# Managerial Accounting Study Guide- Chapters 9-12

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AVOIDABLE

### A general rule in relevant cost analysis is

differential future costs and revenues are always relevant

### The opportunity cost of making a component part in a factory with no excess capacity is the

net benefit foregone from the best alternative use of the capacity required

Both I and II

Only I

### When there is a production constraint, a company should emphasize the products with

the highest contribution margin per unit of the constrained resource

Only II

### Scherer Corporation is preparing a bid for a special order that would require 720 liters of material U48N. The company already has 560 liters of this raw material in stock thatoriginally cost \$6.30 per liter. Material U48N is used in the company's main product and isreplenished on a periodic basis. The resale value of the existing stock of the material is \$5.80 per liter. New stocks of the material can be readily purchased for \$6.65 per liter. What is therelevant cost of the 720 liters of the raw material when deciding how much to bid on the special order

\$4,788

The relevant cost is the current market cost which is 720 liters×current market \$6.65 per liter = \$4,788

### Cung Inc. has some material that originally cost \$68,400. The material has a scrap valueof \$30,100 as is, but if reworked at a cost of \$1,400, it could be sold for \$30,800. What would be the incremental effect on the company's overall profit of reworking and selling the materialrather than selling it as is as scrap

-\$700

Sales value of reworked material \$30,800
Less: Cost to rework material 1,400
Net sales value 29,400
Current scap value 30,100

\$484,455

### Schemm Inc. regularly uses material F04E and currently has in stock 460 liters of thematerial for which it paid \$2,622 several weeks ago. If this were to be sold as is on the openmarket as surplus material, it would fetch \$5.25 per liter. New stocks of the material can be purchased on the open market for \$5.85 per liter, but it must be purchased in lots of 1,000liters. You have been asked to determine the relevant cost of 800 liters of the material to beused in a job for a customer. The relevant cost of the 800 liters of material F04E is

\$4,680

The relevant cost is the current market value: 800 liters×current market \$5.85 per liter =\$4,680

\$155,610

\$5.68

\$965

### A study has been conducted to determine if Product A should be dropped. Sales of the product total \$200,000 per year; variable expenses total \$140,000 per year. Fixed expensescharged to the product total \$90,000 per year. The company estimates that \$40,000 of thesefixed expenses will continue even if the product is dropped. These data indicate that if Product A is dropped, the company's overall net operating income would

decrease by \$10,000 per year

### The Kelsh Company has two divisions--North and South. The divisions have thefollowing revenues and expenses: Management at Kelsh is pondering the elimination of North Division. If North Division wereeliminated, its traceable fixed expenses could be avoided. The total common corporateexpenses would be unaffected. Given these data, the elimination of North Division wouldresult in an overall company net operating income of

\$(140,000)

The company currently has a net operating income of \$50,000—the combined effect of theapparent \$50,000 loss in the North Division and the apparent \$100,000 profit in the SouthDivision. Dropping the North Division would reduce net operating income by \$190,000.Therefore, after dropping the North Division, the overall company net operating loss would be\$140,000 (= \$50,000 - \$190,000).

\$385,000

### The management of Heider Corporation is considering dropping product J14V. Data fromthe company's accounting system appear below In the company's accounting system all fixed expenses of the company are fully allocated to products. Further investigation has revealed that \$211,000 of the fixed manufacturingexpenses and \$172,000 of the fixed selling and administrative expenses are avoidable if product J14V is discontinued. What would be the effect on the company's overall netoperating income if product J14V were dropped?

Overall net operating income would decrease by \$160,000

### Product R19N has been considered a drag on profits at Buzzeo Corporation for some timeand management is considering discontinuing the product altogether. Data from thecompany's accounting system appear below

Overall net operating income would decrease by \$59,000

### Lusk Company produces and sells 15,000 units of Product A each month. The selling price of Product A is \$20 per unit, and variable expenses are \$14 per unit. A study has beenmade concerning whether Product A should be discontinued. The study shows that \$70,000 of the \$100,000 in fixed expenses charged to Product A would continue even if the product wasdiscontinued. These data indicate that if Product A is discontinued, the company's overall netoperating income would

decrease by \$60,000 per month

\$0.40

### Part I51 is used in one of Pries Corporation's products. The company makes 18,000 unitsof this part each year. The company's Accounting Department reports the following costs of producing the part at this level of activity: An outside supplier has offered to produce this part and sell it to the company for \$15.80each. If this offer is accepted, the supervisor's salary and all of the variable costs, includingdirect labor, can be avoided. The special equipment used to make the part was purchasedmany years ago and has no salvage value or other use. The allocated general overheadrepresents fixed costs of the entire company. If the outside supplier's offer were accepted,only \$26,000 of these allocated general overhead costs would be avoided.If management decides to buy part I51 from the outside supplier rather than to continuemaking the part, what would be the annual impact on the company's overall net operatingincome?

Net operating income would decline by \$119,800 per year

\$19.88

### Part N29 is used by Farman Corporation to make one of its products. A total of 11,000units of this part are produced and used every year. The company's Accounting Departmentreports the following costs of producing the part at this level of activity: An outside supplier has offered to make the part and sell it to the company for \$21.20 each. If this offer is accepted, the supervisor's salary and all of the variable costs, including the directlabor, can be avoided. The special equipment used to make the part was purchased manyyears ago and has no salvage value or other use. The allocated general overhead representsfixed costs of the entire company, none of which would be avoided if the part were purchasedinstead of produced internally. In addition, the space used to make part N29 could be used tomake more of one of the company's other products, generating an additional segment marginof \$29,000 per year for that product. What would be the impact on the company's overall netoperating income of buying part N29 from the outside supplier?

Net operating income would decline by \$32,600 per year

### Fillip Corporation makes 4,000 units of part U13 each year. This part is used in one of thecompany's products. The company's Accounting Department reports the following costs of producing the part at this level of activity: An outside supplier has offered to make and sell the part to the company for \$21.60 each. If this offer is accepted, the supervisor's salary and all of the variable costs, including directlabor, can be avoided. The special equipment used to make the part was purchased manyyears ago and has no salvage value or other use. The allocated general overhead representsfixed costs of the entire company. If the outside supplier's offer were accepted, only \$3,000 of these allocated general overhead costs would be avoided. In addition, the space used to produce part U13 would be used to make more of one of the company's other products,generating an additional segment margin of \$13,000 per year for that product.What would be the impact on the company's overall net operating income of buying part U13from the outside supplier

Net operating income would increase by \$9,200 per year

### Ethridge Corporation is presently making part H25 that is used in one of its products. Atotal of 9,000 units of this part are produced and used every year. The company's AccountingDepartment reports the following costs of producing the part at this level of activity: An outside supplier has offered to make and sell the part to the company for \$15.40 each. If this offer is accepted, the supervisor's salary and all of the variable costs can be avoided. Thespecial equipment used to make the part was purchased many years ago and has no salvagevalue or other use. The allocated general overhead represents fixed costs of the entirecompany, none of which would be avoided if the part were purchased instead of producedinternally. If management decides to buy part H25 from the outside supplier rather than tocontinue making the part, what would be the annual impact on the company's overall netoperating income?

Net operating income would decline by \$24,300 per year

\$13,000

\$30,600

\$174

YY, KU, OP

RH, QF, GY

\$135,000

### The constraint at Mcglathery Corporation is time on a particular machine. The companymakes three products that use this machine. Data concerning those products appear below: Assume that sufficient time is available on the constrained machine to satisfy demand for all but the least profitable product. Up to how much should the company be willing to pay toacquire more of the constrained resource

\$11.80 per minute

Option B

### Two products, IF and RI, emerge from a joint process. Product IF has been allocated\$25,300 of the total joint costs of \$46,000. A total of 2,000 units of product IF are producedfrom the joint process. Product IF can be sold at the split-off point for \$11 per unit, or it can be processed further for an additional total cost of \$10,000 and then sold for \$13 per unit. If product IF is processed further and sold, what would be the effect on the overall profit of thecompany compared with sale in its unprocessed form directly after the split-off point

\$6,000 less profit

\$(2)

\$3

### Beilke Corporation processes sugar beets in batches that it purchases from farmers for \$53a batch. A batch of sugar beets costs \$12 to crush in the company's plant. Two intermediate products, beet fiber and beet juice, emerge from the crushing process. The beet fiber can besold as is for \$20 or processed further for \$10 to make the end product industrial fiber that issold for \$26. The beet juice can be sold as is for \$30 or processed further for \$29 to make theend product refined sugar that is sold for \$79. Which of the intermediate products should be processed further

beet fiber should NOT be processed into industrial fiber; beet juice should be processedinto refined sugar

\$2

### Kempler Corporation processes sugar cane in batches. The company purchases a batch of sugar cane for \$34 from farmers and then crushes the cane in the company's plant at the costof \$15. Two intermediate products, cane fiber and cane juice, emerge from the crushing process. The cane fiber can be sold as is for \$26 or processed further for \$17 to make the end product industrial fiber that is sold for \$41. The cane juice can be sold as is for \$32 or processed further for \$22 to make the end product molasses that is sold for \$51. Which of theintermediate products should be processed further?

Cane fiber should NOT be processed into industrial fiber; Cane juice should NOT be processed into molasses

### Are the materials costs and processing costs relevant in the choice between alternatives Xand Y? (Ignore the equipment rental and occupancy costs in this question.)

Only processing costs are relevant

\$39,000

### Zurasky Corporation is considering two alternatives: A and B. Costs associated with thealternatives are listed below: . Are the materials costs and processing costs relevant in the choice between alternatives Aand B? (Ignore the equipment rental and occupancy costs in this question.)

Only materials costs are relevant

\$44,000

\$24,000 increase

\$26

720,000

### Suppose the selling price of the upgraded computers has not been set. At what selling price per unit would the company be as well off upgrading the computers as if it just sold thecomputers in their present condition

\$300

The selling price of the upgraded computers would have to cover the opportunity cost of \$50,000 for selling the computers as is as well as the \$100,000 cost of upgrading.The point of indifference would be \$150,000÷500 computers = \$300 per computer

\$(8,000)

### What would be the effect on the company's overall net operating income if product R89H were dropped

Overall net operating income would decrease by \$66,000

\$(74,000)

### What would be the effect on the company's overall net operating income if product C11Bwere dropped?

Overall net operating income would decrease by \$188,000

\$183,000

\$249

\$(10,800)

\$(1,400)

\$105,000

\$160

### Knaack Corporation is presently making part R20 that is used in one of its products. A totalof 18,000 units of this part are produced and used every year. The company's AccountingDepartment reports the following costs of producing the part at this level of activity: An outside supplier has offered to produce and sell the part to the company for \$27.70 each. If this offer is accepted, the supervisor's salary and all of the variable costs, including directlabor, can be avoided. The special equipment used to make the part was purchased manyyears ago and has no salvage value or other use. The allocated general overhead representsfixed costs of the entire company, none of which would be avoided if the part were purchasedinstead of produced internally. If management decides to buy part R20 from the outside supplier rather than to continuemaking the part, what would be the annual impact on the company's overall net operatingincome

Net operating income would decline by \$50,400 per year

### In addition to the facts given above, assume that the space used to produce part R20 could be used to make more of one of the company's other products, generating an additionalsegment margin of \$27,000 per year for that product. What would be the impact on thecompany's overall net operating income of buying part R20 from the outside supplier andusing the freed space to make more of the other product?

Net operating income would decline by \$23,400 per year

### Meltzer Corporation is presently making part O13 that is used in one of its products. A totalof 3,000 units of this part are produced and used every year. The company's AccountingDepartment reports the following costs of producing the part at this level of activity: An outside supplier has offered to produce and sell the part to the company for \$27.00 each. If this offer is accepted, the supervisor's salary and all of the variable costs, including directlabor, can be avoided. The special equipment used to make the part was purchased manyyears ago and has no salvage value or other use. The allocated general overhead representsfixed costs of the entire company. If the outside supplier's offer were accepted, only \$3,000 of these allocated general overhead costs would be avoided. If management decides to buy part O13 from the outside supplier rather than to continuemaking the part, what would be the annual impact on the company's overall net operatingincome?

Net operating income would decline by \$8,700 per year.

### If management decides to buy part O13 from the outside supplier rather than to continuemaking the part, what would be the annual impact on the company's overall net operating income?

Net operating income would decline by \$8,700 per year.

### In addition to the facts given above, assume that the space used to produce part O13 could be used to make more of one of the company's other products, generating an additionalsegment margin of \$26,000 per year for that product. What would be the impact on thecompany's overall net operating income of buying part O13 from the outside supplier andusing the freed space to make more of the other product?

Net operating income would increase by \$17,300 per year

\$37.00

\$(204,000)

\$42.30

\$50,000 increase

\$1.05

\$81,000 decrease

\$18,900 increase

\$45,000 higher

\$30.25

\$25,200

\$22.00

\$31.20

\$68,000 increase

\$42.50

\$33,320 decrease

\$12,600 increase

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### Residual income is a better measure for performance evaluation of an investment center manager than return on investment because

desirable investment decisions will not be rejected by divisions that already have a high ROI.

Sales

Only I and II.

### In computing the margin in a ROI analysis, which of the following is used

Sales in the denominator

Common stock

### In determining the dollar amount to use for operating assets in the return on investment(ROI) calculation, companies will generally use either net book value or gross cost of theassets. Which of the following is an argument for the use of gross cost rather than net book value?

It encourages the replacement of old, worn-out equipment

### Which of the following will not result in an increase in the residual income, assumingother factors remain constant

An increase in the minimum required rate of return

### All other things the same, which of the following would increase residual income

Decrease in average operating assets

Only I and III

cost center

### Average operating assets are \$110,000 and net operating income is \$23,100. The companyinvests \$25,000 in new assets for a project that will increase net operating income by \$4,750.What is the return on investment (ROI) of the new project

19 %

ROI = Net operating income÷Average operating assets= \$4,750÷\$25,000 = 19%

### Last year a company had stockholder's equity of \$160,000, net operating income of \$16,000 and sales of \$100,000. The turnover was 0.5. The return on investment (ROI) was

8%

Margin = Net operating income÷Sales = \$16,000÷\$100,000 = 16%ROI = Margin×Turnover = 16%×0.5 = 8%

8% and 4%

### Reed Company's sales last year totaled \$150,000 and its return on investment (ROI) was12%. If the company's turnover was 3, then its net operating income for the year must have been

\$6,000

ROI = Margin×Turnover Margin = ROI÷Turnover = 12%÷3 = 4%Margin = Net operating income÷Sales Net operating income = Margin×Sales = 4%×\$150,000 = \$6,000

\$300

-\$1,600

-\$2,900

\$22,500

### Garnick Corporation keeps careful track of the time required to fill orders. The timesrecorded for a particular order appear below: The delivery cycle time was

36.1 hours

Throughput time = Process time + Inspection time + Move time + Queue time= 0.9 hours + 0.3 hours + 3.5 hours + 5.2 hours = 9.9 hoursDelivery cycle time = Wait time + Throughput time= 26.2 hours + 9.9 hours = 36.1 hours

### Galanis Corporation keeps careful track of the time required to fill orders. Dataconcerning a particular order appear below: The throughput time was

14.1 hours

Throughput time = Process time + Inspection time + Move time + Queue time= 1.4 hours + 0.4 hours + 3.6 hours + 8.7 hours = 14.1 hours

### Hoster Corporation keeps careful track of the time required to fill orders. The timesrecorded for a particular order appear below: The throughput time was

8.9 hours

Throughput time = Process time + Inspection time + Move time + Queue time= 1.2 hours + 0.4 hours + 2.9 hours + 4.4 hours = 8.9 hours

### Botelho Corporation keeps careful track of the time required to fill orders. Dataconcerning a particular order appear below The delivery cycle time was

33.1 hours

Throughput time = Process time + Inspection time + Move time + Queue time= 1.9 hours + 0.3 hours + 3.7 hours + 8.9 hours = 14.8 hoursDelivery cycle time = Wait time + Throughput time= 18.3 hours + 14.8 hours = 33.1 hours

### Niemiec Corporation keeps careful track of the time required to fill orders. The timesrecorded for a particular order appear below: The manufacturing cycle efficiency (MCE) was closest to

0.12

Throughput time = Process time + Inspection time + Move time + Queue time= 1.5 hours + 0.2 hours + 2.6 hours + 8.5 hours = 12.8 hoursMCE = Value-added time (Process time)÷Throughput (manufacturing cycle) time= 1.5 hours÷12.8 hours = 0.12

### Mordue Corporation keeps careful track of the time required to fill orders. Dataconcerning a particular order appear below: The manufacturing cycle efficiency (MCE) was closest to

0.16

Throughput time = Process time + Inspection time + Move time + Queue time= 1.7 hours + 0.1 hours + 2.4 hours + 6.7 hours = 10.9 hoursMCE = Value-added time (Process time)÷Throughput (manufacturing cycle) time= 1.7 hours÷10.9 hours = 0.16

### Aide Industries is a division of a major corporation. Data concerning the most recent year appears below Sales ...\$17,400,000 Net operating income \$870,000 Average operating assets \$4,000,000 The division's turnover is closest to

4.35
Turnover = Sales÷Average operating assets = \$17,400,000÷\$4,000,000 = 4.35

### Aide Industries is a division of a major corporation. Data concerning the most recent year appears below Sales ...\$17,400,000 Net operating income \$870,000 Average operating assets \$4,000,000 The division's margin is closest to

5.0%

Margin = Net operating income÷Sales = \$870,000÷\$17,400,000 = 5.0%

### Aide Industries is a division of a major corporation. Data concerning the most recent year appears below Sales ...\$17,400,000 Net operating income \$870,000 Average operating assets \$4,000,000 The division's return on investment (ROI) is closest to

21.75%

ROI = Net operating income÷Average operating assets = \$870,000÷\$4,000,000 = 21.75%

### The Reed Division reports the following operating data for the past two years: The return on investment at Reed was exactly the same in Year 1 and Year 2. The margin in Year 2 was

20%

ROI in Year 1:ROI = Margin×Turnover = 16%×2.5 = 40%By assumption, the ROI is the same in Year 2 as in Year 1. Therefore, in Year 2:ROI = Margin×Turnover 40% = Margin×2Margin = 40%÷2 = 20%

### Sales in Year 2 amounted to

300,000

ROI in Year 1:ROI = Margin×Turnover = 16%×2.5 = 40%By assumption, the ROI is the same in Year 2 as in Year 1. Therefore, in Year 2: Net operating income = ROI×Average operating assets = 40%×\$150,000 = \$60,000Margin = Net operating income÷SalesSales = Net operating income÷Margin = \$60,000÷20% = \$300,000

### Average operating assets in Year 1 were

100,000

Margin = Net operating income÷SalesSales = Net operating income÷Margin= \$40,000÷16% = \$250,000Turnover = Sales÷Average operating assetsAverage operating assets = Sales÷Turnover = \$250,000÷2.5 = \$100,000

### Net operating income in Year 2 amounted to

60,000

ROI in Year 1: ROI = Margin×Turnover = 16%×2.5 = 40%By assumption, the ROI is the same in Year 2 as in Year 1. Therefore, in Year 2: Net operating income = ROI×Average operating assets = 40%×\$150,000 = \$60,000

### The division's margin is closest to

7.9%

Margin= Net operating income÷Sales= \$1,592,640÷\$20,160,000 = 7.9%

### The division's turnover is closest to

2.52

Turnover = Sales÷Average operating assets= \$20,160,000÷\$8,000,000 = 2.52

### The division's return on investment (ROI) is closest to

19.9%

ROI = Net operating income÷Average operating assets= \$1,592,640÷\$8,000,000 = 19.9%

\$86,800

-\$6,700

### The Consumer Products Division of Weiter Corporation had average operating assets of \$570,000 and net operating income of \$65,100 in March. The minimum required rate of return for performance evaluation purposes is 12%.

\$68,400

Minimum required return = Average operating assets×Minimum required rate of return= \$570,000×12% = \$68,400

-\$3,300

### Estes Company has assembled the following data for its divisions for the past year Division A's sales are

\$625,000

Turnover = Sales÷Average operating assetsSales = Average operating assets×Turnover = \$500,000×1.25 = \$625,000

\$30,000

### Division B's average operating assets is

\$130,000

Turnover = Sales÷Average operating assetsAverage operating assets = Sales÷Turnover = \$520,000÷4 = \$130,000

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