ADAMSON UNIVERSITY

MANAGERIAL ACCOUNTING 2
RELEVANT COST
1. Peach has received a special order for 10,000 units of its product. The product
normally sells for $20 and has the following manufacturing costs:

Assume that Peach has sufficient capacity to fill the order. What price should Peach
charge to make a $10,000 incremental profit?
A. $20

B. $17

C. $12

D. $15

2. Violet has received a special order for 100 units of its product. The product normally
sells for $2,000 and has the following manufacturing costs:

Assume that Violet has sufficient capacity to fill the order without harming normal
production and sales. What minimum price should Violet charge to achieve a $25,000
incremental profit?

A. $1,300

B. $1,550

C. $1,680

D. $1,800
 ADAMSON UNIVERSITY
MANAGERIAL ACCOUNTING 2
RELEVANT COST
3. Avocado has received a special order for 2,000 units of its product at a special price. The product normally sells
for $400 and has the following manufacturing costs:

Assume that Avocado has sufficient capacity to fill the order. What special order price should Avocado charge to make
a $20,000 incremental profit?

A. $400

B. $360

C. $270

D. $260

4. Dot has received a special order for 2,000 units of its product at a special price. The product normally sells for
$200 and has the following manufacturing costs:

Assume that Dot has sufficient capacity to fill the order without harming normal production and sales. What minimum
price should Dot charge to achieve a $50,000 incremental profit?

A. $225

B. $155

C. $168

D. $180

ADAMSON UNIVERSITY
MANAGERIAL ACCOUNTING 2
RELEVANT COST
5. Olive Corp currently makes 20,000 subcomponents a year in one of its factories.
The unit costs to produce are:

An outside supplier has offered to provide Olive Corp with the 20,000 subcomponents at
a $36 per unit price. Fixed overhead is not avoidable. If Olive Corp accepts the outside
offer, what will be the effect on short-term profits?

A. $160,000 decrease

B. $320,000 increase

C. $160,000 increase

D. $80,000 decrease

6. Olive Corp currently makes 20,000 subcomponents a year in one of its factories.
The unit costs to produce are:

An outside supplier has offered to provide Olive Corp with the 20,000 subcomponents at
a $36 per unit price. Fixed overhead is not avoidable. If Olive Corp rejects the outside
offer, what will be the effect on short-term profits?

A. $80,000 increase

B. no change

C. $160,000 decrease

D. $80,000 decrease
ADAMSON UNIVERSITY
MANAGERIAL ACCOUNTING 2
RELEVANT COST
7. Almond has received a special order for 6,000 units of its product at a special price
of $90. The product normally sells for $120 and has the following manufacturing costs:
Assume that Almond has sufficient capacity to fill the order. If Almond accepts the order,
what effect will the order have on the company's short-term profit?

A. $72,000 increase

B. $180,000 increase

C. $252,000 decrease

D. zero

ADAMSON UNIVERSITY
MANAGERIAL ACCOUNTING 2
RELEVANT COST
MULTIPLE CHOICE: Choose the best answer. Write only the letter of your choice.
1. Armstrong Co. has 15,000 units in inventory that had a production cost of P3.00 per unit.
These units cannot be sold through normal channels due to a significant technology change. These
units could be reworked at a total cost of P23,000 and sold for P28,000. Another alternative is to
sell the units to a junk dealer for P8,500. The relevant cost for Armstrong to consider in making its
decision is
a. P45,000 of original product costs. c. P68,000 for reworking the units.
b. P23,000 for reworking the units. d. P28,000 for selling the units to the junk dealer.
2. R Corp. sells a product for $18 per unit, and the standard cost card for the product shows the
following costs: Direct material P1.00; Direct Labor P2.00; Overhead (80% fixed) P7.00. R received a
special order for 1,000 units of the product. The only additional cost to R would be foreign import
taxes of P1.00 per unit. If R is able to sell all of the current production domestically, what would be
the minimum sales price that R would consider for this special order?
a. P18.00 b. P11.00 c. P5.40 d. P19.00
3. Boston Shoe Cobblers has been asked to submit a bid on supplying 1,000 pairs of military dress
boots to the Pentagon. The company’s costs per pair of boots are as follows: Direct material P8.00;
Direct labor P6.00; Variable overhead P3.00; Variable selling cost (commission) P3.00; Fixed
overhead (allocated) P2.00; Fixed selling and administrative cost P1.00. Assuming that there would
be no commission on this potential sale, the lowest price the firm can bid is some price greater than
a. P23 b. P20 c. P17 d. P14
4. The Chip Division of Supercomp Corp. produces a high-quality computer chip. Unit production
costs (based on capacity production of 100,000 units per year) follow: Direct material P50.00; Direct
labor P20.00; Overhead (20% variable) P10.00; Sales price P100.00; Selling and Administrative
costs (40% variable) P15. Assume, for this question only, that the Chip Division is operating at a
level of 70,000 chips per year. What is the minimum price that the division would consider on a
“special order” of 1,000 chips to be distributed through normal channels?
a. P78 b. P95 c. P100 d. P81
5. Assume, for this question only, that the Chip Division is producing and selling at capacity. What
is the minimum selling price that the division would consider on a “special order” of 1,000 chips on
which no variable period costs would be incurred?
a. P100 b. P72 c. P81 d. P94
6. The minimum selling price that should be acceptable in a special order situation is equal to total
a. production cost. c. variable costs.
b. variable production cost. d. production cost plus a normal profit margin.
7. A fixed cost is relevant if it is
a. future cost. b. avoidable c. a product cost d. opportunity cost
8. The term incremental cost refers to
a. the profit foregone by selecting one choice instead of another.
b. the additional cost of producing or selling another product or service.
c. a cost that continues to be incurred in the absence of activity.
d. a cost common to all choices in question and not clearly or feasibly allocable to any of them.
9. Which of the following costs is irrelevant in making a decision about a special order price if
some if the company facilities are currently idle?
a. direct labor c. variable cost of utilities
b. equipment depreciation d. opportunity cost of production
10. Costs that cannot be affected by any future actions are called
a. differential b. relevant c. sunk d. opportunity

ADAMSON UNIVERSITY
MANAGERIAL ACCOUNTING 2
RELEVANT COST
Part 1 Analyze and decide if the following statements are True or False.
1. In deciding whether to eliminate a business segment, managers should consider
which costs and benefits will change as a result of the decision.
2. The quality of the goods in question is irrelevant to a make-or-buy decision.
3. When managers make a decision, they base it strictly on the numerical analysis
performed in step three of the decision making process.
4. A sunk cost is never a relevant cost.
5. Another term for relevant cost is incremental cost.
6. The segment margin is the contribution margin of a particular segment.
7. An opportunity cost is the foregone benefit of choosing to do one thing instead of
another.
8. Capacity is a measure of the limit placed on specific resources.
9. Opportunity costs are important in special-order and make-or-buy decisions, but not
in keep-or-drop decisions.
10. A special-order decision analysis cannot be used to make long-term pricing
decisions.

Part 2 Identification

1 to 5. Steps in the managerial decision-making process (in order)

6. Costs that change across decision alternatives

7. Type of decision which involves deciding whether to accept or reject an order that is
outside the scope of normal sales

8. Cost which is not relevant in a special-order decision

9. Type of decision which is the same as an in-sourcing versus outsourcing decision

10. Step in the managerial decision-making process which involves differential analysis