Chapter 10Relevant Information for Decision-Making

LEARNIN !"#EC$I%E&
LO 1 What factors are relevant in making decisions and why?
LO 2 What factors are relevant in making decisions and why?
LO 3 What are the relevant considerations in outsourcing?
LO 4 How can management make the best use of a scarce resource?
LO How does sales mi! "ertain to relevant costing "roblems?
LO # How are s"ecial "rices set$ and when are they used?
LO % How is segment margin used to determine whether a "roduct line should be retained or
eliminated?
LO & '(""endi!) How is a linear "rogramming "roblem formulated?
'(E&$I!N RID
True/False
Difficulty Level Learning Objectives
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11#
$o%&letion
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Multi&le $'oice
Difficulty Level Learning Objectives
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Difficulty Level Learning Objectives
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('ort)*ns+er
Difficulty Level Learning Objectives
Easy Moderate Difficult LO 1 LO 2 LO 3 LO 4 LO LO ! LO " LO #
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,roble%
Difficulty Level Learning Objectives
Easy Moderate Difficult LO 1 LO 2 LO 3 LO 4 LO LO ! LO " LO #
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11*
$R(E)*AL&E
1+ ,nformation that is related to "ast events is relevant in the decision-making "rocess+
(./0 1 2,10 3asy O450 16-1
2+ ,nformation that has a bearing on future events is relevant in the decision-making "rocess+
(./0 7 2,10 3asy O450 16-1
3+ ,n evaluating alternative courses of action$ a manager should select the alternative that "rovides the
highest incremental benefit to the com"any+
(./0 7 2,10 3asy O450 16-2
4+ 7he outsourcing decision is also referred to as a 8make-or-buy9 decision+
(./0 7 2,10 3asy O450 16-3
+ ( com"any may outsource some of its "roduction in order to focus on core com"etencies+
(./0 7 2,10 3asy O450 16-3
#+ ,n an outsourcing decision$ unavoidable fi!ed costs are irrelevant+
(./0 7 2,10 :oderate O450 16-3
%+ ,n an outsourcing decision$ avoidable fi!ed costs are irrelevant+
(./0 1 2,10 :oderate O450 16-3
&+ ,n an outsourcing decision$ variable costs of "roduction are relevant+
(./0 7 2,10 :oderate O450 16-3
*+ ,n an outsourcing decision$ rent received from an outside "arty for facility use is a relevant cash
inflow+
(./0 7 2,10 :oderate O450 16-3
16+ When multi"le "roducts are "roduced and sold$ a change in the sales "rice of one "roduct will cause a
change in the sales mi! of the firm+
(./0 7 2,10 :oderate O450 16-
11+ ,n setting com"ensation structures$ fi!ed salary e!"ense is normally not considered+
(./0 7 2,10 :oderate O450 16-
12+ ,n a s"ecial order decision$ unavoidable fi!ed costs are taken into consideration in setting a sales "rice+
(./0 1 2,10 :oderate O450 16-#
126
13+ ,n a s"ecial order decision$ the sales "rice should be sufficient to cover a ;ob<s variable costs$
incremental fi!ed costs$ and generate a "rofit+
(./0 7 2,10 :oderate O450 16-#
14+ 7he =obinson->atman (ct "rohibits com"anies from "ricing "roducts at different levels when there are
no significant differences in "roduction costs+
(./0 7 2,10 3asy O450 16-#
1+ When making a decision to discontinue an o"erating segment$ allocated common costs are not
considered+
(./0 7 2,10 3asy O450 16-%
1#+ When making a decision to discontinue an o"erating segment$ avoidable fi!ed costs are not
considered+
(./0 1 2,10 3asy O450 16-%
1%+ /egment margin measures a segment<s contribution to the coverage of indirect e!"enses+
(./0 7 2,10 :oderate O450 16-%
1&+ 2e"reciation on factory e?ui"ment is normally a relevant cost in "roduct line decisions+
(./0 1 2,10 :oderate O450 16-%
1*+ :inimi@ation of contribution margin is a common ob;ective function in linear "rogramming+
(./0 1 2,10 3asy O450 16-&
26+ :inimi@ation of variable costs is a common ob;ective function in linear "rogramming+
(./0 7 2,10 3asy O450 16-&
21+ :a!imi@ation of variable costs is a common ob;ective function in linear "rogramming+
(./0 1 2,10 3asy O450 16-&
22+ :a!imi@ation of contribution margin is a common ob;ective function in linear "rogramming+
(./0 7 2,10 3asy O450 16-&
23+ ,n linear "rogramming$ resource constraints are usually e!"ressed as ine?ualities+
(./0 7 2,10 :oderate O450 16-&
24+ ,n linear "rogramming$ a slack variable re"resents the unused "ortion of a resource+
(./0 7 2,10 :oderate O450 16-&
121
2+ ,n linear "rogramming$ a slack variable is associated with A constraints+
(./0 7 2,10 :oderate O450 16-&
2#+ ,n linear "rogramming$ a sur"lus variable is associated with B constraints+
(./0 7 2,10 :oderate O450 16-&
2%+ ,n linear "rogramming$ a sur"lus variable re"resents overachievement of minimum re?uirements+
(./0 7 2,10 :oderate O450 16-&
2&+ ,n linear "rogramming$ a sur"lus variable re"resents the unused "ortion of a resource+
(./0 1 2,10 :oderate O450 16-&
C!M+LE$I!N
1+ 7he amount of revenue that differs across decision choices is referred to as
CCCCCCCCCCCCCCCCCCCCCCCCCCC+
(./0 incremental revenue
2,10 3asy O450 16-1
2+ 7he amount of cost that differs across decision choices is referred to as
CCCCCCCCCCCCCCCCCCCCCCCCCCC+
(./0 incremental cost
2,10 3asy O450 16-1
3+ 7he benefits foregone when one course of action is chosen over another are referred to as
CCCCCCCCCCCCCCCCCCCCCCCCCCCCCCC+
(./0 o""ortunity costs
2,10 3asy O450 16-1
4+ Dosts incurred in the "ast to ac?uire an asset are referred to as CCCCCCCCCCCCCCCCCCCCCCCCCCCCC+
(./0 sunk costs
2,10 3asy O450 16-2
+ When a com"any has work "erformed by an e!ternal su""lier$ it is engaging in
CCCCCCCCCCCCCCCCCCCCCCCCCC+
(./0 outsourcing
2,10 3asy O450 16-3
122
#+ 7he relative "roduct ?uantities com"osing a com"any<s total sales is referred to as a com"any<s
CCCCCCCCCCCCCCCCCCCCCCCCCCCC+
(./0 sales mi!
2,10 3asy O450 16-
%+ 7he e!cess of revenues over direct variable e!"enses and avoidable fi!ed e!"enses is referred to as
CCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCC+
(./0 segment margin
2,10 3asy O450 16-%
&+ ,n linear "rogramming$ a limiting factor that ham"ers management<s "ursuit of an ob;ective is referred
to as a CCCCCCCCCCCCCCCCCCCCCCCCCC+
(./0 constraint
2,10 3asy O450 16-&
*+ ,n linear "rogramming$ the e?uation that s"ecifies management<s ob;ective is referred to as a'n)
CCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCC+
(./0 ob;ective function
2,10 3asy O450 16-&
16+ ,n linear "rogramming$ a CCCCCCCCCCCCCCCCCCCCCCCCCC re"resents the unused amount of a resource
at any level of o"eration+
(./0 slack variable
2,10 :oderate O450 16-&
11+ ,n linear "rogramming$ a CCCCCCCCCCCCCCCCCCCCCCCCCC re"resents the overachievement of a
minimum re?uirement+
(./0 sur"lus variable
2,10 :oderate O450 16-&
M(L$I+LE C,!ICE
1+ Which of the following is not a characteristic of relevant costing information? ,t is
a+ associated with the decision under consideration+
b+ significant to the decision maker+
c+ readily ?uantifiable+
d+ related to a future endeavor+
(./0 D 2,10 3asy O450 16-1
123
2+ ( fi!ed cost is relevant if it is
a+ a future cost+
b+ (voidable+
c+ sunk+
d+ a "roduct cost+
(./0 4 2,10 3asy O450 16-1
3+ =elevant costs are
a+ all fi!ed and variable costs+
b+ all costs that would be incurred within the relevant range of "roduction+
c+ "ast costs that are e!"ected to be different in the future+
d+ antici"ated future costs that will differ among various alternatives+
(./0 2 2,10 3asy O450 16-1
4+ Which of the following is the least likely to be a relevant item in deciding whether to re"lace an old
machine?
a+ ac?uisition cost of the old machine
b+ outlay to be made for the new machine
c+ annual savings to be en;oyed on the new machine
d+ life of the new machine
(./0 ( 2,10 3asy O450 16-2
+ ,f a cost is irrelevant to a decision$ the cost could not be
a+ a sunk cost+
b+ a future cost+
c+ a variable cost+
d+ an incremental cost+
(./0 2 2,10 3asy O450 16-2
#+ Which of the following costs would be relevant in short-term decision making?
a+ incremental fi!ed costs
b+ all costs of inventory
c+ total variable costs that are the same in the considered alternatives
d+ the cost of a fi!ed asset that could be used in all the considered alternatives
(./0 ( 2,10 3asy O450 16-2
%+ 7he term incremental cost refers to
a+ the "rofit foregone by selecting one choice instead of another+
b+ the additional cost of "roducing or selling another "roduct or service+
c+ a cost that continues to be incurred in the absence of activity+
d+ a cost common to all choices in ?uestion and not clearly or feasibly allocable to any of
them+
(./0 4 2,10 3asy O450 16-2
124
&+ ( cost is sunk if it
a+ is not an incremental cost+
b+ is unavoidable+
c+ has already been incurred+
d+ is irrelevant to the decision at hand+
(./0 D 2,10 3asy O450 16-2
*+ :ostCCCCCCCCCCC are relevant to decisions to ac?uire ca"acity$ but not to short-run decisions
involving the use of that ca"acity+
a+ sunk costs
b+ incremental costs
c+ fi!ed costs
d+ "rime costs
(./0 D 2,10 3asy O450 16-2
16+ ,rrelevant costs generally include
/unk costs Historical costs (llocated costs
a+
yes yes no
b+
yes no no
c+
no no yes
d+
yes yes yes
(./0 2 2,10 3asy O450 16-2
11+ ,n deciding whether an organi@ation will kee" an old machine or "urchase a new machine$ a manager
would ignore the
a+ estimated dis"osal value of the old machine+
b+ ac?uisition cost of the old machine+
c+ o"erating costs of the new machine+
d+ estimated dis"osal value of the new machine+
(./0 4 2,10 3asy O450 16-2
12+ 7he "otential rental value of s"ace used for "roduction activities
a+ is a variable cost of "roduction+
b+ re"resents an o""ortunity cost of "roduction+
c+ is an unavoidable cost+
d+ is a sunk cost of "roduction+
(./0 4 2,10 3asy O450 16-3
13+ 7he o""ortunity cost of making a com"onent "art in a factory with e!cess ca"acity for which there is
no alternative use is
a+ the total manufacturing cost of the com"onent+
b+ the total variable cost of the com"onent+
c+ the fi!ed manufacturing cost of the com"onent+
d+ @ero+
(./0 2 2,10 3asy O450 16-3
12
14+ Which of the following are relevant in a make or buy decision?
Eariable
costs
(voidable fi!ed
costs
Fnavoidable fi!ed
costs
a+
no yes yes
b+
yes no yes
c+
no no yes
d+
yes yes no
(./0 2 2,10 3asy O450 16-3
1+ ,n a make or buy decision$ the o""ortunity cost of ca"acity could
a+ be considered to decrease the "rice of units "urchased from su""liers+
b+ be considered to decrease the cost of units manufactured by the com"any+
c+ be considered to increase the "rice of units "urchased from su""liers+
d+ not be considered since o""ortunity costs are not "art of the accounting records+
(./0 ( 2,10 3asy O450 16-3
1#+ Which of the following are relevant in a make or buy decision?
>rime costs /unk costs ,ncremental costs
a+
yes yes yes
b+
yes no yes
c+
yes no no
d+
no no yes
(./0 4 2,10 3asy O450 16-3
1%+ ,n a make or buy decision$ the reliability of a "otential su""lier is
a+ an irrelevant decision factor+
b+ relevant information if it can be ?uantified+
c+ an o""ortunity cost of continued "roduction+
d+ a ?ualitative decision factor+
(./0 2 2,10 3asy O450 16-3
1&+ Which of the following ?ualitative factors favors the buy choice in a make or buy decision for a "art?
a+ maintaining a long-term relationshi" with su""liers
b+ ?uality control is critical
c+ utili@ation of idle ca"acity
d+ "art is critical to "roduct
(./0 ( 2,10 3asy O450 16-3
1*+ When a scarce resource$ such as s"ace$ e!ists in an organi@ation$ the criterion that should be used to
determine "roduction is
a+ contribution margin "er unit+
b+ selling "rice "er unit+
c+ contribution margin "er unit of scarce resource+
d+ total variable costs of "roduction+
(./0 D 2,10 3asy O450 16-4
12#
26+ 1i!ed costs are ignored in allocating scarce resources because
a+ they are sunk+
b+ they are unaffected by the allocation of scarce resources+
c+ there are no fi!ed costs associated with scarce resources+
d+ fi!ed costs only a""ly to long-run decisions+
(./0 4 2,10 3asy O450 16-4
21+ 7he minimum selling "rice that should be acce"table in a s"ecial order situation is e?ual to total
a+ "roduction cost+
b+ variable "roduction cost+
c+ variable costs+
d+ "roduction cost "lus a normal "rofit margin+
(./0 D 2,10 3asy O450 16-#
22+ Which of the following costs is irrelevant in making a decision about a s"ecial order "rice if some of
the com"any facilities are currently idle?
a+ direct labor
b+ e?ui"ment de"reciation
c+ variable cost of utilities
d+ o""ortunity cost of "roduction
(./0 4 2,10 3asy O450 16-#
23+ 7he CCCCCCCCCCCCCCC "rohibits com"anies from "ricing "roducts at different amounts unless these
differences reflect differences in the cost to manufacture$ sell$ or distribute the "roducts+
a+ ,nternal =evenue /ervice
b+ Governmental (ccounting Office
c+ /herman (ntitrust (ct
d+ =obinson->atman (ct
(./0 2 2,10 3asy O450 16-#
24+ (n ad hoc sales discount is
a+ an allowance for an inferior ?uality of marketed goods+
b+ a discount that an ad hoc committee must decide on+
c+ brought about by com"etitive "ressures+
d+ none of the above+
(./0 D 2,10 :oderate O450 16-#
2+ ( manager is attem"ting to determine whether a segment of the business should be eliminated+ 7he
focus of attention for this decision should be on
a+ the net income shown on the segmentHs income statement+
b+ sales minus total e!"enses of the segment+
c+ sales minus total direct e!"enses of the segment+
d+ sales minus total variable e!"enses and avoidable fi!ed e!"enses of the segment+
(./0 2 2,10 3asy O450 16-%
12%
2#+ (ssume a com"any "roduces three "roducts0 ($ 4$ and D+ ,t can only sell u" to 3$666 units of each
"roduct+ >roduction ca"acity is unlimited+ 7he com"any should "roduce the "roduct 'or "roducts) that
has 'have) the highest
a+ contribution margin "er hour of machine time+
b+ gross margin "er unit+
c+ contribution margin "er unit+
d+ sales "rice "er unit+
(./0 D 2,10 3asy O450 16-%
2%+ 1or a "articular "roduct in high demand$ a com"any decreases the sales "rice and increases the sales
commission+ 7hese changes will not increase
a+ sales volume+
b+ total selling e!"enses for the "roduct+
c+ the "roduct contribution margin+
d+ the total variable cost "er unit+
(./0 D 2,10 3asy O450 16-%
2&+ (n increase in direct fi!ed costs could reduce all of the following e-cept
a+ "roduct line contribution margin+
b+ "roduct line segment margin+
c+ "roduct line o"erating income+
d+ cor"orate net income+
(./0 ( 2,10 3asy O450 16-%
2*+ When a com"any discontinues a segment$ total cor"orate costs may decrease in all of the following
categories e-cept
a+ variable "roduction costs+
b+ allocated common costs+
c+ direct fi!ed costs+
d+ variable "eriod costs+
(./0 4 2,10 3asy O450 16-%
36+ ,n evaluating the "rofitability of a s"ecific organi@ational segment$ all CCCCCCCCCCCCCCC would be
ignored+
a+ segment variable costs
b+ segment fi!ed costs
c+ costs allocated to the segment
d+ "eriod costs
(./0 D 2,10 3asy O450 16-%
12&
31+ Ino! Dom"any uses 16$666 units of a "art in its "roduction "rocess+ 7he costs to make a "art are0
direct material$ J12K direct labor$ J2K variable overhead$ J13K and a""lied fi!ed overhead$ J36+ Ino!
has received a ?uote of J from a "otential su""lier for this "art+ ,f Ino! buys the "art$ %6 "ercent of
the a""lied fi!ed overhead would continue+ Ino! Dom"any would be better off by
a+ J6$666 to manufacture the "art+
b+ J16$666 to buy the "art+
c+ J46$666 to buy the "art+
d+ J1#6$666 to manufacture the "art+
(./0 D
Dost to make0 JLunit M 16$666 units N J6$666
Dost to manufacture0 J'12O2O13O*)N J*Lunit
,ncremental difference in favor of buying0 J4Lunit M 16$666 units N ./00000
2,10 :oderate O450 16-3
32+ >aulson Dom"any has only 2$666 hours of machine time each month to manufacture its two "roducts+
>roduct P has a contribution margin of J6$ and >roduct Q has a contribution margin of J#4+ >roduct
P re?uires hours of machine time$ and >roduct Q re?uires & hours of machine time+ ,f >aulson
Dom"any wants to dedicate &6 "ercent of its machine time to the "roduct that will "rovide the most
income$ the com"any will have a total contribution margin of
a+ J26$666+
b+ J246$666+
c+ J216$666+
d+ J266$666+
(./0 4
(ssume &6R of ca"acity a""lied to >roduct P
P0 26$666 hrsL hrs "er unit 4$666 units M J6 D:Lunit J266$666
Q0 $666 hrsL& hrs "er unit #2 units M J#4 D:Lunit 46$666
7otal .1/00000
NNNNNN
2,10 2ifficult O450 16-%
12*
33+ 2oyle Dom"any has 3 divisions0 =$ /$ and 7+ 2ivision =Hs income statement shows the following for
the year ended 2ecember 310
/ales
$1,000,000
Dost of goods sold
(800,000)
Gross "rofit
$ 200,000
/elling e!"enses
$100,000
(dministrative e!"enses
250,000 (350,000)
.et loss
$ (150,000)
Dost of goods sold is % "ercent variable and 2 "ercent fi!ed+ Of the fi!ed costs$ #6 "ercent are
avoidable if the division is closed+ (ll of the selling e!"enses relate to the division and would be
eliminated if 2ivision = were eliminated+ Of the administrative e!"enses$ *6 "ercent are a""lied from
cor"orate costs+ ,f 2ivision = were eliminated$ 2oyle<s income would
a+ increase by J16$666+
b+ decrease by J %$666+
c+ decrease by J1$666+
d+ decrease by J21$666+
(./0 D
/ales foregone J'1$666$666)
DOG/ avoided
Eariable J#66$666
1i!ed 126$666 %26$666
/elling 3!"ense (voided 166$666
(dministrative 3!"ense (voided 2$666
2ecrease in income .2 13300004
555555555
2,10 :oderate O450 16-%
136
34+ 7homas Dom"any is currently o"erating at a loss of J1$666+ 7he sales manager has received a
s"ecial order for $666 units of "roduct$ which normally sells for J3 "er unit+ Dosts associated with
the "roduct are0 direct material$ J#K direct labor$ J16K variable overhead$ J3K a""lied fi!ed overhead$
J4K and variable selling e!"enses$ J2+ 7he s"ecial order would allow the use of a slightly lower
grade of direct material$ thereby lowering the "rice "er unit by J1+6 and selling e!"enses would be
decreased by J1+ ,f 7homas wants this s"ecial order to increase the total net income for the firm to
J16$666$ what sales "rice must be ?uoted for each of the $666 units?
a+ J23+6
b+ J24+6
c+ J2%+6
d+ J34+66
(./0 (
,n order to increase income to J16$666$ there must be an increase of J2$666 or J "er unit+
2irect materials J 4+6
2irect Labor 16+66
Eariable Overhead 3+66
Eariable /elling 3!" 1+66
>roduction Dosts J1&+6
(dditional "rofit "er
unit +66
&ales price)6nit .17830
55555
2,10 :oderate O450 16-#
3+ Suest Dom"any "roduces a "art that has the following costs "er unit0
2irect material
$ 8
2irect labor
3
Eariable overhead
1
1i!ed overhead
5
7otal
$17
Test Dor"oration can "rovide the "art to Suest for J1* "er unit+ Suest Dom"any has determined that
#6 "ercent of its fi!ed overhead would continue if it "urchased the "art+ However$ if Suest no longer
"roduces the "art$ it can rent that "ortion of the "lant facilities for J#6$666 "er year+ Suest Dom"any
currently "roduces 16$666 "arts "er year+ Which alternative is "referable and by what margin?
a+ :ake-J26$666
b+ :ake-J6$666
c+ 4uy-J16$666
d+ 4uy-J46$666
(./0 D
>urchase "rice from Test J'1*6$666)
=ent =evenue =eceived #6$666
Eariable Dosts (voided 126$666
1i!ed Overhead (voided 26$666
Difference in *avor of "69ing . 100000
5555555
2,10 :oderate O450 16-3
131
3#+ 4rowning Dom"any has 1$666 units in inventory that had a "roduction cost of J3 "er unit+ 7hese
units cannot be sold through normal channels due to a significant technology change+ 7hese units
could be reworked at a total cost of J23$666 and sold for J2&$666+ (nother alternative is to sell the
units to a ;unk dealer for J&$66+ 7he relevant cost for 4rowning to consider in making its decision is
a+ J4$666 of original "roduct costs+
b+ J23$666 for reworking the units+
c+ J#&$666 for reworking the units+
d+ J2&$666 for selling the units to the ;unk dealer+
(./0 4
Only the actual reworking costs are relevant+ Original "urchase costs are irrelevant+
2,10 3asy O450 16-3
Ro:ertson Corporation
=obertson Dor"oration sells a "roduct for J1& "er unit$ and the standard cost card for the "roduct
shows the following costs0
2irect material
$ 1
2irect labor
2
Overhead '&6R fi!ed)
7
7otal
$10
3%+ =efer to =obertson Dor"oration+ =obertson received a s"ecial order for 1$666 units of the "roduct+ 7he
only additional cost to =obertson would be foreign im"ort ta!es of J1 "er unit+ ,f =obertson is able to
sell all of the current "roduction domestically$ what would be the minimum sales "rice that =obertson
would consider for this s"ecial order?
a+ J1&+66
b+ J11+66
c+ J+46
d+ J1*+66
(./0 2
7he com"any would increase its minimum sales "rice to reflect the foreign im"ort ta! of J1
"er unit+
2,10 3asy O450 16-#
3&+ =efer to =obertson Dor"oration+ (ssume that =obertson has sufficient idle ca"acity to "roduce the
1$666 units+ ,f =obertson wants to increase its o"erating "rofit by J$#66$ what would it charge as a
"er-unit selling "rice?
a+ J1&+66
b+ J16+66
c+ J11+66
d+ J1#+#6
(./0 D
7he com"any would want to charge a "rice e?ual to a "er unit "rofit of J+#6 "lus variable
costs "er unit of J4+46 and the im"ort ta! "er unit of J1+66+ 7he total "rice is .118008
2,10 :oderate O450 16-3
132
3*+ Glamorous Grooming Dor"oration makes and sells brushes and combs+ ,t can sell all of either "roduct
it can make+ 7he following data are "ertinent to each res"ective "roduct0
4rushes Dombs
Fnits of out"ut "er machine hour
8 20
/elling "rice "er unit
$12.00 $4.00
>roduct cost "er unit
2irect material
$1.00 $1.20
2irect labor
2.00 0.10
Eariable overhead
0.50 0.05
7otal fi!ed overhead is J3&6$666+
7he com"any has 46$666 machine hours available for "roduction+ What sales mi! will ma!imi@e
"rofits?
a+ 326$666 brushes and 6 combs
b+ 6 brushes and &66$666 combs
c+ 1#6$666 brushes and #66$666 combs
d+ 22$#36 brushes and 22$#36 combs
(./0 (
4rushes have a contribution margin of J&+6 "er unitK combs have a contribution margin of
J2+# "er unit+
7he combination of 326$666 brushes and 6 combs "rovides a net "rofit of J346$666+
2,10 3asy O450 16-
46+ Houston 1ootwear Dor"oration has been asked to submit a bid on su""lying 1$666 "airs of military
combat boots to the (rmed 1orces+ 7he com"anyHs costs "er "air of boots are as follows0
2irect material
$8
2irect labor
6
Eariable overhead
3
Eariable selling cost 'commission)
3
1i!ed overhead 'allocated)
2
1i!ed selling and administrative cost
1
(ssuming that there would be no commission on this "otential sale$ the lowest "rice the firm can bid is
some "rice greater than
a+ J23+
b+ J26+
c+ J1%+
d+ J14+
(./0 D
7he lowest "rice would have to be greater than the sum of all variable manufacturing costs+
Eariable manufacturing costs total J1%K therefore the "rice would have to be greater than J1%
"er "air+
2,10 3asy O450 16-
133
41+ Holt ,ndustries has two sales territories-3ast and West+ 1inancial information for the two territories is
"resented below0
3ast West
/ales
$980,000 $750,000
2irect costs0
Eariable
(343,000) (225,000)
1i!ed
(450,000) (325,000)
(llocated common costs
(275,000) (175,000)
.et income 'loss)
$(88,000) $ 25,000
4ecause the com"any is in a start-u" stage$ cor"orate management feels that the 3ast sales territory is
creating too much of a cash drain on the com"any and it should be eliminated+ ,f the 3ast territory is
discontinued$ one sales manager 'whose salary is J46$666 "er year) will be relocated to the West
territory+ 4y how much would HoltHs income change if the 3ast territory is eliminated?
a+ increase by J&&$666
b+ increase by J4&$666
c+ decrease by J2#%$666
d+ decrease by J22%$666
(./0 2
/ales foregone in 3ast J'*&6$666)
Eariable costs avoided 343$666
1i!ed costs avoided 416$666
Decrease in income from
eliminating East territor9
.211;00004
55555555
2,10 :oderate O450 16-%
<oo=ville Motors
Woodville :otors is trying to decide whether it should kee" its e!isting car washing machine or
"urchase a new one that has technological advantages 'which translate into cost savings) over the
e!isting machine+ ,nformation on each machine follows0
Old machine .ew machine
Original cost
$9,000 $20,000
(ccumulated de"reciation
5,000 0
(nnual cash o"erating costs
9,000 4,000
Durrent salvage value of old machine
2,000
/alvage value in 16 years
500 1,000
=emaining life
10 yrs. 10 yrs.
42+ =efer to Woodville :otors+ 7he J4$666 of annual o"erating costs that are common to both the old and
the new machine are an e!am"le of a'n)
a+ sunk cost+
b+ irrelevant cost+
c+ future avoidable cost+
d+ o""ortunity cost+
(./0 4 2,10 3asy O450 16-1
134
43+ =efer to Woodville :otors+ 7he J*$666 cost of the original machine re"resents a'n)
a+ sunk cost+
b+ future relevant cost+
c+ historical relevant cost+
d+ o""ortunity cost+
(./0 ( 2,10 3asy O450 16-2
44+ =efer to Woodville :otors+ 7he J26$666 cost of the new machine re"resents a'n)
a+ sunk cost+
b+ future relevant cost+
c+ future irrelevant cost+
d+ o""ortunity cost+
(./0 4 2,10 3asy O450 16-3
4+ =efer to Woodville :otors+ 7he estimated J66 salvage value of the e!isting machine in 16 years
re"resents a'n)
a+ sunk cost+
b+ o""ortunity cost of selling the e!isting machine now+
c+ o""ortunity cost of kee"ing the e!isting machine for 16 years+
d+ o""ortunity cost of kee"ing the e!isting machine and buying the new machine+
(./0 4 2,10 3asy O450 16-3
4#+ =efer to Woodville :otors+ 7he incremental cost to "urchase the new machine is
a+ J11$666+
b+ J26$666+
c+ J13$666+
d+ J1&$666+
(./0 2
,ncremental cost N >urchase "rice of new machine - Durrent salvage value
,ncremental cost N J'26$666 - 2$666)
Incremental cost 5 .1>0000
2,10 3asy O450 16-3
13
Entertainment &ol6tions Corporation
3ntertainment /olutions Dor"oration manufactures and sells 1: radios+ ,nformation on the "rior yearHs
o"erations 'sales and "roduction :odel (1) is "resented below0
/ales "rice "er unit
$30
Dosts "er unit0
2irect material
7
2irect labor
4
Overhead '6R variable)
6
/elling costs '46R variable)
10
>roduction in units
10,000
/ales in units
9,500
4%+ =efer to 3ntertainment /olutions Dor"oration8 7he :odel 42 radio is currently in "roduction and it
renders the :odel (1 radio obsolete+ ,f the remaining 66 units of the :odel (1 radio are to be sold
through regular channels$ what is the minimum "rice the com"any would acce"t for the radios?
a+ J36
b+ J2%
c+ J1&
d+ J4
(./0 2
J4 would cover the variable selling e!"enses+
2,10 :oderate O450 16-
4&+ =efer to 3ntertainment /olutions Dor"oration+ (ssume that the remaining :odel (1 radios can be sold
through normal channels or to a foreign buyer for J# "er unit+ ,f sold through regular channels$ the
minimum acce"table "rice will be
a+ J36+
b+ J33+
c+ J16+
d+ J4+
(./0 D
J16 will cover the "rice to the foreign buyer "lus the J4 in
variable selling e!"enses+
2,10 :oderate O450 16-
Chip Division of Comp6ter &ol6tions0 Inc8
7he Dhi" 2ivision of Dom"uter /olutions$ ,nc+ "roduces a high-?uality com"uter chi"+ Fnit
"roduction costs 'based on ca"acity "roduction of 166$666 units "er year) follow0
2irect material
$50
2irect labor
20
Overhead '26R variable)
10
Other information0
/ales "rice
100
/GU( costs '46R variable)
15
13#
4*+ =efer to Dhi" 2ivision of Dom"uter /olutions$ ,nc+ (ssume$ for this ?uestion only$ that the Dhi"
2ivision is "roducing and selling at ca"acity+ What is the minimum selling "rice that the division
would consider on a Vs"ecial orderV of 1$666 chi"s on which no variable "eriod costs would be
incurred?
a+ J166
b+ J%2
c+ J&1
d+ J*4
(./0 2
Eariable "eriod costs are J# 'J1 M 46R variable)
7he minimum selling "rice would have to be greater than the manufacturing costs and fi!ed
"eriod costs+
J'166 - #) N .?/ per 6nit
2,10 :oderate O450 16-#
6+ =efer to Dhi" 2ivision of Dom"uter /olutions$ ,nc+ (ssume$ for this ?uestion only$ that the Dhi"
2ivision is o"erating at a level of %6$666 chi"s "er year+ What is the minimum "rice that the division
would consider on a Vs"ecial orderV of 1$666 chi"s to be distributed through normal channels?
a+ J%&
b+ J*
c+ J166
d+ J&1
(./0 (
7he "rice would have to cover all variable costs+
J'6 O 26 O 2 O #) N .;> per 6nit
2,10 :oderate O450 16-#
1+ =efer to Dhi" 2ivision of Dom"uter /olutions$ ,nc+ (ssume$ for this ?uestion only$ that the Dhi"
2ivision is "resently o"erating at a level of &6$666 chi"s "er year+ (cce"ting a Vs"ecial orderV on 2$666
chi"s at J&& will
a+ increase total cor"orate "rofits by J4$666+
b+ increase total cor"orate "rofits by J26$666+
c+ decrease total cor"orate "rofits by J14$666+
d+ decrease total cor"orate "rofits by J24$666+
(./0 4
J'&& - %&) N J16 "rofit "er unit M 2$666 units N .100000 profit increase
2,10 :oderate O450 16-#
13%
Richmon= &teel Corporation
7he ca"ital budgeting committee of the =ichmond /teel Dor"oration is evaluating the "ossibility of
re"lacing its old "i"e-bending machine with a more advanced model+ ,nformation on the e!isting
machine and the new model follows0
3!isting machine .ew machine
Original cost
$200,000 $400,000
:arket value now
80,000
:arket value in year
0 20,000
(nnual cash o"erating costs
40,000 10,000
=emaining life
5 yrs. 5 yrs.
2+ =efer to =ichmond /teel Dor"oration+ 7he ma;or o""ortunity cost associated with the continued use of
the e!isting machine is
a+ J36$666 of annual savings in o"erating costs+
b+ J26$666 of salvage in years on the new machine+
c+ lost sales resulting from the inefficient e!isting machine+
d+ J466$666 cost of the new machine+
(./0 ( 2,10 3asy O450 16-1
3+ =efer to =ichmond /teel Dor"oration+ 7he J&6$666 market value of the e!isting machine is
a+ a sunk cost+
b+ an o""ortunity cost of kee"ing the old machine+
c+ irrelevant to the e?ui"ment re"lacement decision+
d+ a historical cost+
(./0 4 2,10 3asy O450 16-1
4+ =efer to =ichmond /teel Dor"oration+ ,f the com"any buys the new machine and dis"oses of the
e!isting machine$ cor"orate "rofit over the five-year life of the new machine will be
CCCCCCCCCCCCCCCCCCCC than the "rofit that would have been generated had the e!isting machine been
retained for five years+
a+ J16$666 lower
b+ J1%6$666 lower
c+ J236$666 lower
d+ J16$666 higher
(./0 (
(nnual savings in o"erating costs J 16$666
>urchase of new machine '466$666)
2is"osal of e!isting machine &6$666
2is"osal of new machine in years 26$666
Difference in profit .213000004
55555555
2,10 :oderate O450 16-1
13&
+ 3merald Dor"oration has been manufacturing $666 units of >art 1641$ which is used in the
manufacture of one of its "roducts+ (t this level of "roduction$ the cost "er unit of manufacturing >art
1641 is as follows0
2irect material
$ 2
2irect labor
8
Eariable overhead
4
1i!ed overhead a""lied
6
7otal
$20
Hamilton Dom"any has offered to sell 3merald $666 units of >art 1641 for J1* a unit+ 3merald has
determined that it could use the facilities currently used to manufacture >art 1641 to manufacture >art
=(D and generate an o"erating "rofit of J4$666+ 3merald has also determined that two-thirds of the
fi!ed overhead a""lied will continue even if >art 1641 is "urchased from Hamilton+ 7o determine
whether to acce"t Hamilton<s offer$ the net relevant costs to make are
a+ J%6$666+
b+ J&4$666+
c+ J*6$666+
d+ J*$666+
(./0 4
7he relevant costs are the variable costs "er unit as well as the "ortion of fi!ed overhead that
will be avoided for >art 1641+
Eariable costs N J14 "er unit
1i!ed overhead N J 2 "er unit
$666 units M J1# "er unit N J&6$666 O >rofit from =(D N J 4$666
$otal Relevant Costs .>/0000
2,10 :oderate O450 16-3
#+ Harding Dor"oration manufactures batons+ Harding can manufacture 366$666 batons a year at a
variable cost of J%6$666 and a fi!ed cost of J46$666+ 4ased on HardingHs "redictions$ 246$666
batons will be sold at the regular "rice of J+66 each+ ,n addition$ a s"ecial order was "laced for #6$666
batons to be sold at a 46 "ercent discount off the regular "rice+ 7he unit relevant cost "er unit for
HardingHs decision is
a+ J1+6+
b+ J2+6+
c+ J3+66+
d+ J4+66+
(./0 4
7he relevant costs will be the variable costs "er unit+
.;300000)7000000 6nits 5 .1830)6nit
2,10 :oderate O450 16-#
%+ 7he ob;ective in solving the linear "rogramming "roblem is to determine the o"timal levels of the
a+ coefficients+
b+ de"endent variables+
c+ inde"endent variables+
d+ slack variables+
(./0 D 2,10 3asy O450 16-&
13*
&+ ( linear "rogramming "roblem can have
a+ no more than three resource constraints+
b+ only one ob;ective function+
c+ no more than two de"endent variables for each constraint e?uation+
d+ no more than three inde"endent variables+
(./0 4 2,10 3asy O450 16-&
*+ ( linear "rogramming model must
a+ have only one ob;ective function+
b+ have as many inde"endent variables as it has constraint e?uations+
c+ have at least two de"endent variables for each e?uation+
d+ consider only the constraints that can be e!"ressed as ine?ualities+
(./0 ( 2,10 3asy O450 16-&
#6+ ,n a linear "rogramming "roblem$ constraints are indicated by
a+ the inde"endent variables+
b+ the de"endent variables in the constraint e?uations+
c+ the coefficients of the ob;ective function+
d+ iso-cost lines+
(./0 4 2,10 3asy O450 16-&
#1+ 7he feasible region for an L> solution is
a+ defined only by binding constraints on the o"timal solution+
b+ defined as the solution s"ace that satisfies all constraints+
c+ identified by iso-cost and iso-"rofit lines+
d+ identified by all of the above+
(./0 4 2,10 3asy O450 16-&
#2+ ( linear "rogramming solution
a+ always involves more than one constraint+
b+ always involves a corner "oint+
c+ is the one with the highest verte! coordinates+
d+ is "rovided by the in"ut-out"ut coefficients+
(./0 4 2,10 3asy O450 16-&
#3+ 7he ob;ective function and the resource constraints have the same
a+ de"endent variables+
b+ coefficients+
c+ inde"endent variables+
d+ all of the above+
(./0 D 2,10 3asy O450 16-&
146
#4+ Which of the following items continuously checks for an im"roved solution from the one "reviously
com"uted?
(n algorithm /im"le! method
a+
yes yes
b+
yes no
c+
no no
d+
no yes
(./0 ( 2,10 3asy O450 16-&
#+ Which of the following variables is associated with the Vless than or e?ual toV constraints?
/ur"lus /lack
a+
yes yes
b+
yes no
c+
no yes
d+
no no
(./0 D 2,10 3asy O450 16-&
##+ CCCCCCCCCCCCCCCCCCCC "rogramming relates to a variety of techni?ues that are used to allocate
limited resources among activities to achieve a s"ecific ob;ective+
a+ ,nteger
b+ ,n"ut-out"ut
c+ :athematical
d+ =egression
(./0 D 2,10 3asy O450 16-&
#%+ 7he gra"hical a""roach to solving a linear "rogramming "roblem becomes much more com"le! when
there are more than two
constraints decision variables
a+
yes no
b+
no yes
c+
yes yes
d+
no no
(./0 D 2,10 3asy O450 16-&
#&+ 7he feasible region for a gra"hical solution to a "rofit ma!imi@ation "roblem includes
a+ all verte! "oints+
b+ all "oints on every resource constraint line+
c+ the origin+
d+ all of the above+
(./0 D 2,10 3asy O450 16-&
141
(ncommon +ro=6cts Corporation
,n the two following constraint e?uations$ P and Q re"resent two "roducts 'in units) "roduced by the
Fncommon >roducts Dor"oration+
Donstraint 10 3P O Q A 4$266
Donstraint 20 P O 2Q B 3$666
#*+ =efer to Fncommon >roducts Dor"oration+ What is the ma!imum number of units of >roduct P that
can be "roduced?
a+ 4$266
b+ 3$666
c+ #66
d+ 1$466
(./0 2
1$466 units is the only amount that will not cause Donstraint 1 to be violated+
2,10 :oderate O450 16-&
%6+ =efer to Fncommon >roducts Dor"oration+ What is the feasible range for the "roduction of Q?
a+ &46 to 1$66 units
b+ 6 to &46 units
c+ 6 to #31 units
d+ 6 to 166 units
(./0 4
&46 units is the most that can be "roduced without violating Donstraint 1+
2,10 :oderate O450 16-&
%1+ =efer to Fncommon >roducts Dor"oration+ ( solution of P N 66 and Q N #66 would violate
a+ Donstraint 1+
b+ Donstraint 2+
c+ both constraints+
d+ neither constraint+
(./0 (
7his solution would yield a result of 4$66K this violates Donstraint 1+
2,10 3asy O450 16-&
%2+ One constraint in an L> "roblem is0 12P O %Q B 4$666+ ,f the o"timal solution is P N 166 and Q N 66$
this resource has
a+ slack variable of %66+
b+ sur"lus variable of %66+
c+ out"ut coefficient of %66+
d+ none of the above+
(./0 4
7he solution to the constraint is 4$%66$ a sur"lus variable of %66+
2,10 3asy O450 16-&
142
%3+ Donsider the following linear "rogramming "roblem and assume that non-negativity constraints a""ly
to the inde"endent variables0
:a! D: N J14P O J23Q
/ub;ect to
Donstraint 10 4P O Q A 3$266
Donstraint 20 2P O #Q A 2$466
Which of the following are feasible solutions to the linear "rogramming "roblem?
a+ P N #66$ Q N 246
b+ P N &66$ Q N #46
c+ P N 6$ Q N 466
d+ P N 1$266$ Q N 6
(./0 D
7his is the only solution that does not violate Donstraints 1 or 2+
Donstraint 10 4'6) O '466) N 2$666 A 3$266
Donstraint 20 2'6) O #'466) A 2$466 A 2$466
2,10 :oderate O450 16-&
%4+ Dontracting with vendors outside the organi@ation to obtain or ac?uire goods andLor services is called
a+ target costing+
b+ insourcing+
c+ outsourcing+
d+ "roduct harvesting+
(./0 D 2,10 3asy O450 16-3
%+ Which of the following activities within an organi@ation would be least likel9 to be outsourced?
a+ accounting
b+ data "rocessing
c+ trans"ortation
d+ "roduct design
(./0 2 2,10 3asy O450 16-3
%#+ (n outside firm selected to "rovide services to an organi@ation is called a
a+ contract vendor+
b+ lessee+
c+ network organi@ation+
d+ centrali@ed insourcer+
(./0 ( 2,10 3asy O450 16-3
%%+ Dosts forgone when an individual or organi@ation chooses one o"tion over another are
a+ budgeted costs+
b+ sunk costs+
c+ historical costs+
d+ o""ortunity costs+
(./0 2 2,10 3asy O450 16-1
143
%&+ Which of the following costs would not be accounted for in a com"anyHs recordkee"ing system?
a+ an une!"ired cost
b+ an e!"ired cost
c+ a "roduct cost
d+ an o""ortunity cost
(./0 2 2,10 3asy O450 16-1
&,!R$ AN&<ER
1+ What are three characteristics of relevant information?
(./0
=elevant information must be0 '1) associated with the decision under considerationK '2) be im"ortant to
the decision makerK and '3) have a connection to or bearing on some future endeavor+
2,10 3asy O450 16-1
2+ Why is de"reciation e!"ense irrelevant to most managerial decisions$ even when it is a future cost?
(./0
2e"reciation e!"ense is sim"ly the systematic write-off of a sunk cost 'the cost of a long-lived asset)+
2e"reciation e!"ense is therefore always irrelevant unless it "ertains to an asset that is not yet
ac?uired+
2,10 :oderate O450 16-2
3+ What is an o""ortunity cost and why is it a relevant cost?
(./0
(n o""ortunity cost is not a VcostV in the traditional out-of-"ocket sense+ O""ortunity costs are
benefits that are sacrificed to "ursue one alternative rather than another+ Once an alternative is selected$
the o""ortunity costs associated with that alternative will not a""ear directly in the accounting records
of the firm as other costs of that alternative will+ 7hese costs are$ however$ relevant because the
com"any is giving u" one set of benefits to acce"t a second set+ =ational decision making assumes that
the chosen alternative "rovides the greater benefit+
2,10 :oderate O450 16-1
4+ 2efine segment margin and e!"lain why it is a relevant measure of a segmentHs contribution to overall
organi@ational "rofitability+
(./0
/egment margin is the amount of income that remains after deducting all avoidable 'both variable and
fi!ed) costs from sales+ 7his measure is the a""ro"riate gauge of a segmentHs viability because it is a
direct measure of how total organi@ational "rofits would change if the segment was discontinued+
2,10 :oderate O450 16-%
144
+ What is the relationshi" between scarce resources and an organi@ationHs "roduction ca"acity?
(./0
,n the long run$ ca"acity is likely to be constrained by two fundamental resources0 labor and
machinery+ However$ in the short run$ additional constraints can "ush ca"acity to levels below labor
and machine ca"acity+ Donstraints can be induced by raw material shortages$ interru"tions in
distribution channels$ labor strikes in the "lants of su""liers of im"ortant com"onents$ or governmental
restrictions on markets 'gas rationing$ Suotas)+
2,10 :oderate O450 16-4
#+ Fnder what circumstances is the sum of variable "roduction and selling costs the a""ro"riate
minimum "rice for s"ecial orders?
(./0
Eariable costs would serve as the bottom "rice for a s"ecial order only if the s"ecial order could be
"roduced on "roduction ca"acity that would otherwise be idle+ Whenever "resently em"loyed ca"acity
is "artially or wholly surrendered to "roduce a s"ecial order$ the s"ecial order "rice would be based on
both variable costs and the "rofit sacrificed on the best alternative use of the ca"acity+
2,10 :oderate O450 16-#
%+ Why are fi!ed costs generally more relevant in long-run decisions than short-run decisions?
(./0
,n the long run$ all costs are relevant+ ,n the short run$ many costs that a""ly to the e!isting "roduction
technology are sunk+ ,n "articular$ de"reciation charges and lease "ayments on long-term assets are
unavoidable+ ,n the long run$ these assets are re"laced and$ thus their associated costs are relevant in
the re"lacement decision+
2,10 :oderate O450 16-2
&+ 2efine and discuss outsourcing+
(./0
Outsourcing occurs when an organi@ation Vfarms outV some of its normal business activities or
"rocesses+ /everal areas that are most fre?uently outsourced by an organi@ation include "ayroll$
accounting$ trans"ortation$ and "ossibly legal+ When a com"any outsources some of its functions$ it is
able to divert more energy to those areas that "roduce a firmHs core com"etencies or have the ability to
create revenues for the firm+
2,10 :oderate O450 16-3
14
*+ What are some factors that a com"any must consider when deciding to raise or lower sales "rices on
"roducts?
(./0
Suantitative factors include the new contribution margin "er unit of the "roduct$ short-term and long-
term changes in demand and "roduction volume because of the "rice change$ and the best use of a
com"any<s scarce resources+
Sualitative factors include the im"act of changes on customer goodwill toward the com"any$ customer
loyalty toward com"any "roducts$ and com"etitors< res"onses to the firm<s new "ricing structure+
2,10 :oderate O450 16-
+R!"LEM
Agri-Magic Corporation
(gri-:agic Dor"oration grows corn in rural areas of the /outh+ (gri-:agicHs costs "er bushel of corn
'based on an average yield of 136 bushels "er acre) follow0
2irect material
$1.10
2irect labor
0.40
Eariable overhead
0.30
1i!ed overhead
0.60
Eariable selling costs
0.10
1i!ed selling costs
0
(gri-:agic defines direct material costs as seed$ fertili@er$ water$ and other chemicals+ 7he variable
overhead costs re"resent maintenance and re"air costs of machinery+ 7he fi!ed overhead costs are
com"letely com"rised of de"reciation e!"ense on machinery and real estate ta!es+
1+ =efer to (gri-:agic Dor"oration+ (ssume that the current date is :arch 1+ On this date$ (gri-:agic
must make a decision as to whether it is financially better off to "lant a certain farm with corn or leave
the land idle 'no income is derived from idle land)+ Dorn "rices have been severely de"ressed in recent
years and (gri-:agic<s best guess is that corn "rices will be around J2+66 "er bushel at the time the
cro" is ready for harvest+ /hould the com"any "lant corn or leave the land idle? 3!"lain+
(./0
7he com"any should make their decision by com"aring the incremental income from "lanting the corn
cro" to the incremental e!"enses that would be incurred to grow$ harvest$ and market the cro"+ 7he
incremental revenue is sim"ly the J2+66 "er bushel and the incremental costs are all variable costs
'J1+16 O J6+46 O J6+36 O J6+16 N J1+*6)+ 4ased on this com"arison$ the com"any would be J13 "er
acre better off to "lant than to let the land remain idle+
2,10 :oderate O450 16-3
14#
2+ =efer to (gri-:agic Dor"oration+ (ssume for this ?uestion only that the com"any decided to "lant the
corn+ ( local oil refiner has a""roached the com"any about converting the cro" to grain alcohol 'used
to make gasohol) rather than selling the grain to the local grain elevator+ ,f (gri-:agic converts the
grain to alcohol$ it will incur additional costs of J6+#6 "er bushel$ and the com"any will be able to sell
the cro" to the oil refiner for the e?uivalent of J2+6 "er bushel+ Otherwise$ the com"any can sell the
corn cro" to the local grain elevator for J1+& "er bushel+ ,f (gri-:agic elects to sell the grain to the
refinery$ the com"any will not incur the variable selling costs+ What should the com"any do? /u""ort
your answer with calculations+
(./0
7he com"any<s alternatives are to sell the corn as a grain or as alcohol+ 7his decision can be made by
com"aring the incremental costs to convert the grain to alcohol to the increase in "rice he can receive
for marketing the cro" as alcohol rather than grain+ 4y converting the cro" to alcohol$ the com"any
increases total revenue by J6+% "er bushel 'J2+#6 - J1+&) and it incurs additional costs of J6+6
'J6+#6 for the additional "rocessing$ less the J6+16 savings on the variable grain marketing costs)+
7hus$ by converting the grain to alcohol$ the com"any could increase net income by J6+2 "er bushel+
2,10 :oderate O450 16-
3+ =efer to (gri-:agic Dor"oration+ (ssume that the current date is :arch 1+ On this date$ (gri-:agic
Dor"oration must make a decision as to whether it is financially better off to "lant a certain farm to
corn$ leave the land idle 'no income is derived from idle land)$ or rent the land to another farmer for
J6 "er acre+ Dorn "rices have been severely de"ressed in recent years and (gri-:agic Dor"orationHs
best guess is that corn "rices will be around J2+66 "er bushel at the time the cro" is ready for harvest+
What should the com"any do? /how calculations+
(./0
,t has already been determined 'answer to >roblem W1) that "lanting corn is "referred to leaving the
land idle 'by J13 "er acre)+ 4y renting the land$ (gri-:agic Dor"oration is even better off+ Fnder the
rental alternative$ (gri-:agic Dor"oration is J3% "er acre better off than if he "lants corn 'J6 - J13)+
4y renting the land$ the com"any avoids all costs e!ce"t the fi!ed "roduction costs 'J6+#6 "er bushel
or J%& "er acre)+
2,10 :oderate O450 16-
4+ .ew ,beria Dor"oration makes and sells the V7abasco :aiden9$ a wall hanging de"icting a magical
"e""er "lant+ 7he 7abasco :aidens are sold at s"ecialty sho"s for J6 each+ 7he ca"acity of the "lant
is 1$666 :aidens "er year+ Dosts to manufacture and sell each wall hanging are as follows0
2irect material
$ 5.00
2irect labor
6.00
Eariable overhead
8.00
1i!ed overhead
10.00
Eariable selling e!"enses
2.50
.ew ,beria Dor"oration has been a""roached by an 7e!as com"any about "urchasing 2$66 7abasco
:aidens+ 7he com"any is currently making and selling 1$666 "er year+ 7he 7e!as com"any wants to
attach its own Lone /tar label$ which increases costs by J+6 each+ .o selling e!"enses would be
incurred on this order+ 7he cor"oration believes that it must make an additional J1 on each 7abasco
:aiden to acce"t this offer+
a+ What is the o""ortunity cost "er unit of selling to the 7e!as com"any?
b+ What is the minimum selling "rice that should be set?
14%
(./0
a+ O""ortunity cost N /elling "rice minus total variable costs J6 - 'J O J# O J& O J2+6) N
J2&+6
b+ 2irect material 'J+66 O J+6)
$ 5.50
2irect labor
6.00
Eariable overhead
8.00
1i!ed overhead
10.00
Eariable selling
0
O""ortunity cost Xfrom 'a) less
fi!ed overhead includedY
18.50
3!tra amount re?uired to acce"t offer
1.00
:inimum "rice
$49.00
2,10 :oderate O450 16-1
+ :ighty :ike<s (ccounting /ervice "rovides two ty"es of services0 audit and ta!+ (ll com"any
"ersonnel can "erform either service+ ,n efforts to market its services$ :ighty :ike relies on radio and
billboards for advertising+ ,nformation on :ighty :ikeHs "ro;ected o"erations for the coming year
follows0
(udit 7a!es
=evenue "er billable hour
$35 $30
Eariable cost of "rofessional labor
25 20
:aterial cost "er billable hour
2 3
(llocated fi!ed costs "er year
100,000 200,000
>ro;ected billable hours
14,000 10,000
a+ What is :ighty :ike<s "ro;ected "rofit or 'loss)?
b+ ,f J1 s"ent on advertising could increase either audit services billable time by 1 hour
or ta! services billable time by 1 hour$ on which service should the advertising dollar
be s"ent?
(./0
a+ (udit 7a! 7otal
Reven6e@
14$666 J3
$490,000 $ 490,000
16$666 J36
$ 300,000 300,000
%aria:le Costs@
Labor0
14$666 J2
(350,000) (350,000)
16$666 J26
(200,000) (200,000)
:aterial0
14$666 J2
(28,000) (28,000)
16$666 J3
(30,000) (30,000)
Dontribution margin
$112,000 $ 70,000 $ 182,000
1i!ed costs
(100,000) (200,000) (300,000)
>rofit 'loss)
$ 12,000 $(130,000) $(118,000)
14&
b+ 3ach billable hour of audit services generates J& of contribution margin
'J3 - J2 - J2)$ ta! services generates J% of contribution margin
'J36 - J26 - J3)+ 7he advertising should be s"ent on the audit services+
2,10 :oderate O450 16-$16-%
#+ 7he management of Whalen ,ndustries has been evaluating whether the com"any should continue
manufacturing a com"onent or buy it from an outside su""lier+ ( J166 cost "er com"onent was
determined as follows0
2irect material
$ 15
2irect labor
40
Eariable manufacturing overhead
10
1i!ed manufacturing overhead
35
$100
Whalen ,ndustries uses 4$666 com"onents "er year+ (fter Wilfert Dor"oration submitted a bid of J&6
"er com"onent$ some members of management felt they could reduce costs by buying from outside
and discontinuing "roduction of the com"onent+ ,f the com"onent is obtained from Wilfert
Dor"oration$ Whalen ,ndustriesH unused "roduction facilities could be leased to another com"any for
J6$666 "er year+
ReA6ire=@
a+ 2etermine the ma!imum amount "er unit Whalen ,ndustries could "ay an outside
su""lier+
b+ ,ndicate if the com"any should make or buy the com"onent and the total dollar
difference in favor of that alternative+
c+ (ssume the com"any could eliminate one "roduction su"ervisor with a salary of
J36$666 if the com"onent is "urchased from an outside su""lier+ ,ndicate if the
com"any should make or buy the com"onent and the total dollar difference in favor
of that alternative+
(./0
a+ Dost to make N incremental manufacturing cost and o""ortunity cost
N 2: O 2L O E - 1OH O O> DO/7
J%%+6 N J1 O J46 O J16 O 'J6$666L4$666 units)
b+ :ake0 /ave 'J&6+66 - J%%+6) 4$666 N J16$666
c+ ,ncremental mfg+ N J# O 'J36$666L4$666) N J%2+6
O o""ortunity cost J6$666L4$666 N 12+6
7o make J&+66
4uy0 /ave 'J& - J&6) 4$666 units N J26$666
2,10 :oderate O450 16-3
14*
%+ 4a!ter Dor"oration is working at full "roduction ca"acity "roducing 16$666 units of a uni?ue "roduct$
5IL+ :anufacturing costs "er unit for 5IL follow0
2irect material
$ 2
2irect manufacturing labor
3
:anufacturing overhead
5
$10
7he unit manufacturing overhead cost is based on a variable cost "er unit of J2 and fi!ed costs of
J36$666 'at full ca"acity of 16$666 units)+ 7he non-manufacturing costs$ all variable$ are J4 "er unit$
and the selling "rice is J26 "er unit+ ( customer$ 5acksonville Dom"any$ has asked 4a!ter to "roduce
2$666 units of a modification of 5IL to be called =/7+ =/7 would re?uire the same manufacturing
"rocesses as 5IL+ 5acksonville Dom"any has offered to share e?ually the non-manufacturing costs
with 4a!ter+ =/7 will sell at J1 "er unit+
ReA6ire=@
a+ What is the o""ortunity cost to 4a!ter of "roducing the 2$666 units of =/7 'assume
that no overtime is worked)?
b+ 7he Graves Dom"any has offered to "roduce 2$666 units of 5IL for 4rown$ so
4rown can acce"t the 5acksonville offer+ Graves Dom"any would charge 4a!ter J14
"er unit for the 5IL+ /hould 4a!ter acce"t the Graves Dom"any offer?
c+ /u""ose 4a!ter had been working at less than full ca"acity "roducing &$666 units of
5IL at the time the =/7 offer was made+ What is the minimum "rice 4a!ter should
acce"t for =/7 under these conditions 'ignoring the J1 "rice mentioned
"reviously)?
(./0
a+ 5IL
/>
$20
- ED
(11)
'J2 O J3 O J2 O J4)
N D: $ 9
2$666 units N
$18,000
=/7
/>
$15
- ED
(9)
'J2 O J3 O J2 O J2)
N D:
$ 6
! 2$666 units N
12,000
O""ortunity cost
$ 6,000
b+ :ake 'J1 - J14) N J1 2$666 units N J2$666 without giving u" any current
"roduction N 2O ,7+
c+ 7he variable cost to make and sell N J11 'J2 O J3 O J2 O J4) would be the minimum+
(ny "rice over J11 would increase the contribution margin+
2,10 :oderate O450 16-3
16
&+ 7he /amuels Dom"any normally "roduces 16$666 units of >roduct L: "er year+ 2ue to an economic
downturn$ the com"any has some idle ca"acity+ >roduct L: sells for J1 "er unit+
7he firmHs "roduction$ marketing$ and administration costs at its normal ca"acity are0
>er Fnit
2irect material
$1.00
2irect labor
2.00
Eariable overhead
1.50
1i!ed overhead
'J46$666L16$666 units)
3.00
Eariable marketing costs
1.05
1i!ed marketing and administrative costs
'J216$666L16$666 units)
1.40
7otal
$9.95
ReA6ire=@
a+ Dom"ute the firmHs o"erating income before income ta!es if the firm "roduced and
sold 116$666 units+
b+ 1or the current year$ the firm e!"ects to sell the same number of units as it sold in the
"rior year+ However$ in a trade news"a"er$ the firm noticed an invitation to bid on
selling L: to a state government+ 7here are no marketing costs associated with the
order if 2avis is awarded the contract+ 7he com"any wishes to "re"are a bid for
46$666 units at its full manufacturing cost "lus J 6+2 "er unit+ How much should it
bid? ,f 2avis is successful at getting the contract$ what would be its effect on
o"erating income?
c+ (ssume that the com"any is awarded the contract on 5anuary 2$ and in addition it
also receives an order from a foreign vendor for 46$666 units at the regular "rice of
J1 "er unit+ 7he foreign shi"ment will re?uire the firm to incur its normal marketing
costs+ 7he government contract contains a 16-day esca"e clause 'i+e+$ the firm can
re;ect the contract within 16 days without any "enalty)+ ,f the firm acce"ts the
government contract$ overtime "ay at 1 1L2 times the straight time rate will be "aid
on the 46$666 units+ ,n addition$ fi!ed overhead will increase by J#6$666 and
variable overhead will behave in its normal "attern+ 7he com"any has the ca"acity to
"roduce both orders+ 2ecide the following0
1+ /hould the firm acce"t the foreign offer? /how the effect on o"erating income of
acce"ting the order+
2+ (ssuming the foreign order is acce"ted$ should the firm acce"t the government order?
/how the effect on o"erating income of acce"ting the government order+
(./0
a+ /ales '116$666 J1)
$1,650,000
- ED '116$666 J+)
(610,500)
N D:
$1,039,500
- 1D 'J46$666 O J216$666)
(660,000)
N O"erating ,ncome
$ 379,500
11
b+ 1ull cost to manufacture N
$7.50
O "rofit
.25
4id
$7.75
/>
$7.75
- ED
(4.50)
D:
$3.25
40,000 units = $130,000 increase in
operating income.
c+ 1+ />
$15.00
- ED
(6.55) ($1 $3 $1.50 $1.05)
D: $ 8.45
40,000 =
$338,000
- 1D
(60,000)
,ncrease in O"erating ,ncome
$278,000
2+ 4oth orders can be acce"ted even if the increased costs of J46$666 for labor and
J#6$666 for fi!ed overhead are assigned to the government order+
2,10 2ifficult O450 16-3
*+ 7homas Wilson o"erates a woodworking sho" that makes tables and chairs+ He has 2 em"loyees
working 46 hours "er week$ and he has %6 hours "er week available in machine time+ Wilson knows
that he must make at least four chairs for every table+ He has also determined the following additional
re?uirements0
Labor :achine Dontribution
hours hours margin
7able
5 2 $18
Dhair
3 1 4
Write the ob;ective function and constraints for the above "roblem+
(./0
Ob;ective function0 :a! D: = 1&P O 4Q
/ub;ect to0 4P - Q B 6
P O 3Q 1$666
2P O Q %6
P N W of tables
Q N W of chairs
2,10 2ifficult O450 16-&
12