Chapter 12 Accounting 249 quiz

Costs that differ between alternatives are called _____ costs

relevant

Deciding what to do with a joint product at the split-off point is a(n) ____ or _______ decision

sell, process further

A cost that has already been incurred and cannot be avoided regardless of what a manger decides to do is referred to as a(n) _____ cost

sunk

The following are the unit costs of making and selling an item at a volume of 30,000 units per month (which represents the company's capacity): Direct materials $6.00 Direct labor 12.00 Variable overhead 2.00 Fixed overhead 4.00 Selling and administrative: Variable 8.00 Fixed 10.00 Assume the company has 300 units left over from last year which have small defects. These units will have to be sold at a reduced price as scrap or thrown away. This would have no effect on the company's other sales. The variable selling and administrative costs would have to be incurred to sell the defective units. What cost is relevant as a guide for setting a minimum selling price on these defective units? A) $8 per unit B) $18 per unit C) $32 per unit D) $36 per unit

A) $8 per unit

Canal Company sells its product for $126 per unit. The company's unit product cost, based on the full capacity of 300,000 units, is as follows: Direct materials $24 Direct labor 30 Manufacturing overhead 36 Unit product cost $90 A special order offering to buy 120,000 units has been received from a foreign distributor. The only selling costs that would be incurred on this order would be $18 per unit for shipping. The company has sufficient idle capacity to manufacture the additional units. Two-thirds of the manufacturing overhead is fixed and would not be affected by this order. What is the minimum acceptable selling price per unit that should be used in negotiating a price for the special order? A) $84 B) $90 C) $96 D) $108

A) $84 The fixed manufacturing overhead of $24 per unit (or total manufacturing overhead of $36 x 2/3) is not relevant; it does not differ between the two alternatives. The minimum acceptable selling price per unit (which is the relevant benefit or differential revenue) should be set at the relevant (or incremental) costs of accepting this special order, which include the following: Direct materials $24 Direct labor 30 Variable manufacturing overhead (36 x 1/3) 12 Variable selling costs (shipping) 18 Minimum acceptable selling price $84

The managers of a firm are in the process of deciding whether to accept or reject a special order for one of its products. Which cost is not relevant to this decision? A) Common fixed overhead that will continue if the special offer is not accepted B) Direct materials C) Fixed overhead that will be avoided if the special offer is accepted D) Variable overhead

A) Common fixed overhead that will continue if the special offer is not accepted

A study has been conducted to determine if one of the product lines of Saugatuck Company should be discontinued. This product line generates a contribution margin of $300,000 per year. Fixed expenses allocated to the product line are $390,000 per year. It is estimated that $240,000 of these fixed expenses could be eliminated if the product line is discontinued. What is the impact on the company's overall net operating income if the product line is discontinued? A) Decrease of $60,000 per year B) Increase of $60,000 per year C) Decrease of $150,000 per year D) Increase of $150,000 per year

A) Decrease of $60,000 per year Contribution margin that would be lost if product line is discontinued (300,000) Less fixed costs that can be avoided if product line is discontinued 240,000 Increase/Decrease in net operating income (60,000)

The Weiden Corporation has 8,000 obsolete units of a product that are carried in inventory at a manufacturing cost of $160,000. If the units are remachined for $40,000, they could be sold for $72,000. Alternatively, the units could be sold for scrap for $28,000. Which alternative is more desirable and what is the relevant cost? A) Remachine; $40,000 B) Remachine; $200,000 C) Scrap; $132,000 D) Scrap; $160,000

A) Remachine; $40,000 The $160,000 manufacturing cost is a sunk cost (i.e., a cost that has already been incurred and cannot be changed by any decision made now or in the future). Since it does not differ between the two alternatives, the manufacturing cost is not relevant. Remachining and selling the units will increase net operating income by $32,000 (or selling price of $72,000 - cost to remachine of $40,000). On the other hand, selling the units as scrap will increase net operating income by only $28,000. As such, remachining the units is the more desirable alternative. The relevant cost is the difference in cost between any two alternatives. The cost of the remachining alternative is $40,000; there is no cost if the units are sold as scrap. As such, the relevant cost is $40,000.

A cost that can be eliminated in whole or in part by choosing one alternative over another is a(n): A) avoidable cost B) irrelevant cost C) sunk cost D) variable cost

A) avoidable cost

A business segment should only be dropped if a company can avoid more in fixed costs than it gives up in: A) contribution margin B) net operating income C) segment sales D) variable costs

A) contribution margin

Determining whether to carry out an activity in the value chain internally or us a supplier is a _____ decision A) make or buy B) product line C) special order D) utilization of a constrained resource

A) make or buy

Deciding what to do with a joint product at the split-off point is a: A) sell or process further decision B) special order decision C) product line decision D) make or buy decision

A) sell or process further decision

Irrelevant costs include: A) sunk costs B) future costs that differ between alternatives C) all fixed costs D) future costs that do not differ between alternatives

A, D

Which of the following techniques describe how a bottleneck should be managed?(more than one) A) find ways to increase the capacity of the bottleneck B) reduce the costs of the least profitable products C) ensure there is minimal lost time at the bottleneck due to breakdowns and set-ups D) focus business process improvement efforts on the bottleneck

A,C,D

Leonard Pottery makes plates, bowls, and platters using glazes that develop starburst patterns when the pottery is fired. The art of creating this pottery, which includes throwing, bisquing, and glazing, is a craft that takes years of experience to master. The demand for the company's pottery far exceeds the company's studio capacity. Information concerning three of the company's products follows. Selling price per unit: Plates- $36 Bowls- $93 Platters- $120 Variable cost per unit: Plates- 9 Bowls- 21 Platters- 30 Studio time required to produce one unit: Plates- 1 hour Bowls- 3 hours Platters- 4 hours More time could be made available by asking employees in the studio to work overtime. Assuming that this extra time would be used to produce bowls, how much should the company be willing to pay per hour to keep the studio open after normal working hours? A) $7 B) $24 C) $26 D) $72

B) $24

Consider the following production and cost data for the two versions of the product that is manufactured and sold by Kensington Corporation: Contribution margin per unit: Basic- $480 Deluxe- $520 Machine set-ups required per unit: Basic- 32 setups Deluxe- 40 setups Only 260,000 machine set-ups can be performed each year due to limited supply of skilled labor. There is unlimited demand for each product. What is the largest possible total contribution margin that can be realized each year? A) $3,380,000 B) $3,900,000 C) $3,640,000 D) $7,280,000

B) $3,900,000 First, determine which product generates the higher CM per setup as follows. CM per setup = CM per unit ÷ number of setups per unit Basic version: CM per setup = $480 ÷ 32 = $15 per setup Deluxe version: CM per setup = $520 ÷ 40 = $13 per setup The basic version has a higher contribution margin per setup, which is the constraint. As such, unless there are other nonqualitative reasons that should be considered, that is the version of the product that should be produced. The total CM that would be generated if the product with the higher CM per setup (that is, the basic version) is produced is determined as follows. Maximum number of setups 260,000 Number of setups required per unit of the basic version (divide) 32 Number of units of the basic version that can be produced (equals) 8,125 CM generated per unit of the basic version (times) 480 Largest possible total contribution margin that can be realized $3,900,000

When the total amount of the cost will be the same regardless of the alternatives selected in a decision, what should be done about the cost in the decision analysis? A) increase the cost B) ignore the cost C) consider the cost D) lower the cost

B) ignore the cost

A decision to carry out one of the activities in the value chain internally rather than to buy externally from a supplier is a ______ decision A) sell or process B) make or buy C) special order D) product line

B) make or buy

Bell Corporation manufactures solar-powered calculators. The company can manufacture 1,200,000 calculators a year at a variable cost of $3,000,000 and a fixed cost of $1,800,000. Based on management's projections for next year, 960,000 calculators will be sold at the regular price of $20.00 each. A special order has been received for 240,000 calculators to be sold at a 70% discount off the regular price. Total fixed costs would be unaffected by this order. What is the increase in net operating income if the special order is accepted? A) $480,000 B) $600,000 C) $840,000 D) $1,440,000

C) $840,000 First, compute the selling price per unit. Special order selling price = Regular selling price of $20 - Discount of $14 (or $20 x 70%) = $6 per unit Then, compute the variable cost per unit. Variable cost per unit = Total variable costs of $3,000,000 ? 1,200,000 units = $2.50 per unit The total fixed costs of $1,800,000 are not relevant; they do not differ between the two alternatives. The impact on net operating income is determined as follows. Incremental revenue (240,000 units x discounted selling price of $6 per unit) $1,440,000 Less incremental costs (240,000 units x variable costs of $2.50 per unit) $600,000 Increase in net operating income $840,000

Ferguson Company manufactures 4,000 parts per year; the parts are used in the assembly of one of the company's products. The unit product cost of these parts is: Variable manufacturing cost $32 Fixed manufacturing cost 18 Unit product cost $50 The part can be purchased from an outside supplier at $40 per unit. If the part is purchased from the outside supplier, two-thirds of the fixed manufacturing costs can be eliminated. What is the impact on the company's net operating income if the part is purchased from the outside supplier? A) Increase of $8,000 B) Decrease of $8,000 C) Increase of $16,000 D) Decrease of $16,000

C) Increase of $16,000

Ciaran Corporation manufactures three products from a common input in a joint processing operation. Joint processing costs up to the split-off point total $50,000 per year. The company allocates these costs to the joint products on the basis of their total sales value at the split-off point. These sales values are as follows: Product X, $25,000; Product Y, $45,000; and Product Z, $30,000. Each product may be sold at the split-off point or processed further. The additional processing costs and the sales value after further processing for each product (on an annual basis) are as follows. Additional processing costs: Product X- $10,000 Product Y- $32,000 Product Z- $6,000 Sales value (after further processing) Product X- 40,000 Product Y- 75,000 Product Z- 37,000 Which product or products should be processed further? A) Product X B) Product X and Y C) Product X and Z D) Products Y and Y

C) Product X and Z

Costs and benefits that always differ between alternatives are _____ costs and benefits A) sunk B) irrelevant C) relevant D) variable

C) relevant

Which of the following should not be included in the analysis when making a decision? (more than one) A) avoidable costs B) opportunity costs C) non-differential future costs D) sunk costs

C, D

Costs and benefits that always differ between alternatives are _____ costs and benefits A) irrelevant B) variable C) sunk D) relevant

D) relevant

The machine or process that is limiting overall output is called a(n) _______

bottleneck