Question 1

The Cornell Milling Company manufactures an intermediate product identified as W1. Variable manufacturing costs per unit of W1 are as follows:

Direct materials $ 5

Direct labor $15

Variable manufacturing overhead $10

Ithaca Tools has offered to sell Cornell Milling 10,000 units of W1 for $40 per unit. If Cornell Milling accepts the offer, $50,000 of fixed manufacturing overhead will be eliminated.

Applying differential analysis to the situation, Cornell Milling should

Select one:

make: original variable (relevant cost) of production:10000x30=300000

buy: 10000x40-50000=350000

A. make W1; the savings is $50,000.

B. buy W1; the savings is $100,000.

C. make W1; the savings is $100,000.

D. buy W1; the savings is $50,000.

Question 2

In deciding whether to sell a joint product or to process it further, any costs incurred prior to the split-off point should be

Select one:

A. considered as a sunk cost.

B. subtracted from joint revenues.

C. allocated by weight of the product.

D. allocated by size of the product.

Question 3

Which of the following statements is true when making a decision between two alternatives?

Select one:

A. Fixed costs are never relevant.

B. Taxes are never relevant.

C. Variable costs are not relevant when the decision alternatives have different activity levels.

D. Variable costs may not be relevant when the decision alternatives have the same activity levels.