Chapter 18—Activity Resource Usage Model and Tactical Decision Making

MULTIPLE CHOICE

1. _______________ consists of choosing among alternatives with an immediate or limited end in view.
a. Long-run decision making
b. Tactical decision making
c. Universal decision making
d. All of the above
ANS: B PTS: 1 OBJ: 18-1

2. Sound tactical decision making

a. only concerns the short run.
b. consists of large scale actions that serve a broad purpose.
c. consists of supporting the strategic objectives of the firm.
d. only concerns the long run.
ANS: C PTS: 1 OBJ: 18-1

3. The steps in the tactical decision making process are:

I. Comparing relevant costs and relating to strategic goals
II. Identifying feasible alternatives
III. Predicting costs and benefits and eliminating irrelevant costs
IV. Selecting best alternative
V. Defining the problem

What is the proper sequence of steps?

a. I, II, V, III, IV
b. II, I, V, III, IV
c. V, II, III, I, IV
d. V, III, II, IV, I
ANS: C PTS: 1 OBJ: 18-1

4. Which of the following is NOT a step in the tactical decision-making process?

a. Compare full costs and benefits for alternatives.
b. Identify feasible alternatives.
c. Select strategies with the most benefit.
d. Recognize and define the problem.
ANS: A PTS: 1 OBJ: 18-1

5. Which of the following statement is true concerning the nature of tactical decisions?
a. Tactical decisions are often small-scale actions
b. Tactical decisions often have an immediate or limited end in view
c. Tactical decisions should support alternatives that result in long-term competitive
advantage
d. all of the above statements are true
ANS: D PTS: 1 OBJ: 18-1

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 6. The use of relevant cost data to identify the alternative that provides the greatest benefit to the
organization describes
a. target cost analysis.
b. functional cost analysis.
c. activity cost analysis.
d. tactical cost analysis.
ANS: D PTS: 1 OBJ: 18-1

7. Tactical decision-making relies

a. only on relevant cost information.
b. only on qualitative factors.
c. on relevant costs as well as other qualitative factors.
d. on neither relevant costs or qualitative decisions.
ANS: C PTS: 1 OBJ: 18-1

8. An important qualitative factor to consider regarding a special order is the

a. variable costs associated with the special order.
b. avoidable fixed costs associated with the special order.
c. effect the sale of special-order units will have on the sale of regularly priced units.
d. incremental revenue from the special order.
ANS: C PTS: 1 OBJ: 18-1

9. Qualitative factors that should be considered when evaluating a make-or-buy decision are
a. the quality of the outside supplier's product.
b. whether the outside supplier can provide the needed quantities.
c. whether the outside supplier can provide the product when it is needed.
d. all of the above.
ANS: D PTS: 1 OBJ: 18-1

10. Future costs that differ across alternatives describe

a. relevant costs.
b. target cost.
c. full costs.
d. activity-based costs.
ANS: A PTS: 1 OBJ: 18-2

11. Relevant costs are

a. past costs.
b. future costs.
c. full costs.
d. cost drivers.
ANS: B PTS: 1 OBJ: 18-2

12. _______________ are future costs that differ across alternatives.

a. Relevant costs
b. Irrelevant costs
c. Sunk costs
d. Past costs
ANS: A PTS: 1 OBJ: 18-2

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13. Sunk costs are
a. future costs that have no benefit.
b. relevant costs that have only short-run benefits.
c. target costs.
d. costs that cannot be avoided.
ANS: D PTS: 1 OBJ: 18-2

14. Which item is NOT an example of a sunk cost?

a. materials needed for production
b. purchase cost of machinery
c. depreciation
d. All are sunk costs.
ANS: A PTS: 1 OBJ: 18-2

15. The Titanic hit an iceberg and sank. In deciding whether or not to salvage the ship, its book value is
a(n)
a. relevant cost.
b. sunk cost.
c. opportunity cost.
d. discretionary cost.
ANS: B PTS: 1 OBJ: 18-2

16. A purchasing agent has two potential firms from which to buy materials for production. If both firms
charge the same price, the material cost is a(n)
a. irrelevant cost.
b. relevant cost.
c. sunk cost.
d. opportunity cost.
ANS: A PTS: 1 OBJ: 18-2

17. Which of the following statements is true when making a decision between two alternatives?
a. Variable costs may not be relevant when the decision alternatives have the same activity
levels.
b. Variable costs are not relevant when the decision alternatives have different activity levels.
c. Sunk costs are always relevant.
d. Fixed costs are never relevant.
ANS: A PTS: 1 OBJ: 18-2

18. Which of the following costs is NOT relevant to a special-order decision?

a. the direct labor costs to manufacture the special-order units
b. the variable manufacturing overhead incurred to manufacture the special-order units
c. the portion of the cost of leasing the factory that is allocated to the special order
d. All of the above costs are relevant.
ANS: C PTS: 1 OBJ: 18-2

19. Which of the following costs is NOT relevant to a make-or-buy decision?

a. $10,000 of direct labor used to manufacture the parts
b. $30,000 of depreciation on the plant used to manufacture the parts

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 c. the supervisor's salary of $25,000 that will be avoided if the part is purchased from an
outside supplier
d. $15,000 in rent from leasing the production space to another company if the part is
purchased from an outside supplier
ANS: B PTS: 1 OBJ: 18-2

20. Which of the following costs is NOT relevant to a decision to sell a product at split-off or process the
product further and then sell the product?
a. joint costs allocated to the product
b. the selling price of the product at split-off
c. the additional processing costs after split-off
d. the selling price of the product after further processing
ANS: A PTS: 1 OBJ: 18-2

21. Which of the following costs is NOT relevant for special decisions?
a. incremental costs
b. sunk costs
c. avoidable costs
d. All of the above costs are relevant for special decisions.
ANS: B PTS: 1 OBJ: 18-2

22. Which of the following costs is relevant to a make-or-buy decision?

a. original cost of the production equipment
b. annual depreciation of the equipment
c. the amount that would be received if the production equipment were sold
d. the cost of direct materials purchased last month and used to manufacture the component
ANS: C PTS: 1 OBJ: 18-2

23. Abbott Company is considering purchasing a new machine to replace an machine purchased one year
ago that is not achieving the expected results. The following information is available:
Expected maintenance costs of new machine $ 12,000 per year
Purchase price of existing machine $150,000
Expected cost savings of new machine $ 20,000 per year
Expected maintenance costs of existing machine $ 8,000 per year
Resale value of existing machine $35,000
Which of these items is IRRELEVANT?
a. Expected maintenance costs of new machine
b. Purchase cost of existing machine
c. Expected maintenance costs of existing machine
d. Expected resale value of existing machine
ANS: B PTS: 1 OBJ: 18-2

24. In order for costs or benefits to be relevant, what must be true?

a. all decisions must relate to future
b. identifying relevant costs and benefits is an easy process
c. relevancy will relate both to the future and the past
d. all of these are true statements
ANS: A PTS: 1 OBJ: 18-2

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25. Which of the following would be true?
Category
of Cost Relationships Relevancy

a. Flexible Demand changes Irrelevant

b. Flexible Demand constant Irrelevant
c. Committed Demand increase > Unused capacity Not relevant
d. Committed Demand increase < Unused capacity Relevant
ANS: B PTS: 1 OBJ: 18-3

26. _______________ is(are) the cost of acquiring activity capacity.

a. Joint costs
b. Resource spending
c. Absorption costing
d. Variable costing
ANS: B PTS: 1 OBJ: 18-3

27. Which of the following items would be classified as flexible resources?

a. salaried employees
b. depreciation on building
c. fuel to generate electricity internally
d. lease on machinery
ANS: C PTS: 1 OBJ: 18-3

28. Which of the following items would be classified as committed resources (short-term)?
a. salaried employees
b. depreciation on building
c. fuel to generate electricity internally
d. lease on machinery
ANS: A PTS: 1 OBJ: 18-3

29. Which of the following items would be classified as committed resources (long-term)?
a. salaried employees
b. depreciation on building
c. lease on machinery
d. both b and c
ANS: D PTS: 1 OBJ: 18-3

30. A decision to make a component internally versus through a supplier is a

a. special-order decision.
b. keep-or-drop a product-line decision.
c. make-or-buy decision.
d. Both a and c are correct.
ANS: C PTS: 1 OBJ: 18-4

31. In the activity resource model, flexible resources are:

a. resources acquired in advance of usage
b. resources acquired as used and needed

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 c. usually acquired in lumpy amounts
d. are normally fixed or mixed costs
ANS: B PTS: 1 OBJ: 18-3

32. For flexible resources, which of the following statements is true?

a. A change in resource spending will only occur if the demand for a resource drops
permanently and exceeds demand enough so the activity capacity will be reduced
b. Often, resources are acquired in advance for multiple periods and are therefore irrelevant
c. Decisions often affect multi-period capabilities
d. If the demand for an activity changes across alternatives, then resource spending will
change and the cost of the activity will be relevant to the decision
ANS: D PTS: 1 OBJ: 18-3

33. Salda Industries employs 500 workers in the factory. These workers produced 85,000 units in 2009.
Due to a special order, the units produced in 2010 increased to 95,000 units. However, Salda produced
these units without adding workers. How is that possible?
a. The plant had some unused activity capacity
b. The employees were a flexible resource in this situation
c. The labor cost associated with the additional units sold will be a relevant cost
d. none of the above
ANS: A PTS: 1 OBJ: 18-3

34. Upfront resource spending:

a. Is always relevant because it relates to the future
b. Is always relevant because it could reduce future costs
c. Is a sunk cost and therefore never relevant
d. Is always relevant because upfront resource spending will generate future revenues or
benefits
ANS: C PTS: 1 OBJ: 18-3

35. Foster Industries manufactures 20,000 components per year. The manufacturing cost of the
components was determined as follows:

Direct materials $150,000

Direct labor 240,000
Inspecting products 60,000
Providing power 30,000
Providing supervision 40,000
Setting up equipment 60,000
Moving materials 20,000
Total $600,000

If the component is not produced by Foster, inspection of products and provision of power costs will
only be 10% of the production costs; moving materials costs and setting up equipment costs will only
be 50% of the production costs; and supervision costs will amount to only 40% of the production
amount.An outside supplier has offered to sell the component for $25.50.

What is the effect on income if Foster Industries purchases the component from the outside supplier?
a. $25,000 increase
b. $45,000 increase

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 c. $90,000 decrease
d. $90,000 increase
ANS: A
SUPPORTING CALCULATIONS:

Make:
    Direct materials $(150,000)
    Direct labor (240,000)
    Inspecting products (avoid 90%) (54,000)
Providing power (avoid 90%) (27,000)
Providing supervision (avoid 60%) (24,000)
Setting up equipment (avoid 50%) (30,000)
moving materials (avoid 50%) (10,000)
    Total $(535,000)

Buy:
    Purchase price (20,000  $25.50) $(510,000)

$510,000 - $535,000 = $25,000 increase in income

PTS: 1 OBJ: 18-4

36. Vest Industries manufactures 40,000 components per year. The manufacturing cost of the components
was determined as follows:
Direct materials $ 75,000
Direct labor 120,000
Variable manufacturing overhead 45,000
Fixed manufacturing overhead   60,000
Total $300,000

An outside supplier has offered to sell the component for $12.75.

What is the effect on income if Vest Industries purchases the component from the outside supplier?
a. $270,000 decrease
b. $270,000 increase
c. $30,000 decrease
d. $30,000 increase
ANS: A
SUPPORTING CALCULATIONS:

Make:
    Direct materials $ (75,000)
    Direct labor (120,000)
    Variable overhead   (45,000)
    Total $(240,000)

Buy:
    Purchase price (40,000  $12.75) $(510,000)

$510,000 - $240,000 = $270,000 decrease in income

PTS: 1 OBJ: 18-4

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37. Foster Industries manufactures 20,000 components per year. The manufacturing cost of the
components was determined as follows:
Direct materials $150,000
Direct labor 240,000
Variable manufacturing overhead 90,000
Fixed manufacturing overhead  120,000
Total $600,000

An outside supplier has offered to sell the component for $25.50.

Foster Industries can rent its unused manufacturing facilities for $45,000 if it purchases the component
from the outside supplier.

What is the effect on income if Foster purchases the component from the outside supplier?
a. $45,000 increase
b. $15,000 increase
c. $75,000 decrease
d. $105,000 increase
ANS: B
SUPPORTING CALCULATIONS:

Make:
    Direct materials $(150,000)
    Direct labor (240,000)
    Variable overhead   (90,000)
    Total $(480,000)

Buy:
    Purchase price (20,000  $25.50) $(510,000)
    Rental income    45,000 
    Total $(465,000)

$480,000 - $465,000 = $15,000 increase in income

PTS: 1 OBJ: 18-4

38. Vest Industries manufactures 40,000 components per year. The manufacturing cost of the components
was determined as follows:
Direct materials $ 75,000
Direct labor 120,000
Variable manufacturing overhead 45,000
Fixed manufacturing overhead   60,000
Total $300,000

An outside supplier has offered to sell the component for $12.75.

Vest Industries can rent its unused manufacturing facilities for $45,000 if it purchases the component
from the outside supplier.

What is the effect on income if Vest purchases the component from the outside supplier?
a. $225,000 decrease

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 b. $195,000 increase
c. $165,000 decrease
d. $135,000 increase
ANS: A
SUPPORTING CALCULATIONS:

Make:
    Direct materials $ (75,000)
    Direct labor (120,000)
    Variable overhead   (45,000)
    Total $(240,000)

Buy:
    Purchase price (40,000  $12.75) $(510,000)
    Rental income    45,000 
    Total $(465,000)

$465,000 - $240,000 = $225,000 decrease in income

PTS: 1 OBJ: 18-4

39. Miller Company produces speakers for home stereo units. The speakers are sold to retail stores for
$30. Manufacturing and other costs are as follows:
Variable costs per unit: Fixed costs per month:
    Direct materials $ 9.00 Factory overhead $120,000
    Direct labor   4.50 Selling and admin.   60,000
    Factory overhead   3.00 Total $180,000
    Distribution   1.50
    Total $18.00

The variable distribution costs are for transportation to the retail stores. The current production and
sales volume is 20,000 per year. Capacity is 25,000 units per year.

A Tennessee manufacturing firm has offered a one-year contract to supply speaker parts at a cost of
$16.00 per unit. If Miller Company accepts the offer, it will be able to rent unused space to an outside
firm for $18,000 per year. All other information remains the same as the original data. What is the
effect on profits if Miller Company buys from the Tennessee firm?
a. decrease of $19,000
b. increase of $19,000
c. increase of $38,000
d. decrease of $6,000
ANS: C
SUPPORTING CALCULATIONS:

Cost to buy ($17  20,000) $340,000

Cost to make:
    Variable costs [($18.00  20,000] $360,000
    Opportunity costs   18,000  378,000
Profit will increase by $ 38,000

PTS: 1 OBJ: 18-4

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40. Harris Company uses 5,000 units of part AA1 each year. The cost of manufacturing one unit of part
AA1 at this volume is as follows:

Direct materials $10.00

Direct labor 14.00
Variable overhead 6.00
Fixed overhead   4.00
Total $34.00

An outside supplier has offered to sell Harris Company unlimited quantities of part AA1 at a unit cost
of $31.00. If Harris Company accepts this offer, it can eliminate 50 percent of the fixed costs assigned
to part AA1. Furthermore, the space devoted to the manufacture of part AA1 would be rented to
another company for $24,000 per year. If Harris Company accepts the offer of the outside supplier,
annual profits will
a. increase by $29,000.
b. increase by $14,500.
c. increase by $22,000.
d. increase by $2,500.
ANS: A
SUPPORTING CALCULATIONS:

Cost to buy (5,000  $31) + ($2.00  5,000) $165,000

Cost to make (5,000  $34) + $24,000  194,000
Profits increase by $ 29,000

PTS: 1 OBJ: 18-4

41. Houston Corporation manufacturers a part for its production cycle. The costs per unit for 5,000 units of
this part are as follows:

Direct materials $ 32
Direct labor 40
Variable overhead 16
Fixed overhead   32
Total $120

Johnson Company has offered to sell Houston Corporation 5,000 units of the part for $112 per unit. If
Houston Corporation accepts Johnson Company's offer, total fixed costs will be reduced to $60,000.
What alternative is more desirable and by what amount is it more desirable?

Alternative Amount

a. Make $20,000
b. Make $120,000
c. Buy $40,000
d. Buy $100,000
ANS: A

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 SUPPORTING CALCULATIONS:

Make ($120  5,000) $600,000

Buy [($112  5,000) + $60,000]  620,000
Make increases profits by $ 20,000

PTS: 1 OBJ: 18-4

42. A decision to make or eliminate an unprofitable product is a

a. special-order decision.
b. keep-or-drop a product-line decision.
c. make-or-buy decision.
d. Both b and c are correct.
ANS: B PTS: 1 OBJ: 18-4

43. The operations of Smits Corporation are divided into the Childs Division and the Jackson Division.
Projections for the next year are as follows:
Childs Jackson
Division Division Total
Sales $250,000 $180,000 $430,000
Variable costs   90,000  100,000  190,000
Contribution margin $160,000 $ 80,000 $240,000
Direct fixed costs   75,000   62,500  137,500
Segment margin $ 85,000 $ 17,500 $102,500
Allocated common costs   35,000   27,500   62,500
Operating income (loss) $ 50,000  $(10,000) $ 40,000

Operating income for Smits Corporation as a whole if the Jackson Division were dropped would be
a. $22,500.
b. $40,000.
c. $50,000.
d. $60,000.
ANS: A
SUPPORTING CALCULATIONS:
$85,000 - $62,500 = $22,500

PTS: 1 OBJ: 18-4

44. The operations of Knickers Corporation are divided into the Pacers Division and the Bulls Division.
Projections for the next year are as follows:
Pacers  Bulls  
Division Division  Total 
Sales $420,000 $252,000  $672,000
Variable costs  147,000  115,500   262,500
Contribution margin $273,000 $136,500  $409,500
Direct fixed costs  126,000  105,000   231,000
Segment margin $147,000 $ 31,500  $178,500
Allocated common costs   63,000   47,250   110,250
Operating income (loss) $ 84,000 $(15,750) $ 68,250

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 Operating income for Knickers Corporation as a whole if the Bulls Division were dropped would be
a. $99,750.
b. $84,000.
c. $68,250.
d. $36,750.
ANS: D
SUPPORTING CALCULATIONS:
$147,000 - $110,250 = $36,750
PTS: 1 OBJ: 18-4

45. The following information pertains to Ewing Company's three products:

D  E  F  
Unit sales per month 900 1,400 800 

Selling price per unit $6.00 $11.25 $ 7.50 

Variable costs per unit  3.00   9.00   7.80 
Unit contribution margin $3.00 $ 2.25 $(0.30)

Assume that product F is discontinued and the space is used to produce E. Product E's production is
increased to 2,200 units per month, but E's selling price of all units of E is reduced to $10.20. Monthly
profits will
a. decrease by $2,070.
b. increase by $1,200.
c. decrease by $270.
d. increase by $2,640.
ANS: C
SUPPORTING CALCULATIONS:
[2,200  ($10.20 - $9.00)] + (800  $0.30) - (1,400  $2.25) = $270 decrease

PTS: 1 OBJ: 18-4

46. The following information pertains to Dodge Company's three products:

A   B   C   
Unit sales per year 250  400  250  

Selling price per unit $9.00  $12.00  $ 9.00  

Variable costs per unit  3.60    9.00    9.90  
Unit contribution margin $5.40  $ 3.00  $(0.90) 
Contribution margin ratio 60%  25%  (10)%

Assume that product C is discontinued and the extra space is rented for $300 per month. All other
information remains the same as the original data. Annual profits will
a. increase by $75.
b. decrease by $75.
c. increase by $525.
d. remain the same.
ANS: C
SUPPORTING CALCULATIONS:
(250  $0.90) + $300 = $525

PTS: 1 OBJ: 18-4

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47. The following information pertains to the Ewing Company's three products:
D  E   F  
Unit sales per month 900 1,400 800 

Selling price per unit $6.00 $11.25 $ 7.50 

Variable costs per unit  3.00   9.00   7.80 
Unit contribution margin $3.00 $ 2.25 $(0.30)

Assume that the selling price of product F is increased to $8.25 with a reduction in monthly sales to
400 units. Monthly profits will
a. increase by $2,070.
b. increase by $420.
c. increase by $180.
d. decrease by $60.
ANS: B
SUPPORTING CALCULATIONS:
[400  ($8.25 - $7.80)] + (800  $0.30) = $420 increase

PTS: 1 OBJ: 18-4

The following information pertains to the EWIN Company's three products:

M  N   O  
Unit sales per month 9,000 14,000 8,000 

Selling price per unit $6.00 $11.25 $ 7.50 

Variable costs per unit  3.00   9.00   7.00 
Unit contribution margin $3.00 $ 2.25 $ 0.50
Batches 5 10 5
Setups 6 3 1
Direct fixed costs
Advertising 3,000 2,000 1,000
Supervision 5,000 5,000 5,000
Common fixed costs
Inspecting products (10,000)
Materials handling (4,000)
Customer service (5,000)
Plant depreciation (6,000)
General administration (8,000)

48. When EWIN converted over to ABC it discovered the following:

Inspecting products - 20% of the inspection activity was unused.The
inspections used were based on the number of batches
produced.
Materials handling - 10% of the materials handling activity was unused. The
materials handling activity used was based on the
number of production runs
Customer service - 50% of the customer service activity was unused. The
usage was given as follows: M 1,000, N 1000, O 500
Plant depreciation - facility level cost
General administration - facility level cost

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 The product margin for product M using ABC would be
a. $9,000.
b. $13,840.
c. $19,000.
d. $27,000.
ANS: B
SUPPORTING CALCULATIONS:

TOTAL M  N   O  

Unit sales per month 9,000 14,000 8,000 

Selling price per unit $6.00 $11.25 $ 7.50 

Variable costs per unit  3.00   9.00   7.00 
Unit contribution margin $3.00 $ 2.25 $ 0.50

Sales $271,500 $54,000 $157,500 $60,000

Variable costs 209,000 27,000 126,000 56,000
Contribution margin 62,500 27,000 31,500 4,000
Less traceable costs
Advertising 6,000 3,000 2,000 1,000
Supervision 15,000 5,000 5,000 5,000
Inspecting products 8,000 2,000 4,000 2,000
Materials handling 3,600 2,160 1,080 360
Customer service 2,500 1,000 1,000 500
Product margin 27,400 13,840 18,420 (4,860)
Common costs:
Unused activity:
Inspecting products 2,000
Materials handling 400
Customer service 2,500
Facility level
Plant depreciation (6,000) 6,000
General administration (8,000) 8,000
Operating Income 8,500

PTS: 1 OBJ: 18-4

49. When EWIN converted over to ABC it discovered the following:

inspecting products - 20% of the inspection activity was unused.The
inspections used were based on the number of
batches produced.
materials handling - 10% of the materials handling activity was
unused. The materials handling activity used
was based on the number of production runs
customer service - 50% of the customer service activity was
unused. The usage was given as follows: M
1,000, N 1000, O 500
plant depreciation - facility level cost
general administration - facility level cost

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 The operating income for EWIN would be
a. $9,000.
b. $8,500.
c. $19,000.
d. $27,000.
ANS: B
SUPPORTING CALCULATIONS:

TOTAL M  N   O  

Unit sales per month 9,000 14,000 8,000 

Selling price per unit $6.00 $11.25 $ 7.50 

Variable costs per unit  3.00   9.00   7.00 
Unit contribution margin $3.00 $ 2.25 $ 0.50

Sales $271,500 $54,000 $157,500 $60,000

Variable costs 209,000 27,000 126,000 56,000
Contribution margin 62,500 27,000 31,500 4,000
Less traceable costs
Advertising 6,000 3,000 2,000 1,000
Supervision 15,000 5,000 5,000 5,000
Inspecting products 8,000 2,000 4,000 2,000
Materials handling 3,600 2,160 1,080 360
Customer service 2,500 1,000 1,000 500
Product margin 27,400 13,840 18,420 (4,860)
Common costs:
Unused activity:
Inspecting products 2,000
Materials handling 400
Customer service 2,500
Facility level
Plant depreciation (6,000) 6,000
General administration (8,000) 8,000
Operating Income 8,500

PTS: 1 OBJ: 18-4

50. The product margin for product M using functional-based costing would be
a. $9,000.
b. $13,840.
c. $19,000.
d. $41,500.
ANS: C
SUPPORTING CALCULATIONS:
TOTAL M  N   O  
Unit sales per month 9,000 14,000 8,000 

Selling price per unit $6.00 $11.25 $ 7.50 

Variable costs per unit  3.00   9.00   7.00 
Unit contribution margin $3.00 $ 2.25 $ 0.50

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copied, or distributed without the prior consent of the publisher.
 Sales $271,500 $54,000 $157,500 $60,000
Variable costs 209,000 27,000 126,000 56,000
Contribution margin 62,500 27,000 31,500 4,000
Less traceable costs
Advertising 6,000 3,000 2,000 1,000
Supervision 15,000 5,000 5,000 5,000
Product margin 41,500 19,000 24,500 (2,000)
Common costs:
Inspecting products 10,000
Materials handling 4,000
Customer service 5,000
Plant depreciation 6,000
General administration 8,000
Operating Income 8,500

PTS: 1 OBJ: 18-4

51. Miller Company produces speakers for home stereo units. The speakers are sold to retail stores for
$30. Manufacturing and other costs are as follows:
Variable costs per unit: Fixed costs per month:
    Direct materials $ 9.00     Factory overhead $120,000
    Direct labor 4.50     Selling and admin.   60,000
    Factory overhead 3.00     Total $180,000
    Distribution   1.50
    Total $18.00

The variable distribution costs are for transportation to the retail stores. The current production and
sales volume is 20,000 per year. Capacity is 25,000 units per year.
The speakers are currently unpackaged. Packaging them individually would increase costs by $1.20
per unit. However, the units could then be sold for $33.00. All other information remains the same as
the original data. What is the effect on profits if Miller Company packages the speakers?
a. decrease of $36,000
b. decrease of $24,000
c. increase of $36,000
d. no change
ANS: C
SUPPORTING CALCULATIONS:
New unit CM = $33 - $19.20 = $13.80
Old unit CM = $30 - $18.00 = $12.00
Increase in Unit CM = $ 1.80
$1.80  20,000 = $36,000
PTS: 1 OBJ: 18-4

52. Firms may be asked to accept a special order of their product for a reduced price if
a. it can be concealed from the government.
b. excess capacity exists.
c. the order is small.
d. the plant is producing at maximum capacity.
ANS: B PTS: 1 OBJ: 18-4

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copied, or distributed without the prior consent of the publisher.
53. A decision that focuses on whether a specially priced order should be accepted or rejected is a
a. special-order decision.
b. keep-or-drop a product-line decision.
c. make-or-buy decision.
d. Both a and c are correct.
ANS: A PTS: 1 OBJ: 18-4

54. The following information relates to a product produced by Creamer Company:

Direct materials $24
Direct labor 15
Variable overhead 30
Fixed overhead  18
Unit cost $87

Fixed selling costs are $500,000 per year, and variable selling costs are $12 per unit sold. Although
production capacity is 600,000 units per year, the company expects to produce only 400,000 units next
year. The product normally sells for $120 each. A customer has offered to buy 60,000 units for $90
each.

The incremental cost per unit associated with the special order is
a. $84.
b. $81.
c. $69.
d. $64.
ANS: B
SUPPORTING CALCULATIONS:

Direct materials $24

Direct labor 15
Variable overhead 30
Variable selling and administrative  12
$81

PTS: 1 OBJ: 18-4

Meco Company produces a product that has a regular selling price of $360 per unit. At a typical
monthly production volume of 2,000 units, the product's average unit cost of goods sold amounts to
$270. Included in this average is $120,000 of fixed manufacturing costs. All selling and administrative
costs are fixed and amount to $30,000 per month.

Meco Company has just received a special order for 1,000 units at $240 per unit. The buyer will pay
transportation, and the regular selling price will not be affected if Meco accepts the order.

55. Assuming Meco Company has excess capacity, the effect on profits of accepting the order would be
a. a $60,000 increase.
b. a $60,000 decrease.
c. a $30,000 increase.
d. a $30,000 decrease.
ANS: C
SUPPORTING CALCULATIONS:

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copied, or distributed without the prior consent of the publisher.
 1,000  [$240 - ($270 - $120,000/2,000)] = $30,000 increase
PTS: 1 OBJ: 18-4

56. Assuming Meco Company is operating at capacity and accepting the order would require an offsetting
reduction in regular sales, the effect on profits of accepting the order would be a
a. $240,000 decrease.
b. $30,000 increase.
c. $120,000 decrease.
d. $150,000 decrease.
ANS: C
SUPPORTING CALCULATIONS:
$30,000 - [($360 - $210)  1,000] = $120,000 decrease
PTS: 1 OBJ: 18-4

57. The following information relates to a product produced by Creamer Company:

Direct materials $24
Direct labor 15
Variable overhead 30
Fixed overhead  18
Unit cost $87

Fixed selling costs are $500,000 per year, and variable selling costs are $12 per unit sold. Although
production capacity is 600,000 units per year, the company expects to produce only 400,000 units next
year. The product normally sells for $120 each. A customer has offered to buy 60,000 units for $90
each.

If the firm produces the special order, the effect on income would be a
a. $360,000 increase.
b. $360,000 decrease.
c. $540,000 increase.
d. $540,000 decrease.
ANS: C
SUPPORTING CALCULATIONS:

Incremental revenue (60,000  $90) $5,400,000

Less: Incremental costs (60,000  $81)  4,860,000
Incremental profit $ 540,000

PTS: 1 OBJ: 18-4

58. If there is excess capacity, the minimum acceptable price for a special order must cover
a. 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.
ANS: C PTS: 1 OBJ: 18-4
59. If a firm is at full capacity, the minimum special order price must cover

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copied, or distributed without the prior consent of the publisher.
 a. 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 foregone
contribution margin on regular units not produced.
ANS: D PTS: 1 OBJ: 18-4

60. Gundy Company manufactures a product with the following costs per unit at the expected production
of 30,000 units:
Direct materials $4
Direct labor 12
Variable manufacturing overhead 6
Fixed manufacturing overhead 8
The company has the capacity to produce 40,000 units. The product regularly sells for $40. A
wholesaler has offered to pay $32 a unit for 2,000 units.

If the firm is at capacity and the special order is accepted, the effect on operating income would be
a. a $20,000 increase.
b. a $16,000 decrease.
c. a $4,000 increase.
d. $-0-.
ANS: B
SUPPORTING CALCULATIONS:
2,000  ($40 - $32) = $16,000 decrease

PTS: 1 OBJ: 18-4

Walton Company manufactures a product with the following costs per unit at the expected production
level of 84,000 units:
Direct materials $12
Direct labor 36
Variable manufacturing overhead 18
Fixed manufacturing overhead 24

The company has the capacity to produce 90,000 units. The product regularly sells for $120.

61. A wholesaler has offered to pay $110 a unit for 7,500 units.

If the special order is accepted, the effect on operating income would be a

a. $75,000 decrease.
b. $429,000 increase.
c. $495,000 increase.
d. $249,000 increase.
ANS: D

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 SUPPORTING CALCULATIONS:

Incremental revenue (7,500  $110) $ 825,000 

Lost revenue from regular sales (1,500  $120) (180,000)
Incremental costs:
    Direct materials (6,000  $12) $ 72,000
    Direct labor (6,000  $36) 216,000
    Variable overhead (6,000  $18)  108,000  (396,000)
Incremental profit $ 249,000 

PTS: 1 OBJ: 18-4

62. If a wholesaler offered to buy 4,500 units for $100 each, the effect of the special order on income
would be a
a. $153,000 increase.
b. $45,000 increase.
c. $450,000 increase.
d. $90,000 decrease.
ANS: A
SUPPORTING CALCULATIONS:

Incremental revenue (4,500  $100) $ 450,000 

Incremental costs:
    Direct materials (4,500  $12) $ 54,000
    Direct labor (4,500  $36) 162,000
    Variable overhead (4,500  $18)   81,000  (297,000)
Incremental profit $ 153,000 

PTS: 1 OBJ: 18-4

63. Rose Manufacturing Company had the following unit costs:

Direct materials $24
Direct labor 8
Variable factory overhead 10
Fixed factory overhead (allocated) 18

A one-time customer has offered to buy 2,000 units at a special price of $48 per unit. Assuming that
sufficient unused production capacity exists to produce the order and no regular customers will be
affected by the order, how much additional profit (loss) will be generated by accepting the special
order?
a. $12,000 profit
b. $96,000 profit
c. $84,000 loss
d. $24,000 loss
ANS: A
SUPPORTING CALCULATIONS:
2,000  ($48 - $42) = $12,000

PTS: 1 OBJ: 18-4

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copied, or distributed without the prior consent of the publisher.
 Miller Company produces speakers for home stereo units. The speakers are sold to retail stores for
$30. Manufacturing and other costs are as follows:
Variable costs per unit: Fixed costs per month:
    Direct materials $ 9.00     Factory overhead $120,000
    Direct labor 4.50     Selling and admin.   60,000
    Factory overhead 3.00     Total $180,000
    Distribution   1.50
    Total $18.00

The variable distribution costs are for transportation to the retail stores. The current production and
sales volume is 20,000 per year. Capacity is 25,000 units per year.

64. A San Diego wholesaler has proposed to place a special one-time order of 10,000 units at a reduced
price of $24 per unit. The wholesaler would pay all distribution costs, but there would be additional
fixed selling and administrative costs of $3,000. All other information remains the same as the original
data. What is the effect on profits if the special order is accepted?
a. increase of $75,000
b. increase of $57,000
c. decrease of $168,000
d. increase of $12,000
ANS: D
SUPPORTING CALCULATIONS:

Additional revenues (10,000  $24) $240,000

Additional costs:
    Variable (10,000  $16.50) $165,000
    Fixed 3,000
    Opportunity cost (5,000  $12)   60,000  228,000
Profits increase by $ 12,000

PTS: 1 OBJ: 18-4

65. An Atlanta wholesaler has proposed to place a special one-time order for 7,000 units at a special price
of $25.20 per unit. The wholesaler would pay all distribution costs, but there would be additional fixed
selling and administrative costs of $6,000. In addition, assume that overtime production is not possible
and that all other information remains the same as the original data. What is the effect on profits if the
special order is accepted?
a. increase of $54,900
b. increase of $30,900
c. increase of $36,900
d. increase of $176,400
ANS: B
SUPPORTING CALCULATIONS:

Additional revenues (7,000  $25.20) $176,400

Additional costs:
    Variable (7,000  $16.50) $115,500
    Fixed 6,000
    Opportunity cost (2,000  $12)   24,000  145,500
Profits increase by $ 30,900

PTS: 1 OBJ: 18-4

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copied, or distributed without the prior consent of the publisher.
 Reggie Corporation manufactures a single product with the following unit costs for 1,000 units:
Direct materials $2,400
Direct labor 960
Factory overhead (30% variable) 1,800
Selling expenses (50% variable) 900
Administrative expenses (10% variable)    840
Total per unit $6,900

Recently, a company approached Reggie Corporation about buying 100 units for $5,100 each.
Currently, the models are sold to dealers for $7,800. Reggie Corporation's capacity is sufficient to
produce the extra 100 units. No additional selling expenses would be incurred on the special order.

66. How much will income change if the special order is accepted?
a. increase by $398,400
b. decrease by $180,000
c. increase by $111,600
d. no change
ANS: C
SUPPORTING CALCULATIONS:
100  ($5,100 - $2,400 - $960 - ($1,800  0.30) - ($840  0.10)) = $111,600

PTS: 1 OBJ: 18-4

67. If Reggie Corporation wants to increase its profit by $18,000 on the special order, what is the
minimum price it should charge per unit?
a. $4,014
b. $4,164
c. $5,100
d. $6,900
ANS: B
SUPPORTING CALCULATIONS:
$2,400 + $960 + $540 + $84 + (18,000/100) = $4,164

PTS: 1 OBJ: 18-4

68. Boone Products had the following unit costs:

Direct materials $24
Direct labor 10
Variable factory overhead 8
Fixed factory overhead (allocated) 18

A one-time customer has offered to buy 2,000 units at a special price of $48 per unit. Because of
capacity constraints, 1,000 units will need to be produced during overtime. Overtime premium is $8
per unit. How much additional profit (loss) will be generated by accepting the special order?
a. $30,000 loss
b. $4,000 loss
c. $24,000 loss
d. $4,000 profit
ANS: D
SUPPORTING CALCULATIONS:

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copied, or distributed without the prior consent of the publisher.
 1,000  ($48 - $42) = $6,000 
1,000  ($48 - $50) = (2,000)
$4,000 

PTS: 1 OBJ: 18-4

69. Reggie Corporation manufactures a single product with the following unit costs for 1,000 units:

Direct materials $2,400

Direct labor 960
Factory overhead (30% variable) 1,800
Selling expenses (50% variable) 900
Administrative expenses (10% variable)    840
Total per unit $6,900

Recently, a company approached Reggie Corporation about buying 100 units for $5,100 each.
Currently, the models are sold to dealers for $7,800.

Assume there is additional capacity for 60 more units and the firm has to reduce regular customer sales
by 40 units in order to contract the special order. There are selling expenses on only the sales to the
regular customers. What is the net income if the special order of 100 units is accepted?
a. $831,960
b. $876,960
c. $1,011,600
d. $900,000
ANS: B
SUPPORTING CALCULATIONS:

Sales (960  $7,800) $7,488,000

(100  $5,100)    510,000 $7,998,000
Costs:
Variable costs-Regular (960  $4,434*) $4,256,640
Variable costs-Special (100  $3,984**) 398,400
Fixed costs [1,000  ($1,260 + $450 + $756]  2,466,000  7,121,040
Net income $ 876,960

  *$2,400 + [$960 + ($1,800  0.30) + ($900  0.50) + ($840  0.10)] = $4,434

**$2,400 + [$960 + ($1,800  0.30) + ($840  0.10)] = $3,984

PTS: 1 OBJ: 18-4

Stars Manufacturing Company produces Products A1, B2, C3, and D4 through a joint process. The
joint costs amount to $200,000.

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 If Processed Further
Sales Value Additional
Product Units Produced at Split-Off Costs Sales Value
A1 3,000 $10,000  $2,500  $15,000 
B2 5,000 30,000 3,000 35,000
C3 4,000 20,000 4,000 25,000
D4 6,000 40,000 6,000 45,000

70. If Product B2 is processed further, profits will

a. increase by $30,000.
b. decrease by $3,000.
c. increase by $32,000.
d. increase by $2,000.
ANS: D
SUPPORTING CALCULATIONS:
$35,000 - $30,000 - $3,000 = $2,000 increase

PTS: 1 OBJ: 18-4

71. Which product(s) should be sold at split-off to maximize profits in the short run?
a. Product A1
b. Product D4
c. Product B2
d. Products A1 and D4
ANS: B
SUPPORTING CALCULATIONS:

Additional Additional
Product Revenues Costs Differences Decision
A1 $5,000 $2,500 $2,500 Process on
B2 $5,000 $3,000 $2,000 Process on
C3 $5,000 $4,000 $1,000 Process on
D4 $5,000 $6,000 ($1,000) Sell now

PTS: 1 OBJ: 18-4

Manning Company uses a joint process to produce products W, X, Y, and Z. Each product may be sold
at its split-off point or processed further. Additional processing costs of specific products are entirely
variable. Joint processing costs for a single batch of joint products are $120,000. Other relevant data
are as follows:
Sales Value Additional Sales Value of
Product at Split-Off Processing Costs Final Product
W $40,000 $60,000 $80,000
X $12,000 $4,000 $20,000
Y $ 20,000 $ 32,000 $120,000
Z  $ 28,000   $20,000   $32,000
$100,000 $116,000 $252,000

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This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. This may not be resold,
copied, or distributed without the prior consent of the publisher.
72. Which products should Manning process further?
a. all
b. all except Z
c. Y and X
d. none
ANS: C
SUPPORTING CALCULATIONS:
Additional Additional
Product Revenues Costs Differences Decision
W $40,000 $60,000 ($20,000) Sell now
X $8,000 $4,000 $4,000 Process on
Y $100,000 $32,000 $68,000 Process on
Z    $4,000 $20,000  ($16,000) Sell now

PTS: 1 OBJ: 18-4

73. Processing Y further will cause profits to

a. increase by $120,000.
b. increase by $52,000.
c. increase by $68,000.
d. decrease by $32,000.
ANS: C
SUPPORTING CALCULATIONS:
$120,000 - $20,000 - $32,000 = $68,000 increase
PTS: 1 OBJ: 18-4

74. Information about three joint products follows:

A B C
Anticipated production 5,000 lbs. 1,000 lbs. 2,000 lbs.
Selling price/lb. at split-off $10 $30 $16
Additional processing costs/lb.
  after split-off (all variable) $  6 $12 $24
Selling price/lb. after further
  processing $20 $40 $50

The cost of the joint process is $60,000. Which of the joint products should be sold at split-off?
a. A
b. B
c. C
d. both A and B
ANS: B
SUPPORTING CALCULATIONS:
Split-Off Process Further
A $10 $20 - $6 = $14
B $30 $40 - $12 = $28 *Sell now
C $16 $50 - $24 = $26

PTS: 1 OBJ: 18-4

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 Information about three joint products follows:

X Y Z
Anticipated production 12,000 lbs. 8,000 lbs. 7,000 lbs.
Selling price/lb. at split-off $16 $26 $48
Additional processing costs/lb.
  after split-off (all variable) $  8 $20 $20
Selling price/lb. after further
  processing $20 $40 $70

75. The cost of the joint process is $140,000. Which of the joint products should be processed further?
a. X
b. Y
c. Z
d. both X and Y
ANS: C
SUPPORTING CALCULATIONS:

Split-Off Process Further

X $16 $20 - $8 = $12
Y $26 $40 - $20 = $20
Z $48 $70 - $20 = $50 *Process on

PTS: 1 OBJ: 18-4

76. The cost of the joint process is $140,000.

If the firm is currently processing all three products beyond split-off, the firm's income would be
a. $736,000.
b. $654,000.
c. $596,000.
d. $514,000.
ANS: D
SUPPORTING CALCULATIONS:

X (12,000  $12) $144,000

Y (8,000  $20) 160,000
Z (7,000  $50)  350,000
$654,000
Less: Joint costs  140,000
$514,000

PTS: 1 OBJ: 18-4

77. The cost of the joint process is $140,000.

Assuming all of the sell now or process further decisions were correctly made, what will be the firm's
income?
a. $736,000
b. $654,000

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 c. $596,000
d. $610,000
ANS: D
SUPPORTING CALCULATIONS:

X (12,000  $16) $192,000

Y (8,000  $26) 208,000
Z (7,000  $50)  350,000
$750,000
Less: Joint costs  140,000
$610,000

PTS: 1 OBJ: 18-4

PROBLEM

1. Describe the steps in the decision-making process. What is the role of qualitative factors in tactical
decision-making?

ANS:
The decision-making process consists of 5 steps:
1) Define the problem
2) Identify alternatives that are feasible
3) Identify the cost/benefit of each feasible alternative
4) Compare the relevant costs and benefits for each alternative, incorporating important
qualitative factors, and fit with strategy
5) Select alternative that has the greatest cost/benefit and supports the strategy

Not all costs are readily quantifiable so qualitative information must be incorporated into the process.
Reliability, quality, strategic fit are examples of things that must be weighed into the decision-making
process.

PTS: 1 OBJ: 18-1

2. What are relevant costs? How do they relate to decision making?

ANS:
Relevant costs are future costs that would differ among alternatives. They are important to decision
making because only relevant costs should be considered. Decisions are about something that will take
place in the future. Costs that are past costs or that do not differ between alternatives should not be
considered in decision making.

PTS: 1 OBJ: 18-2

3. How is understanding of committed resources and flexible resources important to the activity resource
usage model? How does this relate to relevance?

ANS:
The activity resource usage model is useful for understanding how costs behave. There are two
categories of activity resources: flexible and committed. Flexible resources are resources are resources

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copied, or distributed without the prior consent of the publisher.
 purchased when needed so the resources used equals the resources supplied. Committed resources are
those that are acquired in advance so the usage may or may not be equal to the supply. These
distinctions are important for understanding relevance and costs that can be avoided.

PTS: 1 OBJ: 18-3

4. Given the following three situations:

I. Clessin Architects employs 10 architects who can supply a capacity of 18,000

billable hours per year. The costs related to these 10 architects amounts to
$900,000 or $50 per hour. Last year, the firm billed 17,800 hours. Next year,
the firm estimates billing hours to take a slight downturn to 17,000 hours.
However, Clessin plans to retain all 10 architects.
II. Clessin Architects also employs surveyors on a contract basis. Last year,
Clessin contracted with 8 surveyors to provide surveys for existing projects.
Due to the expected downturn for next year, Clessin will only contract
services of 7 surveyors as needed.
III. Clessin currently leases space in a building at the cost of $36,000 per year.
They are outgrowing their space and contemplating a decision to design and
build their own building at a cost of $250,000. The new building would have
space for at least 18 architects.

Identify which resource category relates to each situation under the activity resource usage model and
explain your choice.

ANS:
Situation I is an example of a committed resource. Committed resources are acquired in advance of
usage, usually in “lumps”. The understanding that a firm will maintain employment levels even though
there may be temporary downturns in demand indicates a committed resource. The company can then
take advantage of excess capacity by possibly accepting special jobs or orders.

Situation II is an example of a flexible resource. In this instance, the cost of the activity reduces due to
a change in activity level.

Situation III is an example of a longer-term decision that would affect a the company’s multi-period
capabilities. This would be an example of a capital decision and is not in the realm of tactical decision
making.

PTS: 1 OBJ: 18-3

5. Junior Company currently buys 30,000 units of a part used to manufacture its product at $40 per unit.
Recently the supplier informed Junior Company that a 20 percent increase will take effect next year.
Junior has some additional space and could produce the units for the following per-unit costs (based on
30,000 units):

Direct materials $16

Direct labor 12
Variable overhead 12
Fixed overhead  10
Total $50

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 If the units are purchased from the supplier, $200,000 of fixed costs will continue to be incurred. In
addition, the plant can be rented out for $20,000 per year if the parts are purchased externally.

Required:

Should Junior Company buy the part externally or make it internally?

ANS:
Produce internally; it saves $120,000. ($1,620,000 - $1,500,000)

If purchased externally:
Purchase price (30,000  $40  1.20) $1,440,000 
Fixed costs 200,000 
Rent received    (20,000)
Net cost to purchase $1,620,000 

If produced internally:
Cost to produce (30,000  $50) $1,500,000 

PTS: 1 OBJ: 18-4

6. Rippey Corporation manufactures a single product with the following unit costs for 5,000 units:

Direct materials $ 60
Direct labor 30
Factory overhead (40% variable) 90
Selling expenses (60% variable) 30
Administrative expenses (20% variable)   15
Total per unit $225

Recently, a company approached Rippey Corporation about buying 1,000 units for $225. Currently, the
models are sold to dealers for $412.50. Rippey's capacity is sufficient to produce the extra 1,000 units.
No additional selling expenses would be incurred on the special order.

Required:

a. What is the profit earned by Rippey Corporation on the original 5,000 units?
b. Should Rippey accept the special order if its goal is to maximize short-run profits? How much
will income be affected?
c. Determine the minimum price Rippey would want to receive in order to increase profits by
$7,500 on the special order.
d. When making a special order decision, what quantitative aspects of the decision should Rippey
Corporation consider?

ANS:
a. Sales (5,000  $412.50) $2,062,500
Less: costs (5,000  $225)  1,125,000
Net income $ 937,500

b. Yes, profit will increase by:

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 Increase in sales (1,000  $225) $225,000 
Less:
    Increase in direct materials (1,000  $60) (60,000)
    Increase in direct labor (1,000  $30) (30,000)
    Increase in var. overhead (1,000  $90  0.40) (36,000)
    Increase in var. selling (1,000  $30  0.60) (18,000)
    Increase in var. adm. (1,000  $15  0.20)   (3,000)
Increase in profits $ 78,000 

c. $60 + $30 + ($90  0.40) + ($30  0.60) + ($15  0.20) +

($7,500/1,000) = $154.50 per unit

d. What is the impact on regular customers?

Will regular customers demand a similar price?
Do we have the capacity to produce the extra units?
Will we lose some regular customers?
Will we be penetrating new markets?
Will we be violating the Robinson-Patman Act?

PTS: 1 OBJ: 18-4

7. Mickey Company manufactures three joint products: X, Y, and Z. The cost of the joint process is
$30,000. Information about the three products follows:
X    Y     Z    
Anticipated production 5,600 lbs. 10,000 lbs. 2,500 lbs.
Selling price/lb. at split-off $2.00 $1.00 $3.00
Additional processing costs/lb.
  after split-off (all variable) $1.50 $1.25 $.75
Selling price/lb. after
  further processing $2.50 $3.75 $6.25
Allocated joint costs $12,000 $10,500 $7,500

Required:
a. Determine whether each product should be sold at split-off or processed further. Show all
supporting calculations in good form.
b. Determine the firm's income if the firm processed all three products beyond split-off.

ANS:
a. Sell at Process Further
Split-Off Then Sell Decision
X $11,200 $14,000
 (8,400) Sell at split-off
$ 5,600

Y $10,000 $37,500
 (12,500) Process further
$25,000

Z $ 7,500 $15,625
  (1,875) Process further
$13,750

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     The joint costs are not relevant to the decision.

b. $14,350 ($13,750 + $25,000 + $5,600 - $30,000)

PTS: 1 OBJ: 18-4

8. The operations of Grant Corporation are divided into the Fix Division and the Roach Division.
Projections for the next year are as follows:
Fix Roach
Division Division Total
Sales $60,000 $ 40,000 $100,000
Variable costs  20,000   15,000   35,000
Contribution margin $40,000 $ 25,000 $ 65,000
Direct fixed costs  12,500   30,000   42,500
Segment margin $27,500  $ (5,000) $ 22,500
Allocated common costs  10,000    7,500   17,500
Operating income (loss) $17,500  $(12,500) $ 5,000

Required:
a. Determine operating income for Grant Corporation as a whole if the Roach Division is
dropped.
b. Should the Roach Division be eliminated?

ANS:
a. Sales $60,000
Variable costs  20,000
Contribution margin $40,000
Direct fixed costs  12,500
Segment margin $27,500
Allocated common costs:
    ($10,000 + $7,500)  17,500
Operating income $10,000

b. Yes. The Roach division should be dropped, since it has a negative segment margin of
$5,000. Dropping the Roach Division increases the firm's income by $5,000.

PTS: 1 OBJ: 18-4

9. Arcadia, Inc., uses a joint process to produce Products W, X, Y, Z. Each product may be sold at its
split-off point or processed further. Additional processing costs of specific products are entirely
variable. Joint processing costs for a single batch of joint products are $200,000. Other relevant data
are as follows:
Sales Value Additional Sales Value of
Product at Split-off Processing Costs Final Product
W $ 40,000 $24,000 $ 70,000
X   16,000  10,000   20,000
Y   20,000  10,000   48,000
Z   24,000  16,000   36,000
$100,000 $60,000 $174,000

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 Required:
a. Determine which products should be processed further.
b. How will processing each product further affect profits?

ANS:
a.
Product Additional Sales Value Additional Costs Difference
W $30,000  $24,000  $ 6,000 
X  4,000 10,000  (6,000)
Y 28,000 10,000 18,000
Z 12,000 16,000  (4,000)

Arcadia, Inc., should process products W and Y further because they increase profits by $6,000 and
$18,000, respectively. Products X and Z should be sold at the split-off point.
b. If all are processed further, profit will increase by $14,000 as compared to $24,000 if
only W and Y are processed further.

PTS: 1 OBJ: 18-4

10. Barron Company's 2010 income statement is as follows:

Sales (5,000 units  $15) $75,000

Less variable expenses:
Cost of goods sold:
    Direct materials $15,000
    Direct labor 10,000
    Variable factory overhead 10,000
    Selling and administrative   2,500  37,500
Contribution margin $37,500
Less fixed expenses:
    Factory overhead $10,000
    Selling and administrative  15,000  25,000
Net income (loss) $12,500

In an attempt to improve the company's profit performance, management is considering a number of

alternative actions.

Required:

Determine the effect of each of the following on monthly profit. Each situation is to be evaluated
independently of all the others.

a. Purchasing automated assembly equipment. This action should reduce direct labor costs by 40
percent. It also will increase variable overhead costs by 10 percent and fixed factory overhead
by $2,500.
b. Reducing the unit selling price by $2 per unit. This should increase the monthly sales by 5,000
units. Fixed factory overhead will increase by $1,500.
c. Increase fixed selling and administrative expenses by $1,000 for advertising costs. The number
of units sold will increase to 8,000 units.

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 ANS:
a. Increase in variable overhead ($10,000  0.10) ($ 1,000 )
Increase in fixed costs ( 2,500) 
Decrease in direct labor cost ($10,000  0.40)  4,000
Net increase in profits $ 500 

b. Increase in sales [($13  10,000) - $75,000] $55,000 

Less:
   Increase in variable expenses
      [5,000  ($37,500/5,000)] $37,500
   Increase in fixed overhead   1,500  39,000 
Increase in profits $16,000 

c. Increase in sales (3,000  $15) $45,000 

Less:
   Increase in variable expenses
      [3,000  ($37,500/5,000)] $22,500
   Increase in fixed S & A expenses   1,000  23,500 
Increase in profits $21,500 

PTS: 1 OBJ: 18-4

11. The management of James Industries has been evaluating whether the company should continue
manufacturing a component or buy it from an outside supplier. A $100 cost per component was
determined as follows:
Direct materials $ 15
Direct labor 40
Variable manufacturing overhead 10
Fixed manufacturing overhead   35
Total $100

James Industries uses 4,000 components per year. After Light, Inc., submitted a bid of $80 per
component, some members of management felt they could reduce costs by buying from outside and
discontinuing production of the component. If the component is obtained from Light, Inc., James's
unused production facilities could be leased to another company for $50,000 per year.

Required:
a. Determine the maximum amount per unit James should pay an outside supplier.
b. Indicate if the company should make or buy the component and the total dollar difference in
favor of that alternative.
c. Assume the company could eliminate production supervisors with salaries totaling $30,000 if
the component is purchased from an outside supplier. Indicate if the company should make or
buy the component and the total dollar difference in favor of that alternative.

ANS:
a. $77.50 [$15 + $40 + $10 + ($50,000/4,000)]

b. $10,000 difference in favor of making the component

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 Buy Make
Outside supplier's price
    ($80  4,000) $(320,000)
Direct materials
    ($15  4,000) $ (60,000)
Direct labor
    ($40  4,000) (160,000)
Variable manufacturing overhead
    ($10  4,000) (40,000)
Fixed manufacturing overhead
    ($35  4,000) (140,000) (140,000)
Rental revenue    50,000            
Totals $(410,000) $(400,000)

The make or buy alternatives also could be analyzed as follows excluding the fixed
manufacturing overhead:

Buy Make
Outside supplier's price $(320,000)
Direct materials $ (60,000)
Direct labor (160,000)
Variable manufacturing overhead (40,000)
Rental revenue    50,000            
Totals $(270,000) $(260,000)

c. $20,000 difference in favor of buying the component from the outside supplier

Buy Make
Outside supplier's price
    ($80  4,000) $(320,000)
Direct materials
    ($15  4,000) $ (60,000)
Direct labor
    ($40  4,000) (160,000)
Variable manufacturing overhead
    ($10  4,000) (40,000)
Fixed manufacturing overhead
    ($35  4,000) (140,000)
    ($140,000 - $30,000) (110,000)
Rental revenue    50,000            
Totals $(380,000) $(400,000)

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 The analysis could be done including only avoidable fixed costs:

Buy Make
Outside supplier's price
    ($80  4,000) $(320,000)
Direct materials
    ($15  4,000) $ (60,000)
Direct labor
    ($40  4,000) (160,000)
Variable manufacturing overhead
    ($10  4,000) (40,000)
Avoidable fixed manufacturing overhead (30,000)
Rental revenue    50,000            
Totals $(270,000) $(290,000)

PTS: 1 OBJ: 18-4

12. Scott Company has an annual capacity of 18,000 units. Budgeted operating results for 2006 are as
follows:
Revenues (16,000 units @ $60) $960,000
Variable costs:
    Manufacturing $384,000
    Selling  128,000  512,000
Contribution margin $448,000

Fixed costs:
    Manufacturing $160,000
    Selling and administrative  120,000  280,000
Operating income $168,000

A foreign wholesaler wants to buy 1,000 units at a price of $40 per unit. All fixed costs would remain
within the relevant range. Variable selling costs on the special order would be the same as variable
selling costs for regular orders.
Required:
a. Determine the effect on operating income if the company produces the special order.
b. Should the company produce the special order?
c. Determine operating income if the customer had wanted a special order of 3,000 units and the
company produced the special order.
d. Should the company produce the 3,000-unit special order?
e. Discuss any nonquantitative factors the company might want to consider when making the
decision.

ANS:
a. $8,000 increase

Incremental revenue ($40  1,000) $ 40,000 

Incremental costs:
    Variable manufacturing ($24  1,000) (24,000)
    Variable selling ($8  1,000)   (8,000)
Incremental contribution margin $ 8,000 

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 Since the company would still be operating within the relevant range, fixed costs would
remain the same.

b. Yes, the company should produce the special order.

c. $164,000

With Without
Special Order Special Order
Revenues:
   (16,000  $60) $ 960,000 
   (15,000  $60) $900,000   
   (3,000  $40) 120,000   
Variable costs:  
   Manufacturing:  
      (16,000  $24) (384,000)  
      (18,000  $24) (432,000)
   Selling:
      (16,000  $8) (128,000)  
      (18,000  $8) _            (144,000)
Contribution margin $448,000    $ 444,000 
Fixed costs:
   Manufacturing (160,000)   (160,000)
   Selling and administrative (120,000)    (120,000)
   Operating income $168,000    $ 164,000 

d. No. If the decision is based on quantitative factors, the company should not produce the
special order.

e. Quantitative considerations might include:

 The possibility of repeat business with the special-order customer.

 Increasing the selling price on subsequent special orders.
 The reliability of regular customer repeat business.
 If the special order is produced, the reaction of regular customers to the reduced price on
the special order.

PTS: 1 OBJ: 18-4

13. Bonilla Corporation, which produces one product, had the following income statement for a recent
month:
Bonilla Corporation
Income Statement
For the Month of April 2009

Sales $30,000
Cost of goods sold  27,000
Gross profit $ 3,000
Selling and administrative   2,500
Net income $ 500

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There were no beginning or ending inventories of work-in-process or finished goods. Bonilla's
manufacturing costs were as follows:

Direct materials (1,200 units  $5) $ 6,000

Direct labor (1,200 units  $8) 9,600
Variable overhead (1,200 units  $4.50) 5,400
Fixed overhead   6,000
Total $27,000

Average cost per unit $ 22.50

Selling and administrative expenses are all fixed.

Bonilla has just received a special order from a firm in Canada to purchase 800 units at $20 each. The
order will not affect the selling price to regular customers.

Required:
a. Prepare a differential analysis of the relevant costs and revenues associated with the decision to
accept or reject the special order, assuming Bonilla has excess capacity.
b. Determine the net advantage or disadvantage (profit increase or decrease) of accepting the
order, assuming Bonilla does not have excess capacity.

ANS:
a. Increase in revenues (800  $20) $16,000
Increase in costs:
Direct materials (800  $5) $4,000
Direct labor (800  $8) 6,400
Variable overhead (800  4.50)  3,600  14,000
Increase in profits $ 2,000

b. Contribution margin of special order $ 2,000

Opportunity cost:
Regular selling price $25.00
Variable costs ($5 + $8 + $4.50)  17.50
Regular unit contribution margin $ 7.50
Lost sales    800   6,000
Net disadvantage ($ 4,000)

PTS: 1 OBJ: 18-4

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