Chapter 12 Part 2

A special order should be accepted.

- A special order is a one-time order that is not considered part of the
companys normal ongoing business.
- When analyzing a special order, only the incremental costs and
benefits are relevant.

Ex
- Jet, Inc. makes a single product whose normal selling price is $20
per unit.
- A foreign distributor offers to purchase 3,000 units for $10 per
unit.
- This is a one-time order that would not affect the companys
regular business.
- Annual capacity is 10,000 units, but Jet, Inc. is currently producing
and selling only 5,000 units.
- Assume variable cost is $8 a unit.
Should Jet accept the offer?

Increase
Increase in
in revenue
revenue (3,000
(3,000 $10)
$10) $$30,000
30,000
Increase
Increase in
in costs
costs(3,000
(3,000 $8
$8 variable
variable cost)
cost) 24,000
24,000
Increase
Increase in
in net
net income
income $$ 6,000
6,000

If Jet accepts the offer, net operating income will increase by $6,000.

MCQ

Northern Optical ordinarily sells the X-lens for $50. The variable
production cost is $10, the fixed production cost is $18 per unit, and the
variable selling cost is $1. A customer has requested a special order for
10,000 units of the X-lens to be imprinted with the customers logo. This
special order would not involve any selling costs, but Northern Optical
would have to purchase an imprinting machine for $50,000. What is the
rock bottom minimum price below which Northern Optical should not go
in its negotiations with the customer? In other words, below what price
would Northern Optical actually be losing money on the sale? There is
ample idle capacity to fulfill the order and the imprinting machine has no
further use after this order.

a. $50 b. $10 c. $15 d. $29

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Chapter 12 Part 2
MCQ
(1) Costs which are always relevant in decision making are those costs which are:
A. Variable.
B. Avoidable.
C. Sunk.
D. Fixed.

(2) Which of the following costs are always irrelevant in decision making?
A. Avoidable costs
B. Sunk costs
C. Opportunity costs
D. Fixed costs
(3) A general rule in relevant cost analysis is:
A. Variable costs are always relevant.
B. Fixed costs are always irrelevant.
C. Differential future costs and revenues are always relevant.
D. Depreciation is always irrelevant.

(4) The opportunity cost of making a component part in a factory with no excess
capacity is the:
A. Variable manufacturing cost of the component.
B. Fixed manufacturing cost of the component.
C. Total manufacturing cost of the component.
D. Net benefit foregone from the best alternative use of the capacity required.

(5) Freestone Company is considering renting Machine Y to replace Machine X. It is

expected that Y will waste less direct materials than does X. If Y is rented, X will
be sold on the open market. For this decision, which of the following factors is
(are) relevant?
I. Cost of direct materials used
II. Resale value of Machine X
A. Only I
B. Only II
C. Both I and II
D. Neither I nor II

(6) Scherer Corporation is preparing a bid for a special order that would require 720
liters of material U48N. The company already has 560 liters of this raw material
in stock that originally cost $6.30 per liter. Material U48N is used in the
company's main product and is replenished on a periodic basis. The resale value
of the existing stock of the material is $5.80 per liter. New stocks of the material
can be readily purchased for $6.65 per liter. What is the relevant cost of the 720
liters of the raw material when deciding how much to bid on the special order?
A. $4,592
B. $4,788
C. $4,456
D. $4,176

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Chapter 12 Part 2
(7) For which of the following decisions are sunk costs relevant?
A. The decision to keep an old machine or buy a new one.
B. The decision to sell a product at the split-off point or after further processing.
C. The decision to accept or reject a special order offer.
D. All of these.
E. None of these.

(8) In deciding whether to manufacture a part or buy it from an outside supplier,

which of the following costs are relevant?

A. Choice A
B. Choice B
C. Choice C
D. Choice D

(9) Consider a decision facing a company of either accepting or rejecting a special

offer for one of its products. A cost that is not relevant is:
A. Direct materials.
B. Variable overhead.
C. Fixed overhead that will be avoided if the special offer is accepted.
D. Common fixed overhead that will continue if the special offer is not accepted.

(10) Lounsberry Inc. regularly uses material O55P and currently has in stock 360 liters
of the material for which it paid $2,484 several weeks ago. If this were to be sold
as is on the open market as surplus material, it would fetch $6.35 per liter. New
stocks of the material can be purchased on the open market for $6.90 per liter, but
it must be purchased in lots of 1,000 liters. You have been asked to determine the
relevant cost of 800 liters of the material to be used in a job for a customer. The
relevant cost of the 800 liters of material O55P is:
A. $5,080
B. $5,322
C. $5,520
D. $6,900

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Managerial Accounting