ACCT 202 Mock Exam 7 Chapter 11 1.

All costs are relevant in a decision except costs that do not differ between alternatives. a. True b. False 2. Sunk costs may be relevant in a decision. a. True b. False 3. Costs that are relevant in one decision are not necessarily relevant in another decision. a. True b. False 4. Allocation of common fixed costs to product lines and to other segments of a company helps the manager to see if the product line or segment is profitable. a. True b. False 5. Opportunity cost may be a key factor in a make or buy decision. a. True b. False 6. All f the following costs are relevant in a make or buy decision except: a. The opportunity cost of space b. Costs that are avoidable by buying rather than making c. Variable costs of producing the item d. Costs that are differential between the make and buy alternatives e. All of the above costs are relevant 7. One of Fowler Companys products has a contribution margin of $50,000 and fixed costs totaling $60,000. If the product is dropped, $40,000 of the fixed costs will continue unchanged. As a result of dropping the product, the companys net operating income should: a. Decrease by $50,000 b. Increase by $30,000 c. Decrease by $30,000 d. Increase by $10,000

8. Giese Company produces 2,000 parts each year that are used in one of its products. The unit product cost of this part is: Variable manufacturing cost . . Fixed manufacturing cost . . . . . Unit product cost . . . . . . . . . . . . . $7.50 6.00 $13.50

The part can be purchased from an outside supplier for $10 per unit. If the part is purchased from the outside supplier, two-thirds of the fixed manufacturing costs can be eliminated. The effect on net operating income as a result of purchasing the part would be a: a. $3,000 increase b. $1,000 decrease c. $7,000 increase d. $5,000 decrease 9. Product A has a contribution margin of $8 per unit, a contribution margin ratio of 50%, and requires 4 machine-hours to produce. Product B has a contribution margin of $12 per unit, a contribution margin ratio of 40%, and requires 5 machine-hours to produce. If the constraint is machine-hours, then the company should emphasize: a. Product A b. Product B 10. Martin Products, Inc. has received a special order for 1,000 units of a sport-fighting kite. The customer has offered a price of $9.95 for each kite. The unit costs of the kite, at its normal sales level of 30,000 units per year, are detailed below: Variable production costs $5.25 Fixed production costs $2.35 Variable selling costs $0.75 Fixed selling and administrative costs $3.45 There is ample idle capacity to produce the special order without any increase in total fixed costs. The variable selling costs on the special order would be $0.15 per unit instead of $0.75 per unit. The special order would have no impact on the companys other sales. What effect would accepting this special order have on the companys net operating income? a. $1,850 increase b. $1,850 decrease c. $4,550 increase

d. $4,550 decrease

11.

Which of the following statements is false? a. Under some circumstances, a sunk cost may be a relevant cost. b. Future costs that do not differ between alternatives are irrelevant. c. The same cost may be relevant or irrelevant depending on the decision context. d. Only variable costs are relevant costs. Fixed costs cannot be relevant costs. e. A and D f. B and C 12. Assume that in October you bought a $450 nonrefundable airline ticket to Telluride, Colorado, for a 5-day/4-night winter ski vacation. You now have an opportunity to buy an airline ticket for a 5-day/4-night winter ski vacation in Stowe, Vermont, for $400 that includes a free ski lift ticket. The price of your lift ticket for the Telluride vacation would be $300. The price of a hotel room in Telluride is $180 per night. The price of a hotel room in Stowe is $150 per night. Which of the following costs is not relevant in a decision of whether to proceed with the planned trip to Telluride or to change to a trip to Stowe? a. The $450 airline ticket to Telluride b. The $400 airline ticket to Stowe c. The $300 lift ticket for the Telluride vacation d. The $180 per night hotel room in Telluride 13. Based on the facts in question 12 above, does a differential cost analysis favor Telluride or Stowe, and by how much? a. Stowe by $470 b. Stowe by $20 c. Telluride by $70 d. Telluride by $20 14. A company has received a special order from a customer to make 5,000 units of a customized product. The direct materials cost per unit of the customized product is $15, the direct labor cost per unit is $5, and the manufacturing overhead per unit is $18, including $6 of variable manufacturing overhead. If the company has sufficient available manufacturing capacity, what is the minimum price that can be accepted for the special order? a. $24

b. $26 c. $32 d. $38

15. Refer to the facts from question 14; however, in answering this question assume that the company is operating at 100% of its capacity without the special order. If the company normally manufactures only one product that has a contribution margin of $20 per unit and that consumes 2 minutes of the constrained resource per unit, what is the opportunity cost (stated in terms of forgone contribution margin) of taking the special order? Assume that the special order would require 1.5 minutes of the constrained resource per unit. a. $25,000 b. $50,000 c. $75,000 d. $100,000 16. Costs that are always relevant in decision-making are: A) avoidable costs. B) fixed costs. C) sunk costs. D) variable costs. 17. The managers of a firm are in the process of deciding whether to accept or reject a special offer for one of its products. A cost that is not relevant is their decision is the: A) common fixed overhead that will continue if the special offer is not accepted. B) direct materials. C) fixed overhead that will be avoided if the special offer is accepted. D) variable overhead. 18. The Brosnan Corporation has 2,000 obsolete units of a product that are carried in inventory at a manufacturing cost of $40,000. If the units are remachined for $10,000, they could be sold for $18,000. Alternatively, the units could be sold for scrap for $2,000. The alternative that is more desirable and the total relevant costs for that alternative are A) Remachine; $10,000. B) Remachine; $50,000. C) Scrap; $18,000. D) Scrap; $40,000.

19. The following are the Burgess Company's unit costs of making and selling an item at a volume of 30,000 units per month (which represents the company's full capacity):

Assume the company has 300 units left over from last year which have small defects and which will have to be sold at a reduced price as scrap. This would have no effect on the company's other sales. The variable selling and administrative costs would have to be incurred to sell the defective units. The relevant cost to be used as a guide for setting a minimum price on these defective units is A) $4.00 per unit. B) $12.00 per unit. C) $16.00 per unit. D) $21.00 per unit. 20. Remington Corporation can manufacture 600,000 units a year at a variable cost of $1,500,000 and a fixed cost of $900,000. Based on management's predictions for next year, 480,000 units will be sold at the regular price of $10.00 each. In addition, a special order was placed for 120,000 units to be sold at a 40% discount off the regular price. Total fixed costs would be unaffected by this order. By what amount would the company's net operating income be increased as a result of the special order? A) $240,000 B) $300,00 C) $420,000 D) $720,000