1. Molar Inc. currently sells 40,000 dental tools to its regular customers but it has a capacity to produce 50,000 tools. Its product sells for $30 per tool and the variable costs incurred are as follows on a per tool basis:

Direct materials $8

Direct labour $4

Sales commission $2

A customer has proposed a special order to purchase 10,000 tools at a special price of $20 per tool. If Molar accepts the order, the company will not have to pay its sales personnel their sales commissions. However, the company will incur a shipping cost of $3 per tool. Molar should reject the order if the price is below _________.

a) $33

b) $15

c) $12

d) $9

e) $31

2. Which of the following statement is true?

a) The term contribution margin appears in the income statement prepared using the absorption costing approach

b) Fixed manufacturing overhead is treated as a period cost under absorption costing method

c) Absorption costing method is more useful than variable costing approach in managerial accounting and internal decision-making purposes

d) Variable costing method is used in external financial reporting

e) Fixed manufacturing overhead is treated as a product cost under absorption costing method

3. The main difference between a static and flexible budget is that:

a) static budget is used in the service industry while flexible budget is used for manufacturing sector only.

b) static budget is prepared for a single level of activity while a flexible budget can be flexed for different activity levels.

c) static budget is more useful for performance measurement purposes.

d) static budget is constructed using standard costs while the flexible budget uses a zero-based approach.

e) The flexible budget variance is caused by the difference in the sales volume between budgeted and actual activity.

4. Skye Company needs 20,000 parts to use in its production cycle. Steelers Inc. has offered to sell the parts to Skye for $44 per unit. However, 60% of Skyes fixed overhead would still continue regardless of the decision made. The costs for Skye to make the part (per unit) are:

Direct materials $12

Direct labour $26

Fixed overhead $10

What decision should Skye take?

a) Buy part, resulting in $120,000 cost advantage

b) Buy part, resulting in $80,000 cost advantage

c) Make part, resulting in $120,000 cost advantage

d) Make part, resulting in $40,000 cost advantage.

e) There is no difference in costs whether to make in-house or buy from external source