accounting chapter 7
What is the total relevant cost of producing the units internally?
$120,000
Superware, Inc. produces multiple products out of a common input. Geratin is one such product, which has a sales value of $15,000 at the split-off point. Joint costs allocated to Geratin are $12,000. Sales value of Geratin increases to $25,000 after further processing, and this processing will cost $7,000. Should Geratin be processed further?
Yes, process further Incremental revenue of $10,000 ($25,000 - $15,000) exceeds incremental costs of $7,000 by $3,000. Hence, Geratin should be processed further
A machine or a process that is a constraint is working _____
at full capacity
If some products must be cut back because of a constraint, the key to maximizing profits is to favor the products that provide the highest ______ drop item here .
contribution margin per unit of the constrained resource
Costs that differ between alternatives and impact the decisions that are made
sunk costs
When a manager increases the capacity of the bottleneck, it is called _____ drop item here the constraint.
tightening
Future costs that do not vary based on the alternative chosen
unavoidable costs
Prairie, Inc. produces a single product. It has an annual capacity of 10,000 units, but currently uses only 80% of it. Each unit is sold for $50 and requires direct material worth $30 and direct labor worth $5. Manufacturing overhead cost is $10 per unit of which 70% is variable. What is Prairie's total incremental cost incurred to produce each unit?
$42 = $30 + $5 + ($10 × 70%)
Roberto, Inc. manufactures products A and B. Both products have a contribution margin ratio of 40%. What is the contribution margin per unit of the constrained resource for product B, if labor time is the constrained resource?
3 per minute The contribution margin per unit of product B is $6 and the total labor time required to produce each unit is 2 minutes. Therefore, the contribution margin per unit of constrained resource for product B is $3 per minute ($6 ÷ 2 minutes).
Roberto, Inc. manufactures products A and B. Both products have a contribution margin ratio of 40%. Assume that labor time is the constrained resource and only a total of 3,000 minutes is available. Product A has a total demand of 500 units and product B has a total demand for 600 units. Considering the constraint, how many units of product B should be produced to maximize profits?
600 units The contribution margin per unit of product B is $6 and the total labor time required to produce each unit is 2 minutes. Therefore, the contribution margin per unit of constrained resource for product B is $3 per minute ($6 ÷ 2 minutes). Similarly, the contribution margin per unit of constrained resource for product A can be calculated as $2 per minute ($8 ÷ 4 minutes). Since product B has a higher contribution margin per unit of constrained resource than product A, the company should produce all the units it can sell of product B (600 units) before producing product A.
Rent paid for the division's regional office
avoidable
Wages paid to the division's employees who will be downsized if the division is dropped
avoidable
Joint costs already incurred up to the split-off point are relevant in decisions concerning what to do from the split-off point onward.
false Joint costs already incurred up to the split-off point are always irrelevant in decisions concerning what to do from the split-off point forward. This is because once the split-off point is reached, the joint costs have already been incurred and nothing can be done to avoid them.
_______ processed through the bottleneck is a way of relaxing a constraint because it is essentially free and might even yield additional cost savings.
reducing defective units
High Roller Inc. is trying to decide whether to buy a private jet or to lease one. The finder's fee is incurred only if the private jet is bought. The finder's fee is a ________ drop item here cost for this decision.
relevant
Variable costs of $6 Allocated rental cost of $4 for space used Allocated selling and distribution costs of $5 Outside supplier's offered selling price of $14 per unit of Zentium
relevant irrelevant irrelevant relevant
If incremental revenue from further processing exceeds incremental costs from such processing incurred after the split-off point, it is profitable to continue processing such joint products after the split-off point.
true It is profitable to continue processing a joint product after the split-off point so long as the incremental revenue from such processing exceeds the incremental processing cost incurred after the split-off point.
Cost of machinery purchased for the Orange County division
unavoidable
Cost of the private jet purchased for the company management's use
unavoidable
General management expenses allocated to the Orange County division
unavoidable
Good Buy is currently producing and marketing a product. The manager at Good Buy is considering a contract manufacturer's offer to supply the same product. Marketing costs involved in selling the product are ________
unavoidable
Prairie, Inc. produces one single product. It has an annual capacity of 10,000 units, but currently uses only 80% of it. Each unit is sold for $50 and requires direct material worth $30 and direct labor worth $5. Manufacturing overhead cost is $10 per unit of which 70% is variable. Should a special order to sell 1,000 units at $44 be accepted?
yes. The incremental revenue generated by the special order is $44,000 (= $44 per unit × 1,000 units). The incremental cost is $42,000 (= (direct materials of $30 per unit + direct labor of $5 per unit + variable manufacturing overhead of $7 per unit) × 1,000 units). Since the incremental net operating income generated by this special order is $2,000 (= $44,000 − $42,000), the special order should be accepted.
