320 Exam 3

Which of the following is true of relevant information? A) All fixed costs are relevant. B) All Future revenues and expenses are relevant. C) Future D) All fixed costs are not relevant.

Future

The concept of outsourcing services to countries with lower labor costs is known as a. opportunity cost. b. offshoring. c. insourcing. d. international outsourcing.

a. international outsourcing.

The main difference between variable costing and absorption costing is a. the treatment of nonmanufacturing costs. b. the accounting for variable manufacturing costs. c. the accounting for fixed manufacturing costs. d. their value for decision makers.

the accounting for fixed manufacturing costs.

The proponents of throughput costing -maintain that variable costing undervalues inventories. -maintain that it provides more incentive to produce for inventory than do either variable or absorption costing. -argue that only direct materials and direct labor are "truly variable" and all indirect manufacturing costs be written off in the period in which they are incurred. -treat all costs except those related to variable direct materials as costs of the period in which they are incurred.

treat all costs except those related to variable direct materials as costs of the period in which they are incurred.

One way for managers to cope with uncertainty in profit planning is to -use CVP analysis because it assumes certainty. recommend management hire a futurist whose work is --to predict business trends. -wait to see what does happen and prepare a report based on actual amounts. -use sensitivity analysis to explore various what-if scenarios in order to analyze changes in revenues or costs or quantities.

use sensitivity analysis to explore various what-if scenarios in order to analyze changes in revenues or costs or quantities.

Operating income using variable costing as compared to absorption costing would be higher when the quantity of beginning inventory equals the quantity of ending inventory. when the quantity of beginning inventory is more than the quantity of ending inventory. when the quantity of beginning inventory is less than the quantity of ending inventory. under no circumstances.

when the quantity of beginning inventory is more than the quantity of ending inventory.

The manner in which a company deals with end-of-period variances will determine the effect production-volume variances have on the company's end-of-period operating income. When the chosen capacity level exceeds the actual production level, which approach to end-of-period variances results in an unfavorable production-volume variance affect on that period's operating income? -Proration approach -Adjusted allocation-rate approach -Theoretical approach -Write-off to cost-of-goods-sold approach

-Write-off to cost-of-goods-sold approach

Use of capacity levels based on demand -hides the amount of unused capacity. -highlights the cost of capacity acquired but not used. -yields a cost rate that does not include a charge for unused capacity. -results in a price that covers the cost of capacity customers expect to pay.

-hides the amount of unused capacity.

A company may experience the downward demand spiral when -the use of theoretical capacity as a denominator level has contributed to budgets that project sales to be higher than actually attainable. -spreading capacity costs over a small number of units and setting selling prices even higher to recover those costs. -engaged in a cyclical business and after experiencing an upturn. -the production-volume variance is unfavorable each time period during a year.

-spreading capacity costs over a small number of units and setting selling prices even higher to recover those costs.

Contribution margin is calculated as -total revenue - total fixed costs. -total revenue - total manufacturing costs (CGS). -total revenue - total variable costs. -operating income + total variable costs.

-total revenue - total variable costs.

Under the contribution income statement, a company's contribution margin will be:

Lower if variable manufacturing overhead costs increase.

Rubium Micro Devices currently manufactures a subassembly for its main product. The costs per unit are as follows: Direct materials $54.00 Direct labor 35.00 Variable overhead 40.00 Fixed overhead 34.00 Total $163.00 Crayola Technologies Inc. has contacted Rubium with an offer to sell 6,000 of the subassemblies for $144.00 each. Rubium will eliminate $89,000 of fixed overhead if it accepts the proposal. Should Rubium make or buy the subassemblies? What is the difference between the two alternatives? A) Buy; savings = $89,000 B) Buy; savings = $7,000 C) Make; savings = $1,000 D) Make; savings = $203,000

Make; savings = $1,000 Cost to buy: 6,000 × $144.00 = $864,000 Cost to make: [($54.00 + $35.00 + $40.00) × 6,000 + $89,000] = $863,000 Cost savings = $864,000 - $863,000 = $1,000; make the subassemblies

Nicholas, Inc. has provided the following unit data for review: Simple Product Advanced Product Selling price $22.75 $55.00 Variable cost 10.00 34.50 Pounds of scarce raw material per unit 3 5 Which product, Simple or Advanced, is most profitable for Nicholas, Inc. to manufacture? a. Both in ratio of 3:5 b Both in ratio of 5:8 c. Simple d. Advanced

Simple Simple Advanced Selling price 22.75 55.00 Variable cost 10.00 34.50 Contribution margin 12.75 20.50 Pounds of material per unit 3 5 Contribution margin per 4.25 4.11 pound of material Simple provides a higher contribution margin per pound of scarce raw material.

Absorption costing enables managers to increase operating income in the short run by changing production schedules. Which statement is true regarding such action? The reason for increased operating income is the deferral of fixed manufacturing overhead contained in unsold inventory. A desirable effect of these changes in production is "cherry picking" the production line. This is done through decreases in the production schedule as customer demand for product falls. None of the above statements are true regarding the manager's action to increase operating income through changes in the production schedule.

The reason for increased operating income is the deferral of fixed manufacturing overhead contained in unsold inventory.

What denominator-level capacity concepts emphasize the output a plant can supply? What denominator-level capacity concepts emphasize the output customers demand for products produced by a plant?

The theoretical capacity and practical capacity denominator-level concepts emphasize what a plant can supply. The normal capacity utilization and master-budget capacity utilization concepts emphasize what customers demand for products produced by a plant.

What is always the question to ask to determine if revenues or costs are relevant?] What is the time frame for achieving results? What difference will a particular action make? Who will be responsible? How much will it cost?

What difference will a particular action make?

In comparing the absorption and variable cost methods, each of the following statements is true except:

When inventory increases over the period, variable net income will exceed absorption net income.

RCG Services is investigating its profitability relationship with each of its customers. What is the one question RCG should ask in deciding whether to keep or drop a particular customer? -Will the customer meet a specific designated gross margin percentage? -Will the customer be willing to pay a higher price to insure RCG's profitability? -Will enough customers be found to replace any customers dropped for lack of profitability? -Will expected total corporate office costs decrease if a decision is made to drop the customer?

Will expected total corporate office costs decrease if a decision is made to drop the customer?

Tee Times, Inc. produces and sells the finest quality golf clubs in all of Clay County. The company expects the following revenues and costs in 2004 for its Elite Quality golf club sets: Revenues (400 sets sold @ $600 per set) $240,000 Variable costs 160,000 Fixed costs 50,000 How many sets of clubs must be sold for Tee Times, Inc. to reach their breakeven point? a. 400 b. 250 c. 200 d. 150

b. 250 Variable costs per unit = $160,000/400 units sold = $400 Contribution Margin = $600 - 400 = $200 per unit Breakeven point = $50,000/$200 = 250 units

On December 31, 2016, Brown Co. had a machine with an original cost of $90,000, accumulated depreciation of $75,000, and an estimated salvage value of zero. On December 31, 2016, Brown was considering the purchase of a new machine having a five-year life, costing $150,000, and having an estimated salvage value of $30,000 at the end of five years. In its decision concerning the possible purchase of the machine, how much should Brown consider as sunk cost at December 31, 2016? a. $150,000 b. $120,000 c. $90,000 d. $15,000

c. $90,000

Troy Instruments uses ten units of Part Number S1798 each month in the production of scientific equipment. The unit cost to manufacturing one unit of S1798 is presented below. Direct materials $ 4,000 Materials handling (10% of direct materials cost) 400 Direct manufacturing labor 6,000 Indirect manufacturing (200% of direct labor) 12,000 Total manufacturing cost $22,400 Materials handling represents the direct variable costs of the Receiving Department that are applied to all direct materials and purchased components on the basis of their cost. This is a separate charge in addition to indirect manufacturing cost. Troy's annual indirect manufacturing cost budget is one-fourth variable and three-fourths fixed. Duncan Supply, one of Troy's reliable vendors, has offered to supply Part Number S1798 at a unit price of $17,000. If Troy purchases the S1798 units from Duncan, the capacity Troy used to manufacture these parts would be idle. Should Troy decide to purchase the parts from Duncan, the unit cost of S1798 would a. decrease by $3,700. b. decrease by $5,600. c. increase by $3,600. d. increase by $5,300.

d. increase by $5,300. 5. Cost to Make Cost to Buy Direct materials $4,000 Purchase of part $17,000 Material handling 400 1,700 Direct labor 6,000 Indirect manufacturing 3,000* *$12,000 25% Total $13,400 $18,700 Difference in favor of making $5,300

One-time-only special orders should only be accepted if ________. A) incremental revenues exceed incremental costs B) differential revenues exceed variable costs C) incremental revenues exceed fixed costs D) total revenues exceed total costs

incremental revenues exceed incremental costs

1) When using the five-step decision process, which one of the following steps should be done first? A) obtain information B) choose an alternative C) evaluation and feedback D) implementing the decision

obtain information

Zephram Corporation has a plant capacity of 200,000 units per month. Unit costs at capacity are: Direct materials $6.00 Direct labor 5.00 Variable overhead 4.00 Fixed overhead 2.00 Marketing—fixed 6.00 Marketing/distribution—variable 4.60 Current monthly sales are 190,000 units at $30.00 each. Q, Inc., has contacted Zephram Corporation about purchasing 2,500 units at $24.00 each. Current sales would not be affected by the one-time-only special order. What is Zephram's change in operating profits if the one-time-only special order is accepted? A) $11,000 increase B) $31,500 increase C) $22,500 increase D) $49,000 increase

$11,000 increase ($6.00 + $5.00 + $4.00 + $4.60) = $19.60 ($24.00 - $19.60) × 2,500 = $11,000 increase

A study by a consultant shows that a company that had $2,000,000 of inventory was holding excess inventory of $320,000 that could be eliminated with a few process improvements. It also has $620,000 in marketable securities that yield 5% per year. What is the estimated annual opportunity cost of holding the excess inventory? A) $16,000 B) $100,000 C) $31,000 D) $47,000

$16,000 $320,000 x 5% = $16,000

Mikaelabelle Products sells product A at a selling price of $40 per unit. Mikaelabelle's cost per unit based on the full capacity of 500,000 units is as follows: Direct materials $ 6 Direct labor 3 Indirect manufacturing (60% of which is fixed) 10 $19 A one-time-only special order offering to buy 50,000 units was received from an overseas distributor. The only other costs that would be incurred on this order would be $4 per unit for shipping. Mikaelabelle has sufficient existing capacity to manufacture the additional units. In negotiating a price for the special order, Mikaelabelle should consider that the minimum selling price per unit should be a. $17 b. $19 c. $21 d. $23

$17 DM $ 6 DL 3 Variable OH 4 Fixed OH 4 ($10 40%) =$17

Alvin Inc. planned and actually manufactured 200,000 units of its single product in 2008, its first year of operations. Variable manufacturing costs were $30 per unit of product. Planned and actual fixed manufacturing costs were $600,000, and marketing and administrative costs totaled $400,000 in 2008. Alvin sold 120,000 units of product in 2008 at a selling price of $40 per unit. Alvin's 2008 operating income using variable costing is a. $800,000. b. $600,000. c. $440,000. d. $200,000.

$200,000 Sales 120,000 $40/unit $4,800,000 VC 120,000 $30/unit 3,600,000 Contribution margin $1,200,000 Fixed costs ($600,000 + $400,000) 1,000,000 Operating income 200,000

Crandle Manufacturers Inc. is approached by a potential customer to fulfill a one-time-only special order for a product similar to one offered to domestic customers. The company has excess capacity. The following per unit data apply for sales to regular customers: Variable costs: Direct materials $140 Direct labor 100 Manufacturing support 105 Marketing costs 55 Fixed costs: Manufacturing support 175 Marketing costs 65 Total costs 640 Markup (50%) 320 Targeted selling price $960 For Crandle Manufacturers Inc., what is the minimum acceptable price of this special order? A) $400 B) $320 C) $480 D) $640

$400 Minimum acceptable price = $140 + $100 + $105 + $55 = $400

Alvin Inc. planned and actually manufactured 200,000 units of its single product in 2008, its first year of operations. Variable manufacturing costs were $30 per unit of product. Planned and actual fixed manufacturing costs were $600,000, and marketing and administrative costs totaled $400,000 in 2008. Alvin sold 120,000 units of product in 2008 at a selling price of $40 per unit. Alvin's 2008 operating income using absorption costing is a. $840,000. b. $800,000. c. $440,000. d. $200,000.

440,000 Sales 120,000 $40 $4,800,000 COGS Variable 3,600,000 Fixed 360,000* 3,960,000 Gross profit 840,000 Fixed costs 400,000 Operating income 440,000 Fixed manufacturing cost $600,000 / 200,000 units = $3 unit $3/unit 120,000 units sold = $360,000

Which of the following should not be considered for every option in the decision process? Relevant revenues Relevant costs Historical costs Opportunity costs

Historical costs

Tee Times, Inc. produces and sells the finest quality golf clubs in all of Clay County. The company expects the following revenues and costs in 2004 for its Elite Quality golf club sets: Revenues (400 sets sold @ $600 per set) $240,000 Variable costs 160,000 Fixed costs 50,000 What amount of sales must Tee Times, Inc. have to earn a target net income of $63,000 if they have a tax rate of 30%? a. $489,000 b. $429,000 c. $420,000 d. $300,000

TNI = $50,000 + $63,000/(1 - 0.30)/$200 = 700 units × $600 = $420,000

Tee Times, Inc. produces and sells the finest quality golf clubs in all of Clay County. The company expects the following revenues and costs in 2004 for its Elite Quality golf club sets: Revenues (400 sets sold @ $600 per set) $240,000 Variable costs 160,000 Fixed costs 50,000 How many sets of clubs must be sold to earn a target operating income of $90,000? a. 700 b. 500 c. 400 d. 300

TOI = $50,000 + $90,000/$200 = 700 units

Which of the following is not a reason for the performance evaluation model to differ from the decision model? -The use of different time frames: one being an annual basis, the other a period of several years. -The accounting systems enable each decision to be tracked separately. -The accrual accounting method incorporates irrelevant costs. -Top management is rarely aware of particular desirable alternatives that were not chosen by subordinate managers.

The accounting systems enable each decision to be tracked separately.

Once a company exceeds its breakeven level, operating income can be calculated by multiplying:

The contribution margin per unit by the difference between unit sales and breakeven sales.

Describe the downward demand spiral and its implications for pricing decisions.

The downward demand spiral is the continuing reduction in demand for a company's product that occurs when the prices of competitors' products are not met and (as demand drops further), higher and higher unit costs result in more and more reluctance to meet competitors' prices. Pricing decisions need to consider competitors and customers as well as costs.

Which of the following is not a correct use of the term opportunity cost? -Opportunity costs are considered period costs rather than inventoriable costs for accounting purposes. -Opportunity costs must be considered by managers when making decisions. -Opportunity cost plus the incremental future revenues and costs equal the relevant revenues and costs of any alternative when capacity is constrained. -The opportunity cost of holding inventory is the income forgone by tying up money in inventory and not investing it elsewhere.

The opportunity cost of holding inventory is the income forgone by tying up money in inventory and not investing it elsewhere.

Which of the following is not an assumption of cost-volume-profit analysis? The time value of money is incorporated in the analysis. Costs can be classified into variable and fixed components. The behavior of revenues and expenses is accurately portrayed as linear over the relevant range. The number of output units is the only driver.

The time value of money is incorporated in the analysis.

The absolute minimum absorption-inventory cost that would be reported under the best conceivable operating conditions is a description of which type of denominator-level concept cost? -Master-budget utilization -Practical capacity -Theoretical capacity -Normal utilization

Theoretical capacity

Which of the following is not a factor in cost-volume-profit analysis? a. Units sold b. Selling price c. Total variable costs d. Fixed costs of a product

Total variable costs