Assignment
1. A cost that will not be affected by later decisions is termed a(n):
a. historical cost
b. differential cost
c. sunk cost
d. replacement cost
2. The condensed income statement for a business for the past year is presented as follows:
|
|
Product
|
|
|
|
F
|
G
|
H
|
Total
|
|
Sales
|
$300,000
|
$220,000
|
$340,000
|
$860,000
|
|
Less variable costs
|
180,000
|
190,000
|
220,000
|
590,000
|
|
Contribution margin
|
$120,000
|
$ 30,000
|
$120,000
|
$270,000
|
|
Less fixed costs
|
50,000
|
50,000
|
40,000
|
140,000
|
|
Income (loss) from oper.
|
$ 70,000
|
$ (20,000)
|
$ 80,000
|
$130,000
|
Management is considering the discontinuance of the manufacture and sale of Product G at the beginning of the current year. The discontinuance would have no effect on the total fixed costs and expenses or on the sales of Products F and H. What is the amount of change in net income for the current year that will result from the discontinuance of Product G?
a. $20,000 increase
b. $30,000 increase
c. $20,000 decrease
d. $30,000 decrease
3. A business is operating at 90% of capacity and is currently purchasing a part used in its manufacturing operations for $15 per unit. The unit cost for the business to make the part is $20, including fixed costs, and $12, not including fixed costs. If 30,000 units of the part are normally purchased during the year but could be manufactured using unused capacity, what would be the amount of differential cost increase or decrease from making the part rather than purchasing it?
a. $150,000 cost increase
b. $ 90,000 cost decrease
c. $150,000 cost decrease
d. $ 90,000 cost increase
4. The amount of income that would result from an alternative use of cash is called:
a. differential income
b. sunk cost
c. differential revenue
d. opportunity cost
5. Jones Co. can further process Product B to produce Product C. Product B is currently selling for $60 per pound and costs $42 per pound to produce. Product C would sell for $82 per pound and would require an additional cost of $13 per pound to produce. What is the differential revenue of producing and selling Product C?
a. $22 per pound
b. $42 per pound
c. $45 per pound
d. $18 per pound
6. Wilson Company is considering replacing equipment which originally cost $500,000 and which has $460,000 accumulated depreciation to date. A new machine will cost $790,000. What is the sunk cost in this situation?
a. $330,000
b. $500,000
c. $40,000
d. $290,000
7. A business is considering a cash outlay of $200,000 for the purchase of land, which it could lease for $35,000 per year. If alternative investments are available which yield an 18% return, the opportunity cost of the purchase of the land is:
a. $35,000
b. $36,000
c. $ 1,000
d. $37,000
8. A business received an offer from an exporter for 20,000 units of product at $15 per unit. The acceptance of the offer will not affect normal production or domestic sales prices. The following data are available:
|
Domestic unit sales price
|
$21
|
|
Unit manufacturing costs:
|
|
|
Variable
|
12
|
|
Fixed
|
5
|
What is the differential revenue from the acceptance of the offer?
a. $300,000
b. $420,000
c. $120,000
d. $240,000
9. Frank Co. is currently operating at 80% of capacity and is currently purchasing a part used in its manufacturing operations for $5 a unit. The unit cost for Frank Co. to make the part is $6, which includes $.40 of fixed costs. If 4,000 units of the part are normally purchased each year but could be manufactured using unused capacity, what would be the amount of differential cost increase or decrease for making the part rather than purchasing it?
a. $12,000 cost decrease
b. $20,000 cost increase
c. $20,000 cost decrease
d. $2,400 cost increase
10. Benson Co. is considering disposing of a machine with a book value of $12,500 and estimated remaining life of five years. The old machine can be sold for $1,500. A new high-speed machine can be purchased at a cost of $25,000. It will have a useful life of five years and no residual value. It is estimated that variable manufacturing costs will be reduced from $26,000 to $23,500 if the new machine is purchased. The total net differential increase or decrease in cost for the new equipment for the entire five years is:
a. decrease of $11,000
b. decrease of $15,000
c. increase of $11,000
d. increase of $15,000
Dary Co. Produces a single product. Its normal selling price is $28 per unit. The variable costs are $18 per unit. Fixed costs are $20,000 for a normal production run of 5,000 units per month. Dary received a request for a special order that would not interfere with normal sales. The order was for 1,500 units and a special price of $17.50 per unit. Dary Co. has the capacity to handle the special order and, for this order, a variable selling cost of $2 per unit would be eliminated.
11. If the order is accepted, what would be the impact on net income?
a. decrease of $750
b. decrease of $6,750
c. increase of $2,250
d. increase of $1,500
12. Should the special order be accepted?
a. Cannot determine from the data given
b. Yes
c. No
d. There would be no difference in accepting or rejecting the special order
13. Carnival Corp. is considering selling its old popcorn machine and replacing it with a newer one. The old machine originally cost $5,000 and has been fully depreciated. Annual costs are $4,000. A high school is willing to buy it for $2,000. New equipment would cost $18,000 and annual operating costs would be $1,500. Both machines have an estimated useful life of 5 years.
a. Stay with the old equipment $3,500 less in net costs
b. Purchase the new equipment $3,500 cost savings
c. Purchase the new equipment - deduction in costs $14,500
d. Stay with the old equipment - cost savings of $2,000
14. Discontinuing a product or segment is a huge decision that must be carefully analyzed. Which of the following would be a valid reason not to discontinue an operation?
a. when the losses are minimal
b. when the variable costs are less than revenues
c. when the variable costs are more than revenues
d. when fixed costs are more than revenues
15. Which of the following would be considered a sunk cost?
a. Purchase of new equipment
b. Equipment rental for the production area
c. Net book value of obsolete equipment that has no market value
d. Depreciation expense
16. A practical approach which is frequently used by managers when setting normal long-run prices is the:
a. cost-plus approach
b. economic theory approach
c. price graph approach
d. market price approach
17. In using the variable cost concept of applying the cost-plus approach to product pricing, what is included in the markup?
a. Total costs plus desired profit
b. Desired profit
c. Total selling and administrative expenses plus desired profit
d. Total fixed manufacturing costs, total fixed selling and administrative expenses, and desired profit
18. Managers who often make special pricing decisions are more likely to use which of the following cost concepts in their work?
a. Total cost
b. Product cost
c. Variable cost
d. Fixed cost
19. In contrast to the total product and variable cost concepts used in setting seller's prices, the target cost approach assumes that:
a. a markup is added to total cost
b. selling price is set by the marketplace
c. a markup is added to variable cost
d. a markup is added to product cost
20. Target costing is arrived at by
a. taking the selling price and subtracting desired profit.
b. taking the selling price and adding desired profit.
c. taking the selling price and subtracting the budget standard cost.
d. taking the budget standard cost and reducing it by 10%.
Problems:
21. Koko Company produces two products. Product A has a contribution margin of $20 and requires 4 machine hours. Product B has a contribution margin of $18 and requires 3 machine hours. Determine the most profitable product assuming the machine hours are the constraint.
22. Pnok Company has been purchasing a component, Part Q, for $18.90 a unit. Pnok is currently operating at 70% of capacity and no significant increase in production is anticipated in the near future. The cost of manufacturing a unit of Part Q, determined by absorption costing methods, is estimated as follows:
|
Direct materials
|
$11.25
|
|
Direct labor
|
4.50
|
|
Variable factory overhead
|
1.12
|
|
Fixed factory overhead
|
3.15
|
|
Total
|
$20.02
|
Prepare a differential analysis report, dated March 12 of the current year, on the decision to make or buy Part Q.
23. Due to Medicare reimbursement cuts, Nurturing Home Care is considering shutting down it's Certified Nursing Assistant Division. Fixed costs will have to be transferred to the Nursing Division if the CNA division is discontinued. Currently, the fixed costs are shared equally. Using the Income Statement below, make a recommendation to the president regarding this decision.
|
Nurturing Home Care
|
|
Condensed Income Statement
|
|
For the Year Ended December 31, 2007
|
|
|
Nursing
|
CNA's
|
Total
|
|
Revenues
|
$3,500,000
|
$900,000
|
$4,400,000
|
|
Variable Costs
|
2,000,000
|
800,000
|
2,800,000
|
|
Fixed Costs
|
400,000
|
400,000
|
800,000
|
|
Net Income from operations
|
$1,100,000
|
($300,000)
|
$ 800,000
|
24. Mavis Company uses the total cost concept of applying the cost-plus approach to product pricing. The costs and expenses of producing and selling 38,400 units of Product E are as follows:
|
Variable costs:
|
|
|
Direct materials
|
$ 4.70
|
|
Direct labor
|
2.50
|
|
Factory overhead
|
1.90
|
|
Selling and administrative expenses
|
2.60
|
|
Total
|
$ 11.70
|
|
Fixed costs:
|
|
|
Factory overhead
|
$80,000
|
|
Selling and administrative expenses
|
14,000
|
Mavis desires a profit equal to a 14% rate of return on invested assets of $640,000.
(a) Determine the amount of desired profit from the production and sale of Product E.
(b) Determine the total costs and the cost amount per unit for the production and sale of 38,400 units of Product E.
(c) Determine the markup percentage for Product E.
(d) Determine the selling price of Product E.