Exam 2 Accounting Questions

additional revenue is greater than relevant costs.

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.

20,000 decrease

A condensed income statement for Gilbert, Inc. follows: (amounts are shown in thousands) Products F G H Total Sales (total) $ 200 $ 180 $ 320 $ 700 Total Unit-level Costs (120 ) (160 ) (200 ) (480 ) Contribution Margin 80 20 120 220 Company-wide Facility-Level Costs (25 ) (30 ) (40 ) (95 ) Income (Loss) $ 55 $ (10 ) $ 80 $ 125 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

avoidable cost of operating the segment.

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.

fixed

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 variable. mixed. fixed. strategic.

variable

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 mixed. fixed. strategic. variable.

decrease 100,000

Based on the segment income statement below, Chips, Inc. is considering eliminating its Barbecue Division line. Revenue from Barbecue Division sales $ 500,000 Salaries for Barbecue Division workers (100,000 ) Direct material (300,000 ) Sunk costs (equipment depreciation) (75,000 ) Allocated company-wide facility-sustaining costs (50,000 ) Net loss $ (25,000 ) If Barbecue Division were eliminated, profitability would increase $25,000. increase $525,000. decrease $100,000. decrease $25,000.

400,000

Based on the segment income statement below, Chips, Inc. is considering eliminating its Barbecue Division line. Revenue from Barbecue Division sales $ 500,000 Salaries for Barbecue Division workers (100,000 ) Direct material (300,000 ) Sunk costs (equipment depreciation) (75,000 ) Allocated company-wide facility-sustaining costs (50,000 ) Net loss $ (25,000 ) If the Division is eliminated, what is the total amount of avoidable cost? $400,000. $475,000. $525,000. $550,000.

$11,200 more than if the switches are purchased.

Benitez Company currently outsources a relay switch that is a component in one of its products. The switches cost $21 each. The company is considering making the switches internally at the following projected annual production costs: Unit-level material cost $ 4 Unit-level labor cost $ 3 Unit-level overhead $ 2 Batch-level set-up cost (6,000 units per batch) $ 26,000 Product-level supervisory salaries $ 38,000 Allocated facility-level costs $ 21,000 The company expects an annual need for 6,000 switches. If the company makes the product, it will have to utilize factory space currently being leased to another company for $1,600 a month. If the company decides to make the parts, total costs will be: $32,200 more than if the switches are purchased. $26,800 less than if the switches are purchased. $11,200 more than if the switches are purchased. $21,000 less than if the switches are purchased.

15,000 units

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 3,750 units. 5,000 units. 15,000 units. none of the above.

The company will lose $5,500 on the job.

Clean, Inc. cleans and waxes floors for commercial customers. The company is presently operating at less than capacity with equipment and employees idle at times. The company recently received an order from a potential customer outside the company's normal geographic service region for a price of $17,000. The size of the proposed job is 30,000 square feet. The company's normal service costs are as follows: Unit-level materials $ 0.26 per square foot Unit-level labor $ 0.33 per square foot Unit-level variable overhead $ 0.16 per square foot Facility-level overhead Allocated at $0.18 per square foot If the company accepts the special offer: The company will lose $700 on the job. The company will lose $5,500 on the job. The company will lose $10,900 on the job. The company will earn $9,200 on the job.

83%

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: 83% 15,000 sets 19% 6,000 sets

40,000 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 must Green produce and sell to break even? 40,000 units 48,000 units 46,667 units none of the above.

none of the above

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: $66. $36. $30. none of the above.

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

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.

10,000

Harcourt Manufacturing (HM) has the capacity to produce 10,000 fax machines per year. HM currently produces and sells 7,000 units per year. 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? Multiple Choice $10,000 $112,000 ($10,000) ($112,000)

Yes, but only if qualitative factors are favorable.

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-sustaining costs are $50,000 and $65,000, respectively. 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.

outsourcing decision

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.

segment elimination 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.

opportunity costs

Jack currently works for a law firm full time and earns $60,000 a year. He is thinking of quitting his job to pursue a medical degree. Medical school will cost him $100,000 per year. If Jack quits his job and goes to medical school, the salary he currently earns would be considered what type of cost? Opportunity cost Fixed cost Sunk cost Irrelevant cost

the company's gross margin is $100,000, while its contribution margin is $60,000.

Omega Company has sales of $300,000 and cost of goods sold of $200,000. The cost of goods sold is a variable cost. The Company incurred $20,000 of fixed operating expenses and $40,000 of variable operating expenses. Based on this information the company's gross margin is $100,000, while its contribution margin is $60,000. net income is $40,000 under the gross margin format and $100,000 under the contribution margin format. net income is $100,000 under the gross margin format and $40,000 under the contribution margin format. the company's gross margin is $60,000, while its contribution margin is $100,000.

75,000

QRC Company is trying to decide which one of two alternatives it will accept. The costs and revenues associated with each alternative are listed below: Alternative A Alternative B Projected revenue $ 195,000 $ 270,000 Unit-level costs 37,000 48,000 Batch-level costs 24,500 36,000 Product-level costs 27,000 29,000 Facility-level costs 22,000 24,500 What is the differential revenue for this decision? $195,000 $270,000 $75,000 $100,000

As volume decreases fixed cost per unit increases.

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

the $119,00 current market value of original site is relevant to the decision.

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. Incorrect 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.

are not considered when evaluating new proposals.

Sunk costs: are not considered when evaluating new proposals. are relevant. differ among the alternatives. impact the future.

special order decision

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.

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 false.

revenue is equal to the total of fixed plus variable cost.

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

Both of the answers are characteristics of relevant information.

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.

100,000 cost decrease

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

Buying the units would increase U-RIDE's cost by $13 per unit.

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. Current production information follows: Unit-level material and labor $ 175 Facility-level depreciation of manufacturing equip. $ 5,000 /month Product-level engine production supervisor's salary $ 2,000 /month Annual facility-level utilities $ 15,000 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.

The cost of buying the engines is $5 per unit less than the relevant cost of making the units.

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. Current production information follows: Unit-level material and labor $ 175 Facility-level depreciation of manufacturing equip. $ 5,000 /month Product-level engine production supervisor's salary $ 2,000 /month Annual facility-level utilities $ 15,000 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? e 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.

60 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: 60 units. 300 units. 240 units. 120 units.

sunk costs

Which of the following are not relevant to decision making? replacement cost incremental cost opportunity cost sunk cost

all of the formulas

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

The cost of the salary for the company president

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

The cost of plant security.

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

An outsourcing decision typically affects only product-level costs.

Which of the following statements is incorrect? An outsourcing decision typically affects only product-level costs. Eliminating a business segment often allows a company to avoid some facility-level costs. Facility-level costs generally are not relevant in special order decisions. Accepting a special order will involve incurring unit-level costs.

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

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.