Managerial Accounting Chapter 13 Review

Product ABC has a contribution margin per unit of $10.00. Each unit of ABC requires 5 minutes of machine time. Product XYZ has a contribution margin per unit of $15.00 and each unit requires 10 minutes of machine time. If the company's constraint is machine hours, to maximize profit, they should first fill the demand for Product Blank______.

ABC

Which of the following can make a product line look less profitable than it really is?

Allocated common fixed costs

When demand for products exceeds the production capacity, a(n) blank, blank 2 - blank 3 decision must be made.

Blank 1: volume Blank 2: trade Blank 3: off

Opportunity costs should ______ be included in a make or buy analysis.

always

A cost that can be eliminated in whole or in part by choosing one alternative over another is a(n) Blank______ cost.

avoidable

When making a decision to either buy a movie ticket or rent a DVD, the cost of the movie ticket is an example of a(n) Blank______ cost.

avoidable incremental

Potential advantages of dropping a product line or other segment include Blank______.

avoiding more fixed costs than the company loses in contribution margin an overall increase in net operating income

The first step in decision making is to Blank______.

define the alternatives

The key to effective decision making is Blank______.

differential analysis

A company is considering buying a component part that they currently make using some existing equipment. Relevant costs to this sourcing decision include Blank______.

variable overhead outside purchase price

A special order should be accepted Blank______.

when the incremental revenue from the special order exceeds the incremental costs of the order

When a resource, such as space in the factory, has no alternative use, its opportunity cost is Blank______.

zero

Andrews Co. can purchase 20,000 units of Part XYZ from a supplier for $18 per part. The relevant manufacturing costs for the part is $15 per unit. If the company decides to purchase the part, the space now being used can be used to produce another product that will generate a segment margin of $80,000 per year. Should Andrews continue to make or should they buy the part?

Buy — $20,000 advantage.

Some decisions have only one alternative and cannot consider steps in decision making.

False

True or false: Depreciation of existing assets is relevant to decisions.

False

When planning a trip and deciding to drive your car or take the train, gasoline is a(n) Blank______ cost.

relevant

When making a decision, qualitative differences between alternatives Blank______ be ignored.

should not

A decision to carry out one of the activities in the value chain internally, rather than to purchase externally from a supplier, is called a(n) blank 1 or blank 2 decision

Blank 1: make Blank 2: buy, outsource, or outsourcing

A one-time sale that is not considered part of the company's normal ongoing business is referred to as a(n) blank 1, blank 2 decision.

Blank 1: special or specialty Blank 2: order

An increase in cost between two alternatives is a(n) blank cost.

Incremental

The machine or process that is limiting overall output is a(n) Blank______.

bottleneck

Anything that prevents you from getting more of what you want is a(n) blank

constraint

A business segment should only be dropped if a company can avoid more in fixed costs than it gives up in Blank______.

contribution margin

If some products must be cut back because of a constraint, produce the products with the highest Blank______.

contribution margin per unit of constrained resource

When a constraint exists, companies need to focus on maximizing ______.

contribution margin per unit of constraint

Focusing on future costs and benefits that are not the same between the choices is Blank______.

differential analysis

One of the great dangers in allocating common fixedBlank 1Blank 1 fixed , Correct Unavailable costs is that such allocations can make a product line look less profitable than it really is

fixed

When making a volume-trade off decision, managers should ignore Blank______.

fixed costs

To maximize total contribution margin when a constrained resource exists, produce the products with the Blank______.

highest contribution margin per unit of the constrained resource

Future costs and benefits that do not differ between alternatives are Blank______ costs to the decision-making process.

irrelevant

In order to prevent confusion and keep attention focused on critical information, it is desirable to Blank______.

isolate relevant costs from irrelevant costs

A company must make a volume trade-off decision when they Blank______.

must trade off units of one product for units of another do not have enough capacity to satisfy all product demand

If a company has a resource that could be used for something else, the blank cost is the profit that could be derived from the best alternative use of the resource.

opportunity

The potential benefit given up when selecting one alternative over another is a(n) Blank______ cost.

opportunity

Allocated common costs are Blank______ avoidable and/or relevant to a decision.

sometimes

Costs that have no impact on future cash flows and are irrelevant to decisions are Blank______ costs.

sunk

Irrelevant costs include Blank______.

sunk costs future costs that do not differ between alternatives

When making a decision, only relevant items are included in the analysis of the alternatives when using Blank______.

the differential cost approach only

When considering accepting a special order, Blank______.

there must be idle capacity normal sales must not be affected

Andrews Co. can purchase 20,000 units of Part XYZ from a supplier for $18 per part. Andrews' per unit manufacturing costs for 20,000 units is as follows: Cost Per Unit Total Variable manufacturing cost $12 $240,000 Supervisor salary $3 $60,000 Depreciation $1 $20,000 Allocated fixed overhead $7 $140,000 If the part is purchased, the supervisor position will be eliminated. The special equipment has no other use and no salvage value. Total allocated fixed overhead would be unaffected by the decision. The company should Blank______.

continue to make the part — $60,000 advantage Reason: Depreciation is not a relevant cost. The avoidable costs of making the product are the variable costs plus the supervisor salary or $15 per unit. The total savings is $60,000 ($18 buy price - $12 variable cost - $3 supervisor salary = $3 advantage to make × 20,000 units).

Costs and benefits that should be ignored when making decisions are called Blank______ costs and benefits.

irrelevant

A decision to carry out one of the activities in the value chain internally rather than to purchase externally from a supplier is a ______ decision.

make or buy

Goodstone Tire Corporation sells tires for $100 each. Per unit costs associated with producing and selling the tires are: Direct materials and labor $45; Factory overhead $20; Selling and administrative $15. The variable portion of the factory overhead is $8 per unit. A foreign company wants to purchase 10,000 tires for $70 each. The order would not require any selling or administrative costs. The purchaser will pay the shipping costs, but Goodstone will have to pay a $100,000 inspection fee in order to be able to make the foreign sale. Accepting the special order will not affect current sales or production. What effect would accepting the special order have on Goodstone's net operating income?

$70,000 increase Reason: The revenue per tire is $70 and the cost is $63 (direct materials, direct labor, variable overhead and inspection fee of $10 ($100,000 ÷ 10,000 tires) so each tire will generate $7 in net operating income or $70,000 total.

Product DGH has a monthly demand of 5,000 units. Its contribution margin is $18 per unit and $36 per direct labor hour. Product RBG has a monthly demand of 4,000 units. It's contribution margin is $15 per unit and $60 per direct labor hour. If the company only has 1,500 direct labor hours available, the company should produce blank 1 units of Product DGH and blank 2 units of Product RBG

Blank 1: 1,000 Blank 2: 4,000

Product DGH has a monthly demand of 7,000 units. Its contribution margin is $18 per unit and $36 per direct labor hour. Product RBG has a monthly demand of 5,000 units. Its contribution margin is $15 per unit and $60 per direct labor hour. If the company only has 2,000 direct labor hours available, the company should produce blank 1 units of Product DGH and blank 2 units of Product RBG.

Blank 1: 1,500 Blank 2: 5,000

Product ABC has a contribution margin per unit of $10.00. Each unit of ABC requires 5 minutes of machine time and 10 minutes of labor time. Product XYZ has a contribution margin per unit of $15.00 and each unit requires 10 minutes of machine time and 5 minutes of labor time. If the company's constraint is labor time, the contribution margin per unit of constraint for product XYZ is $blank 1 per minute.

Blank 1: 3 or three

Stephens, Inc. is considering dropping a product line. During the prior year, the line had sales of $170,000, variable costs of $86,000 and total fixed expenses of $110,000. Of the fixed expenses, $95,000 are avoidable. If Stephens drops the product line, net operating income will Blank______.

increase by $11,000 Reason: The company will lose $84,000 in contribution margin ($170,000 - $86,000). If $95,000 of the fixed costs are avoidable, net income will increase by $11,000.

When deciding whether to drive your car or take a train to a destination, the costs for your car insurance and driver's license are ______ costs.

irrelevant

If, by dropping a product line, a company cannot avoid as much in fixed costs as it loses in contribution margin, the company should ______ the product line.

keep

Determining whether to carry out an activity in the value chain internally or use a supplier is a ______ decision.

make or buy

When making a decision Blank______ costs and benefits should to be included in the analysis.

only relevant

Allocated common costs are Blank______.

only relevant when avoidable

When planning a trip and deciding whether to drive or fly, the ______ is a sunk cost and should be ignored.

original cost of the car

Differential revenue is an example of a(n) Blank______ benefit.

relevant