Cost Analysis Chapter 6

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 if HM accepted the special order A: $10,000 B: $112,000 C: ($10,000) D: ($112,000)

A: $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? A: $100,000 cost decrease B: $100,000 cost increase C: $200,000 cost increase D: $1,000,000 cost increase

A: $100,000 cost decrease

Based on the segment income statement below, Chips, Inc. is considering eliminating the BBQ Division line. Revenue from BBQ Division sales: $500,000 Salaries for BBQ 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? A: $400,000 B: $475,000 C: $525,000 D: $550,000

A: $400,000

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 costs in this situation? A: $600,000 B: $200,000 C: $400,000 D: $500,000

A: $600,000

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) A: HM should reject the offer because accepting it will reduce profitability by $2,000 B: HM should accept the offer because accepting it will contribute $10,000 to profit C: HM should reject the office because accepting it will reduce profitability by $10,000 D: HM should accept the office because accepting it will contribute $12,000 to profit

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

A cost that is relevant to one decision may be irrelevant ti a different decisions. The statement is: A: True B: False

A: True

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 yea. 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 A: acquire the new crane because it has lower relevant costs B: acquire the new crane because it is newer and has a longer useful life C: retain the old crane because it has lower operating expenses D: retain the old crane because it has a higher market value

A: acquire the new crane because it has lower relevant costs

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

A: additional revenue is greater than relevant costs

The Lamp Company (TLC) currently makes ans sells approx 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 is faced with a(n) A: special order decision B: asset replacement decision C: outsourcing information D: segment elimination decision

A: special order decision

U-RIDE , Inc currently produces the electric engines that are used in golf carts made ans sold by the company. Electo has offered to sell the electric engines to U-RIDE at a price of $200 each. Current Production Information: Unit-level material and labor: $175 Facility-level depreciation of manufacturing equipment: $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: A: U-RIDE should make the engines for a cost savings of $25 per unit B: Buying the units would increase U-RIDE's cost by $13 per unit C: U-RIDE has avoidable cost of greater than $200 per unit ans should therefore buy the engines D: Buying the units would increase profitability by $38 per unit

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

Hamilton Company is considering replacing old equipment with the new equipment. Both pieces if equipment are expected to have a remaining useful like of 4 years. The total cost of operating each piece of equipment over its four year life is summarized below. Old Equipment: Original cost: $95,000 Original expected salvage value: $15,000 Current market value: $60,000 Current expected salvage value: $5,000 Depreciation expenses (13,750x4): $55,000 Other operating expenses (20,000x4): $80,000 New Equipment: Purchase price: $70,000 Expected salvage value: $12,000 Depreciation expenses ($14,500x4): $58,000 Other operation expenses ($21,000x4): $84,000 Based on this information, Hamilton should: A: acquire the new equipment because it has the lower relevant cost B: retain the existing equipment because it has lower relevant cost C: acquire the new equipment because it is newer and has a longer useful life. D: retain the existing equipment because it has a higher market value

B: retain the existing equipment because it has lower relevant cost

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

B: segment elimination 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 $1,000 loss on the disposal of the land ($120-000-$119-000). Based on this information. A: the $1,000 loss is relevant to the decision B: the $119,000 current market value of the original site is relevant to the decision C: the $125,000 cost of the replacement property is not relevant to the decision D: the $5,000 difference between the cost of the two properties ($125,000-$120,000) is relevant to the decision

B: the $119,000 current market value of the original site is relevant to the decision

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

B: the cost of plant security

Which of the following is a facility-level cost? A: the cost of direct materials B: the cost of the salary for the company president C: the cost of designing a new product D: the cost of setting up the production line to make a patch of products

B: the cost of the salary for the company president

Which of the following items would not be relevant to an asset replacement decision? A: the market value of the new asset B: The salvage value of the asset being replaced C: The book value of the asset being replaced D: The cost of operating a new asset

C: The book value of the asset being replaced

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: A: the original cost of the asset is relevant to a replacement decision. B: the company should not replace the machine because doing so would require recognition of a $1,000 loss on the disposal of the machine. C: The market value of the machine is relevant to a replacement decision D: the book value of the machine is relevant to a replacement decision

C: The market value of the machine is relevant to a replacement decision

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

C: Yes, but only if qualitative factors are favorable

To be relevant, information must A: differ among the alternatives B: affect the present or future conditions C: both of the answers are characteristics of relevant information D: none of the answers are characteristics of relevant information

C: both of the answers are characteristics of relevant information

Based on the segment income statement below, Chips, Inc. is considering eliminating the BBQ Division line. Revenue from BBQ Division sales: $500,000 Salaries for BBQ 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 BBQ Division were eliminated, profitability would: A: increase $25,000 B: increase $525,000 C: decrease $100,000 D: decrease $25,000

C: decrease $100,000

Hector, Inc currently makes and sells approx 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) A: special order decision B: asset replacement decision C: outsourcing decision D: segment elimination decision

C: outsourcing decision

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

D: All of the answers describe potential qualitative factors with outsourcing decisions

A segment elimination decision involves a comparison between revenue that will be lost through the elimination and the: A: total cost of operating the segment B: fixed cost of operating the segment C: outsourcing cost of operating the segment D: avoidable cost of operating the segment

D: avoidable cost of operating the segment

Which of the following are not relevant to decision making? A: replacement cost B: incremental cost C: opportunity cost D: sunk cost

D: sunk cost

U-RIDE , Inc currently produces the electric engines that are used in golf carts made ans sold by the company. Electo has offered to sell the electric engines to U-RIDE at a price of $200 each. Current Production Information: Unit-level material and labor: $175 Facility-level depreciation of manufacturing equipment: $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 profitability producing and selling 2,000 engines annually. Based on this information, which of the following is true? A: the $36,000 is not relevant because it is an estimate B: buying the units would increase U-RIDE's cost by $13 per unit C: U-RIDE has avoidable cost of less that $200 per unit ans should therefore buy the engines D: the cost of buying these engines is $5 per unit less than the relevant cost of making the units

D: the cost of buying these engines is $5 per unit less than the relevant cost of making the units