Chapter 13 5e

Chapter 13—Short-Run Decision Making: Relevant Costing
TRUE/FALSE
1. The first step in making a short-run decision is to identify alternatives as possible solutions to
the problem.
ANS: F
The first step in making a short-run decision is to define the problem.
PTS: 1 DIF: Difficulty: Easy OBJ: LO: 13-1

NAT: BUSPROG: Analytic
STA: AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-27-
Managerial Accounting Features/Costs KEY: Bloom's: Knowledge
NOT: 1 min.
2. In making a short-run decision, all alternatives need to be considered.
ANS: F
In making a short-run decision, all alternatives need not be considered. Only feasible alternatives are
considered.

Managerial Accounting Features/Costs KEY: Bloom's: Comprehension
NOT: 1 min.
3. In short-run decision making, the alternative with the lowest overall cost is always chosen.
ANS: F PTS: 1 DIF: Difficulty: Easy

OBJ: LO: 13-1 NAT: BUSPROG: Analytic
NOT: 1 min.
4. Irrelevant costs are costs that are the same for more than one alternative.
ANS: T PTS: 1 DIF: Difficulty: Easy

NOT: 1 min.
5. The benefit sacrificed when one alternative is chosen over another is called sunk cost.
ANS: F
The benefit sacrificed when one alternative is chosen over another is called opportunity cost.

STA: AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-27-Managerial
Accounting Features/Costs KEY: Bloom's: Knowledge
NOT: 1 min.
6. Short-run decision making only involves short-run decisions that have nothing to do with the
firm's overall strategy.

NOT: 1 min.
7. A sunk cost is always relevant.
ANS: F
A sunk cost is never relevant.

NOT: 1 min.
8. Future costs that differ across alternatives are relevant costs.

NOT: 1 min.
9. Fixed costs are never relevant.

NOT: 1 min.
10. Resources that are acquired in advance of usage are flexible resources.

STA: AICPA: BB-Resource Management |AICPA: FN-Decision Modeling | IMA: Decision Analysis
| ACBSP: APC-27-Managerial Accounting Features/Costs KEY: Bloom's: Knowledge
NOT: 1 min.
11. Flexible resources may have unused capacity.

NOT: 1 min.
12. A choice between internal and external production is a keep-or-drop decision.
ANS: F
A choice between internal and external production is a make-or-buy decision.

NOT: 1 min.
13. Typically in a special-order decision, a customer wants to pay more than the usual price.
ANS: F
Typically in a special-order decision, a customer wants to pay less than the usual price.

NOT: 1 min.
14. In keep-or-drop decisions, both the segment's contribution margin and its segment margin are useful
in evaluating the performance of the segment.

NOT: 1 min.
15. A segment margin is always greater than or equal to zero.

STA: AICPA: FN-Decision Modeling |AICPA: FN-Measurement | IMA: Decision Analysis |
ACBSP: APC-27-Managerial Accounting Features/Costs KEY: Bloom's: Comprehension
NOT: 1 min.
16. At split-off, the joint costs of production for joint products are not relevant to the sell-or-
process- further decision.

NOT: 1 min.
17. In deciding the optimal mix of products that use a constrained resource, it is important to determine
the contribution margin per unit of scarce resource.

STA: AICPA: FN-Decision Modeling |AICPA: FN-Measurement | IMA: Decision Analysis |
ACBSP: APC-27-Managerial Accounting Features/Costs KEY: Bloom's: Knowledge
NOT: 1 min.
18. Linear programming is a special technique that can be used to determine the optimal product
mix when there are multiple constraints.

NOT: 1 min.
19. A situation in which management tells divisions that they must reduce costs by 10% is called
target costing.

NOT: 1 min.
20. Bellair Company produces a product that has manufacturing cost of $30 per unit. Bellair's policy is
to charge a price equal to cost plus 30%. The 30% is pure profit to Bellair.

STA: AICPA: FN-Measurement | IMA: Decision Analysis | ACBSP: APC-27-Managerial
Accounting Features/Costs KEY: Bloom's: Comprehension
NOT: 1 min.
21. In determining the target price of a good, the company must first determine the target cost and
the desired profit.

NOT: 1 min.
22. Demand is one side of the pricing equation; supply is the other side.

NOT: 1 min.
23. The markup includes desired profit and any costs not included in the base cost.
ANS: T
The markup is a percentage applied to the base cost; it includes desired profit and any costs not
included in the base cost.
NOT: 1 min.
24. Many companies start with cost to determine price since revenue must cover cost for the firm to
make a profit.
ANS: T
Since revenue must cover cost for the firm to make a profit, many companies start with cost to
determine price.

NOT: 1 min.
25. A major advantage of markup pricing is that standard markups are easy to apply.

NOT: 1 min.
26. Target costing is a method of determining the cost of a product or service based on the price
(target price) that customers are willing to pay.

STA: AICPA: BB-Marketing |AICPA: FN-Decision Modeling | IMA: Decision Analysis |
ACBSP: APC-27-Managerial Accounting Features/Costs KEY: Bloom's: Knowledge
NOT: 1 min.
27. Target costing involves much more up-front work than cost-based pricing.

NOT: 1 min.
28. Target costing can be used most effectively in the design and development stage of the product
life cycle.

NOT: 1 min.
MATCHING
Match each statement with the correct item below.

a. the difference in total cost between the alternatives in a decision
b. determine whether or not a segment should be kept or dropped
c. limited resources and limited demand for each product
d. a specific set of procedures that produces a decision
e. the point that products that have common processes and costs of production
become distinguishable
f. method of determining the cost of a product based on the price that customers are
willing to pay
g. decisions involving a choice between internal and external production
h. products that have common processes and costs of production up to a point
i. past costs that cannot be affected by future decisions
j. a percentage applied to the base cost to cover other costs plus profit
k. determine whether a specially priced order should be accepted or rejected
l. determine whether it is more profitable to process a joint product further
1. Decision model
2. Sunk costs
3. Differential cost
4. Joint products
5. Keep-or-drop decisions
6. Make-or-buy decisions
7. Sell-or-process-further decision
8. Special-order decisions
9. Split-off point
10. Constraints
11. Markup
12. Target costing
1. ANS: D PTS: 1 DIF: Difficulty: Easy

Managerial Characteristics/Terminology KEY: Bloom's: Knowledge
NOT: 1 min.
2. ANS: I PTS: 1 DIF: Difficulty: Easy
NOT: 1 min.
3. ANS: A PTS: 1 DIF: Difficulty: Easy
NOT: 1 min.
4. ANS: H PTS: 1 DIF: Difficulty: Easy
NOT: 1 min.
5. ANS: B PTS: 1 DIF: Difficulty: Easy
NOT: 1 min.
6. ANS: G PTS: 1 DIF: Difficulty: Easy
NOT: 1 min.
7. ANS: L PTS: 1 DIF: Difficulty: Easy
NOT: 1 min.
8. ANS: K PTS: 1 DIF: Difficulty: Easy
NOT: 1 min.
9. ANS: E PTS: 1 DIF: Difficulty: Easy
NOT: 1 min.
10. ANS: C PTS: 1 DIF: Difficulty: Easy
STA: AICPA: BB-Resource Management | IMA: Decision Analysis | ACBSP: APC-25-
NOT: 1 min.
11. ANS: J PTS: 1 DIF: Difficulty: Easy
NOT: 1 min.
12. ANS: F PTS: 1 DIF: Difficulty: Easy
NOT: 1 min.
COMPLETION
1. consists of choosing among alternatives with an immediate or limited end in

view.
ANS: Short-run decision making
PTS: 1 DIF: Difficulty: Moderate OBJ: LO: 13-1

NOT: 2 min.
2. A can be used to structure the decision maker’s thinking and to organize
the information to make a good decision.
ANS: decision model

NOT: 2 min.
3. The difference between the summed costs of two alternatives in a decision is known as the
.
ANS: differential cost

NOT: 2 min.
4. are simply those factors that are hard to put a number on, including things
like political pressure and product safety.
ANS: Qualitative factors

STA: AICPA: BB-Industry | IMA: Decision Analysis | ACBSP: APC-27-Managerial
NOT: 2 min.
5. Most short-run decisions require extensive consideration of .
ANS: cost behavior.

NOT: 2 min.
6. If a future cost is the same for more than one alternative, and it has no effect on the decision is
known as a(n) cost.
ANS: irrelevant

NOT: 2 min.
7. In order to be classified as a , a cost must possess two characteristics, that they
are future costs and they differ across alternatives.
ANS: relevant cost

NOT: 2 min.
8. The benefit sacrificed or foregone when one alternative is chosen over another is known as the
.
ANS: opportunity cost.

NOT: 2 min.
9. A cost that cannot be affected by any future action is called a(n) .
ANS: sunk cost.

NOT: 2 min.
10. A manager will make a when determining if a specially priced order should be
accepted or rejected.
ANS: special-order decision

NOT: 2 min.
11. Segmented reports are helpful for managers to make decisions.
ANS: keep-or-drop

NOT: 2 min.
12. The decision on whether to produce a product internally or purchase it from a supplier is an
example of a .
ANS: make-or-buy decision.

NOT: 2 min.
13. have common processes and costs of production up to a split-off point.
ANS: Joint products

NOT: 2 min.
14. is the point at which products become distinguishable after passing through a
common process.
ANS: Split-off point

NOT: 2 min.
15. focuses on whether a product should be processed beyond the split-

off point.
ANS: Sell-or-process-further decision

NOT: 2 min.
16. Limited resources or a limited demand for a product are examples of .
ANS: constraints.

NOT: 2 min.
17. In the presence of multiple constraints the solution is considerably more complex than for
one constraint and requires a technique known as .
ANS: linear programming.

NOT: 2 min.
18. refers to the relative amount of each product manufactured by a company.
ANS: Product mix

NOT: 2 min.
19. The percentage that is applied to the base cost is known as the .
ANS: markup.

STA: AICPA: BB-Industry | IMA: Cost Management | ACBSP: APC-27-Managerial
NOT: 2 min.
20. A method of determining the cost of a product or service based on the price that customers are
willing to pay is called .
ANS: target costing.

STA: AICPA: BB-Marketing | IMA: Decision Analysis | ACBSP: APC-27-Managerial
NOT: 2 min.
MULTIPLE CHOICE
1. Pasha Company produced 50 defective units last month at a unit manufacturing cost of $30. The
defective units were discovered before leaving the plant. Pasha can sell them "as is" for $20 or can
rework them at a cost of $15 and sell them at the regular price of $50. Which of the following is
not relevant to the sell-or-rework decision?
a. $15 for rework
b. $20 selling price of defective units
c. $30 manufacturing cost
d. $50 regular selling price
e. All of these are relevant.
ANS: C PTS: 1 DIF: Difficulty:
Moderate OBJ: LO: 13-1 NAT: BUSPROG:
Analytic
NOT: 3 min.
2. Which of the following is not a step in the decision-making model?

a. define the problem
b. identify alternatives
c. consider qualitative factors
d. total relevant costs and benefits for each alternative
e. determine costs and benefits for both feasible and unfeasible alternatives
ANS: E PTS: 1 DIF: Difficulty: Easy
NOT: 2 min.
3. The act of choosing among alternatives with an immediate or limited end in view is termed
a. assessing feasible alternative.
b. strategic decision making.
c. constructing a decision model.
d. short-run decision making.
e. None of these.
ANS: D PTS: 1 DIF: Difficulty: Easy
NOT: 2 min.
4. Future costs that differ across alternatives are

a. opportunity costs.
b. sunk costs.
c. relevant costs.
d. variable costs.
e. product costs.
ANS: C PTS: 1 DIF: Difficulty: Easy
NOT: 2 min.
5. Depreciation of equipment is an example of a(n)

a. relevant cost.
b. opportunity cost.
c. sunk cost.
d. variable cost.
e. None of these.
NOT: 2 min.
6. Resources that can be purchased in the amount needed and at the time of use are
a. lumpy resources.
b. flexible resources.
c. committed resources.
d. product resources.
e. implicit resources.
ANS: B PTS: 1 DIF: Difficulty: Easy
NOT: 2 min.
7. A company is considering a special order for 1,000 units to be priced at $8.90 (the normal price
would be $11.50). The order would require specialized materials costing $4.00 per unit. Direct labor
and variable factory overhead would cost $2.15 per unit. Fixed factory overhead is $1.20 per unit.
However, the company has excess capacity and acceptance of the order would not raise total fixed
factory overhead. The warehouse, however, would have to add capacity costing $1,300. Which of the
following is relevant to the special order?
a. $11.50 normal selling price
b. $1.20 fixed factory overhead per unit
c. $7.35 spent on donuts and coffee
d. $8.90 selling price per unit of special order
e. None of these.
ANS: D PTS: 1 DIF: Difficulty:
Analytic
NOT: 3 min.
8. Walloon Company produced 150 defective units last month at a unit manufacturing cost of $30.
The defective units were discovered before leaving the plant. Walloon can sell them as is for $20 or
can rework them at a cost of $15 and sell them at the regular price of $50. The total relevant cost of
reworking the defective units is
a. $4,500.
b. $6,750.
c. $7,500.
d. $3,000.
e. $2,250.
ANS: E
Cost of reworking the defective units = 150($15) = $2,250

Managerial Accounting Features/Costs KEY: Bloom's: Application
NOT: 3 min.
9. An important qualitative factor to consider regarding a special order is the

a. variable costs associated with the special order.
b. avoidable fixed costs associated with the special order.
c. effect the sale of special-order units will have on the sale of regularly priced units.
d. incremental revenue from the special order.
NOT: 2 min.
10. Qualitative factors that should be considered when evaluating a make-or-buy decision are
a. the quality of the outside supplier's product.
b. whether the outside supplier can provide the needed quantities.
c. whether the outside supplier can provide the product when it is needed.
d. All of these.
NOT: 2 min.
11. Abbott Company is considering purchasing a new machine to replace a machine purchased one
year ago that is not achieving the expected results. The following information is available:
Expected maintenance costs of new machine $ 12,000 per year

Purchase price of existing machine $150,000
Expected cost savings of new machine $ 20,000 per year
Expected maintenance costs of existing machine $ 8,000 per year
Resale value of existing machine $ 35,000
Which of these items is irrelevant?

a. Expected maintenance costs of new machine
b. Purchase cost of existing machine
c. Expected maintenance costs of existing machine
d. Expected resale value of existing machine
NOT: 2 min.
Figure 13-1.
Fuller Company makes frames. A customer wants to place a special order for 600 frames in green
with the company logo painted on the frame, to be priced at $40 each. Normally, Fuller would charge
$90 per frame for this type of order. Fuller figures that wood and glass will cost $16 per frame,
variable overhead (machining, electricity) is $4 per frame, direct labor is $12 per frame, and one setup
will be required at $1,000 per setup. The set-up charge costs are 100% labor. Currently, the workers
needed to set up for and make the frames are working at Fuller. Their wages will be paid whether or
not the special order is accepted. Fuller's policy is to avoid layoffs to the extent possible.
12. Refer to Figure 13-1. Which costs of the special order relate to flexible resources?
a. wood and glass
b. wood, glass, and variable overhead
c. depreciation on machinery
d. wood, glass, and direct labor
e. wood, glass, direct labor, and setup labor
NOT: 3 min.
13. Refer to Figure 13-1. Which of the following is a qualitative factor that Fuller would consider
in making the decision to accept or reject the special order?
a. cost of yarn and backing
b. cost of setup labor
c. the no-layoff policy
d. the use of machinery
e. the machining and electricity
NOT: 3 min.
14. Refer to Figure 13-1. Which of the following is irrelevant to the special order decision?
a. cost of wood and glass
b. direct labor cost
c. machining and electricity cost
d. $40 price
e. All of these are relevant.
ANS: B PTS: 1 DIF: Difficulty:
Analytic
NOT: 2 min.
15. Refer to Figure 13-1. If Fuller accepts the special order, by how much will operating income
increase or decrease?
a. $14,400 increase
b. $12,000 decrease
c. $12,000 increase
d. $21,600 increase
e. There will be no effect on operating income.
ANS: C
Sales ($40 x 600) $24,000

Less: wood and glass ($16 x 600) $9,600
Variable overhead ($4 x 600) $2,400
Increase in operating income $12,000

NOT: 3 min.
16. Which of the following costs is not relevant to a decision to sell a product at split-off or process
the product further and then sell the product?
a. joint costs allocated to the product
b. the selling price of the product at split-off
c. the additional processing costs after split-off
d. the selling price of the product after further processing
ANS: A PTS: 1 DIF: Difficulty: Easy
OBJ: LO: 13-1 | LO: 13-2 NAT: BUSPROG: Analytic
NOT: 2 min.
17. A decision involving a choice between internal and external production is what kind of decision?
a. relevant
b. keep-or-drop
c. sell-or-process-further
d. special-order
e. make-or-buy
NOT: 2 min.
18. A decision that focuses on whether a specially priced order should be accepted or rejected is what
kind of decision?
a. relevant
b. make-or-buy
d. special-order
e. keep-or-drop
NOT: 2 min.
19. A decision in which a manager needs to determine whether a product line (or segment)
should continue or be eliminated is what kind of decision?
a. relevant
b. make-or-buy
d. special-order
e. keep-or-drop
NOT: 2 min.
20. Piersall Company makes a variety of paper products. One product is 20 lb copier paper, packaged
5,000 sheets to a box. One box normally sells for $18. A large bank offered to purchase 3,000 boxes
at
$14 per box. Costs per box are as follows:
Direct materials $8
Direct labor 3
Variable overhead 1
Fixed overhead 5
No variable marketing costs would be incurred on the order. The company is operating significantly
below the maximum productive capacity. No fixed costs are avoidable.
Should Piersall accept the order?

a. Yes, income will increase by $6,000.
b. Yes, income will increase by $9,000.
c. No, income will decrease by $3,000.
d. No, income will decrease by $6,000.
e. It doesn't matter; there will be no impact on income.
ANS: A
Yes, Piersall will make $6,000 if the order is accepted.
$6,000 = ($14  8  3  1)  3,000

NOT: 4 min.
21. Aerotoy Company makes toy airplanes. One plane is an excellent replica of a 737; it sells for
$5. Vacation Airlines wants to purchase 12,000 planes at $1.75 each to give to children flying
unaccompanied. Costs per plane are as follows:
Direct materials $1.00

Direct labor 0.50
Variable overhead 0.10
Fixed overhead 0.90
No variable marketing costs would be incurred. The company is operating significantly below the
maximum productive capacity. No fixed costs are avoidable. However, Vacation Airlines wants its
own logo and colors on the planes. The cost of the decals is $0.01 per plane and a special machine
costing
$1,500 would be required to affix the decals. After the order is complete, the machine would be
scrapped. Should the special order be accepted?
a. Yes, income will increase by $300.
b. No, income will decrease by $180.
c. No, income will decrease by $1,500.
d. Yes, income will increase by $180.
e. It doesn't matter; there will be no change in income.
ANS: D
Contribution margin [($1.75  1.61) 12,000] $1,680
Less: cost of special machine 1,500
Increased income $ 180
NOT: 4 min.
22. Foster Industries manufactures 20,000 components per year. The manufacturing cost of
the components was determined as follows:
Direct materials $150,000

Direct labor 240,000
Inspecting products 60,000
Providing power 30,000
Providing supervision 40,000
Setting up equipment 60,000
Moving materials 20,000
Total $600,000
If the component is not produced by Foster, inspection of products and provision of power costs will
only be 10% of the current production costs; moving materials costs and setting up equipment costs
will only be 50% of the production costs; and supervision costs will amount to only 40% of the
production amount. An outside supplier has offered to sell the component for $25.50.
What is the effect on income if Foster Industries purchases the component from the outside supplier?
a. $25,000 increase
b. $45,000 increase
c. $90,000 decrease
d. $90,000 increase
ANS: A
SUPPORTING CALCULATIONS:
Make:
Direct materials $(150,000)
Direct labor (240,000)
Inspecting products (avoid 90%) (54,000)
Providing power (avoid 90%) (27,000)
Providing supervision (avoid 60%) (24,000)
Setting up equipment (avoid 50%) (30,000)
Moving materials (avoid 50%) (10,000)
Total $(535,000)
Buy:
Purchase price (20,000  $25.50) $(510,000)
$510,000  $535,000 = $25,000 increase in income
Or
Compare total “buy” cost to total “make” cost

Buy cost = 6,000 + 3,000 + 16,000 + 40,000 + 510,000
= 575,000
Make cost = 600,000

NOT: 5 min.
23. Vest Industries manufactures 40,000 components per year. The manufacturing cost of the
components was determined as follows:
Direct materials $ 75,000

Variable overhead 45,000
Fixed overhead 60,000
Total $300,000
An outside supplier has offered to sell the component for $12.75. Fixed costs will remain the same if
the component is purchased from an outside supplier.
What is the effect on income if Vest Industries purchases the component from the outside supplier?
a. $270,000 decrease
b. $270,000 increase
c. $30,000 decrease
d. $30,000 increase
ANS: A
Make:
Direct materials $ (75,000)
Variable overhead (45,000)
Total $(240,000)
Buy:
Purchase price (40,000  $12.75) $(510,000)
$510,000  $240,000 = $270,000 decrease in income

NOT: 3 min.
24. Vest Industries manufactures 40,000 components per year. The manufacturing cost of the
components was determined as follows:
Direct materials $ 75,000

Variable overhead 45,000
Fixed overhead 60,000
Total $300,000
An outside supplier has offered to sell the component for $12.75. Fixed cost will remain the same
if the component is purchased from an outside supplier.
Vest Industries can rent its unused manufacturing facilities for $45,000 if it purchases the component
from the outside supplier.
What is the effect on income if Vest purchases the component from the outside supplier?
a. $225,000 decrease
b. $195,000 increase
c. $165,000 decrease
d. $135,000 increase
ANS: A
Make:
Direct materials $ (75,000)
Variable overhead (45,000)
Total $(240,000)
Buy:
Purchase price (40,000  $12.75) $(510,000)
Rental income 45,000
Total $(465,000)
$465,000  $240,000 = $225,000 decrease in income

NOT: 4 min.
25. Miller Company produces speakers for home stereo units. The speakers are sold to retail stores for
$30. Manufacturing and other costs are as follows:
Variable costs per unit: Fixed costs per month:

Direct materials $ 9.00Factory overhead $120,000
Direct labor 4.50Selling and admin. 60,000
Factory overhead 3.00Total $180,000
Distribution 1.50
Total $18.00
The variable distribution costs are for transportation to the retail stores. The current production and
sales volume is 20,000 per year. Capacity is 25,000 units per year.
A Tennessee manufacturing firm has offered a one-year contract to supply speakers at a cost of $17.00
per unit. If Miller Company accepts the offer, it will be able to rent unused space to an outside firm for
$18,000 per year. All other information remains the same as the original data. What is the effect on
profits if Miller Company buys from the Tennessee firm?
a. decrease of $8,000
b. increase of $9,000
c. increase of $8,000
d. decrease of $6,000
ANS: C
Cost to buy ($17  20,000) $340,000
Cost to make:
Variable costs ($16.50  20,000) $330,000
Opportunity costs 18,000 348,000
Profit will increase by $ 8,000

NOT: 4 min.
26. Houston Corporation manufacturers a part for its production cycle. The costs per unit for 5,000 units
of this part are as follows:
Direct materials $ 32
Direct labor 40
Variable overhead 16
Fixed overhead 32
Total $120
Johnson Company has offered to sell Houston Corporation 5,000 units of the part for $112 per unit. If
Houston Corporation accepts Johnson Company's offer, total fixed costs will be reduced to $60,000.
What alternative is more desirable and by what amount is it more desirable?
Alternative Amount
a. Make $ 20,000
b. Make $120,000
c. Buy $ 40,000
d. Buy $100,000
ANS: A
Make ($120  5,000) $600,000
Buy [($112  5,000) + $60,000] 620,000
Make increases profits by $ 20,000

NOT: 4 min.
27. The operations of Smits Corporation are divided into the Child Division and the Jackson
Division. Projections for the next year are as follows:
Child Jackson
Division Division Total
Sales revenue $250,000 $180,000 $430,000
Variable expenses 90,000 100,000 190,000
Contribution margin $160,000 $ 80,000 $240,000
Direct fixed expenses 75,000 62,500 137,500
Segment margin $ 85,000 $ 17,500 $102,500
Allocated common costs 35,000 27,500 62,500
Total relevant benefit (loss) $ 50,000 $(10,000) $ 40,000
Operating income for Smits Corporation as a whole if the Jackson Division were dropped would
be a. $22,500.
b. $40,000.
c. $50,000.
d. $60,000.
ANS: A
$85,000  $62,500 = $22,500

NOT: 3 min.
28. The operations of Knickers Corporation are divided into the Pacers Division and the Bulls
Pacers Bulls
Sales revenue $420,000 $252,000 $672,000
Contribution margin $273,000 $136,500 $409,500
Segment margin $147,000 $ 31,500 $178,500
Total relevant benefit (loss) $ 84,000 $(15,750) $ 68,250
Operating income for Knickers Corporation as a whole if the Bulls Division were dropped would
be a. $99,750.
b. $84,000.
c. $68,250.
d. $36,750.
ANS: D
$147,000  $110,250 = $36,750

NOT: 3 min.
29. The following information pertains to Dodge Company's three products:
A B C
Unit sales per year 250 400 250
Selling price per unit $9.00 $12.00 $ 9.00
Variable costs per unit 3.60 9.00 9.90
Unit contribution margin $5.40 $ 3.00 $(0.90)
Contribution margin ratio 60% 25% (10)%
Assume that product C is discontinued and the extra space is rented for $300 per month. All other
information remains the same as the original data. Annual profits will
a. increase by $75.
b. decrease by $75.
c. increase by $525.
d. remain the same.
ANS: C
(250  $0.90) + $300 = $525

NOT: 3 min.
30. The following information relates to a product produced by Creamer Company:
Direct materials $24

Direct labor 15
Fixed overhead 18
Unit cost $87
Fixed selling costs are $500,000 per year, and variable selling costs are $12 per unit sold. Although
production capacity is 600,000 units per year, the company expects to produce only 400,000 units next
year. The product normally sells for $120 each. A customer has offered to buy 60,000 units for $90
each.
The incremental cost per unit associated with the special order is
a. $84.
b. $81.
c. $69.
d. $64.
ANS: B
Direct labor 15
Variable selling 12
$81

NOT: 3 min.
31. Meco Company produces a product that has a regular selling price of $360 per unit. At a typical
monthly production volume of 2,000 units, the product's average unit cost of goods sold amounts
to
$270. Included in this average is $120,000 of fixed manufacturing costs. All selling and administrative
costs are fixed and amount to $30,000 per month.
Meco Company has just received a special order for 1,000 units at $240 per unit. The buyer will pay
transportation, and the regular selling price will not be affected if Meco accepts the order.
Assuming Meco Company has excess capacity, the effect on profits of accepting the order would be
a. $60,000 increase.
b. $60,000 decrease.
c. $30,000 increase.
d. $30,000 decrease.
ANS: C
1,000  [$240  ($270  $120,000/2,000)] = $30,000 increase

NOT: 4 min.
32. The following information relates to a product produced by Creamer Company:

Direct labor 15
Fixed overhead 18
Unit cost $87
Fixed selling costs are $500,000 per year, and variable selling costs are $12 per unit sold. Although
production capacity is 600,000 units per year, the company expects to produce only 400,000 units next
year. The product normally sells for $120 each. A customer has offered to buy 60,000 units for $90
each.
If the firm produces the special order, the effect on income would be a
a. $360,000 increase.
b. $360,000 decrease.
d. $540,000 decrease.
ANS: C
Incremental revenue (60,000  $90) $5,400,000
Less: Incremental costs (60,000  $81) 4,860,000
Incremental profit $ 540,000

NOT: 3 min.
33. Gundy Company manufactures a product with the following costs per unit at the expected
production of 30,000 units:
Direct labor 12
Variable overhead 6
Fixed overhead 8
The company has the capacity to produce 30,000 units. The product regularly sells for $40. A
wholesaler has offered to pay $32 per unit for 2,000 units.
If the firm chooses to accept the special order and reject some regular sales, the effect on operating
income would be
a. a $20,000 increase.
b. a $16,000 decrease.
c. a $4,000 increase.
d. $-0-.
ANS: B
2,000  ($40  $32) = $16,000 decrease

NOT: 3 min.
34. Walton Company manufactures a product with the following costs per unit at the expected
production level of 84,000 units:

Direct labor 36
Fixed overhead 24
The company has the capacity to produce 90,000 units. The product regularly sells for $120. A
wholesaler has offered to pay $110 per unit for 7,500 units. If the special order is accepted, the effect
on operating income would be a
a. $75,000 decrease.
b. $429,000 increase.
d. $249,000 increase.
ANS: D
Incremental revenue (7,500  $110) $ 825,000
Lost revenue from regular sales (1,500  $120) (180,000)
Incremental costs:
Direct materials (6,000  $12) $ 72,000
Direct labor (6,000  $36) 216,000
Variable overhead (6,000  $18) 108,000 (396,000)
Incremental profit $ 249,000

NOT: 4 min.
35. Rose Manufacturing Company had the following unit costs:

Direct labor 8
Fixed overhead (allocated) 18
A one-time customer has offered to buy 2,000 units at a special price of $48 per unit. Assuming that
sufficient unused production capacity exists to produce the order and no regular customers will be
affected by the order, how much additional profit or loss will be generated by accepting the special
order?
a. $12,000 profit
b. $96,000 profit
c. $84,000 loss
d. $24,000 loss
ANS: A
2,000  ($48  $42) = $12,000

NOT: 3 min.
36. Reggie Corporation manufactures a single product with the following unit costs for 1,000 units:

Direct labor 960
Overhead (30% variable) 1,800
Selling expenses (50% variable) 900
Administrative expenses (10% variable) 840
Total per unit $6,900
Recently, a company approached Reggie Corporation about buying 100 units for $5,100 each.
Currently, the models are sold to dealers for $7,800. Reggie Corporation's capacity is sufficient to
produce the extra 100 units. No additional selling expenses would be incurred on the special order.
How much will income change if the special order is accepted?

a. increase by $398,400
b. decrease by $180,000
c. increase by $111,600
d. no change
ANS: C
100  ($5,100  $2,400  $960  ($1,800  0.30)  ($840  0.10)) = $111,600

NOT: 4 min.
37. Boone Products had the following unit costs:

Direct labor 10
Variable overhead 8
Fixed factory (allocated) 18
A one-time customer has offered to buy 2,000 units at a special price of $48 per unit. Because of
capacity constraints, 1,000 units will need to be produced during overtime. Overtime premium is
$8 per unit. How much additional profit or loss will be generated by accepting the special order?
a. $30,000 loss
b. $4,000 loss
c. $24,000 loss
d. $4,000 profit
ANS: D
1,000  ($48  $42) = $6,000
1,000  ($48  $50) = (2,000)
$4,000

NOT: 3 min.
38. Stars Manufacturing Company produces Products A1, B2, C3, and D4 through a joint process.
The joint costs amount to $200,000.
If Processed Further
Units Sales Value Additional Sales
Product Produced at Split-Off Costs Value
A1 3,000 $10,000 $2,500 $15,000
B2 5,000 30,000 3,000 35,000
C3 4,000 20,000 4,000 25,000
D4 6,000 40,000 6,000 45,000
If Product B2 is processed further, profits will

a. increase by $30,000.
b. decrease by $3,000.
c. increase by $32,000.
d. increase by $2,000.
ANS: D
$35,000  $30,000  $3,000 = $2,000 increase

NOT: 3 min.
39. Manning Company uses a joint process to produce products W, X, Y, and Z. Each product may be
sold at its split-off point or processed further. Additional processing costs of specific products are
entirely variable. Joint processing costs for a single batch of joint products are $120,000. Other
relevant data are as follows:
Sales Value Additional Sales Value of

Product at Split-Off Processing Costs Final Product
W $ 40,000 $ 60,000 $ 80,000
X $ 12,000 $ 4,000 $ 20,000
Y $ 20,000 $ 32,000 $120,000
Z $ 28,000 $ 20,000 $ 32,000
$100,000 $116,000 $252,000
Which products should Manning process further?

a. All.
b. All except Z.
c. Y and X.
d. None.
ANS: C
Additional Additional
Product Revenues Costs DifferencesDecision
W $ 40,000 $60,000 ($20,000)Sell now
X $ 8,000 $ 4,000 $ 4,000 Process on
Y $100,000 $32,000 $68,000 Process on
Z $ 4,000 $20,000 ($16,000)Sell now

NOT: 3 min.
40. Information about three joint products follows:
A B C
Anticipated production 5,000 lbs. 1,000 lbs. 2,000 lbs.
Selling price/lb. at split-off $10 $30 $16
Additional processing costs/lb. after split-off
(all variable) $ 6 $12 $24
Selling price/lb. after further processing $20 $40 $50
The cost of the joint process is $60,000. Which of the joint products should be sold at split-off?
a. A.
b. B.
c. C.
d. Both A and B.
ANS: B
Split-Off Process Further
A $10 $20  $ 6 = $14
B $30 $40  $12 = $28 *Sell now
C $16 $50  $24 = $26

NOT: 3 min.
41. Information about three joint products follows:
X Y Z
Selling price/lb. at split-off $16 $26 $48
(all variable) $ 8 $20 $20
Selling price/lb. after further processing $20 $40 $70
The cost of the joint process is $140,000. Which of the joint products should be processed further?
a. X.
b. Y.
c. Z.
d. Both X and Y.
ANS: C
Split-Off Process Further
X $16 $20  $ 8 = $12
Y $26 $40  $20 = $20
Z $48 $70  $20 = $50 *Process on

NOT: 3 min.
Figure 13-2.
ColorPro uses part 87A in the production of color printers. Unit manufacturing costs for part 87A are:
Direct materials $8
Direct labor 2
Variable overhead 1
Fixed overhead 4
ColorPro uses 100,000 units of 87A per year. Filbert Company has offered to sell ColorPro 100,000
units of 87A per year for $12. Fixed overhead is unavoidable.
42. Refer to Figure 13-2. Should ColorPro make or buy the part?
a. Make the part because it will save $100,000 over buying it.
b. Buy the part because it will save $100,000 over making it.
c. Make the part because it will save $1,100,000 over buying it.
d. Buy the part because it will save 1,100,000 over making it.
e. Buy the part because it will save $300,000 over making
it. ANS: A
Make Buy
Direct materials $8 ---
Direct labor 2 ---
Variable overhead 1 ---
Purchase price --- $12
Total relevant costs $11 $12
It is cheaper to make the part in-house.

NOT: 3 min.
43. Refer to Figure 13-2. Now suppose that ColorPro discovers that other costs will increase by $7,000
per year if the component is purchased rather than made internally. Should ColorPro make or buy the
part?
a. Make the part because it will save $100,000 over buying it.
b. Buy the part because it will save $100,000 over making it.
c. Make the part because it will save $107,000 over buying it.
d. Buy the part because it will save $107,000 over making it.
e. Make the part because it will save $10,000 over buying
it. ANS: C
Make Buy
Direct materials $ 800,000 ---
Direct labor 200,000 ---
Variable overhead 100,000 ---
Purchase price --- $1,200,000
Materials handling cost --- 7,000
Total costs $1,100,000 $1,207,000
It is cheaper by $107,000 to make the part in-house.

NOT: 3 min.
44. Refer to Figure 13-2. Which of the following is a qualitative factor that might affect
ColorPro's decision?
a. Filbert has an outstanding reputation for quality.
b. Ordering from Filbert would give ColorPro a chance to see how well Filbert could
meet JIT standards for ColorPro's other products.
c. Filbert is known for the reliability of its products.
d. Making the part in-house would help ColorPro avoid layoffs of direct and indirect labor.
e. All of these.
ANS: E PTS: 1 DIF: Difficulty:
Analytic
NOT: 2 min.
Figure 13-6.
Autry Company manufactures veterinary products. One joint process involves refining a chemical
(dactylyte) into two chemicals  dac and tyl. One batch of 5,000 gallons of dactylyte can be converted
to 2,000 gallons of dac and 3,000 gallons of tyl at a total joint processing cost of $12,000. At the split-
off point, dac can be sold for $3 per gallon and tyl can be sold for $4 per gallon. Autry has just learned
of a new process to convert dac into prodac. The new process costs $4,000 and yields 1,700 gallons of
prodac for every 2,000 gallons of dac. Prodac sells for $5 per gallon.
45. Refer to Figure 13-6. What is Autry's profit from refining one batch of dactylyte if both dac and tyl
are sold at the split-off point?
a. $6,000
b. $12,000
c. $7,000
d. $18,000
e. $15,000
ANS: A
Revenue [(2,000  $3) + (3,000  $4)] $18,000
Less: Joint processing cost 12,000
Gross profit $ 6,000

NOT: 3 min.
46. Refer to Figure 13-6. Should Autry process dac further?

a. No, income will be $1,500 lower.
b. No, income will be $5,000 lower.
c. Yes, income will be $1,500 higher.
d. Yes, income will be $5,000 higher.
e. It doesn't matter; income will be the same.
ANS: A
Sell Dac & Tyl Process Dac
@ Split-off Further
Revenue $18,000 $20,500*
Less: further processing of dac 4,000
Less: Joint processing cost 12,000 12,000
Gross profit $ 6,000 $ 4,500
($3  2,000) = $6,000 Sales of Dac that would not occur if action taken.
($5  $1,700) = $8,500 Sales of Prodac that would occur if action taken.
*Revenue 2nd option $18,000  $6,000 + $8,500 = $20,500.
Gross profit is $1,500 less ($4,500  $6,000).

NOT: 4 min.
Figure 13-7.
Ring Company makes telephones. Currently, Ring makes all components of the telephones in-house.
An outside company has offered to supply one component, part number X76, for $12 each. Ring
uses 22,000 of these components per year. Costs of X76 are as follows:

Direct labor $1.50
Variable overhead $2.75
Fixed overhead $5.00
47. Refer to Figure 13-7. Suppose that 30% of the fixed overhead is avoidable if part X76 is not made
by Ring. Should Ring purchase the part from the outside supplier?
a. No, income will decrease by $71,500.
b. No, income will decrease by $15,000.
c. Yes, income will increase by $74,500.
d. No, income will decrease by $10,500.
e. Yes, income will increase by $10,500.
ANS: A
Relevant cost per unit= $3.00 + $1.50 + $2.75 + $1.50 =
$8.75
Fixed overhead = $5.00 - ($5.00 x 70%) = $1.50
Decrease in income if purchased = ($12.00 - $8.75) x
22,000 = $71,500

NOT: 3 min.
48. Refer to Figure 13-7. Assume that all of the fixed overhead is allocated and cannot be avoided.
Should Ring purchase the part from the outside supplier?
a. Yes, income will increase by $104,500.
b. No, income will decrease by $104,500.
c. Yes, income will increase by $78,500.
d. Yes, income will increase by $95,500.
e. Yes, income will increase by $137,500.
ANS: B
Relevant cost per unit = $3.00 + $1.50 + $2.75 = $7.25
Decrease in income if purchased = ($7.25 - $12.00) x
22,000 = $104,500 added cost if purchased

NOT: 3 min.
Figure 13-8.
Kerrigan Lumber Yard receives 12,000 large trees each year that they process into rough logs.
Currently, Kerrigan sells the rough logs for $75 each. Kerrigan is considering processing the logs
further into refined lumber. Each log can be processed into 200 feet of refined lumber at an additional
cost of $0.40 per foot. The refined lumber can be sold for $0.95 per foot.
49. Refer to Figure 13-8. Should Kerrigan process the rough logs into refined lumber?
a. Yes, income will increase by $35 per log.
b. Yes, income will increase by $110 per log.
c. Yes, income will increase by $75 per log.
d. No, income will decrease by $35 per log.
e. No, income will decrease by $110 per
log. ANS: A
Sell at Split-Off Process Further

Revenue $75.00 $190.00
Less: Processing cost $0.00 $80.00
Income $75.00 $110.00
Increase of $35.00 per log ($110.00 - $75.00)

NOT: 3 min.
50. Refer to Figure 13-8. Assume that the cost of getting the 12,000 large trees falls by half.
Should Kerrigan sell the rough logs at split-off or process it further?
a. Process further, the reduction in the cost of trees makes that option more profitable than
it was before.
b. Sell at split-off because the decrease in the cost of the trees makes that option
more profitable than it was before.
c. Sell at split-off, the reduction in the cost of the trees is irrelevant.
d. Process further, the reduction in the cost of the trees will lower further processing costs.
e. Process further because the reduction in the cost of the trees is irrelevant.
Analytic
NOT: 3 min.
51. A decision that involves potential further processing of joint products is which kind of decision?
a. relevant
b. make-or-buy
d. special-order
e. keep-or-drop
NOT: 2 min.
52. When managers are considering the optimal product mix, they are most concerned with
a. maximizing revenue.
b. minimizing cost.
c. maximizing profit.
d. minimizing selling and administrative expense.
e. balancing productive capacity.
ANS: C PTS: 1 DIF: Difficulty:
Analytic
Management Functions KEY: Bloom's:
Comprehension NOT: 2 min.
53. Limited resources and limited demand for a product are generally referred to as
a. resources.
b. problems.
c. constraints.
d. optima.
e. contribution factors.
NOT: 2 min.
54. The solution of the product mix problem in the presence of multiple constraints requires the use of
a. linear programming.
b. relevant costing.
c. differential costing.
d. excel programming.
e. contribution margin per unit of scarce resource.
ANS: A PTS: 1 DIF: Difficulty: Easy
NOT: 2 min.
Figure 13-3.
Elegance Bath Products, Inc. (EBP) makes a variety of ceramic sinks and tubs. EBP has just developed
a line of sinks and tubs made from a mixture of glass and ceramic. The sinks sell for $150 each and
have variable costs of $80. The tubs sell for $600 and have variable costs of $450. The glass and
ceramic sinks and tubs require the use of specialized molding equipment. The specialized molding
equipment has 4,050 hours of capacity per year. A sink uses an average of 2 hours of specialized
molding equipment time; a tub uses an average of 5 hours of specialized molding equipment time.
55. Refer to Figure 13-3. What is the contribution margin per hour of specialized molding equipment
time for sinks?
a. $35
b. $33.33
c. $70
d. $200
e. $68.33
ANS: A
Contribution margin CM per hour of molding for sinks = $70/2 = $35 per hour of constrained resource
(molding)

Contribution Margin KEY: Bloom's: Application NOT: 3 min.
56. Refer to Figure 13-3. Assume that EBP can sell as many as 1,000 sinks and 500 tubs per year.
How many tubs should EBP produce?
a. 1,000
b. 500
c. 410
d. 675
e. 0
ANS: C
Contribution Margin per molding hour for Sinks is ($150  $80)/2 or $35.
Contribution Margin per molding hour for Tubs is ($600  $450)/2 or $30.
To maximize profits, they should make as many sinks as will sell since the margin per molding hour is
greater. Solving for the maximum sinks of 1,000, the number of tubs would be 410.
Expressed mathematically the equation is: 2  sinks + 5  tubs = 4,050

Contribution Margin | ACBSP: APC-33-Incremental analysis KEY: Bloom's: Application
NOT: 4 min.
57. Refer to Figure 13-3. What is the contribution margin per hour of specialized molding time for tubs?
a. $35
b. $68.33
c. $70
d. $200
e. $30
ANS: E
Contribution margin per hour of molding for tubs = $150/5 = $30

58. Refer to Figure 13-3. Assuming that specialized molding equipment time is the only constrained
resource, and that EBP can sell as many tubs and sinks as it can produce, how many sinks should
be sold?
a. 2,050
b. 2,025
c. 0
d. 4,050
e. 810
ANS: B
Contribution margin per hour of molding for tubs = $150/5 = $30
Contribution margin CM per hour of molding for sinks = $70/2 = $35
Because the contribution margin per hour for sinks ($35) is higher than that of tubs ($30), EBP would
prefer to use the molding equipment as much as possible to make sinks. EBP has capacity for 2,025
sinks (4,050 hours/2 hours).

NOT: 4 min.
Figure 13-4.
Connolly Company produces two types of lamps, classic and fancy, with unit contribution margins of
$13 and $21, respectively. Each lamp must spend time on a special machine. The firm owns four
machines that together provide 18,000 hours of machine time per year. The classic lamp requires 0.20
hours of machine time, the fancy lamp requires 0.50 hours of machine time.
59. Refer to Figure 13-4. What is the contribution margin per hour of machine time for a classic lamp?
a. $26
b. $104
c. $16
d. $65
e. $13
ANS: D
Classic lamp Fancy lamp
Contribution margin per unit $13.00 $21.00
Hours of machine time 0.2 0.5
Contribution margin per hour of machine time $65.00 $42.00

STA: AICPA: FN-Measurement | IMA: Decision Analysis | ACBSP: APC-30-Contribution
Margin KEY: Bloom's: Application NOT: 3 min.
60. Refer to Figure 13-4. What is the contribution margin per hour of machine time for a fancy lamp?
a. $21
b. $42
c. $13
d. $8
e. $6
ANS: B

61. Refer to Figure 13-4. How many of each type of lamp must be sold to optimize total
contribution margin?
a. 18,000 classic lamps; 0 fancy lamps
b. 0 classic lamps; 30,000 fancy lamps
c. 10,000 classic lamps; 10,000 fancy lamps
d. 0 classic lamps; 9,000 fancy lamps
e. 90,000 classic lamps; 0 fancy
lamps ANS: E

Since classic lamps have a contribution margin per hour of machine time of $65 (as opposed to fancy
lamps $42), all machine time should go to the production of classic lamps.
Number of classic lamps = 18,000/0.20 hours per unit = 90,000

62. Refer to Figure 13-4. What is the total contribution margin of the optimal mix of classic and
fancy lamps?
a. $1,280,000
b. $950,000
c. $1,000,000
d. $1,170,000
e. $90,000
ANS: D
Since classic lamps have a contribution margin per hour of machine time of $65 (as opposed to fancy
lamps $42), all machine time should go to the production of classic lamps.
The optimal mix is 90,000 classic lamps and zero fancy lamps.
Total contribution margin = 90,000 x $13 = $1,170,000

Figure 13-5.
Santorino Company produces two models of a component, Model K-3 and Model P-4. The unit
contribution margin for Model K-3 is $6; the unit contribution margin for Model P-4 is $14. Each
model must spend time on a special machine. The firm owns two machines that together provide
4,000 hours of machine time per year. Model K-3 requires 15 minutes of machine time; Model P-4
requires 30 minutes of machine time.
63. Refer to Figure 13-5. What is the amount of machine time for model K-3 in terms of percent of
a machine hour?
a. 10%
b. 20%
c. 25%
d. 40%
e. 50%
ANS: C
Model K-3 requires 15/60 or 25% machine hours.

Incremental analysis KEY: Bloom's: Application NOT: 3 min.
64. Refer to Figure 13-5. What is the contribution margin per unit of scarce resource (machine time)
for Model K-3?
a. $24
b. $12
c. $6
d. $14
e. $28
ANS: A
Model K-3 requires 15/60 or 25% machine hours.
Model P-4 requires 30/60 or 50% machine hours.
Model K-3 Model P-4

Contribution margin per unit $ 6.00 $14.00

STA: AICPA: FN-Decision Modeling | IMA: Decision Analysis |ACBSP: APC-30-
65. Refer to Figure 13-5. What is the amount of machine time for model P-4 in terms of percent of
a machine hour?
a. 10%
b. 20%
c. 25%
d. 30%
e. 50%
ANS: E
Model P-4 requires 30.60 or 50% of machine hours.

Incremental analysis KEY: Bloom's: Application NOT: 3 min.
66. Refer to Figure 13-5. What is the contribution margin per unit of scarce resource (machine time)
for Model P-4?
a. $6
b. $12
c. $24
d. $14
e. $28
ANS: E
Model K-3 requires 15/60 or 0.25 machine hours.
Model P-4 requires 30/60 or 0.50 machine hours.
Model K-3 Model P-4


67. Refer to Figure 13-5. Now suppose that Santorino Company can sell only 5,500 units of each
model. How many units of Model K-3 should be produced?
a. 5,500
b. 312
c. 1,250
d. 2,750
e. 5,000
ANS: E
Model K-3 Model P-4

Since P-4 has the higher contribution margin per hour of machine time, produce 5,500 units of P-4,
which will take 2,750 hours of machine time.
Remaining hours of machine time = 4,000  2,750 = 1,250 hours

Model K-3 units = 1,250/0.25 = 5,000 units

NOT: 4 min.
68. Refer to Figure 13-5. Now suppose that Santorino Company can sell only 5,500 units of each
model. How many units of Model P-4 should be produced?
a. 5,500
b. 5,000
c. 1,250
d. 2,750
e. 1,375
ANS: A
Model K-3 Model P-4

Since P-4 has the higher contribution margin per hour of machine time, produce 5,500 units of P-4.
(Any remaining machine time can be used to produce Model K-3.)

NOT: 4 min.
Figure 13-9.
Sabor Inc. is a medical testing laboratory that performs several tests and analyses for hospitals in the
area. Four of the tests that they perform require the use of a specialized machine that can supply
14,000 hours per year. Information on the four lab tests follows:
Test A Test B Test C Test D

Charging rate $65 $51 $48 $32
Variable cost $25 $18 $13 $8
Machine hours 3 2 1 0.5
69. Refer to Figure 13-9. What is the contribution margin per hour of machine time for Test A?
a. $40
b. $65
c. $25.50
d. $13.33
e. $15.67
ANS: D
(1/3) completed x $40 CM = $13.33

70. Refer to Figure 13-9. What is the contribution margin per hour of machine time for Test
B? a. $20.50
b. $33
c. $16.25
d. $16.50
e. $18
ANS: D
0.5 completed in 1 hour x $33 CM = $16.50

71. Refer to Figure 13-9. What is the contribution margin per hour of machine time for Test C?
a. $48
b. $35
c. $13
d. $16
e. $24
ANS: B
1 completed in 1 hour x $35 CM = $35

72. Refer to Figure 13-9. What is the contribution margin per unit of machine time for Test D?
a. $20
b. $32
c. $8
d. $48
e. $24
ANS: D
2 completed in 1 hour x $24 CM = $48

73. Raffles Company routinely bids on construction jobs. Raffles first determines the budgeted product
cost of the job and then applies a markup of 50%. If a bid of $15,000 is submitted for a new job,
which of the following is true?
a. Budgeted product cost is $15,000.
b. $5,000 is pure profit.
c. All costs pertaining to the job total $15,000.
d. $5,000 includes fixed overhead, selling and administrative expense, and profit.
e. $5,000 includes selling and administrative expense, and profit.
Analytic
NOT: 4 min.
74. The method of determining the cost of a product or service based on the price that customers
are willing to pay is called
a. relevant costing.
b. differential costing.
c. target costing.
d. product costing.
e. overall costing.
NOT: 2 min.
75. Moss Company charges cost plus 35%. What is the price of an item with cost equal to
$65? a. $73.25
b. $95.80
c. $87.75
d. $65.50
e. $22.75
ANS: C
Price = $65 + ($65 x 35%) = $87.75

NOT: 2 min.
76. Stadium Company charges cost plus 60%. If the price of an item is $260, what is the item's cost?
a. $180
b. $162.50
c. $100
d. $125.50
e. $150.75
ANS: B
Price = COGS + (markup  COGS) or Price = COGS  (1 + markup)
thus COGS = price/(1 + markup)
COGS = $260/(1 + .60)

= $260/1.60
= $162.50

NOT: 3 min.
77. Mattson Construction charges each customer a price equal to the cost of direct materials, direct
labor, and overhead plus 40%. Job #1845 included the following costs:

Direct labor $67,000
Overhead $26,000
What is price charged for Job

1845? a.$86,000
b. $42,400
c. $106,000
d. $184,800
e. $166,154
ANS: D
Price = ($39,000 + $67,000 + $26,000)  1.4 = $184,800

NOT: 3 min.
78. Super Pet Supplies sets prices at cost plus 70% of cost. The cost of an aquarium start-up kit is
$110. What price does Super Pet Supplies charge for the aquarium start-up kit?
a. $195
b. $200
c. $187
d. $77
e. $180
ANS: C
Price = $110  1.7 = $187

NOT: 3 min.
79. Curtis Company sets price equal to cost plus 50%. Recently, Curtis charged a customer a price of
$150 for an item. What was the cost of the item to Curtis?
a. $50
b. $75
c. $100
d. $40
e. $80
ANS: C
Cost = $150/1.50 = $100

NOT: 3 min.
80. Wilson Custom Cabinetry makes cabinets to order and prices the completed jobs at product cost plus
40%. Recently, Wilson finished a job and billed the customer $560. If direct materials for the job
cost
$130, and direct labor cost $180, what was the applied overhead for the job?
a. $250
b. $179
c. $350
d. $400
e. $90
ANS: E
Applied overhead = $400*  $130  $180 = $90
*Cost = $560/1.4 = $400

Accounting Features/Costs KEY: Bloom's: Application
NOT: 3 min.
81. Welker Company is designing an all-in-one grill and cooler aimed at sports fans. The company
believes that the product can be sold for $180; and it requires a 30% profit on new products. What
is the target cost of the all-in-one grill and cooler?
a. $140
b. $54
c. $175
d. $126
e. $168
ANS: D
Target cost = $180  $54* = $126
*Desired profit = 0.3  $180 = $54

STA: AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-32-Margin
of safety/sales target KEY: Bloom's: Application NOT: 3 min.
82. Shear-it, Inc., produces paper shredders. Shear-it is considering a new shredder design for home
offices. The marketing vice president believes that a basic unit in a variety of attractive colors could be
sold for $70. Shear-it requires that all new products yield 30% profit. What is the target cost of the
new shredder?
a. $21
b. $91
c. $49
d. $100
e. $63.70
ANS: C
Target cost = $70  $21* = $49
*Desired profit = 0.3  $70 = $21

NOT: 3 min.
83. Brorsen, Inc., has just designed a new product with a target cost of $64. Brorsen requires new
product to have a profit of 20%. What is the target price for the new product?
a. $64
b. $12.80
c. $320
d. $80
e. $53
ANS: D
Target price  desired profit = Target cost
Target price  0.2 (target price) = $64
Target price = $80

NOT: 3 min.
84. Teller Company has designed a caller ID machine with a large screen that can be seen easily
from across the room. The Sales Department believes that this product can be sold for $30 each.
Teller requires that all new products yield 15% profit. What is the target cost of the new product?
a. $26
b. $4.50
c. $30
d. $25.50
e. $28.50
ANS: D
Target cost = $30  $4.50* = $25.50
*Desired profit = 0.15  $30 = $4.50

NOT: 3 min.
85. Fester Company was making a product for $60 and selling it for $80. A competitor began selling
the same product for $68. If Fester is to meet the competition's price, and maintain the same amount
of profit per unit, what is target cost?
a. $40
b. $60
c. $48
d. $17
e. $63
ANS: C
Target cost = $68  20* = $48
*Profit = $80  60 = $20

NOT: 3 min.
86. Victor's Detailing customers would be willing to pay $57 per detail. The company requires an
80% markup on each job. The average job would cost $30.
Victor's Detailing uses markup pricing to set the price on each job. What is the price Victor should
quote a new customer?
a. $30
b. $24
c. $54
d. $84
e. $240
ANS: C
Price = Cost + (Cost  Markup) or Price = Cost  (1 + markup)
$54 = $30 + ($30  0.80) = $30 + $24

NOT: 3 min.
87. Victor's Detailing customers would be willing to pay $57 per detail. The company requires a
40% profit on each job. The average job would cost $30.
Victor's Detailing uses target-costing. What is the price they should quote a new customer?
a. $30
b. $24
c. $57
d. $54
e. $84
ANS: C
Target costing is a method of determining the cost of a product or service based on the price (target
price) that customers are willing to pay. They would charge what the market could bear, which is $57.

NOT: 3 min.
88. Victor's Detailing customers would be willing to pay $57 per detail. The company requires a
40% profit on each job. The average job would cost $30.
Victor's uses target costing. Victor's Detailing should:

a. sell their business.
b. ask their customers to pay more.
c. sell their services at the price customers are willing to pay.
d. find a way to reduce costs.
e. reduce their required percentage to stay in business.
ANS: C
Target cost = Price  (price  profit percent) = $57  ($57  0.40) = $57  $22.80 = $34.20
Victor's cost is below the target cost. He should sell at what the market will pay.

NOT: 3 min.
PROBLEM
1. Sherrell Washington owns a successful hole-in-the-wall bagel shop called Big Apple Bagels. Sherrell
wants to expand the shop by leasing the space next door for $500 per month, and adding tables and
chairs so that customers can dine in. She figures that the tables and chairs will cost $4,000 and that the
bagel machine, that cost $3,500 five years ago, would have to be scrapped in favor of a larger
machine costing $6,400. She thinks sales would increase by $4,000 per month. Variable costs are 50%
of sales.
A. What are the relevant costs and benefits of expanding into the new space?
B. What are the irrelevant costs and benefits of expanding into the new space?
ANS:
A. The relevant costs and benefits
include: Rent on additional space

Table and chairs $4,000
New bagel machine $6,400
Increased sales $4,000
Variable costs on new sales
B. Irrelevant costs and benefits include:

Rent paid for current space
Current bagel machine cost
$3,500 Current sales
Current variable costs

NOT: 4 min.
2. Kara Ring owns a successful flower shower called Always Blooming. Kara wants to expand the shop
by leasing the space next door for $1,200 per month, and adding refrigerators to keep the flowers
fresh and two checkout counters so the customers do not have to wait in long lines. She currently
pays
$1,000 per month for her current store space and has two refrigerators that cost her $6,000 each two
years ago. She figures that the new refrigerators and counters will cost $25,000. She also has
determined that the current cash register that initially cost her $1,000 two years ago and has been
depreciated $250 each year would have to be replaced with two new cash registers costing $1,500
each. She thinks sales would increase by $10,000 per month. Variable costs are 40% of sales.
Required:
A. What are the relevant costs and benefits of expanding into the new space?
B. What are the irrelevant costs and benefits of expanding into the new space?
ANS:
A. Relevant costs and benefits:
Rental of the new space $1,200
Refrigerators and counters $25,000
Two new cash registers $1,500
each Increased sales volume of
$10,000 Variable cost on new sales
volume
B. Irrelevant costs and benefits:

Current rental cost $1,000
Purchase price of the two refrigerators from 2 years ago $6,000 each
Purchase price of the cash register two years ago $1,000 and the depreciation of $250 per year
Current sales volume
Current variable costs

NOT: 5 min.
3. Veblen Company manufactures a variety of athletic shoes: basketball, running, and tennis. Sales of
the tennis shoes have fallen off. Veblen is considering several options: 1) drop the tennis shoe line; 2)
replace the tennis shoe line with golf shoes; 3) retool the tennis shoe line to make "Airtennies." Price
and cost data are as follows:
Basketball Running Tennis Golf Airtennies

Price $90 $65 $40 $60 $70
Variable cost/unit $45 $40 $35 $43 $50
Fixed costs $200,000 $210,000 $50,000 $50,000 $90,000
Number of units 10,000 15,000 2,500 25,000 6,000
If the tennis shoe line is dropped, the $50,000 fixed cost is totally avoidable.
A. Calculate the impact on operating income, using relevant amounts only, for keeping
the tennis shoe line.
B. Calculate the impact on operating income, using relevant amounts only, for option 1.
C. Calculate the impact on operating income, using relevant amounts only, for option 2.
D. Calculate the impact on operating income, using relevant amounts only, for option 3.
E. Which option is best?
ANS:
A. Keep Tennis B. Option 1 C. Option 2 D. Option 3

Sales $100,000 $100,000 $1,400,000 $320,000
COGS & Net FC 137,500 137,500 987,500 252,500
Net Change $(37,500) $ 37,500 $ 412,500 $ 67,500
As is. Increase Income Increase Income Increase Income
E. Clearly, the status quo (keeping the tennis shoe line) is the worst option and option
2 (replace tennis shoes with golf shoes) is the most profitable.
Option 2
Sales Increase = 25,000  $60
$1,500,000  100,000 = $1,400,000
25,000  $43
$1,075,000 +$50,000  137,500 = $987,500
Net Increase = $1,400,000  $987,500 = $412,500
Option 3
Sales Increase = 6,000  $70
$420,000  100,000 = $320,000
Option 3 COGS and Fixed Cost Increase

= 6,000  $50
$300,000 +90,000  137,500 = $252,500
Net Increase = $320,000  $252,500 = $67,500
PTS: 1 DIF: Difficulty: Challenging OBJ: LO: 13-2

NOT: 15 min.
4. Tyler Company has been approached by a new customer with an offer to purchase 6,000 units of its
product KR200 at a price of $11 each. The existing sales would not be affected by this special
order. Tyler normally produces 40,000 units but plans to produce and sell 30,000 in the coming
year. The normal sales price is $18 per unit. Unit cost information is as follows:
Direct labor $2.75
Total $11.50
If Tyler accepts the order, no fixed manufacturing activities will be affected because there is sufficient
excess capacity.
Required:
A. By how much will profit increase or decrease if the order is accepted?
B. Should Tyler accept the special order?
ANS:
A.
Direct labor $2.75
$8.25
$11 - $8.25 = $2.75
$2.75 x 6,000 = $16,500 increase
B. Yes the order should be accepted.

NOT: 5 min.
5. Junior Company currently buys 30,000 units of a part used to manufacture its product at $40 per
unit. Recently the supplier informed Junior Company that a 20% increase will take effect next year.
Junior has some additional space and could produce the units for the following per-unit costs (based
on 30,000 units):

Direct labor 12
Fixed overhead 10
Total $50
If the units are purchased from the supplier, $200,000 of fixed costs will continue to be incurred. In
addition, the plant can be rented out for $20,000 per year if the parts are purchased externally.
Required: Should Junior Company buy the part externally or make it internally?
ANS:
Produce internally; it saves $120,000. ($1,620,000  $1,500,000)
If purchased externally:
Purchase price (30,000  $40  1.20) $1,440,000
Fixed costs 200,000
Rent received (20,000)
Net cost to purchase $1,620,000
If produced internally:
Cost to produce (30,000  $50) $1,500,000

Management Functions KEY: Bloom's: Application
NOT: 10 min.
6. Tapeo Company has always made its electronic components that go into their GPS systems in-
house. Streeter Company has offered to supply these electronic components at a price of $38 each.
Tapeo uses 18,000 units of these components each year. The cost per unit of this component is as
follows:
Direct material $13.75

Direct labor $16.00
Total $45.00
Assume that 45% of Tapeo Company's fixed overhead would be eliminated if the electronic
component was no longer produced in-house.
Required:
A. If Tapeo decided to purchase the electronic component from Streeter Company how much would
its operating income increase or decrease?
B. Should Tapeo continue to make the electronic component or buy it from Streeter Company?
ANS:
A.
Make Buy Differential
Costs to Make
Direct material $13.75 $0.00 $13.75

Direct labor $16.00 $0.00 $16.00
Variable overhead $7.00 $0.00 $7.00
Avoidable Fixed overhead $3.71 $0.00 $3.71
Purchase cost $0.00 $38.00 -$38.00
Total $40.46 $38.00 $2.46
$2.46 x 18,000 = $44,280 increase in operating income
B. Tapeo should buy the electronic component.

NOT: 10 min.
7. Island Princess Pineapples purchases pineapples from area farmers and processes them into rings,
juice, and skins. The cost of the pineapples is a joint cost, as is the initial processing in which the
fruits are skinned, cored, and sliced into rings. At the split-off point, Island Princess sells the skins (for
fertilizer). Juice and rings are processed further (further processing costs occurs for cooking and
canning). Data for the three products follows:
Sales
Rings $2,000
Juice $1,500
Fertilizer $ 400
Further processing costs:
Rings 500
Juice 300
Joint costs $1,600
A. Prepare a segmented income statement for Island Princess, showing results for
rings, juice, fertilizer, and in total. Do not allocate joint costs individually.
B. Now suppose that Island Princess is considering the option of processing the skins
further into pet food which would sell for $1,000. Additional costs would be
$450. Should this be done?
ANS:
A. Rings Juice Fertilizer Total

Sales $2,000 $1,500 $400 $3,900
Further processing costs 500 300 0 800
Product margin $1,500 $1,200 $400 $3,100
Joint costs 1,600
Operating income $1,500
B. Yes. Further processing costs are $450, additional income is $550 ($1,000  $450).
Note that the joint costs do not come into play.

NOT: 5 min.
8. Rippey Corporation manufactures a single product with the following unit costs for 5,000 units:
Direct labor 30
Factory overhead (40% variable) 90
Selling expenses (60% variable) 30
Administrative expenses (20% variable) 15
Total per unit $225
Recently, a company approached Rippey Corporation about buying 1,000 units for $225. Currently, the
models are sold to dealers for $412.50. Rippey's capacity is sufficient to produce the extra 1,000 units.
No additional selling expenses would be incurred on the special order.
Required:
A. What is the profit earned by Rippey Corporation on the original 5,000 units?
B. Should Rippey accept the special order if its goal is to maximize short-run profits?
How much will income be affected?
C. Determine the minimum price Rippey would want to receive in order to increase
profits by $7,500 on the special order.
D. When making a special-order decision, what qualitative aspects of the decision
should Rippey Corporation consider?
ANS:
A. Sales (5,000  $412.50) $2,062,500

Less: costs (5,000  $225) 1,125,000
Net income $ 937,500
B. Yes, profit will increase by:
Increase in sales (1,000  $225) $ 225,000

Less:
Increase in direct materials (1,000  $60) (60,000)
Increase in direct labor (1,000  $30) (30,000)
Increase in var. overhead (1,000  $90  0.40) (36,000)
Increase in var. selling (1,000  $30  0.60) (18,000)
Increase in var. adm. (1,000  $15  0.20)
(3,000) Increase in profits $ 78,000
C. $60 + $30 + ($90  0.40) + ($30  0.60) + ($15  0.20) + ($7,500/1,000)

= $154.50 per unit
D. What is the impact on regular customers?

Will regular customers demand a similar price?
Do we have the capacity to produce the extra units?
Will we lose some regular customers?
Will we be penetrating new markets?

STA: AICPA: FN-Decision Modeling | IMA: Decision Analysis | ACBSP: APC-26-Management
Functions | ACBSP: APC-27-Managerial Accounting Features/Costs
KEY: Bloom's: Application NOT: 15 min.
9. Salley Company makes pagers. Currently, Salley purchases 10,000 plastic housings per year from
an outside company for $1 each. One of Salley's engineers suggested that the company make its
plastic housings in-house. Estimated unit costs are as follows:

Direct labor 0.20
Fixed overhead* 0.40
* Fixed overhead is $2,400 per year in equipment costs specifically traceable to the plastic housing
line and $1,600 per year in general overhead costs to be allocated to this line
A. If Salley makes the housing in-house, net income will be $ Higher
or Lower?
B. What is the highest price per unit that Salley would pay an outside company for
the housings?
C. Now assume that all of the fixed overhead is allocated fixed overhead and will not be
affected by making the product in-house or purchasing it. If Salley makes the
housing in-house, net income will be $ (Higher / Lower).
ANS:
A. $1,100 higher ( = [$1.00  ($0.30 + 0.20 + 0.15 + 0.24)]  10,000). The allocated
fixed overhead is irrelevant. (fixed traceable equipment costs are $2,400/10,000 units
or .24)
B. $0.89 = $0.30 + 0.20 + 0.15 + 0.24
C. $3,500 higher ( = [$1.00  ($0.30 + 0.20 + 0.15)]  10,000). ALL allocated

and traceable fixed overhead is irrelevant.

Figure 13-10.
Goutam Company prints a variety of publications and colored inserts for newspapers. Currently,
Goutam produces its own ink, including a special metallic color. India Inks has offered to supply
Goutam with the 25,000 ounces of metallic ink that it needs each year for $1.24 per ounce. Goutam is
interested because this is a particularly difficult ink to make. The purchasing department must make
special efforts to locate suppliers, the metallic component requires special handling, and, since the
metallic ink uses machinery that is also used to make other colors of ink, the machinery must be
cleaned very well before every batch of metallic. The accounting department supplied the following
unit costs:

Direct labor 0.15
Fixed overhead* 0.50
*Fixed overhead is applied on the basis of a plantwide rate based on direct labor hours.
10. Refer to Figure 13-10.
A. Based on the cost figures, if Goutam purchases metallic ink from the outside
supplier, operating income will be $ (Higher / Lower)?
B. What is the highest price per ounce that Goutam would pay an outside supplier for
the ink?
ANS:
A. $15,750 lower = [$1.24  ($0.40 + 0.15 + 0.06)]  25,000

The allocated fixed overhead is irrelevant.
B. $0.61 since this is the avoidable cost of making the ink in-house, Goutam would not pay
an outside company more than this.

11. Refer to Figure 13-10. Upon hearing of the analysis of the cost of making the metallic ink in-house
versus buying it from an outside supplier, Jim Webb, the production supervisor said "That's nuts! This
ink is a real pain to make and $1.24 per ounce sounds like a bargain to me!" Based on Jim's feelings,
Anna Ruiz (a new CMA in the accounting office) did an ABC analysis of ink production. She came
up with the same direct materials, direct labor and variable overhead, as well as the following
information on activities required by metallic ink production.
Setups $ 60,000600 setups per year

Purchasing $270,0009,000 purchase orders per
year The metallic ink requires 300 purchase orders per year and 80 setups.
A. If Goutam purchases the ink from the outside supplier, operating income would be
$ Higher Lower (circle one)
B. What is the highest price per ounce that Goutam would pay an outside company for
the ink?
ANS:
A. $1,250 higher
= [$1.24  ($0.40 + 0.15 + 0.06 + 0.68)]  25,000
($0.68 is the per ounce cost of setups and purchasing)
Setups = [($60,000/600)  80]/25,000 = 0.32
Purchasing = [($270,000/9,000)  300]/25,000 = 0.36
B. $1.29, since this is the avoidable cost of making the ink in-house, Goutam would
not pay an outside company more than this.
PTS: 1 DIF: Difficulty: Challenging OBJ: LO: 13-2

12. Sherpa Company manufactures tents and sleeping bags. Tents are priced at $80, have variable cost of
$55, and direct fixed costs of $120,000. Sleeping bags are priced at $60, have variable cost of $35, and
direct fixed costs of $66,000. Common fixed costs equal $200,000. Last year, the division sold 5,000
tents and 10,000 sleeping bags.
A. What was the segment margin for tents last year?

B. What was the segment margin for sleeping bags last year?
C. What was Sherpa's operating income last year?
D. If Sherpa stopped making tents, what would operating income be?
ANS:
Tents Sleeping Bags Total

Sales $400,000 $600,000 $1,000,000
Less: Variable cost 275,000 350,000 625,000
Contribution margin $125,000 $250,000 $ 375,000
Less: Direct fixed overhead 120,000 66,000 186,000
Segment margin $ 5,000 $184,000 $ 189,000
Less: Common fixed overhead 200,000
Operating income ($11,000)
A. Segment margin for tents = $5,000

B. Segment margin for sleeping bags = $184,000
C. Operating income = ($11,000)
D. Operating income without tents = ($16,000)

NOT: 10 min.
13. Mickey Company manufactures three joint products: X, Y, and Z. The cost of the joint process is
$30,000. Information about the three products follows:
X Y Z
Selling price/lb. at split-off $2.00 $1.00 $3.00
(all variable) $1.50 $1.25 $.75
Selling price/lb. after further processing $2.50 $3.75 $6.25
Allocated joint costs $12,000 $10,500 $7,500
Required:
A. Determine whether each product should be sold at split-off or processed further.
B. Determine the firm's income if the firm processed all three products beyond split-off.
ANS:
A. Sell at Process Further

Split-Off Then Sell Decision
X $11,200 $14,000
(8,400)Sell at split-off
$ 5,600
Y $10,000 $37,500
(12,500)Process further
$25,000
Z $ 7,500 $15,625
(1,875)Process further
$13,750
The joint costs are not relevant to the decision.
B. $14,350 ($13,750 + $25,000 + $5,600  $30,000)

NOT: 10 min.
14. The operations of Grant Corporation are divided into the Fix Division and the Roach
Fix Roach
Sales revenue $60,000 $40,000 $100,000
Contribution margin $40,000 $25,000 $ 65,000
Segment margin $27,500 $ (5,000) $ 22,500
Total relevant benefit (loss) $17,500 $(12,500) $ 5,000
Required:
A. Determine operating income for Grant Corporation as a whole if the Roach Division
is dropped.
B. Should the Roach Division be eliminated?
ANS:
A. Sales $60,000
Variable costs 20,000
Contribution margin $40,000
Direct fixed costs 12,500
Segment margin $27,500
Allocated common costs:
($10,000 + $7,500) 17,500
Operating income $10,000
B. Yes. The Roach division should be dropped, since it has a negative segment margin of
$5,000. Dropping the Roach Division increases the firm's income by $5,000.

NOT: 10 min.
15. Classy Carry manufactures two types of handbags, the Clutch and the Tote, with unit contribution
margins of $9 and $15, respectively. Regardless of the type, each handbag must go through a stitching
machine. The company owns 4 stitching machines and each provides 3,000 hours of machine time per
year. Each Clutch handbag requires 12 minutes of machine time and each Tote handbag requires 30
minutes of machine time. There are no other constraints.
Required:
A. What is the contribution margin per hour of machine time for each type of handbag?
B. What is the optimal mix of handbags?
C. What is the total contribution margin earned for the optimal mix?
ANS:
A.
Clutch Tote
Contribution margin per unit $9 $15

Required machine time per unit 0.2 0.5
Contribution margin per hour of machine time $45 $30
12 minutes/60 minutes = .20 30 minutes/60 minutes = .50
B. Since the Clutch handbag produces a $45 contribution margin per machine hour, all the machine
time (12,000 hours) should be devoted to the production of the Clutch handbag.
12,000 hours = 60,000 Clutch bags

0.20 hour per Clutch handbag
60,000 Clutch handbags and 0 Tote handbags
C. 60,000 Clutch handbags x $9 CM = $540,000

16. Gordon Company produces two types of gears, Gear Q and Gear S, with unit contribution margins of
$2 and $5, respectively. Each gear must spend time on a special machine. The firm owns ten machines
that together provide 25,000 hours of machine time per year. Gear Q requires 0.10 hours of machine
time; Gear S requires 0.4 hours of machine time.
A. What is the contribution margin per hour of machine time for Gear Q? Gear S?
B. If Gordon faces only the production constraint (25,000 hours of machine time),
how many units of Gear Q should be produced? Gear S? What is the total
contribution margin from this product mix?
C. Now suppose that Gordon cannot sell more than 200,000 units of each type of gear.
How many units of Gear Q should be produced? Gear S? What is the total
ANS:
A. Gear Q Gear S
Contribution margin per unit $ 2.00 $ 5.00
B. Since Gear Q has the higher contribution margin per hour of the scarce
resource, Gordon should produce only Gear Q, and no Gear S.
Gear Q units = 25,000/0.10 = 250,000

Gear S units = 0
Total contribution margin = $2(250,000) = $500,000
C. Gear Q units = 200,000

Remaining machine time = 25,000 hours  (200,000  0.1) = 5,000 machine hours
Gear S units = 5,000/0.4 = 12,500
Total contribution margin = $2(200,000) + $5(12,500) = $462,500

Managerial Accounting Features/Costs | ACBSP: APC-30-Contribution Margin
17. David Company produces two types of gears, Gear A and Gear B, with unit contribution margins of
$6 and $8, respectively. Each gear must spend time on a special machine. The firm owns five
machines that together provide 12,000 hours of machine time per year. Gear A requires 12 minutes of
machine time; Gear B requires 24 minutes of machine time.
A. What is the contribution margin per hour of machine time for Gear A? Gear B?
B. If David faces only the production constraint (12,000 hours of machine time), how
many units of Gear A should be produced? Gear B? What is the total contribution
margin from this product mix?
C. Now suppose that David cannot sell more than 45,000 units of each type of gear.
How many units of Gear A should be produced? Gear B? What is the total
ANS:
A. Gear A Gear B
Contribution margin per unit $ 6.00 $ 8.00
B. Since Gear A has the higher contribution margin per hour of the scarce resource,
Gordon should produce only Gear A, and no Gear B.
Gear A units = 12,000/0.20 = 60,000

Gear B units = 0
Total contribution margin = $6(60,000) = $360,000
C. Gear A units = 45,000
Remaining machine time = 12,000 hours  (45,000  0.2) = 3,000 machine hours
Gear B units = 3,000/0.4 = 7,500

Total contribution margin = $6(45,000) + $8(7,500) = $330,000

18. Auden makes three types of vitamin supplements, all of which require the use of encapsulating
machines that have capacity of 10,000 hours. Information on the three types (per case)
follows:
Basic Vita-Stress Antioxidant+

Selling price $100 $125 $160
Variable cost 50 70 90
Machine hours 0.4 0.50 0.8
A. What is the contribution margin per case for each type?

B. What is the contribution margin per hour of machine time for each type?
C. Based on your analysis in requirement B, if the company can sell all that it can make of
all of the products, how many of each type should be sold to maximize total
contribution margin?
ANS:
A. Basic Vita-Stress Antioxidant+

Price $100 $125 $160
 Variable cost 50 70 90
Contribution margin $ 50 $ 55 $ 70
B. Basic = (1 hour/0.4)  $50 = $125

Vita-Stress = (1 hour/0.5)  $55 = $110
Antioxidant+ = (1 hour/0.8)  $70 = $87.50
C. Basic has the highest contribution margin per machine hour. Therefore, the company
would devote all of its encapsulating machine time to the production of Basic and
make 25,000 cases of it.
Basic = (1 hour/0.4 cases per hour)  10,000 hours

Vita-Stress = 0
Antioxidant+ = 0

19. The Exchange Company is in the process of developing a new product called LS500. The
company requires a 35% profit. The LS500 current design carries with it a total cost of $125.
Required:
A. What is the sales price of the LS500 using markup costing?

B. Assume that the Exchange Company’s marketing department has determined that consumers
are willing to pay $140 for the LS500. What is the target cost for this product?
ANS:
A. $125 x 1.35 = $168.75
B. .35 x $140 = $49 desired profit per unit

$140 - $49 = $91 target cost

NOT: 3 min.
ESSAY
1. "The accounting decision making model is not useful in real life because it only looks at the
numbers." Critique this statement and give an example for which it does not hold true.
ANS:
The decision-making model described in Chapter 13 does indeed focus on quantitative factors.
However, before the decision is made, the decision maker must identify the relevant qualitative factors
and use them in making his/her decision. For example, a student may be considering graduate school
and look at a number of schools. The low cost school may be farther from home and have a lesser
reputation than the higher cost school. The student might rationally choose the higher cost, higher
reputation school.

NAT: BUSPROG: Communication
STA: AICPA: BB-Critical Thinking | IMA: Decision Analysis | ACBSP: APC-27-
NOT: 5 min.
2. Why does a special order decision frequently ignore fixed overhead?
ANS:
Special-order decisions are, by definition, one time orders that will yield less than the usual price or
margin. The firm will usually only consider these if it is operating below capacity. As a result, the
fixed overhead will exist whether or not the order is accepted. The fixed overhead is a sunk cost and
can be ignored for purposes of deciding on the special order.

STA: AICPA: BB-Critical Thinking |AICPA: FN-Decision Modeling | IMA: Decision Analysis |
ACBSP: APC-27-Managerial Accounting Features/Costs KEY: Bloom's: Comprehension
NOT: 5 min.
You decide
3. The managers of Computer World are trying to determine the best method of deciding the price of
their new ultra minicomputer. This computer will present the customers with several unique features
that their other computers do not offer. They have asked you to explain the advantages and
disadvantages of the two costing methods they are considering; markup costing and target costing.
ANS:
Markup costing is a percentage applied to the base cost. This includes desired profit and any costs not
included in the base cost. A major advantage of markup pricing is that standard markups are easy to
apply versus adjusting prices as needed if demand is less than anticipated. The effectiveness of
costing plus pricing relies heavily on the accuracy of the cost system and pricing managers’
understanding of the firm’s cost structure. If they do not have an accurate cost system than they could
be setting prices either too high-which would be undercut by competitors with more appropriate lower
prices- or too low- and would not cover all costs, therefore resulting in a net loss.
Target costing is a method of determining the cost of a product or service based on the price (target
price) that customers are willing to pay. Target costing involves much more up front work than cost-
based pricing. Target costing can be used most effectively in the design and development stage of the
product life cycle because the features of the product as well as its costs are still fairly easy to adjust.
Some may argue that this is the better of the two choices.

STA: AICPA: BB-Critical Thinking | IMA: Cost Management | ACBSP: APC-26-
Management Functions KEY: Bloom's:
Comprehension NOT: 10 min.

Chapter 13 5e

Uploaded by

Document Information

Original Description:

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Chapter 13 5e

Uploaded by

Copyright:

Available Formats

Chapter 13—Short-Run Decision Making: Relevant Costing

PTS: 1 DIF: Difficulty: Easy OBJ: LO: 13-1

2. In making a short-run decision, all alternatives need to be considered.

PTS: 1 DIF: Difficulty: Easy OBJ: LO: 13-1

ANS: F PTS: 1 DIF: Difficulty: Easy

ANS: T PTS: 1 DIF: Difficulty: Easy

PTS: 1 DIF: Difficulty: Easy OBJ: LO: 13-1

ANS: F PTS: 1 DIF: Difficulty: Easy

7. A sunk cost is always relevant.

PTS: 1 DIF: Difficulty: Easy OBJ: LO: 13-1

8. Future costs that differ across alternatives are relevant costs.

ANS: T PTS: 1 DIF: Difficulty: Easy

9. Fixed costs are never relevant.

ANS: F PTS: 1 DIF: Difficulty: Easy

ANS: F PTS: 1 DIF: Difficulty: Easy

11. Flexible resources may have unused capacity.

ANS: F PTS: 1 DIF: Difficulty: Easy

PTS: 1 DIF: Difficulty: Easy OBJ: LO: 13-2

PTS: 1 DIF: Difficulty: Easy OBJ: LO: 13-2

ANS: T PTS: 1 DIF: Difficulty: Easy

15. A segment margin is always greater than or equal to zero.

ANS: F PTS: 1 DIF: Difficulty: Easy

ANS: T PTS: 1 DIF: Difficulty: Easy

ANS: T PTS: 1 DIF: Difficulty: Easy

ANS: T PTS: 1 DIF: Difficulty: Easy

ANS: F PTS: 1 DIF: Difficulty: Easy

ANS: F PTS: 1 DIF: Difficulty: Easy

ANS: F PTS: 1 DIF: Difficulty: Easy

ANS: T PTS: 1 DIF: Difficulty: Easy

PTS: 1 DIF: Difficulty: Easy OBJ: LO: 13-4

ANS: T PTS: 1 DIF: Difficulty: Easy

ANS: T PTS: 1 DIF: Difficulty: Easy

ANS: T PTS: 1 DIF: Difficulty: Easy

ANS: T PTS: 1 DIF: Difficulty: Easy

Match each statement with the correct item below.

1. ANS: D PTS: 1 DIF: Difficulty: Easy

1. consists of choosing among alternatives with an immediate or limited end in

ANS: Short-run decision making

PTS: 1 DIF: Difficulty: Moderate OBJ: LO: 13-1

ANS: decision model

PTS: 1 DIF: Difficulty: Easy OBJ: LO: 13-1

ANS: differential cost

PTS: 1 DIF: Difficulty: Easy OBJ: LO: 13-1

ANS: Qualitative factors

PTS: 1 DIF: Difficulty: Easy OBJ: LO: 13-1

5. Most short-run decisions require extensive consideration of .

ANS: cost behavior.

PTS: 1 DIF: Difficulty: Moderate OBJ: LO: 13-1

PTS: 1 DIF: Difficulty: Easy OBJ: LO: 13-1

ANS: relevant cost

PTS: 1 DIF: Difficulty: Easy OBJ: LO: 13-1

ANS: opportunity cost.

PTS: 1 DIF: Difficulty: Easy OBJ: LO: 13-1

9. A cost that cannot be affected by any future action is called a(n) .

ANS: sunk cost.

PTS: 1 DIF: Difficulty: Easy OBJ: LO: 13-1

ANS: special-order decision

PTS: 1 DIF: Difficulty: Easy OBJ: LO: 13-2

11. Segmented reports are helpful for managers to make decisions.

PTS: 1 DIF: Difficulty: Easy OBJ: LO: 13-2

ANS: make-or-buy decision.

PTS: 1 DIF: Difficulty: Easy OBJ: LO: 13-2