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Chapter 8 Using Accounting Information to Make Managerial DecisionsSummary of Questions by Objectives and Bloom’s Taxonomy

True-False Questions

Item LO Unit BT Item LO Unit BT1. 1 8-1 K 17. 3 8-3 K2. 1 8-1 K 18. 3 8-3 K3. 1 8-1 K 19. 3 8-3 C4. 1 8-1 K 20. 3 8-3 K5. 1 8-1 C 21. 3 8-3 K6. 1 8-1 K 22. 3 8-3 C7. 2 8-2 K 23. 4 8-4 C8. 2 8-2 K 24. 4 8-4 K9. 2 8-2 K 25. 4 8-4 C10. 2 8-2 K 26. 4 8-4 K11. 2 8-2 C 27. 5 8-5 K12. 2 8-2 C 28. 5 8-5 K13. 2 8-2 C 29. 5 8-5 C14. 3 8-3 C 30. 5 8-5 C15. 3 8-3 C16. 3 8-3 K

Multiple-ChoiceItem LO Unit BT Item LO Unit BT Item LO Unit BT31. 1 8-1 K 66 2 8-2 AP 101 4 8-4 K32. 1 8-1 K 67 2 8-2 AP 102 4 8-4 K33 1 8-1 K 68 2 8-2 C 103 4 8-4 K34 1 8-1 K 69 3 8-3 K 104 4 8-4 K35 1 8-1 C 70 3 8-3 K 105 4 8-4 K36 1 8-1 K 71 3 8-3 AP 106 4 8-4 AP37 1 8-1 C 72 3 8-3 K 107 4 8-4 K38 1 8-1 K 73 3 8-3 AP 108 4 8-4 K39 1 8-1 K 74 3 8-3 C 109 4 8-4 K40 1 8-1 C 75 3 8-3 AP 110 4 8-4 K41 1 8-1 C 76 3 8-3 K 111 4 8-4 K42 1 8-1 K 77 3 8-3 K 112 4 8-4 K43 1 8-1 K 78 3 8-3 C 113 4 8-4 C44 1 8-1 K 79 3 8-3 C 114 4 8-4 AP

45 1 8-1 K 80 3 8-3 C 115 4 8-4 AP46 1 8-1 K 81 3 8-3 C 116 4 8-4 AP47 1 8-1 K 82 3 8-3 C 117 5 8-5 K48 1 8-1 C 83 3 8-3 AP 118 5 8-5 K49 1 8-1 C 84 3 8-3 AP 119 5 8-5 C50 1 8-1 C 85 3 8-3 C 120 5 8-5 C51 2 8-2 K 86 3 8-3 K 121 5 8-5 K52 2 8-2 K 87 3 8-3 K 122 5 8-5 K53 2 8-2 C 88 3 8-3 AP 123 5 8-5 K54 2 8-2 C 89 3 8-3 AP 124 5 8-5 K55 2 8-2 AP 90 3 8-3 AP 125 5 8-5 K56 2 8-2 AP 91 3 8-3 K 126 5 8-5 C57 2 8-2 C 92 3 8-3 K 127 5 8-5 C58 2 8-2 AP 93 3 8-3 K 128 5 8-5 AP59 2 8-2 AP 94 3 8-3 AP 129 5 8-5 AP60 2 8-2 C 95 3 8-3 AP 130 5 8-5 AP61 2 8-2 C 96 3 8-3 AP62 2 8-2 C 97 4 8-4 K63 2 8-2 AP 98 4 8-4 K64 2 8-2 AP 99 4 8-4 K65 2 8-2 AP 100 4 8-4 C

MatchingItem LO Unit BT131. 1,2,3,4,5 8-1,8-2,-8-3,8-4,8-5 K

Brief ExercisesItem LO Unit BT132. 1 8-1 C133. 1 8-1 C134. 2 8-2 AP135. 2 8-2 AP136. 3 8-3 AP137. 3 8-3 AP138. 4 8-4 AP139. 4 8-4 AP140. 5 8-5 AP141. 5 8-5 AP

Exercises142. 1 8-1 C

143. 1 8-1 AP144. 1,5 8-1,8-5 C145. 1 8-1 AP146. 2 8-2 AP147. 2 8-2 AP148. 2 8-2 AP149. 3 8-3 AP150. 3 8-3 AP151. 3 8-3 AP152. 4 8-4 AP153. 4 8-4 AP154. 4 8-4 AP155. 5 8-5 AP156. 5 8-5 AP

Short Answer157. 1,3 8-1,8-3 K158. 2 8-2 C159. 3 8-3 K,C160. 4 8-4 C161. 5 8-5 E162. 1 8-1 K163. 2 8-2 K

Essay164. 3 8-3 S165. 4 8-4 K166. 5 8-5 K

Note: TF = True-False; M = Matching; MC = Multiple Choice; BE = Brief Exercises; E = Exercises; Ess = Essay; SA = Short AnswerLearning Objectives

1. Identify relevant information for decision making. (Unit 8.1)2. Determine the qualitative and quantitative impacts of special order pricing.

(Unit 8.2)3. Determine the qualitative and quantitative impacts of outsourcing

decisions. (Unit 8.3)4. Determine how to allocate constrained resources to maximize income.

(Unit 8.4)

5. Calculate the effects on operating income of keeping or eliminating operations. (Unit 8.5)

True/False

1. Relevant information meets two criteria: (1) it differs between the alternatives and (2) the differences have occurred in the past.

Unit 8-1, LO1 – False – Relevant information meets two criteria: (1) it differs between the alternatives and (2) differences will occur in the future.LO: 1, Bloom: K, Unit: 8-1, Difficulty: Moderate, Min: 1, AACSB: Analytic, AICPA FN: Decision Modeling, AICPA PC: Problem Solving and Decision Making, IMA: Decision Analysis

2. Unavoidable costs are incurred under all alternatives, thus they are always relevant.Unit 8-1, LO1 – False – Unavoidable costs are incurred under all alternatives, thus they are irrelevant.LO: 1, Bloom: K, Unit: 8-1, Difficulty: Moderate, Min: 1, AACSB: Analytic, AICPA FN: Decision Modeling, AICPA PC: Problem Solving and Decision Making, IMA: Decision Analysis

3. Sunk costs are irrelevant in deciding between two alternatives because they are incurred in the past, not the future.

Unit 8-1, LO1 – TrueLO: 1, Bloom: K, Unit: 8-1, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA FN: Decision Modeling, AICPA PC: Problem Solving and Decision Making, IMA: Decision Analysis

4. Incremental analysis that helps decision makers understand the impact of their choices is referred to as incremental analysis.


5. All variable costs are relevant and all fixed costs are irrelevant.Unit 8-1, LO1 – False – Cost behavior does not determine whether a cost is relevant.LO: 1, Bloom: C, Unit: 8-1, Difficulty: Difficult, Min: 1, AACSB: Analytic, AICPA FN: Decision Modeling, AICPA PC: Problem Solving and Decision Making, IMA: Decision Analysis

6. The first step in making any decision is to consider all available alternatives.Unit 8-1, LO1 – False – The first step in making any decision is to understand exactly what decision is being made.LO: 1, Bloom: K, Unit: 8-1, Difficulty: Moderate, Min: 1, AACSB: Analytic, AICPA FN: Decision Modeling, AICPA PC: Problem Solving and Decision Making, IMA: Decision Analysis

7. The Robinson-Patman Act of 1936 prohibits companies from engaging in price discrimination – that is, offering the same item to different customers at different prices.


8. The Sarbanes Act of 1936 prohibits companies from engaging in price discrimination – that is, offering the same item to different customers at different prices.

Unit 8-2 – LO2 – False – The Robinson Patman Act of 1936 prohibits companies from engaging in price discrimination – that is, offering the same item to different customers at different prices.

LO: 2, Bloom: K, Unit: 8-2, Difficulty: Moderate, Min: 1, AACSB: Analytic, AICPA FN: Decision Modeling, AICPA PC: Problem Solving and Decision Making, IMA: Decision Analysis

9. Sometimes companies will accept new business at a loss with the expectation that certain customers can influence other potential customers.

Unit 8-2, LO2 – True LO: 2, Bloom: K, Unit: 8-2, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA FN: Decision Modeling, AICPA PC: Problem Solving and Decision Making, IMA: Decision Analysis

10. If regular sales are given up to take a special order, the lost contribution margin on the regular sales must be subtracted from the contribution margin of the special order to arrive at the total impact on operating income.

Unit 8-2, LO2 – True LO: 2, Bloom: K, Unit: 8-2, Difficulty: Moderate, Min: 1, AACSB: Analytic, AICPA FN: Decision Modeling, AICPA PC: Problem Solving and Decision Making, IMA: Decision Analysis

11. In evaluating whether or not to accept a special order, decision makers need to consider only quantitative factors.

Unit 8-2, LO2 – False – In evaluating whether or not to accept a special order, decision makers need to consider more than just quantitative factors.LO: 2, Bloom: C, Unit: 8-2, Difficulty: Moderate, Min: 1, AACSB: Analytic, AICPA FN: Decision Modeling, AICPA PC: Problem Solving and Decision Making, IMA: Decision Analysis

12. When a customer requests a special order and the supplier has capacity constraints, reducing the special order is not normally an option.

Unit 8-2, LO2 – TrueLO: 2, Bloom: C, Unit: 8-2, Difficulty: Difficult, Min: 1, AACSB: Analytic, AICPA FN: Decision Modeling, AICPA PC: Problem Solving and Decision Making, IMA: Decision Analysis

13. The option of accepting a special order should always be chosen if the price exceeds the relevant costs to produce and deliver the order to the customer.

Unit 8-2, LO2 – False – Qualitative factors should be considered in the decision to accept a special order.LO: 2, Bloom: C, Unit: 8-2, Difficulty: Difficult, Min: 1, AACSB: Analytic, AICPA FN: Decision Modeling, AICPA PC: Problem Solving and Decision Making, IMA: Decision Analysis

14. Outsourcing is a relatively new approach to doing business.Unit 8-3, LO3 – False – Though many people think of outsourcing as a relatively new approach to doing business, it has existed for years.LO: 3, Bloom: C, Unit: 8-3, Difficulty: Moderate, Min: 1, AACSB: Analytic, AICPA FN: Decision Modeling, AICPA PC: Problem Solving and Decision Making, IMA: Decision Analysis

15. Offshoring is another term for outsourcing.Unit 8-3, LO3 – False – Outsourcing and offshoring are not synonymous.LO: 3, Bloom: C, Unit: 8-3, Difficulty: Moderate, Min: 1, AACSB: Analytic, AICPA FN: Decision Modeling, AICPA PC: Problem Solving and Decision Making, IMA: Decision Analysis

16. Offshoring means moving a company’s business processes to a foreign country.Unit 8-3, LO3 – TrueLO: 3, Bloom: K, Unit: 8-3, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA FN: Decision Modeling, AICPA PC: Problem Solving and Decision Making, IMA: Decision Analysis

17. When an outsourcing decision refers to the components of a manufactured product, it is more commonly called a insource or outsource decision.

Unit 8-3, LO 3 – False – When an outsourcing decision refers to the components of a manufactured product, it is more commonly called a make or buy decision.LO: 3, Bloom: K, Unit: 8-3, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA FN: Decision Modeling, AICPA PC: Problem Solving and Decision Making, IMA: Decision Analysis

18. When a company accepts an outsourcing offer, managers must take specific action to eliminate the internal costs.

Unit 8-3, LO3 – TrueLO: 3, Bloom: K, Unit: 8-3, Difficulty: Difficult, Min: 1, AACSB: Analytic, AICPA FN: Decision Modeling, AICPA PC: Problem Solving and Decision Making, IMA: Decision Analysis

19. Because depreciation is a fixed cost that is not avoidable, it is irrelevant in making an outsourcing decision.


20. An opportunity cost is the contribution margin of the next-best alternative use of the facilities.Unit 8-3, LO3 – TrueLO: 3, Bloom: K, Unit: 8-3, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA FN: Decision Modeling, AICPA PC: Problem Solving and Decision Making, IMA: Decision Analysis

21. In an outsourcing decision, one important factor is the quality of the outsourced product.Unit 8-3, LO3 – TrueLO: 3, Bloom: K, Unit: 8-3, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA FN: Decision Modeling, AICPA PC: Problem Solving and Decision Making, IMA: Decision Analysis

22. When a company outsources a product, it is easier to control product quality than if the product is produced internally.

Unit 8-3, LO3 – False – When a company produces a product internally, it is easier to control product quality than it is if the product is made by another firm.LO: 3, Bloom: C, Unit: 8-3, Difficulty: Moderate, Min: 1, AACSB: Analytic, AICPA FN: Decision Modeling, AICPA PC: Problem Solving and Decision Making, IMA: Decision Analysis

23. According to the Theory of Constraints, all production should be subordinated to the bottleneck operation.


24. The formula for calculating the contribution margin per constrained resource is Contribution Margin Per Unit divided by Units Produced.

Unit 8-4, LO4 – False – the formula for calculating the contribution margin per constrained resource is Contribution Margin Per Unit divided by Constrained Resource Per Unit.LO: 4, Bloom: K, Unit: 8-4, Difficulty: Moderate, Min: 1, AACSB: Analytic, AICPA FN: Measurement, AICPA PC: Problem Solving and Decision Making, IMA: Decision Analysis

25. In an environment where the there is a constrained resource, the resource should be allocated first to the product with the highest contribution margin.

Unit 8-4, LO4 – False - In an environment where the there is a constrained resource, the resource should be allocated first to the product with the highest contribution margin per constrained resources, and so on.LO: 4, Bloom: C, Unit: 8-4, Difficulty: Difficult, Min: 1, AACSB: Analytic, AICPA FN: Decision Modeling, AICPA PC: Problem Solving and Decision Making, IMA: Decision Analysis

26. The Theory of Constraints seeks to maximize throughput contribution, which equals sales revenue less direct materials cost.

Unit 8-4, LO4 – TrueLO: 4, Bloom: K, Unit: 8-4, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA FN: Measurement, AICPA PC: Problem Solving and Decision Making, IMA: Decision Analysis

27. Costs such as rent and the production manager’s salary are non-differential, but are relevant.Unit 8-5 – LO5 – False – Costs such as rent and the production manager’s salary are non-differential, and therefore not relevant to the decision.LO: 5, Bloom: K, Unit: 8-5, Difficulty: Moderate, Min: 1, AACSB: Analytic, AICPA FN: Decision Modeling, AICPA PC: Problem Solving and Decision Making, IMA: Decision Analysis

28. The segment margin is the contribution margin of a particular segment less any direct fixed costs.

Unit 8-5, LO5 – TrueLO: 5, Bloom: K, Unit: 8-5, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA FN: Measurement, AICPA PC: Problem Solving and Decision Making, IMA: Decision Analysis

29. In determining whether or not to eliminate a segment, differential costs are relevant to the decision.

Unit 8-5, LO5 – TrueLO: 5, Bloom: C, Unit: 8-5, Difficulty: Moderate, Min: 1, AACSB: Analytic, AICPA FN: Decision Modeling, AICPA PC: Problem Solving and Decision Making, IMA: Decision Analysis

30. Variable costs associated with a segment’s sales may not always be avoidable.Unit 8-5, LO5 – False – Variable costs associated with a segment’s sales are always avoidable.LO: 5, Bloom: C, Unit: 8-5, Difficulty: Moderate, Min: 1, AACSB: Analytic, AICPA FN: Decision Modeling, AICPA PC: Problem Solving and Decision Making, IMA: Decision Analysis

Answers to True-False QuestionsItem Ans Item Ans Item Ans Item Ans1. F 9. T 17. F 25. F2. F 10. T 18. T 26. T3. T 11. F 19. T 27. F4. T 12. T 20. T 28. T5. F 13. F 21. T 29. T6. F 14. F 22. F 30. F7. T 15. F 23. T8. F 16. T 24. F

Multiple Choice

31. Managers becoming overwhelmed by the huge amount of information available to them is referred to as

a. Unavoidable overload.b. Information overload.c. Phenomenon overload.d. Irrelevance overload.

Unit 8-1, LO1 – BLO: 1, Bloom: K, Unit: 8-1, Difficulty: Easy, Min: 2, AACSB: Analytic, AICPA FN: Decision Modeling, AICPA PC: Problem Solving and Decision Making, IMA: Decision Analysis

32. To focus on the facts that make a difference in their decisions, managers need to know how to eliminate

a. Avoidable costs.b. Non-value added activities.c. Irrelevant information.d. All of the above.

Unit 8-1, LO1 – CLO: 1, Bloom: K, Unit: 8-1, Difficulty: Easy, Min: 2, AACSB: Analytic, AICPA FN: Decision Modeling, AICPA PC: Problem Solving and Decision Making, IMA: Decision Analysis

33. Which of the following is a criterion of relevant information?a. It differs between the alternatives b. Differences among alternatives will occur in the future.c. Both a and b.d. Neither a nor b.


34. Which of the following is not a criterion of relevant information?a. It differs between the alternatives b. Differences among alternatives will occur in the future.c. The information always relates to variable costs.d. All of the above are criteria of relevant information.

Unit 8-1, LO1 – CLO: 1, Bloom: K, Unit: 8-1, Difficulty: Moderate, Min: 2, AACSB: Analytic, AICPA FN: Decision Modeling, AICPA PC: Problem Solving and Decision Making, IMA: Decision Analysis

35. A characteristic of irrelevant information is that the informationa. The information is the same among the alternatives.b. Differences will occur in the future.c. Both a and b.d. Neither a nor b.

Unit 8-1, LO1 – ALO: 1, Bloom: C, Unit: 8-1, Difficulty: Difficult, Min: 2, AACSB: Analytic, AICPA FN: Decision Modeling, AICPA PC: Problem Solving and Decision Making, IMA: Decision Analysis

36. In evaluating the relevance of specific information, the decision maker must know

a. All relevant and irrelevant informationb. The context of the decision.c. Both a and b.d. Neither a nor b.

Unit 8-1, LO1 – BLO: 1, Bloom: K, Unit: 8-1, Difficulty: Moderate, Min: 2, AACSB: Analytic, AICPA FN: Decision Modeling, AICPA PC: Problem Solving and Decision Making, IMA: Decision Analysis

37. In evaluating the relevance of specific information, which of the following must the decision maker know

a. The classification of any relevant costs.b. The behavior of any relevant costs.c. The context of the decision.d. All of the above.

Unit 8-1, LO1 – CLO: 1, Bloom: C, Unit: 8-1, Difficulty: Difficult, Min: 2, AACSB: Analytic, AICPA FN: Decision Modeling, AICPA PC: Problem Solving and Decision Making, IMA: Decision Analysis

38. Information overload can lead to a. Information fatigue syndromeb. Data overload condition.c. Data volume disease.d. Chronic Information syndrome.

Unit 8-1, LO1 – A LO: 1, Bloom: K, Unit: 8-1, Difficulty: Moderate, Min: 2, AACSB: Analytic, AICPA FN: Decision Modeling, AICPA PC: Problem Solving and Decision Making, IMA: Decision Analysis

39. One way companies have tried to combat information overload is through the creation ofa. Information firewalls.b. Information dashboards.c. Information warning signals.d. Information ceilings.


40. Which of the following combinations results in relevant information?a. Occurs in the future and is unavoidableb. Occurs in the future and is avoidablec. Occurs in the past and is unavoidabled. Occurs in the past and is avoidable

Unit 8-1, LO1 – BLO: 1, Bloom: C, Unit: 8-1, Difficulty: Moderate, Min: 2, AACSB: Analytic, AICPA FN: Decision Modeling, AICPA PC: Problem Solving and Decision Making, IMA: Decision Analysis

41. Which of the following combinations results in irrelevant information?a. Occurs in the past and is unavoidableb. Occurs in the past and is avoidablec. Occurs in the future and is unavoidabled. All of the above result in irrelevant information

Unit 8-1, LO1 – DLO: 1, Bloom: C, Unit: 8-1, Difficulty: Difficult, Min: 2, AACSB: Analytic, AICPA FN: Decision Modeling, AICPA PC: Problem Solving and Decision Making, IMA: Decision Analysis

42. Costs that occur only with the implementation of a particular alternative are referred to asa. Avoidable.b. Sunk.c. Opportunity.d. None of the above.

Unit 8-1, LO1 – ALO: 1, Bloom: K, Unit: 8-1, Difficulty: Easy, Min: 2, AACSB: Analytic, AICPA FN: Decision Modeling, AICPA PC: Problem Solving and Decision Making, IMA: Decision Analysis

43. Avoidable costs are those costs thata. Are always variable.b. Are always fixed.c. Occur only with the implementation of a particular alternative.d. None of the above.


44. Cost that has been incurred in the past is referred to as a. An avoidable cost.b. A sunk cost.c. An opportunity cost.d. A relevant cost.


45. Sunk cost are classified as a. Irrelevant.b. Avoidable.c. Opportunity.d. None of the above.

Unit 8-1, LO1 – ALO: 1, Bloom: K, Unit: 8-1, Difficulty: Moderate, Min: 2, AACSB: Analytic, AICPA FN: Decision Modeling, AICPA PC: Problem Solving and Decision Making, IMA: Decision Analysis

46. Calculations which show the additional impact of one alternative over another are referred to asa. Relevant analysis.b. Avoidable analysis.c. Incremental analysis.d. Opportunity analysis.


47. Incremental analysis helps decision makers to understand

a. The sunk costs involved in their decision.b. The impact of their choices.c. The classification of costs.d. None of the above.


48. Which of the following is a consideration other than the financial impact that managers should address when choosing whether or not to expand their operations?

a. Will an increase in production and sales reduce existing customer service levels?b. Should the company risk hiring a new sales representative?c. Will the expected extra sales become reality?d. All of the above are non-financial considerations that should be addressed.


49. Once viable alternatives have been identified by a decision maker, which of the following is not a step that should be followed?

a. Develop a list of relevant revenues and costs.b. Identify any qualitative factors that may affect the decision.c. Reconsider nonviable alternatives.d. All of the above steps should be followed.


50. Once viable alternatives have been identified by a decision maker, which of the following is not a step that should be followed?

a. Develop a list of relevant revenues and costs.b. Identify any qualitative factors that may affect the decision.c. Choose the alternative that produces the greatest benefit or the lowest cost.d. All of the above steps should be followed.


51. Which of the following laws prohibits companies from engaging in price discrimination?a. Sarbanes-Oxley Act of 2002b. Robinson-Patman Act of 1936c. The Securities Act of 1933d. NAFTA


52. Which of the following laws prohibits companies from offering the same item to different customers at different prices?

a. NAFTA

b. Foreign Corrupt Practices Act of 1977c. Robinson-Patman Act of 1936d. Sarbanes-Oxley Act of 2002.


53. Which of the following is a reason a company would be willing to accept new business at a loss?a. The company has the expectation that it will make up for it in later years.b. The company has the expectation that certain customers can influence other potential

customers.c. Both a and b.d. Neither a nor b.

Unit 8-2, LO2 – CLO: 2, Bloom: C, Unit: 8-2, Difficulty: Moderate, Min: 2, AACSB: Analytic, AICPA FN: Decision Modeling, AICPA PC: Problem Solving and Decision Making, IMA: Decision Analysis

54. Which of the following is a reason a company would be willing to accept new business at a loss?a. The new business will allow the company to reduce its fixed costs.b. The new business will always cover variable costs.c. The new business may result in certain customers influencing other potential customers.d. All of the above.


55. Which of the following would not be a relevant cost in a special order of expensive clocks?a. Direct materialsb. Direct laborc. Variable overheadd. Fixed overhead

Unit 8-2, LO2 – DLO: 2, Bloom: AP, Unit: 8-2, Difficulty: Moderate, Min: 2, AACSB: Analytic, AICPA FN: Decision Modeling, AICPA PC: Problem Solving and Decision Making, IMA: Decision Analysis

56. Which of the following costs would be relevant in deciding whether to accept a special order?a. Direct materialb. Variable overheadc. Both a and bd. Neither a nor b

Unit 8-2, LO2 – CLO: 2, Bloom: AP, Unit: 8-2, Difficulty: Difficult, Min: 2, AACSB: Analytic, AICPA FN: Decision Modeling, AICPA PC: Problem Solving and Decision Making, IMA: Decision Analysis

57. In making the decision about whether to accept a special order for pianos, which of the following costs should be considered?

a. Relevant costs to produce the pianosb. Relevant costs to sell the pianosc. Both a and bd. Neither a nor b


58. If a special order results in a positive contribution margin of $8 when the contribution margin for regular orders is $15, which of the following decisions is the most likely to be chosen?

a. Accept the orderb. Reject the orderc. Accept the order, but only if the customer agrees to an increase in the selling price to

match the $15 regular contribution margin.d. Accept the order, but only if the customer agrees to an increase of $7 in the selling

price.Unit 8-2, LO2 – ALO: 2, Bloom: AP, Unit: 8-2, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA FN: Decision Modeling, AICPA PC: Problem Solving and Decision Making, IMA: Decision Analysis

59. If a special order is being considered when the product sells for $10 and relevant costs are $6 to produce a unit and $2 to sell the unit, which of the following decisions is the most likely to be chosen?

a. Accept the order if the sales price is $6 or more.b. Accept the order if the sales price is $8 or more.c. Accept the order if the sales price is at least $10.d. Reject the order.

Unit 8-2, LO2 – BLO: 2, Bloom: AP, Unit: 8-2, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA FN: Decision Modeling, AICPA PC: Problem Solving and Decision Making, IMA: Decision Analysis

60. Which of the following is not a qualitative issue in a special order pricing decision?a. Will it generate a positive contribution margin?b. If the special order generates new business, will the customer purchase again at the

regular price?c. If the special order uses a lower quality component that is used for regular orders, will it

negatively affect the company’s reputation?d. All of the above are qualitative issues in a special order pricing decision.

Unit 8-2, LO2 – ALO: 2, Bloom: C, Unit: 8-2, Difficulty: Difficult, Min: 2, AACSB: Analytic, AICPA FN: Decision Modeling, AICPA PC: Problem Solving and Decision Making, IMA: Decision Analysis

61. Which of the following is not a qualitative issue in a special order pricing decision?a. Will accepting the special order require the hiring of extra workers or payment of

overtime?b. Will accepting the special order result in the loss of regular customers?c. Will it generate a positive contribution margin?d. If the special order generates new business, will the customer purchase again at the

regular price?Unit 8-2, LO2 – CLO: 2, Bloom: C, Unit: 8-2, Difficulty: Difficult, Min: 2, AACSB: Analytic, AICPA FN: Decision Modeling, AICPA PC: Problem Solving and Decision Making, IMA: Decision Analysis

62. When a customer requests a special order and the supplier has capacity constraints, which of the following is most likely not an option for the customer?

a. Reject the special order.b. Reduce the special order.c. Accept the special order and cut back on normal production.d. Accept the special order and fill it whenever capacity becomes available.

Unit 8-2, LO2 – BLO: 2, Bloom: C, Unit: 8-2, Difficulty: Difficult, Min: 2, AACSB: Analytic, AICPA FN: Decision Modeling, AICPA PC: Problem Solving and Decision Making, IMA: Decision Analysis

63. Which of the following operations would be the most likely to accept a special order based on seasonality?

a. H&R Block tax serviceb. Federal Expressc. An attorney specializing in estate planningd. A hospital approached by a patient negotiating on the price of kidney stone surgery

Unit 8-2, LO2 – ALO: 2, Bloom: AP, Unit: 8-2, Difficulty: Moderate, Min: 2, AACSB: Analytic, AICPA FN: Decision Modeling, AICPA PC: Problem Solving and Decision Making, IMA: Decision Analysis

64. An auto body shop is trying to decide whether or not to purchase a new piece of diagnostic equipment. Which of the following costs would not be relevant to the decision?

a. The cost of the new equipmentb. The increase in property taxes as a result of purchasing the expensive equipmentc. The book value of the old equipmentd. The cost of training a technician to operate the equipment.

Unit 8-2, LO2 – CLO: 2, Bloom: AP, Unit: 8-2, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA FN: Decision Modeling, AICPA PC: Problem Solving and Decision Making, IMA: Decision Analysis

65. A dance studio is considering a plan to add ballroom dance to its offerings. Which of the following is not a relevant consideration in this decision?

a. Will the studio have to hire an additional instructor?b. Will adding the class attract senior citizens?c. Will another class have to be dropped if ball room dancing is offered?d. Is there a demand for ballroom dancing?

Unit 8-2, LO2 – BLO: 2, Bloom: AP, Unit: 8-2, Difficulty: Difficult, Min: 3, AACSB: Analytic, AICPA FN: Decision Modeling, AICPA PC: Problem Solving and Decision Making, IMA: Decision Analysis

66. Your friend purchased a non-refundable ticket to a popular Broadway play for Friday night. Yesterday she was invited to spend the day on the lake with a group of sorority sisters. Her only cost will be for personal items such as lunch. The lake is two hours away from her apartment and the play is another hour in the opposite direction. She knows that if she goes to the lake, she will not get back in time to attend the play. Which of the following is not a relevant cost in making her decision on whether to go to the play or to the lake?

a. The price of the ticketb. The price of eating out at the lakec. The price of renting an umbrella at the laked. The price of driving to the play


67. Your professor is considering retirement. Which of the following will not be relevant in his decision?

a. The amount of retirement he will receive if he retiresb. The amount of salary he will receive if he does not retirec. The cost of commuting to and from schoold. All of the above are relevant in making his decision.

Unit 8-2, LO2 – DLO: 2, Bloom: AP, Unit: 8-2, Difficulty: Difficult, Min: 3, AACSB: Analytic, AICPA FN: Decision Modeling, AICPA PC: Problem Solving and Decision Making, IMA: Decision Analysis

68. Which of the following is not relevant in the decision to accept a special order?a. Depreciation on factory equipment.b. Variable cost of the product.c. Sales commissions based on a percentage of the sales price.d. All of the above are relevant.

Unit 8-2, LO2 – ALO: 2, Bloom: C, Unit: 8-2, Difficulty: Moderate, Min: 2, AACSB: Analytic, AICPA FN: Decision Modeling, AICPA PC: Problem Solving and Decision Making, IMA: Decision Analysis

69. Moving the production of goods from within the organization to a provider outside the organization is referred to as

a. Transfer pricing.b. Product diffusion.c. Segment slicing.d. Outsourcing.

Unit 8-3, LO3– D LO: 3, Bloom: K, Unit: 8-3, Difficulty: Easy, Min: 2, AACSB: Analytic, AICPA FN: Decision Modeling, AICPA PC: Problem Solving and Decision Making, IMA: Decision Analysis

70. Moving the delivery of services from within the organization to a provider outside the organization is referred to as

a. Outcome sourcing.b. Outsourcing.c. Delivery diffusion.d. Delivery transfer


71. Many small businesses hire a local CPA firm to process their payroll. This is an example ofa. Transfer pricing.b. Offshoring.c. Offsourcing.d. Outsourcing.

Unit 8-3, LO3 – DLO: 3, Bloom: AP, Unit: 8-3, Difficulty: Moderate, Min: 2, AACSB: Analytic, AICPA FN: Decision Modeling, AICPA PC: Problem Solving and Decision Making, IMA: Decision Analysis

72. Moving a company’s business processes to a foreign country is referred to asa. Outsourcing.b. Offsourcing.c. Offshoring.d. Outshoring.


73. Delta Airlines uses Wipro, an Indian company, to handle its customer service calls. This is an example of

a. Offshoring.b. Outshoring.c. Outsourcing.d. Offsourcing.


74. The terms outsourcing and offshoring are nota. Opposite.b. Synonymous.c. Identical.d. Interchangeable.

Unit 8-3, LO3 – BLO: 3, Bloom: C, Unit: 8-3, Difficulty: Easy, Min: 2, AACSB: Analytic, AICPA FN: Decision Modeling, AICPA PC: Problem Solving and Decision Making, IMA: Decision Analysis

75. Toyota, a Japanese company, has a manufacturing plant in Canton, Mississippi. If Toyota were to contract with Ford Motor Company to manufacture its autos at a Ford plant in the United States, this would be an example of

a. Offshoringb. Outsourcingc. Offshore outsourcingd. None of the above.

Unit 8-3, LO3 – C

LO: 3, Bloom: AP, Unit: 8-3, Difficulty: Difficult, Min: 3, AACSB: Analytic, AICPA FN: Decision Modeling, AICPA PC: Problem Solving and Decision Making, IMA: Decision Analysis

76. When an outsourcing decision refers to the components of a manufacturing product, it is commonly called

a. Unit outsourcing.b. Make-or-buy decision.c. Transfer of ownership decision.d. None of the above.


77. When an outsourcing decision refers to the components of a manufacturing product, it is commonly called

a. Insourcing.b. Resource Constraint.c. Unit outsourcing.d. Make-or-buy decision.

Unit 8-3, LO3 – DLO: 3, Bloom: K, Unit: 8-3, Difficulty: Easy, Min: 2, AACSB: Analytic, AICPA FN: Decision Modeling, AICPA PC: Problem Solving and Decision Making, IMA: Decision Analysis

78. Which of the following is not one of the top ten reasons companies outsource their operations?a. Redirects resources to core activitiesb. Frees managers’ time to focus on more important issuesc. Reduces and controls operating costsd. Provides diversity so as to produce better quality product


79. Which of the following is not one of the top ten reasons companies outsource their operations?a. More effective than producing all the components of a productb. Provides a cash infusing as freed-up assets are soldc. Provides world-class capabilities at lower costd. Transfers a portion of business risk to an outsource provider

Unit 8-3, LO 3 – ALO: 3, Bloom: C, Unit: 8-3, Difficulty: Difficult, Min: 2, AACSB: Analytic, AICPA FN: Decision Modeling, AICPA PC: Problem Solving and Decision Making, IMA: Decision Analysis

80. Which of the following is not one of the top ten reasons companies outsource their operations?a. Releases capital funds for use in other projectsb. Always less costly to outsourcec. Provides external expertise to improve difficult-to-manage processesd. Accelerates the benefits of process reengineering


81. Which of the following is not a short-term tactical benefit of outsourcing a company’s operations?

a. Release capital funds for use in other projectsb. Frees managers’ time to focus on more important issuesc. Reduces and controls operating costsd. Provides a cash infusion as freed-up assets are sold


82. Which of the following is not a long-term tactical benefit of outsourcing a company’s operations?

a. Frees managers’ time to focus on more important issuesb. Accelerates the benefits of process reengineeringc. Releases capital funds for use in other projectsd. Redirects resources to core activities


83. When a company accepts an outsourcing offer, managers must take specific action to eliminate internal costs. Which of the following is not an example of such an action?

a. Reduce work forceb. Sell production equipmentc. Eliminate income taxesd. Reduce inventory levels

Unit 8-3, LO3 – CLO: 3, Bloom: AP, Unit: 8-3, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA FN: Decision Modeling, AICPA PC: Problem Solving and Decision Making, IMA: Decision Analysis

84. When a company accepts an outsourcing offer, managers must take specification to eliminate internal costs. Which of the following is not a quantitative or qualitative factor managers should consider?

a. Reduce direct laborb. Eliminate shipping chargesc. Employee morald. All of the above are factors to be considered.

Unit 8-3, LO3 – DLO: 3, Bloom: AP, Unit: 8-3, Difficulty: Difficult, Min: 3, AACSB: Analytic, AICPA FN: Decision Modeling, AICPA PC: Problem Solving and Decision Making, IMA: Decision Analysis

85. Depreciation on a factory machine is an example of which of the following types of cost?a. Variable costb. Sunk costc. Opportunity costd. Period cost

Unit 8-3, LO3 – BLO: 3, Bloom: C, Unit: 8-3, Difficulty: Moderate, Min: 2, AACSB: Analytic, AICPA FN: Decision Modeling, AICPA PC: Problem Solving and Decision Making, IMA: Decision Analysis

86. When a company is outsourcing a process, resources are freed up so they can be put to another use. The alternative use is considered to be

a. An opportunity cost.b. A sunk cost.c. A outsource windfall.d. None of the above.


87. When choosing between alternatives, the contribution margin of the next-best alternative is called

a. Incremental revenue.b. Opportunity cost.c. Sunk cost.d. None of the above.


88. Which of the following is not a qualitative issue that must be considered before reaching a decision to outsource?

a. Quality of the outsourced product.b. Number of employees terminated.c. Ability to bring outsourced item back in house.d. All of the above are qualitative issues to be considered.



a. Reliability of the outsource provider.b. Stability of the price offered by the outside supplier.c. Opportunity costs of alternatives.d. All of the above are qualitative issues to be considered.



a. Potential theft of intellectual property.b. Quality of the outsourced product.c. Number of employees to be terminated.d. All of the above are qualitative issues to be considered.


91. The costs that should be included in an outsourcing decision are the:a. Fixed costs.b. Variable costs. c. Unavoidable costs.d. Relevant costs.

Unit 8-3, LO3 – DLO: 3, Bloom: K, Unit: 8-3, Difficulty: Moderate, Min: 2, AACSB: Analytic, AICPA FN: Decision Modeling, AICPA PC: Problem Solving and Decision Making, IMA: Decision Analysis

92. The costs that should be included in an outsourcing decision are the:a. Sunk costs.b. Recurring costs.c. Relevant costs.d. All of the above costs should be included.


93. The costs that should be included in an outsourcing decision are the:a. Fixed costs.b. Nonrecurring costs.c. Opportunity costs.d. Relevant costs.


94. Given the following data, what is the total relevant cost of internal production of 2,000 products?

Direct materials $12Direct labor $ 4Variable overhead $ 1Total fixed overhead $9,000Avoidable fixed $6,000Sunk cost $8,000

a. $34,000b. $40,000c. $48,000d. $49,000

Unit 8-3, LO3 – BLO: 3, Bloom: AP, Unit: 8-3, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA FN: Measurement, AICPA PC: Problem Solving and Decision Making, IMA: Decision Analysis

95. If the unit cost of direct materials is $20, direct labor is $12, variable overhead is $2, avoidable fixed costs are $6,000, unavoidable fixed costs are $5,000 and sunk costs are $9,000, what is the total relevant cost for 300 products?

a. $15,200b. $16,200

c. $24,200d. $25,200

Unit 8-3, O3 – BLO: 3, Bloom: AP, Unit: 8-3, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA FN: Measurement, AICPA PC: Problem Solving and Decision Making, IMA: Decision Analysis

96. Given the following data, what is the total relevant cost of internal production of 50 units?

Direct material $15Direct labor $3Variable overhead $2Avoidable fixed costs $800Unavoidable fixed costs $300Sunk costs $2,000

a. $1,800b. $2,100c. $4,100d. None of the above.

Unit 8-3, LO3 – ALO: 3, Bloom: AP, Unit: 8-3, Difficulty: Moderate, Min: 3, AACSB: Analytic, AICPA FN: Measurement, AICPA PC: Problem Solving and Decision Making, IMA: Decision Analysis

97. When multiple products share a constrained resource, the way to allocate the resource is to compute the

a. Contribution per unit.b. Contribution margin per constrained resource.c. Opportunity cost per unit.d. None of the above.

Unit 8-4, LO4 – BLO: 4, Bloom: K, Unit: 8-4, Difficulty: Easy, Min: 2, AACSB: Analytic, AICPA FN: Measurement, AICPA PC: Problem Solving and Decision Making, IMA: Decision Analysis

98. The formula for computing the contribution per constrained resource isa. Contribution margin per unit multiplied by the constrained resource per unit.b. Contribution margin per unit divided by the constrained resource per unit.c. Total contribution margin multiplied by the constrained resource per unit.d. Total contribution margin divided by the constrained resource per unit.


99. When multiple products share a constrained resource, the constrained resource should be allocated first to the product with

a. The lowest contribution margin.b. The lowest contribution margin per unit.c. The highest contribution margin per constrained resource.d. The highest contribution margin.


100. If a company produces its products in a constrained resource environment, the company should

a. Always produce the product with the lowest contribution margin per constrained resource.

b. Always produce the product with the highest contribution margin per constrained resource.

c. Produce a mix of products such that opportunity cost is minimized.d. Produce a mix of products such as customer service and customer preferences are met.


101. The Theory of Constraints was developed by Eli Goldratt toa. Maximize the performance of a value chain by focusing on constraints that limit an

organization’s output.b. Maximize the performance of a value chain by focusing on those processes that do not

have constraints.c. Limit or eliminate defective product that constrain production.d. None of the above.


102. According to the theory of constraints, which of the following is not a step required to maximize and improve the performance of a value chain?

a. Identify the constraint.b. Compare the constraints with industry averages.c. Decide how to exploit the constraint.d. Elevate the performance of the constraint.


103. According to the theory of constraints, which of the following is not a step required to maximize and improve the performance of a value chain?

a. Identify the constraint.b. Decide how to exploit the constraint.c. Subordinate and synchronize everything else to the first two decisions.d. Determine customer demand.


104. According to the theory of constraints, which of the following is not a step required to maximize and improve the performance of a value chain?a. Decide how to exploit the constraint.b. Elevate the performance of the constraint.c. Determine customer demand.

d. All of the above are required steps.Unit 8-4, LO4 – CLO: 4, Bloom: K, Unit: 8-4, Difficulty: Moderate, Min: 2, AACSB: Analytic, AICPA FN: Decision Modeling, AICPA PC: Problem Solving and Decision Making, IMA: Decision Analysis

105. According to the theory of constraints, which of the following is not a step required to maximize and improve the performance of a value chain?a. Identify the constraint.b. Decide how to exploit the constraint.c. Elevate the performance of the constraint.d. All of the above are required steps.


106. ABC Company manufactures sleeping bags. It has the capacity to produce 6,000 sleeping bags a year, but only produced 5,700 bags that could be sold because 5% of the bags had zippers that were defective. Under the theory of constraints, which of the following would be the most likely action to eliminate the problem of defective zippers?a. Outsource the installation of zippers.b. Redesign the sleeping bag to have a longer zipper.c. Purchase a better-quality zipper.d. Replace sleeping bag production with a product that does not have defects.


107. Instead of maximizing income, as measured by traditional accounting methods, the theory of constraints seeks to maximizea. Contribution income.b. Throughput contribution.c. Quality.d. Gross profit.


108. The theory of constraints seeks to maximizea. Inventory control.b. Contribution marginc. Capacity.d. Throughput contribution.

Unit 8-4, LO4 – DLO: 4, Bloom: K, Unit: 8-4, Difficulty: Easy, Min: 2, AACSB: Analytic, AICPA FN: Measurement, AICPA PC: Problem Solving and Decision Making, IMA: Decision Analysis

109. Throughput contribution equalsa. Sales revenue less fixed costs.b. Sales revenue less product costs.c. Sales revenue less direct materials costs.d. Sales revenues less manufacturing overhead.

Unit 8-4, LO4 – CLO: 4, Bloom: K, Unit: 8-4, Difficulty: Easy, Min: 2, AACSB: Analytic, AICPA FN: Measurement, AICPA PC: Problem Solving and Decision Making, IMA: Decision Analysis

110. Throughput contribution equalsa. Sales revenue less direct materials cost.b. Sales revenue less product costs.c. Direct material plus direct labor.d. Direct material plus traceable manufacturing overhead.

Unit 8-4, LO4 – ALO: 4, Bloom: K, Unit: 8-4, Difficulty: Easy, Min: 2, AACSB: Analytic, AICPA FN: Measurement, AICPA PC: Problem Solving and Decision Making, IMA: Decision Analysis

111. A company can increase its throughput by which of the following actions?a. Increasing salesb. Decreasing costs.c. Either a or b.d. Neither a nor b.


112. A company can increase its throughput by which of the following actions?a. Decreasing sales.b. Increasing costs.c. Either a or b.d. Neither a nor b.

Unit 8-4, LO4 – DLO: 4, Bloom: K, Unit: 8-4, Difficulty: Difficult, Min: 2, AACSB: Analytic, AICPA FN: Decision Modeling, AICPA PC: Problem Solving and Decision Making, IMA: Decision Analysis

113. Which of the following is not relevant to a decision involving the allocation of a single constrained resource among multiple products?a. Unit variable cost of each product.b. Selling price of each product.c. Fixed manufacturing costs.d. Number of orders waiting to be filled.


114. Which of the following is least likely to be a constrained resource?a. Flour to make donuts.b. Beads to make necklaces.c. Specialized equipment.

d. All of the above could be scarce resources.Unit 8-4, LO4 – DLO: 4, Bloom: AP, Unit: 8-4, Difficulty: Difficult, Min: 2, AACSB: Analytic, AICPA FN: Decision Modeling, AICPA PC: Problem Solving and Decision Making, IMA: Decision Analysis

115. ABC Corporation produces three products, Standard, Deluxe and Superior, with the following characteristics:

Standard Deluxe SuperiorSelling price per unit $15 $12 $10Variable cost per unit 10 8 7Contribution margin per unit $ 5 $ 4 $ 3Machine hours per unit 2 2 2

The company has only 1,800 machine hours available each period. If demand exceeds the company’s capacity, in what sequence should orders for the three products be filled to maximize the company’s total contribution margin?a. Standard first, Deluxe second, Superior thirdb. Deluxe first, Standard second, Superior thirdc. Superior first, Standard second, Deluxe thirdd. Standard first, Superior second, Deluxe third

Unit 8-4, LO4 – ALO: 4, Bloom: AP, Unit: 8-4, Difficulty: Difficult, Min: 4, AACSB: Analytic, AICPA FN: Decision Modeling, AICPA PC: Problem Solving and Decision Making, IMA: Decision Analysis

116. ABC Company produces three products, Basic, Regular and Special, with the following characteristics:

Standard Deluxe SuperiorSelling price per unit $15 $12 $14Variable cost per unit 4 8 12Contribution margin per unit $ 6 $ 4 $ 2Machine hours per unit 2 4 1

The company has only 1,500 machine hours available each period. If demand exceeds the company’s capacity, in what sequence should orders for the three products be filled to maximize the company’s total contribution margin?

a. Standard first, Deluxe second, Superior thirdb. Deluxe first, Standard second, Superior thirdc. Superior first, Standard second, Deluxe thirdd. Standard first, Superior second, Deluxe third


117. A common mistake managers make in deciding to close a division is a. Allowing allocated fixed costs to influence his decision.b. Allowing qualitative issues to influence his decision.c. Allowing avoidable costs to influence his decision.d. All of the above.

Unit 8-5, LO5 – ALO: 5, Bloom: K, Unit: 8-5, Difficulty: Moderate, Min: 2, AACSB: Analytic, AICPA FN: Decision Modeling, AICPA PC: Problem Solving and Decision Making, IMA: Decision Analysis

118. Which of the following should not influence a manager’s decision in deciding whether or not to close a division?a. Qualitative factorsb. Allocated fixed costsc. Allocated product costsd. Allocated variable selling expenses


119. Costs such as rent and the production manager’s salary are examples of which type of cost?a. Non-differential costsb. Allocated product costsc. Sunk costsd. Relevant costs

Unit 8-5, LO5 – ALO: 5, Bloom: C, Unit: 8-5, Difficulty: Moderate, Min: 2, AACSB: Analytic, AICPA FN: Decision Modeling, AICPA PC: Problem Solving and Decision Making, IMA: Decision Analysis

120. Which of the following would be least likely classified as a direct cost of a business segment?a. Shippingb. Sales commissionsc. Rentd. Direct material


121. Which of the following terms indicate that costs are not directly caused by the cost object?a. Allocatedb. Assignedc. Commond. All of the above


122. Which of the following terms indicate general corporate cost incurred to support operations as a whole?a. Allocatedb. Assignedc. Commond. All of the above


123. Common costs, those not directly caused by the cost object area. Not relevantb. Non-differentialc. Both a and bd. Neither a nor b


124. The contribution margin of a particular segment less any direct fixed costs is calleda. Segment marginb. Segment profitc. Segment operating margind. None of the above


125. The variable costs associated with the segment’s sales are alwaysa. Sunkb. Avoidablec. Unavoidabled. Irrelevant


126. Which of the following statements is true?a. If the segment margin is negative, the segment should be retained.b. If the segment margin is negative, it should remain in operation until a better use can be

found for its resources.c. If the segment margin is negative, it should file for bankruptcy.d. If the segment margin is negative, the operation should be dropped.

Unit 8-5, LO5 – DLO: 5, Bloom: C, Unit: 8-5, Difficulty: Moderate, Min: 2, AACSB: Analytic, AICPA FN: Decision Modeling, AICPA PC: Problem Solving and Decision Making, IMA: Decision Analysis

127. In a decision to add or eliminate a product or service, which of the following is an avoidable cost?a. Common costsb. Depreciationc. Variable overheadd. Allocated overhead


128. Brandy Company is deciding whether or not to discontinue one of its divisions. The division’s contribution margin is $27,000 per year. The fixed costs charged to the division total $32,000,

but $15,000 would be eliminated if the division is discontinued. If the division is eliminated, the overall net operating income woulda. Decrease by $9,000b. Increase by $12,000c. Decrease by $15,000d. Increase by $27,000


129. Logan Corporation is considering a eliminating a department that has incurred losses over the past several years. The department has a contribution margin of $32,000 per year. The fixed costs charged to the department total $37,000. $15,000 of the fixed costs is avoidable. If the department is eliminated, what would be the effect on the corporation’s net income?a. $17,000 decreaseb. $37,000 decreasec. $15,000 increased. $22,000 increase


130. ABC Corporation makes mattresses in three sizes: twin, queen and king. Twin mattresses has shown a loss for several years, similar to the operating loss shown below:

Twin Queen KingSales $150,000 $250,000 $280,000Variable costs 75,000 150,000 190,000Contribution margin 75,000 100,000 90,000Fixed costs 80,000 80,000 80,000Operating income ($5,000) $20,000 $ 10,000

None of the fixed cost is avoidable. What will total operating income for the corporation if twin mattresses are discontinued?a. $50,000 lossb. $15,000 lossc. $30,000 profitd. $105,000 profit


Answers to Multiple-Choice QuestionsItem Ans Item Ans Item Ans Item Ans Item Ans31. B 51. B 71. D 91. D 111. C32. C 52. C 72. C 92. C 112. D33. C 53. C 73. A 93. D 113. C34. C 54. C 74. B 94. B 114. D

35. A 55. D 75. C 95. B 115. A36. B 56. C 76. B 96. A 116. A37. C 57. C 77. D 97. B 117. A38. A 58. A 78. D 98. B 118. B39. B 59. B 79. A 99. C 119. A40. B 60. A 80. B 100. D 120. C41. D 61. C 81. B 101. B 121. D42. A 62. B 82. C 102. B 122. D43. C 63. A 83. C 103. D 123. C44. B 64. C 84. D 104. C 124. A45. A 65. B 85. B 105. D 125. B46. C 66. A 86. A 106. C 126. D47. B 67. D 87. B 107. B 127. C48. D 68. A 88. B 108. D 128. B49. C 69. D 89. C 109. C 129. A50. D 70. B 90. C 110. A 130. A

Matching

131. Match the following terms to the appropriate statement by placing the letter to the left of each statement.

a. Allocated cost f. Incremental analysisb.

Avoidable cost g. Information overload

c. Bottleneck process h. Opportunity costd.

Common cost i. Sunk cost

e. Differential j. Throughput contribution

____ 1. When information differs between alternatives____ 2. A cost that occurs only with the implemental of a particular alternative____ 3. A cost that has been incurred in the past____ 4. The contribution margin of the next-best alternative____ 5. Sales revenue less direct materials cost____ 6. Costs that are not directly caused by the cost object____ 7. Another term for allocated cost____ 8. A process that limits total output____ 9. A phenomenon occurring when managers become overwhelmed by the huge amount of

information available to them____ 10. Calculations that show the additional impact of one alternative over another

Unit 8-1, 2, 3, 4, 5, LO1, 2, 3, 4, 5Solution:

1. e – Differential2. b – Avoidable cost3. i – Sunk cost4. h – Opportunity cost5. j – Throughput contribution6. a – allocated cost7. d – Common cost8. c – Bottleneck process9. g – Information overload10. f – Incremental analysis

Ans: N/A, LO: 1,2,3,4,5, Bloom: K, Unit: 8-1,8-2,8-3,8-4,8-5, Difficulty: Moderate, Min: 15, AACSB: Analytic, AICPA FN: Decision Modeling, AICPA PC: Problem Solving and Decision Making, IMA: Decision Analysis

Brief Exercises

132. Complete the table below by placing an “X” under each heading that classifies the cost as relevant or irrelevant.

Relevant IrrelevantSales taxes paid on purchasesOriginal cost of equipmentDirect laborSales commissionsFixed factory overhead

Unit 8-1, LO1Solution

Relevant IrrelevantSales taxes paid on purchases XOriginal cost of equipment XDirect labor XSales commissions XFixed factory overhead X

Ans: N/A, LO: 1, Bloom: C, Unit: 8-1, Difficulty: Moderate, Min: 10, AACSB: Analytic, AICPA FN: Decision Modeling, AICPA PC: Problem Solving and Decision Making, IMA: Decision Analysis

133. Complete the table below by placing an “X” under each heading that classifies the costs as avoidable or unavoidable in a decision to accept a special order.

Avoidable UnavoidableDirect material to produce orderOriginal cost of factory machineryFixed overheadCost to deliver products to customersSalary of supervisor moved to another production line

Unit 8-1, LO1Solution:

Avoidable UnavoidableDirect material to produce order XOriginal cost of factory machinery XFixed overhead XCost to deliver products to customers X

Salary of supervisor moved to another production line

X


134. R&W Manufacturing Company produces men’s hiker shorts. The selling price of the shorts is $35. The following standard cost data per unit includes $7 direct material, $4 direct labor and $12 manufacturing overhead (50% variable, 50% fixed). R&W has received a special order for 200 at a price of $20 each. The only additional cost of accepting the special order is a sales commission of $1 per unit. R&W has ample capacity to produce the special order without interrupting regular production. Ignoring qualitative factors, should R&W accept the special order?

Unit 8-2, LO2 Solution:

Relevant costsRevenue $20Direct material 7Direct labor 4Sales commission 1Variable overhead 6Contribution margin $ 2

R&W should accept the special order because the contribution margin for the special order is positive. If the special order is accepted it will produce $400 ($2 x 200) additional profit.

Ans: N/A, LO: 2, Bloom: AP, Unit: 8-2, Difficulty: Difficult, Min: 10-15, AACSB: Analytic, AICPA FN: Decision Modeling, AICPA PC: Problem Solving and Decision Making, IMA: Decision Analysis

135. Elton’s Electronics is a wholesale distributer for TVs and other electronics and appliances. The selling price of TV Model 83G7 is $799. The following standard cost data per Model 83G7 includes $300 direct material, $30 direct labor and $200 manufacturing overhead (75% variable, 25% fixed). Elton has received a special order for 200 Model 83G7s at a price of $450 each. The only additional cost of accepting the special order is a sales commission of $9 per unit. Since the special order is to a retail store that will not be in competition with any other Elton customers. Ignoring qualitative factors, should Elton accept the special order?

Unit 8-2, LO2 Solution:

Relevant costsDirect material $300Direct labor 30Sales commission 9Variable overhead 150Unit cost $489

Sales price for special order $450Variable cost 489Contribution margin ($39)

Elton should not accept the special order because the relevant cost exceeds the sale price. The special order would create a negative contribution resulting in a net loss if the order is accepted.


136. Paper Moon, a manufacturer of outdoor lighting fixtures is operating at less than full capacity. The plant manager is considering making the mounting brackets now being purchased from a supplier at $8 each. Paper Moon already has the equipment to produce the brackets. The plant manager has analyzed the cost of producing the brackets and determined that each bracket will require $2 of direct material, $1 of direct labor, and $8 of manufacturing overhead. Seventy-five percent of the manufacturing overhead is a fixed cost that would not be affected by the decision to manufacture the brackets. Should Paper Moon continue to purchase the brackets or produce them internally?


Make BuyPurchase price of tube $8Direct material $2Direct labor $1Variable overhead $2Fixed overhead $8 $6Costs per unit $13 $14

Paper Moon should not continue to purchase the part from an outside supplier because the cost of relevant cost of making the part is less than the relevant cost of purchasing it.

Ans: N/A, LO: 3, Bloom: AP, Unit: 8-3, Difficulty: Moderate, Min: 10-15, AACSB: Analytic, AICPA FN: Decision Modeling, AICPA PC: Problem Solving and Decision Making, IMA: Decision Analysis

137. Power Tools, Inc. produces gas-powered leaf blowers. The company is currently not operating at full capacity. The plant manager is considering making the rewind assembly for the pull cord which is now being purchased from a supplier at $22 each. Power Tools already has the equipment to produce the assembly. The plant manager has analyzed the cost of producing the assemblies and determined that each assembly will require $8 of direct material, $6 of direct labor, and $12 of manufacturing overhead. Two-thirds of the manufacturing overhead is a fixed cost that would not be affected by the decision to manufacture the brackets. Should Paper Moon continue to purchase the brackets or produce them internally?


Make BuyPurchase price of tube $22Direct material $ 8Direct labor 6Variable overhead 4Fixed overhead 8 $8Costs per unit $26 $30

Power Tool should make the assembly rather than to continue purchasing the part from an outside supplier because the cost of making the part is less than the purchase price.


138. Murphy’s, Inc. has the following production and cost data for two of its products, Standard and Deluxe:

Standard DeluxeContribution margin per unit $60 $40Machine hours needed per unit 2 1

A total of 80,000 hours is available each period for the production of the two products. The demand for both products is strong and Murphy will be able to sell as many of either product as it can produce. Ignoring qualitative issues, which of the two products should Murphy produce?


Standard $60/2 = $30 contribution margin per constraint (machine hours)Deluxe $40/1 = $40 contribution margin per constraint (machine hours)

Murphy should produce the Deluxe product as it provides the higher contribution margin per constraint.

Ans: N/A, LO: 4, Bloom: AP, Unit: 8-4, Difficulty: Easy, Min: 10, AACSB: Analytic, AICPA FN: Decision Modeling, AICPA PC: Problem Solving and Decision Making, IMA: Decision Analysis

139. Ledbetter, Inc. has the following production and cost data for three of its products, Basic, Standard and Deluxe:

Basic Standard DeluxeContribution margin per unit $40 $50 $60Machine hours needed per unit 2 5 4

A total of 8,000 hours is available each period for the production of the three products. The demand for both products is strong and Ledbetter has orders for 1,200 of Basic, 3,000 of Standard and 800 of Deluxe. Ignoring qualitative issues, how many of each product should Ledbetter produce?


Basic $40/2 = $20 contribution margin per constraint (machine hours)Standard $50/5 = $10 contribution margin per constraint (machine hours)Deluxe $60/4 = $15 contribution margin per constraint (machine hours)

Ledbetter should fill the Basic orders first, then the Deluxe and finally the Standard

Order of production:Total Hours available 8,000Basic (1,200 x 2) 2,400 (Ledbetter can fill all of the orders)Hours remaining 5,600Deluxe (800 x 4) 3,200 (Ledbetter can fill all of the orders)Hours remaining 2,400Standard (480 x 5) 2,400(Ledbetter can fill only 480 of the 3,000 orders)

Ans: N/A, LO: 4, Bloom: AP, Unit: 8-4, Difficulty: Moderate, Min: 15, AACSB: Analytic, AICPA FN: Decision Modeling, AICPA PC: Problem Solving and Decision Making, IMA: Decision Analysis

140. Kentucky Distributors has two divisions – Northern and Southern. The divisions have provided the following financial information:

Northern SouthernSales $150,000 $210,000Variable costs 95,000 110,000Common fixed costs 65,000 75,000Net operating income ($ 10,000) $ 25,000

Kentucky’s executives are considering the elimination of the Northern division. If the division is eliminated, the common fixed costs will remain unchanged. Given these data, should the Northern division be eliminated? Why?


Northern Southern TotalWithout Northern

Sales $150,000 $210,000 $360,000 $210,000Variable costs 95,000 110,000 205,000 110,000Contribution margin 55,000 100,000 155,000 100,000Common fixed costs 65,000 75,000 140,000 140,000Net operating income ($ 10,000) $ 25,000 $ 15,000 ($ 40,000)

Kentucky should not eliminate the Northern division. It has a positive contribution, and if it is eliminated, the Southern division would have the burden of $65,000 additional common fixed costs. This would create lower income for the Southern division and the company.


141. Cabells, Inc. has two divisions – Electronics and Appliances. The divisions have provided the following financial information:

Electronics AppliancesSales $310,000 $410,000Variable costs 225,000 270,000Avoidable fixed costs 92,000 60,000Common fixed costs 35,000 35,000Net operating income ($ 42,000) $ 45,000

Cabells’ executives are considering the elimination of the Electronics division. If the division is eliminated, the common fixed costs will remain unchanged. Given these data, should the Electronics division be eliminated? Why?


Electronics Appliances Total

Without Electronic

Sales $310,000 $410,000 $720,000 $410,000Variable costs 225,000 270,000 495,000 270,000Avoidable fixed costs 92,000 60,000 152,000 60,000Common fixed costs 35,000 35,000 70,000 70,000Net operating income ($ 42,000) $ 45,000 $ 3,000 $ 10,000

Cabells should eliminate the Electronics division. The Electronics division before common fixed cost has a $7,000 loss. If the division is eliminated, the company will show a profit of $10,000.


Exercises

142. Suppose you are trying to decide whether to rent an apartment across the street from campus or a nicer apartment one mile from campus. Indicate whether the following pieces of information are relevant or irrelevant to your decision.

Relevant IrrelevantCost of apartmentCar insuranceRenter’s insuranceCost of gasolineCost of campus parking permitCost of car washCost of shoesOriginal cost of your carAmount of utility expense


Relevant IrrelevantCost of apartment XCar insurance XRenter’s insurance XCost of gasoline XCost of campus parking permit XCost of car wash XCost of shoes XOriginal cost of your car XAmount of utility expense X


143. Brandon, Inc. is a consulting firm headquartered in Dallas. Trish Hardin, CEO of the company plans to attend a professional conference in Atlanta where she intends to network in the pursuit of business. She enjoys shopping and dining in Atlanta and is looking forward to the trip. She registered for the conference and made hotel and airfare reservations six weeks ago. Her airline ticket and registration fee are non-refundable, but it is not too late to cancel her hotel room. The day before the conference, a company executive from El Dorado calls and wishes to meet with Trish the next day regarding a consulting project. If Trish chooses to make the trip to El Dorado, she will drive. Both trips will require an overnight stay. Trish does not have a prediction of how much revenue either trip may generate. Costs related to the two trips are as follows:

Cost of Atlanta trip Cost of El Dorado trip

Airfare $450 Mileage $120Meals $150 Meals $ 50Hotel $250 Hotel $100Registration

$100

Required:a. Which of the above costs are not relevant?

b. Without considering qualitative factors, which alternative will Trish choose? Why?

c. What are three factors other than costs that Trish should consider?


a. The airfare and registration fee are sunk costs and thus not relevant.

b. Since Trish cannot predict if either trip will generate more revenue than the other, Trish should make her choice based on incremental analysis of the costs of each trip.

Cost of Atlanta trip Cost of El Dorado tripMileage $120

Meals $150 Meals $ 50Hotel $250 Hotel $100

$400 $270Because the Atlanta trip is more costly, Trish will make the trip to El Dorado.

c. Some factors she might consider are1. The safety of air travel versus driving2. While driving Trish will not be productive, however she might be able to work on the

airplane3. Personal enjoyment in her off-time in Atlanta versus El Dorado


144. Place and “X” in the column that corresponds to the cost classification for each of the following scenarios. Some items may fit in more than one column.

Avoidable Cost

Unavoidable Cost

Sunk Cost

Common Fixed Cost

Original cost of factory machineryDirect materialDepreciation on home office furnitureSalary of employees who will be fired if product is outsourcedCost of item previously made in factory, but now purchased from supplierDepreciation on factory equipmentSalary of supervisor who will be moved to another production line if product is eliminatedCost of nonrefundable airline ticket purchased last weekCost of delivery of products to customersDirect labor

Unit 8-1, 5, LO1, 5Solution

Avoidable Cost

Unavoidable Cost

Sunk Cost

Common Fixed Cost

Original cost of factory machinery X XDirect material XDepreciation on home office furniture XSalary of employees who will be fired if product is outsourced

X

Cost of item previously made in factory, but now purchased from supplier

X

Depreciation on factory equipment XSalary of supervisor who will be moved to another production line if product is eliminated

X

Cost of nonrefundable airline ticket purchased last week

X X

Cost to delivery products to customers XDirect labor X

Ans: N/A, LO: 1,5, Bloom: C, Unit: 8-1,8-5, Difficulty: Moderate, Min: 15, AACSB: Analytic, AICPA FN: Decision Modeling, AICPA PC: Problem Solving and Decision Making, IMA: Decision Analysis

145. Sanderson’s Woodworking Company is considering the addition of a new line of quilt frames to its current product lines. If the new quilt frames are added to Sanderson’s production, contribution margin of the other products is expected to drop by $2,000. Sanderson has summarized the projected revenue and cost for the new line of frames.

Annual sales 200 unitsSelling Price per unit $250Variable costs per unit Manufacturing $180 Selling $5Avoidable fixed costs per year Production $3,000 Selling $4,000Allocated common fixed costs per year $1,600

Required:

a. If Sanderson adds the new quilt frame to its line of products, what will be the increase in operating income?

b. What are three issues that Sanderson should consider before adding the new line?


a.Selling price $250Less variable costs 185Contribution margin 65Number of units x200Total expected contribution margin $13,000Less avoidable costs 7,000Less reduction in contribution margin 2,000Increase in income $ 4,000

b. Sanderson should consider the demand for the quilt frames, whether the factory has the production and storage capacity for the additional inventory, the product mix if there is a resource constraint, the timing of the orders (will there be a need for additional frames near Christmas), employee moral if salesmen are not interested in selling quilt frames.


146. Barber Manufacturing currently makes 2,000 high-end kaleidoscopes each year. Barber has been manufacturing all parts of the units. However, the company has found a manufacturing company that can provide the tubes at a price of $14 each. Since the company’s machine that molds the tubes is getting old, the company is considering purchasing the tubes. If the company purchases the tubes, the machine will be idle. Barber’s standard cost of the molding process for one unit is listed below.

Direct material $4Direct labor $2Variable overhead $4Direct fixed overhead (Utility cost associated with molding machine) $3Non-differential fixed overhead $8Total Cost $21

RequiredShould Barber purchase the tubes or continue manufacturing them? Why?


Make BuyPurchase price of tube $14Direct material $4Direct labor $2Variable overhead $4Direct fixed overhead $3Relevant costs per unit $13 $14Number of units 2,000 2,000Total cost $26,000 $28,000

Barber should continue to manufacture the tubes because it is less expensive than purchasing them. That is, the relevant cost of making the tubes is less than the purchase price from an outside source.


147. Mountaineer, Inc. currently makes 6,000 pairs of weatherproof hiking boots each year. The boots sell for $119. Mountaineer has been manufacturing the boots and applying the weatherproofing as the final process before packaging. However, the company is concerned about the costs associated with the weatherproofing process. The company is concerned that the EPA will not approve of their disposal of the residue from the process, resulting in heavy monetary penalties. Mountaineer has found a manufacturing company that can waterproof the boots and package them at a cost of $18 each. If the company outsources the waterproofing and packaging of the boots, its insurance premiums will be reduced. Mountaineer’s standard cost of the waterproofing and packaging process for one unit is listed below.

Direct material ($1 for waterproofing and $4 for packaging) $5Direct labor (same person waterproofs and packages) $3Variable overhead ($6 for waterproofing and $2 for packaging) $8Direct fixed overhead (Insurance) $6Nondifferential fixed overhead $8Total Cost $30

RequiredShould Barber outsource the waterproofing and packaging? Why?


Make OutsourcePurchase price of tube $18Direct material $5Direct labor $3Variable overhead $8Direct fixed overhead $6Relevant costs per unit $22 $18Number of units 6,000 6,000Total cost $132,000 $108,000

Mountaineer should outsource the waterproofing and packaging because it is less expensive than doing it in-house. That is, the relevant cost of outsourcing is less than Mountaineer keeping the process.


148. Newport Manufacturing makes and sells backyard fire pits. Each fire pit regularly sells for $269. The following cost data per unit are based on a full capacity of 3,000 fire pits produced each period.

Direct material $100Direct labor $75Manufacturing overhead (75% variable) $64

Newport is negotiating a special order for the sale of 75 fire pits to an overseas customer. The only selling cost that would be incurred on the special order would be a $10 sales commission. Newport is expected to make 2,500 fire pits before the special order.

Required:

a. What is the minimum selling price Newport should negotiate for the special order?

b. What are three factors other than relevant costs that Newport should consider concerning this special order?


a. [$100 + $75 + ($64 x .75) + $10] = $233 minimum price per unit to charge

b. Will the special order create conflict with regular customers; will the customer become a regular customer; Might the order create a negative image of Newport (selling to a country that does not have civil liberties for its population); If the customer wishes to purchase the same fire pits at a later date, will it pay the regular price or ask for another special price; Will Newport have to hire additional workers or pay overtime if regular sales increase to the point that the workload cannot be handled by the regular staff.


149. London, Inc. uses 2,000 units of Part 8G3 each year in the manufacture of one of its products. The company currently produces the part internally, but an outside supplier has offered to provide the part at a price of $15 per part. If London chooses to purchase the part from the outside supplier, one half of it’s the fixed manufacturing overhead will be eliminated. London’s standard unit cost of producing the part is listed below.

Direct material $6Direct labor $4Variable manufacturing overhead $2Fixed manufacturing overhead $4Total unit cost $16

RequiredIgnoring qualitative factors, should London continue to make the parts internally or purchase them from the outside supplier? Why?


Make BuyPurchase price of tube $15Direct material $6Direct labor $4Variable overhead $2Direct fixed overhead $2Relevant costs per unit $14 $15Number of units 2,000 2,000Total cost $28,000 $30,000

London should continue to make the part because outsourcing it will increase the company’s cost by $2,000 each year, thus reducing profit. The relevant cost of making the part is less than the cost of purchasing the part.

Ans: N/A, LO: 3, Bloom: AP, Unit: 8-3, Difficulty: Easy, Min: 10-15, AACSB: Analytic, AICPA FN: Decision Modeling, AICPA PC: Problem Solving and Decision Making, IMA: Decision Analysis

150. The Inland Corporation manufactures 1,000 motors that are used in the production of its go-karts. Inland has been approached by an outside supplier that will sell the motor to Inland for $39 each. Inland’s cost to manufacture each motor are as follows:

Direct material $25Direct labor $8Variable overhead $4Fixed overhead $6Total $43

All fixed overhead is unavoidable, and is allocated based on machine hours. The facilities that are used to manufacture the motors have no alternative uses.

Required:

a. Should Inland continue to manufacture the motors?

b. Would your answer change if Inland could lease the facilities previously used to produce the motors for $4,800 per year?


a. Yes. The relevant cost of continuing to produce the motors is:$25 + $8 + 4 = $37 versus $39 to purchase from an outside supplier.

b. Yes, the relevant cost would include the additional revenue of $4.80 per unit.$25 + $8 + $4 - $37 versus $39 - $4.80 = $34.20.


151. Paris Manufacturing Company Inc. uses 400 units of Part #4317 each year in the manufacture of one of its products. The company currently produces the part internally, but an outside supplier has offered to provide the part at a price of $20 per part. If Paris chooses to purchase the part from the outside supplier, one third of it’s the fixed manufacturing overhead will be eliminated. The company’s standard unit cost of producing the part is listed below.

Direct material $8Direct labor $6Variable manufacturing overhead $5Fixed manufacturing overhead $9Total unit cost $28

RequiredIgnoring qualitative factors, should Paris continue to make the parts internally or purchase them from the outside supplier? Why?


Make BuyPurchase price of tube $20Direct material $8Direct labor $6Variable overhead $5Direct fixed overhead $3Relevant costs per unit $22 $20Number of units 400 400Total cost $8,800 $8,000

Paris should not continue to make the part because outsourcing it will increase the company’s cost by $8,000 each year while making it will increase costs by $8,800. The relevant cost of purchasing the part is less than the cost of making it.


152. Logan’s, Inc. has the following production and cost data for two of its products, Basic and Supreme:

Basic SupremeContribution margin per unit $160 $140Machine hours needed per unit 4 5

A total of 40,000 hours is available each period for the production of the two products The demand for both products is strong and Logan is not sure it can fill all orders expected to be received.

Required:

a. Ignoring qualitative issues, which of the two products should Logan focus on filling orders first?

b. List three alternatives that Logan should consider in order to produce more units within the 40,000 hours?


a.Basic $160/4 = $40 contribution margin per constraint (machine hours)Supreme $140/5 = $28 contribution margin per constraint (machine hours)

Logan should produce the Basic first produce as it provides the higher contribution margin per constraint.

b. Logan might consider the following: Purchase machinery that will produce more units in less time. Hire more skilled workers that can complete the orders quickly and without

defects Look at other products currently produced to determine if another lesser

profitable product should be discontinued Redesign the product to move production more efficiently


153. Holt Manufacturing Company produces three products in its Dallas factory. Data relating to the products are given below:

Product A Product B Product CUnit selling price $80 $70 $60Variable manufacturing costs $52 $50 $46Variable selling costs $4 $4 $4Hours required per unit 2 ½ 1Demand per period 3,000 4,000 2,600

A total of 8,200 hours are available in the Dallas facility.

Required:a. How many hours will be required to satisfy the demand for all three products?

b. How much of each product should be produced to maximize Hold’s operating income?


a.Product A Product B Product C

Hours required per unit 2 .50 1Demand per period 3,000 4,000 2,600Hours required 6,000 2,000 2,600

Total time = 10,600 hours

b.Product A Product B Product C

Unit selling price $80 $70 $60Variable manufacturing cost 52 50 46Variable selling costs 4 4 4Contribution margin 24 16 10Hours required per unit 2 .5 1Contribution per hour $12 $32 $10Order of production 2 nd 1 st 3rd

Units to be produced 3,000 4,000 200

Product B 4,000 x .5 = 2,000 hours usedProduct A 3,000 x 2 = 6,000 hours usedProduct C 200 x l.0= 200 hours used

8,200 total hours used


154. Mantle, Inc. produces two types of wooden mallets, Ash and Oak, in its Miami factory. Data relating to the mallets are given below:

Ash OakUnit selling price $30 $28Variable manufacturing costs $11 $12Variable selling costs $1 $1Minutes required per unit 20 15Demand per period 1,200 1,600

A total of 600 hours are available in the Miami facility.

Required:a. How many hours will be required to satisfy the demand for both products?

b. How much of each product should be produced to maximize Mantle’s operating income?


a.Product A Product B

Hours required per unit 1/3 1/4Demand per period 1,200 1,600Hours required 400 400

Total time = 800 hours

b.Ash Oak

Unit selling price $30 $28Variable manufacturing cost 11 12Variable selling costs 1 1Contribution margin 18 15Hours required per unit 1/3 ¼Contribution per hour $54 $60Units to be produced 600 1,600


155. Jerry Mounds, controller for Pearl Distributing, has prepared the following financial information for the most recent period showing profitability the of its three departments :

Department A Department B Department CSales $52,000 $18,000 $20,000Variable expenses 36,000 10,000 14,000Contribution margin 16,000 8,000 6,000Fixed expenses: Factory rent 2,000 1,400 3,200 Depreciation 2,000 600 2,600 Utilities 1,800 1,000 1,200

Total fixed expenses 5,800 3,000 7,000Operating income $10,200 $5,000 ($1,000)

The factory rent of $3,200 assigned to Department C is avoidable if the department is eliminated. Depreciation will remain unchanged if a department is dropped. Discontinuing Department C will reduce the utilities by $600.

Required:

Prepare an analysis showing whether Department C should be eliminated.


Avoidable items if Department C is discontinued:

Sales $20,000Less variable expenses 14,000Contribution margin 6,000Less direct fixed expenses Rent $3,200 Utilities 600 3,800Segment margin $2,200

Since Department C’s segment margin is positive, the company should keep it until a better alternative is identified.


156. Betty Hopper, controller for Diamond Manufacturing Company, has prepared the following financial information for the most recent period showing profitability the of its three divisions:

Appliance Electronics FurnitureSales $102,000 $108,000 $120,000Variable expenses 86,000 92,000 114,000Contribution margin 16,000 16,000 6,000Fixed expenses: Factory insurance 1,000 1,400 2,200 Depreciation 2,000 2,600 3,600 Advertising 600 600 600 Utilities 800 1,000 1,200

Total fixed expenses 4,400 5,600 7,600Operating income $11,600 $10,400 ($ 1,600)

The factory insurance and advertising assigned to the furniture division is avoidable if the division is discontinued. Depreciation will remain unchanged if a division is dropped. Discontinuing furniture will reduce the utilities by $800.

Required:

a. Prepare an analysis showing whether Product C should be eliminated.

b. If the Furniture division is eliminated, what will be effect on the overall profit for Diamond?


a. Avoidable items if the furniture division is discontinued:

Sales $120,000Less variable expenses 114,000Contribution margin 6,000Less direct fixed expenses Insurance $2,200 Advertising 600 Utilities 800 3,600Segment margin $2,400

Since Furniture’s segment margin is positive, the company should keep it until a better alternative is identified.

b. Overall profit will decrease by $2,400, the segment margin of the furniture division


Short Answer

157. List the two criteria information meet to be considered relevant to decision making and explain the difference between sunk cost and opportunity cost and indicate whether they can be considered relevant.

Unit 8-1, 3, LO1, 3Solution:

The two criteria that information must meet to be considered relevant are: It differs between alternatives and The differences occur in the future

A sunk cost represents a cost that has been incurred in the past. Sunk costs are irrelevant.An opportunity cost is the contribution margin of the next-best alternative. Opportunity cost can be relevant

Ans: N/A, LO: 1,3, Bloom: K, Unit: 8-1,8-3, Difficulty: Moderate, Min: 10, AACSB: Analytic, AICPA FN: Decision Modeling, AICPA PC: Problem Solving and Decision Making, IMA: Decision Analysis

158. Why would a movie theater with some seats still available not sell tickets at a reduced price to moviegoers that show up at the last minute?


Movie theaters have high fixed costs and serves different moviegoers at each showing. The marginal costs of showing a move are few while fixed costs are high. If moviegoers knew they could walk in at the last minute and pay far less than the regular price, why would they come early and pay the higher price? After all, they would only miss the pre-film commercials. The only reason a moviegoer would pay in advance is to guarantee a seat, probably on opening day. This practice would begin to shape consumer beliefs about the value of their services, and the companies would not be able to stay in business at the special lower prices.


159. What is an opportunity cost and what is the impact of opportunity cost on a decision to outsource the production of an item?


An opportunity cost is the contribution margin of the next-best alternative. The impact of opportunity cost must be considered when making the decision to outsource the production of an item. For example, when the production of an item is outsourced, the resources that are freed up can be put to another use, so the alternative use is an opportunity cost of using the resources.

Ans: N/A, LO: 3, Bloom: K,C, Unit: 8-3, Difficulty: Easy, Min: 5-7, AACSB: Analytic, AICPA FN: Decision Modeling, AICPA PC: Problem Solving and Decision Making, IMA: Decision Analysis

160. As products are made, capacity is used up. Managers must allocate the constrained resource to products so as to maximize the company’s contribution margin.

Required:

a. List three limited resources that can constrain business operations.

b. How should managers determine the best way to allocate constrained resources among products or operations?


a. Three resources that can constrain business operations include machine hours, direct labor hours, space, and raw materials.

b. The constrained resource should be allocated first to the product with the highest contribution margin per constrained resource, followed by the product with the second-highest contribution margin pre constrained resource, and so on. Each product should receive only as much of the constrained resource as needed to meet customer demand. Qualitative factors such as customer service and customer preferences may also dictate how constrained resources are allocated among products or operations.

Ans: N/A, LO: 4, Bloom: C, Unit: 8-4, Difficulty: Difficult, Min: 10, AACSB: Analytic, AICPA FN: Decision Modeling, AICPA PC: Problem Solving and Decision Making, IMA: Decision Analysis

161. If a product has a positive segment margin but is not as profitable as other products, what should managers do? What if the segment margin is negative?


If the segment margin is positive the operation should be kept until a better use can be found for its resources. If the segment margin is negative, the operation should be dropped.

Ans: N/A, LO: 5, Bloom: E, Unit: 8-5, Difficulty: Easy, Min: 5-7, AACSB: Analytic, AICPA FN: Decision Modeling, AICPA PC: Problem Solving and Decision Making, IMA: Decision Analysis

Essay

162. Your company has realized that some managers are making rash decisions which have created negative consequences for the entire company. You have been assigned to a team responsible for training managers on good decisions based on a relevant-cost decision model. Your team has done some research and found that most management decisions can be approached using a model that asked five questions. List and discuss the five step approach in Chapter 8.


Step 1 What is the decision to be made? In a car-buying decision one might ask what car do I need for a long daily commute.

Step 2 What are the available alternatives? Do I want a used or new auto or a compact or SUV?

Step 3 What are the relevant revenues and costs? Will the used car require more maintenance or will the SUV use too much gas?

Step 4 What are the qualitative issues that must be considered? Will the car impress my friends or is it the color I want?

Step 5 Which alternative offers the greatest benefits or least cost? Pick the best car.

Ans: N/A, LO: 1, Bloom: K, Unit: 8-1, Difficulty: Easy, Min: 10, AACSB: Analytic, AICPA FN: Decision Modeling, AICPA PC: Problem Solving and Decision Making, IMA: Decision Analysis

163. Accepting special orders may produce additional revenues, but may also result in some negative consequences. Discuss the quantitative and qualitative factors that impact the decision to accept a special order.


Accepting a special order has several benefits: Additional contribution margin that otherwise the company would not have May lead to special order customer becoming a regular customer If company has excess capacity, special orders help fill to capacity Possible increase in demand for product

Possible disadvantages of accepting a special order: Possible conflict with regular customers If company is operating at capacity, may require additional costs such as overtime No guarantee that special order will lead to regular business If regular sales are sacrificed to fill special order, loss of contribution margin

Ans: N/A, LO: 2, Bloom: K, Unit: 8-2, Difficulty: Moderate, Min: 10, AACSB: Analytic, AICPA FN: Decision Modeling, AICPA PC: Problem Solving and Decision Making, IMA: Decision Analysis

164. Because of rising salaries and cost of healthcare and other employee benefits, TJ Manufacturing has decided to outsource one of its non-value added processes. As leader of the team responsible for determining the best process to be outsourced, you must write the memo to the CEO, Jon Duncan explaining why your team chose to outsource the payroll function. Explain to the CEO the qualitative and quantitative impacts of your team’s decision on the business.

Unit 8-3, LO3Solution: (Answers will vary)

To: Jon Duncan, CEO

From Team leader

Subject: Outsourcing Decision Explanation

As leader of the team responsible for choosing to outsource one non-value added process, this memo provides the choice our team made and explains the impacts of this decision on the business. The function we chose to outsource is the payroll function. After investigating several alternatives we believe this to be the least disruptive and most likely to maintain the current quality of information.

By outsourcing the payroll function, six positions including one supervisory position will be eliminated. The cost savings is substantial. The space previously used will be taken by accounts payable, which has inadequate space for its computer equipment and files. There will be no additional cost involved in this move. By eliminating the payroll function, the fewest number of employees are impacted. We request that these employees be given first choice of any openings within the company for which they qualify. Two of these employees are nearing retirement age and one is a recent college graduate. We believe outsourcing payroll will have the least negative effect on the company’s reputation. Finally, we believe the quality of payroll functions will be improved. A local CPA firm provides payroll services for companies in our industry of similar size. We have verified satisfaction with the CPA firm from several of its clients and believe the employees will not suffer from this change. We have inquired whether the CPA firm might be interested in hiring some of the employees we will be terminating, and that is a possibility.

We believe that outsourcing the payroll function is the best choice for outsourcing. If you have any questions or desire additional information, please let me know.

Ans: N/A, LO: 3, Bloom: S, Unit: 8-3, Difficulty: Moderate, Min: 20, AACSB: Analytic, AICPA FN: Decision Modeling, AICPA PC: Problem Solving and Decision Making, IMA: Decision Analysis

165. The Theory of Constraints was developed to maximize the performance of a value chain. According to the theory, five steps are required to maximize and improve the performance of a value chain.

Required:

a. List the five steps.

b. Define the two terms bottleneck process and throughput contribution and indicate how these terms are related to the theory of constraints.


a. Step 1 – Identify the constraintStep 2 – Decide how to exploit the constraintStep 3 – Subordinate and synchronize everything else to the first two decisions.Step 4 – Evaluate the performance of the constraint.Step 5 – If during any of these steps the constraint has shifted, go back to step 1.

b. A bottleneck is the point in the production process where output is limited and thus constrains output. Throughput contribution is sales revenue less direct materials costs. Instead of maximizing income, the theory of constraints seeks to maximize throughput contribution.


166. In deciding whether to eliminate a segment of a business, the identification of common costs. Answer the following questions relating to common costs.

a. What is a common fixed cost?

b. Is a common fixed cost considered relevant?

c. Give two examples of common fixed costs.

d. What happens to common fixed costs if a segment is eliminated?


a. A common cost is a cost that is not directly caused by the cost object (or segment). That is, It may be an allocated fixed cost incurred at the corporate level for the benefit of the entire organization.

b. A common cost is a non-differential cost, and thus not a relevant cost.

c. Some common fixed costs include supervisory salaries, executive salaries, headquarter costs such as utilities and accounting.

d. If a segment is eliminated, the common fixed costs are absorbed by the other segments.


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