ACCT 202 Principles of Managerial Accounting
Practice Exam - Chapter 13
Relevant Costs for Decision Making
Dr. Fred Barbee

Select your answer by clicking on the button next to each alternative. You will receive immediate feedback.
1. The opportunity cost ofmaking a component part in a factory with no excess capacity is the:
a.  Variable manufacturing cost of the component.
b.  Fixed manufacturing cost of the component.
c.  Total manufacturing cost of the component.
d.  Net benefit foregone from the best alternative use of the capacity required.
2. Manor Company plans to discontinue a department that has a contribution margin of $24,000 and $48,000 in fixed costs. Of the fixed costs, $21,000 cannot be eliminated. The effect of this discontinuance on Manors net income would be a(an):
a.  Decrease of $3,000.
b.  Increase of $3,000.
c.  Decrease of $24,000.
d.  Increase of $24,000.
Use the following information to answer questions 3 and 4:

Meacham Company has traditionally made a subcomponent of its major product. Annual production of 20,000 subcomponents result in the following costs:

Direct Materials
$200,000
Direct Labor
180,000
Variable Overhead
150,000
Fixed Overhead
100,000

Meacham has received an offer from an outside supplier who is willing to provide 20,000 units of this subcomponent each year at a price of $28 per subcomponent. Meacham knows that the facilities now being used to make the subcomponent would be rented to another company for $75,000 per year if the subcomponent were purchased from the outside supplier. Otherwise, the fixed overhead would be unaffected.

3. If Meacham decides to purchase the subcomponent from the outside supplier, how much higher or lower will operating income be than if Meacham continued to make the subcomponent?

a.  $45,000 higher.
b.  $70,000 higher.
c.  $30,000 lower.
d.  $70,000 lower.
4. Suppose the price for the subcomponent has not been set. At what price per unit charged by the outside supplier would Mecham be economically indifferent between making the subcomponent or buying it from the outside?
a.  $30.25.
b.  $29.25.
c.  $26.50.
d.  $31.50.
Use the following information to answer questions 5 and 6:

The Tingey Company has 500 obsolete microcomputers that are carried in inventory at a total cost of $720,000. If these microcomputers are upgraded at a total cost of $100,000, they can be sold for a total of $160,000. As an alternative, the microcomputers can be sold in their present condition for $50,000.

5. The sunk cost in this situation is:

a.  $720,000.
b.  $160,000.
c.  $50,000.
d.  $100,000.

6. What is the advantage or disadvantage to the company from upgrading the computers rather than selling them in their present condition?

a.  $110,000 advantage
b.  $660,000 disadvantage.
c.  $10,000 advantage.
d.  $60,000 advantage.

Use the following information to answer question 7:

Ahrends Company makes 70,000 units per year of a part it uses in the products it manufactures. The unit product cost of this part is computed as follows:

Direct materials
$17.80
Direct labor
19.00
Variable Manufacturing Overhead
1.00
Fixed Manufacturing Overhead
17.10
Unit product cost
$54.90

An outside supplier has offered to sell the company all of these parts it needs for $48.50 per unit. If the company accepts this offer, the facilities now being used to make the part could be used to make more units of a product that is in high demand. The additional contribution margin on this other product would be $273,000 per year.

If the part were purchased from the outside supplier, all of the direct labor cost of the part would be avoided. However, $8.20 of the fixed manufacturing overhead cost being applied to the part would continue even if the part were purchased from the outside supplier. This fixed manufacturing overhead cost would be applied to the company's remaining products.

7. How much of the unit product cost of $54.90 is relevant in the decision of whether to make or buy the part?

a.  $37.80
b.  $46.70
c.  $54.90
d.  $19.00

8. When there is a production constraint, the company should emphasize the products with:

a.  The highest unit contribution margin..
b.  The highest contribution margin ratios.
c.  The highest contribution margin per unit of the constrained resource.
d.  The highest contribution margins and contribution margin ratios.
9. A general rule in relevant cost analysis is:
a.  Variable costs are always relevant.
b.  Fixed costs are always irrelevant.
c.  Differential future costs and revenues are always relevant.
d.  Depreciation is always irrelevant.
Use the following information to answer question 10:

Gary Company p[roduces products X, Y, and Z from a single raw material input. Budgeted data for the next month is as follows:

 
Product
 
X
Y
Z
Units Produced
2,500
3,000
4,000
Per Unit Sales Value at split-off
$20.00
$22.00
$25.00
Added processing costs per unit
8.00
8.50
8.00
Per unit sales value if processed further
$30.00
$30.00
$35.00

10. If the cost of raw material input is $150,000, which of the products should be processed beyond the split-off point?

a.  X=no; Y=yes; Z=no
b.  X=no; Y=yes; Z=yes
c.  X=yes; Y=no; Z=yes
d.  X=yes; Y=yes; Z=no


Part II: Problems   (To see the answer, click on the solution button.)
Problem 1

PDQ Company makes three products in a single facility. Data concerning these products follow:

 
Products
 
A
B
C
Selling price per unit
$76.10
$72.70
$77.10
Direct Materials
33.10
40.60
46.40
Direct Labor
24.00
13.10
7.20
Variable Manufacturing Overhead
4.60
4.40
3.30
Variable Selling Cost Per Unit
1.60
3.20
2.00
Mixing Minutes per unit
2.80
1.90
2.60
Monthly demand in units
3,000
1,000
2,000

The mixing machines are potentially the constraint in the production facility. a total of 14,700 minutes are available per month on these machines. Direct labor is a variable cost in this company.

Required:

  1. How many minutes of mixing machine time would be required to satisfy demand for all four products?

  2. How much of each product should be produced to mzximize net operating income? (Round off to the nearest whole unit.)

  3. Up to how much should the company be willing to pay for one additional hour of mixing machine time if the company has made the best use of the existing mixing machine capacity? (Round off to the nearest whole cent.


Problem 2

XYZ Company uses 5,000 units of Part X each year as a component in the assembly of one of its products. The company is presently producing Part X internally at a total cost of $80,000 as follows:

Direct Materials
$18,000
Direct Labor
20,000
Variable Manufacturing Overhead
12,000
Fixed Manufacturing Overhead
30,000
Total Costs
$80,000

An outside supplier has offered to provide Part X at a price of $13 per unit. If Lindon Company stops producing the part internally, one-third of the fixed manufacturing overhead would be eliminated.

Required:

Prepare an analysis showing the annual advantage or disadvantage of accepting the outside supplier's offer.



Last Modified October 29, 2004