Managerial Accounting Ch 8

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Managerial Accounting, 3e (Braun/Tietz)

Chapter 8 Relevant Costs for Short-Term Decisions

1) Irrelevant costs are costs that do not affect short-term decisions. Answer: TRUE

Diff: 1 LO: 8-1 EOC: S8-1

AACSB: Reflective Thinking

Learning Outcome: Distinguish between relevant and irrelevant costs 2) Relevant information is future data that do not differ among alternatives. Answer: FALSE

Learning Outcome: Distinguish between relevant and irrelevant costs

3) Management accountants gather and analyze relevant information to compare alternatives. Answer: TRUE

Learning Outcome: Use incremental analysis to make short-term decisions. Distinguish between relevant and irrelevant costs.

4) One key to analyzing short-term business decisions is to focus on relevant revenues, costs and profits. Answer: TRUE

5) One key to analyzing short-term business decisions is to use a contribution margin approach that separates variable costs from fixed costs.

Answer: TRUE Diff: 1

LO: 8-1 EOC: S8-1

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6) Relevant information is expected future data that will not differ among alternatives. Answer: FALSE

Learning Outcome: Distinguish between relevant and irrelevant costs 7) Costs that differ between alternatives are irrelevant.

Answer: FALSE Diff: 1

LO: 8-1 EOC: S8-1

Learning Outcome: Distinguish between relevant and irrelevant costs 8) One cost that is irrelevant in decision making is a sunk cost.

LO: 8-1 EOC: E8-15

Learning Outcome: Distinguish between relevant and irrelevant costs 9) Managers' decisions are based solely on quantitative factors. Answer: FALSE

Diff: 1 LO: 8-1 EOC: E8-15

10) Which of the following best describes a "sunk cost"? A) Costs that were incurred in the past and cannot be changed

B) Benefits foregone by choosing a particular alternative course of action C) A factor that restricts the production or sale of a product

D) Expected future data that differ among alternatives Answer: A

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11) An "opportunity cost" is best described by which of the following? A) Benefits foregone by choosing a particular alternative course of action B) Costs that were incurred in the past and cannot be changed

C) The distribution of all products to be sold

D) Expected future costs that differ among alternatives Answer: A

Learning Outcome: Distinguish between relevant and irrelevant costs 12) A "relevant cost" is best described by which of the following? A) A factor that restricts production or sales of a product

B) Cost of developing, producing, and delivering a product or service C) Costs that were incurred in the past and can not be changed D) Expected future costs that differ among alternatives

Answer: D Diff: 2 LO: 8-1 EOC: S8-1

13) "Contribution margin per unit" is best described by which of the following? A) Sales price per unit minus fixed cost per unit

B) Sales price per unit minus variable cost unit

C) Sales price per unit minus fixed and variable costs per unit D) Units sold time contribution margin ratio

Answer: B Diff: 2 LO: 8-1 EOC: S8-1

14) Expected future data that differs among alternative courses of action are referred to as A) relevant information. B) historical information. C) predictable information. D) irrelevant information. Answer: A Diff: 1 LO: 8-1 EOC: E8-15

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15) Which of the following is irrelevant when making a decision? A) Fixed overhead costs that differ among alternatives

B) The cost of an asset that the company is considering replacing C) The cost of further processing a product that could be sold as is

D) The expected increase in contribution margin of one product line as a result of a decision to discontinue a separate unprofitable product line

Answer: B Diff: 1 LO: 8-1 EOC: E8-15

Learning Outcome: Distinguish between relevant and irrelevant costs 16) Fixed costs that do not differ between two alternatives are

A) irrelevant to the decision. B) considered opportunity costs. C) relevant to the decision.

D) important only if they represent a material dollar amount. Answer: A

Diff: 1 LO: 8-1 EOC: E8-15

Learning Outcome: Distinguish between relevant and irrelevant costs 17) Which of the following is a sunk cost?

A) Operating costs for a new vehicle B) Trade in value of old vehicle

C) Purchase price of vehicle to be traded in D) Purchase price of new vehicle

Answer: C Diff: 1 LO: 8-1 EOC: E8-15

Learning Outcome: Distinguish between relevant and irrelevant costs 18) Fixed costs that may be avoided in the future are referred to as A) relevant costs. B) opportunity costs. C) replacement costs. D) sunk costs. Answer: A Diff: 2 LO: 8-1 EOC: E8-15

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19) A sunk cost is described as which of the following?

A) One that is relevant to a decision because it changes depending on the alternative course of action selected

B) A historical cost that is always irrelevant C) An outlay expected to be incurred in the future D) A historical cost that may be relevant

Answer: B Diff: 1 LO: 8-1 EOC: E8-15

20) The effect of a plant closing on employee morale is an example of which of the following? A) A qualitative factor B) A quantitative factor C) A sunk cost D) A variable cost Answer: A Diff: 1 LO: 8-1 EOC: E8-15

21) The format of the income statement most useful in decision-making is which of the following? A) Absorption costing format

B) Traditional format

C) Contribution margin format D) Single-step format

Answer: C Diff: 2 LO: 8-1 EOC: E8-15

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22) Ida Enterprises is considering replacing a machine that is presently used in its production process. The following information is available:

Old Machine Replacement Machine

Original cost $60,000 $35,000

Remaining useful life in years 5 5

Current age in years 5 0

Book value $25,000

Current disposal value in cash $8,000

Future disposal value in cash (in 5 years) $0 $0 Annual cash operating costs $7,000 $4,000

Which of the information provided in the table is irrelevant to the replacement decision? A) The annual operating cost of the old machine

B) The original cost of the old machine

C) The current disposal value of the old machine D) Both A and C

AACSB: Analytical Thinking

23) All of the following are relevant to the decision to replace equipment except the A) cost of old equipment.

B) selling price of old equipment.

C) future maintenance costs of old equipment. D) cost of new equipment.

Answer: A Diff: 2 LO: 8-1 EOC: S8-1

24) Which of the following is most important in making a short-term special decision? A) Focus on total costs

B) Separate variable from fixed costs

C) Use a conventional absorption costing approach D) Calculating the fixed cost per unit

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25) Managers should consider ________ when making any sort of decision. A) only fixed costs

B) sunk costs

C) only variable costs

D) revenues that differ among alternatives Answer: D

Learning Outcome: Distinguish between relevant and irrelevant costs 26) Label each item below as relevant or irrelevant in making a decision. a) Cost of roof repair made on rental property last year

b) The cost of insurance on a new vehicle when deciding to buy a new vehicle c) Cost of new equipment under evaluation to replace used equipment d) Original cost of old equipment that is being evaluated for replacement

e) Cost of previous year's insurance policy on old equipment being evaluated for replacement f) Accumulated depreciation on old equipment being evaluated for replacement

Answer: a) irrelevant b) relevant c) relevant d) irrelevant e) irrelevant f) irrelevant Diff: 1 LO: 8-1 EOC: S8-1

27) What is the difference between relevant and irrelevant information for making decisions. Provide examples of each.

Answer: Relevant information affects a decision and irrelevant information does not. Relevant

information differs between alternatives and affects the future. For example, the cost of insurance for a car will differ depending upon the make, model, year, etc of the car. Therefore, this information is

relevant when deciding upon which car to purchase. The cost of a parking sticker to park in the school lot is not relevant, since it is the same regardless of the make, model, year, etc. of car.

Diff: 1 LO: 8-1 EOC: E8-15

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28) A special order occurs when a customer requests a one-time order at an increased sales price. Answer: FALSE

Learning Outcome: Use incremental analysis to make short-term decisions

29) Special orders increase income if the revenue from the order does not exceed the incremental variable and fixed costs incurred to fill the order.

LO: 8-2 EOC: S8-2

30) In deciding whether to accept a special sales order, any fixed costs that would remain unchanged are considered relevant data.

LO: 8-2 EOC: S8-2

31) Variable costs are irrelevant to a special decision when those variable costs differ between alternatives.

LO: 8-2 EOC: S8-2

32) Managers should consider the potential effect of a special order on long-run profits and operations. Answer: TRUE

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33) When deciding whether to accept a special order, managers need to consider whether they have available excess capacity.

LO: 8-2 EOC: S8-2

34) If the expected increase in revenues from a special order is greater than the expected increase in variable and fixed costs, then the special order should be accepted.

LO: 8-2 EOC: S8-2

35) In a special sales order decision, the special price must exceed the variable cost of filling the order. In other words, the special order must have ________.

A) sunk costs

B) a positive contribution margin C) opportunity costs

D) a negative contribution margin Answer: B

36) In a special sales order decision, incremental fixed costs that will be incurred if the special order is accepted are considered to be

A) opportunity costs. B) irrelevant to the decision. C) relevant to the decision. D) sunk costs.

Answer: C Diff: 2 LO: 8-2 EOC: S8-2

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37) Managers should consider all of the following when deciding whether to accept a special order, except

A) available excess capacity.

B) the variable costs associated with the special order. C) the effect of the order on regular sales.

D) fixed costs that will not be affected by the order. Answer: D

38) A manager should always reject a special order if

A) the special order price is less than the variable costs of the order. B) there is available excess capacity.

C) the special order price is less than the regular sales price.

D) the special order will require variable nonmanufacturing expenses. Answer: A

Learning Outcome: Use incremental analysis to make short-term decisions 39) Which would be a consideration for making special orders?

A) Available capacity to fill the order

B) If price will cover incremental costs of filling the order C) If the order will affect regular sales in the long run D) All of the above

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40) A company should ________ when making a short-term special decision. A) focus on qualitative factors only

B) focus on quantitative factors only C) separate variable costs from fixed costs D) use a traditional direct costing approach Answer: C

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41) Sky High Seats manufactures seats for airplanes. The company has the capacity to produce 100,000 seats per year, but is currently producing and selling 75,000 seats per year. The following information relates to current production:

Sale price per unit $400

Variable costs per unit:

Manufacturing $220

Marketing and administrative $50 Total fixed costs:

Manufacturing $750,000

Marketing and administrative $200,000

If a special sales order is accepted for 7,000 seats at a price of $350 per unit, and fixed costs remain unchanged, how would operating income be affected? (NOTE: Assume regular sales are not affected by the special order.)

A) Increase by $560,000 B) Decrease by $560,000 C) Increase by $2,450,000 D) Increase by $8,000,000 Answer: A Explanation: A) Variable Mfg. Cost $ 220 Variable Marketing $ 50 Total Variable $ 270

NOW Sales Price $ 350 Less Total Variable Cost 270 = Contribution Margin $ 80 Times units sold × 7,000 = Additional Profit $ 560,000 Diff: 2

LO: 8-2 EOC: E8-18A

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Manufacturing $220

If a special sales order is accepted for 4,000 seats at a price of $325 per unit, fixed costs remain unchanged, and no variable marketing and administrative costs will be incurred for this order, how would operating income be affected? (NOTE: Assume regular sales are not affected by the special order.)

A) Increase by $2,180,000 B) Increase by $420,000 C) Increase by $220,000 D) Decrease by $420,000 Answer: B Explanation: B) Sales Price $ 325

Less Total Variable Cost 220 = Contribution Margin $ 105 Times units sold × 4,000 = Additional Profit $ 420,000 Diff: 2

LO: 8-2 EOC: E8-18A

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Manufacturing $220

If a special sales order is accepted for 3,000 seats at a price of $300 per unit, and fixed costs increase by $10,000, how would operating income be affected? (NOTE: Assume regular sales are not affected by the special order.) A) Decrease by $80,000 B) Increase by $230,000 C) Increase by $90,000 D) Increase by $80,000 Answer: D Explanation: D)

Special sales order volume 3,000 Special order price per unit

Additional revenue from order $ 900,000 Variable manufacturing costs per unit $ 220.00 Variable marketing and administrative costs per

unit

Total variable costs per unit $ 270.00 Special sales order volume 3,000 Total variable costs per unit

Additional variable expenses from order $ 810,000 Additional revenue from order $ 900,000 Additional variable expenses from order $ (810,000) Special order increase in fixed expense

Change in operating income Diff: 2

LO: 8-2 EOC: E8-18A

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Manufacturing $220

If a special sales order is accepted for 2,500 seats at a price of $320 per unit, fixed costs increase by $5,000, and variable marketing and administrative costs for that order are $25 per unit, how would operating income be affected? (NOTE: Assume regular sales are not affected by the special order.)

A) Increase by $187,500 B) Decrease by $182,500 C) Increase by $182,500 D) Increase by $245,000 Answer: C

Explanation: C) Variable Mfg. Cost $ 220 Variable Marketing $ 25

Total Variable $ 245 Now

Sales Price $ 320 Less Total Variable Cost 245 = Contribution Margin $ 75 Times units sold × 2,500 = Contribution Margin $ 187,500 Less: add'l fixed cost 5,000 = Add'l Profit $ 182,500 Diff: 2

LO: 8-2 EOC: E8-18A

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45) Comfort Cloud manufactures seats for airplanes. The company has the capacity to produce 100,000 seats per year, but is currently producing and selling 75,000 seats per year. The following information relates to current production:

Manufacturing $220

If a special sales order is accepted for 6,500 seats at a price of $325 per unit, and fixed costs remain unchanged, how would operating income be affected? (NOTE: Assume regular sales are not affected by the special order.)

A) Decrease by $357,500 B) Increase by $357,500 C) Increase by $2,112,500 D) Increase by $5,500,000 Answer: B Explanation: B) Variable Mfg. Cost $ 220 Variable Marketing $ 50 Total Variable $ 270

NOW Sales Price $ 325 Less Total Variable Cost 270 = Contribution Margin $ 55 Times units sold × 6,500 = Additional Profit $ 357,500 Diff: 2

LO: 8-2 EOC: E8-18A

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46) Comfort Cloud manufactures seats for airplanes. The company has the capacity to prroduce 100,000 seats per year, but is currently producing and selling 75,000 seats per year. The following information relates to current production:

Manufacturing $220

If a special sales order is accepted for 5,500 seats at a price of $325 per unit, fixed costs remain unchanged, and no variable marketing and administrative costs will be incurred for this order, how would operating income be affected? (NOTE: Assume regular sales are not affected by the special order.)

A) Increase by $2,997,500 B) Increase by $302,500 C) Increase by $577,500 D) Decrease by $577,500 Answer: C

Explanation: C) Sales Price $ 325 Less Total Variable Cost 220 = Contribution Margin $ 105 Times units sold × 5,500 = Additional Profit $ 577,500 Diff: 2

LO: 8-2 EOC: E8-18A

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Manufacturing $220

If a special sales order is accepted for 3,200 seats at a price of $350 per unit, and fixed costs increase by $12,000, how would operating income be affected? (NOTE: Assume regular sales are not affected by the special order.) A) Decrease by $244,000 B) Increase by $404,000 C) Increase by $256,000 D) Increase by $244,000 Answer: D Explanation: D)

Additional revenue from order $ 1,120,000 Variable manufacturing costs per unit $ 220.00 Variable marketing and administrative costs per

unit

Additional variable expenses from order $ 864,000 Additional revenue from order $ 1,120,000 Additional variable expenses from order $ (864,000) Special order increase in fixed expenses

LO: 8-2 EOC: E8-18A

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Manufacturing $220

If a special sales order is accepted for 2,500 seats at a price of $310 per unit, fixed costs increase by $6,500, and variable marketing and administrative costs for that order are $25 per unit, how would operating income be affected? (NOTE: Assume regular sales are not affected by the special order.)

A) Increase by $218,500 B) Decrease by $156,000 C) Increase by $162,500 D) Increase by $156,000 Answer: D Explanation: D) Variable Mfg. Cost $ 220 Variable Marketing $ 25 Total Variable $ 245 Now Sales Price $ 310

Less Total Variable Cost 245 = Contribution Margin $ 65 Times units sold × 2,500 = Contribution Margin $ 162,500 Less: add'l fixed cost 6,500 = Add'l Profit $ 156,000 Diff: 2

LO: 8-2 EOC: E8-18A

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49) Samson Incorporated provided the following information regarding its only product:

Sale price per unit $50.00

Direct materials used $160,000

Direct labor incurred $185,000

Variable manufacturing overhead $120,000 Variable selling and administrative expenses $70,000

Fixed manufacturing overhead $65,000

Fixed selling and administrative expenses $12,000

Units produced and sold 20,000

Assume no beginning inventory

Assuming there is excess capacity, what would be the effect on operating income of accepting a special order for 5,000 units at a sale price of $40 per product? (NOTE: Assume regular sales are not affected by the special order.)

A) Decrease by $66,250 B) Increase by $66,250 C) Increase by $200,000 D) Increase by $333,750 Answer: B Explanation: B) Direct Materials $ 160,000 Direct Labor 185,000 Variable Mfg. O/H 120,000 Variable Selling 70,000

Total Mfg. Cost $ 535,000 / units produced 20,000 = $ 26.75 Mfg. cost per unit Then

Sales Price $ 40 Less Mfg cost per Unit 26.75 = Contribution Margin $ 13.25 Times units sold × 5,000 Profit = $66,250 Diff: 2

LO: 8-2 EOC: E8-18A

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Assuming there is excess capacity, what would be the effect on operating income of accepting a special order for 3,000 units at a sale price of $45 per product assuming additional fixed manufacturing overhead costs of $5,000 is incurred? (NOTE: Assume regular sales are not affected by the special order.)

A) Increase by $135,000 B) Decrease by $49,750 C) Increase by $49,750 D) Increase by $54,750 Answer: C Explanation: C) Direct Materials $ 160,000 Direct Labor 185,000 Variable Mfg. O/H 120,000 Variable Selling 70,000

Sales Price $ 45.00 Less Mfg cost per Unit 26.75 = Contribution Margin $ 18.25 Times units sold × 3,000

Total Contribution Margin = $54,750 Less Add'l Fixed cost - 5,000

Add'l Profit 49,750 Diff: 3

LO: 8-2 EOC: E8-18A

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Assuming there is excess capacity, what would be the effect on operating income of accepting a special order for 1,200 units at a sale price of $47 per product? The 1,200 units would not require any variable selling and administrative expenses. (NOTE: Assume regular sales are not affected by the special order.) A) Increase by $84,300 B) Decrease by $28,500 C) Increase by $24,300 D) Increase by $28,500 Answer: D Explanation: D) Direct Materials $ 160,000 Direct Labor 185,000 Variable Mfg. O/H 120,000 Variable Selling 70,000

Sales Price $ 47 Less Mfg cost per Unit 23.25 = Contribution Margin $ 23.75 Times units sold × 1,200 Profit = $28,500 Diff: 2

LO: 8-2 EOC: E8-18A

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52) Blue Technologies manufactures and sells DVD players. Great Products Company has offered Blue Technologies $22 per DVD player for 10,000 DVD players. Blue Technologies' normal selling price is $30 per DVD player. The total manufacturing cost per DVD player is $12 and consists of variable costs of $14 per DVD player and fixed overhead costs of $4 per DVD player. (NOTE: Assume excess capacity and no effect on regular sales.)

How much are the expected increase (decrease) in revenues and expenses from the special sales order? A) Expected increase in revenues $220,000; expected increase in expenses $140,000

B) Expected increase in revenues $220,000; expected increase in expenses $40,000 C) Expected increase in revenues $300,000; expected increase in expenses $140,000 D) Expected increase in revenues $220,000; expected increase in expenses $120,000 Answer: A

Explanation: A) $ 22 × 10,000 = $ 220,000 Add'l Revenue $ 14 × 10,000 = $ 140,000 Add'l Expense

Diff: 2 LO: 8-2 EOC: E8-18A

53) Blue Technologies manufactures and sells DVD players. Great Products Company has offered Blue Technologies $22 per DVD player for 10,000 DVD players. Blue Technologies' normal selling price is $30 per DVD player. The total manufacturing cost per DVD player is $12 and consists of variable costs of $14 per DVD player and fixed overhead costs of $4 per DVD player. (NOTE: Assume excess capacity and no effect on regular sales.)

Should Blue Technologies accept or reject the special sales order? A) Accept, because operating income would increase $360,000. B) Reject, because operating income would decrease $80,000. C) Accept, because operating income would increase $80,000. D) Reject, because operating income would decrease $160,000. Answer: C

Explanation: C) $ 22 × 10,000 = $ 220,000 Add'l Revenue Less $ 14 × 10,000 = 140,000 Add'l Expense

= $ 80,000 Operating Income Diff: 2

LO: 8-2 EOC: E8-18A

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54) ABC Toys manufactures and sells wooden toys for $15 each. The company has the capacity to produce 25,000 toys in a year, but is currently producing and selling 20,000 toys per year. The company currently is incurring the following costs at its current production level of 20,000 toys:

Variable manufacturing costs $ 70,000

Fixed manufacturing costs $ 90,000

Variable selling and administrative costs $ 75,000 Fixed selling and administrative costs $ 50,000

A retailer is interested in purchasing the excess capacity of 5,000 toys if it can receive a special price. This special order would not affect ABC Toys' regular sales or its cost structure. ABC Toys' profits would increase from this special order if the special order price per toy is greater than

A) $8.00. B) $5.80. C) $7.25. D) $14.25. Answer: C Explanation: C) Variable Mfg Cost $ 70,000 Variable Selling Cost + 75,000

Total Cost $ 145,000/ 20,000 produced = $ 7.25 Contribution Margin Diff: 2

LO: 8-2 EOC: E8-18A

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55) Apex Company produces artificial Christmas trees. A local shopping mall recently made a special order offer; the shopping mall would like to purchase 200 extra large white trees. Apex Company is currently producing and selling 20,000 trees; the company has the excess capacity to handle this special order. The shopping mall has offered to pay $120 for each tree. An accountant at Apex Company provides an estimate of the unit product cost as follows:

Direct materials $ 50.00

Direct labor (variable) $ 3.50

Variable manufacturing overhead $ 1.00

Fixed manufacturing overhead $ 4.00

Total unit cost $ 14.50

This special order would require an investment of $10,000 for the molds required for the extra large trees. These molds would have no other purpose and would have no salvage value. The special order trees would also have an additional variable cost of $5.00 per unit associated with having a white tree. This special order would not have any effect on the company's other sales. If the special order is accepted, the company's operating income would increase (decrease) by

A) $2,300 decrease. B) $13,100 decrease. C) $2,100 increase. D) $13,100 increase. Answer: C Explanation: C) Direct materials $ 50.00 Direct Labor 3.50 Variable MOH 1.00 Add'l variable cost 5.00 Total Mfg cost $ 59.50 Now Selling Price $ 120.00 Mfg cost 59.50

Contribution Margin $ 60.50 × 200 units = 12,100 - 10,000 Add'l Fixed = $ 2,100 Diff: 2

LO: 8-2 EOC: E8-18A

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56) The following information relates to current production of outdoor chaise lounges at Backyard Posh: Variable manufacturing costs per unit $ 102.00

Total fixed manufacturing costs $ 525,000 Variable marketing and administrative costs per unit $ 30.00 Total fixed marketing and administrative costs $ 250,000

The regular selling price per chaise lounge is $300.00. The company is analyzing the opportunity to accept a special sales order for 1,200 chaise lounges at a price of $225.00 per unit. Fixed costs would remain unchanged. The company has the capacity to produce 15,000 chaise lounges per year, but is currently producing and selling 10,000 chaise lounges per year. Regular sales will not be affected by the special order. If the company were to accept this special order, how would operating income be affected? A) Increase by $270,000 B) Increase by $111,600 C) Decrease by $111,600 D) Decrease by $270,000 Answer: B Explanation: B)

unit

Additional expenses from order $ 158,400 Additional revenue from order $ 270,000 Additional expenses from order

LO: 8-2 EOC: E8-18A

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The regular selling price per chaise lounge is $300.00. The company is analyzing the opportunity to accept a special sales order for 800 chaise lounge at a price of $250.00 per unit. Fixed costs would remain

unchanged. The company has the capacity to produce 15,000 chaise lounges per year, but is currently producing and selling 10,000 chaise lounges per year. Regular sales will not be affected by the special order. If the company were to accept this special order, how would operating income be affected? A) Decrease by $94,400 B) Decrease by $118,400 C) Increase by $94,400 D) Increase by $118,400 Answer: D Explanation: D)

Special sales order volume 800 Special order price per unit

Additional revenue from order $ 200,000 Special sales order volume 800 Variable manufacturing costs per unit

Additional expenses from order $ 81,600 Additional revenue from order $ 200,000 Additional expenses from order

LO: 8-2 EOC: E8-18A

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58) The following information relates to current production of outdoor chaise lounges Backyard Posh: Variable manufacturing costs per unit $ 102.00

The regular selling price per chaise lounge is $300.00. The company is analyzing the opportunity to accept a special sales order for 200 chaise lounges at a price of $200.00 per unit. Fixed costs would increase by $20,000. The company has the capacity to produce 15,000 chaise lounges per year, but is currently producing and selling 10,000 chaise lounges per year. Regular sales will not be affected by the special order. If the company were to accept this special order, how would operating income be affected? A) Decrease by $6,400 B) Increase by $13,600 C) Decrease by $13,600 D) Increase by $6,400 Answer: A Explanation: A)

Special sales order volume 200

Special order price per unit

unit

Total variable costs per unit $ 132.00

Total variable costs per unit

Additional variable expenses from order $ 26,400 Additional revenue from order $ 40,000 Additional variable expenses from order $ (26,400) Special order increase in fixed expenses

LO: 8-2 EOC: E8-18A

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The regular selling price per chaise lounge is $300.00. The company is analyzing the opportunity to accept a special sales order for 500 chaise lounges at a price of $200.00 per unit. Variable marketing and

administrative costs would be $10 per unit lower than on regular sales. Fixed costs would increase by $15,000. The company has the capacity to produce 15,000 chaise lounges per year, but is currently producing and selling 10,000 chaise lounges per year. Regular sales will not be affected by the special order. If the company were to accept this special order, how would operating income be affected? A) Decrease by $39,000 B) Decrease by $24,000 C) Increase by $39,000 D) Increase by $24,000 Answer: D Explanation: D)

Special order price per unit

unit

Total variable costs per unit

Additional variable expenses from order $ 61,000 Additional revenue from order $ 100,000 Additional variable expenses from order $ (61,000) Special order increase in fixed expenses

LO: 8-2 EOC: E8-18A

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60) Pluto Incorporated provided the following information regarding its single product:

Direct materials used $ 240,000

Direct labor incurred $ 420,000

Variable manufacturing overhead $ 160,000 Fixed manufacturing overhead $ 100,000 Variable selling and administrative expenses $ 60,000 Fixed selling and administrative expenses $ 20,000

The regular selling price for the product is $80. The annual quantity of units produced and sold is 40,000 units (the costs above relate to the 40,000 units production level). The company has excess capacity and regular sales will not be affected by this special order. There was no beginning inventory.

What would be the effect on operating income of accepting a special order for 3,500 units at a sale price of $55 per product? A) Increase by $115,500 B) Increase by $269,500 C) Decrease by $115,500 D) Decrease by $269,500 Answer: A Explanation: A) Direct Materials $ 240,000 Direct Labor 420,000 Variable Overhead 160,000 Variable Selling 60,000 Total $ 880,000 Total $880,000 Divided by production 40,000

Cost per unit $ 22.00

Selling Price $ 55.00

Less cost per unit 22.00 Contribution Margin $ 33.00 × units sold × 3,500 Operating Income $ 115,500 Diff: 2 LO: 8-2 EOC: E8-18A

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What would be the effect on operating income of accepting a special order for 1,500 units at a sale price of $50 per product assuming additional fixed manufacturing overhead costs of $10,000 are incurred? A) Decrease by $42,000 B) Decrease by $32,000 C) Increase by $32,000 D) Increase by $42,000 Answer: C Explanation: C) Direct Materials $ 240,000 Direct Labor 420,000 Variable Overhead 160,000 Variable Selling 60,000 Total $ 880,000 Total $880,000 Divided by production 40,000

Cost per unit $ 22.00

Selling Price $ 50.00

Less cost per unit 22.00 Contribution Margin $ 28.00

× units sold × 1,500

Operating Income $ 42,000

Less Add’d Fixed Cost 10,000

Operating (loss) $32,000

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What would be the effect on operating income of accepting a special order for 1,000 units at a sale price of $40 per product? The special order units would not require any variable selling and administrative expenses. A) Decrease by $18,000 B) Decrease by $19,500 C) Increase by $18,000 D) Increase by $19,500 Answer: D

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Explanation: D)

Divide by Divide by

Units produced and sold

Direct materials cost per unit $ 6.00 Direct labor incurred $ 420,000

Divide by Divide by

Direct labor costs per unit $ 10.50 Variable manufacturing overhead $ 160,000

Divide by Divide by

Variable manufacturing overhead cost per unit $ 4.00 Direct materials cost per unit $ 6.00 Direct labor costs per unit $ 10.50 Variable manufacturing overhead per unit

Special order volume 1,000

Special order sales price per unit

Additional revenue from order $ 40,000

Special order volume 1,000

Special order sales price per unit

Additional revenue from order $ 20,500 Additional revenue from order $ 40,000 Additional variable costs per unit

LO: 8-2 EOC: E8-18A

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63) Indicate whether each item below is a characteristic of a taker or a setter. Use PT for price-taker and PS for price-setter.

a) Cost-plus pricing

b) Product lacks uniqueness c) Less competition d) Target pricing e) Heavy competition Answer: a) PS b) PT c) PS d) PT e) PT Diff: 1 LO: 8-2 EOC: E8-17A

(35)

64) Mountaintop golf course is planning for the coming season. Investors would like to earn a 12% return on the company's $50 million of assets. The company primarily incurs fixed costs to groom the greens and fairways. Fixed costs are projected to be $25,000,000 for the golfing season. About 400,000 golfers are expected each year. Variable costs are about $8 per golfer. The Mountaintop golf course has a favorable reputation in the area and therefore, has some control over the price of a round of golf. Using a cost-plus approach, what price should Mountaintop charge for a round of golf?

Answer:

Variable costs per unit $ 8.00 Expected volume

Total variable costs $ 3,200,000 Investors' return (% of assets) 12% Total assets

Desired profit $ 6,000,000

Total fixed costs $ 25,000,000 Total assets Total costs $ 28,200,000 Desired profit Target revenue $ 34,200,000 Divide by Divide by Expected volume

Cost-plus price per round of golf

(36)

65) Mountaintop golf course is planning for the coming season. Investors would like to earn a 12% return on the company's $50 million of assets. The company primarily incurs fixed costs to groom the greens and fairways. Fixed costs are projected to be $25,000,000 for the golfing season. About 400,000 golfers are expected each year. Variable costs are about $8 per golfer. The Mountaintop golf course is a price-taker and won't be able to charge more than its competitors who charge $75 per round of golf. What profit will it earn? State your answer in dollars and as a percent of assets. Will investors be happy with the profit level?

Answer: Market price per unit $ 75.00 Expected volume

Revenue at market price $ 30,000,000 Variable costs per unit $ 8.00 Expected volume

Total variable costs $ 3,200,000 Revenue at market price $ 30,000,000 Less: total fixed costs $ (25,000,000)

total variable costs Operating income Investors' return (% of ssets) 12% Total assets Desired profit $ 6,000,000 Operating income

Profit expectation shortfall $ 4,200,000 Profit expectation shortfall $ 4,200,000

Divide by Divide by

Total assets Percent of assets

No, investors will not be happy. They wanted 12% ROI. Diff: 3

LO: 8-2 EOC: E8-17A

(37)

66) Extreme Sports received a special order for 1,000 units of its extreme motorbike at a selling price of $250 per motorbike. Extreme Sports has enough extra capacity to accept the order. No additional selling costs will be incurred.

Unit costs to make and sell this product are as follows: Direct materials, $100; direct labor, $50; variable manufacturing overhead, $14; fixed manufacturing overhead, $10, and variable selling costs, $2. A) List the relevant costs.

B) What will be the change in operating income if Extreme Sports accepts the special order? C) Should Extreme Sports accept the special order?

Answer: A)

Relevant costs:

Direct material $ 100.00

Direct labor $ 50.00

Total relevant costs $ 164.00

B)

Special offer volume 1,000

Special offer price $ 250.00

Additional revenue from order $ 250,000 Relevant costs:

Special offer volume 1,000 Additional expenses from order $ 164,000 Additional revenue from order $ 250,000 Additional expenses from order $ (164,000) Change in operating income $ 86,000 C) Yes, Extreme Sports should accept the order.

(38)

67) Jeff's Widget Corporation produces and sells a part used in the production of bicycles. The unit costs associated with this part are as follows:

Direct materials $.14

Direct labor .30

Variable manufacturing overhead .20 Fixed manufacturing overhead .05

Total cost $.69

Saturn Company has approached Jeff's Widget Corporation with an offer to purchase 20,000 units of this part at a price of $.80. Accepting this special sales order will put idle manufacturing capacity to use and will not affect regular sales. Total fixed costs will not change.

Determine whether or not the special order should be accepted. Justify your conclusion. Answer:

Direct labor $ 0.30

Total costs $ 0.64

Additional expenses from order $ 12,800 Additional revenue from order $ 16,000 Additional expenses from order $ (12,800) Change in operating income $ (3,200)

The company should accept the special order since total operating income would increase if the special order were to be accepted.

(39)

68) Revved Up Toys manufactures a computer chip used in the production of remote control cars. When 6,000 cars are produced, the costs per part are:

Direct materials $2.50

Direct labor 1.50

Variable manufacturing overhead 1.00 Fixed manufacturing overhead 1.75

Total $6.75

Sam's Associates has offered to sell Revved Up Toys 6,000 parts for $5.75 each. If Sarah accepts the offer, $1.00 of the fixed manufacturing overhead costs can be eliminated.

a. What is the relevant per unit cost to manufacture the part? b. Which alternative is best for Revved Up Toys and by how much? Answer:

a. Relevant costs to manufacture the part include direct materials, direct labor, variable manufacturing overhead, and fixed manufacturing overhead that can be eliminated, or:

Direct labor $1.50

Variable manufacturing overhead $1.00 Traceable fixed cost per unit $1.00 Relevant cost to produce each unit $6.00 b.

Direct labor $1.50

Variable manufacturing overhead $1.00 Traceable fixed cost per unit $1.00 Relevant cost to produce each unit $6.00

Offer price by supplier $(5.75)

Savings per unit if bought $0.25

Production level 6,000

Total increase in operating income if bought $1,500 Diff: 2

LO: 8-2 EOC: P8-43A

(40)

69) Elite Office Furniture received a special order for 1,200 units of its executive chair at a selling price of $90 per chair. Elite Office Furniture has enough capacity to accept the order. No additional selling costs will be incurred. Unit costs to make and sell this product are as follows: Direct Materials $45; Direct Labor $19; Variable Manufacturing Overhead $6; Fixed Manufacturing Overhead $12; and Variable Selling Costs $5.

List the relevant costs (and amount) to Elite Office Furniture for this special order. Answer:

(41)

70) Elite Office Furniture received a special order for 1,200 units of its executive chairs at a selling price of $90 per chair. Elite Office Furniture has enough capacity to accept the order. No additional selling costs will be incurred. Unit costs to make and sell this product are as follows: Direct Materials $45; Direct Labor $19; Variable Manufacturing Overhead $6; Fixed Manufacturing Overhead $12; and Variable Selling Costs $5.

What will be Elite Office Furniture's change in operating income if they accept the special order? Should Elite Office Furniture accept the order? Explain why or why not.

Answer:

Additional expenses from order $ 84,000 Additional revenue from order $ 108,000 Additional expenses from order $ (84,000) Increase in operating income $ 24,000

Yes, they should accept the order as it results in additional operating income since the company has the additional capacity.

Diff: 2 LO: 8-2 EOC: P8-43A

(42)

71) Heinz Manufacturing produces Item Q with variable manufacturing costs of $12/unit. The selling price of Item Q is $15/unit. The fixed manufacturing overhead cost is $72,000. A normal production run includes 100,000 units. Heinz Manufacturing has discovered an additional process to change Item Q into Item QR. Additional costs are estimated at $7/unit. Item QR would sell for $24/unit. Additional fixed manufacturing overhead costs of $4,500 would be incurred if Item QR is produced. There would be no change in the number of units produced.

What would be the operating income for Item Q? Answer:

Production volume 100,000

Product Q selling price $ 15.00

Product Q revenue $ 1,500,000

Product Q variable costs $ 12.00 Product Q total variable costs $ 1,200,000

Product Q total variable costs $ (1,200,000) Fixed manufacturing overhead for product

Q $ (72,000)

Operating income for Q $ 228,000 Diff: 2

LO: 8-2 EOC: P8-43A

(43)

What would be the operating income for Item QR? Answer:

Product QR selling price $ 24.00

Product QR revenue $ 2,400,000

Product Q variable costs $ 12.00 Product QR additional costs $ 7.00 Product QR variable costs $ 19.00

Product QR total variable costs $ 1,900,000 Fixed manufacturing overhead for product Q $ 72,000 Additional fixed manufacturing overhead $ 4,500 Fixed manufacturing overhead for product

QR $ 76,500

Product QR total variable costs $ (1,900,000) Fixed manufacturing overhead for product

QR $ (76,500)

Operating income for QR $ 423,500 Diff: 2

LO: 8-2 EOC: P8-43A

(44)

Answer:

Product Q selling price $ 15.00

Product Q variable costs $ 12.00

Product Q total variable costs $ 1,200,000

Product Q total variable costs $(1,200,000) Fixed manufacturing overhead for product Q $ (72000)

Operating income for Q $ 228,000

Product QR:

Product QR selling price $ 24.00

Product Q variable costs $ 12.00

Product QR additional costs $ 7.00

Product QR variable costs $ 19.00

Product QR total variable costs $ 1,900,000 Fixed manufacturing overhead for product Q $ 72,000 Additional fixed manufacturing overhead $ 4,500 Fixed manufacturing overhead for product

QR $ 76,500

Product QR total variable costs $(1,900,000) Fixed manufacturing overhead for product

QR $ (76,500)

Operating income for QR $ 423,500

Divide by Divide by

Operating income for Q $ 228,000

1.857 Subtract (1) Increase in income 85.75% Diff: 2 LO: 8-2 EOC: P8-43A

(45)

74) Companies operating in highly competitive industries are generally price-setters. Answer: FALSE

75) When setting prices, a company need not consider whether it is a price-taker or a price-setter for each product that it sells.

LO: 8-3 EOC: S8-3

Learning Outcome: Use incremental analysis to make short-term decisions 76) A price-setter company emphasizes a cost-plus approach to pricing. Answer: TRUE

77) For a product, revenue at market price plus desired operating profit equals target total cost. Answer: FALSE

78) When a company is a price-setter, it emphasizes a target costing approach to pricing. Answer: FALSE

(46)

79) When making a pricing decision, it is not necessary to separate costs into fixed and variable. Answer: FALSE

Learning Outcome: Use incremental analysis to make short-term decisions 80) Cost-plus price minus desired profit equals total cost.

LO: 8-3 EOC: S8-4

81) When using a target costing approach, the company starts with revenue at market price, and then subtracts its desired profit, to yield the target total cost.

LO: 8-3 EOC: S8-4

82) Companies often try to gain more control over pricing by attempting to differentiate their products. Answer: TRUE

83) Product differentiation allows companies to become more of a price-setter, and less of a price-taker. Answer: TRUE

Learning Outcome: Use incremental analysis to make short-term decisions 84) When setting prices, managers need to consider all costs.

LO: 8-3 EOC: S8-4

(47)

85) Managers need to consider variable costs, fixed costs, inventoriable product costs and period costs when setting prices.

LO: 8-3 EOC: S8-4

Learning Outcome: Use incremental analysis to make short-term decisions 86) Cost-plus pricing is essentially the opposite of target-costing.

LO: 8-3 EOC: S8-4

Learning Outcome: Use incremental analysis to make short-term decisions 87) Which of the following best describes "target costing"?

A) An approach to pricing that begins with revenue at market price and subtracts desired profit to arrive at target total cost

B) A factor that restricts production or sales of a product

C) All costs incurred along the value chain in connection with the product or service D) An approach to pricing that begins with the product's total cost and adds desired profit Answer: A

Learning Outcome: Use incremental analysis to make short-term decisions 88) "Total cost of product or service" is best described as which of the following? A) Benefits foregone by choosing a particular alternative course of action B) A factor that restricts production or sales of a product

C) Costs that were incurred in the past and can not be changed

D) All costs incurred along the value chain in connection with the product or service Answer: D

(48)

89) Which of the following describes the products and services of companies that are price-setters? A) They tend to be unique.

B) They are priced by managers using a target-costing emphasis. C) They tend to have a lot of competitors.

D) They tend to be commodities. Answer: A

90) Stockholders' expectations of company profits are affected by which of the following? A) Industry risk

B) Historical company earnings C) General economic conditions D) All of the above

Learning Outcome: Use incremental analysis to make short-term decisions 91) The cost-plus price is described by which of the following?

A) Target total cost plus desired profit B) Total cost plus desired profit

C) Revenue at market price plus desired profit D) Variable cost plus desired profit

Learning Outcome: Use incremental analysis to make short-term decisions 92) Target total cost is described by which of the following?

A) Total cost plus desired profit

B) Revenue at market price plus desired profit C) Revenue at market price minus desired profit D) Total cost minus actual cost

Answer: C Diff: 2 LO: 8-3 EOC: S8-3

(49)

93) Managers must consider which of the following when pricing a product or service? A) All costs

B) Only period costs

C) Only manufacturing costs D) Only variable costs Answer: A

Learning Outcome: Use incremental analysis to make short-term decisions 94) Which of the following pairs are characteristics of price-takers?

A) Less competition and target pricing B) Cost-plus pricing and less competition C) Target costing and heavy competition

D) Cost-plus pricing and lack of product uniqueness Answer: C

Learning Outcome: Use incremental analysis to make short-term decisions 95) Which of the following pairs are characteristics of price-setters?

A) Less competition and target costing B) Cost-plus pricing and less competition

C) Lack of product uniqueness and heavy competition D) Less competition and lack of product uniqueness Answer: B

Learning Outcome: Use incremental analysis to make short-term decisions 96) Big-box retailers such as Lowe's are considered price-takers because A) their products are not unique.

B) there is less competition in the home improvement retail sector. C) their products are unique.

D) they emphasize cost-plus pricing. Answer: A

(50)

97) Target total cost is defined as

A) cost of goods sold less desired profit. B) revenue at market price less desired profit. C) revenue at market price less variable costs. D) revenue at market price less fixed costs. Answer: B

98) Methods for a company to meet target total cost and the profit goals if the current cost of the product is higher than the target cost include which of the following?

A) Accept a lower profit

B) Cut fixed costs, cut variable costs C) Cut fixed costs

D) Any of the above Answer: D

Learning Outcome: Use incremental analysis to make short-term decisions 99) In pricing a product, managers should consider which of the following? A) Only fixed costs

B) Only variable costs C) Only period costs D) None of the above Answer: D