Chapter 6

4. The Lester Company is engaged in the manufacture of various types of decorations. It received an order from a customer for the manufacture of 300,000 units of a specialty item at $5.00 per unit, which is lower than the average cost of producing the units. The variable cost is estimated at $4.40 per unit. The Lester Company should:

A. accept the order without further evaluation since the selling price per unit provides a contribution to fixed costs over and above recovery of variable costs.

B. reject the offer because the average cost per unit exceeds the selling price for units in the special order.

C. evaluate the effect on regular sales of accepting this order as a lower than-regular price before rejecting or accepting the order.

D. All of the other answers are incorrect.

5. Department 2 of Simmons, Inc. has revenues of $300,000, variable expenses of $180,000, and allocated, indirect fixed expenses of $150,000. If the department is eliminated, what will be the effect on net income?

A. $ 30,000 increase

B. $ 30,000 decrease

C. $150,000 decrease

D. $120,000 decrease

6. Jordan, Inc., is considering dropping the production of Product J. It provides revenues of $350,000 but incurs costs of $490,000, 20% of which are fixed costs. The net advantage (disadvantage) of retaining Product J is:

A. ($140,000)

B. ($42,000)

C. $42,000

D. $0

7. The Casey Company produces two joint products. At the split-off point, product A has a sales value of $8 per unit, while product B can be sold for $10 per unit. After further processing, which costs $5 and $9, respectively, product A can be sold for $12 and product B for $22 per unit. Which, if any, of the two products should be processed further?

A. Product B

B. Product A

C. Product A and B

D. Neither product A or B

8. The Sidney Company faces a make-or-buy decision concerning a part it manufactures in-house. The product can be manufactured internally with materials costs of $24 per unit, labor of $9, fixed overhead of $6.50, and variable overhead of $6. At what dollar amount would Sidney be indifferent to making or buying this part if the fixed overhead costs would be unaffected?

A. $24.00

B. $33.00

C. $39.00

D. $43.50