1. Simon Corp. makes an unassembled chair that sells for $20. Product costs are $8 per chair. The product line manager suggests that Simon Corp. should instead sell an assembled chair, as revenues will be higher. Specifically, the market price for this chair is $25. The cost of assembly is $4. Which of the following statements is true?

1 point

The company should not sell the assembled chair because costs per chair are $4 higher.

The company should sell the assembled chair because the costs of assembly are irrelevant.

The company should sell the assembled chair because the $5 in incremental revenue is greater than the $4 in incremental costs.

The company should sell the assembled chair because revenues per chair are $5 higher.

2.

Question 2

Joseph Company incurs per-unit costs of $11 in variable costs and $4 in fixed costs to produce its main product, which sells for $24. A new customer in the market, Katherine, offers to purchase 2,500 units at $16 each.

If the special offer is accepted, the units sold to Katherine would have to be produced with capacity that was otherwise going to be used to produce units sold to other customers.

Assuming Joseph Company is adopting a financial perspective, which of the following is true regarding the decision of whether or not to accept Katherine's special order?

1 point

Joseph should accept the offer, because each unit sold to Katherine increases profits by $5.

Joseph is indifferent because fixed costs are the same regardless.

Joseph should decline the offer, because each unit sold to Katherine decreases profits by $8.

Joseph should accept the offer, because each unit sold to Katherine increases profits by $1.

3.

Question 3

Boris Company has multiple business units. Unit B has the following information: sales revenue is $300,000; variable expenses are $200,000; fixed expenses are $150,000. Fixed expenses - which are mostly represented by traceable (and avoidable) business unit costs (e.g., rent, depreciation, etc.) - are calculated for each business unit separately.

What is the effect on Boris Company as a whole if Unit B is eliminated?

1 point

Total profit will increase by $50,000.

Total profit will decrease by $50,000.

Total profit will decrease by $300,000.

Total profit will not change.

4.

Question 4

Lillian Corporation currently makes a key input into its main product. Bernard, a manager within Lillian, is arguing that the organization should outsource production of this input, and buy it from a third-party supplier.

Currently, the per-unit manufacturing costs are $18 in materials, $20 in labor, $12 in variable manufacturing overhead, and $8 in fixed costs per unit. The fixed costs are allocated from the total of fixed costs generated by the entire factory.

Bernard's third-party supplier would charge Lillian $60 per unit, and could sell to Lillian the entire 1,000 units Lillian needs each year.

Also, if Bernard's plan is implemented, it can use the capacity currently being used to produce an input to generate additional profit of $11,000.

Assuming Lillian is adopting a financial perspective, which of the following is true?

1 point

Lillian should not follow Bernard's plan, because doing so will decrease profits by $2,000.

Lillian should follow Bernard's plan, because doing so will increase profits by $1,000.

Lillian should not follow Bernard's plan, because doing so will decrease profits by $10,000.

Lillian should follow Bernard's plan, because doing so will increase profits by $9,000.

5.

Question 5

Opal Company has multiple business units. Unit 1 has the following information:

Sales revenue: $200,000

Variable expenses: 140,000

Fixed expenses: 100,000

Fixed expenses, which are mostly represented by shared capacity costs (e.g., rent, depreciation, etc. for the factory as a whole), are allocated evenly to business units.

Harry, a manager within Opal Company, is wondering whether Opal should drop Unit 1.

Which of the following statements are true? (Check all that apply.)

1 point

If the fixed expenses are avoidable, they are relevant.

The $140,000 in variable expenses is relevant.

If the fixed expenses are unavoidable, they are relevant.

The $200,000 in sales revenue is relevant.