1. Choice "A" is correct.

Contribution margin is calculated by deducting the total of all

variable costs from total sales. Fixed costs have nothing to do with the calculation of
contribution margin. The other important point to remember is that changes in the
volume of sales does not result in changes in the fixed cost (as long as the company
is operating within its relevant range).Contribution margin ratio is calculated by
dividing the contribution margin per unit by the selling price per unit, or dividing total
contribution margin by total sales. The calculation is done as follows (using the
current level of sales):

Merchandise Automotive Restaurant

Sales $500,000 $400,000 $100,000
Variable costs 300,000 200,000 70,000
Contribution
margin 200,000 200,000 30,000
Contribution 200,000 ÷ 500,000 200,000 ÷ 400,000 30,000 ÷ 100,000
margin ratio = 40% = 50% = 30%
300,000 ÷ 500,000 200,000 ÷ 400,000 70,000 ÷ 100,000
Variable cost ratio = 60% = 50% = 70%

The contribution margin ratios, therefore, are 40 percent, 50 percent, and 30 percent,
consecutively.

2. Choice "C" is correct. In calculating the change in profits (losses) because of new
sales, all incremental revenues and costs must be considered. Because fixed costs
referred to in this example are all incremental, they must be considered as costs
incurred because of the production of the 10,000 additional dolls.

The decrease in the company's profits is in the amount of $39,200 calculated as

follows:

Contribution $400,000 [10,000 × ($100 – $60)]

Fixed costs 456,000
Operating income – 56,000
Tax savings at 30% 16,800

– $39,200
Net loss
3. Correct Answer Explanation: B
Marginal cost is the cost of the next unit produced. It is calculated by taking the
change in costs and dividing it by the change in output (volume).
Harper's marginal cost can be calculated as:
Marginal cost = change in cost ÷ change in volume
Marginal cost = ($3,325,000 - $3,000,000) ÷ (22,500 - 20,000) = $325,000 ÷ 2,500 =
$130.

4. Choice "B" is correct. A special order occurs when a potential new customer offers
to buy a company's product if the selling price is lowered. The opportunity to acquire
a new customer provides the incentive to accept a lower price from that customer.
This new price is a temporary, not permanent, reduction. Companies may be able to
accept a lower price on a special order, because most of the company's fixed costs
are covered by the company's sales to its regular customers. If the special order will
not impact current sales, then the new price need only cover the variable costs and
any additional fixed costs which are incurred. If a company has idle capacity, the
company will not incur any additional fixed costs with respect to the special order.

A special-order price greater than $67 per unit ($64 variable manufacturing costs per
unit + $3 sales commission per each unit sold) will make the special order profitable
for the company to accept. A price greater than $67 per unit covers both the variable
manufacturing costs and the sales commissions, which are also a variable cost.
Variable costs will increase when this special order is accepted. The fixed costs are
ignored, because there is idle capacity; there will not be additional fixed costs.

5. Choice "C" is correct. Marginal analysis focuses on the relevant revenues and
costs that are associated with a business decision, such as the introduction of a new
product or changes in output totals of existing products. Incremental revenues result
in taxable income, and incremental costs are usually deductible for income tax
purposes.

Incremental after-tax income = Pretax income × (1 – Tax rate) = ($50,000 revenue

– $30,000 advertising) × (1 – 0.21) = $15,800
6. Choice "A" is correct. A company would be better off buying a product instead
of making it only if the relevant costs of buying are less than the relevant costs of
making the product. The relevant costs of making the product comprise variable
costs and avoidable fixed costs.

The company would save 60 percent of costs if it purchases products from

outside.

Avoidable fixed costs = ($150,000 × 0.6) ÷ 30,000 = $3

Relevant cost to make unit = Avoidable fixed costs + Variable manufacturing cost
saved
= $3 + $11 = $14.

For Aril to benefit from purchasing the units rather than making the units, the
purchase price must be less than $14.

7. Choice "D" is correct. In a decision to make or buy, managers must determine

whether the opportunity costs associated with making a product with available
capacity are less than the contribution margins associated with using that capacity
for additional business and with buying externally.

By accepting the offer, the company will no longer spend the sum of $7 per unit
associated with DM ($4), DL ($2), and VOH ($1) and $20,000 of the supervisor's
salary. If the company buys the part, the company will rent the facilities to others for
$20,000. The savings from costs avoided and from rental income if the company
buys the part is $180,000: $7 variable costs per unit × 20,000 units + $20,000 salary
avoided + $20,000 rental income. The cost for buying the part is $140,000: $7
purchase price per part × 20,000 parts to be purchased. The net effect on operating
income is an increase of $40,000: $180,000 savings internally – $140,000 cost to
buy externally.

8.Correct Answer Explanation for D:

Marginal revenue product is the amount of change in total revenue that arises from
adding one more unit of a resource, such as labor.
In order to find the marginal revenue product when one worker is added to a team of
11 workers, look at the last two rows of the table. Notice that the Price is in Average
terms. Therefore, you must multiply that column by the units produced to find total
revenue at each worker level. Then, subtract the revenue from using a team of 11
from the revenue from using a team of 12 members:
12 workers: $47.× 28 = $1,316
11 workers: $49.00 × 25 = $(1,225)
Marginal revenue product $91

9. Correct Answer Explanation for A:

Only the variable revenue (selling price per unit) and variable cost (cost of each
treat) are relevant to this decision. Truck operating costs, Joe's salary, and
administrative costs are fixed costs. The fixed costs will be the same whether or not
Cooper sells Creamy Delight. Each unit of Creamy Delight sold contributes $0.95 to
covering fixed costs ($1.75 - $0.80). If Creamy Delight were discontinued, $0.95 ×
100 sales per day × 120 days per year or $11,400 in total contribution would be lost,
and net profit would decline by that amount.

10. Correct Answer Explanation:C

The discontinuance of the Oak Division will result in a $6,000 decline in operating
profits. The discontinuance of the Oak Division will cause a gain of $79,000, which is
calculated by taking the $72,000 in variable costs and adding one half of the fixed
costs of $14,000 to it ($72,000 + (0.5 × $14,000) = $79,000).
However, the discontinuance will cause a loss in sales of $85,000. The resulting
decline in profit will then be $85,000 - $79,000 = $6,000.

11. Answer (B) is correct.

Given excess capacity, the company presumably will not incur opportunity costs if it
accepts the special order. Assuming also that fixed costs will be unaffected, the
incremental cost of the order (the minimum acceptable price) will be $40,750
($33,000 VC + $7,750 cost of external design).

12. Correct Answer Explanation: D

We know that the total cost of producing 100 units is $800, therefore, we can
compute the total cost per unit as:
Total cost per unit = Total Cost ÷ # of Units produced
Total cost per unit = $700 ÷ 100 units = $7 per unit
Given in this problem is the average variable cost per unit of $5, therefore, we can
rearrange the following formula to determine the average fixed per unit:
Total cost per unit = Average Fixed cost per unit + Variable cost per unit
$7 = Average Fixed cost per unit + $5
Average Fixed cost per unit = $2
Total variable costs = $500 ($5 per unit × 100 units)
The marginal cost is neither $2 nor $7 because marginal cost is defined as the cost
change in producing one more unit. The way fixed costs react to adding more units
of production is by allocating the total fixed costs over more units, thus average fixed
cost per unit would decrease.

13. Answer (B) is correct.

Because the manufacturer has excess capacity and existing sales will be unaffected,
the minimum price the manufacturer should be willing to accept is anything above
the total variable cost of the unit ($2.05 + $3.60 + $2.70 + $0.90 = $9.25), an amount
that includes the variable manufacturing cost and the variable selling expenses. The
fixed costs are not relevant.

14. Answer (C) is correct.

The entity should apply relevant costing and contribution margin (revenue – variable
cost) analysis. It presumably has two uses for the production capacity needed to
make 1,000 components: (1) the special order or (2) an alternative with a unit
contribution margin (UCM) of $5 ($5,000 CM ÷ 1,000 units). The fixed costs are not
relevant to the choice between the two uses because they will be incurred in either
case. Thus, the relevant cost is the unit variable cost ($3 DM + $3 DL + $3 VOH =
$9). The unit price at which the entity will be indifferent between the two uses is
therefore $14 ($9 unit variable cost + $5 UCM for the alternative to the special
order).

15. Correct Answer Explanation for C:

Average total cost per unit is the total cost divided by the amount produced. Total
cost = total variable costs + total fixed costs. Therefore for this problem we calculate
total cost per unit as: Total cost = Total Variable Costs of $15,000 + Total Fixed
Costs of $10,000 = Total cost of $25,000. Average Total Cost = Total Cost ÷
Quantity produced. Average Total Cost = $25,000 ÷ 500 = $50.

16. Correct Answer Explanation for C:

The company has unused capacity, so any price over and above the company's
variable costs will increase operating income. The company's variable costs are:
Labor $120,000
Material $66,000
Variable overhead (40% of direct labor) $48,000
Administrative costs (10% of direct labor) $12,000
Subtotal $246,000
Commission on $280,000 price $28,000
Total variable cost $274,000
The total variable cost is lower than the price of $280,000, so the company should
accept the order at a price of $280,000.

17. Correct Answer Explanation for B:

Joint costs prior to the split-off are not relevant to the decision as to whether to
process further or sell at the split-off, because they will be the same regardless of
which choice Wilfredmakes.
We know that AM-12 can be sold for $3.50 per unit at the split-off. Further
processing will cost $90,000 for 60,000 units, so the additional cost per unit for the
additional processing would be $1.50 ($90,000 ÷ 60,000 units of AM-12). Therefore,
the minimum price that Wilfredwould accept must be a price greater than $5.00 per
unit ($3.50 + $1.50).
Why would a price greater than $5.00 per unit be more advantageous than a price
greater than $5.25 per unit, as suggested by another answer choice? If Wilfredcould
get $5.25 per unit, that would increase its gRose profit by more than if it could get
$5.01 per unit, certainly. However, if Wilfredrefuses to accept a price between $5.01
and $5.24 for the further-processed AM-12, it could price itself out of the market.
Flank Corporation might decide it would not pay that much and might walk away
from the deal, leaving Wilfredto sell the AM-12 without further processing for $3.50.
Any price of $5.01 or greater would be advantageous to Wilfredbecause it would
increase gRose profits for the company as a whole. Revenue would increase by a
minimum of $1.51 per unit sold ($5.01 ? $3.50), while cost of goods sold expense
would increase by $1.50 per unit sold. Thus, gRose profit for the company would
increase by a minimum of $0.01 per unit sold, or by at least $600 (60,000 units ×
$0.01).
On the other hand, requiring a price of $5.25 per unit could cause the opportunity —
and the additional gRose profit — to evaporate.

18. Correct Answer Explanation for C:

Segment 1 is providing a $234,000 contribution toward covering the company's
common (allocated) costs, calculated as $700,000 sales revenue less $420,000 cost
of sales, less $14,000 commissions, less $32,000 salaries. Those are the items that
would go away if Segment 1 were dropped.
Segment 1's apparent operating loss is caused by the $144.000 of common
administrative expenses being allocated to it and by the $140,000 in common rental
expense being allocated to it. The common expenses that are being allocated would
not change in total for the company if Segment 1 were dropped. Those common
fixed costs would continue to be paid if Segment 1 were dropped—they would just
be reallocated to the remaining operating segments.
Therefore, the company should not drop Segment 1 because doing so would cause
operating income to decrease by $234,000.
OR
sales revenue = $700000
direct cost associated with segment 1 =$420,000 (cost of
sales)+$14,000(Commissions)+$32,000(Salaries)=$466000
so contribution left after meeting the direct cost associated with segment 1 =
$700000-$466000=$234000
so currently this $234000 is contributed by segment 1 towards the allocated common
cost of 284000($144000+$140000) so they are generating a loss of -50000. but if
we discontinue segment 1, this $234000 needs to be bear by other segments so
that operating income will reduce by $234000 from the current level

19. Answer (C) is correct.

Given sufficient available capacity, no opportunity cost exists. Relevant costs are
limited to variable costs and avoidable fixed costs. Thus, on a per-unit basis, each
chair has a relevant cost of $91 [(2 lbs. of material × $20) + (1 direct labor hour ×
$40) + $10 variable manufacturing overhead + ($5 fixed costs × 20% avoidable)].

20. Correct Answer Explanation:

In a purely competitive market, the individual firm is the price taker. Each television is
sold at the same price, so average revenue and marginal revenue are the same as
the price of the television: $300.

21. Correct Answer Explanation for D:

The marginal revenue is the revenue that comes from selling one more unit. If the
company sells 8 units, the selling price is $450 per unit and total revenues are
$3,600. In order to sell 9 units, however, the price must be lowered to $445. At $445
per unit, the revenue from 9 units is $4,005.
The increase of $405 from $3,600 of revenue at 8 units to $4,005 of revenue at 9
units is the marginal revenue of the 9th unit.

22. Correct Answer Explanation for C:

Total cost at an output level of 11 units is $1,000 fixed costs plus $250 variable
costs, for a total cost of $1,250. The average total cost per unit at that output level is
$1,250 divided by 11, or $113.64.

23. Correct Answer Explanation: C

Richardshould accept the offer from Blurr if the purchase price per unit is less than
the manufacturing cost per unit. The manufacturing cost per unit is the opportunity
cost per unit, consisting of avoidable variable and avoidable fixed costs per unit and
the unit cost of any lost opportunities. There is nothing stated in the problem relating
to avoidable fixed costs or lost opportunities.
Therefore, the cost of manufacturing the table tops is $47 in variable costs($23 direct
material + $12 direct labor + $10 Variable Manufacturing Overhead costs + $2
Variable Administrative costs).

24. Correct Answer Explanation for A:

The company wants to bid a price that will win the job because it could lead to other
educational institution orders. Therefore, it will not use its usual bidding structure of
all variable and fixed costs plus a 10% profit. However, it does not want its current
net income to decrease because of this job. Therefore, it will need to submit a bid
that covers its variable costs. Its variable costs are materials, labor, variable
overhead, and incremental administrative costs. Fixed overhead is not included,
because it will not change as a result of this order. The bid should be:
Labor: 12 hours @ $20 $240
Materials 500
Variable overhead: $2 × 12 labor hours 24
Incremental assembly administrative costs 8
Total bid per computer $772

25. Answer (B) is correct.

Implicit costs are amounts that would have been received if self-owned resources
had been used outside the firm’s business. Economic profit is pure profit, or the
excess of revenue over both explicit and implicit costs. Revenues of $2 million minus
explicit costs of $700,000 result in accounting income of $1.3 million. That amount is
reduced by the $200,000 of implicit costs to arrive at economic profit of $1.1 million.