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ch4

Student: ___________________________________________________________________________

1.

Differential analysis involves the comparison of one or more alternative courses of action with the status
quo.
True

2.

If there is only one alternative course of action and the status quo is unacceptable, then there really is no
decision to make.
True

3.

False

The full cost fallacy occurs when a decision-maker fails to include fixed manufacturing overhead in the
product's cost.
True

9.

False

Fixed costs are always classified as sunk costs in differential cost analysis.
True

8.

False

Only variable costs can be differential costs.


True

7.

False

Short-run decisions often have long-run implications.


True

6.

False

Differential analysis cannot be used for long-run decisions because it cannot incorporate the timing of
revenues and costs (i.e., the time-value of money).
True

5.

False

A decision must involve at least two alternative courses of action.


True

4.

False

False

When deciding whether or not to accept a special order, a decision-maker should focus on differential costs
instead of full costs.
True

False

10. The differential analysis approach to pricing for special orders could lead to under-pricing in the long-run
because fixed costs are not included in the analysis.
True

False

11. Target costs equal the difference between the target selling price and the desired profit margin.
True

False

12. Dumping occurs when a company exports its product to consumers in another country at an export price
that is below the domestic price.
True

False

13. Price discrimination is the practice of selling identical goods or services to different customers at different
prices.
True

False

14. Peak load pricing is the practice of setting prices lowest when the quantity demanded for the product
approaches the physical capacity to produce it.
True

False

15. The alternative courses of action in a make-or-buy decision are (a) manufacture needed items internally or
(b) purchase needed items externally.
True

False

16. The reason opportunity costs are not included in the accounting system is because they involve estimates.
True

False

17. Financial statements prepared in accordance with generally accepted accounting principles (GAAP) provide
differential cost information.
True

False

18. In the short-run, plant capacity is fixed and product choices have to be made that optimize the use of
available capacity.
True

False

19. With constrained resources, the important measure of profitability is the contribution margin per unit of
scarce resource.
True

False

20. The theory of constraints focuses on determining the optimal product mix when one or more resources
restrict the attainment of a goal or objective.
True

False

21. The relevance of a particular cost to a decision is determined by the: (CMA adapted)
A. riskiness of the decision.
B. number of decision variables.
C. amount of the cost.
D. potential effect on the decision.
E. accuracy of the cost.

22. In a decision analysis situation, which one of the following costs is not likely to contain a variable cost
component? (CMA adapted)
A. Labor
B. Overhead
C. Straight-line Depreciation
D. Selling
E. Material
23. Which of the following statements regarding differential costs is (are) false?
(A) The full cost fallacy occurs when a decision-maker fails to include fixed manufacturing overhead in the
product's cost.
(B) When deciding whether or not to accept a special order, a decision-maker should focus on differential
costs instead of full costs.
A.
B.
C.
D.

Only A.
Only B.
Neither A nor B is false.
Both A and B are true.

24. Which of the following costs are irrelevant for a special order that will allow an organization to utilize
some of its present idle capacity?
A. Direct materials
B. Indirect materials
C. Variable overhead
D. Unavoidable fixed overhead
E. Differential sales commission
25. Which of the following statements regarding special orders is (are) true?
(A) The primary decision for special orders is determining whether the differential revenue is greater than
the differential costs associated with the order.
(B) The differential analysis approach to pricing for special orders could lead to underpricing in the longrun because fixed costs are not included in the analysis.
A.
B.
C.
D.

Only A.
Only B.
Neither A nor B is false.
Both A and B are true.

26. Which of the following costs are not considered in a differential analysis for a make-or-buy decision?
A. Indirect materials and indirect labor if the item is manufactured internally
B. Direct materials and direct labor if the item is purchased
C. Variable overhead if the item is manufactured internally
D. Fixed overhead that can be avoided if the item is purchased
E. Fixed overhead that will continue if the item is purchased

27. For the past five years, the RS Company has produced and sold electronic magnets to chemistry labs
throughout the United States. Recently, a strong competitor has entered the market and RS is considering
whether it should continue to produce and sell the electronic magnets. The following information has been
gathered to assist management in their decision:
A) The machinery used to produce the magnet was purchased five-years ago for $500,000.
B) Four of the employees who produce magnets would be reassigned to the magnifying glass division.
C) The space now used to produce the magnets would be used to eliminate the need to rent warehouse
space.
D) Sales volume (units) is estimated to drop by 50% once the competitor becomes fully operational.
Which of the items listed above is (are) relevant to the decision to continue the production and sale of the
electronic magnets?
A. A and C.
B. B and C.
C. C and D.
D. A, B, and D.
E. B, C, and D.
28. Which of the following statements about the theory of constraints is (are) true?
(A) The theory of constraints focuses on determining the optimal product mix when one or more resources
restrict the attainment of a goal or objective.
(B) The theory of constraints focuses on maximizing the rate of throughput contribution while minimizing
investment and other operating costs.
A.
B.
C.
D.

Only A.
Only B.
Neither A nor B is true.
Both A and B are true.

29. The theory of constraints focuses on maximizing throughput contribution margin while minimizing all of
the following except
A.
B.
C.
D.

selling expenses per unit sold.


production bottlenecks.
investment in buildings.
investment in inventories.

30. The AZ Company manufactures kitchen utensils. The company is currently producing well below its full
capacity. The BV Company has approached AZ with an offer to buy 20,000 utensils at $0.75 each. AZ sells
its utensils wholesale for $0.85 each; the average cost per unit is $0.83, of which $0.12 is fixed costs. If AZ
were to accept BV's offer, what would be the increase in AZ's operating profits?
A. $400
B. $800
C. $1,600
D. $2,000
E. AZ's operating profits will not increase as a result of accepting the special order.

31. The MNK Company has gathered the following information for a unit of its most popular product:

The above cost information is based on 4,000 units. A foreign distributor has offered to buy 1,000 units at a
price of $16 per unit. This special order would not disturb regular sales. Variable shipping and other selling
expenses would be an additional $1 per unit for the special order. If the special order is accepted, MNK's
operating profits will increase by:
A. $1,000.
B. $1,600.
C. $2,000.
D. $4,000.
E. $5,000.
32. The following information relates to the Tram Company for the upcoming year.

The cost of goods sold includes $1,200,000 of fixed manufacturing overhead; the operating expenses
include $100,000 of fixed marketing expenses. A special order offering to buy 50,000 units for $7.50 per
unit has been made to Tram. Fortunately, there will be no additional operating expenses associated with the
order and Tram has sufficient capacity to handle the order. How much will operate profits be increased if
Tram accepts the special order?
A. $25,000
B. $62,500
C. $100,000
D. $125,000
E. Operating profits will not increase as a result of accepting the special order.
33. The Regal Baking Company is considering the expansion of its business into door-to-door delivery
service. This would require an additional $12,500 in labor costs per month. Company-owned vehicles
now used to make morning deliveries to restaurants could be used in the afternoons to make the home
deliveries. However, it is estimated that an additional $5,000 would be required per month for gas, oil, and
maintenance. It is further estimated that the home delivery use of the trucks would be allocated 45% of the
existing $6,500 fixed vehicle costs. What is the differential delivery cost per month for expanding into the
home delivery market?
A.
B.
C.
D.

$12,500
$17,500
$19,750
$20,425

34. The Blade Division of Axe Company produces hardened steel blades. One-third of Blade's output is sold
to the Forestry Products Division of Axe; the remainder is sold to outside customers. Blades' estimated
operating profit for the year is:

The Forestry Division has an opportunity to purchase 10,000 blades of the same quality from an outside
supplier on a continuing basis. The Blade Division cannot sell any additional products to outside customers.
Should the Axe Company allow its Forestry Division to purchase the blades from the outside supplier at
$1.25 per unit?
A.
B.
C.
D.

No; making the blades will save Axe $1,500.


Yes; buying the blades will save Axe $1,500.
No; making the blades will save Axe $2,500.
Yes; buying the blades will save Axe $2,500.

35. The Blade Division of Axe Company produces hardened steel blades. One-third of Blade's 30,000 unit
output is sold to the Forestry Products Division of Axe; the remainder is sold to outside customers. Blades'
estimated operating profit for the year is:

The Forestry Division has an opportunity to purchase 10,000 blades of the same quality from an outside
supplier on a continuing basis. The purchase price would be $1.25. If the Blade Division is now operating
at full capacity and can sell all its units to outside customers at the present selling price, what is the
differential cost to Axe of requiring that the blades be made internally and sold to the Forestry Division?
A.
B.
C.
D.

$2,500
$5,000
$7,500
$10,000

36. The CJP Company produces 10,000 units of item S10 annually at a total cost of $190,000.

The XYZ Company has offered to supply 10,000 units of S10 per year for $18 per unit. If CJP accepts the
offer, $4 per unit of the fixed overhead would be saved. In addition, some of CJP's facilities could be rented
to a third party for $15,000 per year. What are the relevant costs for the "make" alternative?
A.
B.
C.
D.

$160,000
$165,000
$175,000
$185,000

37. The CJP Company produces 10,000 units of item S10 annually at a total cost of $190,000.

The XYZ Company has offered to supply 10,000 units of S10 per year for $18 per unit. If CJP accepts the
offer, $4 per unit of the fixed overhead would be saved. In addition, some of CJP's facilities could be rented
to a third party for $15,000 per year. At what price would CJP be indifferent to XYZ's offer?
A.
B.
C.
D.

$17.00
$17.50
$18.50
$19.50

38. Differential costs are (CMA adapted)


A.
B.
C.
D.

the difference in total costs that result from selecting one choice instead of another.
the profit foregone by selecting one choice instead of another.
a cost that continues to be incurred in the absence of activity.
a cost common to all choices in questions and not clearly allocable to any of them.

39. The period of time over which capacity will be unchanged is


A.
B.
C.
D.

long run
sunk cost
short run
product life cycle

40. The time from initial research and development to the time that support to the customer ends is the
A.
B.
C.
D.

product life cycle


short run
target time
predatory price

41. The price based on customers' perceived value for the product and the price that competitors charge:
A.
B.
C.
D.

predatory price
target price
target cost
dumping price

42. The practice of setting price below cost with the intent to drive competitors out of business:
A.
B.
C.
D.

predatory pricing
target pricing
target costing
peak-load pricing

43. The practice of setting prices highest when the quantity demanded for the product approaches capacity:
A.
B.
C.
D.

predatory pricing
target pricing
peak-load pricing
price fixing

44. Agreement among business competitors to set prices at a particular level:


A.
B.
C.
D.

predatory pricing
target pricing
peak-load pricing
price fixing

45. Exporting a product to another country at a price below domestic cost:


A.
B.
C.
D.

dumping
target pricing
peak-load pricing
price fixing

46. A target cost is computed as


A.
B.
C.
D.

cost to manufacture plus a desired markup


cost to manufacture plus designated selling expenses
market willingness to pay - cost to manufacture
market willingness to pay - desired profit

47. The operations of Blink Corporation are divided into the Will Division and the Aloy Division. Projections
for the next year are as follows:

Operating income for Blink Corporation as a whole if the Carter Division were dropped would be
A.
B.
C.
D.

$133,000
$112,000
$91,000
$49,000

48. Bryon Industries manufactures 20,000 components per year. The manufacturing cost of the components
was determined as follows:

An outside supplier has offered to sell the component for $17. If Bryon purchases the component from
the outside supplier, the manufacturing facilities would be unused and could be rented out for $10,000. If
Bryon purchases the component from the supplier instead of manufacturing it, the effect on income would
be:
A.
B.
C.
D.

a $70,000 increase
a $50,000 decrease
a $10,000 decrease
a $30,000 increase

49. Albany Industries produces two products. Information about the products is as follows:

The company's fixed costs totaled $70,000, of which $15,000 can be directly traced to Product 1 and
$40,000 can be directly traced to Product 2. The effect on the firm's profits if Product 2 is dropped would
be a
A.
B.
C.
D.

$10,000 increase
$35,000 increase
$35,000 decrease
$10,000 decrease

50. Which of the following costs would continue to be incurred even if a segment is eliminated?
A.
B.
C.
D.

Direct fixed expenses


Variable cost of goods sold
Common fixed costs
Variable selling and administrative expenses

51. NorWest Shoe Company has two retail stores, one in Albertville and the other in Bloomer. The Albertville
store had sales of $100,000, a contribution margin of 35 percent, and a segment margin of $14,000. The
company's two stores have total sales of $250,000, contribution margin of 32 percent, and a total segment
margin of $31,000. The contribution margin for the Bloomer store must have been
A.
B.
C.
D.

$65,000
$170,000
$105,000
$45,000

52. Miller Industries has two divisions: the West Division and the East Division. Information relating to the
divisions for the year just ended is as follows:

Common fixed expenses have been allocated equally to each of the two divisions. Miller's segment margin
for the West Division is
A.
B.
C.
D.

$150,000
$102,000
$30,000
$110,000

53. Chetek Industries manufactures 15,000 components per year. The manufacturing cost of the components
was determined to be as follows:

Assume that the fixed manufacturing overhead reflects the cost of Chetek's manufacturing facility. This
facility cannot be used for any other purpose. An outside supplier has offered to sell the component to
Chetek for $34. If Chetek Industries purchases the component from the outside supplier, the effect on
income would be a
A.
B.
C.
D.

$30,000 decrease
$30,000 increase
$90,000 decrease
$90,000 increase

54. Chetek Industries manufactures 15,000 components per year. The manufacturing cost of the components
was determined to be as follows:

Assume Chetek Industries could avoid $40,000 of fixed manufacturing overhead if it purchases the
component from an outside supplier. An outside supplier has offered to sell the component for $34. If
Chetek purchases the component from the supplier instead of manufacturing it, the effect on income would
be a
A.
B.
C.
D.

$60,000 increase
$10,000 increase
$100,000 decrease
$140,000 increase

55. The operations of Superior Corporation are divided into the Northrup Division and the Hawley Division.
Projections for the next year are as follows:

Operating income for Superior Corporation, as a whole, if the Hawley Division were dropped would be
A.
B.
C.
D.

$45,000
$80,000
$100,000
$120,000

56. The following information relates to a product produced by Ashland Company:

Fixed selling costs are $1,000,000 per year. Variable selling costs of $4 per unit sold are added to cover
the transportation cost. Although production capacity is 500,000 units per year, Ashland expects to produce
only 400,000 units next year. The product normally sells for $40 each. A customer has offered to buy
60,000 units for $30 each. The customer will pay the transportation charge on the units purchased. If
Ashland accepts the special order, the effect on income would be a
A.
B.
C.
D.

$60,000 increase
$180,000 increase
$420,000 increase
$600,000 decrease

57. If there is excess capacity, the minimum acceptable price for a special order must cover
A. only variable costs associated with the special order.
B. variable and fixed manufacturing costs associated with the special order.
C. variable and incremental fixed costs associated with the special order.
D variable costs and incremental fixed costs associated with the special order, plus the contribution margin
. usually earned on regular units.
58. The Winwood Company manufactures two products: Q and T. The costs and revenues are as follows:

Total demand for Product Q is 14,000 units and for Product T is 9,000 units. Machine time is a scarce
resource. During the year, 54,000 machine hours are available. Product Q requires 5 machine hours per
unit, while Product T requires 3 machine hours per unit.
How many units of Products Q and T should Winwood produce?

A.
B.
C.
D.

a
b
c
d

59. Roswell Inc has 5,400 machine hours available each month. The following information on the company's
three products is available:

If market demand exceeds the available capacity, in what sequence should orders be filled to maximize the
company's profits?
A.
B.
C.
D.

Product 1 first, product 2 second, and product 3 third


Product 2 first, product 3 second, and product 1 third
Product 3 first, product 2 second, and product 1 third
Product 3 first, product 1 second, and product 2 third

60. Lerner Inc has 6,600 machine hours available each month. The following information on the company's
three products is available:

If market demand exceeds the available capacity, in what sequence should orders be filled to maximize the
company's profits?
A.
B.
C.
D.

Product X first, product Z second, and product Y third


Product Y first, product Z second, and product X third
Product Y first, product X second, and product Z third
Product Z first, product X second, and product Y third

61. The Clapton Company manufactures two products: Alpha and Beta. The costs and revenues are as follows:

Total demand for Alpha is 10,000 units and for Beta is 6,000 units. Machine hours is a scarce resource.
During the year, 50,000 machine hours are available. Alpha requires 4 machine hours per unit, while Beta
requires 2.5 machine hours per unit.
How many units of Alpha and Beta should Clapton produce?

A.
B.
C.
D.

a
b
c
d

62. The Clapton Company manufactures two products: Alpha and Beta. The costs and revenues are as follows:

Total demand for Alpha is 10,000 units and for Beta is 6,000 units. Machine time is a scarce resource.
During the year, 50,000 machine hours are available. Alpha requires 4 machine hours per unit, while Beta
requires 2.5 machine hours per unit.
What is the maximum contribution margin Clapton can achieve during a year?
A.
B.
C.
D.

$444,250
$1,014,000
$488,000
$855,500

63. Zurek Inc has 5,400 machine hours available each month. The following information on the company's
three products is available:

The market demand is limited to 2,000 units of each of the three products. How many units of each should
Zurek produce and sell?

A.
B.
C.
D.

a
b
c
d

64. Zurek Inc has 5,400 machine hours available each month. The following information on the company's
three products is available:

The market demand is limited to 2,000 units of each of the three products. What is the maximum possible
contribution margin that Zurek could make in any month?
A.
B.
C.
D.

$81,000
$46,500
$43,000
$51,000

65. Winton Inc has 12,000 machine hours available each month. The following information on the company's
four products is available:

If market demand exceeds the available capacity, in what sequence should orders be filled to maximize the
company's profits?
A.
B.
C.
D.

Product W first, product X second, product Z third, and product Y last.


Product Z first, product W second, product X third, and product Y last.
Product X first, product W second, product Y third, and product Z last.
Product X first, product Z second, product Y third, and product W last.

66. The Axle Division of Becker Company produces axles for off-road sport vehicles. One-third of Axle's
output is sold to an internal division of Becker; the remainder is sold to outside customers. Axle's estimated
operating profit for the year is:

The internal division has an opportunity to purchase 10,000 axles of the same quality from an outside
supplier on a continuing basis. The Axle Division cannot sell any additional products to outside customers.
Should the Becker Company allow its internal division to purchase the axles from the outside supplier at
$13.00 per unit?
A.
B.
C.
D.

No; making the axles will save Becker $15,000.


Yes; buying the axles will save Becker $15,000.
No; making the axles will save Becker $30,000.
Yes; buying the axles will save Becker $30,000.

67. The Axle Division of Becker Company produces axles for off-road sport vehicles. One-third of Axle's
30,000 unit output is sold to an internal division of Becker; the remainder is sold to outside customers.
Axles' estimated operating profit for the year is:

The internal division has an opportunity to purchase 10,000 axles of the same quality from an outside
supplier on a continuing basis. The purchase price would be $13.00. If the Axle Division is now operating
at full capacity and can sell all its units to outside customers at the present selling price, what is the
differential cost to Becker of requiring that the axles be made internally and sold to the internal division?
A.
B.
C.
D.

$25,000
$50,000
$70,000
$100,000

68. The Axle Division of Becker Company produces axles for off-road sport vehicles. One-third of Axle's
30,000 unit output is sold to an internal division of Becker; the remainder is sold to outside customers.
Axles' estimated operating profit for the year is:

The internal division has an opportunity to purchase 10,000 axles of the same quality from an outside
supplier on a continuing basis. The purchase price would be $13.00. If the Axle Division is now operating
at full capacity and can sell all its units to outside customers at the present selling price, what is the
minimum selling price that Axle should accept from the internal division?
A.
B.
C.
D.

$10.00
$13.00
$15.00
$20.00

69. The Axle Division of Becker Company produces axles for off-road sport vehicles. One-third of Axle's
output is sold to an internal division of Becker; the remainder is sold to outside customers. Axle's estimated
operating profit for the year is:

The internal division has an opportunity to purchase 10,000 axles of the same quality from an outside
supplier on a continuing basis. The Axle Division cannot sell any additional products to outside customers.
What is the minimum selling price that Axle should accept from the internal division?
A.
B.
C.
D.

$10.00
$13.00
$15.00
$50.00

70. The Bremmer Company produces 5,000 units of item ZQ98 annually at a total cost of $200,000.

The Daisy Company has offered to supply all 5,000 units of ZQ98 per year for $35 per unit. If Bremmer
accepts the offer, $8 per unit of the fixed overhead would be saved. In addition, some of Bremmer's leased
facilities could be vacated, reducing lease payments by $30,000 per year. What are the relevant costs for
the "make" alternative?
A.
B.
C.
D.

$120,000
$175,000
$190,000
$200,000

71. The Bremmer Company produces 5,000 units of item ZQ98 annually at a total cost of $200,000.

The Daisy Company has offered to supply all 5,000 units of ZQ98 per year for $35 per unit. If Bremmer
accepts the offer, $8 per unit of the fixed overhead would be saved. In addition, some of Bremmer's leased
facilities could be vacated, reducing lease payments by $30,000 per year. At what price would Bremmer be
indifferent to Daisy's offer?
A.
B.
C.
D.

$40
$38
$35
$24

72. The Speedy Delivery Service is considering the expansion of its business into afternoon retail delivery
service. This would require an additional $25,000 in labor costs per month. Company-owned vehicles
now used to make morning deliveries to local manufacturers could be used in the afternoons to make retail
deliveries. However, it is estimated that an additional $10,000 would be required per month for gas, oil, and
maintenance. It is further estimated that the retail delivery use of the trucks would be allocated 45% of the
existing $13,000 fixed vehicle costs. What is the differential delivery cost per month for expanding into the
retail delivery market?
A.
B.
C.
D.

$25,000
$35,000
$39,500
$40,850

73. The Lemaire Company manufactures wiring tools. The company is currently producing well below its full
capacity. The Boisvert Company has approached Lemaire with an offer to buy 10,000 tools at $1.75 each.
Lemaire sells its tools wholesale for $1.85 each; the average cost per unit is $1.83, of which $0.27 is fixed
costs. If Lemaire were to accept Boisvert's offer, what would be the increase in Lemaire's operating profits?
A. $800
B. $1,000
C. $1,900
D. $2,900
E. Lemaire's operating profits will not increase as a result of accepting the special order.
74. The Buchanan Company has gathered the following information for a unit of its most popular product:

The above cost information is based on 10,000 units. A distributor has offered to buy 2,000 units at a
price of $32 per unit. This special order would not disturb regular sales. Special packaging and other
selling expenses would be an additional $0.50 per unit for the special order. If the special order is accepted,
Buchanan's operating profits will increase by:
A. $4,000.
B. $6,400.
C. $8,000.
D. $19,000.
E. $20,000.
75. The Buchanan Company has gathered the following information for a unit of its most popular product:

The above cost information is based on 10,000 units. A distributor has offered to buy 2,000 units at a price
of $32 per unit. The distributor claims this special order would not disturb regular sales at $42. Special
packaging and other selling expenses would be an additional $0.50 per unit for the special order. How
many units of regular sales could be lost before this contract is not profitable?
A. 0 units.
B. 950 units.
C. 1, 000 units.
D. 2,000 units.
E. 10,000 units.

76. The following information relates to the Jax Company for the upcoming year.

The cost of goods sold includes $2,400,000 of fixed manufacturing overhead; the operating expenses
include $200,000 of fixed marketing expenses. A special order offering to buy 50,000 units for $15.00 per
unit has been made to Jax. Fortunately, there will be no additional operating expenses associated with the
order and Jax has sufficient capacity to handle the order. How much will operating profits increase if Jax
accepts the special order?
A. $50,000
B. $125,000
C. $200,000
D. $250,000
E. Operating profits will not increase as a result of accepting the special order.
77. The following information relates to the Jax Company for the upcoming year.

The cost of goods sold includes $2,400,000 of fixed manufacturing overhead; the operating expenses
include $200,000 of fixed marketing expenses. A special order offering to buy 50,000 units for $15.00 per
unit has been made to Jax. Fortunately, there will be no additional operating expenses associated with the
order; however, Jax is operating at full capacity. How much will operating profits increase if Jax accepts
the special order?
A. $50,000
B. $125,000
C. $200,000
D. $250,000
E. Operating profits will not increase as a result of accepting the special order.

78. The following information relates to a product produced by Ashland Company:

Fixed selling costs are $1,000,000 per year. Although production capacity is 500,000 units per year,
Ashland expects to produce only 400,000 units next year. The product normally sells for $80 each. A
customer has offered to buy 60,000 units for $60 each. The customer will pay the transportation charge on
the units purchased. If Ashland accepts the special order, the effect on income would be a
A.
B.
C.
D.

$120,000 increase
$360,000 increase
$840,000 increase
$1,200,000 decrease

79. The operations of Gadwell Corporation are divided into the Blink Division and the Blur Division.
Projections for the next year are as follows:

Operating income for Gadwell Corporation as a whole if the Blur Division were dropped would be
A.
B.
C.
D.

$66,500
$56,000
$45,500
$24,500

80. The operations of Gadwell Corporation are divided into the Blink Division and the Blur Division.
Projections for the next year are as follows:

If the Blur Division were dropped, Blink Division's sales would increase by 30%. If this happened, the
operating income for Gadwell Corporation as a whole would be
A.
B.
C.
D.

$72,800
$56,000
$79,100
$59,150

81. Which of the following statements regarding differential costs is (are) true?
(A) The full cost fallacy occurs when a decision-maker includes fixed manufacturing overhead in the
product's cost.
(B) When deciding whether or not to accept a special order, a decision-maker should focus on differential
costs instead of full costs.
A.
B.
C.
D.

Only A.
Only B.
Neither A nor B is false.
Both A and B are true.

82. Which of the following statements regarding special orders is (are) false?
(A) The primary decision for special orders is determining whether the differential revenue is greater than
the differential costs associated with the order.
(B) The differential analysis approach to pricing for special orders will always lead to underpricing in the
long-run because fixed costs are not included in the analysis.
A.
B.
C.
D.

Only A.
Only B.
Neither A nor B is false.
Both A and B are true.

83. Which of the following costs are not considered in a differential analysis for a make-or-buy decision?
A. Indirect materials and indirect labor if the item is purchased
B. Direct materials and direct labor if the item is manufactured internally
C. Variable overhead if the item is purchased
D. Fixed overhead that will continue if the item is purchased
E. Fixed overhead that can be avoided if the item is purchased
84. For the past five years, the Selin Company has produced and sold frequency meters to genetics labs
throughout the United States. Recently, a strong competitor has entered the market and Selin is considering
whether it should continue to produce and sell the frequency meters. The following information has been
gathered to assist management in their decision:
A) Sales volume (units) is estimated to drop by 25% once the competitor becomes fully operational.
B) The equipment used to produce the meters was purchased five-years ago for $1,500,000.
C) The space now used to produce the meters would be reallocated to eliminate the need to rent warehouse
space.
D) Three of the employees who produce meters would be reassigned to the oscillator division.
Which of the items listed above is (are) relevant to the decision to continue the production and sale of the
frequency meters?
A. A and C.
B. B and C.
C. C and D.
D. A, B, and D.
E. B, C, and D.

85. Which of the following statements about the theory of constraints is (are) true?
(A) The theory of constraints focuses on determining the optimal product mix when two or more resources
restrict the attainment of a goal or objective.
(B) The theory of constraints focuses on maximizing the rate of throughput contribution while maximizing
investment and other operating costs.
A.
B.
C.
D.

Only A.
Only B.
Neither A nor B is true.
Both A and B are true.

86. The Miller Company manufactures wiring tools. The company is currently producing well below its full
capacity. The Brisbois Company has approached Miller with an offer to buy 5,000 tools at $17.50 each.
Miller sells its tools wholesale for $18.50 each; the average cost per unit is $18.30, of which $2.70 is fixed
costs.
Required:
a. If Miller were to accept Brisbois's offer, what would be the increase in Miller's operating profits?
b. Assume that Miller is operating at full capacity. If Miller were to accept Brisbois's offer, what would be
the change in Miller's operating profits?

87. The Pierce Company has gathered the following information for a unit of its most popular product:

The above cost information is based on 10,000 units. Pierce currently sells 8,500 units for $62 per unit. A
distributor has offered to buy 1,000 units at a price of $50 per unit. This special order would not disturb
regular sales.
Required:
a. Calculate Pierce's change in operating profits if the special order is accepted.
b. How many units of regular sales could be lost before this contract is not profitable?

88. The following information relates to the Klessig Company for the upcoming year.

The cost of goods sold includes $3,000,000 of fixed manufacturing overhead; the operating expenses
include $450,000 of fixed marketing expenses. A special order offering to buy 50,000 units for $25.00 per
unit has been made to Klessig. Fortunately, there will be no additional operating expenses associated with
the order and Klessig has sufficient capacity to handle the order.
Required:
a. How much will operating profits increase if Klessig accepts the special order?
b. Assume that Klessig is operating at full capacity. How much will operating profits change if Klessig
accepts the special order?

89. The following information relates to a product produced by Bayfield Company:

Fixed selling costs are $1,000,000 per year. Although production capacity is 900,000 units per year,
Bayfield expects to produce only 800,000 units next year. The product normally sells for $180 each. A
customer has offered to buy 60,000 units for $150 each. The customer will pay the transportation charge on
the units purchased.
Required:
a. Compute the effect on income if Bayfield accepts the special order.
b. If Bayfield accepts the special order, how much could normal sales drop before all of the differential
profits disappear?

90. Carson Corporation produces and sells three products. The three products, Alpha, Beta, and Gamma,
are sold in a local market and in a regional market. At the end of the first quarter of the current year, the
following income statement (in thousands of dollars) has been prepared:

Management has expressed special concern with the regional market because of the extremely poor return
on sales. This market was entered a year ago because of excess capacity. It was originally believed that the
return on sales would improve with time, but after a year, no noticeable improvement can be seen from
the results as reported in the above quarterly statement. In attempting to decide whether to eliminate the
regional market, the following information has been gathered:

All administrative costs and fixed manufacturing costs are common to the three products and the two
markets and are fixed for the period. Remaining marketing costs are fixed for the period and separable by
market. All fixed costs have been arbitrarily allocated to markets.
Required:
(a) Assuming there are no alternative uses for the Carson Corporation's present capacity, would you
recommend dropping the regional market? Why or why not?
(b) Prepare the quarterly income statement showing contribution margins by products. Do not allocate fixed
costs to products.
(c) It is believed that a new product can be ready for sale next year if the Carson Corporation decides to
go ahead with continued research. The new product can be produced by simply converting equipment
presently used in producing product Gamma. This conversion will increase fixed costs by $40,000 per
quarter. What must be the minimum contribution margin per quarter for the new product to make the
changeover financially feasible?

91. Hi-Speed Electronics manufactures low-cost, consumer-grade computers. It sells these computers to
various electronics retailers to market under store brand names. It manufactures two computers, the
Lightning 2.0 and the Lightning 2.4, which differ in terms of speed, memory, and hard drive capacity. The
following information is available:

The average wage rate is $30 per hour. The plant has a capacity of 32,000 direct labor-hours.
Required:
1. A nationwide discount chain has approached Hi-Speed with an offer to buy 2,000 Lightning 2.0
computers and 2,000 Lightning 2.4 computers if the price is lowered to $350 and $450, respectively, per
unit.
a. If Hi-Speed accepts the offer, how many direct labor-hours will be required to produce the additional
computers?
b. How much will the profit increase (or decrease) if Hi-Speed accepts this proposal? All other prices will
remain the same.
Suppose that the customer has offered instead to buy up to 3,000 each of the two models at $350 and $450,
respectively.
c. How many of each product should be manufactured and sold? Assume current demand will not be
affected by the special order. Also assume that the company cannot increase its production capacity to meet
the extra demand.
d. How much will the profits change if this order is accepted instead?

92. The operations of BSC Corporation are divided into the Kaplan Division and the Norton Division.
Projections for the next year are as follows:

a. Operating income for BSC Corporation as a whole if the Norton Division were dropped would be
b. If the Norton Division were dropped, Kaplan Division's sales would increase by 45%. If this happened,
the operating income for BSC Corporation as a whole would be

93. The Tally Company produces 15,000 units of item QT34 annually at a total cost of $600,000.

Manufacturing overhead is 36% variable. The Daisy Company has offered to supply all 15,000 units of
QT34 per year for $35 per unit. If Tally accepts the offer, $8 per unit of the fixed overhead would be
avoided. In addition, some of Tally's leased facilities could be vacated, reducing lease payments by $90,000
per year.
Required:
a. By how much would Tally's profits change if 15,000 of part QT34 are purchased from Daisy?
b. At what price would Tally be indifferent to Daisy's offer?

94. The Sutton Division of Haugen Company produces wheels for off-road sport vehicles. One-half of Sutton's
output is sold to the Wilson Division of Haugen; the remainder is sold to outside customers. Sutton's
estimated operating profit for the year is:

Wilson Division has an opportunity to purchase 20,000 wheels of the same quality from an outside supplier
on a continuing basis.
Required:
a. The Sutton Division cannot sell any additional products to outside customers. Should the Haugen
Company allow Wilson Division to purchase the wheels from the outside supplier at $13.00 per unit?
b. If the Sutton Division is now operating at full capacity and can sell all its units to outside customers
at the present selling price, what is the differential cost to Haugen of requiring that the wheels be made
internally and sold to Wilson Division?
c. If the Sutton Division is now operating at full capacity and can sell all its units to outside customers
at the present selling price, what is the minimum selling price that Sutton should accept from Wilson
Division?
d. The Sutton Division cannot sell any additional products to outside customers. What is the minimum
selling price that Sutton should accept from the Wilson Division?

95. Buffalo Industries produces two products. Information about the products is as follows:

The company's fixed costs totaled $140,000, of which $30,000 can be directly traced to Product Q and
$90,000 can be directly traced to Product R. The effect on the firm's profits if Product R is dropped would
be:

96. Cameron Tool Company has two retail stores, one in Dallas and the other in Sand Creek. The Dallas
store had sales of $200,000, a contribution margin of 35 percent, and a segment margin of $28,000. The
company's two stores have total sales of $500,000, an average contribution margin of 32 percent, and a
total segment margin of $62,000. Prepare a segmented contribution approach statement for Cameron.

97. Bisson Industries has two divisions: the North Division and the South Division. Information relating to the
divisions for the year just ended is as follows:

Common fixed expenses have been allocated equally to each of the two divisions. Prepare a segmented
contribution approach income statement for Bisson

98. The operations of Hurley Corporation are divided into the Northern Division and the Eastern Division.
Projections for the next year are as follows:

a. Operating income for Hurley Corporation, as a whole, if the Eastern Division were dropped would be:
b. If Eastern Division is dropped, Northern's sales will increase by 20%. What will Hurley Corporation's
operating income be?

99. The Wood Company manufactures two products: A and B. The costs and revenues are as follows:

Total demand for Product A is 7,000 units and for Product B is 5,000 units. Machine time is a scarce
resource. During the year, 48,000 machine hours are available. Product A requires 6 machine hours per
unit, while Product B requires 2.5 machine hours per unit.
a. How many units of Products A and B should Wood produce?
b. What will be the maximum possible contribution margin?

100.Gerber Inc has 5,200 machine hours available each month. The following information on the company's
three products is available:

a. What production schedule will maximize the company's profits?


b. What will be the maximum possible contribution margin?

101.Osgood Inc has 6,400 machine hours available each month. The following information on the company's
three products is available:

a. What production schedule will maximize the company's profits?


b. What will be the maximum possible contribution margin?

102.The Rush Company manufactures two products: L and M. The costs and revenues are as follows:

Total demand for Product L is 2,000 units and for Product M is 1,000 units. Machine time is a scarce
resource. During the year, 36,000 machine hours are available.
a. How many units of Products L and M should Rush produce?

103.Gigure Inc has 3,600 machine hours available each month. The following information on the company's
three products is available:

a. What production schedule will maximize the company's profits?


b. What will be the maximum possible contribution margin?

104.Fleury Inc has 9,600 machine hours available each month. The following information on the company's
three products is available:

a. What production schedule will maximize the company's profits?


b. What will be the maximum possible contribution margin?

105.Bruce Industries manufactures 200,000 components per year. The manufacturing cost of the components
was determined as follows:

An outside supplier has offered to sell the component for $3.40. If Bruce purchases the component from the
outside supplier, the manufacturing facilities would be unused and could be rented out for $20,000.
a. If Bruce purchases the component from the supplier instead of manufacturing it, the effect on income
would be
b. What is the maximum price Bruce would be willing to pay the outside supplier?

106.Tofte Industries manufactures 30,000 components per year. The manufacturing cost of the components was
determined to be as follows:

a. Assume that the fixed manufacturing overhead reflects the cost of Tofte's manufacturing facility. This
facility cannot be used for any other purpose. An outside supplier has offered to sell the component to Tofte
for $34. If Tofte Industries purchases the component from the outside supplier, the effect on income would
be a
b. Assume Tofte Industries could avoid $80,000 of fixed manufacturing overhead if it purchases the
component from an outside supplier. An outside supplier has offered to sell the component for $34. If Tofte
purchases the component from the supplier instead of manufacturing it, the effect on income would be a

107.Explain the difference between full costs and differential costs.

108.Explain what is meant by "the full-cost fallacy" in making pricing decisions.

109.Explain the differences between life-cycle product costing and target costing.

110.Explain the distinction between predatory pricing and peak-load pricing.

111.Why is it important to consider opportunity costs in a make-or-buy decision?

ch4 Key
1.

Differential analysis involves the comparison of one or more alternative courses of action with the
status quo.
TRUE
This is the definition of differential analysis
AACSB: Analytic
AICPA: FN-Decision Making
Blooms: Knowledge
Difficulty: Easy
Lanen - Chapter 04 #1
Learning Objective: 1
Topic Area: Differential Analysis

2.

If there is only one alternative course of action and the status quo is unacceptable, then there really is no
decision to make.
TRUE
A decision needs at least two alternatives.
AACSB: Analytic
AICPA: FN-Decision Making
Blooms: Comprehension
Difficulty: Easy
Lanen - Chapter 04 #2
Learning Objective: 1
Topic Area: Differential Analysis

3.

A decision must involve at least two alternative courses of action.


TRUE
If there is only one alternative there is no decision to make.
AACSB: Analytic
AICPA: FN-Decision Making
Blooms: Comprehension
Difficulty: Medium
Lanen - Chapter 04 #3
Learning Objective: 1
Topic Area: Differential Analysis

4.

Differential analysis cannot be used for long-run decisions because it cannot incorporate the timing of
revenues and costs (i.e., the time-value of money).
FALSE
Time value of money can be incorporated into the analysis
AACSB: Analytic
AICPA: FN-Decision Making
Blooms: Comprehension
Difficulty: Medium
Lanen - Chapter 04 #4
Learning Objective: 1
Topic Area: Differential Analysis

5.

Short-run decisions often have long-run implications.


TRUE
Most decisions have long-run implications.
AACSB: Analytic
AICPA: FN-Decision Making
Blooms: Comprehension
Difficulty: Easy
Lanen - Chapter 04 #5
Learning Objective: 1
Topic Area: Differential Analysis

6.

Only variable costs can be differential costs.


FALSE
Fixed costs can differ between alternatives as well.
AACSB: Analytic
AICPA: FN-Decision Making
Blooms: Comprehension
Difficulty: Easy
Lanen - Chapter 04 #6
Learning Objective: 1
Topic Area: Differential Analysis

7.

Fixed costs are always classified as sunk costs in differential cost analysis.
FALSE
Fixed costs can also be differential.
AACSB: Analytic
AICPA: FN-Decision Making
Blooms: Comprehension
Difficulty: Easy
Lanen - Chapter 04 #7
Learning Objective: 1
Topic Area: Differential Analysis

8.

The full cost fallacy occurs when a decision-maker fails to include fixed manufacturing overhead in the
product's cost.
FALSE
The fallacy occurs when fixed costs are included.
AACSB: Analytic
AICPA: FN-Decision Making
Blooms: Comprehension
Difficulty: Medium
Lanen - Chapter 04 #8
Learning Objective: 2
Topic Area: Differential Analysis and Pricing Decisions

9.

When deciding whether or not to accept a special order, a decision-maker should focus on differential
costs instead of full costs.
TRUE
Full costs will include some costs that do not differ and should be excluded.
AACSB: Analytic
AICPA: FN-Decision Making
Blooms: Application
Difficulty: Easy
Lanen - Chapter 04 #9
Learning Objective: 2
Topic Area: Differential Analysis and Pricing Decisions

10.

The differential analysis approach to pricing for special orders could lead to under-pricing in the longrun because fixed costs are not included in the analysis.
TRUE
In the long run fixed costs become differential and should be included.
AACSB: Analytic
AICPA: FN-Decision Making
Blooms: Application
Difficulty: Medium
Lanen - Chapter 04 #10
Learning Objective: 2
Topic Area: Differential Analysis and Pricing Decisions

11.

Target costs equal the difference between the target selling price and the desired profit margin.
TRUE
Target cost focuses on what level of costs would be allowed.
AACSB: Analytic
AICPA: FN-Decision Making
Blooms: Knowledge
Difficulty: Easy
Lanen - Chapter 04 #11
Learning Objective: 3
Topic Area: Cost Analysis for Pricing

12.

Dumping occurs when a company exports its product to consumers in another country at an export price
that is below the domestic price.
TRUE
This is the definition of dumping.
AACSB: Analytic
AICPA: BB-Legal
Blooms: Knowledge
Difficulty: Easy
Lanen - Chapter 04 #12
Learning Objective: 3
Topic Area: Legal Issues Relating to Costs and Sales Prices

13.

Price discrimination is the practice of selling identical goods or services to different customers at
different prices.
TRUE
This is the definition of price discrimination.
AACSB: Analytic
AICPA: BB-Legal
Blooms: Knowledge
Difficulty: Easy
Lanen - Chapter 04 #13
Learning Objective: 3
Topic Area: Legal Issues Relating to Costs and Sales Prices

14.

Peak load pricing is the practice of setting prices lowest when the quantity demanded for the product
approaches the physical capacity to produce it.
FALSE
Prices are set highest when capacity is being approached.
AACSB: Analytic
AICPA: BB-Industry
Blooms: Comprehension
Difficulty: Easy
Lanen - Chapter 04 #14
Learning Objective: 3
Topic Area: Legal Issues Relating to Costs and Sales Prices

15.

The alternative courses of action in a make-or-buy decision are (a) manufacture needed items internally
or (b) purchase needed items externally.
TRUE
Make = internal; buy = external
AACSB: Analytic
AICPA: FN-Decision Making
Blooms: Comprehension
Difficulty: Easy
Lanen - Chapter 04 #15
Learning Objective: 4
Topic Area: Make-It or Buy-It Decisions

16.

The reason opportunity costs are not included in the accounting system is because they involve
estimates.
FALSE
They are not included in the system because they are not the result of a transaction. Many items
included in the accounting system involve estimates (such as depreciation).
AACSB: Analytic
AICPA: FN-Measurement
Blooms: Comprehension
Difficulty: Medium
Lanen - Chapter 04 #16
Learning Objective: 4
Topic Area: Opportunity Costs of Making

17.

Financial statements prepared in accordance with generally accepted accounting principles (GAAP)
provide differential cost information.
FALSE
GAAP has a focus of comparability, not decision relevance.
AACSB: Analytic
AICPA: FN-Measurement
Blooms: Comprehension
Difficulty: Easy
Lanen - Chapter 04 #17
Learning Objective: 4
Topic Area: Make-It or Buy-It Decisions

18.

In the short-run, plant capacity is fixed and product choices have to be made that optimize the use of
available capacity.
TRUE
In the short run, capacity is set and cannot be expanded.
AACSB: Analytic
AICPA: FN-Decision Making
Blooms: Comprehension
Difficulty: Easy
Lanen - Chapter 04 #18
Learning Objective: 4
Topic Area: Product Choice Decisions

19.

With constrained resources, the important measure of profitability is the contribution margin per unit of
scarce resource.
TRUE
You are concerned with the best use of the resource, so you want to maximize the profit.
AACSB: Analytic
AICPA: FN-Decision Making
Blooms: Comprehension
Difficulty: Easy
Lanen - Chapter 04 #19
Learning Objective: 4
Topic Area: Product Choice Decisions

20.

The theory of constraints focuses on determining the optimal product mix when one or more resources
restrict the attainment of a goal or objective.
TRUE
This is the core idea of the theory of constraints.
AACSB: Analytic
AICPA: FN-Decision Making
Blooms: Comprehension
Difficulty: Easy
Lanen - Chapter 04 #20
Learning Objective: 5
Topic Area: Theory of Constraints

21.

The relevance of a particular cost to a decision is determined by the: (CMA adapted)


A.
B.
C.
D.
E.

riskiness of the decision.


number of decision variables.
amount of the cost.
potential effect on the decision.
accuracy of the cost.

Relevance is predicated upon whether it affects a decision.


AACSB: Analytic
AICPA: FN-Decision Making
Blooms: Comprehension
Difficulty: Easy
Lanen - Chapter 04 #21
Learning Objective: 1
Topic Area: Differential Analysis

22.

In a decision analysis situation, which one of the following costs is not likely to contain a variable cost
component? (CMA adapted)
A.
B.
C.
D.
E.

Labor
Overhead
Straight-line Depreciation
Selling
Material

Straight-line depreciation is a fixed cost since it is the same amount each period.
AACSB: Analytic
AICPA: FN-Decision Making
Blooms: Application
Difficulty: Easy
Lanen - Chapter 04 #22
Learning Objective: 1
Topic Area: Differential Analysis

23.

Which of the following statements regarding differential costs is (are) false?


(A) The full cost fallacy occurs when a decision-maker fails to include fixed manufacturing overhead in
the product's cost.
(B) When deciding whether or not to accept a special order, a decision-maker should focus on
differential costs instead of full costs.
A.
B.
C.
D.

Only A.
Only B.
Neither A nor B is false.
Both A and B are true.

The full cost fallacy is when fixed costs are included.


AACSB: Analytic
AICPA: FN-Decision Making
Blooms: Comprehension
Difficulty: Medium
Lanen - Chapter 04 #23
Learning Objective: 2
Topic Area: Differential Analysis and Pricing Decisions

24.

Which of the following costs are irrelevant for a special order that will allow an organization to utilize
some of its present idle capacity?
A.
B.
C.
D.
E.

Direct materials
Indirect materials
Variable overhead
Unavoidable fixed overhead
Differential sales commission

Fixed overhead will be there anyway.


AACSB: Analytic
AICPA: FN-Decision Making
Blooms: Application
Difficulty: Easy
Lanen - Chapter 04 #24
Learning Objective: 2
Topic Area: Short-Run Pricing Decisions: Special Orders

25.

Which of the following statements regarding special orders is (are) true?


(A) The primary decision for special orders is determining whether the differential revenue is greater
than the differential costs associated with the order.
(B) The differential analysis approach to pricing for special orders could lead to underpricing in the
long-run because fixed costs are not included in the analysis.
A.
B.
C.
D.

Only A.
Only B.
Neither A nor B is false.
Both A and B are true.

(A) looks at the short-run while (B) has a long run view.
AACSB: Analytic
AICPA: FN-Decision Making
Blooms: Comprehension
Difficulty: Easy
Lanen - Chapter 04 #25
Learning Objective: 2
Topic Area: Short-Run Pricing Decisions: Special Orders

26.

Which of the following costs are not considered in a differential analysis for a make-or-buy decision?
A.
B.
C.
D.
E.

Indirect materials and indirect labor if the item is manufactured internally


Direct materials and direct labor if the item is purchased
Variable overhead if the item is manufactured internally
Fixed overhead that can be avoided if the item is purchased
Fixed overhead that will continue if the item is purchased

A cost that does not change is not included in the analysis


AACSB: Analytic
AICPA: FN-Decision Making
Blooms: Comprehension
Difficulty: Medium
Lanen - Chapter 04 #26
Learning Objective: 3
Topic Area: Make-It or Buy-It Decisions

27.

For the past five years, the RS Company has produced and sold electronic magnets to chemistry
labs throughout the United States. Recently, a strong competitor has entered the market and RS is
considering whether it should continue to produce and sell the electronic magnets. The following
information has been gathered to assist management in their decision:
A) The machinery used to produce the magnet was purchased five-years ago for $500,000.
B) Four of the employees who produce magnets would be reassigned to the magnifying glass division.
C) The space now used to produce the magnets would be used to eliminate the need to rent warehouse
space.
D) Sales volume (units) is estimated to drop by 50% once the competitor becomes fully operational.
Which of the items listed above is (are) relevant to the decision to continue the production and sale of
the electronic magnets?
A.
B.
C.
D.
E.

A and C.
B and C.
C and D.
A, B, and D.
B, C, and D.

(A) is a sunk cost, (B) will be there anyway, (C & D) would differ
AACSB: Analytic
AICPA: FN-Decision Making
Blooms: Application
Difficulty: Medium
Lanen - Chapter 04 #27
Learning Objective: 4
Topic Area: Decision to Add or Drop a Product Line or Close a Business Unit

28.

Which of the following statements about the theory of constraints is (are) true?
(A) The theory of constraints focuses on determining the optimal product mix when one or more
resources restrict the attainment of a goal or objective.
(B) The theory of constraints focuses on maximizing the rate of throughput contribution while
minimizing investment and other operating costs.
A.
B.
C.
D.

Only A.
Only B.
Neither A nor B is true.
Both A and B are true.

Both statements are true


AACSB: Analytic
AICPA: FN-Decision Making
Blooms: Comprehension
Difficulty: Easy
Lanen - Chapter 04 #28
Learning Objective: 5
Topic Area: Theory of Constraints

29.

The theory of constraints focuses on maximizing throughput contribution margin while minimizing all
of the following except
A.
B.
C.
D.

selling expenses per unit sold.


production bottlenecks.
investment in buildings.
investment in inventories.

Selling expenses are not necessarily minimized.


AACSB: Analytic
AICPA: FN-Decision Making
Blooms: Application
Difficulty: Easy
Lanen - Chapter 04 #29
Learning Objective: 5
Topic Area: Theory of Constraints

30.

The AZ Company manufactures kitchen utensils. The company is currently producing well below its
full capacity. The BV Company has approached AZ with an offer to buy 20,000 utensils at $0.75 each.
AZ sells its utensils wholesale for $0.85 each; the average cost per unit is $0.83, of which $0.12 is fixed
costs. If AZ were to accept BV's offer, what would be the increase in AZ's operating profits?
A.
B.
C.
D.
E.

$400
$800
$1,600
$2,000
AZ's operating profits will not increase as a result of accepting the special order.

[$0.75 - ($0.83 - 0.12)] 20,000 = $800


AACSB: Analytic
AICPA: FN-Decision Making
Blooms: Application
Difficulty: Easy
Lanen - Chapter 04 #30
Learning Objective: 2
Topic Area: Short-Run Pricing Decisions: Special Orders

31.

The MNK Company has gathered the following information for a unit of its most popular product:

The above cost information is based on 4,000 units. A foreign distributor has offered to buy 1,000 units
at a price of $16 per unit. This special order would not disturb regular sales. Variable shipping and other
selling expenses would be an additional $1 per unit for the special order. If the special order is accepted,
MNK's operating profits will increase by:
A.
B.
C.
D.
E.

$1,000.
$1,600.
$2,000.
$4,000.
$5,000.

[$16 - 6 - 3 - 2 - 1] 1,000 = $4,000


AACSB: Analytic
AICPA: FN-Decision Making
Blooms: Application
Difficulty: Medium
Lanen - Chapter 04 #31
Learning Objective: 2
Topic Area: Short-Run Pricing Decisions: Special Orders

32.

The following information relates to the Tram Company for the upcoming year.

The cost of goods sold includes $1,200,000 of fixed manufacturing overhead; the operating expenses
include $100,000 of fixed marketing expenses. A special order offering to buy 50,000 units for $7.50
per unit has been made to Tram. Fortunately, there will be no additional operating expenses associated
with the order and Tram has sufficient capacity to handle the order. How much will operate profits be
increased if Tram accepts the special order?
A.
B.
C.
D.
E.

$25,000
$62,500
$100,000
$125,000
Operating profits will not increase as a result of accepting the special order.

Cost of sales: (3,200,000 - 1,200,000)/400,000 = $5; Operating Exp: (300,000 - 100,000)/400,000 =


0.50; Sales $7.50 - 5 - 0.50 = $2 50,000 units = $100,000
AACSB: Analytic
AICPA: FN-Decision Making
Blooms: Application
Difficulty: Hard
Lanen - Chapter 04 #32
Learning Objective: 2
Topic Area: Short-Run Pricing Decisions: Special Orders

33.

The Regal Baking Company is considering the expansion of its business into door-to-door delivery
service. This would require an additional $12,500 in labor costs per month. Company-owned vehicles
now used to make morning deliveries to restaurants could be used in the afternoons to make the home
deliveries. However, it is estimated that an additional $5,000 would be required per month for gas, oil,
and maintenance. It is further estimated that the home delivery use of the trucks would be allocated 45%
of the existing $6,500 fixed vehicle costs. What is the differential delivery cost per month for expanding
into the home delivery market?
A.
B.
C.
D.

$12,500
$17,500
$19,750
$20,425

$12,500 + $5,000 = $17,500


AACSB: Analytic
AICPA: FN-Decision Making
Blooms: Application
Difficulty: Easy
Lanen - Chapter 04 #33
Learning Objective: 3
Topic Area: Long-Run Pricing Decisions

34.

The Blade Division of Axe Company produces hardened steel blades. One-third of Blade's output
is sold to the Forestry Products Division of Axe; the remainder is sold to outside customers. Blades'
estimated operating profit for the year is:

The Forestry Division has an opportunity to purchase 10,000 blades of the same quality from an outside
supplier on a continuing basis. The Blade Division cannot sell any additional products to outside
customers. Should the Axe Company allow its Forestry Division to purchase the blades from the outside
supplier at $1.25 per unit?
A.
B.
C.
D.

No; making the blades will save Axe $1,500.


Yes; buying the blades will save Axe $1,500.
No; making the blades will save Axe $2,500.
Yes; buying the blades will save Axe $2,500.

Cost to buy externally - $1.25(10,000 units) = $12,500


Cost to make internally - $1.00(10,000 units) = $10,000
AACSB: Analytic
AICPA: FN-Decision Making
Blooms: Application
Difficulty: Hard
Lanen - Chapter 04 #34
Learning Objective: 4
Topic Area: Make-It or Buy-It Decisions

35.

The Blade Division of Axe Company produces hardened steel blades. One-third of Blade's 30,000 unit
output is sold to the Forestry Products Division of Axe; the remainder is sold to outside customers.
Blades' estimated operating profit for the year is:

The Forestry Division has an opportunity to purchase 10,000 blades of the same quality from an
outside supplier on a continuing basis. The purchase price would be $1.25. If the Blade Division is now
operating at full capacity and can sell all its units to outside customers at the present selling price, what
is the differential cost to Axe of requiring that the blades be made internally and sold to the Forestry
Division?
A.
B.
C.
D.

$2,500
$5,000
$7,500
$10,000

Lost CM (2 - 1) = $1; savings by making (1.25 - 1) = .25; Net loss: 1 - 0.25 = 0.75 10,000 units =
$7,500
AACSB: Analytic
AICPA: FN-Decision Making
Blooms: Application
Difficulty: Hard
Lanen - Chapter 04 #35
Learning Objective: 4
Topic Area: Make-It or Buy-It Decisions

36.

The CJP Company produces 10,000 units of item S10 annually at a total cost of $190,000.

The XYZ Company has offered to supply 10,000 units of S10 per year for $18 per unit. If CJP accepts
the offer, $4 per unit of the fixed overhead would be saved. In addition, some of CJP's facilities could be
rented to a third party for $15,000 per year. What are the relevant costs for the "make" alternative?
A.
B.
C.
D.

$160,000
$165,000
$175,000
$185,000

$20,000 + 55,000 + 45,000 + (4 10,000) + 15,000 = $175,000


AACSB: Analytic
AICPA: FN-Decision Making
Blooms: Application
Difficulty: Medium
Lanen - Chapter 04 #36
Learning Objective: 4
Topic Area: Make-It or Buy-It Decisions

37.

The CJP Company produces 10,000 units of item S10 annually at a total cost of $190,000.

The XYZ Company has offered to supply 10,000 units of S10 per year for $18 per unit. If CJP accepts
the offer, $4 per unit of the fixed overhead would be saved. In addition, some of CJP's facilities could be
rented to a third party for $15,000 per year. At what price would CJP be indifferent to XYZ's offer?
A.
B.
C.
D.

$17.00
$17.50
$18.50
$19.50

$20,000 + 55,000 + 45,000 + (4 10,000) + 15,000 = $175,000


$175,000/10,000 = $17.50
AACSB: Analytic
AICPA: FN-Decision Making
Blooms: Application
Difficulty: Medium
Lanen - Chapter 04 #37
Learning Objective: 4
Topic Area: Make-It or Buy-It Decisions

38.

Differential costs are (CMA adapted)


A.
B.
C.
D.

the difference in total costs that result from selecting one choice instead of another.
the profit foregone by selecting one choice instead of another.
a cost that continues to be incurred in the absence of activity.
a cost common to all choices in questions and not clearly allocable to any of them.

This is the definition of differential costs.


AACSB: Analytic
AICPA: FN-Decision Making
Blooms: Comprehension
Difficulty: Easy
Lanen - Chapter 04 #38
Learning Objective: 1
Topic Area: Differential Analysis

39.

The period of time over which capacity will be unchanged is


A.
B.
C.
D.

long run
sunk cost
short run
product life cycle

In the long run capacity can be adjusted, in the short run it cannot.
AACSB: Analytic
AICPA: FN-Decision Making
Blooms: Comprehension
Difficulty: Easy
Lanen - Chapter 04 #39
Learning Objective: 2
Topic Area: Differential Analysis and Pricing Decisions

40.

The time from initial research and development to the time that support to the customer ends is the
A.
B.
C.
D.

product life cycle


short run
target time
predatory price

This is the definition of product life cycle.


AACSB: Analytic
AICPA: FN-Decision Making
Blooms: Knowledge
Difficulty: Easy
Lanen - Chapter 04 #40
Learning Objective: 3
Topic Area: Cost Analysis for Pricing

41.

The price based on customers' perceived value for the product and the price that competitors charge:
A.
B.
C.
D.

predatory price
target price
target cost
dumping price

This is the definition of target price.


AACSB: Analytic
AICPA: FN-Decision Making
Blooms: Knowledge
Difficulty: Easy
Lanen - Chapter 04 #41
Learning Objective: 3
Topic Area: Cost Analysis for Pricing

42.

The practice of setting price below cost with the intent to drive competitors out of business:
A.
B.
C.
D.

predatory pricing
target pricing
target costing
peak-load pricing

This is the definition of predatory pricing.


AACSB: Analytic
AICPA: BB-Legal
Blooms: Knowledge
Difficulty: Easy
Lanen - Chapter 04 #42
Learning Objective: 3
Topic Area: Legal Issues Relating to Costs and Sales Prices

43.

The practice of setting prices highest when the quantity demanded for the product approaches capacity:
A.
B.
C.
D.

predatory pricing
target pricing
peak-load pricing
price fixing

This is the definition of peak-load pricing.


AACSB: Analytic
AICPA: FN-Decision Making
Blooms: Knowledge
Difficulty: Easy
Lanen - Chapter 04 #43
Learning Objective: 3
Topic Area: Legal Issues Relating to Costs and Sales Prices

44.

Agreement among business competitors to set prices at a particular level:


A.
B.
C.
D.

predatory pricing
target pricing
peak-load pricing
price fixing

This is the definition of price fixing.


AACSB: Analytic
AICPA: BB-Legal
Blooms: Knowledge
Difficulty: Easy
Lanen - Chapter 04 #44
Learning Objective: 3
Topic Area: Legal Issues Relating to Costs and Sales Prices

45.

Exporting a product to another country at a price below domestic cost:


A.
B.
C.
D.

dumping
target pricing
peak-load pricing
price fixing

This is the definition of dumping.


AACSB: Analytic
AICPA: BB-Legal
Blooms: Knowledge
Difficulty: Easy
Lanen - Chapter 04 #45
Learning Objective: 3
Topic Area: Legal Issues Relating to Costs and Sales Prices

46.

A target cost is computed as


A.
B.
C.
D.

cost to manufacture plus a desired markup


cost to manufacture plus designated selling expenses
market willingness to pay - cost to manufacture
market willingness to pay - desired profit

Target cost is based on external market prices and desired profit. In essence, how much can a product
cost?
AACSB: Analytic
AICPA: FN-Decision Making
Blooms: Knowledge
Difficulty: Easy
Lanen - Chapter 04 #46
Learning Objective: 3
Topic Area: Cost Analysis for Pricing

47.

The operations of Blink Corporation are divided into the Will Division and the Aloy Division.
Projections for the next year are as follows:

Operating income for Blink Corporation as a whole if the Carter Division were dropped would be
A.
B.
C.
D.

$133,000
$112,000
$91,000
$49,000

$112,000 - 63,000 = $49,000


AACSB: Analytic
AICPA: FN-Decision Making
Blooms: Analysis
Difficulty: Medium
Lanen - Chapter 04 #47
Learning Objective: 4
Topic Area: Decision to Add or Drop a Product Line or Close a Business Unit

48.

Bryon Industries manufactures 20,000 components per year. The manufacturing cost of the components
was determined as follows:

An outside supplier has offered to sell the component for $17. If Bryon purchases the component from
the outside supplier, the manufacturing facilities would be unused and could be rented out for $10,000.
If Bryon purchases the component from the supplier instead of manufacturing it, the effect on income
would be:
A.
B.
C.
D.

a $70,000 increase
a $50,000 decrease
a $10,000 decrease
a $30,000 increase

Make: $100,000 + 160,000 + 60,000 = $320,000


Buy: 20,000 17 = $340,000 - 10,000 = $330,000
Make 320,000 - Buy 330,000 = -10,000 decrease in income to Buy
AACSB: Analytic
AICPA: FN-Decision Making
Blooms: Analysis
Difficulty: Medium
Lanen - Chapter 04 #48
Learning Objective: 4
Topic Area: Make-It or Buy-It Decisions

49.

Albany Industries produces two products. Information about the products is as follows:

The company's fixed costs totaled $70,000, of which $15,000 can be directly traced to Product 1 and
$40,000 can be directly traced to Product 2. The effect on the firm's profits if Product 2 is dropped
would be a
A.
B.
C.
D.

$10,000 increase
$35,000 increase
$35,000 decrease
$10,000 decrease

Current profit: (4,000 6 + 10,000 5) - 70,000 = 4,000


Profit of only Product 1: (4,000 6) - (70,000 - 40,000) = 24,000 - 30,000 = -6,000
Current 4,000 - New (-6,000) = -10,000 decrease
Profit of only Product 1:
AACSB: Analytic
AICPA: FN-Decision Making
Blooms: Analysis
Difficulty: Medium
Lanen - Chapter 04 #49
Learning Objective: 4
Topic Area: Decision to Add or Drop a Product Line or Close a Business Unit

50.

Which of the following costs would continue to be incurred even if a segment is eliminated?
A.
B.
C.
D.

Direct fixed expenses


Variable cost of goods sold
Common fixed costs
Variable selling and administrative expenses

Common fixed costs continue even though a segment is eliminated.


AACSB: Analytic
AICPA: FN-Decision Making
Blooms: Comprehension
Difficulty: Medium
Lanen - Chapter 04 #50
Learning Objective: 4
Topic Area: Decision to Add or Drop a Product Line or Close a Business Unit

51.

NorWest Shoe Company has two retail stores, one in Albertville and the other in Bloomer. The
Albertville store had sales of $100,000, a contribution margin of 35 percent, and a segment margin of
$14,000. The company's two stores have total sales of $250,000, contribution margin of 32 percent, and
a total segment margin of $31,000. The contribution margin for the Bloomer store must have been
A.
B.
C.
D.

$65,000
$170,000
$105,000
$45,000

Total CM: 250,000 32% = $80,000


Albertville CM: 100,000 35% = 35,000
Bloomer = 80,000 - 35,000 = 45,000
AACSB: Analytic
AICPA: FN-Decision Making
Blooms: Analysis
Difficulty: Medium
Lanen - Chapter 04 #51
Learning Objective: 4
Topic Area: Decision to Add or Drop a Product Line or Close a Business Unit

52.

Miller Industries has two divisions: the West Division and the East Division. Information relating to the
divisions for the year just ended is as follows:

Common fixed expenses have been allocated equally to each of the two divisions. Miller's segment
margin for the West Division is
A.
B.
C.
D.

$150,000
$102,000
$30,000
$110,000

(30,000 5) - 48,000 = $102,000


AACSB: Analytic
AICPA: FN-Decision Making
Blooms: Analysis
Difficulty: Medium
Lanen - Chapter 04 #52
Learning Objective: 4
Topic Area: Decision to Add or Drop a Product Line or Close a Business Unit

53.

Chetek Industries manufactures 15,000 components per year. The manufacturing cost of the
components was determined to be as follows:

Assume that the fixed manufacturing overhead reflects the cost of Chetek's manufacturing facility. This
facility cannot be used for any other purpose. An outside supplier has offered to sell the component to
Chetek for $34. If Chetek Industries purchases the component from the outside supplier, the effect on
income would be a
A.
B.
C.
D.

$30,000 decrease
$30,000 increase
$90,000 decrease
$90,000 increase

Make: 150,000 + 240,000 + 90,000 = $480,000


Buy: 15,000 34 = $510,000
Make 480,000 - Buy 510,000 = -30,000 decrease
AACSB: Analytic
AICPA: FN-Decision Making
Blooms: Analysis
Difficulty: Medium
Lanen - Chapter 04 #53
Learning Objective: 4
Topic Area: Make-It or Buy-It Decisions

54.

Chetek Industries manufactures 15,000 components per year. The manufacturing cost of the
components was determined to be as follows:

Assume Chetek Industries could avoid $40,000 of fixed manufacturing overhead if it purchases the
component from an outside supplier. An outside supplier has offered to sell the component for $34. If
Chetek purchases the component from the supplier instead of manufacturing it, the effect on income
would be a
A.
B.
C.
D.

$60,000 increase
$10,000 increase
$100,000 decrease
$140,000 increase

Make: 150,000 + 240,000 + 90,000 = $480,000


Buy: 15,000 34 = $510,000 - 40,000 = 470,000
Make 480,000 - Buy 470,000 = 10,000 increase
AACSB: Analytic
AICPA: FN-Decision Making
Blooms: Analysis
Difficulty: Medium
Lanen - Chapter 04 #54
Learning Objective: 4
Topic Area: Make-It or Buy-It Decisions

55.

The operations of Superior Corporation are divided into the Northrup Division and the Hawley
Division. Projections for the next year are as follows:

Operating income for Superior Corporation, as a whole, if the Hawley Division were dropped would be
A.
B.
C.
D.

$45,000
$80,000
$100,000
$120,000

170,000 - 125,000 = $45,000


AACSB: Analytic
AICPA: FN-Decision Making
Blooms: Analysis
Difficulty: Medium
Lanen - Chapter 04 #55
Learning Objective: 4
Topic Area: Decision to Add or Drop a Product Line or Close a Business Unit

56.

The following information relates to a product produced by Ashland Company:

Fixed selling costs are $1,000,000 per year. Variable selling costs of $4 per unit sold are added to
cover the transportation cost. Although production capacity is 500,000 units per year, Ashland expects
to produce only 400,000 units next year. The product normally sells for $40 each. A customer has
offered to buy 60,000 units for $30 each. The customer will pay the transportation charge on the units
purchased. If Ashland accepts the special order, the effect on income would be a
A.
B.
C.
D.

$60,000 increase
$180,000 increase
$420,000 increase
$600,000 decrease

30 - (10 + 7 + 6) = $7 60,000 = 420,000 increase: the selling costs do not need to be included since
the customer pays for them
AACSB: Analytic
AICPA: FN-Decision Making
Blooms: Analysis
Difficulty: Medium
Lanen - Chapter 04 #56
Learning Objective: 2
Topic Area: Short-Run Pricing Decisions: Special Orders

57.

If there is excess capacity, the minimum acceptable price for a special order must cover
A. only variable costs associated with the special order.
B. variable and fixed manufacturing costs associated with the special order.
C. variable and incremental fixed costs associated with the special order.
D variable costs and incremental fixed costs associated with the special order, plus the contribution
. margin usually earned on regular units.
The differential costs must be covered. There are no opportunity costs since there is excess capacity.
AACSB: Analytic
AICPA: FN-Decision Making
Blooms: Application
Difficulty: Medium
Lanen - Chapter 04 #57
Learning Objective: 2
Topic Area: Short-Run Pricing Decisions: Special Orders

58.

The Winwood Company manufactures two products: Q and T. The costs and revenues are as follows:

Total demand for Product Q is 14,000 units and for Product T is 9,000 units. Machine time is a scarce
resource. During the year, 54,000 machine hours are available. Product Q requires 5 machine hours per
unit, while Product T requires 3 machine hours per unit.
How many units of Products Q and T should Winwood produce?

A.
B.
C.
D.

a
b
c
d

Product Q CM/hr: ($150 - 80)/5 = $14; Product T CM/hr: ($88 - 42)/3 = $15.33: Produce T first: 9,000
units of T 3 hrs = 27,000 hours used: 54,000 - 27,000 = 27,000 hours remaining: Product Q: 27,000
hours available/5 = 5,400 units
AACSB: Analytic
AICPA: FN-Decision Making
Blooms: Analysis
Difficulty: Medium
Lanen - Chapter 04 #58
Learning Objective: 4
Topic Area: Product Choice Decisions

59.

Roswell Inc has 5,400 machine hours available each month. The following information on the
company's three products is available:

If market demand exceeds the available capacity, in what sequence should orders be filled to maximize
the company's profits?
A.
B.
C.
D.

Product 1 first, product 2 second, and product 3 third


Product 2 first, product 3 second, and product 1 third
Product 3 first, product 2 second, and product 1 third
Product 3 first, product 1 second, and product 2 third

P1 CM/hr = 15/3 = $5; P2: 18/2 = $9; P3: 7.50/1 = $7.50


Priority would be P2 ($9/hr) followed by P3 ($7.50) and P1 ($5)
AACSB: Analytic
AICPA: FN-Decision Making
Blooms: Analysis
Difficulty: Medium
Lanen - Chapter 04 #59
Learning Objective: 4
Topic Area: Product Choice Decisions

60.

Lerner Inc has 6,600 machine hours available each month. The following information on the company's
three products is available:

If market demand exceeds the available capacity, in what sequence should orders be filled to maximize
the company's profits?
A.
B.
C.
D.

Product X first, product Z second, and product Y third


Product Y first, product Z second, and product X third
Product Y first, product X second, and product Z third
Product Z first, product X second, and product Y third

X CM/hr = 20/2 = $10; Y: 21/3 = $7; Z: 17.50/2 = 8.75


Priority would be X ($10/hr) followed by Z ($8.75) and Y ($7)
AACSB: Analytic
AICPA: FN-Decision Making
Blooms: Analysis
Difficulty: Medium
Lanen - Chapter 04 #60
Learning Objective: 4
Topic Area: Product Choice Decisions

61.

The Clapton Company manufactures two products: Alpha and Beta. The costs and revenues are as
follows:

Total demand for Alpha is 10,000 units and for Beta is 6,000 units. Machine hours is a scarce resource.
During the year, 50,000 machine hours are available. Alpha requires 4 machine hours per unit, while
Beta requires 2.5 machine hours per unit.
How many units of Alpha and Beta should Clapton produce?

A.
B.
C.
D.

a
b
c
d

Alpha CM/hr: (75 - 40)/4 = $8.75; Beta CM/hr: (44 - 21)/2.5 = 9.20: Produce Beta first: 6,000 units of
Beta 2.5 hrs = 15,000 hours used: 50,000 - 15,000 = 35,000 hours remaining: Alpha: 35,000 hours
available/4 = 8,750 units
AACSB: Analytic
AICPA: FN-Decision Making
Blooms: Analysis
Difficulty: Medium
Lanen - Chapter 04 #61
Learning Objective: 4
Topic Area: Product Choice Decisions

62.

The Clapton Company manufactures two products: Alpha and Beta. The costs and revenues are as
follows:

Total demand for Alpha is 10,000 units and for Beta is 6,000 units. Machine time is a scarce resource.
During the year, 50,000 machine hours are available. Alpha requires 4 machine hours per unit, while
Beta requires 2.5 machine hours per unit.
What is the maximum contribution margin Clapton can achieve during a year?
A.
B.
C.
D.

$444,250
$1,014,000
$488,000
$855,500

Alpha CM/hr: (75 - 40)/4 = $8.75; Beta CM/hr: (44 - 21)/2.5 = 9.20: Produce Beta first: 6,000 units of
Beta 2.5 hrs = 15,000 hours used: 50,000 - 15,000 = 35,000 hours remaining: Alpha: 35,000 hours
available/4 = 8,750 units: CM = 8,750 $35 + 6,000 $23 = $444,250
AACSB: Analytic
AICPA: FN-Decision Making
Blooms: Analysis
Difficulty: Hard
Lanen - Chapter 04 #62
Learning Objective: 4
Topic Area: Product Choice Decisions

63.

Zurek Inc has 5,400 machine hours available each month. The following information on the company's
three products is available:

The market demand is limited to 2,000 units of each of the three products. How many units of each
should Zurek produce and sell?

A.
B.
C.
D.

a
b
c
d

P1 CM/hr = 15/3 = $5; P2: 18/2 = $9; P3: 7.50/1 = $7.50


Priority would be P2 ($9/hr) followed by P3 ($7.50) and P1 ($5): 2,000 units of P2 2 hrs = 4,000 hrs;
5,400 - 4,000 = 1,400 hrs remaining; P3 1,400 units, P1 0 units
AACSB: Analytic
AICPA: FN-Decision Making
Blooms: Analysis
Difficulty: Medium
Lanen - Chapter 04 #63
Learning Objective: 4
Topic Area: Product Choice Decisions

64.

Zurek Inc has 5,400 machine hours available each month. The following information on the company's
three products is available:

The market demand is limited to 2,000 units of each of the three products. What is the maximum
possible contribution margin that Zurek could make in any month?
A.
B.
C.
D.

$81,000
$46,500
$43,000
$51,000

P1 CM/hr = 15/3 = $5; P2: 18/2 = $9; P3: 7.50/1 = $7.50


Priority would be P2 ($9/hr) followed by P3 ($7.50) and P1 ($5): 2,000 units of P2 2 hrs = 4,000 hrs;
5,400 - 4,000 = 1,400 hrs remaining; P3 1,400 units, P1 0 units
CM: 0 $15 + 2,000 $18 + 1,400 $7.50 = $46,500
AACSB: Analytic
AICPA: FN-Decision Making
Blooms: Analysis
Difficulty: Hard
Lanen - Chapter 04 #64
Learning Objective: 4
Topic Area: Product Choice Decisions

65.

Winton Inc has 12,000 machine hours available each month. The following information on the
company's four products is available:

If market demand exceeds the available capacity, in what sequence should orders be filled to maximize
the company's profits?
A.
B.
C.
D.

Product W first, product X second, product Z third, and product Y last.


Product Z first, product W second, product X third, and product Y last.
Product X first, product W second, product Y third, and product Z last.
Product X first, product Z second, product Y third, and product W last.

W CM/hr = (20 - 10)/2 = $5; X: (21 - 9)/3 = $4; Y: (17.50 - 7.50)/2.5 = 2.50; Z: (15 - 10)/1.5 = $3.33
Priority would be W ($5/hr) followed by X ($4), Z ($3.33) and Y ($2.50)
AACSB: Analytic
AICPA: FN-Decision Making
Blooms: Analysis
Difficulty: Medium
Lanen - Chapter 04 #65
Learning Objective: 4
Topic Area: Product Choice Decisions

66.

The Axle Division of Becker Company produces axles for off-road sport vehicles. One-third of Axle's
output is sold to an internal division of Becker; the remainder is sold to outside customers. Axle's
estimated operating profit for the year is:

The internal division has an opportunity to purchase 10,000 axles of the same quality from an outside
supplier on a continuing basis. The Axle Division cannot sell any additional products to outside
customers. Should the Becker Company allow its internal division to purchase the axles from the
outside supplier at $13.00 per unit?
A.
B.
C.
D.

No; making the axles will save Becker $15,000.


Yes; buying the axles will save Becker $15,000.
No; making the axles will save Becker $30,000.
Yes; buying the axles will save Becker $30,000.

Cost to buy externally - $13.00 10,000 units = $130,000


Cost to make internally - $10.00 10,000 units = $100,000
AACSB: Analytic
AICPA: FN-Decision Making
Blooms: Application
Difficulty: Hard
Lanen - Chapter 04 #66
Learning Objective: 4
Topic Area: Make-It or Buy-It Decisions

67.

The Axle Division of Becker Company produces axles for off-road sport vehicles. One-third of Axle's
30,000 unit output is sold to an internal division of Becker; the remainder is sold to outside customers.
Axles' estimated operating profit for the year is:

The internal division has an opportunity to purchase 10,000 axles of the same quality from an outside
supplier on a continuing basis. The purchase price would be $13.00. If the Axle Division is now
operating at full capacity and can sell all its units to outside customers at the present selling price, what
is the differential cost to Becker of requiring that the axles be made internally and sold to the internal
division?
A.
B.
C.
D.

$25,000
$50,000
$70,000
$100,000

Lost CM (20 - 10) = $10; savings by making (13 - 10) = 3; Net loss: 10 - 3 = 7 10,000 units = $70,000
AACSB: Analytic
AICPA: FN-Decision Making
Blooms: Application
Difficulty: Hard
Lanen - Chapter 04 #67
Learning Objective: 4
Topic Area: Make-It or Buy-It Decisions

68.

The Axle Division of Becker Company produces axles for off-road sport vehicles. One-third of Axle's
30,000 unit output is sold to an internal division of Becker; the remainder is sold to outside customers.
Axles' estimated operating profit for the year is:

The internal division has an opportunity to purchase 10,000 axles of the same quality from an outside
supplier on a continuing basis. The purchase price would be $13.00. If the Axle Division is now
operating at full capacity and can sell all its units to outside customers at the present selling price, what
is the minimum selling price that Axle should accept from the internal division?
A.
B.
C.
D.

$10.00
$13.00
$15.00
$20.00

Lost CM (20 - 10) = $10; cost to make: $10; cost to make + opportunity cost = $10 + 10 = $20
AACSB: Analytic
AICPA: FN-Decision Making
Blooms: Analysis
Difficulty: Hard
Lanen - Chapter 04 #68
Learning Objective: 4
Topic Area: Make-It or Buy-It Decisions

69.

The Axle Division of Becker Company produces axles for off-road sport vehicles. One-third of Axle's
output is sold to an internal division of Becker; the remainder is sold to outside customers. Axle's
estimated operating profit for the year is:

The internal division has an opportunity to purchase 10,000 axles of the same quality from an outside
supplier on a continuing basis. The Axle Division cannot sell any additional products to outside
customers. What is the minimum selling price that Axle should accept from the internal division?
A.
B.
C.
D.

$10.00
$13.00
$15.00
$50.00

Lost CM: $0; cost to make: $10; cost to make + opportunity cost = $10 + 0 = $10
AACSB: Analytic
AICPA: FN-Decision Making
Blooms: Analysis
Difficulty: Hard
Lanen - Chapter 04 #69
Learning Objective: 4
Topic Area: Make-It or Buy-It Decisions

70.

The Bremmer Company produces 5,000 units of item ZQ98 annually at a total cost of $200,000.

The Daisy Company has offered to supply all 5,000 units of ZQ98 per year for $35 per unit. If Bremmer
accepts the offer, $8 per unit of the fixed overhead would be saved. In addition, some of Bremmer's
leased facilities could be vacated, reducing lease payments by $30,000 per year. What are the relevant
costs for the "make" alternative?
A.
B.
C.
D.

$120,000
$175,000
$190,000
$200,000

$20,000 + 55,000 + 45,000 + (8 5,000) + 30,000 = $190,000


AACSB: Analytic
AICPA: FN-Decision Making
Blooms: Application
Difficulty: Medium
Lanen - Chapter 04 #70
Learning Objective: 4
Topic Area: Make-It or Buy-It Decisions

71.

The Bremmer Company produces 5,000 units of item ZQ98 annually at a total cost of $200,000.

The Daisy Company has offered to supply all 5,000 units of ZQ98 per year for $35 per unit. If Bremmer
accepts the offer, $8 per unit of the fixed overhead would be saved. In addition, some of Bremmer's
leased facilities could be vacated, reducing lease payments by $30,000 per year. At what price would
Bremmer be indifferent to Daisy's offer?
A.
B.
C.
D.

$40
$38
$35
$24

$20,000 + 55,000 + 45,000 + (8 5,000) + 30,000 = $190,000/5,000 units = $38


AACSB: Analytic
AICPA: FN-Decision Making
Blooms: Analysis
Difficulty: Hard
Lanen - Chapter 04 #71
Learning Objective: 4
Topic Area: Make-It or Buy-It Decisions

72.

The Speedy Delivery Service is considering the expansion of its business into afternoon retail delivery
service. This would require an additional $25,000 in labor costs per month. Company-owned vehicles
now used to make morning deliveries to local manufacturers could be used in the afternoons to make
retail deliveries. However, it is estimated that an additional $10,000 would be required per month for
gas, oil, and maintenance. It is further estimated that the retail delivery use of the trucks would be
allocated 45% of the existing $13,000 fixed vehicle costs. What is the differential delivery cost per
month for expanding into the retail delivery market?
A.
B.
C.
D.

$25,000
$35,000
$39,500
$40,850

$25,000 + $10,000 = $35,000


AACSB: Analytic
AICPA: FN-Decision Making
Blooms: Application
Difficulty: Easy
Lanen - Chapter 04 #72
Learning Objective: 3
Topic Area: Long-Run Pricing Decisions

73.

The Lemaire Company manufactures wiring tools. The company is currently producing well below
its full capacity. The Boisvert Company has approached Lemaire with an offer to buy 10,000 tools at
$1.75 each. Lemaire sells its tools wholesale for $1.85 each; the average cost per unit is $1.83, of which
$0.27 is fixed costs. If Lemaire were to accept Boisvert's offer, what would be the increase in Lemaire's
operating profits?
A.
B.
C.
D.
E.

$800
$1,000
$1,900
$2,900
Lemaire's operating profits will not increase as a result of accepting the special order.

[$1.75 - ($1.83 - 0.27)] 10,000 = $1,900


AACSB: Analytic
AICPA: FN-Decision Making
Blooms: Application
Difficulty: Easy
Lanen - Chapter 04 #73
Learning Objective: 2
Topic Area: Short-Run Pricing Decisions: Special Orders

74.

The Buchanan Company has gathered the following information for a unit of its most popular product:

The above cost information is based on 10,000 units. A distributor has offered to buy 2,000 units at a
price of $32 per unit. This special order would not disturb regular sales. Special packaging and other
selling expenses would be an additional $0.50 per unit for the special order. If the special order is
accepted, Buchanan's operating profits will increase by:
A.
B.
C.
D.
E.

$4,000.
$6,400.
$8,000.
$19,000.
$20,000.

[$32 - 12 - 6 - 4 - 0.50] 2,000 = $19,000


AACSB: Analytic
AICPA: FN-Decision Making
Blooms: Application
Difficulty: Medium
Lanen - Chapter 04 #74
Learning Objective: 2
Topic Area: Short-Run Pricing Decisions: Special Orders

75.

The Buchanan Company has gathered the following information for a unit of its most popular product:

The above cost information is based on 10,000 units. A distributor has offered to buy 2,000 units at a
price of $32 per unit. The distributor claims this special order would not disturb regular sales at $42.
Special packaging and other selling expenses would be an additional $0.50 per unit for the special order.
How many units of regular sales could be lost before this contract is not profitable?
A.
B.
C.
D.
E.

0 units.
950 units.
1, 000 units.
2,000 units.
10,000 units.

[$32 - 12 - 6 - 4 - 0.50] 2,000 = $19,000/($42 - 12 - 6- 4) = 19,000/20 = 950 units


AACSB: Analytic
AICPA: FN-Decision Making
Blooms: Analysis
Difficulty: Hard
Lanen - Chapter 04 #75
Learning Objective: 2
Topic Area: Short-Run Pricing Decisions: Special Orders

76.

The following information relates to the Jax Company for the upcoming year.

The cost of goods sold includes $2,400,000 of fixed manufacturing overhead; the operating expenses
include $200,000 of fixed marketing expenses. A special order offering to buy 50,000 units for $15.00
per unit has been made to Jax. Fortunately, there will be no additional operating expenses associated
with the order and Jax has sufficient capacity to handle the order. How much will operating profits
increase if Jax accepts the special order?
A.
B.
C.
D.
E.

$50,000
$125,000
$200,000
$250,000
Operating profits will not increase as a result of accepting the special order.

Cost of sales: (6,400,000 - 2,400,000)/400,000 = $10; Operating Exp: (600,000 - 200,000)/400,000 =


1.00; Sales $15.00 - 10 - 1 = $4 50,000 units = $200,000
AACSB: Analytic
AICPA: FN-Decision Making
Blooms: Application
Difficulty: Hard
Lanen - Chapter 04 #76
Learning Objective: 2
Topic Area: Short-Run Pricing Decisions: Special Orders

77.

The following information relates to the Jax Company for the upcoming year.

The cost of goods sold includes $2,400,000 of fixed manufacturing overhead; the operating expenses
include $200,000 of fixed marketing expenses. A special order offering to buy 50,000 units for $15.00
per unit has been made to Jax. Fortunately, there will be no additional operating expenses associated
with the order; however, Jax is operating at full capacity. How much will operating profits increase if
Jax accepts the special order?
A.
B.
C.
D.
E.

$50,000
$125,000
$200,000
$250,000
Operating profits will not increase as a result of accepting the special order.

The lack of excess capacity means there are opportunity costs equal to the lost contribution. Jax should
continue to charge $20 per unit.
AACSB: Analytic
AICPA: FN-Decision Making
Blooms: Application
Difficulty: Hard
Lanen - Chapter 04 #77
Learning Objective: 2
Topic Area: Short-Run Pricing Decisions: Special Orders

78.

The following information relates to a product produced by Ashland Company:

Fixed selling costs are $1,000,000 per year. Although production capacity is 500,000 units per year,
Ashland expects to produce only 400,000 units next year. The product normally sells for $80 each. A
customer has offered to buy 60,000 units for $60 each. The customer will pay the transportation charge
on the units purchased. If Ashland accepts the special order, the effect on income would be a
A.
B.
C.
D.

$120,000 increase
$360,000 increase
$840,000 increase
$1,200,000 decrease

60 - (20 + 14 + 12) = $14 60,000 = 840,000 increase: the transportation costs do not need to be
included since the customer pays for them
AACSB: Analytic
AICPA: FN-Decision Making
Blooms: Analysis
Difficulty: Medium
Lanen - Chapter 04 #78
Learning Objective: 2
Topic Area: Short-Run Pricing Decisions: Special Orders

79.

The operations of Gadwell Corporation are divided into the Blink Division and the Blur Division.
Projections for the next year are as follows:

Operating income for Gadwell Corporation as a whole if the Blur Division were dropped would be
A.
B.
C.
D.

$66,500
$56,000
$45,500
$24,500

$56,000 - 31,500 = $24,500


AACSB: Analytic
AICPA: FN-Decision Making
Blooms: Analysis
Difficulty: Medium
Lanen - Chapter 04 #79
Learning Objective: 4
Topic Area: Decision to Add or Drop a Product Line or Close a Business Unit

80.

The operations of Gadwell Corporation are divided into the Blink Division and the Blur Division.
Projections for the next year are as follows:

If the Blur Division were dropped, Blink Division's sales would increase by 30%. If this happened, the
operating income for Gadwell Corporation as a whole would be
A.
B.
C.
D.

$72,800
$56,000
$79,100
$59,150

$182,000 130% = $236,600 - 84,000 - 42,000 - 31,500 = $79,100


AACSB: Analytic
AICPA: FN-Decision Making
Blooms: Analysis
Difficulty: Medium
Lanen - Chapter 04 #80
Learning Objective: 4
Topic Area: Decision to Add or Drop a Product Line or Close a Business Unit

81.

Which of the following statements regarding differential costs is (are) true?


(A) The full cost fallacy occurs when a decision-maker includes fixed manufacturing overhead in the
product's cost.
(B) When deciding whether or not to accept a special order, a decision-maker should focus on
differential costs instead of full costs.
A.
B.
C.
D.

Only A.
Only B.
Neither A nor B is false.
Both A and B are true.

Both statements are true.


AACSB: Analytic
AICPA: FN-Decision Making
Blooms: Comprehension
Difficulty: Medium
Lanen - Chapter 04 #81
Learning Objective: 2
Topic Area: Differential Analysis and Pricing Decisions

82.

Which of the following statements regarding special orders is (are) false?


(A) The primary decision for special orders is determining whether the differential revenue is greater
than the differential costs associated with the order.
(B) The differential analysis approach to pricing for special orders will always lead to underpricing in
the long-run because fixed costs are not included in the analysis.
A.
B.
C.
D.

Only A.
Only B.
Neither A nor B is false.
Both A and B are true.

(B) differential analysis will not always lead to underpricing because there are times the fixed costs are
differential. It may lead to underpricing, but it is not a certainty.
AACSB: Analytic
AICPA: FN-Decision Making
Blooms: Comprehension
Difficulty: Medium
Lanen - Chapter 04 #82
Learning Objective: 2
Topic Area: Short-Run Pricing Decisions: Special Orders

83.

Which of the following costs are not considered in a differential analysis for a make-or-buy decision?
A.
B.
C.
D.
E.

Indirect materials and indirect labor if the item is purchased


Direct materials and direct labor if the item is manufactured internally
Variable overhead if the item is purchased
Fixed overhead that will continue if the item is purchased
Fixed overhead that can be avoided if the item is purchased

A cost that does not change is not included in the analysis


AACSB: Analytic
AICPA: FN-Decision Making
Blooms: Comprehension
Difficulty: Medium
Lanen - Chapter 04 #83
Learning Objective: 3
Topic Area: Make-It or Buy-It Decisions

84.

For the past five years, the Selin Company has produced and sold frequency meters to genetics
labs throughout the United States. Recently, a strong competitor has entered the market and Selin
is considering whether it should continue to produce and sell the frequency meters. The following
information has been gathered to assist management in their decision:
A) Sales volume (units) is estimated to drop by 25% once the competitor becomes fully operational.
B) The equipment used to produce the meters was purchased five-years ago for $1,500,000.
C) The space now used to produce the meters would be reallocated to eliminate the need to rent
warehouse space.
D) Three of the employees who produce meters would be reassigned to the oscillator division.
Which of the items listed above is (are) relevant to the decision to continue the production and sale of
the frequency meters?
A.
B.
C.
D.
E.

A and C.
B and C.
C and D.
A, B, and D.
B, C, and D.

(B) is a sunk cost, (D) will be there anyway, (A & C) would differ
AACSB: Analytic
AICPA: FN-Decision Making
Blooms: Application
Difficulty: Medium
Lanen - Chapter 04 #84
Learning Objective: 4
Topic Area: Decision to Add or Drop a Product Line or Close a Business Unit

85.

Which of the following statements about the theory of constraints is (are) true?
(A) The theory of constraints focuses on determining the optimal product mix when two or more
resources restrict the attainment of a goal or objective.
(B) The theory of constraints focuses on maximizing the rate of throughput contribution while
maximizing investment and other operating costs.
A.
B.
C.
D.

Only A.
Only B.
Neither A nor B is true.
Both A and B are true.

(A) at least one constraining resource, not two; (B) want to minimize the investment and other costs
AACSB: Analytic
AICPA: FN-Decision Making
Blooms: Comprehension
Difficulty: Easy
Lanen - Chapter 04 #85
Learning Objective: 5
Topic Area: Theory of Constraints

86.

The Miller Company manufactures wiring tools. The company is currently producing well below its full
capacity. The Brisbois Company has approached Miller with an offer to buy 5,000 tools at $17.50 each.
Miller sells its tools wholesale for $18.50 each; the average cost per unit is $18.30, of which $2.70 is
fixed costs.
Required:
a. If Miller were to accept Brisbois's offer, what would be the increase in Miller's operating profits?
b. Assume that Miller is operating at full capacity. If Miller were to accept Brisbois's offer, what would
be the change in Miller's operating profits?
a. [$17.50 - ($18.30 - 2.70)] 5,000 = $9,500 increase in profits.
b. (17.50 - 18.50) 5,000 = 5,000 decrease in profits
Feedback: In b) need to recognize the opportunity cost of lost sales
AACSB: Analytic
AICPA: FN-Decision Making
Blooms: Application
Difficulty: Medium
Lanen - Chapter 04 #86
Learning Objective: 2
Topic Area: Short-Run Pricing Decisions: Special Orders

87.

The Pierce Company has gathered the following information for a unit of its most popular product:

The above cost information is based on 10,000 units. Pierce currently sells 8,500 units for $62 per unit.
A distributor has offered to buy 1,000 units at a price of $50 per unit. This special order would not
disturb regular sales.
Required:
a. Calculate Pierce's change in operating profits if the special order is accepted.
b. How many units of regular sales could be lost before this contract is not profitable?
a: [$50 - (55 - 40% 20)] 1,000 = $3,000 increase in profits
b: $3,000/(62 - 47) = 200 units
AACSB: Analytic
AICPA: FN-Decision Making
Blooms: Analysis
Difficulty: Medium
Lanen - Chapter 04 #87
Learning Objective: 2
Topic Area: Short-Run Pricing Decisions: Special Orders

88.

The following information relates to the Klessig Company for the upcoming year.

The cost of goods sold includes $3,000,000 of fixed manufacturing overhead; the operating expenses
include $450,000 of fixed marketing expenses. A special order offering to buy 50,000 units for
$25.00 per unit has been made to Klessig. Fortunately, there will be no additional operating expenses
associated with the order and Klessig has sufficient capacity to handle the order.
Required:
a. How much will operating profits increase if Klessig accepts the special order?
b. Assume that Klessig is operating at full capacity. How much will operating profits change if Klessig
accepts the special order?
a: [$25 - ($14 + 0.75)] 50,000 = $512,500
b: (25 - 30) 50,000 = $250,000 decrease in profits
Feedback: Variable COGS: ($7,200,000 - 3,000,000)/300,000 units = $14; Variable marketing:
($675,000 - 450,000)/300,000 = $0.75
AACSB: Analytic
AICPA: FN-Decision Making
Blooms: Analysis
Difficulty: Hard
Lanen - Chapter 04 #88
Learning Objective: 2
Topic Area: Short-Run Pricing Decisions: Special Orders

89.

The following information relates to a product produced by Bayfield Company:

Fixed selling costs are $1,000,000 per year. Although production capacity is 900,000 units per year,
Bayfield expects to produce only 800,000 units next year. The product normally sells for $180 each. A
customer has offered to buy 60,000 units for $150 each. The customer will pay the transportation charge
on the units purchased.
Required:
a. Compute the effect on income if Bayfield accepts the special order.
b. If Bayfield accepts the special order, how much could normal sales drop before all of the differential
profits disappear?
a. [$150 - ($50 + 35 + 30)] 60,000 = $2,100,000 increase
b. $2,100,000/($180 - 115) = 32,308 units
AACSB: Analytic
AICPA: FN-Decision Making
Blooms: Analysis
Difficulty: Medium
Lanen - Chapter 04 #89
Learning Objective: 2
Topic Area: Short-Run Pricing Decisions: Special Orders

90.

Carson Corporation produces and sells three products. The three products, Alpha, Beta, and Gamma,
are sold in a local market and in a regional market. At the end of the first quarter of the current year, the
following income statement (in thousands of dollars) has been prepared:

Management has expressed special concern with the regional market because of the extremely poor
return on sales. This market was entered a year ago because of excess capacity. It was originally
believed that the return on sales would improve with time, but after a year, no noticeable improvement
can be seen from the results as reported in the above quarterly statement. In attempting to decide
whether to eliminate the regional market, the following information has been gathered:

All administrative costs and fixed manufacturing costs are common to the three products and the two
markets and are fixed for the period. Remaining marketing costs are fixed for the period and separable
by market. All fixed costs have been arbitrarily allocated to markets.
Required:
(a) Assuming there are no alternative uses for the Carson Corporation's present capacity, would you
recommend dropping the regional market? Why or why not?
(b) Prepare the quarterly income statement showing contribution margins by products. Do not allocate
fixed costs to products.
(c) It is believed that a new product can be ready for sale next year if the Carson Corporation decides to
go ahead with continued research. The new product can be produced by simply converting equipment
presently used in producing product Gamma. This conversion will increase fixed costs by $40,000 per
quarter. What must be the minimum contribution margin per quarter for the new product to make the
changeover financially feasible?
(a.) The regional market should not be dropped as this market not only covers all the variable costs and
separable fixed costs but also gives net market contribution of $232,000 toward the common fixed
costs.

(b.) Quarterly income statement (in thousands):

91.

Hi-Speed Electronics manufactures low-cost, consumer-grade computers. It sells these computers to


various electronics retailers to market under store brand names. It manufactures two computers, the
Lightning 2.0 and the Lightning 2.4, which differ in terms of speed, memory, and hard drive capacity.
The following information is available:

The average wage rate is $30 per hour. The plant has a capacity of 32,000 direct labor-hours.
Required:
1. A nationwide discount chain has approached Hi-Speed with an offer to buy 2,000 Lightning 2.0
computers and 2,000 Lightning 2.4 computers if the price is lowered to $350 and $450, respectively, per
unit.
a. If Hi-Speed accepts the offer, how many direct labor-hours will be required to produce the additional
computers?
b. How much will the profit increase (or decrease) if Hi-Speed accepts this proposal? All other prices
will remain the same.
Suppose that the customer has offered instead to buy up to 3,000 each of the two models at $350 and
$450, respectively.
c. How many of each product should be manufactured and sold? Assume current demand will not be
affected by the special order. Also assume that the company cannot increase its production capacity to
meet the extra demand.
d. How much will the profits change if this order is accepted instead?
1a. 2.0: 2 hrs 2,000 units = 4,000 hrs; 2.4: 3 hrs 2,000 units = 6,000 hrs. Total hrs = 4,000 + 6,000 =
10,000 hrs
1b. 2.0: $170 2,000 = $340,000; 2.4: $220 x,000 = $440,000; $340,000 + 440,000 = $780,000
2c. Produce original contract first, 6,000 2.0 and 3,000 2.4. With the remaining 11,000 hrs make 2.0
new first 3,000 units 2 hrs = 6,000 hrs. With the remaining 5,000 hrs make 5,000/3 = 1,666 model 2.4
new.
2d. 2.0 new: 3,000 $170 = $510,000; 2.4 new: 1,666 $220 = $366,520; $510,000 + 366,520 =
$876,520
Feedback: a. hours per unit: 2.0: $60/$30 = 2 hrs; 2.4: $90/$30 = 3 hrs; current production 2.0:6,000
2 hr = 12,000 hrs; 2.4: 3,000 3 hrs = 9,000 hrs; total used 12,000 + 9,000 = 21,000 hrs. Hrs available
32,000 - 21,000 = 11,000 hrs.
1b. CM 2.0: $350 - ($90 + 60 + 30) = $170; CM 2.4: $450 - ($110 + 90 + 30) = $220
2c. CM/hr: 2.0: $600 - 180 = $420/2 hr = $210/hr; 2.4: $780 - 230 = $550/3 hr = $183.33/hr; 2.0 new:
$170/2 hr = $85/hr; 2.4 new: $220/3 hr = $73.33/hr
AACSB: Analytic
AICPA: FN-Decision Making
Blooms: Analysis
Difficulty: Hard
Lanen - Chapter 04 #91
Learning Objective: 2
Learning Objective: 4
Topic Area: Product Choice Decisions
Topic Area: Short-Run Pricing Decisions: Special Orders

92.

The operations of BSC Corporation are divided into the Kaplan Division and the Norton Division.
Projections for the next year are as follows:

a. Operating income for BSC Corporation as a whole if the Norton Division were dropped would be
b. If the Norton Division were dropped, Kaplan Division's sales would increase by 45%. If this
happened, the operating income for BSC Corporation as a whole would be
a. $560,000 - 540,000 = $20,000
b. $720,000 145% = $1,044,000 - 160,000 - 540,000 = $344,000
AACSB: Analytic
AICPA: FN-Decision Making
Blooms: Analysis
Difficulty: Medium
Lanen - Chapter 04 #92
Learning Objective: 4
Topic Area: Decision to Add or Drop a Product Line or Close a Business Unit

93.

The Tally Company produces 15,000 units of item QT34 annually at a total cost of $600,000.

Manufacturing overhead is 36% variable. The Daisy Company has offered to supply all 15,000 units
of QT34 per year for $35 per unit. If Tally accepts the offer, $8 per unit of the fixed overhead would
be avoided. In addition, some of Tally's leased facilities could be vacated, reducing lease payments by
$90,000 per year.
Required:
a. By how much would Tally's profits change if 15,000 of part QT34 are purchased from Daisy?
b. At what price would Tally be indifferent to Daisy's offer?
a. purchase: $35 15,000 = $525,000; make: 60,000 + 165,000 + 375,000 36% + 90,000 = $450,000;
525,000 - 450,000 = $75,000 decrease in profits
b. $450,000/15,000 = $30
AACSB: Analytic
AICPA: FN-Decision Making
Blooms: Analysis
Difficulty: Hard
Lanen - Chapter 04 #93
Learning Objective: 4
Topic Area: Make-It or Buy-It Decisions

94.

The Sutton Division of Haugen Company produces wheels for off-road sport vehicles. One-half of
Sutton's output is sold to the Wilson Division of Haugen; the remainder is sold to outside customers.
Sutton's estimated operating profit for the year is:

Wilson Division has an opportunity to purchase 20,000 wheels of the same quality from an outside
supplier on a continuing basis.
Required:
a. The Sutton Division cannot sell any additional products to outside customers. Should the Haugen
Company allow Wilson Division to purchase the wheels from the outside supplier at $13.00 per unit?
b. If the Sutton Division is now operating at full capacity and can sell all its units to outside customers
at the present selling price, what is the differential cost to Haugen of requiring that the wheels be made
internally and sold to Wilson Division?
c. If the Sutton Division is now operating at full capacity and can sell all its units to outside customers
at the present selling price, what is the minimum selling price that Sutton should accept from Wilson
Division?
d. The Sutton Division cannot sell any additional products to outside customers. What is the minimum
selling price that Sutton should accept from the Wilson Division?
a. make: $10; Buy: $13; income will decrease $3 20,000 units = $60,000 if they buy outside
b. variable cost of $10 + opportunity cost of $10 = $20 per unit 20,000 = $400,000
c. minimum price = $400,000/20,000 = $20/unit
d. minimum price = variable cost = $10/unit
Feedback: a. internal cost to produce: $200,000/20,000 = $10/unit; opportunity cost = 0
b. opportunity cost = $200,000/20,000 = $10 contribution margin lost/unit
AACSB: Analytic
AICPA: FN-Decision Making
Blooms: Application
Difficulty: Hard
Lanen - Chapter 04 #94
Learning Objective: 4
Topic Area: Make-It or Buy-It Decisions

95.

Buffalo Industries produces two products. Information about the products is as follows:

The company's fixed costs totaled $140,000, of which $30,000 can be directly traced to Product Q and
$90,000 can be directly traced to Product R. The effect on the firm's profits if Product R is dropped
would be:
CM of R: (14 - 9) 20,000 = $100,000 - 90,000 traceable fixed = $10,000 decrease in profits
AACSB: Analytic
AICPA: FN-Decision Making
Blooms: Application
Difficulty: Medium
Lanen - Chapter 04 #95
Learning Objective: 2
Topic Area: Decision to Add or Drop a Product Line or Close a Business Unit

96.

Cameron Tool Company has two retail stores, one in Dallas and the other in Sand Creek. The Dallas
store had sales of $200,000, a contribution margin of 35 percent, and a segment margin of $28,000. The
company's two stores have total sales of $500,000, an average contribution margin of 32 percent, and a
total segment margin of $62,000. Prepare a segmented contribution approach statement for Cameron.

AACSB: Analytic
AICPA: FN-Decision Making
Blooms: Application
Difficulty: Medium
Lanen - Chapter 04 #96
Learning Objective: 4
Topic Area: Decision to Add or Drop a Product Line or Close a Business Unit

97.

Bisson Industries has two divisions: the North Division and the South Division. Information relating to
the divisions for the year just ended is as follows:

Common fixed expenses have been allocated equally to each of the two divisions. Prepare a segmented
contribution approach income statement for Bisson

AACSB: Analytic
AICPA: FN-Decision Making
Blooms: Application
Difficulty: Medium
Lanen - Chapter 04 #97
Learning Objective: 4
Topic Area: Decision to Add or Drop a Product Line or Close a Business Unit

98.

The operations of Hurley Corporation are divided into the Northern Division and the Eastern Division.
Projections for the next year are as follows:

a. Operating income for Hurley Corporation, as a whole, if the Eastern Division were dropped would
be:
b. If Eastern Division is dropped, Northern's sales will increase by 20%. What will Hurley Corporation's
operating income be?
a. $255,000 - 225,000 = $30,000
b. $480,000 120% = $576,000 - 225,000 - 225,000 = $126,000
AACSB: Analytic
AICPA: FN-Decision Making
Blooms: Analysis
Difficulty: Easy
Lanen - Chapter 04 #98
Learning Objective: 4
Topic Area: Decision to Add or Drop a Product Line or Close a Business Unit

99.

The Wood Company manufactures two products: A and B. The costs and revenues are as follows:

Total demand for Product A is 7,000 units and for Product B is 5,000 units. Machine time is a scarce
resource. During the year, 48,000 machine hours are available. Product A requires 6 machine hours per
unit, while Product B requires 2.5 machine hours per unit.
a. How many units of Products A and B should Wood produce?
b. What will be the maximum possible contribution margin?
a. CM/hr for A: (300 - 160)/6 = $23.33; CM/hr for B: (175 - 85)/2.5 = $36: produce B first
5,000 units of B 2.5 hr = 12,500 hours needed; 48,000 -12,500 = 35,500 hrs remaining; 35,500/6 =
5,916 units of A
b. 5,000 $140 + 5,916 $90 = $1,232,440
AACSB: Analytic
AICPA: FN-Decision Making
Blooms: Analysis
Difficulty: Medium
Lanen - Chapter 04 #99
Learning Objective: 4
Topic Area: Product Choice Decisions

100.

Gerber Inc has 5,200 machine hours available each month. The following information on the company's
three products is available:

a. What production schedule will maximize the company's profits?


b. What will be the maximum possible contribution margin?
a. CM/hr for P1: 45/3 = $15; P2: 54/2 = $27; P3: 22.50/1 = 22.50; P2 first, then P3, finally P1
P2: 1,000 units 2 = 2,000 hrs; 5,200 - 2,000 = 3,200 remaining; P3 3,000 1 = 3,000 hrs; 200 hrs
remaining; P1 200/3 = 66 units; P1:66;P2: 1,000; P3: 3,000
b. 66 $45 + 1,000 $54 + 3,000 $22.50 = $124,470
AACSB: Analytic
AICPA: FN-Decision Making
Blooms: Analysis
Difficulty: Medium
Lanen - Chapter 04 #100
Learning Objective: 4
Topic Area: Product Choice Decisions

101.

Osgood Inc has 6,400 machine hours available each month. The following information on the
company's three products is available:

a. What production schedule will maximize the company's profits?


b. What will be the maximum possible contribution margin?
a. CM/hr for X: 20/2 = $10; Y: 21/3 = $7; Z: 17.50/2 = $8.75; X first, then Z, finally Y
X: 1,000 units 2 = 2,000 hrs; 6,400 - 2,000 = 4,400 remaining; Z 1,500 2 = 3,000 hrs; 4,400 - 3,000
= 1,400 hrs remaining; Y 1,400/3 = 466 units; X:1,000;Y: 466; Z: 1,500
b. (1,000 $20) + (466 $21) + (1,500 $17.50) = $56,036
AACSB: Analytic
AICPA: FN-Decision Making
Blooms: Analysis
Difficulty: Medium
Lanen - Chapter 04 #101
Learning Objective: 4
Topic Area: Product Choice Decisions

102.

The Rush Company manufactures two products: L and M. The costs and revenues are as follows:

Total demand for Product L is 2,000 units and for Product M is 1,000 units. Machine time is a scarce
resource. During the year, 36,000 machine hours are available.
a. How many units of Products L and M should Rush produce?
L = 1,733; M = 1,000
CM/hr: L ($150 - 90)/15 hr = $4/hr; M: ($112 - 68)/10 hr = $4.40; M first, then L
M 1,000 10 hr = 10,000 hr; 36,000 - 10,000 = 26,000 remaining/15 = 1,733 L
AACSB: Analytic
AICPA: FN-Decision Making
Blooms: Analysis
Difficulty: Medium
Lanen - Chapter 04 #102
Learning Objective: 4
Topic Area: Product Choice Decisions

103.

Gigure Inc has 3,600 machine hours available each month. The following information on the company's
three products is available:

a. What production schedule will maximize the company's profits?


b. What will be the maximum possible contribution margin?
a. CM/hr for P1: 5/2 = $2.50; P2: 4/1 = $4; P3: 2.50/3 = 0.83; P2 first, then P1, finally P3
P2: 800 units 1 = 800 hrs; 3,600 - 800 = 2,800 remaining; P1 1,000 2 = 2,000 hrs; 800 hrs
remaining; P3 800/3 = 266 units; P1:1,000;P2: 800; P3: 266
b. (1,000 $5) + (800 $4) + (266 $2.50) = $8,865
AACSB: Analytic
AICPA: FN-Decision Making
Blooms: Analysis
Difficulty: Medium
Lanen - Chapter 04 #103
Learning Objective: 4
Topic Area: Product Choice Decisions

104.

Fleury Inc has 9,600 machine hours available each month. The following information on the company's
three products is available:

a. What production schedule will maximize the company's profits?


b. What will be the maximum possible contribution margin?
a. CM/hr for X: 20/8 = $2.50; Y: 21/12 = $1.75; Z: 17.50/6 = 2.91; Z first, then X, finally Y
Z: 1,000 units 6 = 6,000 hrs; 9,600 - 6,000 = 3,600 remaining; X 3,600 hrs/8 = 450 units; no time
remaining; X 450;Y: 0; Z: 1,000
b. (450 $20) + (0 $21) + (1,000 $17.50) = $26,500
AACSB: Analytic
AICPA: FN-Decision Making
Blooms: Analysis
Difficulty: Medium
Lanen - Chapter 04 #104
Learning Objective: 4
Topic Area: Product Choice Decisions

105.

Bruce Industries manufactures 200,000 components per year. The manufacturing cost of the
components was determined as follows:

An outside supplier has offered to sell the component for $3.40. If Bruce purchases the component from
the outside supplier, the manufacturing facilities would be unused and could be rented out for $20,000.
a. If Bruce purchases the component from the supplier instead of manufacturing it, the effect on income
would be
b. What is the maximum price Bruce would be willing to pay the outside supplier?
a. Make: $640,000; Buy: 200,000 3.40 = 680,000 - 20,000 = $660,000; income effect: 640,000 660,000 = 20,000 decrease in income if buy
b. ($640,000 + 20,000)/200,000 = $3.30
Feedback: Variable cost to make = $200,000 + 320,000 + 120,000 = $640,000
AACSB: Analytic
AICPA: FN-Decision Making
Blooms: Analysis
Difficulty: Medium
Lanen - Chapter 04 #105
Learning Objective: 4
Topic Area: Make-It or Buy-It Decisions

106.

Tofte Industries manufactures 30,000 components per year. The manufacturing cost of the components
was determined to be as follows:

a. Assume that the fixed manufacturing overhead reflects the cost of Tofte's manufacturing facility. This
facility cannot be used for any other purpose. An outside supplier has offered to sell the component
to Tofte for $34. If Tofte Industries purchases the component from the outside supplier, the effect on
income would be a
b. Assume Tofte Industries could avoid $80,000 of fixed manufacturing overhead if it purchases the
component from an outside supplier. An outside supplier has offered to sell the component for $34.
If Tofte purchases the component from the supplier instead of manufacturing it, the effect on income
would be a
a. Make: $960,000; Buy: $34 30,000 = $1,020,000; income effect: $960,000 - 1,020,000 = $60,000
decrease in income if buy
b. Make: $960,000; Buy: $1,020,000 - 80,000 = $940,000: income effect: $960,000 - 940,000 = $20,000
increase in income if buy
Feedback: Variable cost to make: $300,000 + 480,000 + 180,000 = $960,000
AACSB: Analytic
AICPA: FN-Decision Making
Blooms: Analysis
Difficulty: Medium
Lanen - Chapter 04 #106
Learning Objective: 4
Topic Area: Make-It or Buy-It Decisions

107.

Explain the difference between full costs and differential costs.


Full cost is the sum of all fixed and variable costs of manufacturing and selling a unit. Differential cost
is the cost that differs between two alternatives. Differential costs may include just variable costs, just
fixed costs, or some mix of the two.
AACSB: Analytic
AICPA: FN-Decision Making
Blooms: Comprehension
Difficulty: Easy
Lanen - Chapter 04 #107
Learning Objective: 1
Learning Objective: 2
Topic Area: Differential Analysis

108.

Explain what is meant by "the full-cost fallacy" in making pricing decisions.


The full-cost fallacy arises in short run pricing decisions when fixed costs are included in the analysis.
In the short run, most fixed costs are not differential.
AACSB: Analytic
AICPA: FN-Decision Making
Blooms: Comprehension
Difficulty: Medium
Lanen - Chapter 04 #108
Learning Objective: 2
Topic Area: Differential Analysis and Pricing Decisions

109.

Explain the differences between life-cycle product costing and target costing.
Life-cycle product costing tracks costs attributable to each product from the start of the research for a
product until the finishthe final customer support. Life-cycle product costing is based on what costs
are estimated to be. Target costing starts with the target pricewhat the consumer is willing to pay and
subtracting out the target profit. Target costing is a measure of what costs can be.
AACSB: Analytic
AICPA: FN-Decision Making
Blooms: Comprehension
Difficulty: Medium
Lanen - Chapter 04 #109
Learning Objective: 3
Topic Area: Cost Analysis for Pricing

110.

Explain the distinction between predatory pricing and peak-load pricing.


Predatory pricing is the practice of setting prices below cost with the intent of driving competitors out
of the market. Peak-load pricing is using different prices based on the demand for the product. At peak
demand times, prices charged will be higher than the prices at off-peak times.
AACSB: Analytic
AICPA: FN-Decision Making
Blooms: Comprehension
Difficulty: Medium
Lanen - Chapter 04 #110
Learning Objective: 3
Topic Area: Legal Issues Relating to Costs and Sales Prices

111.

Why is it important to consider opportunity costs in a make-or-buy decision?


Opportunity costs can represent a substantial part of the cost of an alternative and the analyst needs to
consider the foregone opportunities.
AACSB: Analytic
AICPA: FN-Decision Making
Blooms: Comprehension
Difficulty: Medium
Lanen - Chapter 04 #111
Learning Objective: 4
Topic Area: Opportunity Costs of Making

ch4 Summary
Category
AACSB: Analytic
AICPA: BB-Industry
AICPA: BB-Legal
AICPA: FN-Decision Making
AICPA: FN-Measurement
Blooms: Analysis
Blooms: Application
Blooms: Comprehension
Blooms: Knowledge
Difficulty: Easy
Difficulty: Hard
Difficulty: Medium
Lanen - Chapter 04
Learning Objective: 1
Learning Objective: 2
Learning Objective: 3
Learning Objective: 4
Learning Objective: 5
Topic Area: Cost Analysis for Pricing
Topic Area: Decision to Add or Drop a Product Line or Close a Business Unit
Topic Area: Differential Analysis
Topic Area: Differential Analysis and Pricing Decisions
Topic Area: Legal Issues Relating to Costs and Sales Prices
Topic Area: Long-Run Pricing Decisions
Topic Area: Make-It or Buy-It Decisions
Topic Area: Opportunity Costs of Making
Topic Area: Product Choice Decisions
Topic Area: Short-Run Pricing Decisions: Special Orders
Topic Area: Theory of Constraints

# of Questions
111
1
5
103
2
40
29
31
11
37
18
56
111
11
29
17
52
4
5
15
11
7
8
2
21
2
17
20
4