Q1.

Two alternatives, code-named X and Y, are under consideration at Brahler Corporation. Costs associated with the alternatives are listed below.

	Alternative X	Alternative Y
Materials costs	$39,000	$39,000
Processing costs	$44,000	$58,000
Equipment rental	$10,000	$10,000
Occupancy costs	$15,000	$29,000

Are the materials costs and processing costs relevant in the choice between alternatives X and Y? (Ignore the equipment rental and occupancy costs in this question.)

Only processing costs are relevant

Both materials costs and processing costs are relevant

Only materials costs are relevant

Neither materials costs nor processing costs are relevant

Q2.

The Melrose Corporation produces a single product, Product C. Melrose has the capacity to produce 70,000 units of Product C each year. If Melrose produces at capacity, the per unit costs to produce and sell one unit of Product C are as follows:

Direct materials	$20
Direct labor	$17
Variable manufacturing overhead	$13
Fixed manufacturing overhead	$14
Variable selling expense	$12
Fixed selling expense	$8

The regular selling price of one unit of Product C is $100. A special order has been received by Melrose from Moore Corporation to purchase 7,000 units of Product C during the upcoming year. If this special order is accepted, the variable selling expense will be reduced by 75%. Total fixed manufacturing overhead and fixed selling expenses would be unaffected except that Melrose will need to purchase a specialized machine to engrave the Moore name on each unit of product C in the special order. The machine will cost $10,500 and will have no use after the special order is filled. Assume that direct labor is a variable cost.

Assume Melrose expects to sell 60,000 units of Product C to regular customers next year. If Moore company offers to buy the 7,000 special units at $90 per unit, the effect of accepting the special order on Melrose's net operating income for next year will be:

$42,000 increase

$54,000 decrease

$105,000 increase

$248,500 increase

Q3.

Oruro Chemical Corporation manufactures a variety of household cleaners, solvents, and beverages. Because of a recent shortage of mytron, a key ingredient needed for three of its products, the corporation has to decide what amount of each product would be most advantageous to produce. Information related to the three products that use mytron are shown below:

	Hand Soap	Paint Remover	Root Beer
Contribution margin per case	$24	$20	$12
Contribution margin ratio	50%	70%	60%
Mytron required per case (in ounces)	3	5	2
Maximum monthly demand (in cases)	500	200	2,000

Assume that Oruro only has 3,000 ounces of mytron available next month. What is the maximum amount of contribution margin that Oruro can generate next month from the three products above given the shortage of mytron?

$16,000

$19,000

$21,000

$24,000

Q4.

Eley Corporation produces a single product. The cost of producing and selling a single unit of this product at the company's normal activity level of 40,000 units per month is as follows:

Direct materials	$42.60
Direct labor	$8.10
Variable manufacturing overhead	$1.10
Fixed manufacturing overhead	$17.30
Variable selling & administrative expense	$1.80
Fixed selling & administrative expense	$8.00

The normal selling price of the product is $86.10 per unit.

An order has been received from an overseas customer for 2,000 units to be delivered this month at a special discounted price. This order would have no effect on the company's normal sales and would not change the total amount of the company's fixed costs. The variable selling and administrative expense would be $1.20 less per unit on this order than on normal sales.

Direct labor is a variable cost in this company.

Suppose there is ample idle capacity to produce the units required by the overseas customer and the special discounted price on the special order is $76.40 per unit. By how much would this special order increase (decrease) the company's net operating income for the month?

($17,000)

$13,400

$48,000

($5,000)

Q5.

Part A42 is used by Elgin Corporation to make one of its products. A total of 16,000 units of this part are produced and used every year. The company's Accounting Department reports the following costs of producing the part at this level of activity:

	Per Unit
Direct materials	$7.50
Direct labor	$8.90
Variable manufacturing overhead	$5.50
Supervisor's salary	$5.60
Depreciation of special equipment	$8.00
Allocated general overhead	$5.30

An outside supplier has offered to make the part and sell it to the company for $30.40 each. If this offer is accepted, the supervisor's salary and all of the variable costs, including the direct labor, can be avoided. The special equipment used to make the part was purchased many years ago and has no salvage value or other use. The allocated general overhead represents fixed costs of the entire company, none of which would be avoided if the part were purchased instead of produced internally. In addition, the space used to make part A42 could be used to make more of one of the company's other products, generating an additional segment margin of $23,000 per year for that product. What would be the impact on the company's overall net operating income of buying part A42 from the outside supplier?

Net operating income would decrease by $23,400 per year.

Net operating income would decrease by $143,400 per year.

Net operating income would increase by $23,000 per year.

Net operating income would decrease by $189,400 per year

Q6.

Future costs that do not differ between the alternatives in a decision are avoidable costs.

True orFalse

Q7.

The Flint Fan Corporation is considering the addition of a new model fan, the F-27, to its current products. The expected cost and revenue data for the F-27 fan are as follows:

Annual sales	4,000 units
Unit selling price	$58
Unit variable costs:
Production	$34
Selling	$4
Avoidable fixed costs per year:
Production	$20,000
Selling	$30,000
Allocated common fixed costs per year	$55,000

If the F-27 is added as a new product, it is expected that the contribution margin of other products will drop by $7,000 per year.

If the F-27 product is added next year, the change in operating income should be:

$30,000 increase

$5,000 decrease

$23,000 increase

$15,000 increase

Q8.

Hermenegildo Corporation is presently making part P42 that is used in one of its products. A total of 10,000 units of this part are produced and used every year. The company's Accounting Department reports the following costs of producing the part at this level of activity:

	Per Unit
Direct materials	$4.20
Direct labor	$4.40
Variable overhead	$7.70
Supervisor's salary	$6.70
Depreciation of special equipment	$3.10
Allocated general overhead	$3.30

An outside supplier has offered to produce and sell the part to the company for $23.90 each. If this offer is accepted, the supervisor's salary and all of the variable costs, including direct labor, can be avoided. The special equipment used to make the part was purchased many years ago and has no salvage value or other use. The allocated general overhead represents fixed costs of the entire company. If the outside supplier's offer were accepted, only $4,000 of these allocated general overhead costs would be avoided.

If management decides to buy part P42 from the outside supplier rather than to continue making the part, what would be the annual impact on the company's overall net operating income?

Net operating income would decline by $5,000 per year.

Net operating income would decline by $59,000 per year.

Net operating income would decline by $51,000 per year.

Net operating income would decline by $55,000 per year.

Q9.

Bailey Corporation manufactures and sells a number of products, including Product G. Results for last year for the manufacture and sale of Product G are as follows:

Sales		$750,000
Less expenses:
Variable production costs	$450,000
Sales commissions	110,000
Salary of product manager	95,000
Fixed product advertising	80,000
Fixed manufacturing overhead	70,000	805,000
Net operating loss		($55,000)

Bailey is trying to decide whether or not to discontinue the manufacture and sale of Product G. All expenses other than fixed manufacturing overhead are avoidable if the product is dropped. None of the fixed manufacturing overhead is avoidable.

Assume that dropping Product G will have no effect on other product lines. If the company drops Product G, the change in annual net operating income due to this decision will be a:

$10,000 decrease

$55,000 increase

$15,000 decrease

$40,000 decrease

Q10.

The Flint Fan Corporation is considering the addition of a new model fan, the F-27, to its current products. The expected cost and revenue data for the F-27 fan are as follows:

Annual sales	4,000 units
Unit selling price	$58
Unit variable costs:
Production	$34
Selling	$4
Avoidable fixed costs per year:
Production	$20,000
Selling	$30,000
Allocated common fixed costs per year	$55,000

If the F-27 is added as a new product, it is expected that the contribution margin of other products will drop by $7,000 per year.

At what selling price would the new product be just breaking even?

$52.25 per unit

$50.50 per unit

$55.75 per unit

$49.00 per unit

Q11.

Wehn Refiners Inc., processes sugar cane that it purchases from farmers. Sugar cane is processed in batches. A batch of sugar cane costs $40 to buy from farmers and $13 to crush in the company's plant. Two intermediate products, cane fiber and cane juice, emerge from the crushing process. The cane fiber can be sold as is for $28 or processed further for $18 to make the end product industrial fiber that is sold for $37. The cane juice can be sold as is for $31 or processed further for $25 to make the end product molasses that is sold for $66.

Which of the intermediate products should be processed further?

Cane fiber should NOT be processed into industrial fiber; Cane juice should be processed into molasses

Cane fiber should NOT be processed into industrial fiber; Cane juice should NOT be processed into molasses

Cane fiber should be processed into industrial fiber; Cane juice should NOT be processed into molasses

Cane fiber should be processed into industrial fiber; Cane juice should be processed into molasses

Q12.

Duarte Corporation processes sugar beets that it purchases from farmers. Sugar beets are processed in batches. A batch of sugar beets costs $31 to buy from farmers and $15 to crush in the company's plant. Two intermediate products, beet fiber and beet juice, emerge from the crushing process. The beet fiber can be sold as is for $27 or processed further for $14 to make the end product industrial fiber that is sold for $44. The beet juice can be sold as is for $32 or processed further for $29 to make the end product refined sugar that is sold for $50. How much more profit (loss) does the company make by processing the intermediate product beet juice into refined sugar rather than selling it as is? ($34)

($11)

($26)

($57)

Q13.

Dockwiller Inc. manufactures industrial components. One of its products, which is used in the construction of industrial air conditioners, is known as D53. Data concerning this product are given below:

	Per Unit
Selling price	$150
Direct materials	$26
Direct labor	$3
Variable manufacturing overhead	$1
Fixed manufacturing overhead	$17
Variable selling expense	$2
Fixed selling and administrative expense	$18

The above per unit data are based on annual production of 8,000 units of the component. Direct labor is a variable cost.

Refer to the original data in the problem. What is the current contribution margin per unit for component D53 based on its selling price of $150 and its annual production of 8,000 units?

$83 per unit

$118 per unit

$32 per unit

$120 per unit

Q14.

Dowchow Corporation makes two products from a common input. Joint processing costs up to the split-off point total $38,400 a year. The company allocates these costs to the joint products on the basis of their total sales values at the split-off point. Each product may be sold at the split-off point or processed further. Data concerning these products appear below:

	Product X	Product Y	Total
Allocated joint processing costs	$20,800	$17,600	$38,400
Sales value at split-off point	$26,000	$22,000	$48,000
Costs of further processing	$22,600	$20,400	$43,000
Sales value after further processing	$45,000	$45,900	$90,900

What is the net monetary advantage (disadvantage) of processing Product X beyond the split-off point?

$1,600

$22,400

$27,600

($3,600)

Q15.

Wenig Inc. has some material that originally cost $73,500. The material has a scrap value of $45,600 as is, but if reworked at a cost of $6,600, it could be sold for $58,100. What would be the incremental effect on the company's overall profit of reworking and selling the material rather than selling it as is as scrap? decrease of $22,000

decrease of $67,600

increase of $51,500

increase of $5,900

Q16.

Nesmith Corporation is considering two alternatives: A and B. Costs associated with the alternatives are listed below:

	Alternative A	Alternative B
Materials costs	$33,000	$53,000
Processing costs	$38,000	$57,000
Equipment rental	$11,000	$11,000
Occupancy costs	$18,000	$29,000

What is the differential cost of Alternative B over Alternative A, including all of the relevant costs?

$150,000

$100,000

$125,000

$50,000

Q17.

Farnsworth Television makes and sells portable television sets. Each television regularly sells for $200. The following cost data per television are based on a full capacity of 12,000 televisions produced each period:

Direct materials	$75
Direct labor	$55
Manufacturing overhead (75% variable, 25% unavoidablefixed)	$48

A special order has been received by Farnsworth for a sale of 2,500 televisions to an overseas customer. The only selling costs that would be incurred on this order would be $10 per television for shipping. Farnsworth is now selling 7,200 televisions through regular distributors each period. What should be the minimum selling price per television in negotiating a price for this special order?

$200

$166

$178

$176

Q18.

One way to increase the effective utilization of a bottleneck is to put less emphasis on preventing defects and simply discard defective units at final inspection before sending them to customers.

True orFalse

Q19.

Wiacek Corporation has received a request for a special order of 4,000 units of product F65 for $26.60 each. Product F65's unit product cost is $25.80, determined as follows:

Direct materials	$2.40
Direct labor	7.70
Variable manufacturing overhead	6.80
Fixed manufacturing overhead	8.90
Unit product cost	$25.80

Direct labor is a variable cost. The special order would have no effect on the company's total fixed manufacturing overhead costs. The customer would like modifications made to product F65 that would increase the variable costs by $3.00 per unit and that would require an investment of $23,000 in special molds that would have no salvage value.

This special order would have no effect on the company's other sales. The company has ample spare capacity for producing the special order. If the special order is accepted, the company's overall net operating income would increase (decrease) by:

($31,800)

$3,800

$3,200

($48,400)