Introduction to Managerial Accounting

Jeannie M. Folk
Ray H. Garrison
Eric Noreen

Relevant Costs for Decision Making

Multiple Choice Quiz

1 Costs that are always relevant in decision-making are:
avoidable costs.
A)
fixed costs.
B)
sunk costs.
C)
variable costs.
D)

2 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:

common fixed overhead that will continue if the special offer is not accepted.
A)
direct materials.
B)
fixed overhead that will be avoided if the special offer is accepted.
C)
variable overhead.
D)

3 The Empire 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. Which alternative is more
desirable and what are the total relevant costs for that alternative?

remachine; $10,000.
A)
remachine; $50,000.
B)
scrap; $40,000.
C)
scrap; $40,000.
D)

4 The Calculex Company has 800 obsolete calculators that are carried in inventory at a total cost
of $53,400. If these calculators are upgraded at a total cost of $20,000, they can be sold for a
total of $60,000. As an alternative, the calculators can be sold in their present condition for
$22,400. The sunk cost in this situation is:
$0
A)
$20,000.
B)
$22,400.
C)
$53,400.
D)

5 A study has been conducted to determine if one of the departments of Lucy Company should be
discontinued. The contribution margin in the department is $100,000 per year. Fixed expenses
charged to the department are $130,000 per year. It is estimated that $80,000 of these fixed
expenses could be eliminated if the department is discontinued. These data indicate that if the
department is discontinued, Lucy's overall net operating income would:
decrease by $20,000 per year.
A)
increase by $20,000 per year.
B)
decrease by $50,000 per year.
C)
increase by $50,000 per year.

D)

6 Brown Company produces 2,000 parts per year, which are used in the assembly of one of its
products. The unit product cost of these parts is:
Variable manufacturing cost

$24

Fixed manufacturing cost

18

Unit product cost

$42

The part can be purchased from an outside supplier at $40 per unit. If the part is purchased from
the outside supplier, two thirds of the fixed manufacturing costs can be eliminated. The annual
impact on Brown's net operating income as a result of buying the part from the outside supplier
would be:
$4,000 increase.
A)
$4,000 decrease.
B)
$8,000 increase.
C)
$8,000 decrease.
D)

7 The following are the Goodman Company's unit costs of making and selling an item at a volume
of 20,000 units per month (which represents the company's capacity):
Manufacturing:
Direct materials

$2.00

Direct labor

4.00

Variable overhead

1.00

Fixed overhead

1.80

Selling and administrative:

Variable

3.00

Fixed

1.20

Assume the company has 100 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. What cost is relevant as a guide for setting a minimum price on these defective
units?

$3.00
A)
$7.00
B)
$10.00
C)
$13.00
D)

8 Reddy Corporation manufactures coolers. The company can manufacture 600,000 coolers 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 coolers will be sold at the regular price of $10.00 each. In
addition, a special order was placed for 120,000 coolers 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?
$240,000
A)
$300,000
B)
$420,000
C)
$720,000
D)

9 Chapman Company sells its product for $42 per unit. The company's unit product cost based on
the full capacity of 400,000 units is as follows:
Direct materials

$8

Direct labor

10

Manufacturing overhead

12

Unit product cost

$30

A special order offering to buy 40,000 units has been received from a foreign distributor. The
only selling costs that would be incurred on this order would be $6 per unit for shipping. The
company has sufficient idle capacity to manufacture the additional units. Two-thirds of the
manufacturing overhead is fixed and would not be affected by this order. Assume that direct
labor is an avoidable cost in this decision. In negotiating a price for the special order, the
minimum acceptable selling price per unit should be:

$28.
A)
$30.
B)
$32.
C)
$36.
D)

1 Consider the following production and cost data for two products, A and B:
0
Product A
Product B
Contribution margin per unit

$260

$240

Machine set-ups needed per unit

20 set-ups

16 set-ups

The company can only perform 130,000 machine set-ups each period due to limited skilled labor
and there is unlimited demand for each product. What is the largest possible total contribution
margin that can be realized each period?
$1,690,000.
A)
$1,950,000.
B)
$1,820,000.
C)
$3,640,000.
D)

Online Quizzes
13-1. In the decision to replace an old machine with a new machine, which of
the following would be considered a relevant cost?
a. The book value of the old equipment.
b. Amortization expense on the old equipment.

c. The loss on the disposal of the old equipment.

d. The current disposal price for the old equipment.

13-2. The decision to drop a product line should be based on:

a. the fact that the product line shows a net loss over several periods.
b. the ability of the firm to eliminate some fixed costs as a result of dropping the
product.
c. whether the fixed costs that can be avoided by dropping the product line are
less than the contribution margin that will be lost.

d. whether the fixed costs that can be avoided by dropping the

product line are greater than the contribution margin lost.
13-3. To maximize total contribution margin, a firm should:
a. promote those products having the highest unit contribution margins.
b. promote those products having the highest contribution margin ratios.
c. promote those products having the highest contribution margin per unit
of a constrained resource.
d. promote those products having the highest contribution margins and
contribution margin ratios.

13-4. Two or more products produced from a common input are termed:
a. common costs.
b. joint products.
c. joint costs.
d. by-products.

13-5. In a decision to sell or process further beyond the split-off point, a

manager should base the decision on:

a. the amount of joint product costs allocated.

b. the incremental revenue attainable beyond the split-off point.
c. the incremental cost incurred beyond the split-off point.
d. the incremental operating income attainable beyond the split-off point.

13-6. The Regal, Inc. makes 35,000 motors to be used in the production of its
sewing machines. The cost per motor at this level of activity would include:
Direct materials, $4.50; Direct labour, $4.60; Variable factory overhead, $3.75;
Fixed factory overhead, $3.45. An outside supplier recently began producing a
comparable motor for the sewing machine. The price to Regal for this motor is
$15. If Regal decided not to make the motors, there would be no other use for
the production facilities. If Regal decides to continue making the motor, how
much higher or lower would net income be than if the motors are purchased
from the outside supplier?
a. $72,250 higher.
b. $45,500 lower.
c. $311,500 higher.
d. $120,750 higher.

13-7. The WorldCo has two divisions: North and South. The divisions have the
following revenues and expenses:

Sales
Variable costs
Direct fixed costs
Allocated corporate costs
Net income (loss)

North

South

$450,000
225,000
130,000
120,000
(25,000)

$400,000
150,000
105,000
95,000
50,000

The management of WorldCo is considering the elimination of the North

Division. If the North Division were eliminated, the direct fixed costs
associated with this division could be avoided. Given these data, the
elimination of the North Division would result in an overall company net
income (loss) of:
a. $50,000.
b. ($70,000).
c. $25,000.
d. ($75,000).

13-8. Jack's Personal Devices makes and sells hand-held computers. Each
computer regularly sells for $200. The following cost data per computer are
based on a full capacity of 12,000 computers produced each period: Direct
materials. $75; Direct labour, $55; Factory Overhead (75% variable, 25%
unavoidable fixed), $48. A special order has been received by Jack's for a sale
of 2,500 computers to an overseas customer. The only selling costs that would
be incurred on this order would be $10 per computer for shipping. Jack's is
now selling 7,200 computers through regular distributors each period. What
should be the minimum selling price per computer in negotiating a price for
this special order?
a. $200.
b. $166.
c. $178.
d. $176.

13-9. Questions 9 - 10 refer to the following: Welter, Inc. is considering the

addition of a new line of product to its current product lines. The expected cost
and revenue data for the new product are as follows: Annual sales, 2,500
units. Selling price per unit, $304. Variable costs per unit: Production, $125
and Selling, $49. Avoidable traceable fixed costs per year: Production,
$50,000 and Selling, $75,000. Unavoidable allocated corporate costs per

year, $55,000. If the new product is added to the existing product line, the
contribution margin of the other existing product lines is expected to drop
$65,000 per year. If the new product line is added next year, the increase in
net income resulting from this decision would be:
a. $325,000.
b. $200,000.
c. $145,000.
d. $135,000.

13-10. What is the lowest selling price per unit that could be charged for the
new product line and still make it economically desirable to add the new
product line?
a. $246.
b. $224.
c. $232.
d. $282.