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Chapter 013, Relevant Costs for Decision Making Key

True / False Questions


1. The book value of old equipment is not a relevant cost in a decision.
TRUE

AACSB: Reflective Thinking


AICPA BB: Critical Thinking
AICPA FN: Measurement
Learning Objective: 1
Level: Easy

2. One of the dangers of allocating common fixed costs to a product line is that such
allocations can make the line appear less profitable than it really is.
TRUE

AACSB: Reflective Thinking


AICPA BB: Critical Thinking
AICPA FN: Measurement
Learning Objective: 1
Level: Medium

3. A differential cost is a variable cost.


FALSE

AACSB: Reflective Thinking


AICPA BB: Critical Thinking
AICPA FN: Measurement
Learning Objective: 1
Level: Medium

4. All future costs are relevant in decision making.


FALSE

AACSB: Reflective Thinking


AICPA BB: Critical Thinking
AICPA FN: Measurement
Learning Objective: 1
Level: Medium

13-1

Chapter 013, Relevant Costs for Decision Making Key

5. Variable costs are always relevant costs.


FALSE

AACSB: Reflective Thinking


AICPA BB: Critical Thinking
AICPA FN: Measurement
Learning Objective: 1
Level: Medium

6. A sunk cost is a cost that has already been incurred but that can be avoided at least in part
depending on the action a manager takes.
FALSE

AACSB: Reflective Thinking


AICPA BB: Critical Thinking
AICPA FN: Measurement
Learning Objective: 1
Level: Medium

7. A cost that will be incurred regardless of which course of action a manager takes is relevant
to the manager's decision.
FALSE

AACSB: Reflective Thinking


AICPA BB: Critical Thinking
AICPA FN: Measurement
Learning Objective: 1
Level: Easy

8. Opportunity costs are recorded in the accounts of an organization.


FALSE

AACSB: Reflective Thinking


AICPA BB: Critical Thinking
AICPA FN: Measurement
Learning Objective: 1
Level: Easy

13-2

Chapter 013, Relevant Costs for Decision Making Key

9. In a decision to drop a segment, the opportunity cost of the space occupied by the segment
would be the profit that could be derived from the best alternative use of the space.
TRUE

AACSB: Reflective Thinking


AICPA BB: Critical Thinking
AICPA FN: Measurement
Learning Objective: 2
Level: Medium

10. Only the variable costs identified with a product are relevant in a decision concerning
whether to eliminate the product.
FALSE

AACSB: Reflective Thinking


AICPA BB: Critical Thinking
AICPA FN: Measurement
Learning Objective: 2
Level: Medium

11. Managers should pay little attention to bottleneck operations because they have limited
capacity for producing output.
FALSE

AACSB: Reflective Thinking


AICPA BB: Critical Thinking
AICPA FN: Measurement
Learning Objective: 5
Level: Hard

12. Defective units should be detected and scrapped or reworked after the bottleneck
operation rather than before it.
FALSE

AACSB: Reflective Thinking


AICPA BB: Critical Thinking
AICPA FN: Measurement
Learning Objective: 5
Level: Medium

13-3

Chapter 013, Relevant Costs for Decision Making Key

13. All other things equal, it is profitable to continue processing a joint product after the splitoff point so long as the incremental revenue from further processing exceeds the incremental
costs of further processing.
TRUE

AACSB: Reflective Thinking


AICPA BB: Critical Thinking
AICPA FN: Measurement
Learning Objective: 6
Level: Easy

14. Two or more different products that are manufactured in the same production period are
known as joint products.
FALSE

AACSB: Reflective Thinking


AICPA BB: Critical Thinking
AICPA FN: Measurement
Learning Objective: 6
Level: Medium

15. A merchandising company that buys all of its inventory from outside suppliers is an
example of a company that is vertically integrated.
FALSE

AACSB: Reflective Thinking


AICPA BB: Critical Thinking
AICPA FN: Measurement
Learning Objective: 7
Level: Easy

13-4

Chapter 013, Relevant Costs for Decision Making Key

Multiple Choice Questions


16. For which of the following decisions are opportunity costs relevant?

A. Choice A
B. Choice B
C. Choice C
D. Choice D

AACSB: Reflective Thinking


AICPA BB: Critical Thinking
AICPA FN: Measurement
Learning Objective: 1
Level: Easy

17. Which of the following costs are always irrelevant in decision making?
A. avoidable costs
B. sunk costs
C. opportunity costs
D. fixed costs

AACSB: Reflective Thinking


AICPA BB: Critical Thinking
AICPA FN: Measurement
Learning Objective: 1
Level: Easy

13-5

Chapter 013, Relevant Costs for Decision Making Key

18. For which of the following decisions are sunk costs relevant?
A. the decision to keep an old machine or buy a new one.
B. the decision to sell a product at the split-off point or after further processing.
C. the decision to accept or reject a special order offer.
D. all of these.
E. none of these.

AACSB: Reflective Thinking


AICPA BB: Critical Thinking
AICPA FN: Measurement
Learning Objective: 1
Level: Easy

19. The opportunity cost of making a component part in a factory with excess capacity for
which there is no alternative use is:
A. the variable manufacturing cost of the component.
B. the total manufacturing cost of the component.
C. the fixed manufacturing cost of the component.
D. zero.

AACSB: Reflective Thinking


AICPA BB: Critical Thinking
AICPA FN: Measurement
Learning Objective: 1
Level: Medium
Source: CMA, adapted

20. Allocated common fixed costs:


A. can make a product line appear to be unprofitable.
B. are always incremental costs.
C. are always relevant in decisions involving dropping a product line.
D. responses A, B, and C are all correct.

AACSB: Reflective Thinking


AICPA BB: Critical Thinking
AICPA FN: Measurement
Learning Objective: 2
Level: Easy

13-6

Chapter 013, Relevant Costs for Decision Making Key

21. In deciding whether to manufacture a part or buy it from an outside supplier, which of the
following costs are irrelevant?

A. Choice A
B. Choice B
C. Choice C
D. Choice D

AACSB: Reflective Thinking


AICPA BB: Critical Thinking
AICPA FN: Measurement
Learning Objective: 3
Level: Medium

22. Consider a decision facing a company of either accepting or rejecting a special offer for
one of its products. A cost that is not relevant is:
A. direct materials.
B. variable overhead.
C. fixed overhead that will be avoided if the special offer is accepted.
D. common fixed overhead that will continue if the special offer is not accepted.

AACSB: Reflective Thinking


AICPA BB: Critical Thinking
AICPA FN: Measurement
Learning Objective: 4
Level: Easy

13-7

Chapter 013, Relevant Costs for Decision Making Key

23. Which product would be selected in a decision that involves the utilization of a
constrained resource?
A. the product with the lowest total cost per unit.
B. the product with the lowest variable cost per unit.
C. the product that uses the least amount of constrained resource per unit.
D. the product with the highest contribution margin per unit.
E. the product with the highest contribution margin per unit of the constrained resource.

AACSB: Reflective Thinking


AICPA BB: Critical Thinking
AICPA FN: Measurement
Learning Objective: 5
Level: Medium

24. In a plant operating at capacity:


A. every machine and person in the plant is working at the maximum possible rate.
B. only some specific machines or processes are operating at the maximum rate possible.
C. profits are maximized.
D. managers should produce those products with the highest contribution margin in order to
deal with the constrained resource.

AACSB: Reflective Thinking


AICPA BB: Critical Thinking
AICPA FN: Measurement
Learning Objective: 5
Level: Hard

25. United Industries manufactures a number of products at its highly automated factory. The
products are very popular, with demand far exceeding the factory's capacity. To maximize
profit, management should rank products based on their:
A. gross margin
B. contribution margin
C. selling price
D. contribution margin per unit of the constrained resource

AACSB: Reflective Thinking


AICPA BB: Critical Thinking
AICPA FN: Measurement
Learning Objective: 5
Level: Easy
Source: CMA, adapted

13-8

Chapter 013, Relevant Costs for Decision Making Key

26. Sheela Dairy Corporation buys unprocessed cows' milk from local farmers. At the dairy,
this unprocessed milk is broken down into cream and low-fat milk. The cream can be sold at
this point or can be further processed into butter. Which of the following would be relevant in
the decision to further process the cream into butter?
A. the amount paid to the farmers to purchase the unprocessed milk.
B. the cost of breaking down the unprocessed milk into cream and low-fat milk.
C. the portion of corporate fixed expenses that are currently being allocated to cream.
D. none of these.

AACSB: Reflective Thinking


AICPA BB: Critical Thinking
AICPA FN: Measurement
Learning Objective: 6
Level: Medium

27. Consider the following statements:


I. A vertically integrated company is more dependent on its suppliers than a company that is
not vertically integrated.
II. Many companies feel they can control quality better by making their own parts.
III. A vertically integrated company realizes profits from the parts it is "making" instead of
"buying" as well as profits from its regular operations.
Which of the above statements represent advantages to a company that is vertically
integrated?
A. Only I
B. Only III
C. Only I and II
D. Only II and III

AACSB: Reflective Thinking


AICPA BB: Critical Thinking
AICPA FN: Measurement
Learning Objective: 7
Level: Medium

13-9

Chapter 013, Relevant Costs for Decision Making Key

28. JB Lumber Corporation is downsizing operations and has to decide which of its large
saws should be sold. JB currently has four saws but only needs to keep three. All four saws
have a remaining useful life of 3 years and will all have a salvage value of zero at the end of
those 3 years. Also, all four saws have equal annual operating costs and output efficiency.
Information related to the four saws is provided below:

In order to maximize profits for the next three years, which machine would be most beneficial
for JB to sell?
A. 1
B. 2
C. 3
D. 4

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Learning Objective: 1
Level: Hard

13-10

Chapter 013, Relevant Costs for Decision Making Key

29. Degner Inc. has some material that originally cost $19,500. The material has a scrap value
of $13,300 as is, but if reworked at a cost of $2,100, it could be sold for $14,000. What would
be the incremental effect on the company's overall profit of reworking and selling the material
rather than selling it as is as scrap?
A. -$20,900
B. $11,900
C. -$7,600
D. -$1,400

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Learning Objective: 1
Level: Medium
Source: CIMA, adapted

13-11

Chapter 013, Relevant Costs for Decision Making Key

30. Corado Corporation has in stock 77,000 kilograms of material N that it bought five years
ago for $7.15 per kilogram. This raw material was purchased to use in a product line that has
been discontinued. Material N can be sold as is for scrap for $4.50 per kilogram. An
alternative would be to use material N in one of the company's current products, M01Y, which
currently requires 2 kilograms of a raw material that is available for $7.15 per kilogram.
Material N can be modified at a cost of $0.94 per kilogram so that it can be used as a
substitute for this material in the production of product M01Y. However, after modification, 4
kilograms of material N is required for every unit of product M01Y that is produced. Corado
Corporation has now received a request from a company that could use material N in its
production process. Assuming that Corado Corporation could use all of its stock of material N
to make product M01Y or the company could sell all of its stock of the material at the current
scrap price of $4.50 per kilogram, what is the minimum acceptable selling price of material N
to the company that could use material N in its own production process?
A. $1.86
B. $2.64
C. $4.52
D. $4.50

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Learning Objective: 1
Level: Hard
Source: CIMA, adapted

13-12

Chapter 013, Relevant Costs for Decision Making Key

31. Mcneilly Inc. is considering using stocks of an old raw material in a special project. The
special project would require all 220 kilograms of the raw material that are in stock and that
originally cost the company $1,804 in total. If the company were to buy new supplies of this
raw material on the open market, it would cost $8.55 per kilogram. However, the company
has no other use for this raw material and would sell it at the discounted price of $7.75 per
kilogram if it were not used in the special project. The sale of the raw material would involve
delivery to the purchaser at a total cost of $97.00 for all 220 kilograms. What is the relevant
cost of the 220 kilograms of the raw material when deciding whether to proceed with the
special project?
A. $1,705
B. $1,881
C. $1,804
D. $1,608

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Learning Objective: 1
Level: Hard
Source: CIMA, adapted

13-13

Chapter 013, Relevant Costs for Decision Making Key

32. Knedler Corporation is preparing a bid for a special order that would require 720 liters of
material C01D. The company already has 200 liters of this raw material in stock that
originally cost $9.90 per liter. Material C01D is used in the company's main product and is
replenished on a periodic basis. The resale value of the existing stock of the material is $9.60
per liter. New stocks of the material can be readily purchased for $10.10 per liter. What is the
relevant cost of the 720 liters of the raw material when deciding how much to bid on the
special order?
A. $7,232
B. $7,272
C. $6,912
D. $6,972
Relevant cost of the raw material = 720 liters x $10.10 = $7,272

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Learning Objective: 1
Level: Hard
Source: CIMA, adapted

33. Lounsberry Inc. regularly uses material O55P and currently has in stock 360 liters of the
material for which it paid $2,484 several weeks ago. If this were to be sold as is on the open
market as surplus material, it would fetch $6.35 per liter. New stocks of the material can be
purchased on the open market for $6.90 per liter, but it must be purchased in lots of 1,000
liters. You have been asked to determine the relevant cost of 800 liters of the material to be
used in a job for a customer. The relevant cost of the 800 liters of material O55P is:
A. $5,080
B. $5,322
C. $5,520
D. $6,900
Relevant cost of the raw material = 800 liters x $6.90 = $5,520

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Learning Objective: 1
Level: Hard

13-14

Chapter 013, Relevant Costs for Decision Making Key

34. Govoni Corporation is a specialty component manufacturer with idle capacity.


Management would like to use its extra capacity to generate additional profits. A potential
customer has offered to buy 9,500 units of component AIG. Each unit of AIG requires 6 units
of material M51 and 4 units of material M93. Data concerning these two materials follow:

Material M51 is in use in many of the company's products and is routinely replenished.
Material M93 is no longer used by the company in any of its normal products and existing
stocks would not be replenished once they are used up.
What would be the relevant cost of the materials, in total, for purposes of determining a
minimum acceptable price for the order for product AIG?
A. $505,667
B. $502,550
C. $458,850
D. $464,550

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Learning Objective: 1
Level: Hard
Source: CIMA, adapted

13-15

Chapter 013, Relevant Costs for Decision Making Key

35. Nowak Corporation is a specialty component manufacturer with idle capacity.


Management would like to use its extra capacity to generate additional profits. A potential
customer has offered to buy 1,600 units of component FHB. Each unit of FHB requires 8
units of material N95 and 1 unit of material K78. Data concerning these two materials follow:

Material N95 is in use in many of the company's products and is routinely replenished.
Material K78 is no longer used by the company in any of its normal products and existing
stocks would not be replenished once they are used up.
What would be the relevant cost of the materials, in total, for purposes of determining a
minimum acceptable price for the order for product FHB?
A. $65,658
B. $61,279
C. $62,135
D. $64,160

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Learning Objective: 1
Level: Hard
Source: CIMA, adapted

13-16

Chapter 013, Relevant Costs for Decision Making Key

36. A study has been conducted to determine if one of the departments in Parry Company
should be discontinued. The contribution margin in the department is $50,000 per year. Fixed
expenses charged to the department are $65,000 per year. It is estimated that $40,000 of these
fixed expenses could be eliminated if the department is discontinued. These data indicate that
if the department is discontinued, the company's overall net operating income would:
A. decrease by $25,000 per year
B. increase by $25,000 per year
C. decrease by $10,000 per year
D. increase by $10,000 per year

The company's overall net operating income would decrease by the amount of the segment
margin of the department were to be discontinued.

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Learning Objective: 2
Level: Easy

13-17

Chapter 013, Relevant Costs for Decision Making Key

37. Vanikoro Corporation currently has two divisions which had the following operating
results for last year:

Since the Rubber Division sustained a loss, the president of Vanikoro is considering the
elimination of this division. All of the fixed costs for the division could be eliminated if the
division was dropped. If the Rubber Division was dropped at the beginning of last year, how
much higher or lower would Vanikoro's total net operating income have been for the year?
A. $10,000 higher
B. $40,000 lower
C. $50,000 higher
D. $100,000 lower
The segment margin of the Rubber Division represents the amount by which the company's
overall net income would drop if the Rubber Division were to be dropped.

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Learning Objective: 2
Level: Medium

13-18

Chapter 013, Relevant Costs for Decision Making Key

38. The management of Austin Corporation is considering dropping product R97C. Data from
the company's accounting system appear below:

In the company's accounting system all fixed expenses of the company are fully allocated to
products. Further investigation has revealed that $34,000 of the fixed manufacturing expenses
and $20,000 of the fixed selling and administrative expenses are avoidable if product R97C is
discontinued. What would be the effect on the company's overall net operating income if
product R97C were dropped?
A. Overall net operating income would increase by $20,000.
B. Overall net operating income would increase by $10,000.
C. Overall net operating income would decrease by $20,000.
D. Overall net operating income would decrease by $10,000.

The company's net operating income would decrease by the segment margin, $20,000, if
product R97C were dropped.

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Learning Objective: 2
Level: Easy

13-19

Chapter 013, Relevant Costs for Decision Making Key

39. Product L28N has been considered a drag on profits at Beets Corporation for some time
and management is considering discontinuing the product altogether. Data from the
company's accounting system appear below:

In the company's accounting system all fixed expenses of the company are fully allocated to
products. Further investigation has revealed that $41,000 of the fixed manufacturing expenses
and $25,000 of the fixed selling and administrative expenses are avoidable if product L28N is
discontinued. What would be the effect on the company's overall net operating income if
product L28N were dropped?
A. Overall net operating income would decrease by $73,000.
B. Overall net operating income would increase by $10,000.
C. Overall net operating income would decrease by $10,000.
D. Overall net operating income would increase by $73,000.

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Learning Objective: 2
Level: Easy

13-20

Chapter 013, Relevant Costs for Decision Making Key

40. Green Company produces 1,000 parts per year, which are used in the assembly of one of
its products. The unit product cost of these parts is:

The part can be purchased from an outside supplier at $20 per unit. If the part is purchased
from the outside supplier, two thirds of the fixed manufacturing costs can be eliminated. The
annual impact on the company's net operating income as a result of buying the part from the
outside supplier would be:
A. $1,000 increase
B. $1,000 decrease
C. $5,000 increase
D. $2,000 decrease

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Learning Objective: 3
Level: Easy

13-21

Chapter 013, Relevant Costs for Decision Making Key

41. A year ago, Crunchy Cola Corporation bought a stamping machine to make the cans for
its cola. The cost of the machine was $60,000. The machine has a useful life of 5 years and a
salvage value of zero at the end of those five years. Annual depreciation on the machine is
$12,000. One year of depreciation has been recorded. The variable manufacturing cost of
producing the cans is $0.05 per can. The only fixed manufacturing cost is the annual
depreciation of $12,000 on the stamping machine. Crunchy needs 200,000 cans annually.
Dagmar Stamping Company recently gave Crunchy an offer to supply all of its can needs for
the next four years at $0.07 per can. If Crunchy buys from Dagmar, the stamping machine
would not be needed and would be sold for $35,000. If Crunchy buys from Dagmar, what will
be the total dollar increase or decrease in income for the next four years?
A. $16,000 decrease
B. $19,000 increase
C. $29,000 decrease
D. $32,000 increase

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Learning Objective: 3
Level: Hard

13-22

Chapter 013, Relevant Costs for Decision Making Key

42. Curly Inc. is considering whether to continue to make a component or to buy it from an
outside supplier. The company uses 16,000 of the components each year. The unit product
cost of the component according to the company's cost accounting system is given as follows:

Assume that direct labor is a variable cost. Of the fixed manufacturing overhead, 30% is
avoidable if the component were bought from the outside supplier. In addition, making the
component uses 1 minutes on the machine that is the company's current constraint. If the
component were bought, this machine time would be freed up for use on another product that
requires 2 minutes on the constraining machine and that has a contribution margin of $8.10
per unit.
When deciding whether to make or buy the component, what cost of making the component
should be compared to the price of buying the component?
A. $20.60
B. $17.52
C. $24.65
D. $21.57

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Learning Objective: 3
Level: Hard
Source: CIMA, adapted

13-23

Chapter 013, Relevant Costs for Decision Making Key

43. Part J88 is used in one of Quinney Corporation's products. The company makes 3,000
units of this part each year. The company's Accounting Department reports the following costs
of producing the part at this level of activity:

An outside supplier has offered to produce this part and sell it to the company for $32.10
each. If this offer is accepted, the supervisor's salary and all of the variable costs, including
direct labor, can be avoided. The special equipment used to make the part was purchased
many years ago and has no salvage value or other use. The allocated general overhead
represents fixed costs of the entire company. If the outside supplier's offer were accepted, only
$3,000 of these allocated general overhead costs would be avoided.
If management decides to buy part J88 from the outside supplier rather than to continue
making the part, what would be the annual impact on the company's overall net operating
income?
A. Net operating income would decline by $22,200 per year.
B. Net operating income would decline by $16,200 per year.
C. Net operating income would decline by $5,400 per year.
D. Net operating income would decline by $19,200 per year.

13-24

Chapter 013, Relevant Costs for Decision Making Key


AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Learning Objective: 3
Level: Easy

44. Crick Corporation makes 11,000 units of part W28 each year. This part is used in one of
the company's products. The company's Accounting Department reports the following costs of
producing the part at this level of activity:

An outside supplier has offered to make and sell the part to the company for $25.50 each. If
this offer is accepted, the supervisor's salary and all of the variable costs, including direct
labor, can be avoided. The special equipment used to make the part was purchased many years
ago and has no salvage value or other use. The allocated general overhead represents fixed
costs of the entire company. If the outside supplier's offer were accepted, only $18,000 of
these allocated general overhead costs would be avoided. In addition, the space used to
produce part W28 would be used to make more of one of the company's other products,
generating an additional segment margin of $12,000 per year for that product.
What would be the impact on the company's overall net operating income of buying part W28
from the outside supplier?
A. Net operating income would decline by $65,000 per year.
B. Net operating income would increase by $5,800 per year.
C. Net operating income would decline by $89,000 per year.
D. Net operating income would increase by $12,000 per year.

13-25

Chapter 013, Relevant Costs for Decision Making Key

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Learning Objective: 3
Level: Medium

13-26

Chapter 013, Relevant Costs for Decision Making Key

45. Outram Corporation is presently making part I14 that is used in one of its products. A total
of 8,000 units of this part are produced and used every year. The company's Accounting
Department reports the following costs of producing the part at this level of activity:

An outside supplier has offered to make and sell the part to the company for $14.80 each. If
this offer is accepted, the supervisor's salary and all of the variable costs can be avoided. The
special equipment used to make the part was purchased many years ago and has no salvage
value or other use. The allocated general overhead represents fixed costs of the entire
company, none of which would be avoided if the part were purchased instead of produced
internally. If management decides to buy part I14 from the outside supplier rather than to
continue making the part, what would be the annual impact on the company's overall net
operating income?
A. Net operating income would decline by $15,200 per year.
B. Net operating income would increase by $15,200 per year.
C. Net operating income would increase by $52,800 per year.
D. Net operating income would decline by $52,800 per year.

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Learning Objective: 3
Level: Easy

13-27

Chapter 013, Relevant Costs for Decision Making Key

46. Part N19 is used by Malouf Corporation to make one of its products. A total of 7,000 units
of this part are produced and used every year. The company's Accounting Department reports
the following costs of producing the part at this level of activity:

An outside supplier has offered to make the part and sell it to the company for $24.50 each. If
this offer is accepted, the supervisor's salary and all of the variable costs, including the direct
labor, can be avoided. The special equipment used to make the part was purchased many years
ago and has no salvage value or other use. The allocated general overhead represents fixed
costs of the entire company, none of which would be avoided if the part were purchased
instead of produced internally. In addition, the space used to make part N19 could be used to
make more of one of the company's other products, generating an additional segment margin
of $25,000 per year for that product. What would be the impact on the company's overall net
operating income of buying part N19 from the outside supplier?
A. Net operating income would decline by $21,900 per year.
B. Net operating income would decline by $60,700 per year.
C. Net operating income would decline by $10,700 per year.
D. Net operating income would increase by $25,000 per year.

13-28

Chapter 013, Relevant Costs for Decision Making Key


AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Learning Objective: 3
Level: Medium

47. Scales Corporation has received a request for a special order of 6,000 units of product Y45
for $13.70 each. Product Y45's unit product cost is $11.50, determined as follows:

Direct labor is a variable cost. The special order would have no effect on the company's total
fixed manufacturing overhead costs. The customer would like modifications made to product
Y45 that would increase the variable costs by $8.10 per unit and that would require an
investment of $20,000 in special molds that would have no salvage value.
This special order would have no effect on the company's other sales. The company has ample
spare capacity for producing the special order. If the special order is accepted, the company's
overall net operating income would increase (decrease) by:
A. ($26,600)
B. $13,200
C. ($55,400)
D. ($21,300)

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Learning Objective: 4
Level: Easy

13-29

Chapter 013, Relevant Costs for Decision Making Key

48. A customer has requested that Daleske Corporation fill a special order for 2,000 units of
product D84 for $20.30 a unit. While the product would be modified slightly for the special
order, product D84's normal unit product cost is $18.50:

Direct labor is a variable cost. The special order would have no effect on the company's total
fixed manufacturing overhead costs. The customer would like modifications made to product
D84 that would increase the variable costs by $2.50 per unit and that would require an
investment of $7,000 in special molds that would have no salvage value.
This special order would have no effect on the company's other sales. The company has ample
spare capacity for producing the special order. If the special order is accepted, the company's
overall net operating income would increase (decrease) by:
A. ($14,900)
B. ($5,800)
C. $3,600
D. ($8,400)

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Learning Objective: 4
Level: Easy

13-30

Chapter 013, Relevant Costs for Decision Making Key

49. Supreme Celery Corporation manufactures four celery based products. Floods and fire on
the west coast are going to cause a shortage of celery for Supreme next month. Information
related to the four celery products that it produces are shown below. The numbers relate to the
cost per case and the amount of celery per case of product:

To maximize profit next month, in what order would it be best for Supreme to schedule
production (first to last)?
A. Jelly, Cracker Spread, Soup, Snack Bars
B. Jelly, Snack Bars, Cracker Spread, Soup
C. Cracker Spread, Snack Bars, Jelly, Soup
D. Snack Bars, Jelly, Soup, Cracker Spread

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Learning Objective: 5
Level: Hard

13-31

Chapter 013, Relevant Costs for Decision Making Key

50. Hobbins Corporation makes three products that use compound W, the current constrained
resource. Data concerning those products appear below:

Rank the products in order of their current profitability from most profitable to least
profitable. In other words, rank the products in the order in which they should be emphasized.
A. UT,RC,DQ
B. DQ,RC,UT
C. RC,DQ,UT
D. UT,DQ,RC

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Learning Objective: 5
Level: Easy

13-32

Chapter 013, Relevant Costs for Decision Making Key

51. An automated turning machine is the current constraint at Greenleaf Corporation. Three
products use this constrained resource. Data concerning those products appear below:

Rank the products in order of their current profitability from most profitable to least
profitable. In other words, rank the products in the order in which they should be emphasized.
A. DK,BG,QU
B. DK,QU,BG
C. QU,BG,DK
D. BG,QU,DK

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Learning Objective: 5
Level: Easy

13-33

Chapter 013, Relevant Costs for Decision Making Key

52. The constraint at Bulman Corporation is time on a particular machine. The company
makes three products that use this machine. Data concerning those products appear below:

Assume that sufficient time is available on the constrained machine to satisfy demand for all
but the least profitable product. Up to how much should the company be willing to pay to
acquire more of the constrained resource?
A. $28.31 per unit
B. $12.20 per minute
C. $14.90 per minute
D. $69.54 per unit

The company should be willing to pay up to $12.20 per minute to obtain more of the
constrained resource since this is the value to the company of using this constrained resource
to make more of product YO. By assumption, the other products will already have been
produced up to demand.

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Learning Objective: 5
Level: Medium

13-34

Chapter 013, Relevant Costs for Decision Making Key

53. Products A, B, and C are produced from a single raw material input. The raw material
costs $90,000, from which 5,000 units of A, 10,000 units of B, and 15,000 units of C can be
produced each period. Product A can be sold at the split-off point for $2 per unit, or it can be
processed further at a cost of $12,500 and then sold for $5 per unit. Product A should be:
A. sold at the split-off point, since further processing would result in a loss of $0.50 per unit.
B. processed further, since this will increase profits by $2,500 each period.
C. sold at the split-off point, since further processing will result in a loss of $2,500 each
period.
D. processed further, since this will increase profits by $12,500 each period.

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Learning Objective: 6
Level: Medium

54. Cybil Baunt just inherited a 1958 Chevy Impala from her late Aunt Joop. Aunt Joop
purchased the car 25 years ago for $5,000. Cybil is either going to sell the car for $2,000 or
have it restored and sell it for $16,000. The restoration will cost $10,000. Cybil would be
better off by:
A. $4,000 to have the vehicle restored
B. $6,000 to have the vehicle restored
C. $9,000 to have the vehicle restored
D. $11,000 to have the vehicle restored

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Learning Objective: 6
Level: Medium

13-35

Chapter 013, Relevant Costs for Decision Making Key

55. Two products, TD and IB, emerge from a joint process. Product TD has been allocated
$31,200 of the total joint costs of $48,000. A total of 5,000 units of product TD are produced
from the joint process. Product TD can be sold at the split-off point for $24 per unit, or it can
be processed further for an additional total cost of $15,000 and then sold for $26 per unit. If
product TD is processed further and sold, what would be the effect on the overall profit of the
company compared with sale in its unprocessed form directly after the split-off point?
A. $5,000 less profit
B. $115,000 more profit
C. $36,200 less profit
D. $26,200 more profit

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Learning Objective: 6
Level: Medium
Source: CIMA, adapted

13-36

Chapter 013, Relevant Costs for Decision Making Key

56. Arline Cane Products, Inc., processes sugar cane in batches. The company buys a batch of
sugar cane from farmers for $56 which is then crushed in the company's plant at a cost of $14.
Two intermediate products, cane fiber and cane juice, emerge from the crushing process. The
cane fiber can be sold as is for $24 or processed further for $14 to make the end product
industrial fiber that is sold for $34. The cane juice can be sold as is for $40 or processed
further for $23 to make the end product molasses that is sold for $80. How much profit (loss)
does the company make by processing one batch of sugar cane into the end products industrial
fiber and molasses?
A. $13
B. ($6)
C. ($107)
D. $7

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Learning Objective: 6
Level: Easy

13-37

Chapter 013, Relevant Costs for Decision Making Key

57. Gudger Corporation processes sugar cane in batches. The company purchases a batch of
sugar cane for $53 from farmers and then crushes the cane in the company's plant at the cost
of $10. Two intermediate products, cane fiber and cane juice, emerge from the crushing
process. The cane fiber can be sold as is for $29 or processed further for $15 to make the end
product industrial fiber that is sold for $60. The cane juice can be sold as is for $38 or
processed further for $22 to make the end product molasses that is sold for $52. Which of the
intermediate products should be processed further?
A. Cane fiber should be processed into industrial fiber; Cane juice should NOT be processed
into molasses
B. Cane fiber should NOT be processed into industrial fiber; Cane juice should be processed
into molasses
C. Cane fiber should NOT be processed into industrial fiber; Cane juice should NOT be
processed into molasses
D. Cane fiber should be processed into industrial fiber; Cane juice should be processed into
molasses

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Learning Objective: 6
Level: Easy

13-38

Chapter 013, Relevant Costs for Decision Making Key

58. Badal Corporation processes sugar beets in batches. A batch of sugar beets costs $55 to
buy from farmers and $18 to crush in the company's plant. Two intermediate products, beet
fiber and beet juice, emerge from the crushing process. The beet fiber can be sold as is for $20
or processed further for $16 to make the end product industrial fiber that is sold for $53. The
beet juice can be sold as is for $33 or processed further for $23 to make the end product
refined sugar that is sold for $60. How much profit (loss) does the company make by
processing one batch of sugar beets into the end products industrial fiber and refined sugar?
A. ($20)
B. $21
C. $1
D. ($112)

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Learning Objective: 6
Level: Easy

13-39

Chapter 013, Relevant Costs for Decision Making Key

59. Chrisjohn Beet Processors, Inc., processes sugar beets in batches. A batch of sugar beets
costs $51 to buy from farmers and $16 to crush in the company's plant. Two intermediate
products, beet fiber and beet juice, emerge from the crushing process. The beet fiber can be
sold as is for $23 or processed further for $18 to make the end product industrial fiber that is
sold for $47. The beet juice can be sold as is for $46 or processed further for $20 to make the
end product refined sugar that is sold for $59. How much profit (loss) does the company make
by processing the intermediate product beet juice into refined sugar rather than selling it as
is?
A. ($74)
B. ($23)
C. ($7)
D. ($41)

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Learning Objective: 6
Level: Easy

13-40

Chapter 013, Relevant Costs for Decision Making Key

60. Isaac Corporation processes sugar beets in batches that it purchases from farmers for $47
a batch. A batch of sugar beets costs $14 to crush in the company's plant. Two intermediate
products, beet fiber and beet juice, emerge from the crushing process. The beet fiber can be
sold as is for $22 or processed further for $13 to make the end product industrial fiber that is
sold for $42. The beet juice can be sold as is for $45 or processed further for $27 to make the
end product refined sugar that is sold for $67. Which of the intermediate products should be
processed further?
A. beet fiber should NOT be processed into industrial fiber; beet juice should NOT be
processed into refined sugar
B. beet fiber should NOT be processed into industrial fiber; beet juice should be processed
into refined sugar
C. beet fiber should be processed into industrial fiber; beet juice should NOT be processed
into refined sugar
D. beet fiber should be processed into industrial fiber; beet juice should be processed into
refined sugar

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Learning Objective: 6
Level: Easy

13-41

Chapter 013, Relevant Costs for Decision Making Key

The Tolar Company has 400 obsolete desk calculators that are carried in inventory at a total
cost of $26,800. If these calculators are upgraded at a total cost of $10,000, they can be sold
for a total of $30,000. As an alternative, the calculators can be sold in their present condition
for $11,200.

61. The sunk cost in this situation is:


A. $10,000
B. $26,800
C. $11,200
D. $0

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Learning Objective: 1
Level: Easy

62. What is the net advantage or disadvantage to the company from upgrading the
calculators?
A. $8,800 advantage
B. $18,000 disadvantage
C. $20,000 advantage
D. $8,000 disadvantage

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Learning Objective: 1
Level: Medium

13-42

Chapter 013, Relevant Costs for Decision Making Key

63. Assume that Tolar decides to upgrade the calculators. At what selling price per unit would
the company be as well off as if it just sold the calculators in their present condition?
A. $8
B. $30
C. $53
D. $67

Cost per calculator to upgrade = $10,000


Selling price - Cost to upgrade = $28
Selling price - $25 = $28
Selling price = $53

400 calculators = $25

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Learning Objective: 1
Level: Hard

13-43

Chapter 013, Relevant Costs for Decision Making Key

Mccubbin Corporation is considering two alternatives: A and B. Costs associated with the
alternatives are listed below:

64. Are the materials costs and processing costs relevant in the choice between alternatives A
and B? (Ignore the equipment rental and occupancy costs in this question.)
A. Neither materials costs nor processing costs are relevant
B. Both materials costs and processing costs are relevant
C. Only processing costs are relevant
D. Only materials costs are relevant

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Learning Objective: 1
Level: Easy

13-44

Chapter 013, Relevant Costs for Decision Making Key

65. What is the differential cost of Alternative B over Alternative A, including all of the
relevant costs?
A. $161,000
B. $131,500
C. $59,000
D. $102,000

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Learning Objective: 1
Level: Easy

13-45

Chapter 013, Relevant Costs for Decision Making Key

Two alternatives, code-named X and Y, are under consideration at Donat Corporation. Costs
associated with the alternatives are listed below.

66. Are the materials costs and processing costs relevant in the choice between alternatives X
and Y? (Ignore the equipment rental and occupancy costs in this question.)
A. Both materials costs and processing costs are relevant
B. Only materials costs are relevant
C. Only processing costs are relevant
D. Neither materials costs nor processing costs are relevant

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Learning Objective: 1
Level: Easy

13-46

Chapter 013, Relevant Costs for Decision Making Key

67. What is the differential cost of Alternative Y over Alternative X, including all of the
relevant costs?
A. $140,000
B. $123,000
C. $34,000
D. $106,000

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Learning Objective: 1
Level: Easy

The Clemson Company reported the following results last year for the manufacture and sale
of one of its products known as a Tam.

Clemson Company is trying to determine whether or not to discontinue the manufacture and
sale of Tams. The operating results reported above for last year are expected to continue in the
foreseeable future if the product is not dropped. The fixed manufacturing overhead represents
the costs of production facilities and equipment that the Tam product shares with other
products produced by Clemson. If the Tax product were dropped, there would be no change in
the fixed manufacturing costs of the company.

13-47

Chapter 013, Relevant Costs for Decision Making Key


68. Assume that discontinuing the manufacture and sale of Tams will have no effect on the
sale of other product lines. If the company discontinues the Tam product line, the change in
annual operating income (or loss) should be:
A. $55,000 decrease
B. $65,000 decrease
C. $90,000 decrease
D. $70,000 increase

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Learning Objective: 2
Level: Medium

13-48

Chapter 013, Relevant Costs for Decision Making Key

69. Assume that discontinuing the Tam product would result in a $120,000 increase in the
contribution margin of other product lines. How many Tams would have to be sold next year
for the company to be as well off as if it just dropped the line and enjoyed the increase in
contribution margin from other products?
A. 5,000 units
B. 6,000 units
C. 6,500 units
D. 7,000 units

Contribution margin per Tam: $390,000 6,500 = $60


Sales of Tams to be as well off as if it dropped Tams: $30,000
units

$60 = 500 + 6,500 = 7,000

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Learning Objective: 2
Level: Hard

The management of Zorrilla Corporation is considering dropping product R10C. Data from
the company's accounting system appear below:

All fixed expenses of the company are fully allocated to products in the company's accounting
system. Further investigation has revealed that $42,000 of the fixed manufacturing expenses
and $48,000 of the fixed selling and administrative expenses are avoidable if product R10C is
discontinued.

13-49

Chapter 013, Relevant Costs for Decision Making Key


70. According to the company's accounting system, what is the net operating income earned
by product R10C?
A. ($28,000)
B. $28,000
C. $135,000
D. ($135,000)

According to the company's accounting system, the product's net operating loss is $28,000.

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Learning Objective: 2
Level: Easy

13-50

Chapter 013, Relevant Costs for Decision Making Key

71. What would be the effect on the company's overall net operating income if product R10C
were dropped?
A. Overall net operating income would decrease by $28,000.
B. Overall net operating income would decrease by $45,000.
C. Overall net operating income would increase by $28,000.
D. Overall net operating income would increase by $45,000.

Net operating income would decline by $45,000 if product R10C were dropped. Therefore,
the product should not be dropped.

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Learning Objective: 2
Level: Easy

13-51

Chapter 013, Relevant Costs for Decision Making Key

The management of Dorl Corporation has been concerned for some time with the financial
performance of its product I54J and has considered discontinuing it on several occasions.
Data from the company's accounting system appear below:

In the company's accounting system all fixed expenses of the company are fully allocated to
products. Further investigation has revealed that $95,000 of the fixed manufacturing expenses
and $85,000 of the fixed selling and administrative expenses are avoidable if product I54J is
discontinued.

72. According to the company's accounting system, what is the net operating income earned
by product I54J?
A. $14,000
B. ($357,000)
C. ($14,000)
D. $357,000

According to the company's accounting system, the product's net operating loss is $14,000.

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Learning Objective: 2
Level: Easy

13-52

Chapter 013, Relevant Costs for Decision Making Key

73. What would be the effect on the company's overall net operating income if product I54J
were dropped?
A. Overall net operating income would decrease by $177,000.
B. Overall net operating income would increase by $177,000.
C. Overall net operating income would increase by $14,000.
D. Overall net operating income would decrease by $14,000.

Net operating income would decline by $177,000 if product I54J were dropped. Therefore,
the product should not be dropped.

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Learning Objective: 2
Level: Easy

13-53

Chapter 013, Relevant Costs for Decision Making Key

Rowena Corporation manufactures laser printers. Rowena currently manufactures the 32,000
imaging drums that it uses in its printers. The annual costs to manufacture these 32,000 drums
are as follows:

Hardware Solutions, Inc. has offered to provide Rowena with all of its imaging drum needs
for $72 per drum. If Rowena accepts this offer, 70% of the fixed manufacturing cost above
could be totally eliminated. Also, Rowena will be able to use the freed up space to generate
$240,000 of income each year in the production of alternative products.

74. Based on the information presented, would Rowena be better off to make the drums or
buy the drums and by how much?
A. $112,000 better to make
B. $128,000 better to buy
C. $526,400 better to buy
D. $704,000 better to make

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Learning Objective: 3
Level: Medium

13-54

Chapter 013, Relevant Costs for Decision Making Key

75. Assume that demand for Rowena printers goes up from 32,000 annually to 40,000
annually. Also assume that Rowena has the idle capacity to produce the extra 8,000 drums
needed for the printers. Under these conditions, would Rowena be better off to make the
drums or buy the drums and by how much? (Assume that there is no change in cost
structure.)
A. $96,000 better to buy
B. $160,000 better to buy
C. $204,000 better to make
D. $264,000 better to make

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Learning Objective: 3
Level: Medium

13-55

Chapter 013, Relevant Costs for Decision Making Key

Kleffman Corporation is presently making part X31 that is used in one of its products. A total
of 2,000 units of this part are produced and used every year. The company's Accounting
Department reports the following costs of producing the part at this level of activity:

An outside supplier has offered to produce and sell the part to the company for $23.40 each. If
this offer is accepted, the supervisor's salary and all of the variable costs, including direct
labor, can be avoided. The special equipment used to make the part was purchased many years
ago and has no salvage value or other use. The allocated general overhead represents fixed
costs of the entire company. If the outside supplier's offer were accepted, only $1,000 of these
allocated general overhead costs would be avoided.

13-56

Chapter 013, Relevant Costs for Decision Making Key


76. If management decides to buy part X31 from the outside supplier rather than to continue
making the part, what would be the annual impact on the company's overall net operating
income?
A. Net operating income would decline by $5,600 per year.
B. Net operating income would decline by $1,800 per year.
C. Net operating income would decline by $4,600 per year.
D. Net operating income would decline by $6,600 per year.

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Learning Objective: 3
Level: Easy

13-57

Chapter 013, Relevant Costs for Decision Making Key

77. In addition to the facts given above, assume that the space used to produce part X31 could
be used to make more of one of the company's other products, generating an additional
segment margin of $23,000 per year for that product. What would be the impact on the
company's overall net operating income of buying part X31 from the outside supplier and
using the freed space to make more of the other product?
A. Net operating income would increase by $17,400 per year.
B. Net operating income would increase by $21,200 per year.
C. Net operating income would decline by $28,600 per year.
D. Net operating income would increase by $23,000 per year.

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Learning Objective: 3
Level: Medium

13-58

Chapter 013, Relevant Costs for Decision Making Key

Libbee Corporation is presently making part I50 that is used in one of its products. A total of
8,000 units of this part are produced and used every year. The company's Accounting
Department reports the following costs of producing the part at this level of activity:

An outside supplier has offered to produce and sell the part to the company for $24.50 each. If
this offer is accepted, the supervisor's salary and all of the variable costs, including direct
labor, can be avoided. The special equipment used to make the part was purchased many years
ago and has no salvage value or other use. The allocated general overhead represents fixed
costs of the entire company, none of which would be avoided if the part were purchased
instead of produced internally.

13-59

Chapter 013, Relevant Costs for Decision Making Key


78. If management decides to buy part I50 from the outside supplier rather than to continue
making the part, what would be the annual impact on the company's overall net operating
income?
A. Net operating income would decline by $6,400 per year.
B. Net operating income would decline by $32,800 per year.
C. Net operating income would increase by $32,800 per year.
D. Net operating income would increase by $6,400 per year.

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Learning Objective: 3
Level: Easy

13-60

Chapter 013, Relevant Costs for Decision Making Key

79. In addition to the facts given above, assume that the space used to produce part I50 could
be used to make more of one of the company's other products, generating an additional
segment margin of $24,000 per year for that product. What would be the impact on the
company's overall net operating income of buying part I50 from the outside supplier and
using the freed space to make more of the other product?
A. Net operating income would increase by $24,000 per year.
B. Net operating income would increase by $17,600 per year.
C. Net operating income would decline by $8,800 per year.
D. Net operating income would decline by $30,400 per year.

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Learning Objective: 3
Level: Medium

13-61

Chapter 013, Relevant Costs for Decision Making Key

Kava Inc. manufactures industrial components. One of its products, which is used in the
construction of industrial air conditioners, is known as K65. Data concerning this product are
given below:

The above per unit data are based on annual production of 4,000 units of the component.
Direct labor can be considered to be a variable cost.
Source: CMA, adapted

80. The company has received a special, one-time-only order for 500 units of component K65.
There would be no variable selling expense on this special order and the total fixed
manufacturing overhead and fixed selling and administrative expenses of the company would
not be affected by the order. Assuming that Kava has excess capacity and can fill the order
without cutting back on the production of any product, what is the minimum price per unit on
the special order below which the company should not go?
A. $180
B. $38
C. $59
D. $78

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Learning Objective: 4
Level: Medium

13-62

Chapter 013, Relevant Costs for Decision Making Key

81. The company has received a special, one-time-only order for 500 units of component K65.
There would be no variable selling expense on this special order and the total fixed
manufacturing overhead and fixed selling and administrative expenses of the company would
not be affected by the order. However, assume that Kava has no excess capacity and this
special order would require 10 minutes of the constraining resource, which could be used
instead to produce products with a total contribution margin of $11,000. What is the minimum
price per unit on the special order below which the company should not go?
A. $60
B. $81
C. $100
D. $22

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Learning Objective: 4
Learning Objective: 5
Level: Hard

13-63

Chapter 013, Relevant Costs for Decision Making Key

82. Refer to the original data in the problem. What is the current contribution margin per unit
for component K65 based on its selling price of $180 and its annual production of 4,000
units?
A. $142
B. $102
C. $40
D. $140

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Learning Objective: 4
Level: Easy

13-64

Chapter 013, Relevant Costs for Decision Making Key

The following are the Wyeth Company's unit costs of making and selling an item at a volume
of 10,000 units per month (which represents the company's capacity):

Present sales amount to 9,000 units per month. An order has been received from a customer in
a foreign market for 1,000 units. The order would not affect current sales. Fixed costs, both
manufacturing and selling and administrative, are constant within the relevant range between
8,000 and 10,000 units per month. The variable selling and administrative costs would have to
be incurred for this special order as well as all other sales. Assume direct labor is a variable
cost.

13-65

Chapter 013, Relevant Costs for Decision Making Key


83. How much will the company's net operating income be increased or (decreased) if it
prices the 1,000 units in the special order at $6 each?
A. $(500)
B. $400
C. $2,500
D. $1,000

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Learning Objective: 4
Level: Medium

84. Assume the company has 50 units left over from last year which have small defects and
which will have to be sold at a reduced price as scrap. This would have no effect on the
company's other sales. What cost is relevant as a guide for setting a minimum price on these
defective units?
A. $6.50
B. $5.00
C. $1.50
D. $3.50
Only the variable selling cost per unit is relevant, since all other costs are sunk.

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Learning Objective: 4
Level: Medium

13-66

Chapter 013, Relevant Costs for Decision Making Key

Elgot Company produces a single product. The cost of producing and selling a single unit of
this product at the company's normal activity level of 30,000 units per month is as follows:

The normal selling price of the product is $51.10 per unit.


An order has been received from an overseas customer for 3,000 units to be delivered this
month at a special discounted price. This order would have no effect on the company's normal
sales and would not change the total amount of the company's fixed costs. The variable selling
and administrative expense would be $0.50 less per unit on this order than on normal sales.
Direct labor is a variable cost in this company.

13-67

Chapter 013, Relevant Costs for Decision Making Key


85. Suppose there is ample idle capacity to produce the units required by the overseas
customer and the special discounted price on the special order is $44.70 per unit. By how
much would this special order increase (decrease) the company's net operating income for the
month?
A. $5,100
B. $(14,100)
C. $36,900
D. $(17,700)

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Learning Objective: 4
Level: Medium

13-68

Chapter 013, Relevant Costs for Decision Making Key

86. Suppose the company is already operating at capacity when the special order is received
from the overseas customer. What would be the opportunity cost of each unit delivered to the
overseas customer?
A. $6.40
B. $2.20
C. $1.70
D. $18.20

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Learning Objective: 4
Level: Hard

13-69

Chapter 013, Relevant Costs for Decision Making Key

87. Suppose there is not enough idle capacity to produce all of the units for the overseas
customer and accepting the special order would require cutting back on production of 1,200
units for regular customers. The minimum acceptable price per unit for the special order is
closest to:
A. $51.10
B. $39.68
C. $40.90
D. $49.40

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Learning Objective: 4
Level: Hard

13-70

Chapter 013, Relevant Costs for Decision Making Key

Brubacher Company makes four products in a single facility. These products have the
following unit product costs:

The grinding machines are potentially the constraint in the production facility. A total of
20,500 minutes are available per month on these machines.
Direct labor is a variable cost in this company.

13-71

Chapter 013, Relevant Costs for Decision Making Key


88. How many minutes of grinding machine time would be required to satisfy demand for all
four products?
A. 14,000
B. 18,900
C. 20,500
D. 22,400

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Learning Objective: 5
Level: Easy

89. Which product makes the LEAST profitable use of the grinding machines?
A. Product A
B. Product B
C. Product C
D. Product D

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Learning Objective: 5
Level: Hard

13-72

Chapter 013, Relevant Costs for Decision Making Key

90. Which product makes the MOST profitable use of the grinding machines?
A. Product A
B. Product B
C. Product C
D. Product D

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Learning Objective: 5
Level: Hard

13-73

Chapter 013, Relevant Costs for Decision Making Key

91. Up to how much should the company be willing to pay for one additional minute of
grinding machine time if the company has made the best use of the existing grinding machine
capacity? (Round off to the nearest whole cent.)
A. $0.00
B. $18.30
C. $12.21
D. $10.00

The company should be willing to pay up to $12.21 per minute to obtain more of the
constrained resource since this is the value to the company of using this constrained resource
to make more of product A. By assumption, the other products will already have been
produced up to demand.

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Learning Objective: 5
Level: Hard

13-74

Chapter 013, Relevant Costs for Decision Making Key

Creelman Company makes four products in a single facility. Data concerning these products
appear below:

The milling machines are potentially the constraint in the production facility. A total of 13,000
minutes are available per month on these machines.

92. How many minutes of milling machine time would be required to satisfy demand for all
four products?
A. 13,000
B. 11,600
C. 7,000
D. 15,000

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Learning Objective: 5
Level: Easy

13-75

Chapter 013, Relevant Costs for Decision Making Key

93. Which product makes the LEAST profitable use of the milling machines?
A. Product A
B. Product B
C. Product C
D. Product D

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Learning Objective: 5
Level: Medium

13-76

Chapter 013, Relevant Costs for Decision Making Key

94. Which product makes the MOST profitable use of the milling machines?
A. Product A
B. Product B
C. Product C
D. Product D

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Learning Objective: 5
Level: Medium

13-77

Chapter 013, Relevant Costs for Decision Making Key

95. Up to how much should the company be willing to pay for one additional minute of
milling machine time if the company has made the best use of the existing milling machine
capacity? (Round off to the nearest whole cent.)
A. $10.40
B. $13.80
C. $0.00
D. $4.74

The company should be willing to pay up to $4.74 per minute to obtain more of the
constrained resource since this is the value to the company of using this constrained resource
to make more of product B. By assumption, the other products will already have been
produced up to demand.

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Learning Objective: 5
Level: Medium

13-78

Chapter 013, Relevant Costs for Decision Making Key

Brittman Corporation makes three products that use the current constraint-a particular type of
machine. Data concerning those products appear below:

96. Rank the products in order of their current profitability from most profitable to least
profitable. In other words, rank the products in the order in which they should be emphasized.
A. IP,YD,NI
B. YD,NI,IP
C. YD,IP,NI
D. NI,YD,IP

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Learning Objective: 5
Level: Easy

13-79

Chapter 013, Relevant Costs for Decision Making Key

97. Assume that sufficient constraint time is available to satisfy demand for all but the least
profitable product. Up to how much should the company be willing to pay to acquire more of
the constrained resource?
A. $13.50 per minute
B. $15.50 per minute
C. $78.65 per unit
D. $39.15 per unit

The company should be willing to pay up to $13.50 per minute to obtain more of the
constrained resource since this is the value to the company of using this constrained resource
to make more of product IP. By assumption, the other products will already have been
produced up to demand.

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Learning Objective: 5
Level: Medium

13-80

Chapter 013, Relevant Costs for Decision Making Key

The constraint at Artis Corporation is time on a particular machine. The company makes
three products that use this machine. Data concerning those products appear below:

98. Rank the products in order of their current profitability from most profitable to least
profitable. In other words, rank the products in the order in which they should be emphasized.
A. CT,LN,SI
B. SI,CT,LN
C. CT,SI,LN
D. LN,SI,CT

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Learning Objective: 5
Level: Easy

13-81

Chapter 013, Relevant Costs for Decision Making Key

99. Assume that sufficient time is available on the constrained machine to satisfy demand for
all but the least profitable product. Up to how much should the company be willing to pay to
acquire more of this constrained resource?
A. $12.40 per minute
B. $12.80 per unit
C. $15.10 per minute
D. $58.89 per unit

The company should be willing to pay up to $12.40 per minute to obtain more of the
constrained resource since this is the value to the company of using this constrained resource
to make more of product SI. By assumption, the other products will already have been
produced up to demand.

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Learning Objective: 5
Level: Medium

Dodge Company makes two products from a common input. Joint processing costs up to the
split-off point total $44,800 a year. The company allocates these costs to the joint products on
the basis of their total sales values at the split-off point. Each product may be sold at the splitoff point or processed further. Data concerning these products appear below:

100. What is the net monetary advantage (disadvantage) of processing Product X beyond the
split-off point?
A. $31,300
B. $5,300
C. $23,500
D. $(2,500)

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Learning Objective: 6
Level: Medium

13-82

Chapter 013, Relevant Costs for Decision Making Key

101. What is the net monetary advantage (disadvantage) of processing Product Y beyond the
split-off point?
A. $39,600
B. $51,000
C. $13,000
D. $1,600

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Learning Objective: 6
Level: Medium

102. What is the minimum amount the company should accept for Product X if it is to be sold
at the split-off point?
A. $40,000
B. $23,500
C. $18,200
D. $45,300

If the company were to accept less than $23,500 at the split-off point, they would be better off
processing further.

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Learning Objective: 6
Level: Hard

13-83

Chapter 013, Relevant Costs for Decision Making Key

Oran Refiners, Inc., processes sugar cane that it purchases from farmers. Sugar cane is
processed in batches. A batch of sugar cane costs $76 to buy from farmers and $18 to crush in
the company's plant. Two intermediate products, cane fiber and cane juice, emerge from the
crushing process. The cane fiber can be sold as is for $21 or processed further for $12 to make
the end product industrial fiber that is sold for $43. The cane juice can be sold as is for $47 or
processed further for $21 to make the end product molasses that is sold for $88.

103. How much profit (loss) does the company make by processing one batch of sugar cane
into the end products industrial fiber and molasses?
A. ($127)
B. $30
C. ($26)
D. $4

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Learning Objective: 6
Level: Easy

13-84

Chapter 013, Relevant Costs for Decision Making Key

104. How much profit (loss) does the company make by processing the intermediate product
cane juice into molasses rather than selling it as is?
A. ($27)
B. ($74)
C. $20
D. $2

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Learning Objective: 6
Level: Easy

13-85

Chapter 013, Relevant Costs for Decision Making Key

105. Which of the intermediate products should be processed further?


A. Cane fiber should be processed into industrial fiber; Cane juice should be processed into
molasses
B. Cane fiber should be processed into industrial fiber; Cane juice should NOT be processed
into molasses
C. Cane fiber should NOT be processed into industrial fiber; Cane juice should NOT be
processed into molasses
D. Cane fiber should NOT be processed into industrial fiber; Cane juice should be processed
into molasses

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Learning Objective: 6
Level: Easy

13-86

Chapter 013, Relevant Costs for Decision Making Key

Hayase Corporation processes sugar beets that it purchases from farmers. Sugar beets are
processed in batches. A batch of sugar beets costs $35 to buy from farmers and $14 to crush in
the company's plant. Two intermediate products, beet fiber and beet juice, emerge from the
crushing process. The beet fiber can be sold as is for $27 or processed further for $11 to make
the end product industrial fiber that is sold for $40. The beet juice can be sold as is for $36 or
processed further for $21 to make the end product refined sugar that is sold for $46.

106. How much profit (loss) does the company make by processing one batch of sugar beets
into the end products industrial fiber and refined sugar?
A. ($81)
B. $14
C. $5
D. ($9)

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Learning Objective: 6
Level: Easy

13-87

Chapter 013, Relevant Costs for Decision Making Key

107. How much profit (loss) does the company make by processing the intermediate product
beet juice into refined sugar rather than selling it as is?
A. ($11)
B. ($25)
C. ($36)
D. ($60)

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Learning Objective: 6
Level: Easy

108. Which of the intermediate products should be processed further?


A. beet fiber should NOT be processed into industrial fiber; beet juice should NOT be
processed into refined sugar
B. beet fiber should be processed into industrial fiber; beet juice should be processed into
refined sugar
C. beet fiber should be processed into industrial fiber; beet juice should NOT be processed
into refined sugar
D. beet fiber should NOT be processed into industrial fiber; beet juice should be processed
into refined sugar

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Learning Objective: 6
Level: Easy

13-88

Chapter 013, Relevant Costs for Decision Making Key

Essay Questions
109. Rackett Corporation is considering two alternatives that are code-named M and N. Costs
associated with the alternatives are listed below:

Required:
a. Which costs are relevant and which are not relevant in the choice between these two
alternatives?
b. What is the differential cost between the two alternatives?

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Learning Objective: 1
Level: Easy

13-89

Chapter 013, Relevant Costs for Decision Making Key

110. Costs associated with two alternatives, code-named Q and R, being considered by Lang
Corporation are listed below:

Required:
a. Which costs are relevant and which are not relevant in the choice between these two
alternatives?
b. What is the differential cost between the two alternatives?

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Learning Objective: 1
Level: Easy

13-90

Chapter 013, Relevant Costs for Decision Making Key

111. When Mr. Ding L. Berry, president and chief executive of Berry, Inc., first saw the
segmented income statement below, he flew into his usual rage: "When will we ever start
showing a real profit? I'm starting immediate steps to eliminate those two unprofitable lines!"

*These traceable expenses could be eliminated if the product lines to which they are traced
were discontinued.
Required:
Recommend which segments, if any, should be eliminated. Prepare a report in good form to
support your answer.
A segmented income report, without the allocation of common fixed expenses, will provide
the basis for deciding which segments to drop.

The only segment that possibly should be eliminated is segment W, which shows a negative
segment margin of $2,000.

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Learning Objective: 2
Level: Medium

13-91

Chapter 013, Relevant Costs for Decision Making Key

112. The management of Thews Corporation is considering dropping product E28I. Data from
the company's accounting system appear below:

All fixed expenses of the company are fully allocated to products in the company's accounting
system. Further investigation has revealed that $86,000 of the fixed manufacturing expenses
and $67,000 of the fixed selling and administrative expenses are avoidable if product E28I is
discontinued.
Required:
a. What is the net operating income earned by product E28I according to the company's
accounting system? Show your work!
b. What would be the effect on the company's overall net operating income of dropping
product E28I? Should the product be dropped? Show your work!

a. According to the company's accounting system, the product's net operating loss is $10,000.
b. Net operating income would decline by $125,000 if product E28I were dropped. Therefore,
the product should not be dropped.

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Learning Objective: 2
Level: Easy

13-92

Chapter 013, Relevant Costs for Decision Making Key

113. Tjelmeland Corporation is considering dropping product S85U. Data from the company's
accounting system appear below:

All fixed expenses of the company are fully allocated to products in the company's accounting
system. Further investigation has revealed that $55,000 of the fixed manufacturing expenses
and $71,000 of the fixed selling and administrative expenses are avoidable if product S85U is
discontinued.
Required:
a. According to the company's accounting system, what is the net operating income earned by
product S85U? Show your work!
b. What would be the effect on the company's overall net operating income of dropping
product S85U? Should the product be dropped? Show your work!

a. According to the company's accounting system, the product's net operating loss is $11,000.
b. Net operating income would decline by $76,000 if product S85U were dropped. Therefore,
the product should not be dropped.

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Learning Objective: 2
Level: Easy

13-93

Chapter 013, Relevant Costs for Decision Making Key

114. The management of Drummer Corporation is considering dropping product D84L. Data
from the company's accounting system appear below:

All fixed expenses of the company are fully allocated to products in the company's accounting
system. Further investigation has revealed that $201,000 of the fixed manufacturing expenses
and $156,000 of the fixed selling and administrative expenses are avoidable if product D84L
is discontinued.
Required:
What would be the effect on the company's overall net operating income if product D84L
were dropped? Should the product be dropped? Show your work!

Net operating income would decline by $3,000 if product D84L were dropped. Therefore, the
product should not be dropped.

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Learning Objective: 2
Level: Easy

13-94

Chapter 013, Relevant Costs for Decision Making Key

115. Fouch Company makes 30,000 units per year of a part it uses in the products it
manufactures. The unit product cost of this part is computed as follows:

An outside supplier has offered to sell the company all of these parts it needs for $51.90 a
unit. If the company accepts this offer, the facilities now being used to make the part could be
used to make more units of a product that is in high demand. The additional contribution
margin on this other product would be $219,000 per year.
If the part were purchased from the outside supplier, all of the direct labor cost of the part
would be avoided. However, $6.20 of the fixed manufacturing overhead cost being applied to
the part would continue even if the part were purchased from the outside supplier. This fixed
manufacturing overhead cost would be applied to the company's remaining products.
Required:
a. How much of the unit product cost of $52.30 is relevant in the decision of whether to make
or buy the part?
b. What is the net total dollar advantage (disadvantage) of purchasing the part rather than
making it?
c. What is the maximum amount the company should be willing to pay an outside supplier per
unit for the part if the supplier commits to supplying all 30,000 units required each year?

13-95

Chapter 013, Relevant Costs for Decision Making Key

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Learning Objective: 3
Level: Hard

13-96

Chapter 013, Relevant Costs for Decision Making Key

116. Janeiro Skate, Inc. currently manufactures the wheels that it uses for its in-line skates.
The annual costs to manufacture the 150,000 wheels needed each year are as follows:

Kasba Rubber Company has offered to provide Janeiro with all of its annual wheel needs for
$3.50 per wheel. If Janeiro accepts this offer, 75% of the fixed overhead above could be
totally eliminated. Also, Janeiro would be able to rent out the freed up space and could
generate $72,000 of income annually.
Required:
Based on this information, would Janeiro be better off to continue making the wheels or to
buy them from Kasba? SHOW YOUR COMPUTATIONS.
It would be better by $42,000 to buy.
($165,000 + $45,000 + $60,000 + $225,000 + $72,000) >
($3.50 x 150,000)

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Learning Objective: 3
Level: Hard

13-97

Chapter 013, Relevant Costs for Decision Making Key

117. Tingstrom Inc. makes a range of products. The company's predetermined overhead rate is
$20 per direct labor-hour, which was calculated using the following budgeted data:

Component B6 is used in one of the company's products. The unit cost of the component
according to the company's cost accounting system is determined as follows:

An outside supplier has offered to supply component B6 for $76 each. The outside supplier is
known for quality and reliability. Assume that direct labor is a variable cost, variable
manufacturing overhead is really driven by direct labor-hours, and total fixed manufacturing
overhead would not be affected by this decision. Tingstrom chronically has idle capacity.
Required:
Is the offer from the outside supplier financially attractive? Why?

13-98

Chapter 013, Relevant Costs for Decision Making Key


Direct materials, direct labor, and variable manufacturing overhead are relevant in this
decision. Fixed manufacturing overhead is not relevant since it would not be affected by the
decision. The variable portion of the manufacturing overhead rate is computed as follows:

Since the outside supplier has offered to sell the component for $76.00 each, but it only costs
the company $57.60 to make the component internally, this is not a financially attractive offer.

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Learning Objective: 3
Level: Hard
Source: CIMA, adapted

13-99

Chapter 013, Relevant Costs for Decision Making Key

118. Rosiek Corporation uses part A55 in one of its products. The company's Accounting
Department reports the following costs of producing the 4,000 units of the part that are
needed every year.

An outside supplier has offered to make the part and sell it to the company for $32.30 each. If
this offer is accepted, the supervisor's salary and all of the variable costs, including direct
labor, can be avoided. The special equipment used to make the part was purchased many years
ago and has no salvage value or other use. The allocated general overhead represents fixed
costs of the entire company. If the outside supplier's offer were accepted, only $4,000 of these
allocated general overhead costs would be avoided. In addition, the space used to produce part
A55 could be used to make more of one of the company's other products, generating an
additional segment margin of $26,000 per year for that product.
Required:
a. Prepare a report that shows the effect on the company's total net operating income of
buying part A55 from the supplier rather than continuing to make it inside the company.
b. Which alternative should the company choose?

b. The total cost of the make alternative is lower by $18,400. Thus, net operating income
would decline by $18,400 if the offer from the supplier were accepted. Therefore, the
company should continue to make the part itself.

13-100

Chapter 013, Relevant Costs for Decision Making Key


AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Learning Objective: 3
Level: Medium

119. Part F77 is used in one of Wilcutt Corporation's products. The company's Accounting
Department reports the following costs of producing the 7,000 units of the part that are
needed every year.

An outside supplier has offered to make the part and sell it to the company for $28.30 each. If
this offer is accepted, the supervisor's salary and all of the variable costs, including direct
labor, can be avoided. The special equipment used to make the part was purchased many years
ago and has no salvage value or other use. The allocated general overhead represents fixed
costs of the entire company. If the outside supplier's offer were accepted, only $9,000 of these
allocated general overhead costs would be avoided.
Required:
a. Prepare a report that shows the effect on the company's total net operating income of
buying part F77 from the supplier rather than continuing to make it inside the company.
b. Which alternative should the company choose?

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Chapter 013, Relevant Costs for Decision Making Key

b. The total cost of the make alternative is lower by $26,000. Thus, net operating income
would decline by $26,000 if the offer from the supplier were accepted. Therefore, the
company should continue to make the part itself.

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Learning Objective: 3
Level: Easy

13-102

Chapter 013, Relevant Costs for Decision Making Key

120. Julison Company produces a single product. The cost of producing and selling a single
unit of this product at the company's normal activity level of 60,000 units per month is as
follows:

The normal selling price of the product is $79.80 per unit.


An order has been received from an overseas customer for 2,000 units to be delivered this
month at a special discounted price. This order would have no effect on the company's normal
sales and would not change the total amount of the company's fixed costs. The variable selling
and administrative expense would be $0.30 less per unit on this order than on normal sales.
Direct labor is a variable cost in this company.
Required:
a. Suppose there is ample idle capacity to produce the units required by the overseas customer
and the special discounted price on the special order is $71.60 per unit. By how much would
this special order increase (decrease) the company's net operating income for the month?
b. Suppose the company is already operating at capacity when the special order is received
from the overseas customer. What would be the opportunity cost of each unit delivered to the
overseas customer?
c. Suppose there is not enough idle capacity to produce all of the units for the overseas
customer and accepting the special order would require cutting back on production of 700
units for regular customers. What would be the minimum acceptable price per unit for the
special order?

13-103

Chapter 013, Relevant Costs for Decision Making Key

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Learning Objective: 4
Level: Hard

13-104

Chapter 013, Relevant Costs for Decision Making Key

121. Zaccagnino Corporation makes a range of products. The company's predetermined


overhead rate is $14 per direct labor-hour, which was calculated using the following budgeted
data:

Management is considering a special order for 300 units of product D03C at $119 each. The
normal selling price of product D03C is $157 and the unit product cost is determined as
follows:

If the special order were accepted, normal sales of this and other products would not be
affected. The company has ample excess capacity to produce the additional units. Assume that
direct labor is a variable cost, variable manufacturing overhead is really driven by direct
labor-hours, and total fixed manufacturing overhead would not be affected by the special
order.
Required:
If the special order were accepted, what would be the impact on the company's overall profit?

13-105

Chapter 013, Relevant Costs for Decision Making Key


Direct materials, direct labor, and variable manufacturing overhead are relevant in this
decision. Fixed manufacturing overhead is not relevant since it would not be affected by the
decision. The variable portion of the manufacturing overhead rate is computed as follows:

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Learning Objective: 4
Level: Hard
Source: CIMA, adapted

13-106

Chapter 013, Relevant Costs for Decision Making Key

122. Biello Co. manufactures and sells medals for winners of athletic and other events. Its
manufacturing plant has the capacity to produce 15,000 medals each month; current monthly
production is 14,250 medals. The company normally charges $115 per medal. Cost data for
the current level of production are shown below:

The company has just received a special one-time order for 600 medals at $102 each. For this
particular order, no variable selling and administrative costs would be incurred. This order
would also have no effect on fixed costs.
Required:
Should the company accept this special order? Why?
Only the direct materials and direct labor costs are relevant in this decision. To make the
decision, we must compute the average direct materials and direct labor cost per unit.

Since price on the special order is $102 per medal and the relevant cost is only $87, the
company would earn a profit of $15 per medal. Therefore, the special order should be
accepted.

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Learning Objective: 4
Level: Medium
Source: CMA, adapted

13-107

Chapter 013, Relevant Costs for Decision Making Key

123. Manning Co. manufactures and sells trophies for winners of athletic and other events. Its
manufacturing plant has the capacity to produce 18,000 trophies each month; current monthly
production is 15,300 trophies. The company normally charges $141 per trophy. Cost data for
the current level of production are shown below:

The company has just received a special one-time order for 900 trophies at $73 each. For this
particular order, no variable selling and administrative costs would be incurred. This order
would also have no effect on fixed costs.
Required:
Should the company accept this special order? Why?
Only the direct materials and direct labor costs are relevant in this decision. To make the
decision, we must compute the average direct materials and direct labor cost per unit.

Since price on the special order is $73 per trophy and the relevant cost is $81, the company
would suffer a loss of $8 per trophy. Therefore, the special order should not be accepted.

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Learning Objective: 4
Level: Medium
Source: CMA, adapted

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124. Ries Corporation has received a request for a special order of 8,000 units of product R34
for $34.20 each. The normal selling price of this product is $35.70 each, but the units would
need to be modified slightly for the customer. The normal unit product cost of product R34 is
computed as follows:

Direct labor is a variable cost. The special order would have no effect on the company's total
fixed manufacturing overhead costs. The customer would like some modifications made to
product R34 that would increase the variable costs by $6.30 per unit and that would require a
one-time investment of $40,000 in special molds that would have no salvage value. This
special order would have no effect on the company's other sales. The company has ample
spare capacity for producing the special order.
Required:
Determine the effect on the company's total net operating income of accepting the special
order. Show your work!

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Learning Objective: 4
Level: Easy

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125. A customer has asked Clougherty Corporation to supply 4,000 units of product M97,
with some modifications, for $40.10 each. The normal selling price of this product is $48.00
each. The normal unit product cost of product M97 is computed as follows:

Direct labor is a variable cost. The special order would have no effect on the company's total
fixed manufacturing overhead costs. The customer would like some modifications made to
product M97 that would increase the variable costs by $5.70 per unit and that would require a
one-time investment of $31,000 in special molds that would have no salvage value. This
special order would have no effect on the company's other sales. The company has ample
spare capacity for producing the special order.
Required:
Determine the effect on the company's total net operating income of accepting the special
order. Show your work!

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Learning Objective: 4
Level: Easy

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Chapter 013, Relevant Costs for Decision Making Key

126. Gloster Company makes three products in a single facility. These products have the
following unit product costs:

The mixing machines are potentially the constraint in the production facility. A total of 27,400
minutes are available per month on these machines.
Direct labor is a variable cost in this company.
Required:
a. How many minutes of mixing machine time would be required to satisfy demand for all
three products?
b. How much of each product should be produced to maximize net operating income? (Round
off to the nearest whole unit.)
c. Up to how much should the company be willing to pay for one additional hour of mixing
machine time if the company has made the best use of the existing mixing machine capacity?
(Round off to the nearest whole cent.)

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c. The company should be willing to pay up to the contribution margin per minute for the
marginal job, which is $4.59.

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Learning Objective: 5
Level: Hard

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127. Hon Company makes three products in a single facility. Data concerning these products
follow:

The mixing machines are potentially the constraint in the production facility. A total of 24,500
minutes are available per month on these machines.
Direct labor is a variable cost in this company.
Required:
a. How many minutes of mixing machine time would be required to satisfy demand for all
three products?
b. How much of each product should be produced to maximize net operating income? (Round
off to the nearest whole unit.)
c. Up to how much should the company be willing to pay for one additional hour of mixing
machine time if the company has made the best use of the existing mixing machine capacity?
(Round off to the nearest whole cent.)

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c. The company should be willing to pay up to the contribution margin per minute for the
marginal job, which is $4.89.

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Learning Objective: 5
Level: Medium

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128. Witch's Brew Company manufactures and sells three potions that all use gargoyle
eyelashes as an ingredient. The high demand for all three of these potions exceeds the supply
of gargoyle eyelashes that Witch's Brew is able to buy from its suppliers. Information related
to the three potions is provided below:

Each year, Witch's Brew is only able to buy 6,000 gargoyle eyelashes. Annual fixed costs at
Witch's Brew are $45,000.
Required:
Based on these restrictions, what is the maximum annual net operating income that Witch's
Brew can make each year?

Use 2,000 eyelashes to make 1,000 bottles of Passion Potion and use the remaining 4,000
eyelashes to make Smart Potion.
4,000 eyelashes left/5 eyelashes per bottle of Smart Potion = 800 bottles of Smart Potion
(1000 x $30) + (800 x $70) = $86,000
$86,000 - $45,000 = $41,000

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Learning Objective: 5
Level: Hard

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Chapter 013, Relevant Costs for Decision Making Key

129. Closter Corporation makes three products that use the current constraint, which is a
particular type of machine. Data concerning those products appear below:

Required:
a. Rank the products in order of their current profitability from the most profitable to the least
profitable. In other words, rank the products in the order in which they should be emphasized.
Show your work!
b. Assume that sufficient constraint time is available to satisfy demand for all but the least
profitable product. Up to how much should the company be willing to pay to acquire more of
the constrained resource?

b. The company should be willing to pay up to $12.50 per minute to obtain more of the
constrained resource since this is the value to the company of using this constrained resource
to make more of product HV. By assumption, the other products will already have been
produced up to demand.

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Learning Objective: 5
Level: Easy

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130. The constraint at Crumedy Inc. is an expensive milling machine. The three products
listed below use this constrained resource.

Required:
a. Rank the products in order of their current profitability from the most profitable to the least
profitable. In other words, rank the products in the order in which they should be emphasized.
Show your work!
b. Assume that sufficient constraint time is available to satisfy demand for all but the least
profitable product. Up to how much should the company be willing to pay to acquire more of
the constrained resource?

b. The company should be willing to pay up to $10.70 per minute to obtain more of the
constrained resource since this is the value to the company of using this constrained resource
to make more of product GV. By assumption, enough of the other two products will already
have been produced to fully satisfy demand.

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Learning Objective: 5
Level: Easy

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131. Iacollia Company makes two products from a common input. Joint processing costs up
to the split-off point total $47,600 a year. The company allocates these costs to the joint
products on the basis of their total sales values at the split-off point. Each product may be sold
at the split-off point or processed further. Data concerning these products appear below:

Required:
a. What is the net monetary advantage (disadvantage) of processing Product X beyond the
split-off point?
b. What is the net monetary advantage (disadvantage) of processing Product Y beyond the
split-off point?
c. What is the minimum amount the company should accept for Product X if it is to be sold at
the split-off point?
d. What is the minimum amount the company should accept for Product Y if it is to be sold at
the split-off point?

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Learning Objective: 6
Level: Hard

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Chapter 013, Relevant Costs for Decision Making Key

132. Veron Corporation purchases potatoes from farmers. The potatoes are then peeled,
producing two intermediate products-peels and depeeled spuds. The peels can then be
processed further to make a cocktail of organic nutrients. And the depeeled spuds can be
processed further to make frozen french fries. A batch of potatoes costs $35 to buy from
farmers and $19 to peel in the company's plant. The peels produced from a batch can be sold
as is for animal feed for $24 or processed further for $14 to make the cocktail of nutrients that
are sold for $48. The depeeled spuds can be sold as is for $34 or processed further for $29 to
make frozen french fries that are sold for $55.
Required:
a. Assuming that no other costs are involved in processing potatoes or in selling products, how
much money does the company make from processing one batch of potatoes into the cocktail
of organic nutrients and frozen french fries? Show your work!
b. Should each of the intermediate products, peels and depeeled spuds, be sold as is or
processed further into an end product? Explain.

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AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Learning Objective: 6
Level: Easy

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Chapter 013, Relevant Costs for Decision Making Key

133. Policastro Corporation produces two intermediate products, A and B, from a common
input. Intermediate product A can be further processed into end product X. Intermediate
product B can be further processed into end product Y. The common input is purchased in
batches that cost $71 each and the cost of processing a batch to produce intermediate products
A and B is $10. Intermediate product A can be sold as is for $29 or processed further for $14
to make end product X that is sold for $39. Intermediate product B can be sold as is for $45 or
processed further for $29 to make end product Y that is sold for $91.
Required:
a. Assuming that no other costs are involved in processing potatoes or in selling products, how
much money does the company make from processing one batch of the common input into the
end products X and Y? Show your work!
b. Should each of the intermediate products, A and B, be sold as is or processed further into an
end product? Explain.

AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Learning Objective: 6
Level: Easy

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