Chapter 6 Quiz

Product X-547 is one of the joint products in a joint manufacturing process. Management is considering whether to sell X-547 at the split-off point or to process X-547 further into Xylene. The following data have been gathered: Selling price of X-547 Variable cost of processing X-547 into Xylene. The avoidable fixed costs of processing X-547 into Xylene. The selling price of Xylene. The joint cost of the process from which X-547 is produced. Which of the above items are relevant in a decision of whether to sell the X-547 as is or process it further into Xylene?

I, II, III, and IV.

An automated turning machine is the current constraint at Jordison Corporation. Three products use this constrained resource. Data concerning those products appear below: LNJQRQSelling price per unit $160.98$335.19$417.60Variable cost per unit $118.74$277.23$320.32Minutes on the constraint 2.40 4.20 7.60 Rank the products in order of their current profitability from most profitable to least profitable. In other words, rank the products in the order in which they should be emphasized.

LN, JQ, RQ

A joint product is:

one of several products produced from a common input

The Wyeth Corporation produces three products, A, B, and C, from a single raw material input. Product A can be sold at the splitoff point for $40,000, or it can be processed further at a total cost of $15,000 and then sold for $58,000. Joint costs total $60,000 annually. Product A should be:

processed further and then sold

Which of the following costs are always irrelevant in decision making?

sunk costs

Accepting a special order will improve overall net operating income if the revenue from the special order exceeds:

the incremental costs associated with the order

The opportunity cost of making a component part in a factory with excess capacity for which there is no alternative use is:

zero

The constraint at Rauchwerger Corporation is time on a particular machine. The company makes three products that use this machine. Data concerning those products appear below: WXKDFSSelling price per unit$192.00$542.66$222.84Variable cost per unit$158.72$420.54$167.76Minutes on the constraint 3.20 8.60 3.60 Assume that sufficient time is available on the constrained machine to satisfy demand for all but the least profitable product. Up to how much should the company be willing to pay to acquire more of the constrained resource?

$10.40 per minute

The constraint at Pickrel Corporation is time on a particular machine. The company makes three products that use this machine. Data concerning those products appear below: VDJTSMSelling price per unit$344.85$415.40$119.32Variable cost per unit$270.18$310.88$91.96Minutes on the constraint 5.70 6.70 1.90 Assume that sufficient time is available on the constrained machine to satisfy demand for all but the least profitable product. Up to how much should the company be willing to pay to acquire more of this constrained resource?

$13.10 per minute

Zouar Computer Corporation currently manufactures the disk drives that it uses in its computers. The costs to produce 5,000 of these disk drives last year were as follows: Cost per driveDirect materials$12 Direct labor 2 Variable manufacturing overhead 5 Fixed manufacturing overhead 7 Total$26 Kidal Electronics has offered to provide Zouar with all of its disk drive needs for $27 per drive. If Zouar accepts this offer, Zouar will be able to use the freed up space to generate an additional $40,000 of income each year to produce more of its computer keyboards. Only $3 per drive of the fixed manufacturing overhead cost above could be avoided. Direct labor is an avoidable cost in this decision. Based on this information, would Zouar be financially better off making the drives or buying the drives and by how much?

$15,000 better to buy

Cybil Baunt just inherited a 1958 Chevy Impala from her late Aunt Joop. Aunt Joop purchased the car 40 years ago for $8,000. Cybil is either going to sell the car for $10,000 or have it restored and then sell it for $22,000. The restoration will cost $9,000. Cybil would be financially better off by:

$3,000 to have the vehicle restored

Fabri Corporation is considering eliminating a department that has an annual contribution margin of $26,000 and $74,000 in annual fixed costs. Of the fixed costs, $18,000 cannot be avoided. The annual financial advantage (disadvantage) for the company of eliminating this department would be:

$30,000

A customer has requested that Lewelling Corporation fill a special order for 2,500 units of product S47 for $35 a unit. While the product would be modified slightly for the special order, product S47's normal unit product cost is $19.80: Direct materials$4.90 Direct labor 6.00 Variable manufacturing overhead 2.00 Fixed manufacturing overhead 6.90 Unit product cost$19.80 Assume that direct labor is a variable cost. The special order would have no effect on the company's total fixed manufacturing overhead costs. The customer would like modifications made to product S47 that would increase the variable costs by $1.60 per unit and that would require an investment of $19,000.00 in special molds that would have no salvage value. This special order would have no effect on the company's other sales. The company has ample spare capacity for producing the special order. The annual financial advantage (disadvantage) for the company as a result of accepting this special order should be:

$32,250

One of the employees of Davenport Corporation recently was involved in an accident with one of the corporation's delivery vans. The corporation is either going to repair the damaged van or sell it as is and buy a comparable used van. Information related to this decision is provided below: Initial cost of the damaged van$30,000Accumulated depreciation to date on van$18,000Salvage value of van immediately before crash$9,000Salvage value of van immediately after crash$1,000Cost to repair damaged van$5,000Cost of a comparable used van$10,000 Based on the information above, Davenport would be financially better off:

$4,000 by repairing the damaged van.

The following are Silver Corporation's unit costs of making and selling an item at a volume of 8,000 units per month (which represents the company's capacity): Manufacturing: Direct materials$4 Direct labor$5 Variable overhead$2 Fixed overhead$8 Selling and administrative: Variable$1 Fixed$6 Present sales amount to 7,000 units per month. An order has been received from a customer in a foreign market for 1,000 units. The order would not affect regular sales. Total fixed costs, both manufacturing and selling and administrative, would not be affected by this order. The variable selling and administrative costs would have to be incurred for this special order as well as all other sales. Assume that direct labor is a variable cost. What is the financial advantage (disadvantage) for the company from this special order if it prices the 1,000 units at $20 per unit?

$8,000

Gallerani Corporation has received a request for a special order of 5,000 units of product A90 for $28.00 each. Product A90's unit product cost is $27.55, determined as follows: Direct materials$3.10 Direct labor 8.40 Variable manufacturing overhead 7.50 Fixed manufacturing overhead 8.55 Unit product cost$27.55 Assume that direct labor is a variable cost. The special order would have no effect on the company's total fixed manufacturing overhead costs. The customer would like modifications made to product A90 that would increase the variable costs by $4.30 per unit and that would require an investment of $14,000 in special molds that would have no salvage value. This special order would have no effect on the company's other sales. The company has ample spare capacity for producing the special order. The annual financial advantage (disadvantage) for the company as a result of accepting this special order should be:

$9,500

Part U16 is used by Mcvean Corporation to make one of its products. A total of 13,500 units of this part are produced and used every year. The company's Accounting Department reports the following costs of producing the part at this level of activity: Per UnitDirect materials$3.00Direct labor$7.60Variable manufacturing overhead$8.10Supervisor's salary$3.50Depreciation of special equipment$1.90Allocated general overhead$7.10 An outside supplier has offered to make the part and sell it to the company for $25.10 each. If this offer is accepted, the supervisor's salary and all of the variable costs, including the direct labor, can be avoided. The special equipment used to make the part was purchased many years ago and has no salvage value or other use. The allocated general overhead represents fixed costs of the entire company, none of which would be avoided if the part were purchased instead of produced internally. In addition, the space used to make part U16 could be used to make more of one of the company's other products, generating an additional segment margin of $25,500 per year for that product. The annual financial advantage (disadvantage) for the company as a result of buying part U16 from the outside supplier should be:

($13,650)

Product U23N has been considered a drag on profits at Jinkerson Corporation for some time and management is considering discontinuing the product altogether. Data from the company's budget for the upcoming year appear below: Sales$730,000 Variable expenses$350,000 Fixed manufacturing expenses$234,000 Fixed selling and administrative expenses$161,000 In the company's accounting system all fixed expenses of the company are fully allocated to products. Further investigation has revealed that $144,000 of the fixed manufacturing expenses and $93,000 of the fixed selling and administrative expenses are avoidable if product U23N is discontinued. The financial advantage (disadvantage) for the company of eliminating this product for the upcoming year would be:

($143,000)

Rebelo Corporation is presently making part E07 that is used in one of its products. A total of 17,000 units of this part are produced and used every year. The company's Accounting Department reports the following costs of producing the part at this level of activity: Per UnitDirect materials$3.80Direct labor$3.80Variable manufacturing overhead$1.10Supervisor's salary$2.50Depreciation of special equipment$1.40Allocated general overhead$8.60 An outside supplier has offered to make and sell the part to the company for $20.80 each. If this offer is accepted, the supervisor's salary and all of the variable costs, including direct labor, can be avoided. The special equipment used to make the part was purchased many years ago and has no salvage value or other use. The allocated general overhead represents fixed costs of the entire company, none of which would be avoided if the part were purchased instead of produced internally. If management decides to buy part E07 from the outside supplier rather than to continue making the part, what would be the annual impact on the company's overall net operating income?

($163,200)

Lusk Corporation produces and sells 14,400 units of Product X each month. The selling price of Product X is $26 per unit, and variable expenses are $20 per unit. A study has been made concerning whether Product X should be discontinued. The study shows that $72,000 of the $101,000 in monthly fixed expenses charged to Product X would not be avoidable even if the product was discontinued. If Product X is discontinued, the monthly financial advantage (disadvantage) for the company of eliminating this product should be:

($57,400)

The Cook Corporation has two divisions--East and West. The divisions have the following revenues and expenses: East West Sales $580,000 $474,000 Variable costs 180,000 229,300 Traceable fixed costs 172,500 208,000 Allocated common corporate costs 114,800 177,800 Net operating income (loss) $112,700 $(141,100) The management of Cook is considering the elimination of the West Division. If the West Division were eliminated, its traceable fixed costs could be avoided. Total common corporate costs would be unaffected by this decision. Given these data, the elimination of the West Division would result in an overall company net operating income (loss) of:

($65,100)

Part U16 is used by Mcvean Corporation to make one of its products. A total of 13,000 units of this part are produced and used every year. The company's Accounting Department reports the following costs of producing the part at this level of activity: Per UnitDirect materials$2.90Direct labor$7.50Variable manufacturing overhead$8.00Supervisor's salary$3.40Depreciation of special equipment$1.80Allocated general overhead$7.00 An outside supplier has offered to make the part and sell it to the company for $29.80 each. If this offer is accepted, the supervisor's salary and all of the variable costs, including the direct labor, can be avoided. The special equipment used to make the part was purchased many years ago and has no salvage value or other use. The allocated general overhead represents fixed costs of the entire company, none of which would be avoided if the part were purchased instead of produced internally. In addition, the space used to make part U16 could be used to make more of one of the company's other products, generating an additional segment margin of $25,000 per year for that product. The annual financial advantage (disadvantage) for the company as a result of buying part U16 from the outside supplier should be:

($79,000)

The Wester Corporation produces three products with the following costs and selling prices: Product ABC Selling price per unit$21$12$32 Variable cost per unit$11$7$18 Fixed cost per unit$5$3$9 Direct labor hours per unit 0.4 0.1 0.7 Machine hours per unit 0.2 0.5 0.2 The company has insufficient capacity to fulfill all of the demand for these three products. If direct labor hours are the constraint, then the ranking of the products from the most profitable to the least profitable use of the constrained resource is:

B, A, C

Holden Corporation produces three products, with costs and selling prices as follows: Product A Product B Product C Selling price per unit $30 100%/$20 100%/$15 100% Variable costs per unit 1860% 1575% 640% Contribution margin per unit $12 40%/$5 25%/$9 60% A particular machine is the bottleneck. On that machine, 3 machine hours are required to produce each unit of Product A, 1 hour is required to produce each unit of Product B, and 2 hours are required to produce each unit of Product C. Rank the products from the most profitable to the least profitable use of the constrained resource (bottleneck).

B, C, A

Which of the following would be relevant in the decision to sell or throw out obsolete inventory? Direct material cost assigned to the inventory/Fixed overhead cost assigned to the inventory A)YesYes B)YesNo C)NoYes D)NoNo

Choice D

In a sell or process further decision, consider the following costs: 1 variable production cost incurred prior to split-off. 2 variable production cost incurred after split-off. 3 An avoidable fixed production cost incurred after split-off. Which of the above costs is (are) not relevant in a decision regarding whether the product should be processed further?

Only 1

Danny Dolittle makes crafts in his spare time and always sells everything he makes at local craft shows. Danny specializes in four products. Because Danny's time is limited before the next craft show, he is trying to decide how to use his time to the best advantage. Information related to the four products that Danny produces are shown below: Rag DollsPot HoldersBread BasketsFinger PuppetsContribution margin per unit$8 $2 $12 $6 Contribution margin ratio 40% 25% 32% 30%Time required per unit (in hours) 1.4 0.5 3.5 2.0 Rank the products from the most profitable to the least profitable use of the constrained resource.

Rag Dolls, Pot Holders, Bread Baskets, Finger Puppets

Faustina Chemical Corporation manufactures three chemicals (TX14, NJ35, and KS63) from a joint process. The three chemicals are in industrial grade form at the split-off point. They can either be sold at that point or processed further into premium grade. Costs related to each batch of this chemical process is as follows: TX14NJ35KS63Sales value at split-off point$16,000$12,000$5,000Allocated joint costs$6,000$6,000$6,000Sales value after further processing$20,000$18,000$9,000Cost of further processing$5,000$3,000$2,000 For which product(s) above would it be more profitable for Faustina to sell at the split-off point rather than process further?

TX14 only

The Freed Corporation produces three products, X, Y, Z, from a single raw material input. Product Y can be sold at the split-off point for total annual revenues of $50,000, or it can be processed further at a total annual cost of $16,000 and then sold for $68,000. Which of the following statements is true concerning Product Y?

The annual financial advantage from processing Product Y further is $2,000.

Banfield Corporation makes three products that use compound W, the current constrained resource. Data concerning those products appear below: VPYIWXSelling price per unit$248.04$230.66$505.44Variable cost per unit$190.71$172.14$388.80Centiliters of compound W 3.90 3.80 8.10 Rank the products in order of their current profitability from most profitable to least profitable. In other words, rank the products in the order in which they should be emphasized.

YI, VP, WX

Paine Corporation processes sugar beets in batches that it purchases from farmers for $72 a batch. A batch of sugar beets costs $11 to crush in the company's plant. Two intermediate products, beet fiber and beet juice, emerge from the crushing process. The beet fiber can be sold as is for $27 or processed further for $16 to make the end product industrial fiber that is sold for $40. The beet juice can be sold as is for $43 or processed further for $28 to make the end product refined sugar that is sold for $100. Which of the intermediate products should be processed further?

beet fiber should NOT be processed into industrial fiber; beet juice should be processed into refined sugar

United Industries manufactures a number of products at its highly automated factory. The products are very popular, with demand far exceeding the factory's capacity. To maximize profit, management should rank products based on their:

contribution margin per unit of the constrained resource