Exam 1

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ABC Company has fixed costs of $300,000 per month. Total output per month is 150,000 units. Minimum pay for production line workers is $5.85 per hour, and total variable costs are currently $275,000 per month. If variable costs increase to $350,000 per month and production output increases to 250,000 per month, what is the marginal cost for increasing production?

$0.75 per unit marginal cost. ($350,000 variable cost − $275,000 variable costs before the increase in production = $75,000 increased costs) by the increase in production (100,000 units). $75,000 ÷ 100,000 units = $0.75 per unit marginal cost.

Pony Express Company invested $400,000 in a new machine to produce cones for the textile industry. Pony Express' variable costs are 40% of the selling price, and its fixed costs are $800,000. Pony Express has an effective income tax rate of 30%. The amount of sales required to earn an 12% after-tax return on its investment would be:

$1,447,619

$1.83 per unit before and $1.40 per unit after the increase in production.

Good Earth Products produces orange juice and candied orange peels. A 1,000-pound batch of oranges, costing $500, is transformed using labor of $50 into 100 pounds of orange peels and 300 pints of juice. The company has determined that the sales value of 100 pounds of peels at the split-off point is $350, and the value of a pint of juice (not pasteurized or bottled) is $0.40. Beyond the split-off point, the cost of sugar coating and packaging the 100 pounds of peels is $150. The cost of pasteurizing and packaging the 300 pints of juice is $260. A 100-pound box of sugar-coated peels can be sold to commercial baking companies for $600. Each pint of pasteurized juice can be sold for $1.00. What is the incremental benefit (cost) to the company of sugar coating 100 pounds of peels rather than selling the peels at the split-off point? And what is the incremental benefit (cost) to the company of pasteurizing and packaging a pint of juice rather than selling the juice at the split-off point?

$100 for peels; ($80) for juice

Jordan Company budgeted sales of 400,000 calculators at $40 per unit for the year. Variable manufacturing costs were budgeted at $16 per unit, and fixed manufacturing costs at $10 per unit. A special order offering to buy 40,000 calculators for $23 each was received by Jordan in March. Jordan has sufficient plant capacity to manufacture the additional quantity; however, the production would have to be done on an overtime basis at an estimated additional cost of $3 per calculator. Acceptance of the special order would not affect Jordan's normal sales and no selling expenses would be incurred. What would be the effect on operating profit if the special order is accepted?

$160,000 increase

$2 per unit before and $1.20 per unit after the increase in production.

Auburn Products Inc. has compiled the following daily cost information for its manufacturing operation. Output (units) Fixed Cost Variable Cost 0 $2,000 $ 0 1 2,000 200 2 2,000 380 3 2,000 550 4 2,000 700 5 2,000 860 6 2,000 1,040 7 2,000 1,250 8 2,000 1,500 Auburn's marginal cost for the 7th unit is:

$210.

Capital Company has decided to discontinue a product produced on a machine purchased four years ago at a cost of $70,000. The machine has a current book value of $30,000. Due to technologically improved machinery now available in the marketplace the existing machine has no current salvage value. The company is reviewing the various aspects involved in the production of a new product. The engineering staff advised that the existing machine can be used to produce the new product. Other costs involved in the production of the new product will be materials of $20,000 and labor priced at $5,000. Ignoring income taxes, the costs relevant to the decision to produce or not to produce the new product would be:

$25,000.

Oakland College is considering outsourcing grounds maintenance. In this regard, Oakland has received a bid from Highline Grounds Maintenance for $300,000 per year. Highline states that its bid will cover all services and planting materials required to "keep Oakland's grounds in a condition comparable to prior years." Oakland's cost for grounds maintenance in the preceding year were $309,000, as shown here. Salaray of 3 fulltime gardeners $195,000 Plant materials 80,000 Fertilizer 10,000 Fuel 12,000 Depreciation 12,000 Total = 309,000 If Oakland College outsources maintenance, it will be able to sell equipment for $30,000 in Year 1, and the three gardeners will be laid off. Based on relevant costs, what is the incremental value to Oakland College of accepting the bid from Highline in Year 1 of the decision?

$27,000

$3.83 per unit before and $2.60 per unit after the increase in production.

Carpets Unlimited produces and sells three lines of carpet: economy grade, standard grade, and deluxe grade. The chief financial officer of the company has prepared the following report on the profitability in the past year. In the report, fixed costs are allocated based on yards of carpet.

$33,750 loss

Daily sales and cost data for Crawford Industries are shown below. Sales Total Units $ Costs 20 $2,000 $1,200 21 2,090 1,250 22 2,170 1,290 23 2,240 1,330 24 2,300 1,380 25 2,350 1,440 The marginal cost of the 23rd unit is:

$40.00.

Williams makes $35,000 a year as an accounting clerk. He decides to quit his job to enter a one year MBA program full-time. He believes he can obtain employment after graduation from the MBA program at an annual salary of $75,000. Assume Williams doesn't work in the summer or hold any part-time jobs. His tuition, books, living expenses, and fees total $25,000 a year. Given this information, the annual total economic cost of Williams' MBA studies is:

$60,000.

Williams makes $35,000 a year as an accounting clerk. He decides to quit his job to enter a one year MBA program full-time. Assume Williams doesn't work in the summer or hold any part-time jobs. His tuition, books, living expenses, and fees total $25,000 a year. Given this information, the annual total economic cost of Williams' MBA studies is:

$60,000. 35,000 + 25,000 = 60,000

XYZ Corporation manufactures power saws and sells them for $70. The table below shows XYZ's total costs for up to 7 units of production. What is the average cost for 7 units of production? Quantity Total Cost 0 $70 1 120 2 160 3 190 4 230 5 295 6 365 7 445

$63.57.

Refrigerator Company manufactures ice-makers for installation in refrigerators. The costs per unit, for 20,000 units of ice-makers, are as follows. Direct materials $ 7 Direct labor 12 Variable overhead 5 Fixed overhead 10 Total costs $34 Cool Compartments Inc. has offered to sell 20,000 ice-makers to Refrigerator Company for $28 per unit. If Refrigerator accepts Cool Compartments' offer, the facilities used to manufacture ice-makers could be used to produce 20,000 water filtration units. Revenues from the sale of water filtration units are estimated at $80,000, with variable costs equal to 60% of sales. In addition, $6 per unit of the fixed overhead associated with the manufacture of ice-makers could be eliminated. What are the relevant costs involved for Refrigerator Company to make the ice-makers internally or to buy them externally from Cool Compartments, Inc.?

$632,000 vs. $560,000. Purchase costs = ($28 per unit)(20,000 units) = $560,000 The relevant costs involved to make the ice-makers internally are calculated as: Make cost = (unit variable costs) + (fixed overhead) + (opportunity cost) Unit variable costs = ($7 + $12 + $5)(20,000 units) = $480,000 Fixed costs = ($6)(20,000 units) = $120,000 Opportunity Cost = (contribution margin ratio)(potential revenue lost) Opportunity Cost = (1 − 0.6)($80,000) = $32,000 Make cost = $480,000 + $120,000 + $32,000 = $632,000

XYZ Corporation manufactures power saws and sells them for $70. The table below shows XYZ's total costs for up to 7 units of production. What is the marginal cost for the fifth unit of production? Quantity Total Cost 0 $70 1 120 2 160 3 190 4 230 5 295 6 365 7 445

$65 $295 − $230 = $65.

Midwestern Sod produces two products, fescue grass and Bermuda grass, as shown here. Selling per Sq yard -Fescue grass $3.00 ; VC per sq yard $0.85 -Bermuda Grass 3.85 ; VC per sq yard $1.57 The company has 130,000 square yards of growing space available. In the past year, the company dedicated 65,000 square yards to fescue and 65,000 square yards to Bermuda grass. Annual fixed costs are $130,000, which the company allocates to products based on relative growing space. Martha Lopez, the chief financial officer of Midwestern Sod, has suggested that in the coming year, all 130,000 square yards should be devoted to Bermuda grass. The president vetoed her suggestion, saying, "I know that right now home construction is booming in our area, and we can sell all the grass we can produce, irrespective of what type. But you know a lot of developers really like that fescue grass, and I'd hate to disappoint them by not offering it." What is the opportunity cost of the president's decision to stick with both types of grass?

$8,450 Cm of fescue = 3 - .85 = 2.15 per sq yard CM of Bermuda = 3.85-1.57=2.28 per sq yard ((2.28 - 2.15) * 65,000) = 8,450

($3,000)

Bryant Company has a factory machine with a book value of $90,000 and a remaining useful life of five years. It can be sold for $30,000. A new machine is available at a cost of $600,000. This machine will have a five-year useful life with no salvage value. The new machine will lower annual variable manufacturing costs from $600,000 to $500,000. Ignoring the effect of income taxes, the overall increase or decrease in net income to replace the machine is (compared to continuing with the current machine):

($70,000)

Daily costs for Kelso Manufacturing include $1,000 of fixed costs and total variable costs are shown below. Unit Output 10 11 12 13 14 15 Cost $125 $250 $400 $525 $700 $825 The average total cost at an output level of 11 units is:

113.64 Average total cost at an output level of 11 units = ($1,000 + $250) ÷ 11 = $1,250 ÷ 11 = $113.64.

Harper Products' cost information for the normal range of output in a month is shown below. Output in units Total Cost 20,000 $3,000,000 22,500 3,325,000 25,000 3,650,000 What is Harper's short-run marginal cost?

130 Marginal cost = change in cost ÷ change in volume Marginal cost = ($3,325,000 − $3,000,000) ÷ (22,500 − 20,000) = $325,000 ÷ 2,500 = $130.

Daily costs for Kelso Manufacturing include $1,250 in fixed costs and total variable costs are shown below. Unit Output 10 11 12 13 14 15 Cost $150 $300 $480 $620 $750 $900 The marginal cost of the 12th unit is:

180 Marginal cost of 12th unit = change in cost from 11th to 12th unit Marginal cost of 12th unit = ($480 − $300) = $180.

Eagle Brand Inc. produces two products. Data regarding these products are presented below. Product X Product Y Selling price per unit $100 $130 Variable costs per unit $80 $100 Raw materials used per unit 4 lbs. 10 lbs. Eagle Brand has 1,000 pounds of raw materials which can be used to produce Products X and Y. Which one of the alternatives below should Eagle Brand accept in order to maximize contribution margin?

250 units of product X.

Which of the costs shown here is relevant to the related decision?

3 - opportunity cost

ABC Corporation manufactures televisions, which have a selling price of $300 each. The industry is a purely competitive market. If five televisions are produced and sold, what is the marginal revenue for the fifth television set?

300

Given a unit selling price of $125, fixed costs of $3,500, variable costs per unit of $75, and a total quantity of 250 sold, what is the break-even point?

70 units

ABC makes and sells ski wax at $20 per set. Using the table below, if wages are currently $20, how many workers can the company profitably employ? Workers Total Product 0 0 1 8 2 15 3 21 4 26 5 30 6 33 7 35 8 36 9 36

850

All of the following are typical decision applications of marginal analysis except:

Capital addition proposals.

In differential cost analysis, which one of the following best fits the description of a sunk cost?

Cost of a large crane used to move materials.

All of the following are parts of the decision-making process except:

Incorporate historical revenues and costs.

Current business segment operations for Whitman, a mass retailer, are presented below. Merchandise Automotive Restaurant Total Sales $ 500,000 $ 400,000 $ 100,000 $1,000,000 VC 300,000 200,000 70,000 570,000 Fixed Cost 100.000 100,000 50.000 250,000 Operating Income (loss) 100,000 100,000 (20,000) 180,000 Management is contemplating the discontinuance of the Restaurant segment since "it is losing money." If this segment is discontinued, $30,000 of its fixed costs will be eliminated. In addition, Merchandise and Automotive sales will decrease 5% from their current levels. When considering the decision, Whitman's controller advised that one of the financial aspects Whitman should review is contribution margin. Which one of the following options reflects the current contribution margin ratios for each of Whitman's business segments?

Merchandise: 40%; Automotive: 50%; Restaurant: 30%. Contribution margin ratio = (sales − variable costs) ÷ (sales) CM Ratio for Merchandise = ($500,000 − $300,0000) ÷ $500,000 = 40% CM Ratio for Automotive = ($400,000 − $200,000) ÷ $400,000 = 50% CM Ratio for Restaurants = ($100,000 − $70,000) ÷ $100,000 = 30%.

Mega Chemical Company produces ZylexA and a related product called ZylexB. ZylexB, which sells for $17.00 per gallon, is made from a base of ZylexA plus additional ingredients. It takes 25 minutes to manufacture a gallon of ZylexA and an additional 10 minutes to manufacture a gallon of ZylexB. ZylexA sells for $11.00 per gallon. The cost per gallon of manufacturing ZylexA and the additional costs to convert it into ZylexB are shown here. Zylex A Material 2.00 Labor 2.50 V-OH 2.25 Zylex A -into B Material 2.40 Labor .90 V-OH 1.20 Image shows a table with column heads "ZylexA" and "ZylexA into ZylexB" and row heads: material, labor, and variable overhead. Both products have been successful, and demand for both products is strong and beyond the company's capacity to fulfill. Since it takes additional time to manufacture ZylexB, the vice-president of production is trying to determine whether ZylexB should be produced. Mega Chemical runs four production lines and two production shifts each week, resulting in 320 available production hours (4 lines × 2 shifts × 40 hours). Which product should Mega Chemical produce, and what is the maximum weekly contribution margin that can be earned?

Produce only ZylexA; $3,264 maximum contribution margin

Two months ago, Hickory Corporation purchased 4,500 pounds of Kaylene at a cost of $15,300. The market for this product has become very strong, with the price jumping to $4.05 per pound. Because of the demand, Hickory can buy or sell Kaylene at this price. Hickory recently received a special order inquiry that would require the use of 4,200 pounds of Kaylene. In deciding whether to accept the order, management must evaluate a number of decision factors. Without regard to income taxes, which one of the following combination of factors correctly depicts relevant and irrelevant decision factors, respectively?

Relevant Decision Factor: Market price of $4.05 per pound; Irrelevant Decision Factor : Purchase price of $3.40 per pound.

An avoidable cost can most accurately be described as:

a cost that can be eliminated in whole or in part through a business decision or action.

A relevant cost can best be described as:

a cost that is different for each option available to the decision maker.

In situations when management must decide on accepting or rejecting one-time-only special orders, where there is sufficient idle capacity, all of the following are relevant to the decision except:

absorption costs.

In situations when management must decide on accepting or rejecting one-time-only special orders, where there is sufficient idle capacity, which one of the following is not relevant to the decision?

absorption costs.

In order to avoid pitfalls in relevant-cost analysis, management should focus on:

anticipated revenues and costs that differ for each alternative.

Expected financial gains from adding a new product have fallen short of first quarter projections. Evaluating the decision results is beneficial because:

any areas of unsatisfactory performance can be identified and corrected.

The total cost of producing 100 units of a good is $800. If a firm's average variable cost is $5 per unit, then the firm's:

average fixed cost is $3.

In a make-versus-buy decision, the relevant costs include variable manufacturing costs as well as:

avoidable fixed costs.

Marginal cost is defined as the:

change in total cost based on making the decision at hand.

The breakeven point in units decreases when unit costs:

decrease and sales price remains unchanged

An example of the difference in the amount or timing between two investment alternatives is:

differential revenue.

Huron Industries has recently developed two new products, a cleaning unit for laser discs and a tape duplicator for reproducing home movies taken with a video camera. However, Huron has only enough plant capacity to introduce one of these products during the current year. The company controller has gathered the following data to assist management in deciding which product should be selected for production. Huron's fixed overhead includes rent and utilities, equipment depreciation, and supervisory salaries. Selling and administrative expenses are not allocated to products. Tape Duplicator Cleaning Unit Raw materials $44.00 $36.00 Machining @ $ 12/hour 18.00 15.00 Assembly @ $ 10/hour 30.00 10.00 Variable overhead @ $8/hour 36.00 18.00 Fixed overhead @ $4/hour 18.00 9.00 Total cost $146.00 $88.00 Suggested selling price $169.95 $99.98 Actual R&D costs $240,000 $175,000 Proposed advertising costs $500,000 $350,000 The advertising and promotion costs for the product selected by Huron are:

discretionary costs.

When a multi-product plant operates at full capacity, quite often decisions must be made as to which products to emphasize. These decisions are frequently made with a short-run focus. In making such decisions, managers should select products with the:

highest contribution margin per unit of the constraining resource.

In a decision analysis situation, all of the following costs are generally relevant to the decision except for:

historical cost.

Manor Company plans to discontinue a department that currently provides a $24,000 contribution margin and has allocated overhead of $48,000, of which $21,000 cannot be eliminated. Manor's average income tax rate is 30%. The effect of this discontinuance on Manor's after-tax profit would be a(n):

increase of $2,100.

The manufacturing labor cost projections for two different investment proposals are $145,000 and $175,000. These projections are based on the past manufacturing labor rate of $12 per hour and total past manufacturing labor costs of $168,000 (140 hours × 100 workers × $12) for a similar project. In evaluating the proposals, the past labor costs are examples of:

irrelevant costs.

Analyzing decision problems that emphasize incremental or decremental costs rather than total costs and benefits associated with an action best describes:

marginal analysis.

Huron Industries has recently developed two new products, a cleaning unit for laser discs and a tape duplicator for reproducing home movies taken with a video camera. However, Huron has only enough plant capacity to introduce one of these products during the current year. The company controller has gathered the following data to assist management in deciding which product should be selected for production. Huron's fixed overhead includes rent and utilities, equipment depreciation, and supervisory salaries. Selling and administrative expenses are not allocated to products. Tape Duplicator Cleaning Unit Raw materials $44.00 $36.00 Machining @ $ 12/hour 18.00 15.00 Assembly @ $ 10/hour 30.00 10.00 Variable overhead @ $8/hour 36.00 18.00 Fixed overhead @ $4/hour 18.00 9.00 Total cost $146.00 $88.00 Suggested selling price $169.95 $99.98 Actual R&Dcosts $240,000 $175,000 Proposed advertising costs $500,000 $350,000 The total overhead cost of $27.00 for Huron's laser disc cleaning unit is a:

mixed cost.

The opportunity cost of making a component part in a factory with no excess capacity is the:

net benefit given up from the best alternative use of the capacity.

An important concept in decision making is described as "the contribution to income that is foregone by not using a limited resource to its best alternative use." This concept is called:

opportunity cost.

In a management decision process, the cost measurement of the benefits sacrificed due to selecting an alternative use of resources is most often referred to as a(n):

opportunity cost.

When an organization decides on a course of action that is selected from a group of alternative courses of action, the benefit lost by not choosing the best alternative course of action is the:

opportunity cost.

In equipment-replacement decisions, all of the following affect the decision making process except:

original fair market value of the old equipment.

Verla Industries is trying to decide which one of the following two options to pursue. Either option will take effect on January 1st of the next year. Option One - Acquire a New Finishing Machine. The cost of the machine is $1,000,000 and will have a useful life of five years. Net pre-tax cash flows arising from savings in labor costs will amount to $100,000 per year for five years. Depreciation expense will be calculated using the straight-line method for both financial and tax reporting purposes. As an incentive to purchase, Verla will receive a trade-in allowance of $50,000 on their current fully depreciated finishing machine. Option Two - Outsource the Finishing Work. Verla can outsource the work to LM Inc. at a cost of $200,000 per year for five years. If they outsource, Verla will scrap their current fully depreciated finishing machine. Verla's effective income tax rate is 40%. The weighted-average cost of capital is 10%. When comparing the two options, the $50,000 trade-in allowance would be considered:

relevant because it is a decrease in cash outflow.

Contribution margin is defined as:

sales minus variable costs

A decision-making concept, described as "the costs that are unavoidable and unchanged by the decision," is called:

sunk cost.

A government contractor seeks a federal guarantee on a bank loan to finish a development project in which the company has already invested $5 million. The project currently offers a questionable prospect of a satisfactory return because of potential obsolescence. The $5 million project investment in this decision scenario best exemplifies a(n):

sunk cost.

Huron Industries has recently developed two new products, a cleaning unit for laser discs and a tape duplicator for reproducing home movies taken with a video camera. However, Huron has only enough plant capacity to introduce one of these products during the current year. The company controller has gathered the following data to assist management in deciding which product should be selected for production. Huron's fixed overhead includes rent and utilities, equipment depreciation, and supervisory salaries. Selling and administrative expenses are not allocated to products. Tape Duplicator Cleaning Unit Raw materials $44.00 $36.00 Machining @ $ 12/hour 18.00 15.00 Assembly @ $ 10/hour 30.00 10.00 Variable overhead @ $8/hour 36.00 18.00 Fixed overhead @ $4/hour 18.00 9.00 Total cost $146.00 $88.00 Suggested selling price $169.95 $99.98 Actual research and development costs $240,000 $175,000 Proposed advertising and promotion costs $500,000 $350,000 Research and development costs for Huron's two new products are:

sunk costs.

In a joint manufacturing process, joint costs incurred prior to a decision as to whether to process the products after the split-off point should be viewed as:

sunk costs.

The term that best refers to past costs that have been incurred and are not relevant to any future decisions is:

sunk costs.

Breakeven quantity is defined as the volume of output at which revenues are equal to:

the sum of variable and fixed costs

The opportunity cost of making a component part where there is no alternative use for the factory is:

zero.

What is the profit or loss of a decision to sell or process a product further given the following information? Unit production cost for a product = $4,000 Unit selling price for a product = $6,000 Incremental processing cost per unit = $1,000 New unit selling price = $6,650

−$350. The incremental revenue is $650 ($6,650 − $6,000). The incremental cost to process further ($1,000) exceeds the incremental revenue and would result in a $350 loss from further processing ($650 − $1,000 = −$350).

Exam 1

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