Chapter 07
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CH APTE R 7 Use of Cost Information in Management Decision-Making Summary of Questions by Objectives and Bloom’s Taxonomy TRUE-FALSE 1.
Incremental revenue is the additional revenue received as a result of selecting one decision alternative over another.
2.
Sunk costs are not incremental costs.
3.
Differential costs are also incremental costs.
4.
In deciding whether to sell or process further, the costs that have been incurred to process the product to this point are incremental costs.
5.
In a make or buy decision, direct materials and direct labor are usually incremental costs.
6.
In a make or buy decision, the original purchase price of the equipment which is currently used in the manufacturing process is usually a relevant cost.
7.
Fixed costs that are avoidable are incremental costs in a make or buy decision.
8.
Avoidable costs are not relevant.
9.
Chief resource officer is another title for the person who is responsible for the company’s financial accounting system.
10.
The proper way to analyze the decision to drop a product line is to compare sunk costs to incremental costs.
11.
Common costs are fixed costs that are not directly traceable to an individual product line.
12.
If a department is eliminated, the company will avoid the fixed costs that have been allocated to that department.
13.
When deciding whether to eliminate a segment, the segment should generally be kept if its contribution margin less avoidable fixed costs is positive.
14.
Opportunity costs represent the benefits foregone by selecting one alternative over another.
15.
Avoidable costs are always incremental costs.
16.
Fixed costs are always sunk costs.
7-2
Test Bank to accompany Jiambalvo Managerial Accounting, 4th Edition
17.
Two or more products which result from common inputs are called joint products.
18.
The best way to allocate the cost of common inputs to joint products is based on the physical quantities of the outputs.
Chapter 7 The Use of Cost Information in Management Decision Making
7-3
19.
Allocating joint costs to products based on physical quantities will make the products have the same contribution margin ratio if they are sold at the split-off point.
20.
The stage of production at which individual products are identifiable is referred to as the spin-off point.
21.
A disadvantage of using an outside supplier is the associated loss of control over the production process.
22.
The qualitative aspects of a decision must receive the same careful attention as the quantitative aspects.
23.
The primary benefit of using an outside supplier is that the adverse effect of a downturn in business is less severe.
*24.
When applying the theory of constraints, management attempts to improve throughput in all areas of the factory.
*25.
Improving performance in areas which are not bottlenecks will not improve overall output.
*26.
According to the theory of constraints, everything else should be subordinate to the binding constraint.
*27.
The binding constraint is the process that limits throughput.
Material from the appendix to the chapter is marked with an asterisk (*). Answers 1 2 3 4 5
T T T F T
6 7 8 9 10
F T F F F
11 12 13 14 15
T F T T T
16 17 18 19 20
F T F F F
21 22 23 24 25
T T T F T
26 T 27 T
7-4
Test Bank to accompany Jiambalvo Managerial Accounting, 4th Edition
MULTIPLE CHOICE 28.
Which of the following is often not a differential cost? A. Direct labor B. Direct material C. Variable manufacturing overhead D. Fixed manufacturing overhead
29.
Which of the following is never considered in incremental analysis? A. Incremental revenue B. Sunk costs C. Incremental profit D. Differential costs
30.
Which of the following is not a term used to describe the additional costs incurred as a result of selecting one decision alternative over another? A. Differential costs B. Relevant costs C. Sunk costs D. Incremental costs
31.
When deciding between two alternatives, the preferred alternative always has A. no opportunity costs. B. greater revenues than the other alternatives. C. less expense than the other alternatives. D. greater incremental profit than the other alternatives.
32.
Costs that were incurred in the past which are never incremental costs are called A. sunk costs. B. opportunity costs. C. differential costs. D. relevant costs.
33.
A company is trying to decide whether to sell partially completed goods in their current state or incur additional costs to finish the goods and sell them as complete units. Which of the following is not relevant to the decision? A. The selling price of the completed units. B. The costs incurred to process the units to this point. C. The selling price of the partially completed units. D. The costs that will be incurred to finish the units.
Chapter 7 The Use of Cost Information in Management Decision Making
7-5
34.
A company is trying to decide whether to keep or drop the sporting goods department in its department store. If the segment is dropped, the manager will be fired. The manager's salary, in relation to the decision to keep or drop the sporting goods department, is A. avoidable and therefore relevant. B. not avoidable and therefore relevant. C. sunk and therefore not relevant. D. the same for all alternatives and therefore not relevant.
35.
Which of the following is not normally relevant in a make or buy decision? A. direct materials B. supervisory salaries C. incremental revenues D. opportunity costs
36.
A company is currently making a necessary component in house (the company is producing the component for its own use). The company has received an offer to buy the component from an outside supplier. A machine is being rented to make the component. If the company were to buy the component, the machine would no longer be rented. The rent on the machine, in relation to the decision to make or buy the component, is: A. sunk and therefore not relevant. B. avoidable and therefore not relevant. C. avoidable and therefore relevant. D. unavoidable and therefore relevant.
37.
Fixed costs that will be eliminated if a particular course of action is undertaken are called A. optional costs. B. opportunity costs. C. direct costs. D. avoidable costs.
38.
The value of benefits foregone by selecting one decision alternative over another is a(n) A. sunk cost. B. incremental benefit. C. differential revenue. D. opportunity cost.
39.
A product line should be dropped when A. it has a negative contribution margin. B. its avoidable fixed costs are greater than its contribution margin. C. there will be a positive change in income if the product line is dropped. D. All of the above.
7-6
Test Bank to accompany Jiambalvo Managerial Accounting, 4th Edition
40.
Common costs A. are fixed costs that are not directly traceable to an individual product line. B. normally not avoidable. C. Both A and B are true. D. Neither A nor B is true.
41.
Which of the following is a direct cost of a specific department in a retail store? A. Company president’s salary. B. Rent on the store. C. Utilities for the store. D. Cost of the department’s inventory.
42.
When a department or product line is dropped, the common fixed costs which had been allocated to that department A. are eliminated. B. become variable costs. C. are allocated to the remaining departments or product lines. D. become sunk costs.
43.
You have tickets to go to Mexico (Cancun specifically) over spring break. Just this week your best friend informs you that s/he is getting married over spring break and would like you to be in the wedding as an attendant. Which of the following is a sunk cost that should not be relevant to your decision as to whether be in the wedding or go on the trip to Mexico? A. The cost of the airline tickets to Mexico. B. The amount of refund you could get on the airline tickets to Mexico. C. The cost of the clothing you will have to buy/rent to be in the wedding. D. The fact that you have never been anywhere for Spring Break and were really looking forward to going to Mexico.
44.
Which of the following statements regarding opportunity costs is true? A. Opportunity costs are recorded with two debits, rather than a debit and a credit. B. Opportunity costs are always incremental costs. C. Opportunity costs are a key factor in financial accounting. D. The same decision will be reached whether or not opportunity costs are considered in the analysis.
Chapter 7 The Use of Cost Information in Management Decision Making
45.
7-7
Robin Company currently produces 8,000 units of part B13. Current costs for part B13 are as follows: Direct materials Direct labor Factory rent Administrative General factory overhead Total
$12 9 7 10 7 $45
If the company decides to buy part B13, 50% of the administrative costs would be avoided. All of the Robin Company items, including part B13, are manufactured in the same rented production facility. The company has an offer from a wholesaler that wishes to sell the part to Robin for $31 per unit. What effect will occur if the company decides to accept the offer? A. The cost for this part will increase by $5 per unit. B. The cost for this part will be the same. C. The cost for this part will decrease by $14 per unit. D. The cost for this part will decrease by $10 per unit. 46.
Walter Jewelry Company produces a bracelet which normally sells for $79.95. The company produces 1,500 units annually but has the capacity to produce 2,000 units. A special order for manufacturing and selling 200 bracelets at $49.95 has been received which would not disrupt current operations. Current costs for the bracelet are as follows: Direct materials Direct labor Variable overhead Fixed overhead Total
$17.00 14.50 4.00 5.00 $40.50
In addition, the customer would like to add a monogram to each bracelet which would require an additional $2 per unit in additional labor costs and Walter Jewelry would also have to purchase a piece of equipment to create the monogram which would cost $1,600. This equipment would not have any other uses. With regard to this special order, only A. incremental revenues will exceed incremental costs by $2,490. B. incremental revenues will exceed incremental costs by $890. C. incremental revenues will exceed incremental costs by $2,890 D. incremental revenues will exceed incremental costs by $1,290
7-8
Test Bank to accompany Jiambalvo Managerial Accounting, 4th Edition
47.
NY Memorabilia Company produces a souvenir plate which normally sells for $79.95. The company produces 1,500 plates annually but has the capacity to produce 2,000 plates. A special order for manufacturing and selling 200 plates at $49.95 has been received which would not disrupt current operations. Current costs for the plate are as follows: Direct materials Direct labor Variable overhead Fixed overhead Total
$17.00 14.50 4.00 5.00 $40.50
In addition, the customer would like to add a date to each plate which would require an additional $2 per plate in additional labor costs and NY Memorabilia Company would also have to purchase a piece of equipment to create the date which would cost $1,200. This equipment would not have any other uses. Which statement is true with regard to this special order? A. Incremental revenues will exceed incremental costs by $2,490. B. Incremental revenues will exceed incremental costs by $890. C. Incremental revenues will exceed incremental costs by $2,890. D. Incremental revenues will exceed incremental costs by $1,290. 48.
Rockwell Company owns a single restaurant which has a cantina primarily used to seat patrons while they wait on their tables. The company is considering eliminating the cantina and adding more dining tables. Segmented contribution income statements are as follows and fixed costs applicable to both segments are allocated on the basis of sales.
Sales Variable costs Direct fixed costs Allocated fixed costs Net Income
Restaurant $800,000 475,000 50,000 212,500 $ 62,500
Cantina $200,000 160,000 15,000 37,500 ($12,500)
Total $1,000,000 635,000 65,000 250,000 $50,000
What financial effect will occur to profit if Rockwell eliminates the cantina but no more dining customers are served? A. Net income will increase by $12,500 B. Net income will decrease to $37,500. C. Net income will decline by $25,000 D. Net income will be $25,000
Chapter 7 The Use of Cost Information in Management Decision Making
7-9
49.
Hydra Company has two locations, downtown and at a suburban mall. During March, the company reported total net income of $337,000 and sales of $1.2 million. The contribution margin in the downtown store was $320,000 (40% of sales). The contribution margin in the mall store is $200,000. Total fixed costs are $90,000 in the downtown store and $93,000 in the mall location. How much are sales at the mall location? A. $400,000 B. $800,000 C. $666,667 D. Not enough information is provided to answer.
50.
Collegebooks Company has two locations, downtown and on campus. During March, the company reported net income of $164,000 and sales of $1.2 million. The contribution margin in the downtown store was $320,000 (32% of sales). The contribution margin in the campus store is $110,000. Direct fixed costs are $90,000 in the downtown store and $93,000 in the campus location. How much are total variable costs? A. $410,000 B. $3,750,000 C. $192,000 D. $853,000
51.
Ricket Company has 1,500 obsolete calculators that are carried in inventory at a cost of $13,200. If these calculators are upgraded at a cost of $9,500, they could be sold for $22,500. Alternatively, the calculators could be sold “as is” for $9,000. What is the net advantage or disadvantage of reworking the calculators? A. $13,000 advantage B. $4,000 advantage C. $9,200 disadvantage D. $200 disadvantage
52.
BigByte Company has 12 obsolete computers that are carried in inventory at a cost of $13,200. If these computers are upgraded at a cost of $7,500, they could be sold for $15,300. Alternatively, the computers could be sold “as is” for $9,000. What is the net advantage or disadvantage of reworking the computers? A. $6,300 advantage B. $1,200 disadvantage C. $5,400 disadvantage D. $3,000 advantage
7-10
Test Bank to accompany Jiambalvo Managerial Accounting, 4th Edition
53.
The following are production and cost data for two products, buckets and pails.
Contribution margin per unit Machine set-ups needed per unit
Buckets $450 20
Pails $280 14
The company can only perform 14,000 set-ups each period yet there is unlimited demand for each product. What is the maximum contribution margin for the year? A. $315,000 B. $35,000 C. $280,000 D. $595,000 54.
The following are production and cost data for two products, A and B.
Contribution margin per unit Machine set-ups needed per unit
Product A $450 25
Product B $340 20
The company can only perform 12,000 set-ups each period yet there is unlimited demand for each product. What is the maximum contribution margin for the year? A. $216,000 B. $204,000 C. $420,000 D. $18,050,000 55.
Central Apparel Company owns two stores and management is considering eliminating the east store due to declining sales. Contribution income statements are as follows and common fixed costs are allocated on the basis of sales. West East Total Sales $420,000 $90,000 $510,000 Variable costs 210,000 45,000 255,000 Direct fixed costs 50,000 25,000 75,000 Allocated fixed costs 110,000 35,000 145,000 Net Income $ 50,000 ($15,000) $35,000 Central’s management feels that if they eliminate the east store, that sales in the west store will increase by 20%. If the east store is closed, what effect will occur to the overall company net income? A. Increase by $25,000 B. Increase by $22,000 C. Increase by $12,000 D. Increase by $15,000
Chapter 7 The Use of Cost Information in Management Decision Making
56.
7-11
Explorer Company manufactures two products, hard-tops and covers for its convertible vehicles. Data for each follows:
Direct labor hours required per unit Contribution margin per unit
Hard-top 4 $240
Covers 8 $390
Only 4,200 direct labor hours are available per month. How many units of each product should Explorer make in order to maximize profits? Hard-tops Covers A. 4,200 400 B. 1,050 0 C. 1,050 250 D. 0 250 57.
Urban Athletics Company has two store locations, north and south. During October, the company reported net income of $192,000 on sales of $905,000. Sales in the north store were $680,000 and variable costs in the south store were 60% of sales. The contribution margin in the north store was $204,000. If total direct costs are $50,000, how much will allocated fixed costs be? A. $102,000 B. $2,000 C. $52,000 D. $30,000
58.
The Abbott Company currently makes 10,000 units annually of a part it utilizes in the products it manufactures. Current costs for the part are as follows: Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead Total
$16.25 11.85 6.30 10.20 $44.60
If the company decides to buy the part the empty warehouse space could be rented for $35,000 annually. In addition, half of the fixed manufacturing overhead costs would be avoided if the company decides to buy the part. The company has an offer from a manufacturer to produce the part for $42 per unit. If the company decides to accept the offer the net advantage or disadvantage to the company’s annual net income would be: A. An advantage of $10,000. B. An advantage of $35,000. C. A disadvantage of $25,000. D. An advantage of $26,000.
7-12
Test Bank to accompany Jiambalvo Managerial Accounting, 4th Edition
59.
Manor Homes plans to discontinue a segment which last year generated a contribution margin of $65,000 and incurred $40,000 in fixed costs. If the segment is discontinued, half of the fixed costs will not be avoided. If Manor Homes decides to discontinue this segment the overall effect on profits will be: A. a decrease of $65,000. B. a decrease of $25,000. C. a decrease of $45,000. D. an increase of $45,000.
60.
Rumper Company has 2,000 obsolete ratchers in its inventory which have a cost of $22 each. If the ratchers are reworked they could be sold for $37 each. If sold as-is, the revenue would be only $10 each. If Rumper Company decides to rework the ratchers, how much should the company be willing to invest to ensure that no additional loss occurs on the sale of the ratchers? A. $44,000 B. $54,000 C. $20,000 D. $22,000
61.
Wester Company sells product Z for $23 per unit. Unit product costs are as follows: Direct materials Direct labor Manufacturing overhead Total
$4 5 12 $21
A special order to purchase 20,000 units was recently received. There is enough capacity to fill the order and filling this order would not disrupt current operations. Wester Company would incur an additional $3 per unit for shipping costs. Half of the manufacturing overhead costs are fixed and would be incurred no matter how many units are produced. In negotiating a price, how much is the minimum acceptable selling price? A. $18 B. $19 C. $22 D. $15
Chapter 7 The Use of Cost Information in Management Decision Making
7-13
62.
Rogertree Company manufactures a number of products from the same raw material. Joint processing costs total $10,000 per month. Product A could be sold at the cut-off point for $18,000 per month or it can be further processed at a cost of $9,000 per month and then sold for $35,000. Rogertree Company should: A. Further process product A because its incremental revenues will exceed incremental costs by $8,000. B. Further process product A because its incremental revenues will exceed incremental costs by $26,000. C. Sell as-is because the incremental loss is $2,000 if processed further. D. Further process product A because its incremental revenues will exceed incremental costs by $16,000.
63.
Tilma Company sells product X for $23 per unit. Unit product costs are as follows: Direct materials Direct labor Manufacturing overhead Total
$4 5 12 $21
A special order to purchase 20,000 units was recently received. There is enough capacity to fill the order and filling this order would not disrupt current operations. Tilma Company would incur an additional $3 per unit for shipping costs. 40% of the manufacturing overhead costs are fixed and would be incurred no matter how many units are produced. In negotiating a price, how much is the minimum acceptable selling price? A. $19.20 B. $19.00 C. $16.80 D. $12.00 64.
Meadows Company manufactures a number of products from the same raw material. Joint processing costs total $10,000 per month. Product Z could be sold at the cut-off point for $18,000 per month or it can be further processed at a cost of $9,000 per month and then sold for $26,000. Meadows Company should: A. further process product Z because its incremental revenues will exceed incremental costs by $7,000. B. further process product Z because its incremental revenues will exceed incremental costs by $17,000. C. sell product Z at the split-off point because its incremental costs will exceed incremental revenues by $1,000. D. sell product Z at the split-off point because its incremental costs will exceed incremental revenues by $7,000.
7-14
Test Bank to accompany Jiambalvo Managerial Accounting, 4th Edition
Answers 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45
D B C D A B A B C D D D C D C A B A
46 47 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63
B D C A A B B A A B B C A C B A A A
64 C
Incremental revenue is the additional revenue received as a result of selecting one decision alternative over another.
2.
Sunk costs are not incremental costs.
3.
Differential costs are also incremental costs.
4.
In deciding whether to sell or process further, the costs that have been incurred to process the product to this point are incremental costs.
5.
In a make or buy decision, direct materials and direct labor are usually incremental costs.
6.
In a make or buy decision, the original purchase price of the equipment which is currently used in the manufacturing process is usually a relevant cost.
7.
Fixed costs that are avoidable are incremental costs in a make or buy decision.
8.
Avoidable costs are not relevant.
9.
Chief resource officer is another title for the person who is responsible for the company’s financial accounting system.
10.
The proper way to analyze the decision to drop a product line is to compare sunk costs to incremental costs.
11.
Common costs are fixed costs that are not directly traceable to an individual product line.
12.
If a department is eliminated, the company will avoid the fixed costs that have been allocated to that department.
13.
When deciding whether to eliminate a segment, the segment should generally be kept if its contribution margin less avoidable fixed costs is positive.
14.
Opportunity costs represent the benefits foregone by selecting one alternative over another.
15.
Avoidable costs are always incremental costs.
16.
Fixed costs are always sunk costs.
7-2
Test Bank to accompany Jiambalvo Managerial Accounting, 4th Edition
17.
Two or more products which result from common inputs are called joint products.
18.
The best way to allocate the cost of common inputs to joint products is based on the physical quantities of the outputs.
Chapter 7 The Use of Cost Information in Management Decision Making
7-3
19.
Allocating joint costs to products based on physical quantities will make the products have the same contribution margin ratio if they are sold at the split-off point.
20.
The stage of production at which individual products are identifiable is referred to as the spin-off point.
21.
A disadvantage of using an outside supplier is the associated loss of control over the production process.
22.
The qualitative aspects of a decision must receive the same careful attention as the quantitative aspects.
23.
The primary benefit of using an outside supplier is that the adverse effect of a downturn in business is less severe.
*24.
When applying the theory of constraints, management attempts to improve throughput in all areas of the factory.
*25.
Improving performance in areas which are not bottlenecks will not improve overall output.
*26.
According to the theory of constraints, everything else should be subordinate to the binding constraint.
*27.
The binding constraint is the process that limits throughput.
Material from the appendix to the chapter is marked with an asterisk (*). Answers 1 2 3 4 5
T T T F T
6 7 8 9 10
F T F F F
11 12 13 14 15
T F T T T
16 17 18 19 20
F T F F F
21 22 23 24 25
T T T F T
26 T 27 T
7-4
Test Bank to accompany Jiambalvo Managerial Accounting, 4th Edition
MULTIPLE CHOICE 28.
Which of the following is often not a differential cost? A. Direct labor B. Direct material C. Variable manufacturing overhead D. Fixed manufacturing overhead
29.
Which of the following is never considered in incremental analysis? A. Incremental revenue B. Sunk costs C. Incremental profit D. Differential costs
30.
Which of the following is not a term used to describe the additional costs incurred as a result of selecting one decision alternative over another? A. Differential costs B. Relevant costs C. Sunk costs D. Incremental costs
31.
When deciding between two alternatives, the preferred alternative always has A. no opportunity costs. B. greater revenues than the other alternatives. C. less expense than the other alternatives. D. greater incremental profit than the other alternatives.
32.
Costs that were incurred in the past which are never incremental costs are called A. sunk costs. B. opportunity costs. C. differential costs. D. relevant costs.
33.
A company is trying to decide whether to sell partially completed goods in their current state or incur additional costs to finish the goods and sell them as complete units. Which of the following is not relevant to the decision? A. The selling price of the completed units. B. The costs incurred to process the units to this point. C. The selling price of the partially completed units. D. The costs that will be incurred to finish the units.
Chapter 7 The Use of Cost Information in Management Decision Making
7-5
34.
A company is trying to decide whether to keep or drop the sporting goods department in its department store. If the segment is dropped, the manager will be fired. The manager's salary, in relation to the decision to keep or drop the sporting goods department, is A. avoidable and therefore relevant. B. not avoidable and therefore relevant. C. sunk and therefore not relevant. D. the same for all alternatives and therefore not relevant.
35.
Which of the following is not normally relevant in a make or buy decision? A. direct materials B. supervisory salaries C. incremental revenues D. opportunity costs
36.
A company is currently making a necessary component in house (the company is producing the component for its own use). The company has received an offer to buy the component from an outside supplier. A machine is being rented to make the component. If the company were to buy the component, the machine would no longer be rented. The rent on the machine, in relation to the decision to make or buy the component, is: A. sunk and therefore not relevant. B. avoidable and therefore not relevant. C. avoidable and therefore relevant. D. unavoidable and therefore relevant.
37.
Fixed costs that will be eliminated if a particular course of action is undertaken are called A. optional costs. B. opportunity costs. C. direct costs. D. avoidable costs.
38.
The value of benefits foregone by selecting one decision alternative over another is a(n) A. sunk cost. B. incremental benefit. C. differential revenue. D. opportunity cost.
39.
A product line should be dropped when A. it has a negative contribution margin. B. its avoidable fixed costs are greater than its contribution margin. C. there will be a positive change in income if the product line is dropped. D. All of the above.
7-6
Test Bank to accompany Jiambalvo Managerial Accounting, 4th Edition
40.
Common costs A. are fixed costs that are not directly traceable to an individual product line. B. normally not avoidable. C. Both A and B are true. D. Neither A nor B is true.
41.
Which of the following is a direct cost of a specific department in a retail store? A. Company president’s salary. B. Rent on the store. C. Utilities for the store. D. Cost of the department’s inventory.
42.
When a department or product line is dropped, the common fixed costs which had been allocated to that department A. are eliminated. B. become variable costs. C. are allocated to the remaining departments or product lines. D. become sunk costs.
43.
You have tickets to go to Mexico (Cancun specifically) over spring break. Just this week your best friend informs you that s/he is getting married over spring break and would like you to be in the wedding as an attendant. Which of the following is a sunk cost that should not be relevant to your decision as to whether be in the wedding or go on the trip to Mexico? A. The cost of the airline tickets to Mexico. B. The amount of refund you could get on the airline tickets to Mexico. C. The cost of the clothing you will have to buy/rent to be in the wedding. D. The fact that you have never been anywhere for Spring Break and were really looking forward to going to Mexico.
44.
Which of the following statements regarding opportunity costs is true? A. Opportunity costs are recorded with two debits, rather than a debit and a credit. B. Opportunity costs are always incremental costs. C. Opportunity costs are a key factor in financial accounting. D. The same decision will be reached whether or not opportunity costs are considered in the analysis.
Chapter 7 The Use of Cost Information in Management Decision Making
45.
7-7
Robin Company currently produces 8,000 units of part B13. Current costs for part B13 are as follows: Direct materials Direct labor Factory rent Administrative General factory overhead Total
$12 9 7 10 7 $45
If the company decides to buy part B13, 50% of the administrative costs would be avoided. All of the Robin Company items, including part B13, are manufactured in the same rented production facility. The company has an offer from a wholesaler that wishes to sell the part to Robin for $31 per unit. What effect will occur if the company decides to accept the offer? A. The cost for this part will increase by $5 per unit. B. The cost for this part will be the same. C. The cost for this part will decrease by $14 per unit. D. The cost for this part will decrease by $10 per unit. 46.
Walter Jewelry Company produces a bracelet which normally sells for $79.95. The company produces 1,500 units annually but has the capacity to produce 2,000 units. A special order for manufacturing and selling 200 bracelets at $49.95 has been received which would not disrupt current operations. Current costs for the bracelet are as follows: Direct materials Direct labor Variable overhead Fixed overhead Total
$17.00 14.50 4.00 5.00 $40.50
In addition, the customer would like to add a monogram to each bracelet which would require an additional $2 per unit in additional labor costs and Walter Jewelry would also have to purchase a piece of equipment to create the monogram which would cost $1,600. This equipment would not have any other uses. With regard to this special order, only A. incremental revenues will exceed incremental costs by $2,490. B. incremental revenues will exceed incremental costs by $890. C. incremental revenues will exceed incremental costs by $2,890 D. incremental revenues will exceed incremental costs by $1,290
7-8
Test Bank to accompany Jiambalvo Managerial Accounting, 4th Edition
47.
NY Memorabilia Company produces a souvenir plate which normally sells for $79.95. The company produces 1,500 plates annually but has the capacity to produce 2,000 plates. A special order for manufacturing and selling 200 plates at $49.95 has been received which would not disrupt current operations. Current costs for the plate are as follows: Direct materials Direct labor Variable overhead Fixed overhead Total
$17.00 14.50 4.00 5.00 $40.50
In addition, the customer would like to add a date to each plate which would require an additional $2 per plate in additional labor costs and NY Memorabilia Company would also have to purchase a piece of equipment to create the date which would cost $1,200. This equipment would not have any other uses. Which statement is true with regard to this special order? A. Incremental revenues will exceed incremental costs by $2,490. B. Incremental revenues will exceed incremental costs by $890. C. Incremental revenues will exceed incremental costs by $2,890. D. Incremental revenues will exceed incremental costs by $1,290. 48.
Rockwell Company owns a single restaurant which has a cantina primarily used to seat patrons while they wait on their tables. The company is considering eliminating the cantina and adding more dining tables. Segmented contribution income statements are as follows and fixed costs applicable to both segments are allocated on the basis of sales.
Sales Variable costs Direct fixed costs Allocated fixed costs Net Income
Restaurant $800,000 475,000 50,000 212,500 $ 62,500
Cantina $200,000 160,000 15,000 37,500 ($12,500)
Total $1,000,000 635,000 65,000 250,000 $50,000
What financial effect will occur to profit if Rockwell eliminates the cantina but no more dining customers are served? A. Net income will increase by $12,500 B. Net income will decrease to $37,500. C. Net income will decline by $25,000 D. Net income will be $25,000
Chapter 7 The Use of Cost Information in Management Decision Making
7-9
49.
Hydra Company has two locations, downtown and at a suburban mall. During March, the company reported total net income of $337,000 and sales of $1.2 million. The contribution margin in the downtown store was $320,000 (40% of sales). The contribution margin in the mall store is $200,000. Total fixed costs are $90,000 in the downtown store and $93,000 in the mall location. How much are sales at the mall location? A. $400,000 B. $800,000 C. $666,667 D. Not enough information is provided to answer.
50.
Collegebooks Company has two locations, downtown and on campus. During March, the company reported net income of $164,000 and sales of $1.2 million. The contribution margin in the downtown store was $320,000 (32% of sales). The contribution margin in the campus store is $110,000. Direct fixed costs are $90,000 in the downtown store and $93,000 in the campus location. How much are total variable costs? A. $410,000 B. $3,750,000 C. $192,000 D. $853,000
51.
Ricket Company has 1,500 obsolete calculators that are carried in inventory at a cost of $13,200. If these calculators are upgraded at a cost of $9,500, they could be sold for $22,500. Alternatively, the calculators could be sold “as is” for $9,000. What is the net advantage or disadvantage of reworking the calculators? A. $13,000 advantage B. $4,000 advantage C. $9,200 disadvantage D. $200 disadvantage
52.
BigByte Company has 12 obsolete computers that are carried in inventory at a cost of $13,200. If these computers are upgraded at a cost of $7,500, they could be sold for $15,300. Alternatively, the computers could be sold “as is” for $9,000. What is the net advantage or disadvantage of reworking the computers? A. $6,300 advantage B. $1,200 disadvantage C. $5,400 disadvantage D. $3,000 advantage
7-10
Test Bank to accompany Jiambalvo Managerial Accounting, 4th Edition
53.
The following are production and cost data for two products, buckets and pails.
Contribution margin per unit Machine set-ups needed per unit
Buckets $450 20
Pails $280 14
The company can only perform 14,000 set-ups each period yet there is unlimited demand for each product. What is the maximum contribution margin for the year? A. $315,000 B. $35,000 C. $280,000 D. $595,000 54.
The following are production and cost data for two products, A and B.
Contribution margin per unit Machine set-ups needed per unit
Product A $450 25
Product B $340 20
The company can only perform 12,000 set-ups each period yet there is unlimited demand for each product. What is the maximum contribution margin for the year? A. $216,000 B. $204,000 C. $420,000 D. $18,050,000 55.
Central Apparel Company owns two stores and management is considering eliminating the east store due to declining sales. Contribution income statements are as follows and common fixed costs are allocated on the basis of sales. West East Total Sales $420,000 $90,000 $510,000 Variable costs 210,000 45,000 255,000 Direct fixed costs 50,000 25,000 75,000 Allocated fixed costs 110,000 35,000 145,000 Net Income $ 50,000 ($15,000) $35,000 Central’s management feels that if they eliminate the east store, that sales in the west store will increase by 20%. If the east store is closed, what effect will occur to the overall company net income? A. Increase by $25,000 B. Increase by $22,000 C. Increase by $12,000 D. Increase by $15,000
Chapter 7 The Use of Cost Information in Management Decision Making
56.
7-11
Explorer Company manufactures two products, hard-tops and covers for its convertible vehicles. Data for each follows:
Direct labor hours required per unit Contribution margin per unit
Hard-top 4 $240
Covers 8 $390
Only 4,200 direct labor hours are available per month. How many units of each product should Explorer make in order to maximize profits? Hard-tops Covers A. 4,200 400 B. 1,050 0 C. 1,050 250 D. 0 250 57.
Urban Athletics Company has two store locations, north and south. During October, the company reported net income of $192,000 on sales of $905,000. Sales in the north store were $680,000 and variable costs in the south store were 60% of sales. The contribution margin in the north store was $204,000. If total direct costs are $50,000, how much will allocated fixed costs be? A. $102,000 B. $2,000 C. $52,000 D. $30,000
58.
The Abbott Company currently makes 10,000 units annually of a part it utilizes in the products it manufactures. Current costs for the part are as follows: Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead Total
$16.25 11.85 6.30 10.20 $44.60
If the company decides to buy the part the empty warehouse space could be rented for $35,000 annually. In addition, half of the fixed manufacturing overhead costs would be avoided if the company decides to buy the part. The company has an offer from a manufacturer to produce the part for $42 per unit. If the company decides to accept the offer the net advantage or disadvantage to the company’s annual net income would be: A. An advantage of $10,000. B. An advantage of $35,000. C. A disadvantage of $25,000. D. An advantage of $26,000.
7-12
Test Bank to accompany Jiambalvo Managerial Accounting, 4th Edition
59.
Manor Homes plans to discontinue a segment which last year generated a contribution margin of $65,000 and incurred $40,000 in fixed costs. If the segment is discontinued, half of the fixed costs will not be avoided. If Manor Homes decides to discontinue this segment the overall effect on profits will be: A. a decrease of $65,000. B. a decrease of $25,000. C. a decrease of $45,000. D. an increase of $45,000.
60.
Rumper Company has 2,000 obsolete ratchers in its inventory which have a cost of $22 each. If the ratchers are reworked they could be sold for $37 each. If sold as-is, the revenue would be only $10 each. If Rumper Company decides to rework the ratchers, how much should the company be willing to invest to ensure that no additional loss occurs on the sale of the ratchers? A. $44,000 B. $54,000 C. $20,000 D. $22,000
61.
Wester Company sells product Z for $23 per unit. Unit product costs are as follows: Direct materials Direct labor Manufacturing overhead Total
$4 5 12 $21
A special order to purchase 20,000 units was recently received. There is enough capacity to fill the order and filling this order would not disrupt current operations. Wester Company would incur an additional $3 per unit for shipping costs. Half of the manufacturing overhead costs are fixed and would be incurred no matter how many units are produced. In negotiating a price, how much is the minimum acceptable selling price? A. $18 B. $19 C. $22 D. $15
Chapter 7 The Use of Cost Information in Management Decision Making
7-13
62.
Rogertree Company manufactures a number of products from the same raw material. Joint processing costs total $10,000 per month. Product A could be sold at the cut-off point for $18,000 per month or it can be further processed at a cost of $9,000 per month and then sold for $35,000. Rogertree Company should: A. Further process product A because its incremental revenues will exceed incremental costs by $8,000. B. Further process product A because its incremental revenues will exceed incremental costs by $26,000. C. Sell as-is because the incremental loss is $2,000 if processed further. D. Further process product A because its incremental revenues will exceed incremental costs by $16,000.
63.
Tilma Company sells product X for $23 per unit. Unit product costs are as follows: Direct materials Direct labor Manufacturing overhead Total
$4 5 12 $21
A special order to purchase 20,000 units was recently received. There is enough capacity to fill the order and filling this order would not disrupt current operations. Tilma Company would incur an additional $3 per unit for shipping costs. 40% of the manufacturing overhead costs are fixed and would be incurred no matter how many units are produced. In negotiating a price, how much is the minimum acceptable selling price? A. $19.20 B. $19.00 C. $16.80 D. $12.00 64.
Meadows Company manufactures a number of products from the same raw material. Joint processing costs total $10,000 per month. Product Z could be sold at the cut-off point for $18,000 per month or it can be further processed at a cost of $9,000 per month and then sold for $26,000. Meadows Company should: A. further process product Z because its incremental revenues will exceed incremental costs by $7,000. B. further process product Z because its incremental revenues will exceed incremental costs by $17,000. C. sell product Z at the split-off point because its incremental costs will exceed incremental revenues by $1,000. D. sell product Z at the split-off point because its incremental costs will exceed incremental revenues by $7,000.
7-14
Test Bank to accompany Jiambalvo Managerial Accounting, 4th Edition
Answers 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45
D B C D A B A B C D D D C D C A B A
46 47 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63
B D C A A B B A A B B C A C B A A A
64 C
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