1.Knox Company uses 10,000 units of a part in its production process.

The costs to make a part are: direct

material, $12; direct labor, $25; variable overhead, $13; and applied fixed overhead, $30. Knox has
received a quote of $55 from a potential supplier for this part. If Knox buys the part, 70 percent of the
applied fixed overhead would continue. Knox Company would be better off by
a. $50,000 to manufacture the part.
b. $150,000 to buy the part.
c. $40,000 to buy the part.
d. $160,000 to manufacture the part.

2.Paulson Company has only 25,000 hours of machine time each month to manufacture its two products. Product
X has a contribution margin of $50, and Product Y has a contribution margin of $64. Product X requires 5
hours of machine time, and Product Y requires 8 hours of machine time. If Paulson Company wants to
dedicate 80 percent of its machine time to the product that will provide the most income, the company
will have a total contribution margin of
a. $250,000.
b. $240,000.
c. $210,000.
d. $200,000.

3.Doyle Company has 3 divisions: R, S, and T. Division R's income statement shows the following for the year
ended December 31:

Sales $1,000,000
Cost of goods sold (800,000)
Gross profit $ 200,000
Selling expenses $100,000
Administrative expenses 250,000 (350,000)
Net loss $ (150,000)

Cost of goods sold is 75 percent variable and 25 percent fixed. Of the fixed costs, 60 percent are
avoidable if the division is closed. All of the selling expenses relate to the division and would be
eliminated if Division R were eliminated. Of the administrative expenses, 90 percent are applied from
corporate costs. If Division R were eliminated, Doyle’s income would
a. increase by $150,000.
b. decrease by $ 75,000.
c. decrease by $155,000.
d. decrease by $215,000.
4. Thomas Company is currently operating at a loss of $15,000. The sales manager has received a special
order for 5,000 units of product, which normally sells for $35 per unit. Costs associated with the product
are: direct material, $6; direct labor, $10; variable overhead, $3; applied fixed overhead, $4; and variable
selling expenses, $2. The special order would allow the use of a slightly lower grade of direct material,
thereby lowering the price per unit by $1.50 and selling expenses would be decreased by $1. If Thomas
wants this special order to increase the total net income for the firm to $10,000, what sales price must be
quoted for each of the 5,000 units?
a. $23.50
b. $24.50
c. $27.50
d. $34.00
5.Quest Company produces a part that has the following costs per unit:

Direct material $ 8
Direct labor 3
Variable overhead 1
Fixed overhead 5
Total $17

Zest Corporation can provide the part to Quest for $19 per unit. Quest Company has determined that 60
percent of its fixed overhead would continue if it purchased the part. However, if Quest no longer
produces the part, it can rent that portion of the plant facilities for $60,000 per year. Quest Company
currently produces 10,000 parts per year. Which alternative is preferable and by what margin?
a. Make-$20,000
b. Make-$50,000
c. Buy-$10,000
d. Buy-$40,000

6.Browning Company has 15,000 units in inventory that had a production cost of $3 per unit. These units cannot
be sold through normal channels due to a significant technology change. These units could be reworked at a total
cost of $23,000 and sold for $28,000. Another alternative is to sell the units to a junk dealer for $8,500. The
relevant cost for Browning to consider in making its decision is

a. $45,000 of original product costs.

b. $23,000 for reworking the units.
c. $68,000 for reworking the units.
d. $28,000 for selling the units to the junk dealer.

Robertson Corporation

Robertson Corporation sells a product for $18 per unit, and the standard cost card for the product shows
the following costs:

Direct material $ 1
Direct labor 2
Overhead (80% fixed) 7
Total $10

7.Refer to Robertson Corporation. Robertson received a special order for 1,000 units of the product. The only
additional cost to Robertson would be foreign import taxes of $1 per unit. If Robertson is able to sell all
of the current production domestically, what would be the minimum sales price that Robertson would
consider for this special order?
a. $18.00
b. $11.00
c. $5.40
d. $19.00
8.Refer to Robertson Corporation. Assume that Robertson has sufficient idle capacity to produce the 1,000 units.
If Robertson wants to increase its operating profit by $5,600, what would it charge as a per-unit selling
price?
a. $18.00
b. $10.00
c. $11.00
d. $16.60

9. Glamorous Grooming Corporation makes and sells brushes and combs. It can sell all of either product it
can make. The following data are pertinent to each respective product:

Brushes Combs
Units of output per machine hour 8 20
Selling price per unit $12.00 $4.00
Product cost per unit
Direct material $1.00 $1.20
Direct labor 2.00 0.10
Variable overhead 0.50 0.05

Total fixed overhead is $380,000.

The company has 40,000 machine hours available for production. What sales mix will maximize profits?
a. 320,000 brushes and 0 combs
b. 0 brushes and 800,000 combs
c. 160,000 brushes and 600,000 combs
d. 252,630 brushes and 252,630 combs

10.Houston Footwear Corporation has been asked to submit a bid on supplying 1,000 pairs of military combat
boots to the Armed Forces. The company's costs per pair of boots are as follows:

Direct material $8
Direct labor 6
Variable overhead 3
Variable selling cost (commission) 3
Fixed overhead (allocated) 2
Fixed selling and administrative cost 1

Assuming that there would be no commission on this potential sale, the lowest price the firm can bid is
some price greater than
a. $23.
b. $20.
c. $17.
d. $14.

11. Holt Industries has two sales territories-East and West. Financial information for the two territories is
presented below:

East West
Sales $980,000 $750,000
 Direct costs:
Variable (343,000) (225,000)
Fixed (450,000) (325,000)
Allocated common costs (275,000) (175,000)
Net income (loss) $(88,000) $ 25,000

Because the company is in a start-up stage, corporate management feels that the East sales territory is
creating too much of a cash drain on the company and it should be eliminated. If the East territory is
discontinued, one sales manager (whose salary is $40,000 per year) will be relocated to the West territory.
By how much would Holt's income change if the East territory is eliminated?
a. increase by $88,000
b. increase by $48,000
c. decrease by $267,000
d. decrease by $227,000

Woodville Motors

Woodville Motors is trying to decide whether it should keep its existing car washing machine or purchase
a new one that has technological advantages (which translate into cost savings) over the existing machine.
Information on each machine follows:

Old machine New machine

Original cost $9,000 $20,000
Accumulated depreciation 5,000 0
Annual cash operating costs 9,000 4,000
Current salvage value of old machine 2,000
Salvage value in 10 years 500 1,000
Remaining life 10 yrs. 10 yrs.

12.Refer to Woodville Motors. The $4,000 of annual operating costs that are common to both the old and the
new machine are an example of a(n)
a. sunk cost.
b. irrelevant cost.
c. future avoidable cost.
d. opportunity cost.

13.Refer to Woodville Motors. The $9,000 cost of the original machine represents a(n)
a. sunk cost.
b. future relevant cost.
c. historical relevant cost.
d. opportunity cost.

14.Refer to Woodville Motors. The $20,000 cost of the new machine represents a(n)
a. sunk cost.
b. future relevant cost.
c. future irrelevant cost.
d. opportunity cost.
15.Refer to Woodville Motors. The estimated $500 salvage value of the existing machine in 10 years represents
a(n)
a. sunk cost.
b. opportunity cost of selling the existing machine now.
c. opportunity cost of keeping the existing machine for 10 years.
d. opportunity cost of keeping the existing machine and buying the new machine.
16. Refer to Woodville Motors. The incremental cost to purchase the new machine is
a. $11,000.
b. $20,000.
c. $13,000.
d. $18,000.

Entertainment Solutions Corporation

Entertainment Solutions Corporation manufactures and sells FM radios. Information on the prior year's
operations (sales and production Model A1) is presented below:

Sales price per unit $30

Costs per unit:
Direct material 7
Direct labor 4
Overhead (50% variable) 6
Selling costs (40% variable) 10
Production in units 10,000
Sales in units 9,500

17. Refer to Entertainment Solutions Corporation. The Model B2 radio is currently in production and it
renders the Model A1 radio obsolete. If the remaining 500 units of the Model A1 radio are to be sold
through regular channels, what is the minimum price the company would accept for the radios?
a. $30
b. $27
c. $18
d. $4

18. Refer to Entertainment Solutions Corporation. Assume that the remaining Model A1 radios can be sold
through normal channels or to a foreign buyer for $6 per unit. If sold through regular channels, the
minimum acceptable price will be
a. $30.
b. $33.
c. $10.
d. $4.

Chip Division of Computer Solutions, Inc.

The Chip Division of Computer Solutions, Inc. produces a high-quality computer chip. Unit production
costs (based on capacity production of 100,000 units per year) follow:

Direct material $50

Direct labor 20
 Overhead (20% variable) 10
Other information:
Sales price 100
SG&A costs (40% variable) 15

19. Refer to Chip Division of Computer Solutions, Inc. Assume, for this question only, that the Chip
Division is producing and selling at capacity. What is the minimum selling price that the division would
consider on a "special order" of 1,000 chips on which no variable period costs would be incurred?
a. $100
b. $72
c. $81
d. $94

20. Refer to Chip Division of Computer Solutions, Inc. Assume, for this question only, that the Chip Division
is operating at a level of 70,000 chips per year. What is the minimum price that the division would
consider on a "special order" of 1,000 chips to be distributed through normal channels?
a. $78
b. $95
c. $100
d. $81

21. Refer to Chip Division of Computer Solutions, Inc. Assume, for this question only, that the Chip Division
is presently operating at a level of 80,000 chips per year. Accepting a "special order" on 2,000 chips at
$88 will
a. increase total corporate profits by $4,000.
b. increase total corporate profits by $20,000.
c. decrease total corporate profits by $14,000.
d. decrease total corporate profits by $24,000.

Richmond Steel Corporation

The capital budgeting committee of the Richmond Steel Corporation is evaluating the possibility of
replacing its old pipe-bending machine with a more advanced model. Information on the existing machine
and the new model follows:

Existing machine New machine

Original cost $200,000 $400,000
Market value now 80,000
Market value in year 5 0 20,000
Annual cash operating costs 40,000 10,000
Remaining life 5 yrs. 5 yrs.

22. Refer to Richmond Steel Corporation. The major opportunity cost associated with the continued use of
the existing machine is
a. $30,000 of annual savings in operating costs.
b. $20,000 of salvage in 5 years on the new machine.
c. lost sales resulting from the inefficient existing machine.
d. $400,000 cost of the new machine.
23. Refer to Richmond Steel Corporation. The $80,000 market value of the existing machine is
a. a sunk cost.
b. an opportunity cost of keeping the old machine.
c. irrelevant to the equipment replacement decision.
d. a historical cost.

24. Refer to Richmond Steel Corporation. If the company buys the new machine and disposes of the existing
machine, corporate profit over the five-year life of the new machine will be ____________________ than
the profit that would have been generated had the existing machine been retained for five years.
a. $150,000 lower
b. $170,000 lower
c. $230,000 lower
d. $150,000 higher

25. Emerald Corporation has been manufacturing 5,000 units of Part 10541, which is used in the manufacture
of one of its products. At this level of production, the cost per unit of manufacturing Part 10541 is as
follows:

Direct material $ 2
Direct labor 8
Variable overhead 4
Fixed overhead applied 6
Total $20

Hamilton Company has offered to sell Emerald 5,000 units of Part 10541 for $19 a unit. Emerald has
determined that it could use the facilities currently used to manufacture Part 10541 to manufacture Part
RAC and generate an operating profit of $4,000. Emerald has also determined that two-thirds of the fixed
overhead applied will continue even if Part 10541 is purchased from Hamilton. To determine whether to
accept Hamilton’s offer, the net relevant costs to make are
a. $70,000.
b. $84,000.
c. $90,000.
d. $95,000.
78. Which of the following costs would not be accounted for in a company's recordkeeping system?
a. an unexpired cost
b. an expired cost
c. a product cost
d. an opportunity cost
ANS: D DIF: Easy OBJ: 10-1