About question #74, the answer is [$32 - 12 - 6 - 4 - 0.50] 2,000 = $19,000 where is the "4" come from?

ch4 Student: ___________________________________________________________________________ 1. Differential analysis involves the comparison of one or more alternative courses of action with the status quo. True 2. If there is only one alternative course of action and the status quo is unacceptable, then there really is no decision to make. True 3. False The full cost fallacy occurs when a decision-maker fails to include fixed manufacturing overhead in the product's cost. True 9. False Fixed costs are always classified as sunk costs in differential cost analysis. True 8. False Only variable costs can be differential costs. True 7. False Short-run decisions often have long-run implications. True 6. False Differential analysis cannot be used for long-run decisions because it cannot incorporate the timing of revenues and costs (i.e., the time-value of money). True 5. False A decision must involve at least two alternative courses of action. True 4. False False When deciding whether or not to accept a special order, a decision-maker should focus on differential costs instead of full costs. True False 10. The differential analysis approach to pricing for special orders could lead to under-pricing in the long-run because fixed costs are not included in the analysis. True False 11. Target costs equal the difference between the target selling price and the desired profit margin. True False 12. Dumping occurs when a company exports its product to consumers in another country at an export price that is below the domestic price. True False 13. Price discrimination is the practice of selling identical goods or services to different customers at different prices. True False 14. Peak load pricing is the practice of setting prices lowest when the quantity demanded for the product approaches the physical capacity to produce it. True False 15. The alternative courses of action in a make-or-buy decision are (a) manufacture needed items internally or (b) purchase needed items externally. True False 16. The reason opportunity costs are not included in the accounting system is because they involve estimates. True False 17. Financial statements prepared in accordance with generally accepted accounting principles (GAAP) provide differential cost information. True False 18. In the short-run, plant capacity is fixed and product choices have to be made that optimize the use of available capacity. True False 19. With constrained resources, the important measure of profitability is the contribution margin per unit of scarce resource. True False 20. The theory of constraints focuses on determining the optimal product mix when one or more resources restrict the attainment of a goal or objective. True False 21. The relevance of a particular cost to a decision is determined by the: (CMA adapted) A. riskiness of the decision. B. number of decision variables. C. amount of the cost. D. potential effect on the decision. E. accuracy of the cost. 22. In a decision analysis situation, which one of the following costs is not likely to contain a variable cost component? (CMA adapted) A. Labor B. Overhead C. Straight-line Depreciation D. Selling E. Material 23. Which of the following statements regarding differential costs is (are) false? (A) The full cost fallacy occurs when a decision-maker fails to include fixed manufacturing overhead in the product's cost. (B) When deciding whether or not to accept a special order, a decision-maker should focus on differential costs instead of full costs. A. B. C. D. Only A. Only B. Neither A nor B is false. Both A and B are true. 24. Which of the following costs are irrelevant for a special order that will allow an organization to utilize some of its present idle capacity? A. Direct materials B. Indirect materials C. Variable overhead D. Unavoidable fixed overhead E. Differential sales commission 25. Which of the following statements regarding special orders is (are) true? (A) The primary decision for special orders is determining whether the differential revenue is greater than the differential costs associated with the order. (B) The differential analysis approach to pricing for special orders could lead to underpricing in the longrun because fixed costs are not included in the analysis. A. B. C. D. Only A. Only B. Neither A nor B is false. Both A and B are true. 26. Which of the following costs are not considered in a differential analysis for a make-or-buy decision? A. Indirect materials and indirect labor if the item is manufactured internally B. Direct materials and direct labor if the item is purchased C. Variable overhead if the item is manufactured internally D. Fixed overhead that can be avoided if the item is purchased E. Fixed overhead that will continue if the item is purchased 27. For the past five years, the RS Company has produced and sold electronic magnets to chemistry labs throughout the United States. Recently, a strong competitor has entered the market and RS is considering whether it should continue to produce and sell the electronic magnets. The following information has been gathered to assist management in their decision: A) The machinery used to produce the magnet was purchased five-years ago for $500,000. B) Four of the employees who produce magnets would be reassigned to the magnifying glass division. C) The space now used to produce the magnets would be used to eliminate the need to rent warehouse space. D) Sales volume (units) is estimated to drop by 50% once the competitor becomes fully operational. Which of the items listed above is (are) relevant to the decision to continue the production and sale of the electronic magnets? A. A and C. B. B and C. C. C and D. D. A, B, and D. E. B, C, and D. 28. Which of the following statements about the theory of constraints is (are) true? (A) The theory of constraints focuses on determining the optimal product mix when one or more resources restrict the attainment of a goal or objective. (B) The theory of constraints focuses on maximizing the rate of throughput contribution while minimizing investment and other operating costs. A. B. C. D. Only A. Only B. Neither A nor B is true. Both A and B are true. 29. The theory of constraints focuses on maximizing throughput contribution margin while minimizing all of the following except A. B. C. D. selling expenses per unit sold. production bottlenecks. investment in buildings. investment in inventories. 30. The AZ Company manufactures kitchen utensils. The company is currently producing well below its full capacity. The BV Company has approached AZ with an offer to buy 20,000 utensils at $0.75 each. AZ sells its utensils wholesale for $0.85 each; the average cost per unit is $0.83, of which $0.12 is fixed costs. If AZ were to accept BV's offer, what would be the increase in AZ's operating profits? A. $400 B. $800 C. $1,600 D. $2,000 E. AZ's operating profits will not increase as a result of accepting the special order. 31. The MNK Company has gathered the following information for a unit of its most popular product: The above cost information is based on 4,000 units. A foreign distributor has offered to buy 1,000 units at a price of $16 per unit. This special order would not disturb regular sales. Variable shipping and other selling expenses would be an additional $1 per unit for the special order. If the special order is accepted, MNK's operating profits will increase by: A. $1,000. B. $1,600. C. $2,000. D. $4,000. E. $5,000. 32. The following information relates to the Tram Company for the upcoming year. The cost of goods sold includes $1,200,000 of fixed manufacturing overhead; the operating expenses include $100,000 of fixed marketing expenses. A special order offering to buy 50,000 units for $7.50 per unit has been made to Tram. Fortunately, there will be no additional operating expenses associated with the order and Tram has sufficient capacity to handle the order. How much will operate profits be increased if Tram accepts the special order? A. $25,000 B. $62,500 C. $100,000 D. $125,000 E. Operating profits will not increase as a result of accepting the special order. 33. The Regal Baking Company is considering the expansion of its business into door-to-door delivery service. This would require an additional $12,500 in labor costs per month. Company-owned vehicles now used to make morning deliveries to restaurants could be used in the afternoons to make the home deliveries. However, it is estimated that an additional $5,000 would be required per month for gas, oil, and maintenance. It is further estimated that the home delivery use of the trucks would be allocated 45% of the existing $6,500 fixed vehicle costs. What is the differential delivery cost per month for expanding into the home delivery market? A. B. C. D. $12,500 $17,500 $19,750 $20,425 34. The Blade Division of Axe Company produces hardened steel blades. One-third of Blade's output is sold to the Forestry Products Division of Axe; the remainder is sold to outside customers. Blades' estimated operating profit for the year is: The Forestry Division has an opportunity to purchase 10,000 blades of the same quality from an outside supplier on a continuing basis. The Blade Division cannot sell any additional products to outside customers. Should the Axe Company allow its Forestry Division to purchase the blades from the outside supplier at $1.25 per unit? A. B. C. D. No; making the blades will save Axe $1,500. Yes; buying the blades will save Axe $1,500. No; making the blades will save Axe $2,500. Yes; buying the blades will save Axe $2,500. 35. The Blade Division of Axe Company produces hardened steel blades. One-third of Blade's 30,000 unit output is sold to the Forestry Products Division of Axe; the remainder is sold to outside customers. Blades' estimated operating profit for the year is: The Forestry Division has an opportunity to purchase 10,000 blades of the same quality from an outside supplier on a continuing basis. The purchase price would be $1.25. If the Blade Division is now operating at full capacity and can sell all its units to outside customers at the present selling price, what is the differential cost to Axe of requiring that the blades be made internally and sold to the Forestry Division? A. B. C. D. $2,500 $5,000 $7,500 $10,000 36. The CJP Company produces 10,000 units of item S10 annually at a total cost of $190,000. The XYZ Company has offered to supply 10,000 units of S10 per year for $18 per unit. If CJP accepts the offer, $4 per unit of the fixed overhead would be saved. In addition, some of CJP's facilities could be rented to a third party for $15,000 per year. What are the relevant costs for the "make" alternative? A. B. C. D. $160,000 $165,000 $175,000 $185,000 37. The CJP Company produces 10,000 units of item S10 annually at a total cost of $190,000. The XYZ Company has offered to supply 10,000 units of S10 per year for $18 per unit. If CJP accepts the offer, $4 per unit of the fixed overhead would be saved. In addition, some of CJP's facilities could be rented to a third party for $15,000 per year. At what price would CJP be indifferent to XYZ's offer? A. B. C. D. $17.00 $17.50 $18.50 $19.50 38. Differential costs are (CMA adapted) A. B. C. D. the difference in total costs that result from selecting one choice instead of another. the profit foregone by selecting one choice instead of another. a cost that continues to be incurred in the absence of activity. a cost common to all choices in questions and not clearly allocable to any of them. 39. The period of time over which capacity will be unchanged is A. B. C. D. long run sunk cost short run product life cycle 40. The time from initial research and development to the time that support to the customer ends is the A. B. C. D. product life cycle short run target time predatory price 41. The price based on customers' perceived value for the product and the price that competitors charge: A. B. C. D. predatory price target price target cost dumping price 42. The practice of setting price below cost with the intent to drive competitors out of business: A. B. C. D. predatory pricing target pricing target costing peak-load pricing 43. The practice of setting prices highest when the quantity demanded for the product approaches capacity: A. B. C. D. predatory pricing target pricing peak-load pricing price fixing 44. Agreement among business competitors to set prices at a particular level: A. B. C. D. predatory pricing target pricing peak-load pricing price fixing 45. Exporting a product to another country at a price below domestic cost: A. B. C. D. dumping target pricing peak-load pricing price fixing 46. A target cost is computed as A. B. C. D. cost to manufacture plus a desired markup cost to manufacture plus designated selling expenses market willingness to pay - cost to manufacture market willingness to pay - desired profit 47. The operations of Blink Corporation are divided into the Will Division and the Aloy Division. Projections for the next year are as follows: Operating income for Blink Corporation as a whole if the Carter Division were dropped would be A. B. C. D. $133,000 $112,000 $91,000 $49,000 48. Bryon Industries manufactures 20,000 components per year. The manufacturing cost of the components was determined as follows: An outside supplier has offered to sell the component for $17. If Bryon purchases the component from the outside supplier, the manufacturing facilities would be unused and could be rented out for $10,000. If Bryon purchases the component from the supplier instead of manufacturing it, the effect on income would be: A. B. C. D. a $70,000 increase a $50,000 decrease a $10,000 decrease a $30,000 increase 49. Albany Industries produces two products. Information about the products is as follows: The company's fixed costs totaled $70,000, of which $15,000 can be directly traced to Product 1 and $40,000 can be directly traced to Product 2. The effect on the firm's profits if Product 2 is dropped would be a A. B. C. D. $10,000 increase $35,000 increase $35,000 decrease $10,000 decrease 50. Which of the following costs would continue to be incurred even if a segment is eliminated? A. B. C. D. Direct fixed expenses Variable cost of goods sold Common fixed costs Variable selling and administrative expenses 51. NorWest Shoe Company has two retail stores, one in Albertville and the other in Bloomer. The Albertville store had sales of $100,000, a contribution margin of 35 percent, and a segment margin of $14,000. The company's two stores have total sales of $250,000, contribution margin of 32 percent, and a total segment margin of $31,000. The contribution margin for the Bloomer store must have been A. B. C. D. $65,000 $170,000 $105,000 $45,000 52. Miller Industries has two divisions: the West Division and the East Division. Information relating to the divisions for the year just ended is as follows: Common fixed expenses have been allocated equally to each of the two divisions. Miller's segment margin for the West Division is A. B. C. D. $150,000 $102,000 $30,000 $110,000 53. Chetek Industries manufactures 15,000 components per year. The manufacturing cost of the components was determined to be as follows: Assume that the fixed manufacturing overhead reflects the cost of Chetek's manufacturing facility. This facility cannot be used for any other purpose. An outside supplier has offered to sell the component to Chetek for $34. If Chetek Industries purchases the component from the outside supplier, the effect on income would be a A. B. C. D. $30,000 decrease $30,000 increase $90,000 decrease $90,000 increase 54. Chetek Industries manufactures 15,000 components per year. The manufacturing cost of the components was determined to be as follows: Assume Chetek Industries could avoid $40,000 of fixed manufacturing overhead if it purchases the component from an outside supplier. An outside supplier has offered to sell the component for $34. If Chetek purchases the component from the supplier instead of manufacturing it, the effect on income would be a A. B. C. D. $60,000 increase $10,000 increase $100,000 decrease $140,000 increase 55. The operations of Superior Corporation are divided into the Northrup Division and the Hawley Division. Projections for the next year are as follows: Operating income for Superior Corporation, as a whole, if the Hawley Division were dropped would be A. B. C. D. $45,000 $80,000 $100,000 $120,000 56. The following information relates to a product produced by Ashland Company: Fixed selling costs are $1,000,000 per year. Variable selling costs of $4 per unit sold are added to cover the transportation cost. Although production capacity is 500,000 units per year, Ashland expects to produce only 400,000 units next year. The product normally sells for $40 each. A customer has offered to buy 60,000 units for $30 each. The customer will pay the transportation charge on the units purchased. If Ashland accepts the special order, the effect on income would be a A. B. C. D. $60,000 increase $180,000 increase $420,000 increase $600,000 decrease 57. If there is excess capacity, the minimum acceptable price for a special order must cover A. only variable costs associated with the special order. B. variable and fixed manufacturing costs associated with the special order. C. variable and incremental fixed costs associated with the special order. D variable costs and incremental fixed costs associated with the special order, plus the contribution margin . usually earned on regular units. 58. The Winwood Company manufactures two products: Q and T. The costs and revenues are as follows: Total demand for Product Q is 14,000 units and for Product T is 9,000 units. Machine time is a scarce resource. During the year, 54,000 machine hours are available. Product Q requires 5 machine hours per unit, while Product T requires 3 machine hours per unit. How many units of Products Q and T should Winwood produce? A. B. C. D. a b c d 59. Roswell Inc has 5,400 machine hours available each month. The following information on the company's three products is available: If market demand exceeds the available capacity, in what sequence should orders be filled to maximize the company's profits? A. B. C. D. Product 1 first, product 2 second, and product 3 third Product 2 first, product 3 second, and product 1 third Product 3 first, product 2 second, and product 1 third Product 3 first, product 1 second, and product 2 third 60. Lerner Inc has 6,600 machine hours available each month. The following information on the company's three products is available: If market demand exceeds the available capacity, in what sequence should orders be filled to maximize the company's profits? A. B. C. D. Product X first, product Z second, and product Y third Product Y first, product Z second, and product X third Product Y first, product X second, and product Z third Product Z first, product X second, and product Y third 61. The Clapton Company manufactures two products: Alpha and Beta. The costs and revenues are as follows: Total demand for Alpha is 10,000 units and for Beta is 6,000 units. Machine hours is a scarce resource. During the year, 50,000 machine hours are available. Alpha requires 4 machine hours per unit, while Beta requires 2.5 machine hours per unit. How many units of Alpha and Beta should Clapton produce? A. B. C. D. a b c d 62. The Clapton Company manufactures two products: Alpha and Beta. The costs and revenues are as follows: Total demand for Alpha is 10,000 units and for Beta is 6,000 units. Machine time is a scarce resource. During the year, 50,000 machine hours are available. Alpha requires 4 machine hours per unit, while Beta requires 2.5 machine hours per unit. What is the maximum contribution margin Clapton can achieve during a year? A. B. C. D. $444,250 $1,014,000 $488,000 $855,500 63. Zurek Inc has 5,400 machine hours available each month. The following information on the company's three products is available: The market demand is limited to 2,000 units of each of the three products. How many units of each should Zurek produce and sell? A. B. C. D. a b c d 64. Zurek Inc has 5,400 machine hours available each month. The following information on the company's three products is available: The market demand is limited to 2,000 units of each of the three products. What is the maximum possible contribution margin that Zurek could make in any month? A. B. C. D. $81,000 $46,500 $43,000 $51,000 65. Winton Inc has 12,000 machine hours available each month. The following information on the company's four products is available: If market demand exceeds the available capacity, in what sequence should orders be filled to maximize the company's profits? A. B. C. D. Product W first, product X second, product Z third, and product Y last. Product Z first, product W second, product X third, and product Y last. Product X first, product W second, product Y third, and product Z last. Product X first, product Z second, product Y third, and product W last. 66. The Axle Division of Becker Company produces axles for off-road sport vehicles. One-third of Axle's output is sold to an internal division of Becker; the remainder is sold to outside customers. Axle's estimated operating profit for the year is: The internal division has an opportunity to purchase 10,000 axles of the same quality from an outside supplier on a continuing basis. The Axle Division cannot sell any additional products to outside customers. Should the Becker Company allow its internal division to purchase the axles from the outside supplier at $13.00 per unit? A. B. C. D. No; making the axles will save Becker $15,000. Yes; buying the axles will save Becker $15,000. No; making the axles will save Becker $30,000. Yes; buying the axles will save Becker $30,000. 67. The Axle Division of Becker Company produces axles for off-road sport vehicles. One-third of Axle's 30,000 unit output is sold to an internal division of Becker; the remainder is sold to outside customers. Axles' estimated operating profit for the year is: The internal division has an opportunity to purchase 10,000 axles of the same quality from an outside supplier on a continuing basis. The purchase price would be $13.00. If the Axle Division is now operating at full capacity and can sell all its units to outside customers at the present selling price, what is the differential cost to Becker of requiring that the axles be made internally and sold to the internal division? A. B. C. D. $25,000 $50,000 $70,000 $100,000 68. The Axle Division of Becker Company produces axles for off-road sport vehicles. One-third of Axle's 30,000 unit output is sold to an internal division of Becker; the remainder is sold to outside customers. Axles' estimated operating profit for the year is: The internal division has an opportunity to purchase 10,000 axles of the same quality from an outside supplier on a continuing basis. The purchase price would be $13.00. If the Axle Division is now operating at full capacity and can sell all its units to outside customers at the present selling price, what is the minimum selling price that Axle should accept from the internal division? A. B. C. D. $10.00 $13.00 $15.00 $20.00 69. The Axle Division of Becker Company produces axles for off-road sport vehicles. One-third of Axle's output is sold to an internal division of Becker; the remainder is sold to outside customers. Axle's estimated operating profit for the year is: The internal division has an opportunity to purchase 10,000 axles of the same quality from an outside supplier on a continuing basis. The Axle Division cannot sell any additional products to outside customers. What is the minimum selling price that Axle should accept from the internal division? A. B. C. D. $10.00 $13.00 $15.00 $50.00 70. The Bremmer Company produces 5,000 units of item ZQ98 annually at a total cost of $200,000. The Daisy Company has offered to supply all 5,000 units of ZQ98 per year for $35 per unit. If Bremmer accepts the offer, $8 per unit of the fixed overhead would be saved. In addition, some of Bremmer's leased facilities could be vacated, reducing lease payments by $30,000 per year. What are the relevant costs for the "make" alternative? A. B. C. D. $120,000 $175,000 $190,000 $200,000 71. The Bremmer Company produces 5,000 units of item ZQ98 annually at a total cost of $200,000. The Daisy Company has offered to supply all 5,000 units of ZQ98 per year for $35 per unit. If Bremmer accepts the offer, $8 per unit of the fixed overhead would be saved. In addition, some of Bremmer's leased facilities could be vacated, reducing lease payments by $30,000 per year. At what price would Bremmer be indifferent to Daisy's offer? A. B. C. D. $40 $38 $35 $24 72. The Speedy Delivery Service is considering the expansion of its business into afternoon retail delivery service. This would require an additional $25,000 in labor costs per month. Company-owned vehicles now used to make morning deliveries to local manufacturers could be used in the afternoons to make retail deliveries. However, it is estimated that an additional $10,000 would be required per month for gas, oil, and maintenance. It is further estimated that the retail delivery use of the trucks would be allocated 45% of the existing $13,000 fixed vehicle costs. What is the differential delivery cost per month for expanding into the retail delivery market? A. B. C. D. $25,000 $35,000 $39,500 $40,850 73. The Lemaire Company manufactures wiring tools. The company is currently producing well below its full capacity. The Boisvert Company has approached Lemaire with an offer to buy 10,000 tools at $1.75 each. Lemaire sells its tools wholesale for $1.85 each; the average cost per unit is $1.83, of which $0.27 is fixed costs. If Lemaire were to accept Boisvert's offer, what would be the increase in Lemaire's operating profits? A. $800 B. $1,000 C. $1,900 D. $2,900 E. Lemaire's operating profits will not increase as a result of accepting the special order. 74. The Buchanan Company has gathered the following information for a unit of its most popular product: The above cost information is based on 10,000 units. A distributor has offered to buy 2,000 units at a price of $32 per unit. This special order would not disturb regular sales. Special packaging and other selling expenses would be an additional $0.50 per unit for the special order. If the special order is accepted, Buchanan's operating profits will increase by: A. $4,000. B. $6,400. C. $8,000. D. $19,000. E. $20,000. 75. The Buchanan Company has gathered the following information for a unit of its most popular product: The above cost information is based on 10,000 units. A distributor has offered to buy 2,000 units at a price of $32 per unit. The distributor claims this special order would not disturb regular sales at $42. Special packaging and other selling expenses would be an additional $0.50 per unit for the special order. How many units of regular sales could be lost before this contract is not profitable? A. 0 units. B. 950 units. C. 1, 000 units. D. 2,000 units. E. 10,000 units. 76. The following information relates to the Jax Company for the upcoming year. The cost of goods sold includes $2,400,000 of fixed manufacturing overhead; the operating expenses include $200,000 of fixed marketing expenses. A special order offering to buy 50,000 units for $15.00 per unit has been made to Jax. Fortunately, there will be no additional operating expenses associated with the order and Jax has sufficient capacity to handle the order. How much will operating profits increase if Jax accepts the special order? A. $50,000 B. $125,000 C. $200,000 D. $250,000 E. Operating profits will not increase as a result of accepting the special order. 77. The following information relates to the Jax Company for the upcoming year. The cost of goods sold includes $2,400,000 of fixed manufacturing overhead; the operating expenses include $200,000 of fixed marketing expenses. A special order offering to buy 50,000 units for $15.00 per unit has been made to Jax. Fortunately, there will be no additional operating expenses associated with the order; however, Jax is operating at full capacity. How much will operating profits increase if Jax accepts the special order? A. $50,000 B. $125,000 C. $200,000 D. $250,000 E. Operating profits will not increase as a result of accepting the special order. 78. The following information relates to a product produced by Ashland Company: Fixed selling costs are $1,000,000 per year. Although production capacity is 500,000 units per year, Ashland expects to produce only 400,000 units next year. The product normally sells for $80 each. A customer has offered to buy 60,000 units for $60 each. The customer will pay the transportation charge on the units purchased. If Ashland accepts the special order, the effect on income would be a A. B. C. D. $120,000 increase $360,000 increase $840,000 increase $1,200,000 decrease 79. The operations of Gadwell Corporation are divided into the Blink Division and the Blur Division. Projections for the next year are as follows: Operating income for Gadwell Corporation as a whole if the Blur Division were dropped would be A. B. C. D. $66,500 $56,000 $45,500 $24,500 80. The operations of Gadwell Corporation are divided into the Blink Division and the Blur Division. Projections for the next year are as follows: If the Blur Division were dropped, Blink Division's sales would increase by 30%. If this happened, the operating income for Gadwell Corporation as a whole would be A. B. C. D. $72,800 $56,000 $79,100 $59,150 81. Which of the following statements regarding differential costs is (are) true? (A) The full cost fallacy occurs when a decision-maker includes fixed manufacturing overhead in the product's cost. (B) When deciding whether or not to accept a special order, a decision-maker should focus on differential costs instead of full costs. A. B. C. D. Only A. Only B. Neither A nor B is false. Both A and B are true. 82. Which of the following statements regarding special orders is (are) false? (A) The primary decision for special orders is determining whether the differential revenue is greater than the differential costs associated with the order. (B) The differential analysis approach to pricing for special orders will always lead to underpricing in the long-run because fixed costs are not included in the analysis. A. B. C. D. Only A. Only B. Neither A nor B is false. Both A and B are true. 83. Which of the following costs are not considered in a differential analysis for a make-or-buy decision? A. Indirect materials and indirect labor if the item is purchased B. Direct materials and direct labor if the item is manufactured internally C. Variable overhead if the item is purchased D. Fixed overhead that will continue if the item is purchased E. Fixed overhead that can be avoided if the item is purchased 84. For the past five years, the Selin Company has produced and sold frequency meters to genetics labs throughout the United States. Recently, a strong competitor has entered the market and Selin is considering whether it should continue to produce and sell the frequency meters. The following information has been gathered to assist management in their decision: A) Sales volume (units) is estimated to drop by 25% once the competitor becomes fully operational. B) The equipment used to produce the meters was purchased five-years ago for $1,500,000. C) The space now used to produce the meters would be reallocated to eliminate the need to rent warehouse space. D) Three of the employees who produce meters would be reassigned to the oscillator division. Which of the items listed above is (are) relevant to the decision to continue the production and sale of the frequency meters? A. A and C. B. B and C. C. C and D. D. A, B, and D. E. B, C, and D. 85. Which of the following statements about the theory of constraints is (are) true? (A) The theory of constraints focuses on determining the optimal product mix when two or more resources restrict the attainment of a goal or objective. (B) The theory of constraints focuses on maximizing the rate of throughput contribution while maximizing investment and other operating costs. A. B. C. D. Only A. Only B. Neither A nor B is true. Both A and B are true. 86. The Miller Company manufactures wiring tools. The company is currently producing well below its full capacity. The Brisbois Company has approached Miller with an offer to buy 5,000 tools at $17.50 each. Miller sells its tools wholesale for $18.50 each; the average cost per unit is $18.30, of which $2.70 is fixed costs. Required: a. If Miller were to accept Brisbois's offer, what would be the increase in Miller's operating profits? b. Assume that Miller is operating at full capacity. If Miller were to accept Brisbois's offer, what would be the change in Miller's operating profits? 87. The Pierce Company has gathered the following information for a unit of its most popular product: The above cost information is based on 10,000 units. Pierce currently sells 8,500 units for $62 per unit. A distributor has offered to buy 1,000 units at a price of $50 per unit. This special order would not disturb regular sales. Required: a. Calculate Pierce's change in operating profits if the special order is accepted. b. How many units of regular sales could be lost before this contract is not profitable? 88. The following information relates to the Klessig Company for the upcoming year. The cost of goods sold includes $3,000,000 of fixed manufacturing overhead; the operating expenses include $450,000 of fixed marketing expenses. A special order offering to buy 50,000 units for $25.00 per unit has been made to Klessig. Fortunately, there will be no additional operating expenses associated with the order and Klessig has sufficient capacity to handle the order. Required: a. How much will operating profits increase if Klessig accepts the special order? b. Assume that Klessig is operating at full capacity. How much will operating profits change if Klessig accepts the special order? 89. The following information relates to a product produced by Bayfield Company: Fixed selling costs are $1,000,000 per year. Although production capacity is 900,000 units per year, Bayfield expects to produce only 800,000 units next year. The product normally sells for $180 each. A customer has offered to buy 60,000 units for $150 each. The customer will pay the transportation charge on the units purchased. Required: a. Compute the effect on income if Bayfield accepts the special order. b. If Bayfield accepts the special order, how much could normal sales drop before all of the differential profits disappear? 90. Carson Corporation produces and sells three products. The three products, Alpha, Beta, and Gamma, are sold in a local market and in a regional market. At the end of the first quarter of the current year, the following income statement (in thousands of dollars) has been prepared: Management has expressed special concern with the regional market because of the extremely poor return on sales. This market was entered a year ago because of excess capacity. It was originally believed that the return on sales would improve with time, but after a year, no noticeable improvement can be seen from the results as reported in the above quarterly statement. In attempting to decide whether to eliminate the regional market, the following information has been gathered: All administrative costs and fixed manufacturing costs are common to the three products and the two markets and are fixed for the period. Remaining marketing costs are fixed for the period and separable by market. All fixed costs have been arbitrarily allocated to markets. Required: (a) Assuming there are no alternative uses for the Carson Corporation's present capacity, would you recommend dropping the regional market? Why or why not? (b) Prepare the quarterly income statement showing contribution margins by products. Do not allocate fixed costs to products. (c) It is believed that a new product can be ready for sale next year if the Carson Corporation decides to go ahead with continued research. The new product can be produced by simply converting equipment presently used in producing product Gamma. This conversion will increase fixed costs by $40,000 per quarter. What must be the minimum contribution margin per quarter for the new product to make the changeover financially feasible? 91. Hi-Speed Electronics manufactures low-cost, consumer-grade computers. It sells these computers to various electronics retailers to market under store brand names. It manufactures two computers, the Lightning 2.0 and the Lightning 2.4, which differ in terms of speed, memory, and hard drive capacity. The following information is available: The average wage rate is $30 per hour. The plant has a capacity of 32,000 direct labor-hours. Required: 1. A nationwide discount chain has approached Hi-Speed with an offer to buy 2,000 Lightning 2.0 computers and 2,000 Lightning 2.4 computers if the price is lowered to $350 and $450, respectively, per unit. a. If Hi-Speed accepts the offer, how many direct labor-hours will be required to produce the additional computers? b. How much will the profit increase (or decrease) if Hi-Speed accepts this proposal? All other prices will remain the same. Suppose that the customer has offered instead to buy up to 3,000 each of the two models at $350 and $450, respectively. c. How many of each product should be manufactured and sold? Assume current demand will not be affected by the special order. Also assume that the company cannot increase its production capacity to meet the extra demand. d. How much will the profits change if this order is accepted instead? 92. The operations of BSC Corporation are divided into the Kaplan Division and the Norton Division. Projections for the next year are as follows: a. Operating income for BSC Corporation as a whole if the Norton Division were dropped would be b. If the Norton Division were dropped, Kaplan Division's sales would increase by 45%. If this happened, the operating income for BSC Corporation as a whole would be 93. The Tally Company produces 15,000 units of item QT34 annually at a total cost of $600,000. Manufacturing overhead is 36% variable. The Daisy Company has offered to supply all 15,000 units of QT34 per year for $35 per unit. If Tally accepts the offer, $8 per unit of the fixed overhead would be avoided. In addition, some of Tally's leased facilities could be vacated, reducing lease payments by $90,000 per year. Required: a. By how much would Tally's profits change if 15,000 of part QT34 are purchased from Daisy? b. At what price would Tally be indifferent to Daisy's offer? 94. The Sutton Division of Haugen Company produces wheels for off-road sport vehicles. One-half of Sutton's output is sold to the Wilson Division of Haugen; the remainder is sold to outside customers. Sutton's estimated operating profit for the year is: Wilson Division has an opportunity to purchase 20,000 wheels of the same quality from an outside supplier on a continuing basis. Required: a. The Sutton Division cannot sell any additional products to outside customers. Should the Haugen Company allow Wilson Division to purchase the wheels from the outside supplier at $13.00 per unit? b. If the Sutton Division is now operating at full capacity and can sell all its units to outside customers at the present selling price, what is the differential cost to Haugen of requiring that the wheels be made internally and sold to Wilson Division? c. If the Sutton Division is now operating at full capacity and can sell all its units to outside customers at the present selling price, what is the minimum selling price that Sutton should accept from Wilson Division? d. The Sutton Division cannot sell any additional products to outside customers. What is the minimum selling price that Sutton should accept from the Wilson Division? 95. Buffalo Industries produces two products. Information about the products is as follows: The company's fixed costs totaled $140,000, of which $30,000 can be directly traced to Product Q and $90,000 can be directly traced to Product R. The effect on the firm's profits if Product R is dropped would be: 96. Cameron Tool Company has two retail stores, one in Dallas and the other in Sand Creek. The Dallas store had sales of $200,000, a contribution margin of 35 percent, and a segment margin of $28,000. The company's two stores have total sales of $500,000, an average contribution margin of 32 percent, and a total segment margin of $62,000. Prepare a segmented contribution approach statement for Cameron. 97. Bisson Industries has two divisions: the North Division and the South Division. Information relating to the divisions for the year just ended is as follows: Common fixed expenses have been allocated equally to each of the two divisions. Prepare a segmented contribution approach income statement for Bisson 98. The operations of Hurley Corporation are divided into the Northern Division and the Eastern Division. Projections for the next year are as follows: a. Operating income for Hurley Corporation, as a whole, if the Eastern Division were dropped would be: b. If Eastern Division is dropped, Northern's sales will increase by 20%. What will Hurley Corporation's operating income be? 99. The Wood Company manufactures two products: A and B. The costs and revenues are as follows: Total demand for Product A is 7,000 units and for Product B is 5,000 units. Machine time is a scarce resource. During the year, 48,000 machine hours are available. Product A requires 6 machine hours per unit, while Product B requires 2.5 machine hours per unit. a. How many units of Products A and B should Wood produce? b. What will be the maximum possible contribution margin? 100. Gerber Inc has 5,200 machine hours available each month. The following information on the company's three products is available: a. What production schedule will maximize the company's profits? b. What will be the maximum possible contribution margin? 101. Osgood Inc has 6,400 machine hours available each month. The following information on the company's three products is available: a. What production schedule will maximize the company's profits? b. What will be the maximum possible contribution margin? 102. The Rush Company manufactures two products: L and M. The costs and revenues are as follows: Total demand for Product L is 2,000 units and for Product M is 1,000 units. Machine time is a scarce resource. During the year, 36,000 machine hours are available. a. How many units of Products L and M should Rush produce? 103. Gigure Inc has 3,600 machine hours available each month. The following information on the company's three products is available: a. What production schedule will maximize the company's profits? b. What will be the maximum possible contribution margin? 104. Fleury Inc has 9,600 machine hours available each month. The following information on the company's three products is available: a. What production schedule will maximize the company's profits? b. What will be the maximum possible contribution margin? 105. Bruce Industries manufactures 200,000 components per year. The manufacturing cost of the components was determined as follows: An outside supplier has offered to sell the component for $3.40. If Bruce purchases the component from the outside supplier, the manufacturing facilities would be unused and could be rented out for $20,000. a. If Bruce purchases the component from the supplier instead of manufacturing it, the effect on income would be b. What is the maximum price Bruce would be willing to pay the outside supplier? 106. Tofte Industries manufactures 30,000 components per year. The manufacturing cost of the components was determined to be as follows: a. Assume that the fixed manufacturing overhead reflects the cost of Tofte's manufacturing facility. This facility cannot be used for any other purpose. An outside supplier has offered to sell the component to Tofte for $34. If Tofte Industries purchases the component from the outside supplier, the effect on income would be a b. Assume Tofte Industries could avoid $80,000 of fixed manufacturing overhead if it purchases the component from an outside supplier. An outside supplier has offered to sell the component for $34. If Tofte purchases the component from the supplier instead of manufacturing it, the effect on income would be a 107. Explain the difference between full costs and differential costs. 108. Explain what is meant by "the full-cost fallacy" in making pricing decisions. 109. Explain the differences between life-cycle product costing and target costing. 110. Explain the distinction between predatory pricing and peak-load pricing. 111. Why is it important to consider opportunity costs in a make-or-buy decision? ch4 Key 1. Differential analysis involves the comparison of one or more alternative courses of action with the status quo. TRUE This is the definition of differential analysis AACSB: Analytic AICPA: FN-Decision Making Blooms: Knowledge Difficulty: Easy Lanen - Chapter 04 #1 Learning Objective: 1 Topic Area: Differential Analysis 2. If there is only one alternative course of action and the status quo is unacceptable, then there really is no decision to make. TRUE A decision needs at least two alternatives. AACSB: Analytic AICPA: FN-Decision Making Blooms: Comprehension Difficulty: Easy Lanen - Chapter 04 #2 Learning Objective: 1 Topic Area: Differential Analysis 3. A decision must involve at least two alternative courses of action. TRUE If there is only one alternative there is no decision to make. AACSB: Analytic AICPA: FN-Decision Making Blooms: Comprehension Difficulty: Medium Lanen - Chapter 04 #3 Learning Objective: 1 Topic Area: Differential Analysis 4. Differential analysis cannot be used for long-run decisions because it cannot incorporate the timing of revenues and costs (i.e., the time-value of money). FALSE Time value of money can be incorporated into the analysis AACSB: Analytic AICPA: FN-Decision Making Blooms: Comprehension Difficulty: Medium Lanen - Chapter 04 #4 Learning Objective: 1 Topic Area: Differential Analysis 5. Short-run decisions often have long-run implications. TRUE Most decisions have long-run implications. AACSB: Analytic AICPA: FN-Decision Making Blooms: Comprehension Difficulty: Easy Lanen - Chapter 04 #5 Learning Objective: 1 Topic Area: Differential Analysis 6. Only variable costs can be differential costs. FALSE Fixed costs can differ between alternatives as well. AACSB: Analytic AICPA: FN-Decision Making Blooms: Comprehension Difficulty: Easy Lanen - Chapter 04 #6 Learning Objective: 1 Topic Area: Differential Analysis 7. Fixed costs are always classified as sunk costs in differential cost analysis. FALSE Fixed costs can also be differential. AACSB: Analytic AICPA: FN-Decision Making Blooms: Comprehension Difficulty: Easy Lanen - Chapter 04 #7 Learning Objective: 1 Topic Area: Differential Analysis 8. The full cost fallacy occurs when a decision-maker fails to include fixed manufacturing overhead in the product's cost. FALSE The fallacy occurs when fixed costs are included. AACSB: Analytic AICPA: FN-Decision Making Blooms: Comprehension Difficulty: Medium Lanen - Chapter 04 #8 Learning Objective: 2 Topic Area: Differential Analysis and Pricing Decisions 9. When deciding whether or not to accept a special order, a decision-maker should focus on differential costs instead of full costs. TRUE Full costs will include some costs that do not differ and should be excluded. AACSB: Analytic AICPA: FN-Decision Making Blooms: Application Difficulty: Easy Lanen - Chapter 04 #9 Learning Objective: 2 Topic Area: Differential Analysis and Pricing Decisions 10. The differential analysis approach to pricing for special orders could lead to under-pricing in the longrun because fixed costs are not included in the analysis. TRUE In the long run fixed costs become differential and should be included. AACSB: Analytic AICPA: FN-Decision Making Blooms: Application Difficulty: Medium Lanen - Chapter 04 #10 Learning Objective: 2 Topic Area: Differential Analysis and Pricing Decisions 11. Target costs equal the difference between the target selling price and the desired profit margin. TRUE Target cost focuses on what level of costs would be allowed. AACSB: Analytic AICPA: FN-Decision Making Blooms: Knowledge Difficulty: Easy Lanen - Chapter 04 #11 Learning Objective: 3 Topic Area: Cost Analysis for Pricing 12. Dumping occurs when a company exports its product to consumers in another country at an export price that is below the domestic price. TRUE This is the definition of dumping. AACSB: Analytic AICPA: BB-Legal Blooms: Knowledge Difficulty: Easy Lanen - Chapter 04 #12 Learning Objective: 3 Topic Area: Legal Issues Relating to Costs and Sales Prices 13. Price discrimination is the practice of selling identical goods or services to different customers at different prices. TRUE This is the definition of price discrimination. AACSB: Analytic AICPA: BB-Legal Blooms: Knowledge Difficulty: Easy Lanen - Chapter 04 #13 Learning Objective: 3 Topic Area: Legal Issues Relating to Costs and Sales Prices 14. Peak load pricing is the practice of setting prices lowest when the quantity demanded for the product approaches the physical capacity to produce it. FALSE Prices are set highest when capacity is being approached. AACSB: Analytic AICPA: BB-Industry Blooms: Comprehension Difficulty: Easy Lanen - Chapter 04 #14 Learning Objective: 3 Topic Area: Legal Issues Relating to Costs and Sales Prices 15. The alternative courses of action in a make-or-buy decision are (a) manufacture needed items internally or (b) purchase needed items externally. TRUE Make = internal; buy = external AACSB: Analytic AICPA: FN-Decision Making Blooms: Comprehension Difficulty: Easy Lanen - Chapter 04 #15 Learning Objective: 4 Topic Area: Make-It or Buy-It Decisions 16. The reason opportunity costs are not included in the accounting system is because they involve estimates. FALSE They are not included in the system because they are not the result of a transaction. Many items included in the accounting system involve estimates (such as depreciation). AACSB: Analytic AICPA: FN-Measurement Blooms: Comprehension Difficulty: Medium Lanen - Chapter 04 #16 Learning Objective: 4 Topic Area: Opportunity Costs of Making 17. Financial statements prepared in accordance with generally accepted accounting principles (GAAP) provide differential cost information. FALSE GAAP has a focus of comparability, not decision relevance. AACSB: Analytic AICPA: FN-Measurement Blooms: Comprehension Difficulty: Easy Lanen - Chapter 04 #17 Learning Objective: 4 Topic Area: Make-It or Buy-It Decisions 18. In the short-run, plant capacity is fixed and product choices have to be made that optimize the use of available capacity. TRUE In the short run, capacity is set and cannot be expanded. AACSB: Analytic AICPA: FN-Decision Making Blooms: Comprehension Difficulty: Easy Lanen - Chapter 04 #18 Learning Objective: 4 Topic Area: Product Choice Decisions 19. With constrained resources, the important measure of profitability is the contribution margin per unit of scarce resource. TRUE You are concerned with the best use of the resource, so you want to maximize the profit. AACSB: Analytic AICPA: FN-Decision Making Blooms: Comprehension Difficulty: Easy Lanen - Chapter 04 #19 Learning Objective: 4 Topic Area: Product Choice Decisions 20. The theory of constraints focuses on determining the optimal product mix when one or more resources restrict the attainment of a goal or objective. TRUE This is the core idea of the theory of constraints. AACSB: Analytic AICPA: FN-Decision Making Blooms: Comprehension Difficulty: Easy Lanen - Chapter 04 #20 Learning Objective: 5 Topic Area: Theory of Constraints 21. The relevance of a particular cost to a decision is determined by the: (CMA adapted) A. B. C. D. E. riskiness of the decision. number of decision variables. amount of the cost. potential effect on the decision. accuracy of the cost. Relevance is predicated upon whether it affects a decision. AACSB: Analytic AICPA: FN-Decision Making Blooms: Comprehension Difficulty: Easy Lanen - Chapter 04 #21 Learning Objective: 1 Topic Area: Differential Analysis 22. In a decision analysis situation, which one of the following costs is not likely to contain a variable cost component? (CMA adapted) A. B. C. D. E. Labor Overhead Straight-line Depreciation Selling Material Straight-line depreciation is a fixed cost since it is the same amount each period. AACSB: Analytic AICPA: FN-Decision Making Blooms: Application Difficulty: Easy Lanen - Chapter 04 #22 Learning Objective: 1 Topic Area: Differential Analysis 23. Which of the following statements regarding differential costs is (are) false? (A) The full cost fallacy occurs when a decision-maker fails to include fixed manufacturing overhead in the product's cost. (B) When deciding whether or not to accept a special order, a decision-maker should focus on differential costs instead of full costs. A. B. C. D. Only A. Only B. Neither A nor B is false. Both A and B are true. The full cost fallacy is when fixed costs are included. AACSB: Analytic AICPA: FN-Decision Making Blooms: Comprehension Difficulty: Medium Lanen - Chapter 04 #23 Learning Objective: 2 Topic Area: Differential Analysis and Pricing Decisions 24. Which of the following costs are irrelevant for a special order that will allow an organization to utilize some of its present idle capacity? A. B. C. D. E. Direct materials Indirect materials Variable overhead Unavoidable fixed overhead Differential sales commission Fixed overhead will be there anyway. AACSB: Analytic AICPA: FN-Decision Making Blooms: Application Difficulty: Easy Lanen - Chapter 04 #24 Learning Objective: 2 Topic Area: Short-Run Pricing Decisions: Special Orders 25. Which of the following statements regarding special orders is (are) true? (A) The primary decision for special orders is determining whether the differential revenue is greater than the differential costs associated with the order. (B) The differential analysis approach to pricing for special orders could lead to underpricing in the long-run because fixed costs are not included in the analysis. A. B. C. D. Only A. Only B. Neither A nor B is false. Both A and B are true. (A) looks at the short-run while (B) has a long run view. AACSB: Analytic AICPA: FN-Decision Making Blooms: Comprehension Difficulty: Easy Lanen - Chapter 04 #25 Learning Objective: 2 Topic Area: Short-Run Pricing Decisions: Special Orders 26. Which of the following costs are not considered in a differential analysis for a make-or-buy decision? A. B. C. D. E. Indirect materials and indirect labor if the item is manufactured internally Direct materials and direct labor if the item is purchased Variable overhead if the item is manufactured internally Fixed overhead that can be avoided if the item is purchased Fixed overhead that will continue if the item is purchased A cost that does not change is not included in the analysis AACSB: Analytic AICPA: FN-Decision Making Blooms: Comprehension Difficulty: Medium Lanen - Chapter 04 #26 Learning Objective: 3 Topic Area: Make-It or Buy-It Decisions 27. For the past five years, the RS Company has produced and sold electronic magnets to chemistry labs throughout the United States. Recently, a strong competitor has entered the market and RS is considering whether it should continue to produce and sell the electronic magnets. The following information has been gathered to assist management in their decision: A) The machinery used to produce the magnet was purchased five-years ago for $500,000. B) Four of the employees who produce magnets would be reassigned to the magnifying glass division. C) The space now used to produce the magnets would be used to eliminate the need to rent warehouse space. D) Sales volume (units) is estimated to drop by 50% once the competitor becomes fully operational. Which of the items listed above is (are) relevant to the decision to continue the production and sale of the electronic magnets? A. B. C. D. E. A and C. B and C. C and D. A, B, and D. B, C, and D. (A) is a sunk cost, (B) will be there anyway, (C & D) would differ AACSB: Analytic AICPA: FN-Decision Making Blooms: Application Difficulty: Medium Lanen - Chapter 04 #27 Learning Objective: 4 Topic Area: Decision to Add or Drop a Product Line or Close a Business Unit 28. Which of the following statements about the theory of constraints is (are) true? (A) The theory of constraints focuses on determining the optimal product mix when one or more resources restrict the attainment of a goal or objective. (B) The theory of constraints focuses on maximizing the rate of throughput contribution while minimizing investment and other operating costs. A. B. C. D. Only A. Only B. Neither A nor B is true. Both A and B are true. Both statements are true AACSB: Analytic AICPA: FN-Decision Making Blooms: Comprehension Difficulty: Easy Lanen - Chapter 04 #28 Learning Objective: 5 Topic Area: Theory of Constraints 29. The theory of constraints focuses on maximizing throughput contribution margin while minimizing all of the following except A. B. C. D. selling expenses per unit sold. production bottlenecks. investment in buildings. investment in inventories. Selling expenses are not necessarily minimized. AACSB: Analytic AICPA: FN-Decision Making Blooms: Application Difficulty: Easy Lanen - Chapter 04 #29 Learning Objective: 5 Topic Area: Theory of Constraints 30. The AZ Company manufactures kitchen utensils. The company is currently producing well below its full capacity. The BV Company has approached AZ with an offer to buy 20,000 utensils at $0.75 each. AZ sells its utensils wholesale for $0.85 each; the average cost per unit is $0.83, of which $0.12 is fixed costs. If AZ were to accept BV's offer, what would be the increase in AZ's operating profits? A. B. C. D. E. $400 $800 $1,600 $2,000 AZ's operating profits will not increase as a result of accepting the special order. [$0.75 - ($0.83 - 0.12)] 20,000 = $800 AACSB: Analytic AICPA: FN-Decision Making Blooms: Application Difficulty: Easy Lanen - Chapter 04 #30 Learning Objective: 2 Topic Area: Short-Run Pricing Decisions: Special Orders 31. The MNK Company has gathered the following information for a unit of its most popular product: The above cost information is based on 4,000 units. A foreign distributor has offered to buy 1,000 units at a price of $16 per unit. This special order would not disturb regular sales. Variable shipping and other selling expenses would be an additional $1 per unit for the special order. If the special order is accepted, MNK's operating profits will increase by: A. B. C. D. E. $1,000. $1,600. $2,000. $4,000. $5,000. [$16 - 6 - 3 - 2 - 1] 1,000 = $4,000 AACSB: Analytic AICPA: FN-Decision Making Blooms: Application Difficulty: Medium Lanen - Chapter 04 #31 Learning Objective: 2 Topic Area: Short-Run Pricing Decisions: Special Orders 32. The following information relates to the Tram Company for the upcoming year. The cost of goods sold includes $1,200,000 of fixed manufacturing overhead; the operating expenses include $100,000 of fixed marketing expenses. A special order offering to buy 50,000 units for $7.50 per unit has been made to Tram. Fortunately, there will be no additional operating expenses associated with the order and Tram has sufficient capacity to handle the order. How much will operate profits be increased if Tram accepts the special order? A. B. C. D. E. $25,000 $62,500 $100,000 $125,000 Operating profits will not increase as a result of accepting the special order. Cost of sales: (3,200,000 - 1,200,000)/400,000 = $5; Operating Exp: (300,000 - 100,000)/400,000 = 0.50; Sales $7.50 - 5 - 0.50 = $2 50,000 units = $100,000 AACSB: Analytic AICPA: FN-Decision Making Blooms: Application Difficulty: Hard Lanen - Chapter 04 #32 Learning Objective: 2 Topic Area: Short-Run Pricing Decisions: Special Orders 33. The Regal Baking Company is considering the expansion of its business into door-to-door delivery service. This would require an additional $12,500 in labor costs per month. Company-owned vehicles now used to make morning deliveries to restaurants could be used in the afternoons to make the home deliveries. However, it is estimated that an additional $5,000 would be required per month for gas, oil, and maintenance. It is further estimated that the home delivery use of the trucks would be allocated 45% of the existing $6,500 fixed vehicle costs. What is the differential delivery cost per month for expanding into the home delivery market? A. B. C. D. $12,500 $17,500 $19,750 $20,425 $12,500 + $5,000 = $17,500 AACSB: Analytic AICPA: FN-Decision Making Blooms: Application Difficulty: Easy Lanen - Chapter 04 #33 Learning Objective: 3 Topic Area: Long-Run Pricing Decisions 34. The Blade Division of Axe Company produces hardened steel blades. One-third of Blade's output is sold to the Forestry Products Division of Axe; the remainder is sold to outside customers. Blades' estimated operating profit for the year is: The Forestry Division has an opportunity to purchase 10,000 blades of the same quality from an outside supplier on a continuing basis. The Blade Division cannot sell any additional products to outside customers. Should the Axe Company allow its Forestry Division to purchase the blades from the outside supplier at $1.25 per unit? A. B. C. D. No; making the blades will save Axe $1,500. Yes; buying the blades will save Axe $1,500. No; making the blades will save Axe $2,500. Yes; buying the blades will save Axe $2,500. Cost to buy externally - $1.25(10,000 units) = $12,500 Cost to make internally - $1.00(10,000 units) = $10,000 AACSB: Analytic AICPA: FN-Decision Making Blooms: Application Difficulty: Hard Lanen - Chapter 04 #34 Learning Objective: 4 Topic Area: Make-It or Buy-It Decisions 35. The Blade Division of Axe Company produces hardened steel blades. One-third of Blade's 30,000 unit output is sold to the Forestry Products Division of Axe; the remainder is sold to outside customers. Blades' estimated operating profit for the year is: The Forestry Division has an opportunity to purchase 10,000 blades of the same quality from an outside supplier on a continuing basis. The purchase price would be $1.25. If the Blade Division is now operating at full capacity and can sell all its units to outside customers at the present selling price, what is the differential cost to Axe of requiring that the blades be made internally and sold to the Forestry Division? A. B. C. D. $2,500 $5,000 $7,500 $10,000 Lost CM (2 - 1) = $1; savings by making (1.25 - 1) = .25; Net loss: 1 - 0.25 = 0.75 10,000 units = $7,500 AACSB: Analytic AICPA: FN-Decision Making Blooms: Application Difficulty: Hard Lanen - Chapter 04 #35 Learning Objective: 4 Topic Area: Make-It or Buy-It Decisions 36. The CJP Company produces 10,000 units of item S10 annually at a total cost of $190,000. The XYZ Company has offered to supply 10,000 units of S10 per year for $18 per unit. If CJP accepts the offer, $4 per unit of the fixed overhead would be saved. In addition, some of CJP's facilities could be rented to a third party for $15,000 per year. What are the relevant costs for the "make" alternative? A. B. C. D. $160,000 $165,000 $175,000 $185,000 $20,000 + 55,000 + 45,000 + (4 10,000) + 15,000 = $175,000 AACSB: Analytic AICPA: FN-Decision Making Blooms: Application Difficulty: Medium Lanen - Chapter 04 #36 Learning Objective: 4 Topic Area: Make-It or Buy-It Decisions 37. The CJP Company produces 10,000 units of item S10 annually at a total cost of $190,000. The XYZ Company has offered to supply 10,000 units of S10 per year for $18 per unit. If CJP accepts the offer, $4 per unit of the fixed overhead would be saved. In addition, some of CJP's facilities could be rented to a third party for $15,000 per year. At what price would CJP be indifferent to XYZ's offer? A. B. C. D. $17.00 $17.50 $18.50 $19.50 $20,000 + 55,000 + 45,000 + (4 10,000) + 15,000 = $175,000 $175,000/10,000 = $17.50 AACSB: Analytic AICPA: FN-Decision Making Blooms: Application Difficulty: Medium Lanen - Chapter 04 #37 Learning Objective: 4 Topic Area: Make-It or Buy-It Decisions 38. Differential costs are (CMA adapted) A. B. C. D. the difference in total costs that result from selecting one choice instead of another. the profit foregone by selecting one choice instead of another. a cost that continues to be incurred in the absence of activity. a cost common to all choices in questions and not clearly allocable to any of them. This is the definition of differential costs. AACSB: Analytic AICPA: FN-Decision Making Blooms: Comprehension Difficulty: Easy Lanen - Chapter 04 #38 Learning Objective: 1 Topic Area: Differential Analysis 39. The period of time over which capacity will be unchanged is A. B. C. D. long run su