Managerial Accounting Study Guide- Chapters 9-12

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Future costs that do not differ among the alternatives are not relevant in a decision

TRUE

Fixed costs are irrelevant in a decision

FALSE

Sunk costs are considered to be avoidable costs

FALSE

Avoidable costs are also called relevant costs

TRUE

An avoidable cost is a cost that can be eliminated (in whole or in part) as a result of choosing one alternative over another

TRUE

A sunk cost is a cost that has already been incurred and that cannot be avoided regardless of what action is chosen

TRUE

The book value of a machine, as shown on the balance sheet, is relevant in a decisionconcerning the replacement of that machine by another machine

FALSE

If by dropping a product a firm can avoid more in fixed costs than it loses in contributionmargin, then the firm is better off economically if the product is dropped

TRUE

Generally, a product line should be dropped when the fixed costs that can be avoided bydropping the product line are less than the contribution margin that will be lost

FALSE

The cost of a resource that has no alternative use in a make or buy decision problem hasan opportunity cost of zero

TRUE

Vertical integration is the involvement by a company in more than one of the steps fromsecuring basic raw materials to the production and distribution of a finished product

TRUE

Depreciation expense on existing factory equipment is generally relevant to a decision of whether to accept or reject a special offer for a company's product

FALSE

When a company has a production constraint, the product with the highest contributionmargin per unit of the constrained resource should be given highest priority

TRUE

Managers should not authorize working overtime at a work station that contains a bottleneck

FALSE

Joint costs are not relevant to the decision to sell a product at the split-off point or to process the product further

TRUE

Joint production costs are relevant costs in decisions about what to do with a product fromthe split-off point onward in the production process

FALSE

Costs which are always relevant in decision making are those costs which are

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

Freestone Company is considering renting Machine Y to replace Machine X. It isexpected that Y will waste less direct materials than does X. If Y is rented, X will be sold onthe open market. For this decision, which of the following factors is (are) relevant

Both I and II

Which of the following are valid reasons for eliminating a product line

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

In a sell or process further decision, which of the following costs are relevant

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 $30,800
Less: Cost to rework material 1,400
Net sales value 29,400
Current scap value 30,100
Net disadvantage -$ 700

Liffick Corporation is a specialty component manufacturer with idle capacity.Management would like to use its extra capacity to generate additional profits. A potentialcustomer has offered to buy 6,200 units of component VFG. Each unit of VFG requires 8units of material C79 and 6 units of material X70. Data concerning these two materials follow

Material C79 is in use in many of the company's products and is routinely replenished.Material X70 is no longer used by the company in any of its normal products and existingstocks would not be replenished once they are used up.What would be the relevant cost of the materials, in total, for purposes of determining aminimum acceptable price for the order for product VFG

$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

Stampka Corporation is a specialty component manufacturer with idle capacity.Management would like to use its extra capacity to generate additional profits. A potentialcustomer has offered to buy 4,200 units of component JJF. Each unit of JJF requires 6 units of material O38 and 9 units of material P56. Data concerning these two materials follow: Material O38 is in use in many of the company's products and is routinely replenished.Material P56 is no longer used by the company in any of its normal products and existingstocks would not be replenished once they are used up.What would be the relevant cost of the materials, in total, for purposes of determining aminimum acceptable price for the order for product JJF?

$155,610

Janus Corporation has in stock 43,700 kilograms of material L that it bought five yearsago for $6.10 per kilogram. This raw material was purchased to use in a product line that has been discontinued. Material L can be sold as is for scrap for $3.23 per kilogram. Analternative would be to use material L in one of the company's current products, E99D, whichcurrently requires 2 kilograms of a raw material that is available for $9.45 per kilogram.Material L can be modified at a cost of $0.62 per kilogram so that it can be used as asubstitute for this material in the production of product E99D. However, after modification, 3kilograms of material L is required for every unit of product E99D that is produced. JanusCorporation has now received a request from a company that could use material L in its production process. Assuming that Janus Corporation could use all of its stock of material Lto make product E99D or the company could sell all of its stock of the material at the currentscrap price of $3.23 per kilogram, what is the minimum acceptable selling price of material Lto the company that could use material L in its own production process

$5.68

Lampshire Inc. is considering using stocks of an old raw material in a special project. Thespecial project would require all 160 kilograms of the raw material that are in stock and thatoriginally cost the company $1,136 in total. If the company were to buy new supplies of thisraw material on the open market, it would cost $7.25 per kilogram. However, the companyhas no other use for this raw material and would sell it at the discounted price of $6.50 per kilogram if it were not used in the special project. The sale of the raw material would involvedelivery to the purchaser at a total cost of $75 for all 160 kilograms. What is the relevant costof the 160 kilograms of the raw material when deciding whether to proceed with the special project

$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).

Power Systems Inc. manufactures jet engines for the United States armed forces on a cost- plus basis. The production cost of a particular jet engine is shown below:

If production of this engine was discontinued, the production capacity would be idle, and thesupervisor would be laid off. The depreciation referred to above is for special equipment thatwould have no resale value and that does not wear out through use. When asked to bid on thenext contract for this engine, the minimum unit price that Power Systems should bid is

$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

Peluso Company, a manufacturer of snowmobiles, is operating at 70% of plant capacity.Peluso's plant manager is considering making the headlights now being purchased from anoutside supplier for $11 each. The Peluso plant has idle equipment that could be used tomanufacture the headlights. The design engineer estimates that each headlight requires $4 of direct materials, $3 of direct labor, and $6.00 of manufacturing overhead. Forty percent of themanufacturing overhead is a fixed cost that would be unaffected by this decision. A decision by Peluso Company to manufacture the headlights should result in a net gain (loss) for each headlight of

$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

Iwasaki Inc. is considering whether to continue to make a component or to buy it from anoutside supplier. The company uses 13,000 of the components each year. The unit productcost of the component according to the company's cost accounting system is given as follows: Assume that direct labor is a variable cost. Of the fixed manufacturing overhead, 30% isavoidable if the component were bought from the outside supplier. In addition, making thecomponent uses 1 minute on the machine that is the company's current constraint. If thecomponent were bought, this machine time would be freed up for use on another product thatrequires 2 minutes on this machine and that has a contribution margin of $5.20 per unit.When deciding whether to make or buy the component, what cost of making the componentshould be compared to the price of buying the component

$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

Pitkin Company produces a part used in the manufacture of one of its products. The unit product cost of the part is $33, computed as follows: An outside supplier has offered to provide the annual requirement of 10,000 of the parts for only $27 each. The company estimates that 30% of the fixed manufacturing overhead costsabove will continue if the parts are purchased from the outside supplier. Assume that directlabor is an avoidable cost in this decision. Based on these data, the per unit dollar advantageor disadvantage of purchasing the parts from the outside supplier would be

$3 advantage

A customer has requested that Inga Corporation fill a special order for 2,000 units of product K81 for $25.00 a unit. While the product would be modified slightly for the specialorder, product K81's normal unit product cost is $19.90: Direct labor is a variable cost. The special order would have no effect on the company's totalfixed manufacturing overhead costs. The customer would like modifications made to productK81 that would increase the variable costs by $1.20 per unit and that would require aninvestment of $10,000 in special molds that would have no salvage value.This special order would have no effect on the company's other sales. The company has amplespare capacity for producing the special order. If the special order is accepted, the company'soverall net operating income would increase (decrease) by

$13,000

Rojo Corporation has received a request for a special order of 8,000 units of product W68for $27.20 each. Product W68's unit product cost is $18.50, determined as follows: Direct labor is a variable cost. The special order would have no effect on the company's totalfixed manufacturing overhead costs. The customer would like modifications made to productW68 that would increase the variable costs by $7.90 per unit and that would require aninvestment of $31,000 in special molds that would have no salvage value.This special order would have no effect on the company's other sales. The company has amplespare capacity for producing the special order. If the special order is accepted, the company'soverall net operating income would increase (decrease) by:

$30,600

Ellis Television makes and sells portable televisions. Each television regularly sells for $210. The following cost data per television is based on a full capacity of 10,000 televisions produced each period. A special order has been received by Ellis for a sale of 2,000 televisions to an overseascustomer. The only selling costs that would be incurred on this order would be $6 per television for shipping. Ellis is now selling 6,000 televisions through regular channels each period. What should be the minimum selling price per television in negotiating a price for thisspecial order?

$174

An automated turning machine is the current constraint at Naik Corporation. Three products use this constrained resource. Data concerning those products appear below: Rank the products in order of their current profitability from most profitable to least profitable. In other words, rank the products in the order in which they should be emphasized

YY, KU, OP

Pappan Corporation makes three products that use compound W, the current constrainedresource. Data concerning those products appear below: Rank the products in order of their current profitability from most profitable to least profitable. In other words, rank the products in the order in which they should be emphasized

RH, QF, GY

Consider the following production and cost data for two products, X and Y: The company has 15,000 machine hours available each period, and there is unlimited demandfor each product. What is the largest possible total contribution margin that can be realizedeach period?

$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

Wright Company produces products I, J, and K from a single raw material input.Budgeted data for the next month follows: If the cost of the raw material input is $78,000, which of the products should be processed beyond the split-off point?

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

Coakley Beet Processors, Inc., processes sugar beets in batches. A batch of sugar beetscosts $48 to buy from farmers and $10 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 $24 or processed further for $16 to make the end product industrial fiber that issold for $36. The beet juice can be sold as is for $44 or processed further for $28 to make theend product refined sugar that is sold for $70. How much profit (loss) does the company make by processing the intermediate product beet juice into refined sugar rather than selling it asis?

$(2)

Galluzzo Corporation processes sugar beets in batches. A batch of sugar beets costs $51 to buy from farmers and $14 to crush in the company's plant. Two intermediate products, beetfiber and beet juice, emerge from the crushing process. The beet fiber can be sold as is for $20or processed further for $18 to make the end product industrial fiber that is sold for $45. The beet juice can be sold as is for $41 or processed further for $21 to make the end productrefined sugar that is sold for $62. How much profit (loss) does the company make by processing one batch of sugar beets into the end products industrial fiber and refined sugar?

$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

Zollars Cane Products, Inc., processes sugar cane in batches. The company buys a batchof sugar cane from farmers for $70 which is then crushed in the company's plant at a cost of $19. Two intermediate products, cane fiber and cane juice, emerge from the crushing process.The cane fiber can be sold as is for $21 or processed further for $13 to make the end productindustrial fiber that is sold for $42. The cane juice can be sold as is for $44 or processedfurther for $26 to make the end product molasses that is sold for $88. How much profit (loss)does the company make by processing one batch of sugar cane into the end products industrialfiber and molasses

$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

What is the differential cost of Alternative Y over Alternative X, including all of therelevant costs

$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

What is the differential cost of Alternative B over Alternative A, including all of the relevant costs?

$44,000

If Austin chooses to produce 4,000 afghans each month, the change in the monthly netoperating income as compared to selling 4,000 spindles of yarn is

$24,000 increase

What is the lowest price Austin should be willing to accept for one afghan as long as itcan sell spindles of yarn to the outside market for $12 each

$26

TThe Tingey Company has 500 obsolete microcomputers that are carried in inventory at a totalcost 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
The sunk cost in this situation is

720,000

What is the net advantage or disadvantage to the company from upgrading the computersrather than selling them in their present condition

$10,000 advantage

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

The management of Fries Corporation has been concerned for some time with the financial performance of its product R89H and has considered discontinuing it on several occasions.Data from the 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 $31,000 of the fixed manufacturing expensesand $46,000 of the fixed selling and administrative expenses are avoidable if product R89H isdiscontinued.

According to the company's accounting system, what is the net operating income earned by product R89H

$(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

The management of Freshwater Corporation is considering dropping product C11B. Datafrom the company's accounting system appear below: All fixed expenses of the company are fully allocated to products in the company's accountingsystem. Further investigation has revealed that $211,000 of the fixed manufacturing expensesand $122,000 of the fixed selling and administrative expenses are avoidable if product C11Bis discontinued. 12-138

According to the company's accounting system, what is the net operating income earned by product C11B

$(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

The Western Company is considering the addition of a new product to its current productlines. The expected cost and revenue data for the new product are as follows: If the new product is added to the existing product line, then sales of existing products willdecline. As a consequence, the contribution margin of the other existing product lines isexpected to drop $78,000 per year

If the new product is added next year, the increase in net operating income resulting fromthis decision would be

$183,000

What is the lowest selling price per unit among those listed below that could be chargedfor the new product and still make it economically desirable to add the new product

$249

Condensed monthly operating income data for Cosmo Inc. for November is presented below.Additional information regarding Cosmo's operations follows the statement. Three-quarters of each store's traceable fixed expenses are avoidable if the store were to beclosed.Cosmo allocates common fixed expenses to each store on the basis of sales dollars.Management estimates that closing the Town Store would result in a ten percent decrease inMall Store sales, while closing the Mall Store would not affect Town Store sales.The operating results for November are representative of all months.

A decision by Cosmo Inc. to close the Town Store would result in a monthly increase(decrease) in Cosmo's operating income of

$(10,800)

Cosmo is considering a promotional campaign at the Town Store that would not affect theMall Store. Increasing annual promotional expenses at the Town Store by $60,000 in order toincrease Town Store sales by ten percent would result in a monthly increase (decrease) inCosmo's operating income of

$(1,400)

The Cabinet Shoppe is considering the addition of a new line of kitchen cabinets to its current product lines. Expected cost and revenue data for the new cabinets are as follows: If the new cabinets are added, it is expected that the contribution margin of other product linesat the cabinet shop will drop by $20,000 per year.

If the new cabinet product line is added next year, the increase in net operating incomeresulting from this decision would be

$105,000

What is the lowest selling price per unit that could be charged for the new cabinets fromthe following list and still make it economically desirable to add the new product line?

$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

Ahsan Company makes 60,000 units per year of a part it uses in the products it manufactures.The unit product cost of this part is computed as follows: An outside supplier has offered to sell the company all of these parts it needs for $45.70 aunit. If the company accepts this offer, the facilities now being used to make the part could beused to make more units of a product that is in high demand. The additional contributionmargin on this other product would be $318,000 per year.If the part were purchased from the outside supplier, all of the direct labor cost of the partwould be avoided. However, $3.50 of the fixed manufacturing overhead cost being applied tothe part would continue even if the part were purchased from the outside supplier. This fixedmanufacturing overhead cost would be applied to the company's remaining product

How much of the unit product cost of $40.50 is relevant in the decision of whether tomake or buy the part

$37.00

What is the net total dollar advantage (disadvantage) of purchasing the part rather thanmaking it?

$(204,000)

What is the maximum amount the company should be willing to pay an outside supplier per unit for the part if the supplier commits to supplying all 60,000 units required each year

$42.30

If Talboe chooses to buy the wheel from the outside supplier, then the change in annualnet operating income is a

$50,000 increase

What is the highest price that Talboe could pay the outside supplier for each wheel andstill be economically indifferent between making or buying the wheels

$1.05

Assume that there is no other use for the capacity now being used to produce thecomponent and the total fixed manufacturing overhead of the company would be unaffected by this decision. If Rodgers Company purchases the components rather than making theminternally, what would be the impact on the company's annual net operating income

$81,000 decrease

Assume that if the component is purchased from the outside supplier, $35,100 of annualfixed manufacturing overhead would be avoided and the facilities now being used to make thecomponent would be rented to another company for $64,800 per year. If Rodgers chooses to buy the component from the outside supplier under these circumstances, then the impact onannual net operating income due to accepting the offer would be

$18,900 increase

If Meacham decides to purchase the subcomponent from the outside supplier, how muchhigher or lower will net operating income be than if Meacham continued to make the subcomponent

$45,000 higher

Suppose the price for the subcomponent has not been set. At what price per unit charged by the outside supplier would Meacham be economically indifferent between making thesubcomponent or buying it from the outside

$30.25

Suppose there is ample idle capacity to produce the units required by the overseascustomer and the special discounted price on the special order is $41.60 per unit. By howmuch would this special order increase (decrease) the company's net operating income for themonth?

$25,200

Suppose the company is already operating at capacity when the special order is receivedfrom the overseas customer. What would be the opportunity cost of each unit delivered to theoverseas customer

$22.00

Suppose there is not enough idle capacity to produce all of the units for the overseascustomer and accepting the special order would require cutting back on production of 200units for regular customers. The minimum acceptable price per unit for the special order isclosest to

$31.20

If Varone can expect to sell 32,000 Homs next year through regular channels and thespecial order is accepted at 15% off the regular selling price, the effect on net operatingincome next year due to accepting this order would be a

$68,000 increase

If Varone can expect to sell 32,000 Homs next year through regular channels, at whatspecial order price from Fairview should Varone be economically indifferent between either accepting or not accepting this special order

$42.50

If Varone has an opportunity to sell 37,960 Homs next year through regular channels andthe special order is accepted for 15% off the regular selling price, the effect on net operatingincome next year due to accepting this order would be a

$33,320 decrease

If Immanuel accepts this special order, the change in monthly net operating income will be a

$12,600 increase

Residual income is superior to return on investment as a means of measuring performance because it encourages managers to make investment decisions that are more consistent withthe interests of the company as a whole

True

Residual income equals average operating assets multiplied by the difference between thereturn on investment and the minimum required rate of return

True

Consider a company that has only variable costs. All other things the same, an increase inunit sales will result in no change in the return on investment

False

The use of return on investment as a performance measure may lead managers to makedecisions that are not in the best interests of the company as a whole

True

Residual income is the net operating income that an investment center earns above theminimum required return on the investment in operating assets

True

Residual income should not be used to evaluate a cost center

True

The performance measures on a balanced scorecard tend to fall into four groups: financialmeasures, customer measures, internal business process measures, and external business process measures

False

A balanced scorecard should contain every performance measure that can be expected toinfluence a company's profits

False

The performance measures on an individual's scorecard should not be overly influenced byactions taken by others in the company or by events that are outside of the individual's control.

True

Managers of cost centers are evaluated according to the profits which their departmentsare able to generate

False

If expenses exceed revenues in a department, then it would be considered a cost center.

False

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.

Turnover is computed by dividing average operating assets into

Sales

Which of the following statements provide(s) an argument in favor of including only a plant's net book value rather than gross book value as part of operating assets in the ROIcomputation?I. Net book value is consistent with how plant and equipment items are reported on a balancesheet.II. Net book value is consistent with the computation of net operating income, which includesdepreciation as an operating expense.III. Net book value allows ROI to decrease over time as assets get older

Only I and II.

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

Sales in the denominator

Which of the following is not an operating asset

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

Which of the following three statements are correct?I. A profit center has control over both cost and revenue.II. An investment center has control over invested funds, but not over costs and revenue.III. A cost center has no control over sales

Only I and III

The purpose of the Data Processing Department of Falena Corporation is to assist thevarious departments of the corporation with their information needs free of charge. The Data Processing Department would best be evaluated as a

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%

Sales and average operating assets for Company P and Company Q are given below: What is the margin that each company will have to earn in order to generate a return oninvestment of 20%?

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

A company's current net operating income is $16,800 and its average operating assets are$80,000. The company's required rate of return is 18%. A new project being consideredwould require an investment of $15,000 and would generate annual net operating income of $3,000. What is the residual income of the new project?

$300

Soderquist Corporation uses residual income to evaluate the performance of its divisions.The company's minimum required rate of return is 11%. In April, the Commercial ProductsDivision had average operating assets of $100,000 and net operating income of $9,400. Whatwas the Commercial Products Division's residual income in April

-$1,600

In August, the Universal Solutions Division of Jugan Corporation had average operatingassets of $670,000 and net operating income of $77,500. The company uses residual income,with a minimum required rate of return of 12%, to evaluate the performance of its divisions.What was the Universal Solutions Division's residual income in August?

-$2,900

Division B had an ROI last year of 15%. The division's minimum required rate of return is10%. If the division's average operating assets last year were $450,000, then the division'sresidual income for last year was

$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%

The West Division of Shekarchi Corporation had average operating assets of $620,000 andnet operating income of $80,100 in March. The minimum required rate of return for performance evaluation purposes is 14%. 46.

What was the West Division's minimum required return in March?

$86,800

What was the West Division's residual income in March

-$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

What was the Consumer Products Division's residual income in March

-$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

Division A's residual income is

$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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