TRUE/FALSE 13.

In a special order decision, the sales price should be sufficient to cover a job’s variable costs,
incremental fixed costs, and generate a profit.
1. Information that is related to past events is relevant in the decision-making process.
ANS: T DIF: Moderate OBJ: 10-6
ANS: F DIF: Easy OBJ: 10-1
14. The Robinson-Patman Act prohibits companies from pricing products at different levels when there are
2. Information that has a bearing on future events is relevant in the decision-making process. no significant differences in production costs.

ANS: T DIF: Easy OBJ: 10-1 ANS: T DIF: Easy OBJ: 10-6

3. In evaluating alternative courses of action, a manager should select the alternative that provides the 15. When making a decision to discontinue an operating segment, allocated common costs are not
highest incremental benefit to the company. considered.

ANS: T DIF: Easy OBJ: 10-2 ANS: T DIF: Easy OBJ: 10-7

4. The outsourcing decision is also referred to as a “make-or-buy” decision. 16. When making a decision to discontinue an operating segment, avoidable fixed costs are not
considered.
ANS: T DIF: Easy OBJ: 10-3
ANS: F DIF: Easy OBJ: 10-7
5. A company may outsource some of its production in order to focus on core competencies.
17. Segment margin measures a segment’s contribution to the coverage of indirect expenses.
ANS: T DIF: Easy OBJ: 10-3
ANS: T DIF: Moderate OBJ: 10-7
6. In an outsourcing decision, unavoidable fixed costs are irrelevant.
18. Depreciation on factory equipment is normally a relevant cost in product line decisions.
ANS: T DIF: Moderate OBJ: 10-3
ANS: F DIF: Moderate OBJ: 10-7
7. In an outsourcing decision, avoidable fixed costs are irrelevant.
19. Minimization of contribution margin is a common objective function in linear programming.
ANS: F DIF: Moderate OBJ: 10-3
ANS: F DIF: Easy OBJ: 10-8
8. In an outsourcing decision, variable costs of production are relevant.
20. Minimization of variable costs is a common objective function in linear programming.
ANS: T DIF: Moderate OBJ: 10-3
ANS: T DIF: Easy OBJ: 10-8
9. In an outsourcing decision, rent received from an outside party for facility use is a relevant cash inflow.
21. Maximization of variable costs is a common objective function in linear programming.
ANS: T DIF: Moderate OBJ: 10-3
ANS: F DIF: Easy OBJ: 10-8
10. When multiple products are produced and sold, a change in the sales price of one product will cause a
change in the sales mix of the firm. 22. Maximization of contribution margin is a common objective function in linear programming.

ANS: T DIF: Moderate OBJ: 10-5 ANS: T DIF: Easy OBJ: 10-8

11. In setting compensation structures, fixed salary expense is normally not considered. 23. In linear programming, resource constraints are usually expressed as inequalities.

ANS: T DIF: Moderate OBJ: 10-5 ANS: T DIF: Moderate OBJ: 10-8

12. In a special order decision, unavoidable fixed costs are taken into consideration in setting a sales price. 24. In linear programming, a slack variable represents the unused portion of a resource.

ANS: F DIF: Moderate OBJ: 10-6 ANS: T DIF: Moderate OBJ: 10-8

376 377
 6. The relative product quantities composing a company’s total sales is referred to as a company’s
25. In linear programming, a slack variable is associated with < constraints. ____________________________.

ANS: T DIF: Moderate OBJ: 10-8 ANS: sales mix

26. In linear programming, a surplus variable is associated with > constraints. DIF: Easy OBJ: 10-5

ANS: T DIF: Moderate OBJ: 10-8 7. The excess of revenues over direct variable expenses and avoidable fixed expenses is referred to as
________________________________.
27. In linear programming, a surplus variable represents overachievement of minimum requirements.
ANS: segment margin
ANS: T DIF: Moderate OBJ: 10-8
DIF: Easy OBJ: 10-7
28. In linear programming, a surplus variable represents the unused portion of a resource.
8. In linear programming, a limiting factor that hampers management’s pursuit of an objective is referred
ANS: F DIF: Moderate OBJ: 10-8 to as a __________________________.

ANS: constraint
COMPLETION
DIF: Easy OBJ: 10-8
1. The amount of revenue that differs across decision choices is referred to as
___________________________. 9. In linear programming, the equation that specifies management’s objective is referred to as a(n)
__________________________________.
ANS: incremental revenue
ANS: objective function
DIF: Easy OBJ: 10-1
DIF: Easy OBJ: 10-8
2. The amount of cost that differs across decision choices is referred to as
___________________________. 10. In linear programming, a __________________________ represents the unused amount of a resource
at any level of operation.
ANS: incremental cost
ANS: slack variable
DIF: Easy OBJ: 10-1
DIF: Moderate OBJ: 10-8
3. The benefits foregone when one course of action is chosen over another are referred to as
_______________________________. 11. In linear programming, a __________________________ represents the overachievement of a
minimum requirement.
ANS: opportunity costs
ANS: surplus variable
DIF: Easy OBJ: 10-1
DIF: Moderate OBJ: 10-8
4. Costs incurred in the past to acquire an asset are referred to as _____________________________.

ANS: sunk costs MULTIPLE CHOICE

DIF: Easy OBJ: 10-2 1. Which of the following is not a characteristic of relevant costing information? It is
a. associated with the decision under consideration.
5. When a company has work performed by an external supplier, it is engaging in b. significant to the decision maker.
__________________________. c. readily quantifiable.
d. related to a future endeavor.
ANS: outsourcing
ANS: C DIF: Easy OBJ: 10-1
DIF: Easy OBJ: 10-3

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 8. A cost is sunk if it
2. A fixed cost is relevant if it is a. is not an incremental cost.
a. a future cost. b. is unavoidable.
b. Avoidable. c. has already been incurred.
c. sunk. d. is irrelevant to the decision at hand.
d. a product cost.
ANS: C DIF: Easy OBJ: 10-2
ANS: B DIF: Easy OBJ: 10-1
9. Most___________ are relevant to decisions to acquire capacity, but not to short-run decisions
3. Relevant costs are involving the use of that capacity.
a. all fixed and variable costs. a. sunk costs
b. all costs that would be incurred within the relevant range of production. b. incremental costs
c. past costs that are expected to be different in the future. c. fixed costs
d. anticipated future costs that will differ among various alternatives. d. prime costs

ANS: D DIF: Easy OBJ: 10-1 ANS: C DIF: Easy OBJ: 10-2

4. Which of the following is the least likely to be a relevant item in deciding whether to replace an old 10. Irrelevant costs generally include
machine?
a. acquisition cost of the old machine Sunk costs Historical costs Allocated costs
b. outlay to be made for the new machine
c. annual savings to be enjoyed on the new machine a. yes yes no
d. life of the new machine b. yes no no
c. no no yes
ANS: A DIF: Easy OBJ: 10-2 d. yes yes yes

5. If a cost is irrelevant to a decision, the cost could not be ANS: D DIF: Easy OBJ: 10-2
a. a sunk cost.
b. a future cost. 11. In deciding whether an organization will keep an old machine or purchase a new machine, a manager
c. a variable cost. would ignore the
d. an incremental cost. a. estimated disposal value of the old machine.
b. acquisition cost of the old machine.
ANS: D DIF: Easy OBJ: 10-2 c. operating costs of the new machine.
d. estimated disposal value of the new machine.
6. Which of the following costs would be relevant in short-term decision making?
a. incremental fixed costs ANS: B DIF: Easy OBJ: 10-2
b. all costs of inventory
c. total variable costs that are the same in the considered alternatives 12. The potential rental value of space used for production activities
d. the cost of a fixed asset that could be used in all the considered alternatives a. is a variable cost of production.
b. represents an opportunity cost of production.
ANS: A DIF: Easy OBJ: 10-2 c. is an unavoidable cost.
d. is a sunk cost of production.
7. The term incremental cost refers to
a. the profit foregone by selecting one choice instead of another. ANS: B DIF: Easy OBJ: 10-3
b. the additional cost of producing or selling another product or service.
c. a cost that continues to be incurred in the absence of activity. 13. The opportunity cost of making a component part in a factory with excess capacity for which there is
d. a cost common to all choices in question and not clearly or feasibly allocable to any of no alternative use is
them. a. the total manufacturing cost of the component.
b. the total variable cost of the component.
ANS: B DIF: Easy OBJ: 10-2 c. the fixed manufacturing cost of the component.
d. zero.

ANS: D DIF: Easy OBJ: 10-3

380 381
14. Which of the following are relevant in a make or buy decision?
20. Fixed costs are ignored in allocating scarce resources because
Variable Avoidable fixed Unavoidable fixed a. they are sunk.
costs costs costs b. they are unaffected by the allocation of scarce resources.
c. there are no fixed costs associated with scarce resources.
a. no yes yes d. fixed costs only apply to long-run decisions.
b. yes no yes
c. no no yes ANS: B DIF: Easy OBJ: 10-4
d. yes yes no
21. The minimum selling price that should be acceptable in a special order situation is equal to total
ANS: D DIF: Easy OBJ: 10-3 a. production cost.
b. variable production cost.
15. In a make or buy decision, the opportunity cost of capacity could c. variable costs.
a. be considered to decrease the price of units purchased from suppliers. d. production cost plus a normal profit margin.
b. be considered to decrease the cost of units manufactured by the company.
c. be considered to increase the price of units purchased from suppliers. ANS: C DIF: Easy OBJ: 10-6
d. not be considered since opportunity costs are not part of the accounting records.
22. Which of the following costs is irrelevant in making a decision about a special order price if some of
ANS: A DIF: Easy OBJ: 10-3 the company facilities are currently idle?
a. direct labor
16. Which of the following are relevant in a make or buy decision? b. equipment depreciation
c. variable cost of utilities
Prime costs Sunk costs Incremental costs d. opportunity cost of production

a. yes yes yes ANS: B DIF: Easy OBJ: 10-6

b. yes no yes
c. yes no no 23. The _______________ prohibits companies from pricing products at different amounts unless these
d. no no yes differences reflect differences in the cost to manufacture, sell, or distribute the products.
a. Internal Revenue Service
ANS: B DIF: Easy OBJ: 10-3 b. Governmental Accounting Office
c. Sherman Antitrust Act
17. In a make or buy decision, the reliability of a potential supplier is d. Robinson-Patman Act
a. an irrelevant decision factor.
b. relevant information if it can be quantified. ANS: D DIF: Easy OBJ: 10-6
c. an opportunity cost of continued production.
d. a qualitative decision factor. 24. An ad hoc sales discount is
a. an allowance for an inferior quality of marketed goods.
ANS: D DIF: Easy OBJ: 10-3 b. a discount that an ad hoc committee must decide on.
c. brought about by competitive pressures.
18. Which of the following qualitative factors favors the buy choice in a make or buy decision for a part? d. none of the above.
a. maintaining a long-term relationship with suppliers
b. quality control is critical ANS: C DIF: Moderate OBJ: 10-6
c. utilization of idle capacity
d. part is critical to product 25. A manager is attempting to determine whether a segment of the business should be eliminated. The
focus of attention for this decision should be on
ANS: A DIF: Easy OBJ: 10-3 a. the net income shown on the segment's income statement.
b. sales minus total expenses of the segment.
19. When a scarce resource, such as space, exists in an organization, the criterion that should be used to c. sales minus total direct expenses of the segment.
determine production is d. sales minus total variable expenses and avoidable fixed expenses of the segment.
a. contribution margin per unit.
b. selling price per unit. ANS: D DIF: Easy OBJ: 10-7
c. contribution margin per unit of scarce resource.
d. total variable costs of production.

ANS: C DIF: Easy OBJ: 10-4

382 383
 31. Knox Company uses 10,000 units of a part in its production process. The costs to make a part are:
26. Assume a company produces three products: A, B, and C. It can only sell up to 3,000 units of each direct material, $12; direct labor, $25; variable overhead, $13; and applied fixed overhead, $30. Knox
product. Production capacity is unlimited. The company should produce the product (or products) that has received a quote of $55 from a potential supplier for this part. If Knox buys the part, 70 percent of
has (have) the highest the applied fixed overhead would continue. Knox Company would be better off by
a. contribution margin per hour of machine time. a. $50,000 to manufacture the part.
b. gross margin per unit. b. $150,000 to buy the part.
c. contribution margin per unit. c. $40,000 to buy the part.
d. sales price per unit. d. $160,000 to manufacture the part.

ANS: C DIF: Easy OBJ: 10-7 ANS: C

Cost to make: $55/unit * 10,000 units = $550,000
27. For a particular product in high demand, a company decreases the sales price and increases the sales Cost to manufacture: $(12+25+13+9)= $59/unit
commission. These changes will not increase Incremental difference in favor of buying: $4/unit * 10,000 units = $40,000
a. sales volume.
b. total selling expenses for the product. DIF: Moderate OBJ: 10-3
c. the product contribution margin.
d. the total variable cost per unit. 32. Paulson Company has only 25,000 hours of machine time each month to manufacture its two products.
ANS: C DIF: Easy OBJ: 10-7 Product X has a contribution margin of $50, and Product Y has a contribution margin of $64. Product
X requires 5 hours of machine time, and Product Y requires 8 hours of machine time. If Paulson
28. An increase in direct fixed costs could reduce all of the following except Company wants to dedicate 80 percent of its machine time to the product that will provide the most
a. product line contribution margin. income, the company will have a total contribution margin of
b. product line segment margin. a. $250,000.
c. product line operating income. b. $240,000.
d. corporate net income. c. $210,000.
d. $200,000.
ANS: A DIF: Easy OBJ: 10-7
ANS: B
29. When a company discontinues a segment, total corporate costs may decrease in all of the following Assume 80% of capacity applied to Product X
categories except
a. variable production costs. X: 20,000 hrs/5 hrs per unit 4,000 units * $50 CM/unit $200,000
b. allocated common costs. Y: 5,000 hrs/8 hrs per unit 625 units * $64 CM/unit 40,000
c. direct fixed costs. Total $240,000
d. variable period costs. ======

ANS: B DIF: Easy OBJ: 10-7 DIF: Difficult OBJ: 10-7

30. In evaluating the profitability of a specific organizational segment, all _______________ would be
ignored.
a. segment variable costs
b. segment fixed costs
c. costs allocated to the segment
d. period costs

ANS: C DIF: Easy OBJ: 10-7

384 385
33. Doyle Company has 3 divisions: R, S, and T. Division R's income statement shows the following for 34. Thomas Company is currently operating at a loss of $15,000. The sales manager has received a
the year ended December 31: special order for 5,000 units of product, which normally sells for $35 per unit. Costs associated with
the product are: direct material, $6; direct labor, $10; variable overhead, $3; applied fixed overhead,
Sales $1,000,000 $4; and variable selling expenses, $2. The special order would allow the use of a slightly lower
Cost of goods sold (800,000) grade of direct material, thereby lowering the price per unit by $1.50 and selling expenses would be
Gross profit $ 200,000 decreased by $1. If Thomas wants this special order to increase the total net income for the firm to
Selling expenses $100,000 $10,000, what sales price must be quoted for each of the 5,000 units?
Administrative expenses 250,000 (350,000) a. $23.50
Net loss $ (150,000) b. $24.50
c. $27.50
Cost of goods sold is 75 percent variable and 25 percent fixed. Of the fixed costs, 60 percent are d. $34.00
avoidable if the division is closed. All of the selling expenses relate to the division and would be
eliminated if Division R were eliminated. Of the administrative expenses, 90 percent are applied from ANS: A
corporate costs. If Division R were eliminated, Doyle’s income would In order to increase income to $10,000, there must be an increase of $25,000 or $5 per unit.
a. increase by $150,000. Direct materials $ 4.50
b. decrease by $ 75,000. Direct Labor 10.00
c. decrease by $155,000. Variable Overhead 3.00
d. decrease by $215,000. Variable Selling Exp 1.00
Production Costs $18.50
ANS: C Additional profit per
Sales foregone $(1,000,000) unit 5.00
COGS avoided Sales price/unit $23.50
Variable $600,000 =====
Fixed 120,000 720,000
Selling Expense Avoided 100,000 DIF: Moderate OBJ: 10-6
Administrative Expense Avoided 25,000
Decrease in income $( 155,000) 35. Quest Company produces a part that has the following costs per unit:
=========
Direct material $ 8
DIF: Moderate OBJ: 10-7 Direct labor 3
Variable overhead 1
Fixed overhead 5
Total $17

Zest Corporation can provide the part to Quest for $19 per unit. Quest Company has determined that
60 percent of its fixed overhead would continue if it purchased the part. However, if Quest no longer
produces the part, it can rent that portion of the plant facilities for $60,000 per year. Quest Company
currently produces 10,000 parts per year. Which alternative is preferable and by what margin?
a. Make-$20,000
b. Make-$50,000
c. Buy-$10,000
d. Buy-$40,000

ANS: C
Purchase price from Zest $(190,000)
Rent Revenue Received 60,000
Variable Costs Avoided 120,000
Fixed Overhead Avoided 20,000
Difference in Favor of Buying $ 10,000
=======

DIF: Moderate OBJ: 10-3

386 387
36. Browning Company has 15,000 units in inventory that had a production cost of $3 per unit. These 39. Glamorous Grooming Corporation makes and sells brushes and combs. It can sell all of either product
units cannot be sold through normal channels due to a significant technology change. These units it can make. The following data are pertinent to each respective product:
could be reworked at a total cost of $23,000 and sold for $28,000. Another alternative is to sell the
units to a junk dealer for $8,500. The relevant cost for Browning to consider in making its decision is Brushes Combs
a. $45,000 of original product costs. Units of output per machine hour 8 20
b. $23,000 for reworking the units. Selling price per unit $12.00 $4.00
c. $68,000 for reworking the units. Product cost per unit
d. $28,000 for selling the units to the junk dealer. Direct material $1.00 $1.20
Direct labor 2.00 0.10
ANS: B Variable overhead 0.50 0.05
Only the actual reworking costs are relevant. Original purchase costs are irrelevant.
Total fixed overhead is $380,000.
DIF: Easy OBJ: 10-3
The company has 40,000 machine hours available for production. What sales mix will maximize
Robertson Corporation profits?
a. 320,000 brushes and 0 combs
Robertson Corporation sells a product for $18 per unit, and the standard cost card for the product b. 0 brushes and 800,000 combs
shows the following costs: c. 160,000 brushes and 600,000 combs
d. 252,630 brushes and 252,630 combs
Direct material $ 1
Direct labor 2 ANS: A
Overhead (80% fixed) 7
Total $10 Brushes have a contribution margin of $8.50 per unit; combs have a contribution margin of
$2.65 per unit.
37. Refer to Robertson Corporation. Robertson received a special order for 1,000 units of the product. The
The combination of 320,000 brushes and 0 combs provides a net profit of $340,000.
only additional cost to Robertson would be foreign import taxes of $1 per unit. If Robertson is able to
sell all of the current production domestically, what would be the minimum sales price that Robertson
would consider for this special order? DIF: Easy OBJ: 10-5
a. $18.00
b. $11.00 40. Houston Footwear Corporation has been asked to submit a bid on supplying 1,000 pairs of military
c. $5.40 combat boots to the Armed Forces. The company's costs per pair of boots are as follows:
d. $19.00
Direct material $8
ANS: D Direct labor 6
The company would increase its minimum sales price to reflect the foreign import tax of $1 Variable overhead 3
per unit. Variable selling cost (commission) 3
Fixed overhead (allocated) 2
DIF: Easy OBJ: 10-6 Fixed selling and administrative cost 1

38. Refer to Robertson Corporation. Assume that Robertson has sufficient idle capacity to produce the Assuming that there would be no commission on this potential sale, the lowest price the firm can bid is
1,000 units. If Robertson wants to increase its operating profit by $5,600, what would it charge as a some price greater than
per-unit selling price? a. $23.
a. $18.00 b. $20.
b. $10.00 c. $17.
c. $11.00 d. $14.
d. $16.60
ANS: C
ANS: C The lowest price would have to be greater than the sum of all variable manufacturing costs.
The company would want to charge a price equal to a per unit profit of $5.60 plus variable Variable manufacturing costs total $17; therefore the price would have to be greater than $17
costs per unit of $4.40 and the import tax per unit of $1.00. The total price is $11.00. per pair.

DIF: Moderate OBJ: 10-3 DIF: Easy OBJ: 10-5

388 389
41. Holt Industries has two sales territories-East and West. Financial information for the two territories is
presented below: 43. Refer to Woodville Motors. The $9,000 cost of the original machine represents a(n)
a. sunk cost.
East West b. future relevant cost.
Sales $980,000 $750,000 c. historical relevant cost.
Direct costs: d. opportunity cost.
Variable (343,000) (225,000)
Fixed (450,000) (325,000) ANS: A DIF: Easy OBJ: 10-2
Allocated common costs (275,000) (175,000)
Net income (loss) $(88,000) $ 25,000 44. Refer to Woodville Motors. The $20,000 cost of the new machine represents a(n)
a. sunk cost.
Because the company is in a start-up stage, corporate management feels that the East sales territory is b. future relevant cost.
creating too much of a cash drain on the company and it should be eliminated. If the East territory is c. future irrelevant cost.
discontinued, one sales manager (whose salary is $40,000 per year) will be relocated to the West d. opportunity cost.
territory. By how much would Holt's income change if the East territory is eliminated?
ANS: B DIF: Easy OBJ: 10-3
a. increase by $88,000
b. increase by $48,000
45. Refer to Woodville Motors. The estimated $500 salvage value of the existing machine in 10 years
c. decrease by $267,000
represents a(n)
d. decrease by $227,000
a. sunk cost.
ANS: D b. opportunity cost of selling the existing machine now.
Sales foregone in East $(980,000) c. opportunity cost of keeping the existing machine for 10 years.
Variable costs avoided 343,000 d. opportunity cost of keeping the existing machine and buying the new machine.
Fixed costs avoided 410,000 ANS: B DIF: Easy OBJ: 10-3
Decrease in income from $(227,000)
eliminating East territory ======== 46. Refer to Woodville Motors. The incremental cost to purchase the new machine is
a. $11,000.
DIF: Moderate OBJ: 10-7 b. $20,000.
c. $13,000.
Woodville Motors d. $18,000.

Woodville Motors is trying to decide whether it should keep its existing car washing machine or ANS: D
purchase a new one that has technological advantages (which translate into cost savings) over the Incremental cost = Purchase price of new machine - Current salvage value
existing machine. Information on each machine follows: Incremental cost = $(20,000 - 2,000)
Incremental cost = $18,000
Old machine New machine
Original cost $9,000 $20,000 DIF: Easy OBJ: 10-3
Accumulated depreciation 5,000 0
Annual cash operating costs 9,000 4,000
Current salvage value of old machine 2,000
Salvage value in 10 years 500 1,000
Remaining life 10 yrs. 10 yrs.

42. Refer to Woodville Motors. The $4,000 of annual operating costs that are common to both the old and
the new machine are an example of a(n)
a. sunk cost.
b. irrelevant cost.
c. future avoidable cost.
d. opportunity cost.

ANS: B DIF: Easy OBJ: 10-1

390 391
 Entertainment Solutions Corporation 49. Refer to Chip Division of Computer Solutions, Inc. Assume, for this question only, that the Chip
Division is producing and selling at capacity. What is the minimum selling price that the division
Entertainment Solutions Corporation manufactures and sells FM radios. Information on the prior year's would consider on a "special order" of 1,000 chips on which no variable period costs would be
operations (sales and production Model A1) is presented below: incurred?
a. $100
Sales price per unit $30 b. $72
Costs per unit: c. $81
Direct material 7 d. $94
Direct labor 4
Overhead (50% variable) 6 ANS: D
Selling costs (40% variable) 10 Variable period costs are $6 ($15 * 40% variable)
Production in units 10,000 The minimum selling price would have to be greater than the manufacturing costs and fixed
Sales in units 9,500 period costs.
$(100 - 6) = $94 per unit
47. Refer to Entertainment Solutions Corporation. The Model B2 radio is currently in production and it
renders the Model A1 radio obsolete. If the remaining 500 units of the Model A1 radio are to be sold DIF: Moderate OBJ: 10-6
through regular channels, what is the minimum price the company would accept for the radios?
a. $30 50. Refer to Chip Division of Computer Solutions, Inc. Assume, for this question only, that the Chip
b. $27 Division is operating at a level of 70,000 chips per year. What is the minimum price that the division
c. $18 would consider on a "special order" of 1,000 chips to be distributed through normal channels?
d. $4 a. $78
b. $95
ANS: D c. $100
$4 would cover the variable selling expenses. d. $81

ANS: A
DIF: Moderate OBJ: 10-5
The price would have to cover all variable costs.
48. Refer to Entertainment Solutions Corporation. Assume that the remaining Model A1 radios can be sold $(50 + 20 + 2 + 6) = $78 per unit
through normal channels or to a foreign buyer for $6 per unit. If sold through regular channels, the
minimum acceptable price will be DIF: Moderate OBJ: 10-6
a. $30.
b. $33. 51. Refer to Chip Division of Computer Solutions, Inc. Assume, for this question only, that the Chip
c. $10. Division is presently operating at a level of 80,000 chips per year. Accepting a "special order" on 2,000
d. $4. chips at $88 will
a. increase total corporate profits by $4,000.
ANS: C b. increase total corporate profits by $20,000.
$10 will cover the price to the foreign buyer plus the $4 in c. decrease total corporate profits by $14,000.
variable selling expenses. d. decrease total corporate profits by $24,000.

ANS: B
DIF: Moderate OBJ: 10-5
$(88 - 78) = $10 profit per unit * 2,000 units = $20,000 profit increase
Chip Division of Computer Solutions, Inc.
DIF: Moderate OBJ: 10-6
The Chip Division of Computer Solutions, Inc. produces a high-quality computer chip. Unit
production costs (based on capacity production of 100,000 units per year) follow:

Direct material $50

Direct labor 20
Overhead (20% variable) 10
Other information:
Sales price 100
SG&A costs (40% variable) 15

392 393
 55. Emerald Corporation has been manufacturing 5,000 units of Part 10541, which is used in the
Richmond Steel Corporation manufacture of one of its products. At this level of production, the cost per unit of manufacturing Part
10541 is as follows:
The capital budgeting committee of the Richmond Steel Corporation is evaluating the possibility of
replacing its old pipe-bending machine with a more advanced model. Information on the existing Direct material $ 2
machine and the new model follows: Direct labor 8
Variable overhead 4
Existing machine New machine Fixed overhead applied 6
Original cost $200,000 $400,000 Total $20
Market value now 80,000
Market value in year 5 0 20,000 Hamilton Company has offered to sell Emerald 5,000 units of Part 10541 for $19 a unit. Emerald has
Annual cash operating costs 40,000 10,000 determined that it could use the facilities currently used to manufacture Part 10541 to manufacture Part
Remaining life 5 yrs. 5 yrs. RAC and generate an operating profit of $4,000. Emerald has also determined that two-thirds of the
fixed overhead applied will continue even if Part 10541 is purchased from Hamilton. To determine
52. Refer to Richmond Steel Corporation. The major opportunity cost associated with the continued use of whether to accept Hamilton’s offer, the net relevant costs to make are
the existing machine is a. $70,000.
a. $30,000 of annual savings in operating costs. b. $84,000.
b. $20,000 of salvage in 5 years on the new machine. c. $90,000.
c. lost sales resulting from the inefficient existing machine. d. $95,000.
d. $400,000 cost of the new machine.
ANS: B
ANS: A DIF: Easy OBJ: 10-1 The relevant costs are the variable costs per unit as well as the portion of fixed overhead that
will be avoided for Part 10541.
53. Refer to Richmond Steel Corporation. The $80,000 market value of the existing machine is Variable costs = $14 per unit
a. a sunk cost. Fixed overhead = $ 2 per unit
b. an opportunity cost of keeping the old machine. 5,000 units * $16 per unit = $80,000 + Profit from RAC = $ 4,000
c. irrelevant to the equipment replacement decision. Total Relevant Costs $84,000
d. a historical cost.
DIF: Moderate OBJ: 10-3
ANS: B DIF: Easy OBJ: 10-1
56. Harding Corporation manufactures batons. Harding can manufacture 300,000 batons a year at a
54. Refer to Richmond Steel Corporation. If the company buys the new machine and disposes of the variable cost of $750,000 and a fixed cost of $450,000. Based on Harding's predictions, 240,000
existing machine, corporate profit over the five-year life of the new machine will be batons will be sold at the regular price of $5.00 each. In addition, a special order was placed for 60,000
____________________ than the profit that would have been generated had the existing machine been batons to be sold at a 40 percent discount off the regular price. The unit relevant cost per unit for
retained for five years. Harding's decision is
a. $150,000 lower a. $1.50.
b. $170,000 lower b. $2.50.
c. $230,000 lower c. $3.00.
d. $150,000 higher d. $4.00.
ANS: A ANS: B
Annual savings in operating costs $ 150,000 The relevant costs will be the variable costs per unit.
Purchase of new machine (400,000) $750,000/300,000 units = $2.50/unit
Disposal of existing machine 80,000
Disposal of new machine in 5 years 20,000
DIF: Moderate OBJ: 10-6
Difference in profit $(150,000)
======== 57. The objective in solving the linear programming problem is to determine the optimal levels of the
a. coefficients.
DIF: Moderate OBJ: 10-1 b. dependent variables.
c. independent variables.
d. slack variables.

ANS: C DIF: Easy OBJ: 10-8

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58. A linear programming problem can have
a. no more than three resource constraints. 64. Which of the following items continuously checks for an improved solution from the one previously
b. only one objective function. computed?
c. no more than two dependent variables for each constraint equation.
d. no more than three independent variables. An algorithm Simplex method

ANS: B DIF: Easy OBJ: 10-8 a. yes yes

b. yes no
59. A linear programming model must c. no no
a. have only one objective function. d. no yes
b. have as many independent variables as it has constraint equations.
c. have at least two dependent variables for each equation. ANS: A DIF: Easy OBJ: 10-8
d. consider only the constraints that can be expressed as inequalities.
65. Which of the following variables is associated with the "less than or equal to" constraints?
ANS: A DIF: Easy OBJ: 10-8
Surplus Slack
60. In a linear programming problem, constraints are indicated by
a. the independent variables. a. yes yes
b. the dependent variables in the constraint equations. b. yes no
c. the coefficients of the objective function. c. no yes
d. iso-cost lines. d. no no

ANS: B DIF: Easy OBJ: 10-8 ANS: C DIF: Easy OBJ: 10-8

61. The feasible region for an LP solution is 66. ____________________ programming relates to a variety of techniques that are used to allocate
a. defined only by binding constraints on the optimal solution. limited resources among activities to achieve a specific objective.
b. defined as the solution space that satisfies all constraints. a. Integer
c. identified by iso-cost and iso-profit lines. b. Input-output
d. identified by all of the above. c. Mathematical
d. Regression
ANS: B DIF: Easy OBJ: 10-8
ANS: C DIF: Easy OBJ: 10-8
62. A linear programming solution
a. always involves more than one constraint. 67. The graphical approach to solving a linear programming problem becomes much more complex when
b. always involves a corner point. there are more than two
c. is the one with the highest vertex coordinates.
d. is provided by the input-output coefficients. constraints decision variables
ANS: B DIF: Easy OBJ: 10-8
a. yes no
b. no yes
63. The objective function and the resource constraints have the same
c. yes yes
a. dependent variables.
d. no no
b. coefficients.
c. independent variables. ANS: C DIF: Easy OBJ: 10-8
d. all of the above.
68. The feasible region for a graphical solution to a profit maximization problem includes
ANS: C DIF: Easy OBJ: 10-8
a. all vertex points.
b. all points on every resource constraint line.
c. the origin.
d. all of the above.

ANS: C DIF: Easy OBJ: 10-8

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 Uncommon Products Corporation
73. Consider the following linear programming problem and assume that non-negativity constraints apply
In the two following constraint equations, X and Y represent two products (in units) produced by the to the independent variables:
Uncommon Products Corporation.
Max CM = $14X + $23Y
Constraint 1: 3X + 5Y < 4,200 Subject to
Constraint 2: 5X + 2Y > 3,000 Constraint 1: 4X + 5Y < 3,200
Constraint 2: 2X + 6Y < 2,400
69. Refer to Uncommon Products Corporation. What is the maximum number of units of Product X that
can be produced? Which of the following are feasible solutions to the linear programming problem?
a. 4,200 a. X = 600, Y = 240
b. 3,000 b. X = 800, Y = 640
c. 600 c. X = 0, Y = 400
d. 1,400 d. X = 1,200, Y = 0

ANS: D ANS: C
1,400 units is the only amount that will not cause Constraint 1 to be violated. This is the only solution that does not violate Constraints 1 or 2.
Constraint 1: 4(0) + 5(400) = 2,000 < 3,200
DIF: Moderate OBJ: 10-8 Constraint 2: 2(0) + 6(400) < 2,400 < 2,400

70. Refer to Uncommon Products Corporation. What is the feasible range for the production of Y? DIF: Moderate OBJ: 10-8
a. 840 to 1,500 units
b. 0 to 840 units 74. Contracting with vendors outside the organization to obtain or acquire goods and/or services is called
c. 0 to 631 units a. target costing.
d. 0 to 1500 units b. insourcing.
c. outsourcing.
ANS: B d. product harvesting.
840 units is the most that can be produced without violating Constraint 1.
ANS: C DIF: Easy OBJ: 10-3
DIF: Moderate OBJ: 10-8
75. Which of the following activities within an organization would be least likely to be outsourced?
71. Refer to Uncommon Products Corporation. A solution of X = 500 and Y = 600 would violate a. accounting
a. Constraint 1. b. data processing
b. Constraint 2. c. transportation
c. both constraints. d. product design
d. neither constraint. ANS: D DIF: Easy OBJ: 10-3
ANS: A
This solution would yield a result of 4,500; this violates Constraint 1. 76. An outside firm selected to provide services to an organization is called a
a. contract vendor.
b. lessee.
DIF: Easy OBJ: 10-8 c. network organization.
d. centralized insourcer.
72. One constraint in an LP problem is: 12X + 7Y > 4,000. If the optimal solution is X = 100 and Y =
500, this resource has ANS: A DIF: Easy OBJ: 10-3
a. slack variable of 700.
b. surplus variable of 700. 77. Costs forgone when an individual or organization chooses one option over another are
c. output coefficient of 700. a. budgeted costs.
d. none of the above. b. sunk costs.
c. historical costs.
ANS: B d. opportunity costs.
The solution to the constraint is 4,700, a surplus variable of 700.
ANS: D DIF: Easy OBJ: 10-1
DIF: Easy OBJ: 10-8

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 5. What is the relationship between scarce resources and an organization's production capacity?
78. Which of the following costs would not be accounted for in a company's recordkeeping system?
a. an unexpired cost ANS:
b. an expired cost In the long run, capacity is likely to be constrained by two fundamental resources: labor and
c. a product cost machinery. However, in the short run, additional constraints can push capacity to levels below labor
d. an opportunity cost and machine capacity. Constraints can be induced by raw material shortages, interruptions in
distribution channels, labor strikes in the plants of suppliers of important components, or governmental
ANS: D DIF: Easy OBJ: 10-1 restrictions on markets (gas rationing, Quotas).

SHORT ANSWER DIF: Moderate OBJ: 10-4

1. What are three characteristics of relevant information? 6. Under what circumstances is the sum of variable production and selling costs the appropriate minimum
price for special orders?
ANS:
Relevant information must be: (1) associated with the decision under consideration; (2) be important to ANS:
the decision maker; and (3) have a connection to or bearing on some future endeavor. Variable costs would serve as the bottom price for a special order only if the special order could be
produced on production capacity that would otherwise be idle. Whenever presently employed capacity
DIF: Easy OBJ: 10-1 is partially or wholly surrendered to produce a special order, the special order price would be based on
both variable costs and the profit sacrificed on the best alternative use of the capacity.
2. Why is depreciation expense irrelevant to most managerial decisions, even when it is a future cost?
DIF: Moderate OBJ: 10-6
ANS:
Depreciation expense is simply the systematic write-off of a sunk cost (the cost of a long-lived asset). 7. Why are fixed costs generally more relevant in long-run decisions than short-run decisions?
Depreciation expense is therefore always irrelevant unless it pertains to an asset that is not yet
acquired. ANS:
In the long run, all costs are relevant. In the short run, many costs that apply to the existing production
DIF: Moderate OBJ: 10-2 technology are sunk. In particular, depreciation charges and lease payments on long-term assets are
unavoidable. In the long run, these assets are replaced and, thus their associated costs are relevant in
3. What is an opportunity cost and why is it a relevant cost? the replacement decision.

ANS: DIF: Moderate OBJ: 10-2

An opportunity cost is not a "cost" in the traditional out-of-pocket sense. Opportunity costs are benefits
that are sacrificed to pursue one alternative rather than another. Once an alternative is selected, the 8. Define and discuss outsourcing.
opportunity costs associated with that alternative will not appear directly in the accounting records of
the firm as other costs of that alternative will. These costs are, however, relevant because the company ANS:
is giving up one set of benefits to accept a second set. Rational decision making assumes that the Outsourcing occurs when an organization "farms out" some of its normal business activities or
chosen alternative provides the greater benefit. processes. Several areas that are most frequently outsourced by an organization include payroll,
accounting, transportation, and possibly legal. When a company outsources some of its functions, it is
DIF: Moderate OBJ: 10-1 able to divert more energy to those areas that produce a firm's core competencies or have the ability to
create revenues for the firm.
4. Define segment margin and explain why it is a relevant measure of a segment's contribution to overall
organizational profitability. DIF: Moderate OBJ: 10-3

ANS:
Segment margin is the amount of income that remains after deducting all avoidable (both variable and
fixed) costs from sales. This measure is the appropriate gauge of a segment's viability because it is a
direct measure of how total organizational profits would change if the segment was discontinued.

DIF: Moderate OBJ: 10-7

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 9. What are some factors that a company must consider when deciding to raise or lower sales prices on
products? ANS:
The company’s alternatives are to sell the corn as a grain or as alcohol. This decision can be made by
ANS: comparing the incremental costs to convert the grain to alcohol to the increase in price he can receive
Quantitative factors include the new contribution margin per unit of the product, short-term and for marketing the crop as alcohol rather than grain. By converting the crop to alcohol, the company
long-term changes in demand and production volume because of the price change, and the best use of a increases total revenue by $0.75 per bushel ($2.60 - $1.85) and it incurs additional costs of $0.50
company’s scarce resources. ($0.60 for the additional processing, less the $0.10 savings on the variable grain marketing costs).
Qualitative factors include the impact of changes on customer goodwill toward the company, customer Thus, by converting the grain to alcohol, the company could increase net income by $0.25 per bushel.
loyalty toward company products, and competitors’ responses to the firm’s new pricing structure.
DIF: Moderate OBJ: 10-5
DIF: Moderate OBJ: 10-5
3. Refer to Agri-Magic Corporation. Assume that the current date is March 15. On this date, Agri-Magic
Corporation must make a decision as to whether it is financially better off to plant a certain farm to
PROBLEM corn, leave the land idle (no income is derived from idle land), or rent the land to another farmer for
$50 per acre. Corn prices have been severely depressed in recent years and Agri-Magic Corporation's
Agri-Magic Corporation best guess is that corn prices will be around $2.00 per bushel at the time the crop is ready for harvest.
What should the company do? Show calculations.
Agri-Magic Corporation grows corn in rural areas of the South. Agri-Magic's costs per bushel of corn
(based on an average yield of 130 bushels per acre) follow: ANS:
It has already been determined (answer to Problem #1) that planting corn is preferred to leaving the
Direct material $1.10
land idle (by $13 per acre). By renting the land, Agri-Magic Corporation is even better off. Under the
Direct labor 0.40
rental alternative, Agri-Magic Corporation is $37 per acre better off than if he plants corn ($50 - $13).
Variable overhead 0.30
By renting the land, the company avoids all costs except the fixed production costs ($0.60 per bushel
Fixed overhead 0.60
or $78 per acre).
Variable selling costs 0.10
Fixed selling costs 0
DIF: Moderate OBJ: 10-5
Agri-Magic defines direct material costs as seed, fertilizer, water, and other chemicals. The variable 4. New Iberia Corporation makes and sells the "Tabasco Maiden”, a wall hanging depicting a magical
overhead costs represent maintenance and repair costs of machinery. The fixed overhead costs are pepper plant. The Tabasco Maidens are sold at specialty shops for $50 each. The capacity of the plant
completely comprised of depreciation expense on machinery and real estate taxes. is 15,000 Maidens per year. Costs to manufacture and sell each wall hanging are as follows:
1. Refer to Agri-Magic Corporation. Assume that the current date is March 15. On this date, Agri-Magic Direct material $ 5.00
must make a decision as to whether it is financially better off to plant a certain farm with corn or leave Direct labor 6.00
the land idle (no income is derived from idle land). Corn prices have been severely depressed in recent Variable overhead 8.00
years and Agri-Magic’s best guess is that corn prices will be around $2.00 per bushel at the time the Fixed overhead 10.00
crop is ready for harvest. Should the company plant corn or leave the land idle? Explain. Variable selling expenses 2.50

ANS: New Iberia Corporation has been approached by an Texas company about purchasing 2,500 Tabasco
The company should make their decision by comparing the incremental income from planting the corn Maidens. The company is currently making and selling 15,000 per year. The Texas company wants to
crop to the incremental expenses that would be incurred to grow, harvest, and market the crop. The attach its own Lone Star label, which increases costs by $.50 each. No selling expenses would be
incremental revenue is simply the $2.00 per bushel and the incremental costs are all variable costs incurred on this order. The corporation believes that it must make an additional $1 on each Tabasco
($1.10 + $0.40 + $0.30 + $0.10 = $1.90). Based on this comparison, the company would be $13 per Maiden to accept this offer.
acre better off to plant than to let the land remain idle.
a What is the opportunity cost per unit of selling to the Texas company?
DIF: Moderate OBJ: 10-3 .
b What is the minimum selling price that should be set?
2. Refer to Agri-Magic Corporation. Assume for this question only that the company decided to plant the .
corn. A local oil refiner has approached the company about converting the crop to grain alcohol (used
to make gasohol) rather than selling the grain to the local grain elevator. If Agri-Magic converts the
ANS:
grain to alcohol, it will incur additional costs of $0.60 per bushel, and the company will be able to sell
the crop to the oil refiner for the equivalent of $2.50 per bushel. Otherwise, the company can sell the
a. Opportunity cost = Selling price minus total variable costs $50 - ($5 + $6 + $8 + $2.50) =
corn crop to the local grain elevator for $1.85 per bushel. If Agri-Magic elects to sell the grain to the
$28.50
refinery, the company will not incur the variable selling costs. What should the company do? Support
your answer with calculations.

402 403
 b. Direct material ($5.00 + $.50) $ 5.50
Direct labor 6.00
Variable overhead 8.00
Fixed overhead 10.00
Variable selling 0
Opportunity cost [from (a) less
fixed overhead included] 18.50
Extra amount required to accept offer 1.00
Minimum price $49.00

DIF: Moderate OBJ: 10-1

5. Mighty Mike’s Accounting Service provides two types of services: audit and tax. All company
personnel can perform either service. In efforts to market its services, Mighty Mike relies on radio and
billboards for advertising. Information on Mighty Mike's projected operations for the coming year
follows:

Audit Taxes
Revenue per billable hour $35 $30
Variable cost of professional labor 25 20
Material cost per billable hour 2 3
Allocated fixed costs per year 100,000 200,000
Projected billable hours 14,000 10,000

a What is Mighty Mike’s projected profit or (loss)?

.
b If $1 spent on advertising could increase either audit services billable time by 1
. hour or tax services billable time by 1 hour, on which service should the
advertising dollar be spent?

ANS:

a. Audit Tax Total

Revenue:
14,000 × $35 $490,000 $ 490,000

10,000 × $30 $ 300,000 300,000

Variable Costs:
Labor:
14,000 × $25 (350,000) (350,000)

10,000 × $20 (200,000) (200,000)

Material:
14,000 × $2 (28,000) (28,000)

10,000 × $3 (30,000) (30,000)

Contribution margin $112,000 $ 70,000 $ 182,000
Fixed costs (100,000) (200,000) (300,000)
Profit (loss) $ 12,000 $(130,000) $(118,000)

404