ACCT 2200 Test 2

Harcourt Manufacturing (HM) has the capacity to produce 10,000 fax machines per year. HM currently produces and sells 7,000 units per year. The fax machines normally sell for $100 each. Modem Products has offered to buy 2,000 fax machines from HM for $60 each. Unit-level costs associated with manufacturing the fax machines are $15 each for direct labor and $40 each for direct materials. Product-level and facility-level costs are $50,000 and $65,000, respectively. How much would profit increase (decrease) if HM accepted this special order? $10,000 $112,000 ($10,000) ($112,000)

$10,000 Revenue (2,000 x $60) = $120,000 Unit-Level Costs (2,000 x ($15 + $40)) = ($110,000) Profit = $10,000

Tom's Toolery is operating at 80% of its productive capacity. It is currently paying $20 per unit for a part used in its manufacturing operation. Tom's estimates it could make the part internally for a total cost of $24 per unit, consisting of $18 of unit-level production costs and $6 of facility-level costs that are currently attributed to other products. Tom's usually purchases 50,000 units of the part each year. These units could be manufactured using Tom's excess capacity. What is the effect on cost if the company decides to start making the part? $100,000 cost decrease $100,000 cost increase $200,000 cost increase $1,000,000 cost increase

$100,000 cost decrease Cost to purchase $20 Relevant cost to make* 18 Decrease in cost per unit - $2

Gilbert's management is considering whether to eliminate manufacturing product G at the beginning of the next year. The elimination will have no effect on the sales or unit-level costs of products F and H. The change in income that would result from eliminating product G is $30,000 increase $20,000 decrease $10,000 increase $10,000 decrease

$20,000 decrease Product G is currently contributing $20,000 to profitability ($180,000 Revenue - $160,000 avoidable cost). The facility-level costs are not avoidable regardless of whether Product G is eliminated. If the Product G is eliminated, company-wide profitability will decrease by $20,000.

Jason Company is considering replacing equipment which originally cost $600,000. New equipment costs $500,000 and the old equipment can be sold for $400,000. What is the sunk cost in this situation? $600,000 $200,000 $400,000 $500,000

$600,000 The original cost of the old equipment is the result of a historical event that cannot be changed by current or future action. In other words, you cannot change the past. Therefore the original cost of old equipment is a sunk cost that is not relevant to current or future decisions.

To be relevant, information must

-differ across alternatives -affect present and future decisions

Krauss Company purchased a construction crane three years ago for $180,000. The crane has a current book value of $100,000 and operating expenses excluding depreciation of $12,000 per year. The current market value of this crane is $85,000. If the old crane is kept five more years, its salvage value would be $10,000. A new crane would cost $70,000, have a useful life of five years, and would require $13,000 per year in operating expenses excluding depreciation. The new crane has a salvage value of $20,000 after five years. Based on this information, Krauss should acquire the new crane because it has the lower relevant cost. acquire the new crane because it is newer and has a longer useful life. retain the old crane because it has lower operating expenses. retain the old crane because it has a higher market value.

Acquire the new crane because it has the lower relevant cost As shown in the following table the relevant cost of acquiring and operating the new crane is lower than the cost of retaining and operating the old crane. Therefore Krauss should acquire the new crane. Old Crane: OC ($85k market - 10k salvage) = 75k Operating expense (12k x 5) = 60k New crane: OC (70k - 20k) = 50k Operating expense = 13k x 5 = 65k

Which of the following statements is true regarding potential qualitative issues affecting outsourcing decisions? Outsourcing reduces a manufacturer's vertical integration. Low balling refers to the practice of offering lower prices initially and then raising prices when the buyer becomes dependent. Outsourcing can cause morale issues for the employees who are not directly affected by the practice. All of the answers describe potential qualitative factors associated with outsourcing decisions.

All of the answers describe potential qualitative factors associated with outsourcing decisions.

A segment elimination decision involves a comparison between revenue that will be lost through the elimination and the total cost of operating the segment. fixed cost of operating the segment. outsourcing costs of operating the segment. avoidable cost of operating the segment.

Avoidable cost of operating the segment Only the costs that can be avoided or saved by the decision to eliminate are relevant to the revenue versus cost comparison.

To be relevant, information must: Differ among the alternatives. Affect present or future conditions. Both of the answers are characteristics of relevant information. None of the answers are characteristics of relevant information.

Both of the answers are characteristics of relevant information.

U-RIDE, Inc. currently produces the electric engines that are used in golf carts made and sold by the Company. Electco has offered to sell the electric engines to U-RIDE at a price of $200 each. U-RIDE is currently operating profitably producing and selling 2,000 engines a year using 90% of its manufacturing capacity. Which of the following is true? U-RIDE should make the engines for cost savings of $25 per unit. Buying the units would increase U-RIDE's cost by $13 per unit. U-RIDE has avoidable costs of greater than $200 per unit and should therefore buy the engines. Buying the units would increase profitability by $38 per unit.

Buying the units would increase U-RIDE's cost by $13 per unit. Unit-level material cost - $175 Product-level Cost [($2,000 x 12 months) ÷ 2,000 engines] -12 Total - $187 *The depreciation is a sunk cost that is not relevant. The facility-level utility cost will be incurred regardless of whether the motors are made or outsourced and are therefore, not relevant. If URIDE outsources the engines the company will incur additional cost of $13 per unit ($200 to buy - $187 to make).

Which of the following is least likely to be classified as a unit-level cost? Cost of direct materials Cost of plant security Cost of inspecting items produced Cost of direct labor

Cost of plant security The cost of providing security for the plant facility does not change when increases or decreases in the number of units made occur.

If Barbecue Division were eliminated, profitability would increase $25,000. increase $525,000. decrease $100,000. decrease $25,000.

Decrease $100,000 Rev from sales - $500,000 Avoidable costs: Salaries for workers - ($100,000) Direct materials - ($300,000) Contribution to profit - $100,000

Harcourt Manufacturing (HM) has the capacity to produce 10,000 fax machines per year. HM currently produces and sells 7,000 units per year. HM currently leases its excess capacity for a rental fee of $12,000. The fax machines normally sell for $100 each. Modem Products has offered to buy 2,000 fax machines from HM for $60 each. Unit-level costs associated with manufacturing the fax machines are $15 each for direct labor and $40 each for direct materials. Product-level and facility-level costs are $50,000 and $65,000, respectively. Based on this information (ignore qualitative characteristics) HM should reject the offer because accepting it will reduce profitability by $2,000. HM should accept the offer because accepting it will contribute $10,000 to profit. HM should reject the offer because accepting it will reduce profitability by $10,000. HM should accept the offer because accepting it will contribute $12,000 to profit.

HM should reject the offer because accepting it will reduce profitability by $2,000.

What is total avoidable cost?

If the Division is eliminated Chips, Inc. could avoid paying for the salaries and direct materials incurred to make the barbecue chips. The sunk cost and the facility-level cost cannot be avoided regardless of whether the Division is eliminated. Total avoidable cost is $400,000 ($100,000 salaries + $300,000 materials).

The Lamp Company (TLC) currently makes and sells approximately 5,000 lamps per year. TLC recently received an offer from a new customer to purchase 500 lamps. TLC has the capacity to make the additional lamps but is reluctant to accept the offer because the price offered is significantly below the normal selling price. Based on this information TLC if faced with a(n) special order decision. asset replacement decision. outsourcing decision. segment elimination decision.

Special order decision

which of the follwing are not relevent to decision making

Sunk Costs Sunk costs are based on historical events that cannot be changed by current or future events. In other words, you cannot change the past. In other words, the past is the same regardless of which alternatives are selected in a current decision. Since sunk costs do not differ between the alternatives and do not affect present or future conditions they are not relevant for decision making purposes.

Which of the following are not relevant to decision making? Replacement cost Incremental cost Opportunity cost Sunk cost

Sunk cost Sunk costs are based on historical events that cannot be changed by current or future events. In other words, you cannot change the past. In other words, the past is the same regardless of which alternatives are selected in a current decision. Since sunk costs do not differ between the alternatives and do not affect present or future conditions they are not relevant for decision making purposes.

Steel City Company (SCC) paid $120,000 to purchase land that it planned to use as a future building site. A short time later the Company was approached with an opportunity to purchase a better property. The new property cost $125,000. After considering the alternative SCC decided to reject the offer because the Company would be required to sell the original site for $119,000 thereby incurring a $1,000 loss on the disposal of the land ($120,000 - $119,000).Based on this information the $1,000 loss is relevant to the decision. the $119,00 current market value of original site is relevant to the decision. the $125,000 cost of the replacement property is not relevant to the decision. the $5,000 difference between the cost of the two properties ($125,000 - $120,000) is relevant to the decision.

The $119,00 current market value of original site is relevant to the decision. The $1,000 loss ($120,000 - $119,000) and the $5,000 dollar difference between the cost of the original site and the cost of the replacement property are not relevant because these items are based on the historical cost of original site which is a sunk cost. The current market value of the old property ($119,000) and the cost of the replacement property ($125,000) are both relevant to the decision because they impact the current or future condition of the Company.

Which of the following items would not be relevant to an asset replacement decision? The market value of the new asset. The salvage value of the asset being replaced. The book value of the asset being replaced. The cost of operating the new asset.

The book value of the asset being replaced The book value is the original cost of the asset minus accumulated depreciation. These are historical facts that cannot be changed by present or future events. In other words, the book value of the old asset is a sunk cost that is not relevant to the decision.

Buying the engines will free up manufacturing capacity that could be used to make a new economy line golf cart that would produce an additional $36,000 profit per year. U-RIDE is currently operating profitably producing and selling 2,000 engines annually. Based on this information, which of the following is true? The $36,000 is not relevant because it is an estimate. Buying the units would increase U-RIDE's cost by $13 per unit. U-RIDE has avoidable costs of less than $200 per unit and should therefore buy engines. The cost of buying the engines is $5 per unit less than the relevant cost of making the units.

The cost of buying the engines is $5 per unit less than the relevant cost of making the units. Unit-level material cost - $175 Product-level Cost [($2,000 x 12 months) ÷ 2,000 engines] - $12 Opportunity Cost ($36,000 ÷ 2,000 engines) - $18 Total - $205 *The depreciation is a sunk cost that is not relevant. The facility-level utility cost will be incurred regardless of whether the motors are made or outsourced and are therefore, not relevant. If U-RIDE continues to make the engines, the Company loses the opportunity to develop the new line of economy carts and therefore incurs a $36,000 annual opportunity cost. Under these circumstances it is $5 cheaper to buy the engines than it is to make them ($200 purchase price versus $205 relevant cost to make).

Which of the following is a facility-level cost? Cost of direct materials The cost of the salary for the company president. Cost of designing a new product The cost of setting up the production line to make a batch of products.

The cost of the salary for the company president. The cost of direct materials is a unit-level cost. The cost of designing a product is a product-level cost. Generally, set-up costs are batch-level costs. They are incurred each time a new batch is produced. They may include the cost of setting up the production machines, training employees, paperwork and ordering cost to provide materials for the batch.

The break-even point is the point at which

Total revenue equals total cost

The amount of net income determined for an accounting period will be the same regardless of whether the income statement is prepared under a contribution margin format used in managerial accounting or the product costing format use in financial accounting. This statement is

True

The amount of net income determined for an accounting period will be the same regardless of whether the income statement is prepared under a contribution margin format used in managerial accounting or the product costing format use in financial accounting. This statement is

True The amount of total cost and net income will be the same regardless of which format is used. The difference between the two formats centers on how costs are categorized.

Should HM accept the special order? Yes, unequivocally. No. Yes, but only if qualitative factors are favorable. No, because GAAP requires all costs to be included in the product.

Yes To be accepted a special order decision must provide both favorable quantitative and qualitative results.

What are sunk costs

a cost that has already been incurred and cannot be recovered.

Green Manufacturing Company produces a product that has a variable cost of $30 per unit. Fixed costs amount to $240,000. The selling price of the product is $36. How many units of product must Green produce and sell to break even? a. 40,000 units b. 48,000 units c. 46,667 units d. none of the above.

a. 40,000 units Break-even = Fixed cost ÷ Contribution margin per unit = $240,000 ÷($36 - $ 30) = 40,000 units.

Unistar Computers makes and sells a unique computer that is designed for a specific market. Cost information relating to that product is shown below: Sales Price $1,500 per unit Variable Costs $1,000 per unit Fixed Costs $120,000 total Unistar expects to make and sell 300 computers. Based on this information, the margin of safety expressed in units is: a. 60 units. b. 300 units. c. 240 units. d. 120 units.

a. 60 units. Explanation: Begin by determining the break-even point. Break-even point = Total Fixed Cost ÷ Contribution Margin Per Unit Break-even point = $120,000 ÷ ($1,500 - $1,000) = 240 units Margin of safety = Budgeted sales - Break-even sales Margin of safety = 300 units - 240 units = 60 units

Derek's Drum Depot (DDD) wants to add a new line of drumsticks to its product line. The following data apply to the new drumsticks line. Budgeted sales 30,000 sets per year Sales price $5 per set Variable costs $3 per set Fixed costs $10,000 per set year The margin of safety for DDD is: a. 83% b. 15,000 sets c. 19% d. 6,000 sets

a. 83% As a percentage: (Budgeted sales − Break-even sales) ÷ Budgeted sales $10,000 fixed costs ÷ ($5 - $3) = 5,000 units [(30,000 sets x $5) − (5,000 sets x $5)] ÷ (30,000 x $5) = 83% In Units: (Budgeted sales − Break-even sales) = (30,000 sets − 5,000 sets) = 25,000 sets

The margin of safety is a measure of the distance between budgeted sales and the break-even point. It can be measured in dollars, in units or as a percentage. a. These statements are true. b. These statements are false. c. Statement one is true and statement two is false. d. Statement one is false and statement two is true.

a. These statements are true.

The graph below depicts Dove Company's monthly warehouse rental cost. (Graph with straight horizontal line parallel to X axis) Based on the graph, the rental cost is a a. fixed cost. b. variable cost. c. mixed cost. d. The answer cannot be determined from the information provided.

a. fixed cost. The line on the graph shows that the cost remains constant and does not change

A company should accept a special order if additional revenue is greater than relevant costs. the avoidable cost of making the products is less than the sunk cost. the company is operating at full capacity. qualitative features are unfavorable.

additional revenue is greater than relevant costs

At a production and sales level of 3,000 units, Bastion Company incurred $60,000 of fixed cost and $36,000 of variable cost. When 4,000 units of product are produced and sold the company's cost per unit is: a. $24. b. $32. c. $27. d. $29.

c. $27. Variable cost per unit = $36,000 ÷ 3,000 units = $12. Total cost at 4,000 units is: Variable (4,000 units x $12) = $48,000 Fixed 60,000 Total = $108,000 Cost per unit = $108,000 ÷ 4,000 units = $27 per unit

Boland Company sells a product that is priced at $20 per unit. The per unit contribution margin is equal to 25 percent of the sales price. If fixed costs amount to $55,000 and the company has a desired profit of $20,000, the number of units that must be sold to earn the desired profit is a. 3,750 units. b. 5,000 units. c. 15,000 units. d. none of the above.

c. 15,000 units. Contribution margin per unit = Sales price x .25 = $20 x .25 = $5 (Fixed cost + Desired profit) ÷ Contribution margin per unit = Units necessary to earn the desired profit. ($55,000 + $20,000) ÷ $5 = 15,000 units

Green Manufacturing Company produces a product that has a variable cost of $30 per unit. Fixed costs amount to $240,000. The selling price of the product is $36. How many units of product would Green be required to sell in order to earn a desired profit of $180,000? a. 71,667 units b. 74,000 units c. 70,000 units d. none of the above.

c. 70,000 units (Fixed cost + desired profit) ÷ Contribution margin per unit = Units necessary to earn desired profit ($240,000 + $180,000) ÷ ($36 - $30) = 70,000 units

Select the true statement: a. As volume increases fixed cost per unit remains constant. b. As volume increases variable cost per unit increases. c. As volume decreases fixed cost per unit increases. d. As volume increases variable cost per unit decreases.

c. As volume decreases fixed cost per unit increases.

At lunchtime, Pete's Chilly Dogs sells hot dogs, chips, and soft drinks from five portable hot dog carts stationed on busy street corners. The depreciation cost on the carts is $1,000 per year for each cart. The company buys supplies (hot dogs, chips, cups, napkins) as needed. The 5 cart operators are each paid $8,000 per year plus 5% of sales revenue. Relative to the number of customers at a particular hot dog stand, the depreciation cost is a. mixed. b. strategic. c. fixed. d. variable.

c. fixed. Since total depreciation charge does not change in relation to the number of customers that buy food at a particular stand, it is a fixed cost.

With respect to a company that is currently earning a profit, a. the lower the margin of safety the less likely a company is to incur a loss. b. the higher the margin of safety the more likely a company is to incur a loss. c. the higher the margin of safety the less likely a company is to incur a loss. d. None of the choices is correct.

c. the higher the margin of safety the less likely a company is to incur a loss.

The following information was drawn from the accounting records of Dark Night, Inc. Sales Revenue (250 @ $600 per unit) $150,000 Cost of Goods Sold: Variable (250 @ $300 per unit) (75,000) Gross Margin 75,000 Sales Commissions (250 @ $20) (5,000) Fixed Period Expenses (9,000) Net Income $61,000 Based on this information Dark Night's contribution margin is: a. $67,000. b. $141,000. c. $61,000. d. $70,000.

d. $70,000. Revenue − Variable Cost = Contribution Margin: $150,000 − $75,000 − $5,000 = $70,000.

Which of the following formulas is used to determine the margin of safety? a. Budgeted sales in units - Break-even sales in units. b. Budgeted sales in dollars - Break-even sales in dollars. c. (Budgeted sales in units - Break-even sales in units) ÷ Budgeted sales in units. d. All of the formulas will yield a measure of the margin of safety.

d. All of the formulas will yield a measure of the margin of safety.

Based on the behavior shown in the following table, which of the following is a variable cost? Cost Per Unit of Materials : 2= 500 3=500 4=500 5=500 Total Labor Cost: 2=3,000 3=4,500 4=6,000 5= 7,500 Total Utilities Cost: 2= 4,500 3= 4,500 4= 4,500 5=4,500 a. Cost Per Unit of Materials b. Total Labor Cost c. Total Utilities Cost d. Both the cost per unit of materials and the total labor cost are variable costs.

d. Both the cost per unit of materials and the total labor cost are variable costs. When volume increases variable cost per unit remains constant. Since the per unit cost of materials remains constant regardless of the number of units produced, it is a variable cost. Also, when volume increases total variable cost increases. Since the total labor cost increases in proportion to increases in the number of units produced it is a variable cost.

Green Manufacturing Company produces a product that has a variable cost of $30 per unit. Fixed costs amount to $240,000. The selling price of the product is $36. The contribution margin per unit is: a. $66. b. $36. c. $30. d. none of the above.

d. none of the above. Contribution Margin = Sales Price - Variable cost = $36 - $30 = $6.

The break-even point is the point at which a. revenue exceeds variable cost but does not fully cover fixed cost. b. revenue exceeds fixed cost but does not fully cover variable cost. c. revenue exceeds the total of fixed plus variable cost. d. revenue is equal to the total of fixed plus variable cost.

d. revenue is equal to the total of fixed plus variable cost. The break-even point is the point where the company earns a zero profit. This is the point where revenue is equal to total cost. Total cost is equal to fixed costs + variable costs.

The contribution margin is determined by subtracting a. variable product and fixed period costs from sales. b. fixed product costs from sales. c. variable product and fixed product costs from sales. d. variable product and variable period costs from sales.

d. variable product and variable period costs from sales. The contribution margin is determined by subtracting all variable costs (product and period) from sales.

At lunchtime, Pete's Chilly Dogs sells hot dogs, chips, and soft drinks from five portable hot dog carts stationed on busy street corners. The depreciation cost on the carts is $1,000 per year for each cart. The company buys supplies (hot dogs, chips, cups, napkins) as needed. The 5 cart operators are each paid $8,000 per year plus 5% of sales revenue. Relative to the number of hot dog carts, the depreciation cost is a. mixed. b. strategic. c. fixed. d. variable.

d. variable. The more hot dog carts in use the greater the total depreciation charge. Since the total amount of depreciation cost increases or decreases in proportion to the number of carts in service, it is a variable cost under these circumstances.

What is salvage value

is the estimated resale value of an asset at the end of its useful life. Salvage value is subtracted from the cost of a fixed asset to determine the amount of the asset cost that will be depreciated.

Hector, Inc. currently makes and sells approximately 5,000 shovels per year. Hector has an offer to buy the shovels it currently makes at a price that is below its cost of making them. Based on this information Hector is faced with a(n) special order decision. asset replacement decision. outsourcing decision. segment elimination decision.

outsourcing decision.

Interrelated sales transactions (sales of one product affects the sales of another product) is a qualitative characteristic most commonly examined in a special order decision. segment elimination decision. make or buy decision. Interrelated sales analysis is not used in any of the decisions identified in the answers provided.

segment elimination decision. Segment elimination decisions frequently include an analysis of interrelated sales transactions. For example, eliminating children's clothing could affect the sales of women's clothing. Women who previously bought something for themselves while shopping for their children may no longer visit the store.

Tucker Company is considering replacing a machine. The machine had originally cost $12,000. It has accumulated depreciation of $4,000. The current market value of the machine is $7,000. Based on this information alone the original cost of the asset is relevant to a replacement decision. the Company should not replace the machine because doing so would require the recognition of a $1,000 loss on the disposal of the machine. the market value of the machine is relevant to a replacement decision. the book value of the machine is relevant to a replacement decision.

the market value of the machine is relevant to a replacement decision. The original cost, book value and the loss are all based on past transactions that cannot be changed by current or future action. They represent sunk costs that are not relevant to a replacement decision.