1. Sunk costs are costs that have proven to be unproductive. (Points : 2)
2. A cost may be relevant for one decision making situation but irrelevant for another situation. (Points : 2)
3. In a special order situation, any fixed cost associated with the order would be irrelevant. (Points : 2)
4. Costs that can be eliminated in whole or in part if a particular business segment is discontinued are called: (Points : 2)
5. Which of the following best describes an opportunity cost: (Points : 2)
it is a relevant cost in decision making, but is not part of the traditional accounting records.
it is not a relevant cost in decision making, but is part of the traditional accounting records.
it is a relevant cost in decision making, and is part of the traditional accounting records.
it is not a relevant cost in decision making, and is not part of the traditional accounting records.
6. The acceptance of a special order will improve overall net operating income so long as the revenue from the special order exceeds: (Points : 2)
the contribution margin on the order.
the incremental costs associated with the order.
the variable costs associated with the order.
the sunk costs associated with the order.
7. Hamby Corporation is preparing a bid for a special order that would require 780 liters of material W34C. The company already has 640 liters of this raw material in stock that originally cost $8.30 per liter. Material W34C is used in the company’s main product and is replenished on a periodic basis. The resale value of the existing stock of the material is $7.60 per liter. New stocks of the material can be readily purchased for $8.35 per liter. What is the relevant cost of the 780 liters of the raw material when deciding how much to bid on the special order? (Points : 2)
8. Munafo Corporation is a specialty component manufacturer with idle capacity. Management would like to use its extra capacity to generate additional profits. A potential customer has offered to buy 6,500 units of component VGI. Each unit of VGI requires 1 unit of material I57 and 5 units of material M97. Data concerning these two materials follow:
Material I57 is in use in many of the company’s products and is routinely replenished. Material M97 is no longer used by the company in any of its normal products and existing stocks would not be replenished once they are used up.
What would be the relevant cost of the materials, in total, for purposes of determining a minimum acceptable price for the order for product VGI? (Points : 2)
9. Rice Corporation currently operates two divisions which had operating results last year as follows:
Since the Troy Division also sustained an operating loss in the prior year, Rice’s president is considering the elimination of this division. Troy Division’s traceable fixed costs could be avoided if the division were eliminated. The total common corporate costs would be unaffected by the decision. If the Troy Division had been eliminated at the beginning of last year, Rice Corporation’s operating income for last year would have been: (Points : 2)
10. The following information relates to next year’s projected operating results of the Children’s Division of Grunge Clothing Corporation:
If Children’s Division is dropped, half of the fixed costs above can be eliminated. What will be the effect on Grunge’s profit next year if Children’s Division is dropped instead of being kept? (Points : 2)
11. Product U23N has been considered a drag on profits at Jinkerson Corporation for some time and management is considering discontinuing the product altogether. Data from the company’s accounting system appear below:
In the company’s accounting system all fixed expenses of the company are fully allocated to products. Further investigation has revealed that $144,000 of the fixed manufacturing expenses and $93,000 of the fixed selling and administrative expenses are avoidable if product U23N is discontinued. What would be the effect on the company’s overall net operating income if product U23N were dropped? (Points : 2)
Overall net operating income would increase by $15,000.
Overall net operating income would increase by $143,000.
Overall net operating income would decrease by $143,000.
Overall net operating income would decrease by $15,000.
12. The following standard costs pertain to a component part manufactured by Bor Company:
An outside supplier has offered to supply all of the parts needed by Bor Company for $50 each. The 60% of the manufacturing overhead cost that is fixed would be unaffected by this decision. In the decision to “make or buy,” what is the relevant unit cost to make the part internally? (Points : 2)
13. Quikcook Microwave Company currently manufactures the doors that it uses for its microwave ovens. The annual costs to manufacture the 40,000 doors needed each year are as follows:
Delilah Glass Corporation has offered to provide Quikcook with all of its annual door needs for $14 per door. If Quikcook accepts this offer, only 40% of the fixed overhead above could be totally eliminated. Also, Quikcook has no alternative use for the idle facilities if the decision was made to go with Delilah’s offer. Based on this information, would Quikcook be better off to make the doors or buy the doors and by how much? (Points : 2)
$48,000 better to buy
$48,000 better to make
$112,000 better to buy
$112,000 better to make
14. Part S51 is used in one of Haberkorn Corporation’s products. The company makes 12,000 units of this part each year. The company’s Accounting Department reports the following costs of producing the part at this level of activity:
An outside supplier has offered to produce this part and sell it to the company for $37.70 each. If this offer is accepted, the supervisor’s salary and all of the variable costs, including direct labor, can be avoided. The special equipment used to make the part was purchased many years ago and has no salvage value or other use. The allocated general overhead represents fixed costs of the entire company. If the outside supplier’s offer were accepted, only $17,000 of these allocated general overhead costs would be avoided.
If management decides to buy part S51 from the outside supplier rather than to continue making the part, what would be the annual impact on the company’s overall net operating income? (Points : 2)
Net operating income would decline by $5,800 per year.
Net operating income would decline by $22,800 per year.
Net operating income would decline by $149,800 per year.
Net operating income would decline by $39,800 per year.
15. Ignace Timekeepers, Inc. manufactures and sells wrist watches. Ignace has the capacity to manufacture and sell 20,000 watches each year but is currently only manufacturing and selling 15,000. The following costs relate to annual operations at 15,000 watches:
Ignace normally sells its watches for $42 each. A discount chain is interested in purchasing Ignace’s excess capacity of 5,000 watches. This special order would not affect regular sales or the cost structure above. Ignace’s profits for the year will increase as long as the price on this special order exceeds: (Points : 2)
16. Wood Carving Corporation manufactures three products. Because of a recent lack of skilled wood carvers, the corporation has had a shortage of available labor hours. The following per unit data relates to the three products of the corporation:
Assume that Wood Carving only has 1,800 labor hours available next month. Also assume that Wood Carving can only sell 800 units of each product in a given month. What is the maximum amount of contribution margin that Wood Carving can generate next month given this labor hour shortage? (Points : 2)
17. Banfield Corporation makes three products that use compound W, the current constrained resource. Data concerning those products appear below:
Rank the products in order of their current profitability from most profitable to least profitable. In other words, rank the products in the order in which they should be emphasized. (Points : 2)
WX, VP, YI
YI, VP, WX
WX, YI, VP
VP, WX, YI
18. Ouzts Corporation is considering two alternatives: A and B. Costs associated with the alternatives listed below:
What is the differential cost of Alternative B over Alternative A, including all of the relevant costs?
(Points : 2)
19. The Draper Company is considering dropping its Doombug toy due to continuing losses. Revenue and costs data on the toy for the past year follow:
Sales of 15,000 units $150,000
less Variable expenses $120,000
= Contribution margin $30,000
less Fixed expenses $40,000
= Net operating loss ($10,000)
If the toy were discontinued, then Draper could avoid $8,000 per year in fixed costs.
Under the given conditions, the change in annual operating income from discontinuing the production and sale of Doombugs would be: (Points : 2)
20. The management of Bonga Corporation is considering dropping product D74F. Data from the company’s accounting system appear below:
Variable expenses $390,000
Fixed manufacturing expenses $266,000
Fixed selling and administrative expenses $232,000
All fixed expenses of the company are fully allocated to products in the company’s accounting system. Further investigation has revealed that $111,000 of the fixed manufacturing expenses and $103,000 of the fixed selling and administrative expenses are avoidable if product D74F is discontinued.
According to the company’s accounting system, what is the net operating income earned by product D74F? (Points : 2)
1. Sunk costs are costs that have proven to be unproductive. (Points : 2)