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1. Mankus Inc. is considering using stocks of an old raw material in a special project.
The special project

would require all $120 kilograms of the raw material that are in stock and that originally cost the
company $816 in total. If the company were to buy new supplies of this raw material on the open
market, it would cost $7.25 per kilogram. However, the company has no other use for this raw material
and would sell it at the discounted price of $6.75 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 $50 for all 120
kilograms. What is the relevant cost of the 1 20 kilograms of the raw material when deciding whether to
proceed with the special project?
A) $760
B) $870
C) $716
D) $810
Solution:
Relevant Cost = Income−Delivery Cost
=(120×$6.75)−$50
=$810−$50
=$760
2. Kahn Corporation (a multi-product company) produces and sells 8,000 units of Product X each year.
Each unit of Product X sells for $10 and has a contribution margin of $6. If Product X is discontinued,
$50,000 of the $60,000 in annual fixed costs charged to Product X could be eliminated. The annual
financial advantage (disadvantage) for the company of eliminating this product should be:
A) Increase by $2,000
B) decrease by ($2,000)
C) Increase by $12,000
D) decrease by ($12,000)
The correct alternative is Option A) Increase by $2,000.
Solution:
Financial Advantage = Contribution Margin Lost + Avoidable Fixed Expenses
=($6×8,000)+$50,000
=$2,000
3. Jordan Company budgeted sales of 400,000 calculators at $40 per unit last year. Variable
manufacturing costs were budgeted at $16 per unit, and fixed manufacturing costs at $10 per unit. A
special order for 40,000 calculators at $23 each was received by Jordan in March. Jordan has sufficient
plant capacity to manufacture the additional quantity without incurring any additional fixed
manufacturing costs; however, the production would have to be done on an overtime basis at an
estimated additional cost of $3 per calculator. Acceptance of the special order would not affect Jordan’s
normal sales and no selling expenses would be incurred. What would be the effect on net operating
income if the special order were accepted?
Solution:
Incremental revenues= 40,000 x $23 = 920,000
Incremental costs = ($16+3)x 40,000 = 760,000
A) $120,000 decrease
B) $160,000 increase
C) $240,000 decrease
D) $280,000 increase
4. Two products, LB and NH, emerge from a joint process. Product LB has beenallocated $30,800 of the
total joint costs of $44,000. A total of 2,000 units of productLB are produced from the joint process.
Product LB can be sold at the split-off pointfor $13 per unit, or it can be processed further for an
additional total cost of $14,000and then sold for $15 per unit. If product LB is processed further and
sold, what wouldbe the effect on the overall profit of the company compared with sale in
itsunprocessed form directly after the split-off point?
A) $16,000 more profit
B) $20,800 more profit
C) $40,800 less profit
D) $10,000 less profit
5. The following information relates to next year's projected operating results of the Aluminum Division
of Wroclaw:
Contribution margin $200,000
Fixed expenses $500,000
Net operating loss $(300,000)
If the Aluminum Division of Wroclaw is eliminated, $170,000 of the above fixed expenses could be
avoided. The annual financial advantage (disadvantage) for the company of eliminating this division
should be:
A) ($300,000)
B) $30,000
C) ($30,000)
D) $300,000
Solution:
Financial Advantage = Contribution Margin Lost+Avoidable Fixed Expenses
=$(200,000)+$170,000
=$(30,000)
6. Chow Inc. has its own cafeteria with the following annual costs:
Food P400,000
Labor P300,000
Overhead. P440,000
Capital P1,140,000
The overhead is 40% fixed. Of the fixed overhead, P100,000 is the salary of the cafeteriasupervisor.
The remainder of the fixed overhead has been allocated from total companyoverhead. Assuming the
cafeteria supervisor will remain and that Chow will continue to paysaid salary, the maximum cost Chow
will be willing to pay an outsider firm to service thecafeteria is
a. P1,140,000
b. P1,040,000
c. P700,000
d. P964,000
7.

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1. Mankus Inc. is considering using stocks of an old raw material in a special project.

The special project

Relevant Cost = Income−Delivery Cost

Financial Advantage = Contribution Margin Lost + Avoidable Fixed Expenses

Incremental revenues= 40,000 x $23 = 920,000

Incremental costs = ($16+3)x 40,000 = 760,000

A) $16,000 more profit

B) $20,800 more profit

C) $40,800 less profit

D) $10,000 less profit

Contribution margin $200,000

Fixed expenses $500,000

Net operating loss $(300,000)

Financial Advantage = Contribution Margin Lost+Avoidable Fixed Expenses

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