Chap 6

1. Consider the following statements: I. A cost that can be avoided by choosing one alternative over another is relevant for decision purposes. II. A Make or Buy decision involves how much of a product to make or buy.. a. I is true; Il is true b. I is true; Il is false c. I is false; Il is true d. I is false; Il is false 2. Consider the following statements: I. Future costs that do differ among the alternatives are relevant in a decision. II. A cost that will be incurred regardless of which alternative is selected is not relevant when choosing between the alternatives. a. I is true; Il is true b. I is true; Il is false c. I is false; Il is true d. I is false; Il is false 3. Consider the following statements: I. A product whose revenues do not cover its variable costs and its traceable fixed costs should usually be dropped. II. When a company has a production constraint, total contribution margin will be maximized by emphasizing the products with the smallest contribution margin per unit of the constrained resource. a. I is true; Il is true b. I is true; Il is false c. I is false; Il is true d. I is false; Il is false 4. Costs that can be eliminated in whole or in part if a particular business segment is discontinued are called: a. sunk costs. b. opportunity costs. c. avoidable costs. d. irrelevant costs. 5. The Cook Corporation has two divisions--East and West. The divisions have the following revenues and expenses: Sales Variable costs Traceable fixed costs Allocated common corporate costs Net operating income (loss) East $ 500,000 200,000 150,000 135,000 $ West $ 550,000 275,000 180,000 170,000 S (75.000 15.000 The management of Cook is considering the elimination of the West Division. If the West Division were eliminated, its traceable fixed costs could be avoided. Total common corporate costs would be unaffected by this decision. Given these data, the elimination of the West Division would result in an overall company net operating income (loss) of: a. $15,000 b. ($155,000) c. ($75,000) d. ($60,000) e. None of the above. The answer is 6. Sharp Corporation produces 10,000 parts each year, which are used in the production of one of its products. The unit product cost of a part is $36, computed as follows: Variable production cost Fixed production cost Unit product cost $ 16 20 $ 36 The parts can be purchased from an outside supplier for only $28 each. The space in which the parts are now produced would be idle and fixed production costs would be reduced by one- fourth. Based on these data, the financial advantage (disadvantage) of purchasing the parts from the outside supplier would be: a. $56,000 b. ($56,000) c. $70,000 d. ($70,000) e. None of the above. The answer is 7. CoolAir Corporation manufactures portable window air conditioners. CoolAir has the capacity to manufacture and sell 80,000 air conditioners each year but is currently only manufacturing and selling 60,000. The following per unit numbers relate to annual operations at 60,000 units: Per Unit $ 125 Selling price Manufacturing costs: Variable Fixed Selling and administrative costs: Variable Fixed $ $ 25 40 $ $ 10 15 The City of Clearwater would like to purchase 3,000 air conditioners from CoolAir but only if they can get them for $75 each. Variable selling and administrative costs on this special order will drop down to $2 per unit. This special order will not affect the 60,000 regular sales and it will not affect the total fixed costs. The annual financial advantage (disadvantage) for the company as a result of accepting this special order from the City of Clearwater should be: a. ($21,000) b. $24,000 c. $144,000 d. ($129,000) e. None of the above. The answer is 8. Marley Corporation makes three products (X, Y, & Z) with the following characteristics: Products X Y Z Selling price per unit $ 10 $ 15 $ 20 Variable cost per unit $ 6 $ 10 $ 10 Machine hours per unit 2 4 4 The company has a capacity of 2,000 machine hours, but there is virtually unlimited demand for each product. In order to maximize total contribution margin, how many units of each product should the company produce? a. 1,000 units of X, 500 units of Y, and 500 units of Z b. O units of X, 0 units of Y, and 500 units of Z c. O units of X, 500 units of Y, and 0 units of Z d. 1,000 units of X, 0 units of Y, and 0 units of Z e. None of the above. The answer is 9. Cybil Baunt just inherited a 1958 Chevy Impala from her late Aunt Joop. Aunt Joop purchased the car 40 years ago for $8,000. Cybil is either going to sell the car for $10,000 or have it restored and then sell it for $25,000. The restoration will cost $9,000. Cybil would be financially better off by: a. $3,000 to have the vehicle restored b. $6,000 to have the vehicle restored c. $9,000 to have the vehicle restored d. $11,000 to have the vehicle restored e. None of the above. The answer is 10. Elly Industries is a multi-product company that currently manufactures 30,000 units of part MR24 each month for use in production of its products. The facilities now being used to produce part MR24 have a fixed monthly cost of $150,000 and a capacity to produce 35,000 units per month. If Elly were to buy part MR24 from an outside supplier, the facilities would be idle, but its fixed costs would continue at 40% of their present amount. The variable production costs of Part MR24 are $11 per unit. If Elly industries is able to obtain part MR24 from an outside supplier at a purchase price of $10 per unit, the monthly financial advantage (disadvantage) of buying the part rather than making it would be: a. $30,000 b. $180,000 c. d. $120,000 e. None of the above. The answer is