INTRODUCTION TO MANAGEMENT ACCOUNTING 16TH EDITION BY HORNGREN - TEST BANK Instant Download - Complete Test Bank With Answers Sample Questions Are Posted Below Introduction to Management Accounting, 16e (Horngren) Chapter 6 Relevant Information for Decision Making with a Focus on Operational Decisions 6.1 Questions 1) Differential cost is …
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INTRODUCTION TO MANAGEMENT ACCOUNTING 16TH EDITION BY HORNGREN – TEST BANK
Instant Download – Complete Test Bank With Answers
Sample Questions Are Posted Below
Introduction to Management Accounting, 16e (Horngren)
Chapter 6 Relevant Information for Decision Making with a Focus on Operational Decisions
6.1 Questions
1) Differential cost is the difference in ________ between two alternatives.
Answer: D
Diff: 1
LO: 6-1
AACSB: Reflective thinking skills
Learning Outcome: Use incremental analysis to make short-term decisions
2) Differential revenue is the difference in ________ between two alternatives.
Answer: D
Diff: 1
LO: 6-1
AACSB: Reflective thinking skills
Learning Outcome: Use incremental analysis to make short-term decisions
3) Incremental costs are the ________ generated by a proposed alternative.
Answer: D
Diff: 2
LO: 6-1
AACSB: Reflective thinking skills
Learning Outcome: Use incremental analysis to make short-term decisions
4) Incremental benefits are the ________ generated by a proposed alternative.
Answer: D
Diff: 2
LO: 6-1
AACSB: Reflective thinking skills
Learning Outcome: Use incremental analysis to make short-term decisions
5) Johnston Company wants to double production of Product X from 1,000 units to 2,000 units. The variable manufacturing cost per unit is $10. The variable nonmanufacturing cost per unit is $20. There are no fixed costs. The selling price per unit is $50. What is the incremental cost of the proposed change?
Answer: C
Diff: 2
LO: 6-1
AACSB: Analytic skills
Learning Outcome: Use incremental analysis to make short-term decisions
6) Jeffrey Company wants to double production of Product X from 1,000 units to 2,000 units. The variable manufacturing cost per unit is $10. The variable nonmanufacturing cost per unit is $20. There are no fixed costs. The selling price per unit is $50. What is the incremental revenue of the proposed change?
Answer: D
Diff: 2
LO: 6-1
AACSB: Analytic skills
Learning Outcome: Use incremental analysis to make short-term decisions
7) Marjorie Company has an idle machine that originally cost $200,000. The book value of the machine is $100,000. The company is considering three alternative uses of the idle machine:
Alternative 1: Disposal of machine. Disposal value of machine is $50,000.
Alternative 2: Use the idle machine to increase production of Product A. Contribution margin from additional sales of Product A is estimated to be $60,000.
Alternative 3: Use the idle machine to increase production of Product B. Contribution margin from additional sales of Product B is estimated to be $70,000.
When considering Alternative 3, what is the opportunity cost of the idle machine?
Answer: B
Diff: 2
LO: 6-1
AACSB: Analytic skills
Learning Outcome: Use incremental analysis to make short-term decisions
8) Marianne Company has an idle machine that originally cost $200,000. The book value of the machine is $100,000. The company is considering three alternative uses of the idle machine:
Alternative 1: Disposal of machine. Disposal value of machine is $50,000.
Alternative 2: Use the idle machine to increase production of Product A. Contribution margin from additional sales of Product A is estimated to be $60,000.
Alternative 3: Use the idle machine to increase production of Product B. Contribution margin from additional sales of Product B is estimated to be $70,000.
When considering Alternative 2, what is the opportunity cost of the idle machine?
Answer: C
Diff: 2
LO: 6-1
AACSB: Analytic skills
Learning Outcome: Use incremental analysis to make short-term decisions
9) Nancy Company has an idle machine that originally cost $200,000. The book value of the machine is $100,000. The company is considering three alternative uses of the idle machine:
Alternative 1: Disposal of machine. Disposal value of machine is $50,000.
Alternative 2: Use the idle machine to increase production of Product A. Contribution margin from additional sales of Product A is estimated to be $60,000.
Alternative 3: Use the idle machine to increase production of Product B. Contribution margin from additional sales of Product B is estimated to be $70,000.
When considering the opportunity cost of the idle machine, what is the net financial benefit from Alternative 3?
Answer: A
Diff: 2
LO: 6-1
AACSB: Analytic skills
Learning Outcome: Use incremental analysis to make short-term decisions
10) When evaluating alternative uses of a capital asset, equivalent decisions are reached using the opportunity cost approach and ________.
Answer: D
Diff: 1
LO: 6-1
AACSB: Reflective thinking skills
Learning Outcome: Use incremental analysis to make short-term decisions
11) A proposed project will require the use of ten machines in a company. Each machine has five alternative uses. What is the simplest way to evaluate the desirability of the project?
Answer: C
Diff: 2
LO: 6-1
AACSB: Reflective thinking skills
Learning Outcome: Use incremental analysis to make short-term decisions
12) The key to determining the financial difference between two alternative courses of action is to identify the ________.
Answer: C
Diff: 1
LO: 6-1
AACSB: Reflective thinking skills
Learning Outcome: Use incremental analysis to make short-term decisions
13) The term opportunity cost applies to a resource that a company ________.
Answer: D
Diff: 1
LO: 6-1
AACSB: Reflective thinking skills
Learning Outcome: Use incremental analysis to make short-term decisions
14) An opportunity cost is ________.
Answer: D
Diff: 1
LO: 6-1
AACSB: Reflective thinking skills
Learning Outcome: Use incremental analysis to make short-term decisions
15) The salary foregone by a person who quits a job to start a business is an example of a(n) ________.
Answer: B
Diff: 2
LO: 6-1
AACSB: Analytic skills
Learning Outcome: Use incremental analysis to make short-term decisions
16) Nestle Company paid $130,000 for a machine used to mill oats. The annual contribution margin from oat sales is $60,000. The machine could be sold for $80,000. The opportunity cost of producing the oats is ________.
Answer: C
Diff: 2
LO: 6-1
AACSB: Analytic skills
Learning Outcome: Use incremental analysis to make short-term decisions
17) Sue is considering leaving her current position to open a coffee shop. Sue’s current annual salary is $83,000. Annual coffee shop revenue and costs are estimated at $260,000 and $210,000, respectively. What is Sue’s opportunity cost of staying at her current work position?
Answer: A
Diff: 2
LO: 6-1
AACSB: Analytic skills
Learning Outcome: Use incremental analysis to make short-term decisions
18) Mary is considering leaving her current position to open an ice cream shop. Mary’s current annual salary is $77,000. Annual ice cream shop revenue and costs are estimated at $260,000 and $210,000, respectively. What is Mary’s annual opportunity cost of starting the ice cream shop?
Answer: B
Diff: 2
LO: 6-1
AACSB: Analytic skills
Learning Outcome: Use incremental analysis to make short-term decisions
19) Determining the opportunity cost of a project depends on the alternatives available.
Answer: TRUE
Diff: 1
LO: 6-1
AACSB: Reflective thinking skills
Learning Outcome: Use incremental analysis to make short-term decisions
20) Opportunity costs and outlay costs are widely used synonyms.
Answer: FALSE
Diff: 1
LO: 6-1
AACSB: Reflective thinking skills
Learning Outcome: Use incremental analysis to make short-term decisions
21) Opportunity costs apply to resources that a company has committed to purchase.
Answer: TRUE
Diff: 2
LO: 6-1
AACSB: Reflective thinking skills
Learning Outcome: Use incremental analysis to make short-term decisions
6.2 Questions
1) In a make-or-buy decision for a part for a product, which of the following qualitative factors play a role?
Answer: D
Diff: 2
LO: 6-2
AACSB: Reflective thinking skills
Learning Outcome: Distinguish between relevant and irrelevant costs, Use incremental analysis to make short-term decisions
2) What is the most common value-chain function outsourced in most businesses?
Answer: D
Diff: 2
LO: 6-2
AACSB: Reflective thinking skills
Learning Outcome: Distinguish between relevant and irrelevant costs, Use incremental analysis to make short-term decisions
3) In make-or-buy decisions for a part for a product, relevant costs include ________.
Answer: D
Diff: 2
LO: 6-2
AACSB: Reflective thinking skills
Learning Outcome: Distinguish between relevant and irrelevant costs, Use incremental analysis to make short-term decisions
4) In a make-or-buy decision, which of the following is the fundamental question that is asked in making the decision?
Answer: D
Diff: 2
LO: 6-2
AACSB: Reflective thinking skills
Learning Outcome: Distinguish between relevant and irrelevant costs, Use incremental analysis to make short-term decisions
5) Bonneville Company is producing a subassembly used in the production of a product. The costs incurred for the subassembly follow:
Per Unit
Direct materials $6.00
Direct labor 4.00
Variable factory overhead 1.00
Fixed supervisor salary 3.00
Depreciation expense on factory equipment 2.00
General fixed factory overhead allocated 5.00
Total costs $21.00
The above per unit costs are based on 8,000 units. An outside supplier will provide 8,000 subassemblies for $19 per unit. The supervisor will be terminated if the subassemblies are not produced in house. The idle factory will be used to manufacture another product with a contribution margin of $60,000. What should Bonneville do?
Answer: C
Diff: 2
LO: 6-2
AACSB: Analytic skills
Learning Outcome: Distinguish between relevant and irrelevant costs, Use incremental analysis to make short-term decisions
6) Blue Company is a small company with limited expertise with customer service. Blue Company has a contract with New Company to handle all of Blue Company’s customer service needs. For Blue Company, this is an example of ________.
Answer: C
Diff: 1
LO: 6-2
AACSB: Reflective thinking skills
Learning Outcome: Distinguish between relevant and irrelevant costs, Use incremental analysis to make short-term decisions
7) Fixed overhead costs that will continue regardless of a make-or-buy decision are ________ to the make-or-buy decision.
Answer: B
Diff: 2
LO: 6-2
AACSB: Analytic skills
Learning Outcome: Distinguish between relevant and irrelevant costs, Use incremental analysis to make short-term decisions
8) When making a make-or-buy decision for a part used in a product, which of the following item is relevant to the decision?
Answer: D
Diff: 2
LO: 6-2
AACSB: Analytic skills
Learning Outcome: Distinguish between relevant and irrelevant costs, Use incremental analysis to make short-term decisions
9) Buddy Company manufactures a part for its production cycle. The costs per unit for 5,000 units of the part are as follows:
Per Unit
Direct materials $3.00
Direct labor 5.00
Variable factory overhead 4.00
Fixed factory overhead 4.00
Total costs $16.00
The fixed factory overhead costs are avoidable. Spalding Company has offered to sell 5,000 units of the same part to Buddy Company for $15 per unit. Assuming no other use for the facilities, Buddy Company should ________.
Answer: C
Diff: 2
LO: 6-2
AACSB: Analytic skills
Learning Outcome: Distinguish between relevant and irrelevant costs, Use incremental analysis to make short-term decisions
10) Benton Company manufactures a part for its production cycle. The costs per unit for 38,000 units of the part are as follows:
Per Unit
Direct materials $3.00
Direct labor 5.00
Variable factory overhead 3.00
Fixed factory overhead 4.00
Total costs $15.00
The fixed factory overhead costs are unavoidable. Assume no other use for the facilities. What is the highest price Benton Company should pay for the part from an outside supplier?
Answer: B
Diff: 2
LO: 6-2
AACSB: Analytic skills
Learning Outcome: Distinguish between relevant and irrelevant costs, Use incremental analysis to make short-term decisions
11) Christian Company manufactures a part for its production cycle. The annual costs per unit for 5,000 units of the part are as follows:
Per Unit
Direct materials $3.00
Direct labor 5.00
Variable factory overhead 4.00
Fixed factory overhead 2.00
Total costs $14.00
The fixed factory overhead costs are unavoidable. Another company has offered to sell 5,000 units of the same part to Christian Company for $15 per unit. The facilities currently used to make the part could be rented out to another manufacturer for $20,000 a year. Christian Company should ________.
Answer: C
Diff: 2
LO: 6-2
AACSB: Analytic skills
Learning Outcome: Distinguish between relevant and irrelevant costs, Use incremental analysis to make short-term decisions
12) Laskowski Company manufactures a part for its production cycle. The annual costs per unit for 5,000 units of the part are as follows:
Per Unit
Direct materials $3.00
Direct labor 5.00
Variable factory overhead 4.00
Fixed factory overhead 2.00
Total costs $14.00
The fixed factory overhead costs are unavoidable. Hendricks Company has offered to sell 5,000 units of the same part to Laskowski Company for $14 per unit. The facilities currently used for the part could be used to make 5,000 units annually of a new product that would contribute $5 a unit to fixed expenses. No additional fixed costs would be incurred with the new product. Laskowski Company should ________.
Answer: D
Diff: 2
LO: 6-2
AACSB: Analytic skills
Learning Outcome: Distinguish between relevant and irrelevant costs, Use incremental analysis to make short-term decisions
13) Krakowski Company manufactures a part for its production cycle. The costs per unit for 10,000 units of the part are as follows:
Per Unit
Direct materials $20.00
Direct labor 15.00
Variable factory overhead 16.00
Fixed factory overhead 10.00
Total costs $61.00
The fixed factory overhead costs are unavoidable. Winters Company has offered to sell 10,000 units of the same part to Krakowski Company for $55 per unit. Assuming no other use for the facilities, Krakowski Company should ________.
Answer: A
Diff: 2
LO: 6-2
AACSB: Analytic skills
Learning Outcome: Distinguish between relevant and irrelevant costs, Use incremental analysis to make short-term decisions
14) Corrao Company manufactures a part for its production cycle. The costs per unit for 10,000 units of the part are as follows:
Per Unit
Direct materials $20.00
Direct labor 13.00
Variable factory overhead 15.00
Fixed factory overhead 14.00
Total costs $62.00
The fixed factory overhead costs are unavoidable. Assuming no other use for the facilities, what is the highest price that Corrao Company should be willing to pay for the part?
Answer: C
Diff: 2
LO: 6-2
AACSB: Analytic skills
Learning Outcome: Distinguish between relevant and irrelevant costs, Use incremental analysis to make short-term decisions
15) Potter Company manufactures a part for its production cycle. The annual costs per unit for 10,000 units of the part are as follows:
Per Unit
Direct materials $20.00
Direct labor 15.00
Variable factory overhead 16.00
Fixed factory overhead 10.00
Total costs $61.00
The fixed factory overhead costs are unavoidable. Paulson Company has offered to sell 10,000 units of the same part to Potter Company for $60 per unit. The facilities currently used to make the part could be rented out to another manufacturer for $100,000 per year. Potter Company should ________.
Answer: C
Diff: 2
LO: 6-2
AACSB: Analytic skills
Learning Outcome: Distinguish between relevant and irrelevant costs, Use incremental analysis to make short-term decisions
16) Golden Company manufactures a part for its production cycle. The annual costs per unit for 10,000 units of the part are as follows:
Per Unit
Direct materials $20.00
Direct labor 15.00
Variable factory overhead 6.00
Fixed factory overhead 10.00
Total costs $51.00
The fixed factory overhead costs are unavoidable. Olson Company has offered to sell 10,000 units of the same part to Golden Company for $55 per unit. The facilities currently used to make the part could be used to make 10,000 units per year of a new product that has a contribution margin of $20 per unit. No additional fixed costs would be incurred with the new product. Golden Company should ________.
Answer: C
Diff: 2
LO: 6-2
AACSB: Analytic skills
Learning Outcome: Distinguish between relevant and irrelevant costs, Use incremental analysis to make short-term decisions
17) Kaiman Company currently produces a key part at a total cost of $210,000. Annual variable costs are $170,000. Of the annual fixed costs, $10,000 relate specifically to this part. The remaining fixed costs are unavoidable.
Another manufacturer has offered to supply the part annually for $200,000. The facilities currently used to manufacture the part could be used to manufacture a new product with an expected contribution margin of $30,000 per year. Alternatively, the facilities could be rented out at $60,000 per year. Given all of these alternatives, what is Kaiman Company’s lowest net relevant cost for the parts?
Answer: B
Diff: 3
LO: 6-2
AACSB: Analytic skills
Learning Outcome: Distinguish between relevant and irrelevant costs, Use incremental analysis to make short-term decisions
18) Dolphin Company currently produces 10,000 units of a key part at a total cost of $512,000 annually. Variable costs are $300,000 annually. Of the annual fixed costs, $140,000 relate specifically to this part. The remaining fixed costs are unavoidable.
Another manufacturer has offered to supply the part for $48 per unit. The facilities currently used to manufacture the part could be used to manufacture a new product with an expected contribution margin of $30,000 per year. Alternatively, the facilities could be rented out at $60,000 per year. Given all of these alternatives, what is Dolphin Company’s lowest net relevant cost for the parts?
Answer: A
Diff: 3
LO: 6-2
AACSB: Analytic skills
Learning Outcome: Distinguish between relevant and irrelevant costs, Use incremental analysis to make short-term decisions
19) Thompson Company currently produces 10,000 units of a key part at a total cost of $512,000 annually. Annual variable costs are $300,000. Of the annual fixed costs, $140,000 relate specifically to this part. The remaining fixed costs are unavoidable.
Another manufacturer has offered to supply the part for $48 per unit. The facilities currently used to manufacture the part could be used to manufacture a new product with an expected contribution margin of $60,000 annually. Alternatively, the facilities could be rented out at $70,000 annually. If Thompson Company makes the part, what is the annual opportunity cost of the facilities?
Answer: D
Diff: 3
LO: 6-2
AACSB: Analytic skills
Learning Outcome: Distinguish between relevant and irrelevant costs, Use incremental analysis to make short-term decisions
20) Madison Company produces a part that is used in the manufacture of one of its products. The costs associated with the production of 5,000 units of this part are as follows:
Direct materials $108,000
Direct labor 156,000
Variable factory overhead 72,000
Fixed factory overhead 168,000
Total costs $504,000
Of the fixed factory overhead costs, $72,000 are avoidable. Middleton Company has offered to sell 5,000 units of the same part to Madison for $87.00 per unit. Assuming there is no other use for the facilities, Madison Company should ________.
Answer: B
Diff: 2
LO: 6-2
AACSB: Analytic skills
Learning Outcome: Distinguish between relevant and irrelevant costs, Use incremental analysis to make short-term decisions
21) Davidson Company produces a part that is used in the manufacture of one of its products. The costs associated with the production of 5,000 units of this part are as follows:
Direct materials $108,000
Direct labor 156,000
Variable factory overhead 70,000
Fixed factory overhead 168,000
Total costs $502,000
Of the fixed factory overhead costs, $72,000 are avoidable. Assuming there is no other use for the facilities. What is the highest price Davidson Company should be willing to pay for 5,000 units of the part?
Answer: C
Diff: 2
LO: 6-2
AACSB: Analytic skills
Learning Outcome: Distinguish between relevant and irrelevant costs, Use incremental analysis to make short-term decisions
22) Gonzalez Company produces a part that is used in the manufacture of one of its products. The annual costs associated with the production of 5,000 units of this part are as follows:
Direct materials $100,000
Direct labor 56,000
Variable factory overhead 72,000
Fixed factory overhead 168,000
Total costs $396,000
Of the fixed factory overhead costs, $72,000 are avoidable. Another company has offered to sell 5,000 units of the same part to Gonzalez for $70.00 per unit. The facilities currently used to make the part can be rented out to another manufacturer for $72,000 per year. What should Gonzalez Company do?
Answer: C
Diff: 2
LO: 6-2
AACSB: Analytic skills
Learning Outcome: Distinguish between relevant and irrelevant costs, Use incremental analysis to make short-term decisions
23) Fast Company has just decided to outsource the production of a part for a product. Assume Fast Company leaves the area of the manufacturing plant idle where it was producing the outsourced part. It has no alternative uses of the plant. What is the opportunity cost of the idle area of the manufacturing plant to Fast Company?
Answer: A
Diff: 3
LO: 6-2
AACSB: Analytic skills
Learning Outcome: Distinguish between relevant and irrelevant costs, Use incremental analysis to make short-term decisions
24) Outsourcing is the purchase of products or services by a company from an outside supplier.
Answer: TRUE
Diff: 1
LO: 6-2
AACSB: Reflective thinking skills
Learning Outcome: Distinguish between relevant and irrelevant costs, Use incremental analysis to make short-term decisions
25) Qualitative factors do not affect a make-or-buy decision.
Answer: FALSE
Diff: 1
LO: 6-2
AACSB: Reflective thinking skills
Learning Outcome: Distinguish between relevant and irrelevant costs, Use incremental analysis to make short-term decisions
26) In a make-or-buy decision, if plant facilities will remain idle when the decision is made to outsource a part used in a product, then the opportunity cost of the plant facilities is zero. Assume there are no alternative uses of the plant facilities available.
Answer: TRUE
Diff: 2
LO: 6-2
AACSB: Reflective thinking skills
Learning Outcome: Distinguish between relevant and irrelevant costs, Use incremental analysis to make short-term decisions
27) Each year, Madsen Company purchases 8,000 units of a part that it needs for production of its product. The supplier notified Madsen Company that a price increase will take effect shortly, which will bring the price of the part to $25 per part. Madsen Company is considering the use of idle facilities to produce the part. The annual production costs to produce the needed 8,000 parts are as follows:
Direct materials $17,500
Direct labor 30,000
Variable indirect production costs 14,000
Fixed indirect production costs 33,500
The idle facilities could also be rented out at an annual rent of $99,000. All the fixed indirect production costs are avoidable.
Required:
Determine if Madsen Company should buy the part or produce it internally.
Answer: Alternatives:
Buy Part: $25 × 8,000 units = $200,000
Buy Part and Rent Facilities: ($25 × 8,000) – $99,000 = $101,000
Make Part: ($17,500 + $30,000 + $14,000 + $33,500) = $95,000
Conclusion:
The lowest cost alternative is to make the part. Madsen Company should make the part.
Diff: 2
LO: 6-2
AACSB: Analytic skills
Learning Outcome: Distinguish between relevant and irrelevant costs, Use incremental analysis to make short-term decisions
28) Andrea Company manufactures a part for its production cycle. The annual costs per unit for 20,000 units of this part are as follows:
Direct materials $15
Direct labor 12
Variable indirect production costs 19
Fixed indirect production costs 16
Total cost $62
Andrea Company has been approached by a supplier who will sell 20,000 units of the same part for $940,000. All the fixed indirect production costs are unavoidable if Andrea Company ceases production of the part.
Required:
Answer:
A)
Alternatives:
Make part: ($15 + $12 + $19) × 20,000 = $920,000
Buy part: $940,000
Conclusion:
The least costly alternative is to make the part.
B)
Alternatives:
Make part: $920,000
Buy part: $940,000
Buy part and rent out facilities: $940,000 – $100,000 = $840,000
Conclusion:
The least costly alternative is to buy the part and rent out the facilities. In contrast to making the part, the company would save $80,000 ($920,000 – $840,000) per year.
Diff: 2
LO: 6-2
AACSB: Analytic skills
Learning Outcome: Distinguish between relevant and irrelevant costs, Use incremental analysis to make short-term decisions
29) Jeff Company produces a part that is used in the manufacture of one of its products. The annual costs associated with the production of 11,000 units of this part are as follows:
Direct materials $25,000
Direct labor 34,000
Variable indirect production costs 65,000
Fixed indirect production costs 40,000
Total costs $164,000
A supplier is willing to sell 11,000 units of the part to Jeff Company for $12.50 per unit. When examining the fixed indirect production costs, Jeff Company determines $10,000 is avoidable.
Required:
Answer:
A)
Alternatives:
Make part: ($25,000 + $34,000 + $65,000 + $10,000) = $134,000
Buy part: ($12.50 × 11,000) = $137,500
Conclusion:
The least costly alternative is to make the part. Jeff should not accept the supplier’s offer.
B)
Alternatives:
Make part: $134,000
Buy part: $137,500
Buy part and rent out facilities: $137,500 – $50,000 = $87,500
Conclusion:
The least costly alternative is to buy the part and rent out the facilities.
Diff: 2
LO: 6-2
AACSB: Analytic skills
Learning Outcome: Distinguish between relevant and irrelevant costs, Use incremental analysis to make short-term decisions
6.3 Questions
1) If a department in a department store is under consideration to be eliminated, unavoidable fixed expenses are ________ to the decision.
Answer: D
Diff: 2
LO: 6-3
AACSB: Reflective thinking skills
Learning Outcome: Distinguish between relevant and irrelevant costs, Use incremental analysis to make short-term decisions
2) Department A covers one section of a large factory building. Which of the following costs is relevant to the decision to eliminate Department A?
Answer: D
Diff: 1
LO: 6-3
AACSB: Reflective thinking skills
Learning Outcome: Distinguish between relevant and irrelevant costs, Use incremental analysis to make short-term decisions
3) If a department in a grocery store is under consideration to be eliminated, which of the following cost(s) is(are) NOT relevant to the decision?
Answer: D
Diff: 2
LO: 6-3
AACSB: Reflective thinking skills
Learning Outcome: Distinguish between relevant and irrelevant costs, Use incremental analysis to make short-term decisions
4) If a department in a department store is eliminated, ________ costs will not continue.
Answer: D
Diff: 1
LO: 6-3
AACSB: Reflective thinking skills
Learning Outcome: Distinguish between relevant and irrelevant costs, Use incremental analysis to make short-term decisions
5) Central Industries has three product lines: A, B and C. The following information is available:
Product A Product B Product C
Sales $100,000 $90,000 $44,000
Variable costs 76,000 48,000 35,000
Contribution margin 24,000 42,000 9,000
Avoidable fixed costs 9,000 18,000 3,000
Unavoidable fixed costs 6,000 9,000 7,700
Operating income(loss) $9,000 $15,000 $(1,700)
Central Industries is thinking about dropping Product C because it is reporting a loss. Assume Central Industries drops Product C and does not replace it. What will happen to operating income?
Answer: C
Diff: 2
LO: 6-3
AACSB: Analytic skills
Learning Outcome: Distinguish between relevant and irrelevant costs, Use incremental analysis to make short-term decisions
6) Sahara Industries has three product lines: A, B and C. The following annual information is available:
Product A Product B Product C
Sales $100,000 $90,000 $88,000
Variable costs 76,000 48,000 79,000
Contribution margin 24,000 42,000 9,000
Avoidable fixed costs 9,000 18,000 3,000
Unavoidable fixed costs 6,000 9,000 9,400
Operating income(loss) $9,000 $15,000 $(3,400)
Sahara Industries is thinking about dropping Product C because it is reporting a loss. Assume Sahara Industries drops Product C and the space formerly used to produce Product C is rented out for $15,000 per year. What will happen to operating income?
Answer: B
Diff: 2
LO: 6-3
AACSB: Analytic skills
Learning Outcome: Distinguish between relevant and irrelevant costs, Use incremental analysis to make short-term decisions
7) Cesar Company has three product lines: A, B and C. The following annual information is available:
Product A Product B Product C
Sales $100,000 $90,000 $44,000
Variable costs 76,000 48,000 35,000
Contribution margin 24,000 42,000 9,000
Avoidable fixed costs 9,000 18,000 3,000
Unavoidable fixed costs 6,000 9,000 7,700
Operating income(loss) $9,000 $15,000 $(1,700)
Assume Cesar Company drops Product C. Cesar Company then doubles the production and sales of Product B without increasing fixed costs. What will happen to operating income?
Answer: C
Diff: 3
LO: 6-3
AACSB: Analytic skills
Learning Outcome: Distinguish between relevant and irrelevant costs, Use incremental analysis to make short-term decisions
8) Bally Company has three product lines: A, B and C. The following annual information is available:
Product A Product B Product C
Sales $60,000 $90,000 $24,000
Variable costs 36,000 48,000 20,000
Contribution margin 24,000 42,000 4,000
Avoidable fixed costs 9,000 18,000 3,000
Unavoidable fixed costs 6,000 9,000 2,400
Operating income(loss) $9,000 $15,000 $(1,400)
Assume Bally Company drops Product C. What will happen to operating income?
Answer: C
Diff: 2
LO: 6-3
AACSB: Analytic skills
Learning Outcome: Distinguish between relevant and irrelevant costs, Use incremental analysis to make short-term decisions
9) The most recent income statement for the Venetian Branch of Palm Harbor Bank is presented below:
Sales $57,000
Variable costs 31,500
Contribution margin 25,500
Avoidable fixed costs 13,500
Unavoidable fixed costs 20,000
Operating loss $(8,000)
Palm Harbor Bank is thinking about eliminating the Venetian Branch. If the branch is eliminated, Palm Harbor Bank’s operating income will ________.
Answer: C
Diff: 1
LO: 6-3
AACSB: Analytic skills
Learning Outcome: Distinguish between relevant and irrelevant costs, Use incremental analysis to make short-term decisions
10) The most recent income statement for the South Branch of First Financial Bank is presented below:
Sales $57,000
Variable costs 31,500
Contribution margin 25,500
Avoidable fixed costs 13,500
Unavoidable fixed costs 18,000
Operating loss $(6,000)
First Financial Bank is thinking about eliminating the South Branch. If the branch is eliminated, First Financial Bank’s operating income will ________.
Answer: C
Diff: 1
LO: 6-3
AACSB: Analytic skills
Learning Outcome: Distinguish between relevant and irrelevant costs, Use incremental analysis to make short-term decisions
11) ________ are relevant in deciding whether to add or delete a department from a department store.
Answer: A
Diff: 1
LO: 6-3
AACSB: Reflective thinking skills
Learning Outcome: Distinguish between relevant and irrelevant costs, Use incremental analysis to make short-term decisions
12) In deciding whether to add or delete a product or service, common costs are probably ________.
Answer: D
Diff: 2
LO: 6-3
AACSB: Reflective thinking skills
Learning Outcome: Distinguish between relevant and irrelevant costs, Use incremental analysis to make short-term decisions
13) When deciding whether to add or delete a department, managers should keep the department as long as ________ from the department exceeds ________.
Answer: C
Diff: 2
LO: 6-3
AACSB: Analytic skills
Learning Outcome: Distinguish between relevant and irrelevant costs, Use incremental analysis to make short-term decisions
14) In deciding whether to add or delete a product, the insurance expense associated with the custom-built equipment used to produce the product is an ________ cost. Assume the equipment will be sold if the company discontinues the product.
Answer: A
Diff: 2
LO: 6-3
AACSB: Analytic skills
Learning Outcome: Distinguish between relevant and irrelevant cost, Use incremental analysis to make short-term decisions
15) In deciding whether to add or delete a product, the salary of the plant manager is an ________. Assume the plant manager supervised the production of several products.
Answer: C
Diff: 2
LO: 6-3
AACSB: Analytic skills
Learning Outcome: Distinguish between relevant and irrelevant costs, Use incremental analysis to make short-term decisions
16) Variable expenses are divided into avoidable and unavoidable costs.
Answer: FALSE
Diff: 1
LO: 6-3
AACSB: Reflective thinking skills
Learning Outcome: Distinguish between relevant and irrelevant costs, Use incremental analysis to make short-term decisions
17) Unavoidable costs are never relevant in deciding whether to eliminate a product or department.
Answer: TRUE
Diff: 2
LO: 6-3
AACSB: Reflective thinking skills
Learning Outcome: Distinguish between relevant and irrelevant costs, Use incremental analysis to make short-term decisions
18) Heating and air conditioning costs are examples of common costs to the different departments in a retail store.
Answer: TRUE
Diff: 2
LO: 6-3
AACSB: Analytic skills
Learning Outcome: Distinguish between relevant and irrelevant costs, Use incremental analysis to make short-term decisions
19) When adding or dropping a product line, variable costs are the only relevant costs.
Answer: FALSE
Diff: 2
LO: 6-3
AACSB: Reflective thinking skills
Learning Outcome: Distinguish between relevant and irrelevant costs, Use incremental analysis to make short-term decisions
20) When adding or dropping a product line, fixed avoidable costs may be relevant costs.
Answer: TRUE
Diff: 2
LO: 6-3
AACSB: Reflective thinking skills
Learning Outcome: Distinguish between relevant and irrelevant costs, Use incremental analysis to make short-term decisions
21) Qualitative information can influence decisions to add or drop a department.
Answer: TRUE
Diff: 2
LO: 6-3
AACSB: Analytic skills
Learning Outcome: Distinguish between relevant and irrelevant costs, Use incremental analysis to make short-term decisions
22) Freedom Company has three departments. Data for the most recent year are presented below:
Dept. X Dept. Y Dept. Z
Sales $400 $200 $80
Variable expenses 128 52 34
Unavoidable fixed expenses 96 52 12
Avoidable fixed expenses 116 104 54
Required:
Answer:
A)
Sales $680
Variable expenses (214)
Avoidable fixed expenses (274)
Unavoidable fixed expenses (160)
Operating income $32
B)
Dept. X: $400 – $128 = $272
Dept. Y: $200 – $52 = $148
Dept. Z: $80 – $34 = $46
C)
Dept. X: $272 – $212 = $60
Dept. Y: $148 – $156 = $(8)
Dept. Z: $46 – $66 = $(20)
D)
Dept. Z should be eliminated because the contribution margin of $46 is less than avoidable fixed expenses of $54. Dept. Y should not be eliminated because the contribution margin of $148 exceeds the avoidable fixed expenses of $104. Dept. X should not be eliminated because the contribution margin of $272 exceeds the avoidable fixed expenses of $116.
Diff: 2
LO: 6-3
AACSB: Analytic skills
Learning Outcome: Distinguish between relevant and irrelevant costs, Use incremental analysis to make short-term decisions
23) Olson Company has three departments. Data for the most recent year is presented below:
Dept. C Dept. A Dept. T
Sales $4,000 $1,920 $2,240
Variable expenses 3,280 1,420 520
Unavoidable fixed expenses 480 180 440
Avoidable fixed expenses 555 265 360
Operating income (loss) $(315) $55 $920
Olson Company is considering eliminating Dept. C because it is operating at a loss.
Required:
Answer:
Diff: 3
LO: 6-3
AACSB: Analytic skills
Learning Outcome: Distinguish between relevant and irrelevant costs, Use incremental analysis to make short-term decisions
6.4 Questions
1) A company can sell any mix of Product A and Product B at full capacity. The company has 100,000 hours of capacity. The demand for each product exceeds the capacity. It takes one hour to make one unit of Product A and two hours to make one unit of Product B. The following information is available:
Product A Product B
Units produced from capacity available 100,000 50,000
Contribution margin per unit $20 $30
If capacity is the limiting factor, which product should be produced?
Answer: D
Diff: 1
LO: 6-4
AACSB: Reflective thinking skills
Learning Outcome: None
2) A company has 100,000 hours of capacity and manufactures two products, Product X and Product Z. Neither product has enough demand to utilize the entire capacity, but the combined demand of both products exceeds the capacity of the plant. It takes one hour to make one unit of Product X and two hours to make one unit of Product Z. The following information is available:
Product X Product Z
Units produced from capacity available 100,000 50,000
Contribution margin per unit $20 $30
What product or products should be made?
Answer: C
Diff: 1
LO: 6-4
AACSB: Reflective thinking skills
Learning Outcome: None
3) A company has 10,000 hours of capacity and manufactures two products. Product 1 takes 2 hours per unit. Product 2 takes 3 hours per unit. The contribution margin per unit for Product 1 is $5. The contribution margin per unit for Product 2 is $6. The demand for either product exceeds the factory capacity. Which product or products should be manufactured?
Answer: C
Diff: 1
LO: 6-4
AACSB: Reflective thinking skills
Learning Outcome: None
4) A company has 10,000 hours of capacity and manufactures two products. Product 1 takes 2 hours per unit. Product 2 takes 3 hours per unit. The contribution margin per unit for Product 1 is $5. The contribution margin per unit for Product 2 is $6. Neither product has enough demand to use all of the plant capacity, but the demand for both products exceeds the plant capacity. Which product or products should be manufactured?
Answer: C
Diff: 1
LO: 6-4
AACSB: Reflective thinking skills
Learning Outcome: None
5) ________ is the item that restricts or constrains the production or sale of a product.
Answer: D
Diff: 1
LO: 6-4
AACSB: Analytic skills
Learning Outcome: None
6) If demand is the limiting factor, and there are no other scarce resources, managers should emphasize the product with ________.
Answer: C
Diff: 2
LO: 6-4
AACSB: Reflective thinking skills
Learning Outcome: None
7) Bronski Corporation manufactures two products, Simple and Complex. The following information was gathered:
Simple Complex
Selling price per unit $37.00 $26.00
Variable cost per unit 32.00 22.00
Total fixed costs are $18,000. Assume demand for either product exceeds the factory’s capacity. It takes one hour of production time to make Simple and two hours to make Complex. The annual capacity of the plant is 10,000 hours. How many units of Simple and Complex should Bronski Corporation produce and sell to maximize profits?
Answer: C
Diff: 2
LO: 6-4
AACSB: Analytic skills
Learning Outcome: None
8) Watson Corporation manufactures two products, Simple and Complex. The following annual information was gathered:
Simple Complex
Selling price per unit $47.00 $26.00
Variable cost per unit 42.00 22.00
Total annual fixed costs are $18,000. Assume demand for either product exceeds the factory’s capacity. It takes one hour to make one unit of Complex. However, Simple takes 50% longer to manufacture when compared to Complex. Only 120,000 hours of plant capacity are available. How many units of Simple and Complex should Watson Corporation produce and sell in a year to maximize profits?
Answer: C
Diff: 2
LO: 6-4
AACSB: Analytic skills
Learning Outcome: None
9) A scarce resource restricts or constrains the production or sale of a product.
Answer: TRUE
Diff: 1
LO: 6-4
AACSB: Reflective thinking skills
Learning Outcome: None
10) Scarce resources include labor hours.
Answer: TRUE
Diff: 1
LO: 6-4
AACSB: Reflective thinking skills
Learning Outcome: None
11) In retail sales, the limiting resource is often floor space.
Answer: TRUE
Diff: 1
LO: 6-4
AACSB: Reflective thinking skills
Learning Outcome: None
12) If the limiting factor is demand, the most profitable product is the one with the highest contribution margin per unit.
Answer: TRUE
Diff: 2
LO: 6-4
AACSB: Reflective thinking skills
Learning Outcome: None
13) Inventory turnover is the number of times the average inventory is sold per year.
Answer: TRUE
Diff: 1
LO: 6-4
AACSB: Reflective thinking skills
Learning Outcome: None
6.5 Questions
1) Which of the following is(are) characteristic(s) of joint products?
Answer: D
Diff: 2
LO: 6-5
AACSB: Reflective thinking skills
Learning Outcome: Distinguish between relevant and irrelevant costs, Use incremental analysis to make short-term decisions
2) When manufacturing multiple products that are not initially separately identifiable, manufacturing costs incurred after the split-off point are known as ________ costs.
Answer: D
Diff: 1
LO: 6-5
AACSB: Reflective thinking skills
Learning Outcome: Distinguish between relevant and irrelevant costs, Use incremental analysis to make short-term decisions
3) The ________ is the juncture in manufacturing where the joint products become individually identifiable.
Answer: B
Diff: 1
LO: 6-5
AACSB: Reflective thinking skills
Learning Outcome: Distinguish between relevant and irrelevant costs, Use incremental analysis to make short-term decisions
4) ________ costs are costs of manufacturing two or more products that are not separately identifiable as individual products until their split-off point.
Answer: B
Diff: 1
LO: 6-5
AACSB: Reflective thinking skills
Learning Outcome: Distinguish between relevant and irrelevant costs, Use incremental analysis to make short-term decisions
5) Which of the following item is irrelevant to the decision whether to process joint products beyond the split-off point?
Answer: D
Diff: 2
LO: 6-5
AACSB: Reflective thinking skills
Learning Outcome: Distinguish between relevant and irrelevant costs, Use incremental analysis to make short-term decisions
6) Which of the following cost is relevant to the decision whether to process joint products beyond the split-off point?
Answer: C
Diff: 2
LO: 6-5
AACSB: Reflective thinking skills
Learning Outcome: Distinguish between relevant and irrelevant costs, Use incremental analysis to make short-term decisions
7) Joint products should be processed beyond the split-off point if ________.
Answer: B
Diff: 2
LO: 6-5
AACSB: Reflective thinking skills
Learning Outcome: Distinguish between relevant and irrelevant costs, Use incremental analysis to make short-term decisions
8) Uptown Corporation has a joint process that produces three products: P, G and A. Each product may be sold at split-off or processed further and then sold. Joint-processing costs for a year amount to $20,000. Other data follows:
Sales Value Separable Processing Sales Value
Product at Split-Off Costs after Split-Off at Completion
P $32,000 $5,000 $39,000
G 16,500 7,500 29,000
A 6,400 8,000 10,000
Processing Product P beyond the split-off point will cause profits to ________.
Answer: B
Diff: 2
LO: 6-5
AACSB: Analytic skills
Learning Outcome: Distinguish between relevant and irrelevant costs, Use incremental analysis to make short-term decisions
9) Mayfair Corporation has a joint process that produces three products: P, G and A. Each product may be sold at split-off or processed further and then sold. Joint-processing costs for a year amount to $15,000. Other data follows:
Sales Value Separable Processing Sales Value
Product at Split-Off Costs after Split-Off at Completion
P $62,000 $5,000 $88,000
G 12,500 6,500 19,500
A 9,400 5,000 12,000
Processing Product G beyond the split-off point will cause profits to ________.
Answer: B
Diff: 2
LO: 6-5
AACSB: Analytic skills
Learning Outcome: Distinguish between relevant and irrelevant costs, Use incremental analysis to make short-term decisions
10) Southridge Corporation has a joint process that produces two products: A and B. Each product may be sold at the split-off point or processed further and then sold. Joint-processing costs for a year are $20,000.
Product A can be sold at the split-off point for $32,000. Alternatively, Product A can be processed further and sold for $40,000. Additional processing costs are $5,000.
When deciding whether to sell Product A at the split-off point or to process further, the ________ is NOT relevant.
Answer: A
Diff: 2
LO: 6-5
AACSB: Analytic skills
Learning Outcome: Distinguish between relevant and irrelevant costs, Use incremental analysis to make short-term decisions
11) Brookfield Corporation has a joint process that produces three products: X, Y and Z. Each product may be sold at split-off or processed further and then sold. Joint-processing costs for a year amount to $100,000. Other data follows:
Sales Value Separable Processing Sales Value
Product at Split-Off Costs after Split-Off at Completion
X $128,000 $16,000 $150,000
Y 75,000 26,000 99,000
Z 32,600 20,000 50,000
Processing Product X beyond the split-off point will cause profits to ________.
Answer: B
Diff: 2
LO: 6-5
AACSB: Analytic skills
Learning Outcome: Distinguish between relevant and irrelevant costs, Use incremental analysis to make short-term decisions
12) Boston Corporation has a joint process that produces three products: X, Y and Z. Each product may be sold at split-off or processed further and then sold. Joint-processing costs for a year amount to $100,000. Other data follows:
Sales Value Separable Processing Sales Value
Product at Split-Off Costs after Split-Off at Completion
X $128,000 $16,000 $160,000
Y 50,000 25,000 77,000
Z 25,600 20,000 40,000
Processing Product Y beyond the split-off point will cause profits to ________.
Answer: C
Diff: 2
LO: 6-5
AACSB: Analytic skills
Learning Outcome: Distinguish between relevant and irrelevant costs, Use incremental analysis to make short-term decisions
13) Cleveland Corporation has a joint process that produces three products: X, Y and Z. Each product may be sold at split-off or processed further and then sold. Joint-processing costs for a year amount to $100,000. Other data follows:
Sales Value Separable Processing Sales Value
Product at Split-Off Costs after Split-Off at Completion
X $128,000 $16,000 $140,000
Y 50,000 27,000 76,000
Z 25,600 10,000 40,000
To maximize profits, the corporation should process ________ further.
Answer: A
Diff: 2
LO: 6-5
AACSB: Analytic skills
Learning Outcome: Distinguish between relevant and irrelevant costs, Use incremental analysis to make short-term decisions
14) Chicago Corporation has a joint process that produces three products: X, Y and Z. Each product may be sold at split-off or processed further and then sold. Joint-processing costs for a year amount to $100,000. Other data follows:
Sales Value Separable Processing Sales Value
Product at Split-Off Costs after Split-Off at Completion
X $128,000 $16,000 $152,000
Y 50,000 26,000 76,000
Z 25,600 20,000 40,000
Processing Product X beyond the split-off point will cause profits to ________.
Answer: B
Diff: 2
LO: 6-5
AACSB: Analytic skills
Learning Outcome: Distinguish between relevant and irrelevant costs, Use incremental analysis to make short-term decisions
15) DesPlaines Corporation has a joint process that produces three products: P, G and A. Each product may be sold at split-off or processed further and then sold. Joint-processing costs for a year amount to $25,000. The production level for each product is 10,000 units. Other data follows:
Sales Value Separable Processing Sales Value
Product at Split-Off Costs after Split-Off at Completion
P $12 $8 $20
G 10 4 17
A 15 6 19
If Product P is processed beyond the split-off point, profits will ________.
Answer: D
Diff: 2
LO: 6-5
AACSB: Analytic skills
Learning Outcome: Distinguish between relevant and irrelevant costs, Use incremental analysis to make short-term decisions
16) Lisle Corporation has a joint process that produces three products: P, G and A. Each product may be sold at split-off or processed further and then sold. Joint-processing costs for a year amount to $25,000. The production level for each product is 10,000 units. Other data follows:
Sales Value Separable Processing Sales Value
Product at Split-Off Costs after Split-Off at Completion
P $12 $9 $21
G 10 3 17
A 15 6 19
Product G ________.
Answer: C
Diff: 2
LO: 6-5
AACSB: Analytic skills
Learning Outcome: Distinguish between relevant and irrelevant costs, Use incremental analysis to make short-term decisions
17) Downers Grove Corporation has a joint process that produces three products: P, G and A. Each product may be sold at split-off or processed further and then sold. Joint-processing costs for a year amount to $25,000. The production level for each product is 10,000 units. Other data follows:
Sales Value Separable Processing Sales Value
Product at Split-Off Costs after Split-Off at Completion
P $12 $10 $21
G 12 4 17
A 10 6 19
To maximize profits, Downers Grove Corporation should process ________ further.
Answer: D
Diff: 2
LO: 6-5
AACSB: Analytic skills
Learning Outcome: Distinguish between relevant and irrelevant costs, Use incremental analysis to make short-term decisions
18) Naperville Corporation has a joint process that produces three products: P, G and A. Each product may be sold at split-off or processed further and then sold. Joint-processing costs for a year amount to $25,000. The production level for each product is 10,000 units. Other data follows:
Sales Value Separable Processing Sales Value
Product at Split-Off Costs after Split-Off at Completion
P $12 $8 $21
G 10 4 17
A 15 6 19
Processing Product P beyond the split-off point will cause profits to ________.
Answer: B
Diff: 2
LO: 6-5
AACSB: Analytic skills
Learning Outcome: Distinguish between relevant and irrelevant costs, Use incremental analysis to make short-term decisions
19) Woodridge Corporation has a joint process that produces three products: P, G and A. Each product may be sold at split-off or processed further and then sold. Joint-processing costs for a year amount to $25,000. The production level for each product is 1,000 units. Other data follows:
Sales Value Separable Processing Sales Value
Product at Split-Off Costs after Split-Off at Completion
P $12 $9 $21
G 10 4 17
A 15 6 19
Assume Woodridge Corporation processes the joint products beyond the split-off point that will maximize net income. Woodridge Corporation’s net income is ________.
Answer: B
Diff: 3
LO: 6-5
AACSB: Analytic skills
Learning Outcome: Distinguish between relevant and irrelevant costs, Use incremental analysis to make short-term decisions
20) Separable costs are part of a joint process and cannot be exclusively identified with individual products.
Answer: FALSE
Diff: 2
LO: 6-5
AACSB: Reflective thinking skills
Learning Outcome: Distinguish between relevant and irrelevant costs, Use incremental analysis to make short-term decisions
21) The split-off point is the juncture in manufacturing where the joint products become individually identifiable.
Answer: TRUE
Diff: 2
LO: 6-5
AACSB: Reflective thinking skills
Learning Outcome: Distinguish between relevant and irrelevant costs, Use incremental analysis to make short-term decisions
22) The relevant information for a sell or process further decision for joint products includes the costs incurred before the split-off point.
Answer: FALSE
Diff: 2
LO: 6-5
AACSB: Reflective thinking skills
Learning Outcome: Distinguish between relevant and irrelevant costs, Use incremental analysis to make short-term decisions
23) It is profitable to extend processing or to incur additional costs on a joint product if the additional revenue exceeds the joint cost.
Answer: FALSE
Diff: 2
LO: 6-5
AACSB: Reflective thinking skills
Learning Outcome: Distinguish between relevant and irrelevant costs, Use incremental analysis to make short-term decisions
24) The allocation of joint costs to joint products should affect the decision to sell or process the joint products further.
Answer: FALSE
Diff: 2
LO: 6-5
AACSB: Reflective thinking skills
Learning Outcome: Distinguish between relevant and irrelevant costs, Use incremental analysis to make short-term decisions
25) Foster Corporation has a joint process, which produces three products, A, B and C. Each product may be sold at split-off or processed further and then sold. Joint processing costs for a year are $40,000. Other relevant data are:
Sales Value Separable Processing Sales Value
Product at Split-Off Costs After Split-Off at Completion
A $15,500 $2,200 $17,700
B 18,000 8,000 23,000
C 24,000 11,500 37,500
Required:
Answer:
Product B Revenue 18,000
Product C Revenue 37,500
Less: Joint Costs (40,000)
Less: Product C Addtl. Costs (11,500)
Operating income $19,500
Diff: 3
LO: 6-5
AACSB: Analytic skills
Learning Outcome: Distinguish between relevant and irrelevant costs, Use incremental analysis to make short-term decisions
26) Sealy Company has a joint process, which produces three products called A, B and C. Each product may be sold at split-off or processed further and then sold. Joint processing costs for a year are $20,000. Other relevant data are:
Sales Value Separable Processing Sales Value
Product at Split-Off Costs After Split-Off at Completion
A $94,000 $28,000 $115,000
B 60,000 10,000 82,000
C 66,000 14,000 79,000
Required:
Answer:
Product B Revenue 82,000
Product C Revenue 66,000
Less: Joint Costs (20,000)
Less: Product B Addtl. Costs (10,000)
Operating income $212,000
Diff: 3
LO: 6-5
AACSB: Analytic skills
Learning Outcome: Distinguish between relevant and irrelevant costs, Use incremental analysis to make short-term decisions
6.6 Questions
1) Equipment to be sold has a book value of $4,000. The cost of the equipment is $10,000. The cash received at sale is $2,000. What is the gain or loss on disposal of the equipment?
Answer: A
Diff: 2
LO: 6-6
AACSB: Analytic skills
Learning Outcome: Distinguish between relevant and irrelevant costs, Use incremental analysis to make short-term decisions
2) When considering the replacement of old equipment, which of the following item is relevant?
Answer: D
Diff: 2
LO: 6-6
AACSB: Analytic skills
Learning Outcome: Distinguish between relevant and irrelevant costs, Use incremental analysis to make short-term decisions
3) Book value on a depreciable asset is defined as ________.
Answer: C
Diff: 1
LO: 6-6
AACSB: Reflective thinking skills
Learning Outcome: Distinguish between relevant and irrelevant costs, Use incremental analysis to make short-term decisions
4) Which of the following costs is NOT relevant to an equipment replacement decision?
Answer: D
Diff: 2
LO: 6-6
AACSB: Reflective thinking skills
Learning Outcome: Distinguish between relevant and irrelevant costs, Use incremental analysis to make short-term decisions
5) Which of the following cost is relevant to an equipment replacement decision?
Answer: B
Diff: 2
LO: 6-6
AACSB: Reflective thinking skills
Learning Outcome: Distinguish between relevant and irrelevant costs, Use incremental analysis to make short-term decisions
6) BEE Company is considering the replacement of a machine that is presently used in production. Which of the following items are irrelevant to the replacement decision?
Answer: D
Diff: 2
LO: 6-6
AACSB: Reflective thinking skills
Learning Outcome: Distinguish between relevant and irrelevant costs, Use incremental analysis to make short-term decisions
7) Ernie Company is considering replacing a machine that is currently used in the production process. The ________ is irrelevant to the replacement decision.
Answer: C
Diff: 2
LO: 6-6
AACSB: Analytic skills
Learning Outcome: Distinguish between relevant and irrelevant costs, Use incremental analysis to make short-term decisions
8) Benson Company is considering the replacement of a machine that is presently used in production. The following data are available:
Old Machine New Machine
Original cost $57,000 $35,000
Useful life in years 17 5
Current age in years 12 0
Book value $39,000 –
Disposal value now $8,000 –
Disposal value in 5 years 0 0
Annual cash operating costs $7,000 $4,000
Adding all five years together, the total relevant costs to consider if the new machine is purchased is ________.
Answer: C
Diff: 2
LO: 6-6
AACSB: Analytic skills
Learning Outcome: Distinguish between relevant and irrelevant costs, Use incremental analysis to make short-term decisions
9) Gray Lake Company is considering the replacement of a machine that is presently used in production. The following data are available:
Old Machine New Machine
Original cost $57,000 $35,000
Useful life in years 17 5
Current age in years 12 0
Book value $39,000 –
Disposal value now $8,000 –
Disposal value in 5 years 0 0
Annual cash operating costs $7,000 $4,000
Adding all five years together, the total relevant costs to consider if the old machine is not replaced is ________.
Answer: C
Diff: 2
LO: 6-6
AACSB: Analytic skills
Learning Outcome: Distinguish between relevant and irrelevant costs, Use incremental analysis to make short-term decisions
10) Inverness Company is considering the replacement of a machine that is presently used in production. The following data are available:
Old Machine New Machine
Original cost $57,000 $35,000
Useful life in years 17 5
Current age in years 12 0
Book value $39,000 –
Disposal value now $8,000 –
Disposal value in 5 years 0 0
Annual cash operating costs $7,000 $4,000
Adding all five years together, what is the difference in total relevant costs between the old machine and the new machine?
Answer: A
Diff: 2
LO: 6-6
AACSB: Analytic skills
Learning Outcome: Distinguish between relevant and irrelevant costs, Use incremental analysis to make short-term decisions
11) Amanda Company is considering the replacement of a machine that is presently used in production. The following data are available:
Old Machine New Machine
Original cost $200,000 $160,000
Useful life in years 10 5
Current age in years 5 0
Book value $100,000 –
Disposal value now $32,000 –
Disposal value in 5 years 0 0
Annual cash operating costs $20,000 $14,000
Adding all five years together, the total relevant costs to consider if the new machine is purchased is ________.
Answer: C
Diff: 2
LO: 6-6
AACSB: Analytic skills
Learning Outcome: Distinguish between relevant and irrelevant costs, Use incremental analysis to make short-term decisions
12) Park Ridge Company is considering the replacement of a machine that is presently used in production. The following data are available:
Old Machine New Machine
Original cost $200,000 $160,000
Useful life in years 10 5
Current age in years 5 0
Book value $100,000 –
Disposal value now $32,000 –
Disposal value in 5 years 0 0
Annual cash operating costs $20,000 $14,000
Adding all five years together, the total relevant costs to consider if the old machine is kept is ________.
Answer: D
Diff: 2
LO: 6-6
AACSB: Analytic skills
Learning Outcome: Distinguish between relevant and irrelevant costs, Use incremental analysis to make short-term decisions
13) Gurnee Company is considering the replacement of a machine that is presently used in production. The following data are available:
Old Machine New Machine
Original cost $200,000 $160,000
Useful life in years 10 5
Current age in years 5 0
Book value $100,000 –
Disposal value now $32,000 –
Disposal value in 5 years 0 0
Annual cash operating costs $20,000 $14,000
Adding all five years together, what is the difference in total relevant costs between the old and new machines?
Answer: C
Diff: 2
LO: 6-6
AACSB: Analytic skills
Learning Outcome: Distinguish between relevant and irrelevant costs, Use incremental analysis to make short-term decisions
14) The gain or loss on the disposal of equipment is determined by ________.
Answer: C
Diff: 2
LO: 6-6
AACSB: Reflective thinking skills
Learning Outcome: Distinguish between relevant and irrelevant costs, Use incremental analysis to make short-term decisions
15) Sunbury Company is considering the replacement of a machine that is presently used in production. The following data are available:
Old Machine New Machine
Original cost $60,000 $35,000
Useful life in years 10 5
Current age in years 5 0
Book value $25,000 –
Disposal value now $8,000 –
Disposal value in 5 years 0 0
Annual cash operating costs $12,000 $4,000
Adding all five years together, the total relevant costs to consider if the old machine is kept are ________.
Answer: D
Diff: 2
LO: 6-6
AACSB: Analytic skills
Learning Outcome: Distinguish between relevant and irrelevant costs, Use incremental analysis to make short-term decisions
16) The disposal value of old equipment is relevant in equipment replacement decisions.
Answer: TRUE
Diff: 2
LO: 6-6
AACSB: Reflective thinking skills
Learning Outcome: Distinguish between relevant and irrelevant costs, Use incremental analysis to make short-term decisions
17) Sunk cost is used to describe a historical cost or past cost.
Answer: TRUE
Diff: 1
LO: 6-6
AACSB: Reflective thinking skills
Learning Outcome: Distinguish between relevant and irrelevant costs, Use incremental analysis to make short-term decisions
18) When making a decision to replace some old equipment with new equipment, the book value of the old equipment is irrelevant information.
Answer: TRUE
Diff: 2
LO: 6-6
AACSB: Reflective thinking skills
Learning Outcome: Distinguish between relevant and irrelevant costs, Use incremental analysis to make short-term decisions
19) An equipment’s book value is the original cost plus accumulated depreciation.
Answer: FALSE
Diff: 2
LO: 6-6
AACSB: Reflective thinking skills
Learning Outcome: Distinguish between relevant and irrelevant costs, Use incremental analysis to make short-term decisions
20) The cost of new equipment is relevant in deciding whether to keep or replace old equipment.
Answer: TRUE
Diff: 2
LO: 6-6
AACSB: Reflective thinking skills
Learning Outcome: Distinguish between relevant and irrelevant costs, Use incremental analysis to make short-term decisions
21) Past costs are irrelevant in equipment replacement decisions.
Answer: TRUE
Diff: 1
LO: 6-6
AACSB: Reflective thinking skills
Learning Outcome: Distinguish between relevant and irrelevant costs, Use incremental analysis to make short-term decisions
22) Jorgensen Company is considering the replacement of equipment used in operations. The following data are available:
Old Equipment New Equipment
Original cost $210,000 $40,000
Useful life in years 12 7
Current age in years 5 0
Book value $65,000 –
Disposal value now $30,000 –
Disposal value in 7 years 0 0
Annual cash operating costs $9,000 $8,000
Required:
Answer:
A)
Keep Replace Difference
Cash operating costs $63,000 $56,000 $7,000
Disposal value old equip. (30,000) 30,000
New equipment, cost ______ 40,000 (40,000)
Total relevant costs $63,000 $66,000 $(3,000)
Diff: 2
LO: 6-6
AACSB: Analytic skills
Learning Outcome: Distinguish between relevant and irrelevant costs, Use incremental analysis to make short-term decisions
23) Mueller Company is considering the replacement of equipment used in operations. The following data are available:
Old Equipment New Equipment
Original cost $93,000 $60,000
Useful life in years 13 6
Current age in years 7 0
Book value $57,000 –
Disposal value now $50,000 –
Disposal value in 6 years 0 0
Annual cash operating costs $14,000 $11,000
Required:
Answer:
A)
Keep Replace Difference
Cash operating costs $84,000 $66,000 $18,000
Disposal value of old equip. (50,000) 50,000
New equipment, cost ______ 60,000 (60,000)
Total relevant costs $84,000 $76,000 $8,000
Diff: 2
LO: 6-6
AACSB: Analytic skills
Learning Outcome: Distinguish between relevant and irrelevant costs, Use incremental analysis to make short-term decisions
6.7 Questions
1) When choosing between two alternatives, what of the following are relevant costs?
Answer: D
Diff: 2
LO: 6-7
AACSB: Reflective thinking skills
Learning Outcome: Distinguish between relevant and irrelevant costs
2) The following is a useful rule of thumb when making operational decisions. Managers should NOT use ________.
Answer: C
Diff: 2
LO: 6-7
AACSB: Reflective thinking skills
Learning Outcome: Distinguish between relevant and irrelevant costs
3) LL Company produces and sells a product that has variable costs of $9 per unit and fixed costs of $200,000 per year. If production decreases from 50,000 to 40,000 units, the total cost per unit will ________.
Answer: A
Diff: 1
LO: 6-7
AACSB: Analytic skills
Learning Outcome: Distinguish between relevant and irrelevant costs
4) Melissa Company produces and sells a product that has variable costs of $8 per unit and fixed costs of $240,000 per year. If 20,000 units are produced and sold in a year, what is the total cost per unit?
Answer: D
Diff: 1
LO: 6-7
AACSB: Analytic skills
Learning Outcome: Distinguish between relevant and irrelevant costs
5) Zach Company produces and sells a product that has variable costs of $7 per unit and fixed costs of $200,000 per year. If 40,000 units are produced and sold in a year, what is the total cost per unit?
Answer: C
Diff: 1
LO: 6-7
AACSB: Analytic skills
Learning Outcome: Distinguish between relevant and irrelevant costs
6) Joshua Company produces and sells a product that has variable costs of $7 per unit and fixed costs of $200,000 per year. If production increases from 20,000 units to 25,000 units, the total cost will ________.
Answer: B
Diff: 1
LO: 6-7
AACSB: Analytic skills
Learning Outcome: Distinguish between relevant and irrelevant costs
7) When analyzing alternatives, it is not advisable to use fixed costs per unit because a new fixed cost per unit must be calculated for every different volume of production.
Answer: TRUE
Diff: 2
LO: 6-7
AACSB: Reflective thinking skills
Learning Outcome: Distinguish between relevant and irrelevant costs
8) Future costs are irrelevant if they are the same under all feasible alternatives.
Answer: TRUE
Diff: 2
LO: 6-7
AACSB: Reflective thinking skills
Learning Outcome: Distinguish between relevant and irrelevant costs
6.8 Questions
1) Managers may be tempted to make decisions that are not in the best interests of the company because ________.
Answer: B
Diff: 2
LO: 6-8
AACSB: Reflective thinking skills
Learning Outcome: None
2) A widespread problem in practice is that the decision model used by managers for ________ and the model used by their superiors in ________ are different.
Answer: C
Diff: 2
LO: 6-8
AACSB: Reflective thinking skills
Learning Outcome: None
3) Since managers are usually evaluated based on the operating results in one year, they do not usually consider the long range impact of their decisions.
Answer: TRUE
Diff: 2
LO: 6-8
AACSB: Reflective thinking skills
Learning Outcome: None
4) Conflicts in the decision-making process can arise when superiors evaluate a manager’s performance using a model consistent with the decision model used by the manager.
Answer: FALSE
Diff: 2
LO: 6-8
AACSB: Reflective thinking skills
Learning Outcome: None
5) Generally, companies use aggregate measures of performance when conducting performance evaluations of managers.
Answer: TRUE
Diff: 2
LO: 6-8
AACSB: Reflective thinking skills
Learning Outcome: None
Original price was: $30.00.$20.00Current price is: $20.00.
Original price was: $30.00.$20.00Current price is: $20.00.
Original price was: $30.00.$20.00Current price is: $20.00.
Original price was: $30.00.$20.00Current price is: $20.00.
Original price was: $30.00.$20.00Current price is: $20.00.
Original price was: $30.00.$20.00Current price is: $20.00.
