1.

Current business segment operations for Whitman, a mass retailer, are presented
below.

Merchandise Automotive Restaurant Total

Sales $500,000 $400,000 $100,000 $1,000,000
Variable costs 300,000 200,000 70,000 570,000
Fixed costs 100,000 100,000 50,000 250,000
Operating income (loss) $100,000 $100,000 $(20,000) $180,000

Management is contemplating the discontinuance of the Restaurant segment

because "it is losing money". If this segment is discontinued, $30,000 of its fixed
costs will be eliminated. In addition, Merchandise and Automotive sales will decrease
5 percent from their current levels. When considering the decision, Whitman's
controller advised that one of the financial aspects Whitman should review is
contribution margin. Which one of the following options reflects the current
contribution margin ratio for each of Whitman's business segments?

Retailing Automotive Restaurant

A. 40% 50% 30%
B. 60% 50% 70%
C. 40% 50% 70%
D. 60% 50% 30%

2. The Doll House, a very profitable company, plans to introduce a new type
of doll to its product line. The sales price and costs for the new dolls are as
follows:

Selling price per doll $100

Variable cost per doll $60
Incremental annual fixed costs $456,000
Income tax rate 30%

If 10,000 new dolls are produced and sold, the effect on Doll House's profit (loss)
would be:

A. $280,000.
B. ($56,000).
C. ($39,200).
D. ($176,000).
3. Harper Products' cost information for the normal range of output in a month is
shown below.
Output in units Total Cost
20,000 $3,000,000
22,500 3,325,000
25,000 3,650,000

What is Harper's short-run marginal cost?

A. $146.

B. $130.

C. $150.

D. $26.

4. A company's budget indicated the following cost per unit for the company's most
popular product.

Variable manufacturing costs $64

Fixed manufacturing overhead 45
Sales commissions 3
Fixed selling and administrative costs 32

Although this product normally sells for $160 per unit, the company received a
special order from a new customer. If the company has idle capacity, its income
would increase by accepting the order if the selling price per unit for the order was
greater than:

A. $144.
B. $67.
C. $109.
D. $64.
5. An organization believes it can increase the sales revenue of a given product by
$50,000 by implementing a new advertising campaign that will cost $30,000.
Assuming a 21% tax rate, what is the incremental after-tax income gained through
this approach?

A. $26,300
B. $20,000
C. $15,800
D. $10,500

6. Aril Industries is a multiproduct company that currently manufactures

30,000 units of Part 730 each month for use in production. The facilities now
being used to produce Part 730 have fixed monthly overhead costs of
$150,000, and a theoretical capacity to produce 60,000 units per month. If
Aril were to buy Part 730 from an outside supplier, the facilities would be idle
and 40 percent of fixed costs would continue to be incurred. There are no
alternative uses for the facilities. The variable production costs of Part 730
are $11 per unit. Fixed overhead is allocated based on planned production
levels.

If Aril Industries continues to use 30,000 units of Part 730 each month, it
would realize a net benefit by purchasing Part 730 from an outside supplier
only if the supplier's unit price is less than:

CalculatorTime Value Tables

A. $14.00.
B. $12.50.
C. $13.00.
D. $12.00.
7. A company producing home appliances uses parts that it currently manufactures
internally. A supplier offered to sell the parts to the company at the same quality for
$7 per unit. The cost accounting department accumulated the following information
related to the production of these parts:

Parts need in a year 20,000 units

Direct materials (DM) per unit $4
Direct labor (DL) per unit $2
Variable overhead cost (VOH) per unit $1
Supervisor's salary $60,000

If the company decides to purchase the parts from the external vendor, $40,000 of
the supervisor's salary will continue to be paid because the supervisor will continue
to work as a part-time employee. The space that is currently used for the production
of the parts can be rented to others at $20,000 per year.

Which of the following statements is correct?

CalculatorTime Value Tables

A. The company should reject the offer because the purchase price ($7 per unit) is
higher than the variable costs of producing the unit internally.
B. The supervisor's salary is irrelevant to the decision and therefore should be
ignored in the analysis.
C. The company should reject the offer because only $20,000 of the supervisor's
salary is saved.
D. The company should accept the offer because operating income would increase
by $40,000

8.

Number
of Total Product Units Average Selling Price
Workers
10 20 $55
11 25 $49
12 28 $47
The marginal revenue product when one worker is added to a team of 11 workers is
A. $225.00
B. $42.00
C. $47.50
D. $91
9. Joe Cooper owns and operates an ice cream truck that he drives through
residential neighborhoods to sell five different treats to the area’s children. On
average, Cooper sells 100 of each type of treat per day for the 120 days per year
when the weather is warm enough to generate sales. Four of his products are
profitable, but the other, Creamy Delight, indicates a loss as follows:
Selling price/unit $ 1.75
Cost of each treat 0.80
Truck operating costs/unit 0.37
Joe's salary/unit 0.60
Administrative costs/unit 0.08
Loss/unit $(0.10)
If Cooper cannot raise his selling price, he should
A. continue to sell Creamy Delight to avoid a decrease in profit of $11,400.
B. continue to sell Creamy Delight to avoid a decrease in profit of $6,960.
C. discontinue the sales of Creamy Delight to increase his profits by $240.
D. discontinue the sales of Creamy Delight to increase his profits by $1,200.

10. The Furniture Company currently has three divisions: Maple, Oak, and Cherry.
The oak furniture line does not seem to be doing well and the president of the
company is considering dropping this line. If it is dropped, the revenues associated
with the Oak Division will be lost and the related variable costs saved. Also, 50% of
the fixed costs allocated to the oak furniture line would be eliminated. The income
statements, by divisions, are as follows.
Particulars Maple Oak Cherry
Sales $55,000 $85,000 $100,000
Variable Costs $40,000 $72,000 $82,000
Contribution Margin $15,000 $13,000 $18,000
Fixed costs $10,000 $14,000 $10,200
Operating profit (loss) $ 5,000 $(1,000) $ 7,800
Which one of the following options should be recommended to the president of the
company?

A. Discontinue the Oak Division which would result in a $1,000 increase in operating
profits.

B. Continue operating the Oak Division as discontinuance would result in a total

operating loss of $1,200.

C. Continue operating the Oak Division as discontinuance would result in a $6,000

decline in operating profits.

D. Discontinue the Oak Division which would result in a $7,000 increase in operating
profits.
11. A company has considerable excess manufacturing capacity. A special job
order’s cost sheet includes the following applied manufacturing overhead costs:
Fixed costs $21,000
Variable costs 33,000
The fixed costs include a normal $3,700 allocation for in-house design costs,
although no in-house design will be done. Instead, the job will require the use of
external designers costing $7,750. What is the total amount to be included in the
calculation to determine the minimum acceptable price for the job?
A. $36,700
B. $40,750
C. $54,000
D. $58,050

12. The total cost of producing 100 units of a good is $700. If a firm's average
variable cost is $5 per unit, then the firm's:

A. marginal cost is $7.

B. marginal cost is $2.

C. total variable cost is $300.

D. average fixed cost is $2.

13. A manufacturer has been approached by a new customer who wants to place a
one-time order for a component similar to one that the manufacturer makes for
another customer. Existing sales will not be affected by acceptance of this order. The
manufacturer has a policy of setting its targeted selling price at 60% over full
manufacturing cost. The manufacturing costs and the targeted selling price for the
existing product are presented as follows.
Direct materials $ 2.30
Direct labor 3.60
Variable manufacturing overhead
(applied at 75% of direct labor cost) 2.70
Fixed manufacturing overhead
(applied at 150% of direct labor cost) 5.40

Total manufacturing cost $14.00

Markup (60% of full manufacturing cost) 8.40

Targeted selling price $22.40

The manufacturer has excess capacity to produce the quantity of the component
desired by the new customer. The direct materials used in the component for the
new customer would cost the manufacturer $0.25 less than the component currently
being made. The variable selling expenses (packaging and shipping) would be the
same, or $0.90 per unit. Under these circumstances, the minimum unit price at which
the manufacturer would accept the special order is one exceeding
A. $8.35
B. $9.25
C. $14.00
D. $14.80

14. Rodder, Inc., manufactures a component in a router assembly. The selling price
and unit cost data for the component are as follows:
Selling price $15
Direct materials cost 3
Direct labor cost 3
Variable overhead cost 3
Fixed manufacturing overhead cost 2
Fixed selling and administration cost 1
The company received a special one-time order for 1,000 components. Rodder has
an alternative use for production capacity for the 1,000 components that would
produce a contribution margin of $5,000. What amount is the lowest unit price
Rodder should accept for the component?
A. $9
B. $12
C. $14
D. $24

15. If a firm currently producing 500 units of output incurs total fixed costs of $10,000
and total variable costs of $15,000, the average total cost per unit is
A. $20
B. $25.
C. $50.
D. $30.
16. GaryCorporation builds custom-designed machinery. A review of selected data
and the company's pricing policies revealed the following.

 A 10% commission is paid on all sales orders.

 Variable and fixed factory overheads total 40% and 20%, respectively, of
direct labor.
 Corporate administrative costs amount to 10% of direct labor.
 When bidding on jobs, Garyadds a 25% markup to the total of all factory and
administrative costs to cover income taxes and produce a profit.
 The firm's income tax rate is 40%.

The company expects to operate at a maximum of 80% of practical capacity.

Garyrecently received an invitation to bid on the manufacture of some custom
machinery for Kennendale, Inc. For this project, Green's production accountants
estimate the material and labor costs will be $66,000 and $120,000, respectively.
Accordingly, Garysubmitted a bid to Kennendale in the amount of $375,000. Feeling
Green's bid was too high, Kennendale countered with a price of $280,000. Which
one of the following options should be recommended to Green's management?
A. Accept the counteroffer even though the order will decrease operating income
B. Reject the counteroffer even though the order will increase operating income.
C. Accept the counteroffer because the order will increase operating income.
D. Reject the counteroffer because the order will decrease operating income.

17. WilfredCorporation produces chemicals used in the cleaning industry. During the
previous month, Wilfredincurred $300,000 of joint costs in producing 60,000 units of
AM-12 and 40,000 units of BM-36. Wilfreduses the units-of-production method to
allocate joint costs. Currently, AM-12 is sold at split-off for $3.50 per unit. Flank
Corporation has approached Wilfredto purchase all of the production of AM-12 after
further processing. The further processing will cost Wilfred$90,000.
Concerning AM-12, which one of the following alternatives is most advantageous?

A. Wilfredshould process further and sell to Flank if the total selling price per unit
after further processing is greater than $3.00, which covers the joint costs

B. Wilfredshould process further and sell to Flank if the total selling price per unit
after further processing is greater than $5.00.

C. Wilfredshould process further and sell to Flank if the total selling price per unit
after further processing is greater than $5.25, which maintains the same gRose
profit percentage.

D. Wilfredshould continue to sell at split-off unless Flank offers at least $4.50 per unit
after further processing, which covers Whitehall's total costs.
18. A retail company has three segments with total operating income of $500,000.
Selected financial information for Segment 1 is presented below.
Particulars Segment 1
Unit sales $28,000
Sales revenue $700,000
Cost of sales $420,000
Administrative expenses $144,000
Commissions $14,000
Rent $140,000
Salaries $32,000

 Administrative expenses are allocated to the three segments equally.

 Commissions are paid to the salespersons in each segment based on 2% of
gRose sales.
 The company rents the entire building and allocates the rent to the three
segments based on the square footage occupied by each.
 Salaries represent payments to the employees in the segment.

The controller has expressed concern about the operating loss for Segment 1 and
has suggested that it be closed. If the segment is closed, none of the employees
would be retained. Should the company drop Segment 1?
A. Yes, because total operating income would increase by $50,000
B. No because total operating income would decrease by $94,000.
C. No because total operating income would decrease by $234,000.
D. No because total operating income would decrease by $126,000.

19. S Corp. produces premium office chairs. Due to a recent change in market
share, S must decide whether to make or buy an order of 1,000 chairs. The materials
cost of producing a chair is $20 per pound, the cost of direct labor is $40 per direct
labor hour, and manufacturing overhead (100% variable) is allocated at a rate of $10
per chair. Fixed costs for the year are $5 per chair, of which 20% are avoidable.
Each chair requires 2 pounds of materials and 1 hour of direct labor to complete.
Assuming that S has excess capacity, the total cost per chair relevant to the make-
or-buy decision is
A. $95
B. $90
C. $91
D. $71
20. ABC Corporation manufactures televisions, which have a selling price of $300
each. The industry is a purely competitive market. If five televisions are produced
and sold, what is the marginal revenue for the fifth television set?
A. $360.

B. $300.

C. $50.

D. $60

21. A fuel company can sell 8 units of product at a selling price of $450. However, at
a selling price of $445 the company can sell 9 units. What is the marginal revenue
that is derived from selling the 9th unit?
A. $4,005.
B. $445.
C. ($5).
D. $405.

22. Daily costs for Ken Manufacturing include $1,000 of fixed costs and total variable
costs are shown below.
Unit Output 10 11 12 13 14 15
Cost $125 $250 $400 $525 $700 $825
The average total cost at an output level of 11 units is
A. $250.00
B. $125.00.
C. $113.64.
D. $215.91.

23. RichardCorporation is a table manufacturing company that has the following cost
structure for producing table tops. The variable administrative cost is incurred only if
the table tops are manufactured by Randall.
Particulars Unit Costs
Direct materials $23
Direct labor $12
Variable manufacturing overhead $10
Fixed manufacturing overhead $17
Variable administrative costs $2
Fixed administrative costs $3
Total unit costs $67
Recently, RichardCorporation received an offer from Blurr Corporation to supply the
table tops to Randall. Richardis considering buying the table tops from Blurr instead
of manufacturing them internally.
Which one of the following statements is correct?

A. Richardshould reject Blurr's offer if it is less than $47.00.

B. Richardshould reject Blurr's offer if it is $50.00 or greater.

C. Richardshould accept Blurr's offer if it is less than $47.00.

D. Richardshould accept Blurr's offer if it is less than $64.00.

24. Basic Computer Company (BCC) sells its micro-computers using bid pricing. It
develops bids on a full cost basis. Full cost includes estimated material, labor,
variable overheads, fixed manufacturing overheads, and reasonable incremental
computer assembly administrative costs, plus a 10% return on full cost. BCC
believes bids in excess of $925 per computer are not likely to be considered.
BCC's current cost structure, based on its normal production levels, is $500 for
materials per computer and $20 per labor hour. Assembly and testing of each
computer requires 12 labor hours. BCC's variable manufacturing overhead is $2 per
labor hour, fixed manufacturing overhead is $3 per labor hour, and incremental
administrative costs are $8 per computer assembled.
The company has received a request from the School Board for 500 computers.
BCC's management expects heavy competition in bidding for this job. As this is a
very large order for BCC, and could lead to other educational institution orders,
management is extremely interested in submitting a bid which would win the job, but
at a price high enough so that current net income will not be unfavorably impacted.
Management believes this order can be absorbed within its current manufacturing
facility. Which one of the following bid prices should be recommended to BCC's
management?
A $772.00.
B $764.00.
C $849.20.
D $888.80.
25. During the previous year, a firm produced 200,000 pogo sticks and sold them all
for $10 each. The explicit costs of production were $700,000, and the implicit costs
of production were $200,000. The firm had
A. An accounting profit of $1.1 million and an economic profit of $0.
B. An accounting profit of $1.3 million and an economic profit of $1.1 million.
C. An accounting profit of $1.3 million and an economic profit of $1.3 million.
D. An accounting profit of $1.3 million and an economic profit of $1.5 million.