CHAPTER5:SHORTTERMDECISIONSANDACCOUNTINGINFORMATION

MultipleChoice
a1.Thesalaryorwagethatyoucouldbeearningwhileyouaretakingthistestis
a.anopportunitycost.
b.asunkcost.
c.anincrementalcost.
d.ajointcost.
d2.Thekindofcostthatcanbeignoredinshorttermdecisionmakingis
a.adifferentialcost.
b.anopportunitycost.
c.arelevantcost.
d.asunkcost.
b3.Theroleofsunkcostsindecisionmakingcanbesummedupinwhichofthefollowingsayings?
a.Nothingventured,nothinggained.
b.Bygonesarebygones.
c.Apennysavedisapennyearned.
d.Theloveofmoneyistherootofallevil.

c4.Allocatedcostsare
a.generallyseparable.
b.generallyvariable.
c.generallycommon.
d.especiallyimportantindecidingwhethertodropasegment.

a5.TheRobinsonPatmanActforbidschargingdifferentpricestodifferentcustomersunless
a.thepricedifferencesarejustifiedbydifferencesindistributioncosts.
b.pricesofferedcompetitorsarefullydisclosedtoallcustomers.
c.suchpricesproduceprofitsnogreaterthannormalprofits.
d.thecustomersarelocatedwithintheseller'sstate.

c6.Aproductshouldbedroppedif
a.ithasanegativeincrementalprofit.
b.ithasanegativecontributionmargin.
c.droppingitwillincreasethetotalprofitofthecompany.
d.itisnotessentialtothecompany'sproductline.
a7.Fromitsrefiningprocessanoilcompanyobtainsthreeproducts,oneofwhichcanbeprocessed
furtherintoadifferentproduct,theothertwoofwhichcanbesoldafterfurtherrefining.
Therefiningprocessis
a.ajointprocess.
b.amixedcostprocess.
c.anunavoidableprocess.
d.aprocesswhosecostsshouldbeallocatedtotheresultingproducts.
b8.TheAccessoriesDepartmentshowssalesof$35,000.Variablecostsare$30,000andallocated
unavoidablefixedcostsare$9,000,leavinga$4,000loss.Basedonthisinformationandall
otherthingsequal,
a.thedepartmentcontributes$35,000tototalprofits.
b.droppingthedepartmentwillreducetotalcompanyprofitsby$5,000.
c.thedepartmentshouldbeclosed.
d.thedepartmentshouldbekeptonlyifunitvolumecanbeincreasedenoughtoincreasesales
by$4,000.

d9.Amajorfactorinevaluatingaspecialorderis
a.theexpectedcontributionmarginontheorder.
b.thepossibleeffectsonsalesatregularprices.
c.theavailabilityofcapacitytoproducetheadditionalunits.
d.alloftheabove.
a10.Whichofthefollowingistrueforamakeorbuydecision?
a.Thereliabilityoftheoutsidesupplierofthecomponentisimportanttothedecision.
b.Depreciationonequipmentusedinmakingthecomponentandhavingnootheruseisthe
criticalfactorinthedecision.
c.Opportunitycostsareirrelevant.
d.Thecompanyshouldmakethecomponentifthepurchasepriceislessthantheperunit
variablecosttomakethecomponent.
b11.Whichofthefollowingcostsisrelevantindecidingwhethertoselljointproductsatsplit
offorprocessthemfurther?
a.Theunavoidablecostsoffurtherprocessing.
b.Theavoidablecostsoffurtherprocessing.
c.Thevariablecostofoperatingthejointprocess.
d.Thecostofmaterialsusedtomakethejointproducts.
b12.Amanufacturingprocessthatinvariablyproducestwoormoreproducts

a.isacomplementaryprocess.
b.isajointprocess.
c.normallyhasonlyfixedcosts.
d.usuallyhasprimarilyvariablecosts.
d13.Whichofthefollowingisashorttermdecisioninwhichopportunitycostsarenotrelevant?
a.Makeorbuydecision.
b.Specialorderdecision.
c.Dropasegmentdecision.
d.Noneoftheabove.
c14.

Whichofthefollowingisatruestatement?
a. TheoryofConstraintsisusefulforidentifyingphysicalconstraintsbutcannot
incorporatenonphysicalconstraints.
b. TheoryofConstraintsisusefulinanalyzinginternalconstraintsbutcannotidentify
externalconstraints.
c. Constraintsmaybeeitherinternalorexternal.
d. Internalconstraintsarephysicalwhileexternalconstraintsareimaginary.

b15.Acompanyhasspacethatitusestomakeacomponent.Itcouldrentthespacetoanother
company.Therentis
a.asunkcost.
\
b.anopportunitycost.
c.ajointcost.
d.anavoidablecost.
a16.EscanabaCompanyhas200unitsofanobsoletecomponent.Thevariablecosttoproducethemwas
$10perunit.Theycouldnowbesoldfor$1.75eachanditwouldcost$7.60tomakethemnow.
Iftheunitscouldbeusedtomakeaproductforaspecialorder,theirrelevantcostis
a.$1.75.
b.$7.60.
c.$10.00.
d.someothernumber.
c17.Inamakeorbuydecision,whichofthefollowingistrue?
a.Variablecostsaretheonlyrelevantcosts.
b.Allocatedfixedcostsarerelevant.
c.Alternativeusesofspaceandmachineryarerelevant.
d.Makingisthecorrectdecisionwhenthereisidlecapacity.
a18.Thebestcharacterizationofanopportunitycostisthatitis
a.relevanttodecisionmakingbutisnotusuallyreflectedinaccountingrecords.
b.notrelevanttodecisionmakingandisnotusuallyreflectedinaccountingrecords.
c.relevanttodecisionmakingandisusuallyreflectedinaccountingrecords.
d.notrelevanttodecisionmakingandisusuallyreflectedinaccountingrecords.
a19.Asunkcostis
a.notavoidable.
b.avoidableunderonealternativebutnotunderanother.
c.jointorcommon.
d.directtoasegment.
b20.Differentialcostsarecoststhatare
a.notavoidable.
b.avoidableunderonealternativebutnotunderanother.
c.jointorcommon.
d.notdirecttoasegment.
a21.Acommoncost
a.relatestoaprocessthatproducesmorethanoneproduct.
b.shouldbeallocatedtothesegmentsofacompany.
c.canusuallybeavoidedinitsentiretybydroppingasegment.
d.noneoftheabove.
a22.Anopportunitycostcommonlyassociatedwithaspecialorderis
a.thecontributionmarginonlostsales.
b.thevariablecostsoftheorder.
c.additionalfixedcostsrelatedtotheincreasedoutput.
d.anyoftheabove.
b23.

WhichofthefollowingstatementspertainingtotheTheoryofConstraintsistrue?
a. Inventoryisevilandshouldneverbekept.
b. Inventoryisimportanttokeepimmediatelybeforeabottleneckprocess.
c. Inventoryshouldbekeptbeforeeverymachiningprocesstopreventanydowntime.
d. Noneoftheabovearetrue.

c24.Whichofthefollowingcostclassificationschemesismostrelevanttodecisionmaking?
a.Fixedvariable.

b.Jointcommon
c.Avoidableunavoidable.
d.Directcommon.
d25.WhichofthefollowingisNOTrelevantindecidingwhethertoprocessajointproductbeyond
itssplitoffpoint?
a.Thesplitoffvalue.
b.Thepriceafteradditionalprocessing.
c.Thecostoffurtherprocessing.
d.Thecostofoperatingthejointprocess.
c26.BensonCompanyhas200unitsofanobsoletepart.Thevariablecosttoproducethemwas$4per
unit.Theycouldnowbesoldfor$3eachanditwouldcost$6tomakethemnow.Theparts
couldbereworkedfor$8eachandsoldfor$17.Whatisthemonetaryadvantageofreworking
thepartsoverthenextbestaction?
a.$600.
b.$1,000.
c.$1,200.
d.$2,000.
b27.PuebloCompanysellsaproductfor$60.Variablecostis$32.Pueblocouldacceptaspecial
orderfor1,000unitsat$46.IfPuebloacceptedtheorder,howmanyunitscoulditloseat
theregularpricebeforethedecisionbecameunwise?
a.1,000.
b.500.
c.200.
d.0.
c28.WhichofthefollowingisNOTashorttermdecision?
a.Acceptaspecialorder.
b.Makeorbuyacomponent.
c.Replaceamachine.
d.Sellajointproductatsplitofforprocessitfurther.
d29.Thevariablecostofaunitofproductmadeyesterdayis
a.anincrementalcost.
b.anopportunitycost.
c.adifferentialcost.
d.asunkcost.
d30.Themostprofitableuseofaresourcethathaslimitedcapacityandisneededinthe
productionofmorethanoneproductisafunctionofwhichofthefollowing?
a.Thenumberofunitsofeachproductthecompanycansell.
b.Thecontributionmarginofeachproduct.
c.Theamountofresourceuserequiredforeachunitofeachproduct.
d.Alloftheabove.
c31.WhichofthefollowingisNOTrelevantinamakeorbuydecisionaboutaparttheentityuses
insomeofitsproducts?
a.Thereliabilityoftheoutsidesupplier.
b.Thealternativeusesofownedequipmentusedtomakethepart.
c.Theoutsidesupplier'sperunitvariablecosttomakethepart.
d.Thenumberofunitsofthepartneededeachperiod.
d32.WhichofthefollowingisNOTrelevanttoadecisionaboutwhethertodropasegment?
a.Thecontributionmarginexpectedtobeproducedbythesegment.
b.Theavoidablefixedcostsdirecttothatsegment.
c.Thecomplementaryeffectsofdroppingthesegment.
d."Noneoftheabove"isthebestanswerbecausealloftheabovearerelevant.
a33.Justintimemanufacturersarelesslikelythanconventionalmanufacturingcompaniesto
a.operateajointprocessthatresultsinjointproducts.
b.beabletoaccommodatespecialorders.
c.haveconstraintsontheirproductivecapacity.
d.fitanyoftheabovecharacterizations.
d34.ThetotaldemandforProductZisrelevanttoadecisionabout
a.thebestuseofaresourcethatisinlimitedsupplyandisusedintheproductionof
ProductZandoneotherofthecompany'sproducts.
b.whethertosellProductZ,ajointproduct,atsplitofforprocessitfurtherintoanother
salableproduct.
c.replacingProductZwithanotherproduct.
d.alloftheabovedecisions.
c35.BuchananCompanycurrentlysells4,000unitsofproductQfor$1each.Capacityis5,000
units.Variablecostsare$0.40andavoidablefixedcostsare$400.Achainstorehasoffered
$0.80perunitfor400unitsofQ.IfBuchananacceptstheorder,thechangeinincomewill
bea

a.$60decrease.
b.$80decrease.
c.$160increase.
d.$480increase.
a36.TylerCompanycurrentlysells1,000unitsofproductMfor$1each.Variablecostsare$0.40
andavoidablefixedcostsare$400.Adiscountstorehasoffered$0.80perunitfor400units
ofproductM.Themanagersbelievethatiftheyacceptthespecialorder,theywilllosesome
salesattheregularprice.Determinethenumberofunitstheycouldlosebeforetheorder
becameunprofitable.
a.267units
b.500units
c.600units
d.Someothernumber.
b37.BearValleyproducesthreeproducts:A,B,andC.Onemachineisusedtoproducethe
products.Thecontributionmargins,salesdemands,andtimeonthemachine(inminutes)are
asfollows:
timeon
Demand CM
machine

A
100
$25
10
B
80
18
5
C
150
30
10
Thereare2400minutesavailableonthemachineduringtheweek.Howmanyunitsshouldbe
producedandsoldtomaximizetheweeklycontribution?
ABC
a.10080150
b.5080150
c.900150
d.10080100
d38.ElkGroveproducesthreeproducts:A,B,andC.Amachineisusedtoproducetheproducts.
Thecontributionmargins,salesdemands,andtimeonthemachine(inminutes)areasfollows:
timeon
Demand CM
machine

A
120
$20
5
B
80
36
10
C
100
50
15
Thereare2400minutesavailableonthemachineduringtheweek.Howmanyunitsshouldbe
producedandsoldtomaximizetheweeklycontribution?
ABC
a.12080100
b.2080100
c.12030100
d.1208066
a39.BlackOakCompanymakesandsellsoakboxesforapriceof$60each.Unitcostsbasedon
anticipatedmonthlysalesof1,000boxesareasfollows:
Directmaterialcost
$15
Directlaborcost
12
Variablemanufacturingoverhead 3
Variablesellingoverhead 5
Fixedcosts 2
Achainstorehasofferedtobuy100boxespermonthat$58each.Toacceptthis
specialorder,BlackOakwillhavetorestrictitssalestoregularcustomerstoonly
900boxespermonthlybecauseitsproductioncapacitycannotbeexpandedintheshort
run.However,novariablesellingexpenseswillbeincurredforthisspecialorder.If
BlackOakacceptsthechainstore'soffer,itsprofitwill
a.increaseby$300.
b.increaseby$500.
c.decreaseby$200.
d.decreaseby$500.
a40.MedfordCorporationoperatesaplantwithaproductivecapacitytomanufacture20,000unitsof
itsproductayear.Thefollowinformationpertainstotheproductioncostsatcapacity:
Variablecosts$160,000
Fixedcosts240,000

Totalcosts$400,000
=========

Asupplierhasofferedtosell4,000unitstoMedfordannually.Assumenochangeinthefixed
costs.WhatisthepriceperunitthatmakesMedfordindifferentbetweenthe"make"and"buy"
options?
a.$8
b.$12
c.$20
d.$0
b41.DJHCompanyproduces1,000unitsofPartXpermonth.Thetotalmanufacturingcostsofthe
partareasfollows:
Directmaterials$10,000
Directlabor15,000
Variableoverhead5,000
Fixedoverhead30,000

Totalmanufacturingcost$60,000
=======
Anoutsidesupplierhasofferedtosupplythepartat$40perunit.Itisestimatedthat20%
ofthefixedoverheadassignedtoPartXwillnolongerbeincurredifthecompanypurchases
thepartfromtheoutsidesupplier.IfDJHCompanypurchases1,000unitsofPartXfromthe
outsidesupplierpermonth,thenitsmonthlyoperatingincomewill
a.decreaseby$20,000.
b.decreaseby$4,000.
c.notchange.
d.increaseby$20,000.
c42.DJHCompanyproduces1,000unitsofPartXpermonth.Thetotalmanufacturingcostsofthe
partareasfollows:
Directmaterials$10,000
Directlabor15,000
Variableoverhead5,000
Fixedoverhead30,000

Totalmanufacturingcost$60,000
=======
Anoutsidesupplierhasofferedtosupplythepartat$40perunit.Itisestimatedthat20%
ofthefixedoverheadassignedtoPartXwillnolongerbeincurredifthecompanypurchases
thepartfromtheoutsidesupplier.WhatisthemaximumpricethatDJHCompanyshouldbe
willingtopaytheoutsidesupplier?
a.$60
b.$40
c.$36
d.$25
c43.ScooterCompanyproducesthreeproductsfromajointprocesscosting$100,000.Thefollowing
informationisavailable:
CoststoSellingPrice
SellingPriceProcessAfterFurther
UnitsatSplitoffFurtherProcessing

A10,000$35$70,000$40
B20,000$40$30,000$45
C30,000$20$90,000$25
Whichproductsshouldbeprocessedfurther?
a.Aonly.
b.AandB.
c.BandC.
d.A,B,andC.
b44.GencoCompanyproducesthreeproductsfromajointprocesscosting$100,000.Thefollowing
informationisavailable:
CoststoSellingPrice
SellingPriceProcessAfterFurther
UnitsatSplitoffFurtherProcessing

A2,000$25$60,000$50
B3,000$30$60,000$45
C5,000$40$80,000$60
Whichproductsshouldbesoldwithoutfurtherprocessing?
a.Bonly.

b.AandB.
c.BandC.
d.A,B,andC.
c45.ColfaxCompanyexpectstoincurthefollowingcostsattheplannedproductionlevelof10,000
units:
Directmaterials$100,000
Directlabor120,000
Variableoverhead60,000
Fixedoverhead30,000
Thesellingpriceis$50perunit.Thecompanycurrentlyoperatesatfullcapacityof10,000
units.Capacitycanbeincreasedto13,000unitsbyoperatingovertime.Variablecosts
increaseby$14perunitforovertimeproduction.Fixedoverheadcostsremainunchangedwhen
overtimeoperationsoccur.ColfaxCompanyhasreceivedaspecialorderfromawholesalerwho
hasofferedtobuy1,000unitsat$45each.Whatistheincrementalcostassociatedwiththis
specialorder?
a.$14,000
b.$28,000
c.$42,000
d.$45,000
b46.ColfaxCompanyexpectstoincurthefollowingcostsattheplannedproductionlevelof10,000
units:
Directmaterials$100,000
Directlabor120,000
Variableoverhead60,000
Fixedoverhead30,000
Thesellingpriceis$50perunit.Thecompanycurrentlyoperatesatfullcapacityof10,000
units.Capacitycanbeincreasedto13,000unitsbyoperatingovertime.Variablecosts
increaseby$14perunitforovertimeproduction.Fixedoverheadcostsremainunchangedwhen
overtimeoperationsoccur.ColfaxCompanyhasreceivedaspecialorderfromawholesalerwho
hasofferedtobuy1,000unitsat$45each.WhatistheimpactonColfax'soperatingincome
ifthisspecialorderisaccepted?
a.$17,000increase
b.$3,000increase
c.nochange
d.$5,000decrease
c47.GMHCompanymanufactures100,000unitsofPartXannuallyforuseinoneofitsmainproducts.
Thetotalmanufacturingcostfor100,000unitsofPartXisasfollows:

Directmaterials$120,000
Directlabor80,000
Variableoverhead40,000
Fixedoverhead160,000

Totalcost$400,000
========
SelinCompanyhasofferedtosellGMH100,000unitsofPartXperyear.IfGMHacceptsthis
offer,thefacilitiesusedtoproducePartXcanbeusedintheproductionofother
components.ThischangewouldsaveGMH$10,000inrentfortheleasedproductionfacility
usedatpresenttosupporttheproductionofothercomponents.Whatistheamountofrelevant
costsforthismakeorbuydecision?
a.$200,000
b.$240,000
c.$250,000
d.$400,000
d48.GMHCompanymanufactures100,000unitsofPartXannuallyforuseinoneofitsmainproducts.
Thetotalmanufacturingcostfor100,000unitsofPartXisasfollows:

Directmaterials$120,000
Directlabor80,000
Variableoverhead40,000
Fixedoverhead160,000

Totalcost$400,000
========
SuttonCompanyhasofferedtosellGMH100,000unitsofPartXperyear.IfGMHacceptsthis
offer,thefacilitiesusedtoproducePartXcanbeusedintheproductionofother
components.ThischangewouldsaveGMH$10,000inrentfortheleasedproductionfacility
usedatpresenttosupporttheproductionofothercomponents.Whatisthemaximumpricethat

GMHshouldbewillingtopaySuttonforpartX?
a.$1.20
b.$2.00
c.$2.40
d.$2.50
d49.Barrie,Inc.,producesthreeproducts:A,B,andC.Twomachinesareusedtoproducethe
products.Thecontributionmargins,salesdemands,andtimeoneachmachine(inminutes)is
asfollows:
time
time
Demand CM

onM1

onM2
A
100
$12
5
10
B
80
18
10
5
C
100
25
15
5
Thereare2,400minutesavailableoneachmachineduringtheweek.Howmanyunitsshouldbe
producedandsoldtomaximizetheweeklycontribution?
ABC
a.10080100
b.2080100
c.10040100
d.1008073
b50.Barrie,Inc.,producesthreeproducts:A,B,andC.Twomachinesareusedtoproducethe
products.Thecontributionmargins,salesdemands,andtimeoneachmachine(inminutes)is
asfollows:
time
time
Demand CM

onM1

onM2
A
100
$12
5
10
B
80
18
10
5
C
150
25
5
10
Thereare2,400minutesavailableoneachmachineduringtheweek.Howmanyunitsshouldbe
producedandsoldtomaximizetheweeklycontribution?
ABC
a.10080150
b.5080150
c.900150
e. 10080100
TrueFalse
F1.Iftheresultsofadecisionarenotasgoodasexpected,therehasbeenanerrorinthe
decisionmakingprocess.
T2.Thecostsofoperatingajointprocesscanbefixedorvariable.
T3.Incrementalcostscanbeeitherfixedorvariable.
T4.Ingeneral,thesmallerthesegmentbeingconsideredinadecision,thefewertheavoidable
costs.
T5.Agivenfixedcostmightbeseparableandrelevantforthepurposeofonedecisionandcommon
andirrelevantforthepurposeofanotherdecisioninthesamecompany.
F6.Opportunitycostisusuallytheamountpaidforaresource.
T7.Fixedcoststhatareallocatedtoseveralsegmentsarenormallyirrelevanttodecisionsfor
oneofthosesegments.
T8.Theonlyrevenuesorcoststhatarerelevantindecisionmakingarethedifferentialrevenues
orcosts.
T9.Constraintsmaybeinternaltothefirmorexternaltothefirm.
T10.Management'sobjectiveshouldbetoexploitaconstraintratherthantoeliminateit.

Problems
1.WilsonCompanyexpectsthefollowingresults,withoutconsideringanyofthechangesdescribed
below.
ProductAProductBTotal

Sales$100$300$400
Variablecosts40100140

Contributionmargin$60$200$260

Fixedcostsavoidable(20)(30)(50)
unavoidable(50)(100)(150)

Profit(loss)$(10)$70$60
=============

Theunavoidablecostsareallocatedbasedonunitsalesof1,000Aand2,000B.CONSIDEREACH
QUESTIONINDEPENDENTLYUNLESSTOLDOTHERWISE.

a.ComputeWilson'sincomeifproductAisdropped.

b.IfproductAweredroppedandtheunitsalesofproductBincreasedby30%,whatwouldthe
company'sincomebe?

c.ProductAcanbedroppedandreplacedwithanewproduct,C,whichwouldhaveavoidablefixed
costsof$50.ProductCwouldsellfor$0.60,havevariablecostsof$0.20,andexpected
volumeof400units.ComputeWilson'sincomeifAwerereplacedbyC.

d.SupposenowthatproductsAandBarejointproductsthatarebeingsoldatsplitoff.Allof
thecostsshownontheincomestatementarethematerials,labor,andoverheadofthejoint
process.FindincomeifproductBwereprocessedfurtheratadditionalcostsof$90andsold
for$350.

SOLUTION:
a.Wilson'sincome:$20($200CMfromB$30$150)
b.Wilson'sincome:$80($260CMfromB$30$150)
c.Wilson'sincome:$130[$20+400($0.60$0.20)$50]
d.Wilson'sincome:$20($60CMfromA+$50incrementalrevenue
$90incrementalcost)

2.ArapahoeCorp.canmakethreeproductsfromajointprocess.Themonthlycostofthejoint
processis$10,000.Followingaredataaboutthethreeproducts.
SalesValueSalesValueCostsof
atifFurtherAdditional
ProductSplitoffPointProcessedProcessing

A$8,000$12,000$2,500
B$9,000$10,000$2,000
C$0$2,500$1,000

a.Whichproduct(s)shouldbesoldatthesplitoffpoint?

b.Arapahoeiscurrentlyprocessingallthreeproductsratherthansellinganyofthematthe
splitoffpoint.Finditscurrentincome.

SOLUTION:
a.ProductBshouldbesoldatsplitoff.
b.Income:$9,000($12,000+$10,000+$2,500$2,500$2,000$1,000$10,000)

3.MadisonCo.operatesajointprocess.Threeproducts,B,C,andDemergefromthatprocess,each
ofwhichcanbesoldimmediatelyorprocessedfurther.Monthlyoutputis50,000gallons;50%is
B,30%isC,and20%isD.Youhavethefollowinginformation.
BCD

Pergallonsplitoffprice$8$9$6
Pergallonpriceafterfurther
processing$13$15$12
Pergallonvariablecostof
furtherprocessing$4$2$4
Avoidabledirectfixedcostsof
furtherprocessing,permonth$35,000$45,000$18,000
Unavoidabledirectfixedcosts
offurtherprocessing,permonth$18,000$40,000$7,000
Whichproduct(s),ifany,shouldbesoldatsplitoff?

SOLUTION:
Bshouldbesoldatsplitoff.
B:[50,000x50%]x[$13$8$4]$35,000=$10,000
C:[50,000x30%]x[$15$9$2]$45,000=$15,000
D:[50,000x20%]x[$12$6$4]$18,000=$2,000

4.MiltonCompanyhasthreeproducts:A,B,andC.Threemachinesareusedtoproducetheproducts.
Thecontributionmargins,salesdemands,andtimeoneachmachine(inminutes)isasfollows:
time
A
B
C

Demand CM
100
80
60

onM1

$45
$30
$40

time

onM2

10
10
5

time
onM3

15
5
10

12
8
5

Thereare2,400minutesavailableoneachmachineduringtheweek.Allmaterialsneededare
readilyavailableonajustintimebasis.
a. Whataretheloadfactorsforeachofthethreemachines?
b. Whichmachineisthebottleneck?
c. HowmanyunitsofA,B,andCshouldbeproducedduringtheweek?

SOLUTION:
a. M1:87.5%[(10x100)+(10x80)+(5x60)]/2,400
M2:104.2%[(15x100)+(5x80)+(10x60)]/2,400
M3:89.2%[(12x100)+(8x80)+(5x60)]/2,400
b. ThebottleneckisM2asidentifiedbytheloadfactorexceeding100%
c. A:93,B:80,C:60
A:$45/15=$3
B:$30/5=$6
C:$40/10=$4
Timeavailable2,400
ProduceBfirst80x5=400
Timeremaining2,000
ProduceC:60x10=600
Timeremaining1,400
ProduceA93x151,395
Timeremaining5
5.LaCrosseCompanyexpectsthefollowingresults,withoutconsideringanyofthechangesdescribed
below.
ProductAProductBTotal

Sales$1,000$3,000$4,000
Variablecosts4001,0001,400

Contributionmargin$600$2,000$2,600
Fixedcostsavoidable(200)(300)(500)
unavoidable(500)(1,000)(1,500)

Profit(loss)$(100)$700$600
=================

Theunavoidablecostsareallocatedbasedonunitsalesof1,000Aand2,000B.Anexporterhas
offered$0.80perunitfor200unitsofA.
a.FindthechangeinincomeifLaCrosseacceptstheorder,assumingnolossofregularsales.

b.Themanagersbelievethatiftheyacceptthespecialorder,theywilllosesomesalesatthe
regularprice.Determinethenumberofunitstheycouldlosebeforetheorderbecame
unprofitable.
c.Themanagersbelievethattheywilllose80unitsattheregularpriceiftheyacceptthe
order.Calculatethepricetheymustchargeforthespecialordertoincreaseincomeby$50.
SOLUTION:
a.Changeinincome:$80increase[200x($0.80$0.40variablecostperunit)]

b.Salestolose:133units[$80/($1.00$0.40)]=133
c.Price:$0.89
Lostcontributionmargin(80x$0.60)$48.0
Desiredprofit50.0

Contributionmarginrequiredfromspecialorder$98.0
Dividedby20.units200

Equalscontributionmarginperunit$0.49
Plusvariablecost0.40

Equalsrequiredprice$0.89
=====

6.MaysCompanymanufactures200,000unitsofpartXYZannually.Thefollowinginformationhasbeen
collected:
Materials$200,000
Directlabor110,000
Variableoverhead50,000
Fixedoverhead100,000

Totalcosts$460,000
========
ClemensCompanyhasofferedtoprovidepartXYZfor$2perunit.Assumenootherproductiveuse
ofthespaceexists.
a.WhatwouldbethedollarimpactifMaysacceptedtheoffer?
b.WhatisthemaximumpriceMaysiswillingtopayforthepart?

SOLUTION:
a.$40,000lessprofits($360,000make$400,000buy)
Costtobuythepart:200,000x$2=$240,000
Costtomakethepart:$200,000+110,000+50,000=$360,000
b.$1.80($360,000/200,000)

7.Gonzalezcanproduceanyofthreeproductswithitscurrentproductionline.Theheattreating
equipmenthas400hoursavailableduringanygivenmonth.Perunitproduction,sales,andcost
statisticsareasfollows:
ABC

Sellingprice$15$20$10
Variablecost$9$12$7
Requiredtimeinheattreat1.5hrs2.5hrs.1.0hrs
Maximumdemandpermonth100100100
a.HowmanyofeachproductshouldGonzalezproduceandsell?
b.SupposethesellingpriceofCincreasesto$12.HowmanyofeachproductshouldGonzalez
produceandsell?

SOLUTION:
a.100A,100B,0C
A:($159)/1.5=$4.00/hr100x1.5hrs=150.0hrs
B:($2012)/2.5=$3.20/hr100x2.5hrs=250.0
C:($107)/1.0=$3.00/hr0(nohoursremaining)
b.100A,60B,100C
C:($127)/1.0=$5.00/hr100x1.0hrs=100.0hrs
A:($159)/1.5=$4.00/hr100x1.5hrs=150.0
B:($2012)/2.5=$3.20/hr(400100150)/2.5hrs=60units
8.ScottsoEnterpriseshasthefollowingproductsandcosts:
ABC
Unitdemandpermonth2,0003,0004,000

Sellingprice$500$600$800
Materials150300350
Laborandoverhead180210300
Salescommission5075100
Laborandoverheadareappliedtoeachproductatarateof$30permachinehour.Management
considersbothlaborandoverheadtobefixedcosts.
a. Scottsocurrentlyhas60,000hoursavailableforproductioneachmonth.Howmanyunitsshould
beproducedandsoldforeachproduct?
b. AnexporterhasapproachedScottsowithanoffertopurchase500unitsofproductCfora
discountedprice.Thisisaonetimeorderandwillnotaffectnormalsales.Nocommission
willbepaid.WhatistheminimumpriceScottsoshouldaccept?

SOLUTION:
a.A:2,000B:1,142C:4,000
Throughput/hourforA:$50[(50015050)/(180/30)]
Throughput/hourforB:$32.14[(60030075)/(210/30)]
Throughput/hourforC:$35[(800350100)/(300/30)]
Hoursavailable60,000
ProduceA:2,000x612,000
Timeremaining48,000
ProduceC:4,000x1040,000
Timeremaining8,000
ProduceB:1,142x77,994
Timeremaining6
b.$575
LostthroughputofB:$32.14x7hours=$225
Materials350
Minimumprice$575
9.MiamiCompanycurrentlysells3,000unitsofproductAfor$1.25each.Variablecostsare$0.60,
avoidablefixedcostsare$750,andunavoidableallocatedfixedcostsare$1,500.Anexporter
hasoffered$0.90perunitfor800unitsofproductA.
a.FindthechangeinincomeifMiamicanaccepttheorderwithoutaffectingcurrentsales.

b.Themanagersbelievethatiftheyacceptthespecialorder,theywilllosesomesalesatthe
regularprice.Determinethenumberofunitstheycouldlosebeforetheorderbecame
unprofitable.
c.Themanagersbelievethattheywilllose270unitsattheregularpriceiftheyacceptthe
order.Calculatethepricetheymustchargeforthespecialordertoincreaseincomeby
$200.
SOLUTION:
a.Changeinincome:$240increase[800x($0.90$0.60)]
b.Salestolose:369units[$240/($1.25$0.60)]=369
c.Price:$1.07
Lostcontributionmargin(270x$0.65)$175.5
Desiredprofit200.0

Contributionmarginrequiredfromspecialorder$375.5
Dividedby800units800

Equalscontributionmarginperunit$0.47rounded
Plusvariablecost0.60

Equalsrequiredprice$1.07
=====
10.ArpeggioCompanymanufactures1,000unitsofpartXYZannually.Thefollowinginformationhas
beencollected:
Materials$200,000
Directlabor110,000
Variableoverhead50,000
Fixedoverhead100,000

Totalcosts$460,000

========
MobileCompanyhasofferedtoprovidepartXYZfor$400perunit.IfArpeggioacceptstheoffer
anotherproductwillbemovedintothespacevacated,saving$60,000ayearinrent.
a.WhatwouldbethedollarimpactifArpeggioacceptedtheoffer?
b.WhatisthemaximumpriceArpeggioiswillingtopayforthepart?

SOLUTION:
a.$20,000moreprofits($420,000make$400,000buy)
Costtobuythepart:1,000x$400=$400,000
Costtomakethepart:$200,000+110,000+50,000=$360,000+60,000rent=$420,000
b.$420($420,000/1,000)