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1) When deciding whether to discontinue a segment of a business, managers should focus on:
A) equipment used by that segment that could become idle
B) reallocation of corporate costs
C) how total costs differ among alternatives
D) operating income per unit of the discontinued segment
2) When deciding whether to discontinue a segment of a business, relevant costs include all of the following EXCEPT:
A) fixed supervision costs that can be eliminated
B) variable marketing costs per unit of product sold
C) cost of goods sold
D) future administrative costs that will continue
3) Molly, Inc. is considering eliminating one of its product lines. The fixed costs currently allocated to the product line will be allocated to other product lines upon discontinuance. What financial effects occur if the product line is discontinued?
A) net income will decrease by the amount of the contribution margin of the product line being discontinued
B) the company's total fixed costs will increase
C) total fixed costs will decrease by the amount of the product line's fixed costs
D) net income will decrease by the amount of the product line's fixed costs
4) Discontinuing unprofitable products will increase profitability:
A) if the resources no longer required by the discontinued product can be eliminated
B) if capacity constraints are adjusted
D) when a large portion of the fixed costs are unavoidable
5) A segment has the following data:
Variable costs 160,000
Fixed costs 155,000
What will be the incremental effect on net income if this segment is eliminated, assuming the fixed costs will be allocated to profitable segments?
A) $15,000 increase
B) $155,000 decrease
C) $140,000 decrease
D) $145,000 decrease
6) Camera Corner is considering eliminating Model AE2 from its camera line because of losses over the past quarter. The past three months of information for Model AE2 are summarized below:
Sales (1,000 units) $300,000
Direct materials 150,000
Direct labor ($15 per hour) 60,000
Operating loss ($10,000)
Overhead costs are 70% variable and the remaining 30% is depreciation of special equipment for model AE2 that has no resale value.
If Model AE2 is dropped from the product line, operating income will:
A) increase by $10,000
B) decrease by $20,000
C) increase by $30,000
D) decrease by $10,000
The management accountant for Giada's Book Store has prepared the following income statement for the most current year:
Cookbook Travel Book Classics Total
Sales $60,000 $100,000 $40,000 $200,000
Cost of goods sold 36,000 65,000 20,000 121,000
Contribution margin 24,000 35,000 20,000 79,000
Order and delivery processing 18,000 21,000 8,000 47,000
Rent (per sq. foot used) 2,000 1,000 3,000 6,000
Allocated corporate costs 7,000 7,000 7,000 21,000
Corporate profit $ (3,000) $ 6,000 $ 2,000 $ 5,000
7) If the cookbook product line had been discontinued prior to this year, the company would have reported:
A) greater corporate profits
B) the same amount of corporate profits
C) less corporate profits
D) resulting profits cannot be determined
8) If the travel book line had been discontinued, corporate profits for the current year would have decreased by:
Rambo Company has three products, A, B, and C. The following information is available:
Product A Product B Product C
Sales $60,000 $90,000 $24,000
Variable costs 36,000 48,000 15,000
Contribution margin 24,000 42,000 9,000
Avoidable 6,000 15,000 4,000
Unavoidable 7,000 9,000 5,400
Operating income $ 11,000 $18,000 $ (400)
9) Rambo Company is thinking of dropping Product C because it is reporting a loss. Assuming Rambo drops Product C and does NOT replace it, operating income will:
A) increase by $400
B) increase by $4,000
C) decrease by $5,000
D) decrease by $9,400
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