the fixed expenses can be eliminated and the other 40% will be allocated to other product lines. If management decides to eliminate this product line, the company’s net income will

  1. increase by $40,000.
  2. decrease by $90,000.
  3. decrease by $12,000.
  4. increase by $12,000.

Ans: C, LO: 6, Bloom: AN, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Cost Management

  1. A company is considering eliminating a product line. The fixed costs currently allocated to the product line will be allocated to other product lines upon discontinuance. If the product line is discontinued,
  2. total net income will increase by the amount of the product line’s fixed costs.
  3. total net income will decrease by the amount of the product line’s fixed costs.
  4. the contribution margin of the product line will indicate the net income increase or decrease.
  5. the company’s total fixed costs will decrease.

Ans: C, LO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Cost Management

  1. A segment has the following data:

Sales $700,000

Variable expenses 300,000

Fixed expenses 550,000

What will be the incremental effect on net income if this segment is eliminated, assuming the fixed expenses will be allocated to profitable segments?

  1. $400,000 increase
  2. $400,000 decrease
  3. $5,000 decrease
  4. Cannot be determined from the data provided.

Ans: B, LO: 6, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Cost Management

  1. Corn Crunchers has three product lines. Its only unprofitable line is Corn Nuts, the results of which appear below for 2013:

Sales $1,400,000

Variable expenses 920,000

Fixed expenses 600,000

Net loss $ (120,000)

If this product line is eliminated, 30% of the fixed expenses can be eliminated. How much are the relevant costs in the decision to eliminate this product line?

  1. $180,000
  2. $1,520,000
  3. $1,340,000
  4. $1,100,000

Ans: D, LO: 6, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Cost Management

  1. North Division has the following information:

Sales $1,200,000

Variable expenses 640,000

Fixed expenses 620,000

If this division is eliminated, the fixed expenses will be allocated to the company’s other divisions. What is the incremental effect on net income if the division is dropped?

  1. $60,000 increase
  2. $620,000 decrease
  3. $560,000 decrease
  4. $580,000 increase

Ans: C, LO: 6, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Cost Management

  1. The potential effects of the decision to eliminate a line of business on existing employees and the community are
  2. ignored in incremental analysis.
  3. quantitative factors.
  4. qualitative factors.
  5. opportunity costs.

Ans: C, LO: 6, Bloom: C, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Cost Management

  1. When will the elimination of a product line have no effect on the company’s overall profit?
  2. When the avoidable fixed costs equal the product line’s contribution margin
  3. When the unavoidable fixed costs equal the product line’s contribution margin
  4. When there are no fixed costs incurred by the product line
  5. When the product line contribution margin is negative

Ans: A, LO: 6, Bloom: C, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Cost Management

  1. Accounting’s contribution to the decision-making process occurs in all of the following steps except to
  2. identify the problem and assign responsibility.
  3. determine possible courses of action.
  4. review results of the decision.
  5. make a decision.

Ans: A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Investment Decisions

  1. It costs Dryer Company $26 per unit ($18 variable and $8 fixed) to produce its product, which normally sells for $38 per unit. A foreign wholesaler offers to purchase 5,000 units at $21 each. Dryer would incur special shipping costs of $2 per unit if the order were accepted. Dryer has sufficient unused capacity to produce the 5,000 units. If the special order is accepted, what will be the effect on net income?
  2. $5,000 decrease
  3. $5,000 increase
  4. $15,000 increase
  5. $90,000 increase

Ans: B, LO: 2, Bloom: AN, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Investment Decisions

  1. In a make-or-buy decision, opportunity costs are
  2. added to the make total cost.
  3. deducted from the make total cost.
  4. added to the buy total cost.
  5. ignored.

Ans: A, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Investment Decisions

  1. Which of the following would generally not affect a make-or-buy decision?
  2. Selling expenses
  3. Direct labor
  4. Variable manufacturing costs
  5. Opportunity cost

Ans: A, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Investment Decisions

  1. A cost that cannot be changed by any present or future decision is a(n)
  2. incremental cost.

b opportunity cost.

  1. sunk cost.
  2. variable cost.

Ans: C, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics

  1. If an unprofitable segment is eliminated
  2. it is impossible for net income to decrease.
  3. fixed expenses allocated to the eliminated segment will be eliminated.
  4. variable expenses of the eliminated segment will be eliminated.
  5. it is impossible for net income to increase.

Ans: C, LO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics

  1. All of the following are relevant in deciding whether to eliminate an unprofitable segment except the segment’s
  2. sales.
  3. variable expenses.
  4. contribution margin.
  5. fixed expenses.

Ans: D, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics

Answers to Multiple Choice Questions

ItemAns.ItemAns.ItemAns.ItemAns.ItemAns.ItemAns.ItemAns.
31.b51.b71.a91.b111.d131.c151.a
32.b52.a72.b92.d112.b132.d152.b
33.c53.a73.d93.a113.d133.b153.c
34.b54.d74.a94.c114.b134.b154.c
35.c55.b75.c95.d115.d135.b155.b
36.d56.d76.a96.b116.d136.b156.d
37.c57.d77.d97.b117.b137.b157.c
38.b58.d78.b98.c118.c138.d158.c
39.d59.b79.d99.c119.b139.d159.a
40.c60.a80.a100.a120.c140.d160.a
41.c61.b81.d101.a121.d141.d161.b
42.c62.d82.b102.b122.c142.c162.a
43.b63.c83.b103.d123.a143.c163.a
44.b64.b84.a104.b124.d144.d164.c
45.c65.b85.c105.c125.a145.d165.c
46.a66.d86.a106.d126.c146.b166.d
47.d67.b87.b107.c127.b147.d
48.b68.d88.d108.b128.b148.c
49.d69.b89.b109.a129.d149.a
50.d70.c90.b110.c130.d150.b

BRIEF Exercises

BE 167

Sedgwick Inc. is considering Plan 1 which is estimated to have sales of $40,000 and costs of $15,500. The company currently has sales of $37,000 and costs of $14,000.

Instructions

Compare plans using incremental analysis.

Ans: N/A, LO: 1, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Investment Decisions

Solution 167 (3 min.)

Incremental revenue ($40,000 – $37,000) $3,000

Incremental costs ($15,500 – $14,000) (1,500)

Incremental increase in profit if Plan 1 is selected $1,500

BE 168

Pederson Enterprises produces giant stuffed bears. Each bear consists of $12 of variable costs and $9 of fixed costs and sells for $45. A wholesaler offers to buy 8,000 units at $14 each, of which Pederson has the capacity to produce. Pederson will incur extra shipping costs of $1 per bear.

Instructions

Determine the incremental income or loss that Pederson Enterprises would realize by accepting the special order.

Ans: N/A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Investment Decisions

Solution 168 (5 min.)

Incremental revenue (8,000 × $14) $112,000

Incremental variable costs ($12 × 8,000) (96,000)

Incremental shipping costs ($1× 8,000) (8,000)

Incremental profit if special order accepted $ 8,000

BE 169

Notson, Inc. produces several models of clocks. An outside supplier has offered to produce the commercial clocks for Notson for $420 each. Notson needs 1,200 clocks annually. Notson has provided the following unit costs for its commercial clocks:

Direct materials $100

Direct labor 140

Variable overhead 80

Fixed overhead (40% avoidable) 150

Instructions

Prepare an incremental analysis which shows the effect of the make-or-buy decision.

Ans: N/A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics

Solution 169 (5 min.)

Incremental Analysis Incremental Effect

Cost to buy (1,200 × $420) $(504,000)

Cost savings:

Savings of DM $100 × 1,200 = $120,000

Savings of DL $140 × 1,200 = 168,000

Savings of VOH $80 × 1,200 = 96,000

Savings of FOH 40% × $150 × 1,200 = 72,000

Total cost savings + 456,000

Incremental net cost to buy $ (48,000)

BE 170

Parks Corporation currently manufactures 3,000 staplers annually for its main product. The costs per stapler are as follows:

Direct materials $ 3

Direct labor 7

Variable overhead 4

Fixed overhead 7

Total $21

Gallup Company has contacted Parks with an offer to sell it 3,000 staplers for $18 each. $5 of the fixed overhead per unit is unavoidable.

Instructions

Prepare an incremental analysis for the make-or-buy decision.

Ans: N/A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics

Solution 170 (5 min.)

Incremental cost to buy (3,000 × $18) $(54,000)

Incremental savings on direct materials (3,000 × $3) + 9,000

Incremental savings on direct labor (3,000 × $7) + 21,000

Incremental savings on variable MOH (3,000 × $4) + 12,000

Incremental savings on fixed MOH (3,000 × $2) + 6,000

Incremental net cost to buy $ (6,000)

BE 171

Calc, Inc. owns a machine that produces baskets for the gift packages the company sells. The company uses 900 baskets in production each month. The costs of making one basket is $4 for direct materials, $3 for variable manufacturing overhead, $2 for direct labor, and $5 for fixed manufacturing overhead. The unit cost is based on the monthly production of 900 baskets. The company determined that 30% of the fixed manufacturing overhead is avoidable. An outside supplier has offered to sell Calc the baskets for $13 each, and can supply all the units it needs.

Instructions

Prepare an incremental analysis to determine if Calc should buy the baskets from the supplier.

Ans: N/A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics

Solution 171 (6–8 min.)

Incremental cost to buy (900 × $13) $(11,700)

Incremental cost savings:

DM ($4 × 900) +3,600

VOH ($3 × 900) +2,700

DL ($2 × 900) +1,800

FOH ($5 × 30% × 900) +1,350

Additional cost to buy $ (2,250)

or

Make Buy

Incremental cost to buy (900 × $13) $11,700

Incremental costs to make: DM ($4 × 900) $3,600

VOH ($3 × 900) 2,700

DL ($2 × 900) 1,800

FOH 4,500 3,150

Incremental cost to buy $12,600 $14,850

BE 172

Hernandez, Inc. manufactures three models of picture frames for a total of 8,000 frames per year. The unit cost to produce a metal frame follows:

Direct materials $ 6

Direct labor 8

Variable overhead 2

Fixed overhead (70% unavoidable) 5

Total $21

A local company has offered to supply Hernandez the 8,000 metal frames it needs for $17 each.

Instructions

Create an incremental analysis for the make-or-buy decision.

Ans: N/A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics

Solution 172 (5 min.)

Incremental cost to buy (8,000 × $17) $(136,000)

Incremental savings:

Direct materials savings (8,000 × $6) +48,000

Direct labor savings (8,000 × $8) +64,000

Variable overhead savings (8,000 × $2) +16,000

Fixed overhead savings—avoidable portion (8000 × $1.50) +12,000

Incremental savings if “buy” decision is made $ 4,000

BE 173

Wood Chuck Furniture currently manufactures rocking chairs as its main product. Each chair uses one seat cushion and one back cushion with the following costs per set of cushions (one seat and one back):

Direct materials $ 1

Direct labor 10

Variable overhead 5

Fixed overhead 8

Total $24

Shepert Company has contacted Wood Chuck with an offer to sell it 5,000 sets of cushions for $18 each. If Wood Chuck buys the cushions, $2 of the fixed overhead per unit will be allocated to other products.

Instructions

Should Wood Chuck make or buy the cushions?

Ans: N/A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 4, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics

Solution 173 (5 min.)

Cost to make – Cost to buy = Incremental cost

($24 – $2) – $18 = $4 = Incremental cost per set

Incremental cost to make = $4 × 5,000 units = $20,000

Therefore, Wood Chuck should buy to save $4 per set.

BE 174

Paola Farms, Inc. produces a crop of chickens at a total cost of $66,000. The production generates 60,000 chickens which can be sold for $1 each to a slaughtering company, or the chickens can be slaughtered in house and then sold for $2.75 each. It costs $65,000 more to turn the annual chicken crop into chicken meat.

Instructions

If Paola Farms slaughters the chickens, determine how much incremental profit or loss it would report. What should Paola Farms do?

Ans: N/A, LO: 4, Bloom: AN, Difficulty: Medium, Min: 4, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics

Solution 174 (4 min.)

Incremental revenues: ($2.75 – $1.00) × 60,000 chickens = $105,000

Incremental costs: given as $65,000

Incremental profits: $105,000 – $65,000 = $40,000 profit

Paola Farms should slaughter.

BE 175

Elmdale Company has a machine that affixes labels to bottles. The machine has a book value of $80,000 and a remaining useful life of 3 years and no salvage value. A new, more efficient machine is available at a cost of $300,000 that will have a 5-year useful life with no salvage value. The new machine will lower annual variable production costs from $520,000 to $410,000.
BE 175 (Cont.)

Instructions

Prepare an analysis showing whether the old machine should be retained or replaced.

Ans: N/A, LO: 5, Bloom: AN, Difficulty: Medium, Min: 4, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Investment Decisions

Solution 175 (4 min.)

Retain Equipment Replace Equipment Net Income Change

Variable manufacturing costs $1,560,000 $1,230,000 $330,000*

New machine cost (300,000)

Net savings over 3 years $ 30,000

*For 3 years of remaining life

BE 176

Keith Inc. has 4 product lines: sour cream, ice cream, yogurt, and butter. Demand of individual products is not affected by changes in other product lines. 30% of the fixed costs are direct, and the other 70% are allocated. Results of June follow:

Sour Cream Ice Cream Yogurt Butter Total

Units sold 2,000 500 400 200 3,100

Revenue $10,000 $20,000 $10,000 $20,000 $60,000

Variable departmental costs 6,000 13,000 4,200 4,800 28,000

Fixed costs 5,000 2,000 3,000 7,000 17,000

Net income (loss) $ (1,000) $ 5,000 $ 2,800 $ 8,200 $15,000

Instructions

Prepare an incremental analysis of the effect of dropping the sour cream product line.

Ans: N/A, LO: 6, Bloom: AP, Difficulty: Medium, Min: 4, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics

Solution 176 (4 min.)

Incremental revenue $(10,000)

Incremental variable cost savings + 6,000

Incremental fixed cost savings ($5,000 x .30) + 1,500

Incremental decrease in profits if dropped $ (2,500)

BE 177

Parino Company has three product lines in its retail stores: books, videos, and music. The allocated fixed costs are based on units sold and are unavoidable. Demand of individual products is not affected by changes in other product lines. Results of the fourth quarter are presented below:

Books Music Videos Total

Units sold 1,000 2,000 2,000 5,000

Revenue $24,000 $48,000 $30,000 $102,000

Variable departmental costs 15,000 22,000 23,000 60,000

Direct fixed costs 3,000 6,000 4,000 13,000

Allocated fixed costs 4,400 8,800 8,800 22,000

Net income (loss) $ 1,600 $11,200 $ (5,800) $ 7,000

BE 177 (Cont.)

Instructions

Prepare an incremental analysis of the effect of dropping the Video product line.

Ans: N/A, LO: 6, Bloom: AP, Difficulty: Medium, Min: 4, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics

Solution 177 (5 min.)

Incremental revenue $(30,000)

Incremental savings on variable costs +23,000

Incremental savings on direct fixed costs +4,000

Incremental decrease in profit to drop video line $ (3,000)

BE 178

Harmark has three product lines in its retail stores: kites, wind socks, and flags. Results of the fourth quarter are presented below:

Kites Wind Socks Flags Total

Units sold 1,000 2,000 2,000 5,000

Revenue $22,000 $40,000 $23,000 $85,000

Variable departmental costs 17,000 22,000 12,000 51,000

Direct fixed costs 1,000 3,000 2,000 6,000

Allocated fixed costs 8,000 8,000 8,000 24,000

Net income (loss) $ (4,000) $ 7,000 $ 1,000 $ 4,000

The allocated fixed costs are unavoidable. Demand of individual products is not affected by changes in other product lines.

Instructions

What will happen to profits if Harmark discontinues the Kites product line?

Ans: N/A, LO: 6, Bloom: AP, Difficulty: Medium, Min: 4, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics

Solution 178 (5 min.)

Incremental revenue $(22,000)

Incremental costs:

Variable cost savings +17,000

Direct fixed cost savings +1,000

Drop in profits if discontinued $ (4,000)

BE 179

Dolls R Us sells three products in its retail stores: baby dolls, teenage dolls, and plush dolls. Results of the fourth quarter are below:

Baby Dolls Teenage Dolls Plush Dolls Total

Units sold 1,000 2,000 2,000 5,000

Revenue $32,000 $43,000 $26,000 $101,000

Variable departmental costs 22,000 24,000 13,000 59,000

Direct fixed costs 5,000 4,000 3,000 12,000

Allocated fixed costs 6,000 7,000 7,000 20,000

Net income (loss) $ (1,000) $ 8,000 $ 3,000 $ 10,000

BE 179 (cont.)

Instructions

Demand for individual products is not affected by changes in other product lines. Prepare an incremental analysis to determine if the Baby Dolls should be discontinued

Ans: N/A, LO: 6, Bloom: AN, Difficulty: Medium, Min: 4, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics

Solution 179 (5 min.)

Incremental revenue $(32,000)

Incremental costs:

Variable cost savings +22,000

Direct cost savings +5,000

Drop in profits if discontinued $ (5,000)

Exercises

Ex. 180

Roland Company operates a small factory in which it manufactures two products: A and B. Production and sales result for last year were as follow:

A B

Units sold 8,000 16,000

Selling price per unit 65 52

Variable costs per unit 35 30

Fixed costs per unit 15 15

For purposes of simplicity, the firm allocates total fixed costs over the total number of units of A and B produced and sold.

The research department has developed a new product (C) as a replacement for product B. Market studies show that Roland Company could sell 11,000 units of C next year at a price of $80, the variable costs per unit of C are $39. The introduction of product C will lead to a 10% increase in demand for product A and discontinuation of product B. If the company does not introduce the new product, it expects next year’s result to be the same as last year’s.

Instructions

Should Roland Company introduce product C next year? Explain why or why not. Show calculations to support your decision.

Ans: N/A, LO: 1, 6, Bloom: AN, Difficulty: Hard, Min: 9, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics

Solution 180 (8 – 10 min.)

Calculation of contribution margin per unit:

A B C

Selling price per unit $ 65 $ 52 $ 80

Less: variable costs/unit 35 30 39

Net incremental net income $ 30 $ 22 $ 41

Fixed costs = 15 × (8,000 + 16,000) = 360,000

Company profit with Products A and B:

A B Total

Units sold 8,000 16,000

Sales revenue $ 520,000 $ 832,000 $ 1,352,000

Less: Variable costs 280,000 480,000 $ 760,000

Contribution margin $ 240,000 $ 352,000 592,000

Less: Fixed costs 360,000

Net profit $ 232,000

Solution 180 (cont.)

Company profit with Products A and C:

A C Total

Units sold 8,800* 11,000

Sales Revenue $ 572,000 $ 880,000 $ 1,452,000

Less: Variable costs 308,000 429,000 737,000

Contribution margin $ 264,000 $ 451,000 715,000

Less: Fixed costs 360,000

Net profit $ 355,000

*Product A sales increase by 10%, (8,000 ´ 110%)

Yes product C should be introduced since net profit increases by $123,000 ($355,000 – $232,000)

Ex. 181

Felter Company produced and sold 50,000 units of product and is operating at 70% of plant capacity. Unit information about its product is as follows:

Sales price $70

Variable manufacturing cost $45

Fixed manufacturing cost ($500,000 ÷ 50,000) 10 55

Profit per unit $15

The company received a proposal from a foreign company to buy 10,000 units of Felter Company’s product for $50 per unit. This is a one-time only order and acceptance of this proposal will not affect the company’s regular sales. The president of Felter Company is reluctant to accept the proposal because he is concerned that the company will lose money on the special order.

Instructions

Prepare a schedule reflecting an incremental analysis of this proposal and indicate the effect the acceptance of this order might have on the company’s income.

Ans: N/A, LO: 2, Bloom: AN, Difficulty: Hard, Min: 9, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics

Solution 181 (9–13 min.)

FELTER COMPANY

Incremental Analysis

Proposal to sell 10,000 units at $50

Net Income

Reject Order Accept Order Increase (Decrease)

Revenues (10,000 × $50) $ -0- $500,000 $500,000

Costs (10,000 × $45) -0- (450,000) (450,000)

Net Income $ -0- $ 50,000 $ 50,000

Felter Company would increase its income by $50,000 in accepting the special order.

Ex. 182

Carney Company manufactures cappuccino makers. For the first eight months of 2013, the company reported the following operating results while operating at 80% of plant capacity:

Sales (500,000 units) $90,000,000

Cost of goods sold 54,000,000

Gross profit 36,000,000

Operating expenses 24,000,000

Net income $12,000,000

An analysis of costs and expenses reveals that variable cost of goods sold is $95 per unit and variable operating expenses are $35 per unit.

In September, Carney Company receives a special order for 40,000 machines at $135 each from a major coffee shop franchise. Acceptance of the order would result in $10,000 of shipping costs but no increase in fixed expenses.

Instructions

(a) Prepare an incremental analysis for the special order.

(b) Should Carney Company accept the special order? Justify your answer.

Ans: N/A, LO: 2, Bloom: AN, Difficulty: Medium, Min: 12, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics

Solution 182 (12–17 min.)

(a) Net Income

Reject Order Accept Order Increase (Decrease)

Revenues $ -0- $5,400,000 $5,400,000

Cost of Goods Sold -0- 3,800,000* (3,800,000)

Operating Expense -0- 1,410,000** (1,410,000)

Net Income $ -0- $ 190,000 $ 190,000

*Variable cost of goods sold = 40,000 × $95 = $3,800,000.

**Variable operating expenses = 40,000 × $35 = $1,400,000 + $10,000 = $1,410,000.

(b) The incremental analysis shows Carney Company should accept the special order because incremental revenues exceed incremental costs. This recommendation assumes that acceptance of the special order will not affect relations with existing customers.

Ex. 183

Gregg Company supplies schools with floor mattresses to use in physical education classes. Gregg has received a special order from a large school district to buy 600 mats at $45 each. Acceptance of the special order will not affect fixed costs but will result in $1,200 of shipping costs.

For the first 6 months of 2016, the company reported the following operating results while operating at 80% capacity:

Sales (100,000 units) $7,000,000

Cost of goods sold 4,200,000

Gross profit 2,800,000

Operating expenses 2,000,000

Net income $ 800,000

Cost of goods sold was 75% variable and 25% fixed; operating expenses were 70% variable and 30% fixed.

Ex 183 (cont.)

Instructions

(a) Prepare an incremental analysis for the special order.

(b) Should Gregg Company accept the special order? Justify your answer.

Ans: N/A, LO: 2, Bloom: E, Difficulty: Medium, Min: 13, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics

Solution 183 (13–18 min.)

(a) Net Income

Reject Order Accept Order Increase (Decrease)

Revenues $ -0- $27,000 $27,000

Cost of Goods Sold -0- 18,900 (18,900)

Operating Expense -0- 9,600 (9,600)

Net Income $ -0- $ (1,500) $ (1,500)

Variable cost of goods sold = $4,200,000 × 75% = $3,150,000.

Variable cost of goods sold per unit = $3,150,000 ÷ 100,000 = $31.50.

Variable cost of goods sold for the special order = 600 × $31.50 = $18,900.

Variable operating expenses = $2,000,000 × 70% = $1,400,000

Variable operating expenses per unit = $1,400,000 ÷ 100,000 = $14

Variable operating expenses for the special order = 600 × $14 = $8,400 + $1,200

= $9,600

(b) The incremental analysis shows Gregg Company should not accept the special order because incremental costs exceed incremental revenues.

Ex. 184

Larkin Company produces golf discs which it normally sells to retailers for $6 each. The cost of manufacturing 25,000 golf discs is:

Materials $ 10,000

Labor 30,000

Variable overhead 20,000

Fixed overhead 40,000

Total $100,000

Larkin also incurs 5% sales commission ($0.30) on each disc sold.

Rudd Corporation offers Larkin $4.25 per disc for 3,000 discs. Rudd would sell the discs under its own brand name in foreign markets not yet served by Larkin. If Larkin accepts the offer, its fixed overhead will increase from $40,000 to $43,000 due to the purchase of a new imprinting machine. No sales commission will result from the special order.

Instructions

(a) Prepare an incremental analysis for the special order.

(b) Should Larkin accept the special order? Why or why not?

Ans: N/A, LO: 2, Bloom: E, Difficulty: Hard, Min: 12, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics

Solution 184 (12 min.)

(a) Reject Accept

Order Order Net Income Effect

Revenues $ -0- $12,750 $12,750

Materials ($0.40) -0- (1,200) (1,200)

Labor ($1.20) -0- (3,600) (3,600)

Variable overhead ($0.80) -0- (2,400) (2,400)

Fixed overhead -0- (3,000) (3,000)

Sales commissions -0- -0- -0-

Net income $ -0- $ 2,550 $ 2,550

(b) As shown in the incremental analysis, Larkin should accept the special order because incremental revenue exceeds incremental expenses by $2,550.

Ex. 185

Kasten, Inc. budgeted 10,000 widgets for production during 2016. Kasten has capacity to produce 12,000 units. Fixed factory overhead is allocated to production. The following estimated costs were provided:

Direct material ($7/unit) $ 70,000

Direct labor ($15/hr. × 2 hrs./unit) 300,000

Variable manufacturing overhead ($4/unit) 40,000

Fixed factory overhead costs ($5/unit) 50,000

Total $460,000

Cost per unit = $46

Instructions

Answer each of the following independent questions:

  1. Kasten received an order for 1,000 units from a new customer in a country in which Kasten has never done business. This customer has offered $43 per widget. Should Kasten accept the order?

  1. Kasten received an offer from another company to manufacture the same quality widgets for $39. Should Kasten let someone else manufacture all 10,000 widgets and focus only on distribution?

Ans: N/A, LO: 2, 3, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics

Solution 185 (10–12 min.)
  1. Yes, Kasten can make an extra $2,000.

Incremental revenue per widget $43

Incremental cost per widget: $7 + ($15 × 2) + $4 = 41

Incremental profit per unit $ 2

Total incremental profit = $2 × 1,000 = $2,000

  1. Yes, Kasten will save $20,000 if it buys instead of makes.

Cost to buy per widget $39

Cost to make per widget: $7 + ($15 × 2) + $4 = 41

Incremental savings per widget if purchased $ 2

Total incremental savings if purchased = $2 × 10,000 = $20,000

Ex. 186

Coyle Company manufactured 6,000 units of a component part that is used in its product and incurred the following costs:

Direct materials $35,000

Direct labor 15,000

Variable manufacturing overhead 10,000

Fixed manufacturing overhead 20,000

$80,000

Another company has offered to sell the same component part to the company for $13 per unit. The fixed manufacturing overhead consists mainly of depreciation on the equipment used to manufacture the part and would not be reduced if the component part was purchased from the outside firm. If the component part is purchased from the outside firm, Coyle Company has the opportunity to use the factory equipment to produce another product which is estimated to have a contribution margin of $22,000.

Instructions

Prepare an incremental analysis report for Coyle Company which can serve as informational input into this make or buy decision.

Ans: N/A, LO: 3, Bloom: E, Difficulty: Medium, Min: 13, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics

Solution 186 (13–18 min.)

Make Buy Increase (Decrease)

Direct materials $35,000 $ -0- $ 35,000

Direct labor 15,000 -0- 15,000

Variable manufacturing overhead 10,000 -0- 10,000

Fixed manufacturing overhead 20,000 20,000 -0-

Purchase price (6,000 × $13) -0- 78,000 (78,000)

Total annual cost 80,000 98,000 (18,000)

Opportunity cost 22,000 -0- 22,000

Total cost $102,000 $98,000 $ 4,000

Income is expected to increase by $4,000 if the component part is purchased from the outside firm and the new product is manufactured.

Ex. 187

Agler Corporation currently manufactures a subassembly for its main product. The costs per unit are as follows:

Direct materials $ 1

Direct labor 10

Variable overhead 5

Fixed overhead 8

Total $24

Funkhouser Company has contacted Agler with an offer to sell it 4,000 of the subassemblies for $17 each. If Agler buys the subassemblies, $2 of the fixed overhead per unit will be allocated to other products.

+
-
Only 0 units of this product remain

You might also be interested in