Horngren ch06
Horngren ch06
Horngren ch06
Learning Objectives
True/False:
7. Separable costs are part of a joint process and cannot be exclusively identified
with individual products.
8. The split-off point is the juncture in manufacturing where the joint products
become individually identifiable.
9. The relevant information for a sell or process further decision includes the costs
incurred before the split-off point.
F (L.O. 3, easy)
12. Sunk cost is another term for historical cost or past cost.
13. When making a decision to replace some old equipment with new, the
depreciation taken on both the old or new equipment is irrelevant information.
188
14. In practice, sunk costs often influence important decisions, especially when a
decision maker doesn't want to admit that a previous decision was a bad decision.
15. Future costs are relevant if they are the same under all feasible alternatives.
16. Only unit costs computed using the same denominator level of production should
be compared.
17. Conflicts in the decision making process can arise when superiors evaluate a
manager's performance using a model consistent with the decision model.
18. The absorption approach to the income statement is used by companies for
external financial reporting.
19. The absorption approach emphasizes the distribution between fixed and variable
costs.
20. The contribution margin is computed using variable manufacturing costs and
variable selling and administrative costs.
Multiple Choice:
21. A homeowner has paid off the mortgage on his house and continues to live in the
house. The interest income foregone by not selling the house and investing the
proceeds is an example of a(n)
a. sunk cost.
b. detrimental cost.
c. opportunity cost.
d. outlay cost.
L.O. 1 Moderate
189
22. Opportunity cost
a. is the contribution of the best alternative that is excluded from consideration.
b. applies to resources owned by the company.
c. is the cost of resources owned by the company.
d. all of the above.
L.O. 1 Easy
L.O. 1 Easy
24. War Eagle Mill paid $120,000 for a machine used to mill wheat flour. The annual
contribution margin from wheat flour sales is $50,000. The machine could be
sold for $80,000. The opportunity cost of producing wheat flour is L.O. 1
a. $100,000.
b. $80,000.
c. $50,000.
d. $30,000.
L.O. 1 Easy
25. The salary foregone by a person who quits a job to start a business is an example
of a(n)
a. sunk cost.
b. opportunity cost.
c. depreciable cost.
d. outlay cost.
L.O. 1 Easy
26. Karen is considering leaving her current position to open a tea shop. Karen’s
current salary is $45,000. Annual tea shop revenue and costs are estimated at
$250,000 and $210,000 respectively.
What is the outlay cost associated with the decision to open the tea shop?
a. $45,000
b. $210,000
c. $255,000
d. $40,000
L.O. 1 Moderate
190
27. Karen is considering leaving her current position to open a tea shop. Karen’s
current salary is $45,000. Annual tea shop revenue and costs are estimated at
$250,000 and $210,000 respectively.
L.O. 1 Moderate
28. Karen is considering leaving her current position to open a tea shop. Karen’s current
salary is $45,000. Annual tea shop revenue and costs are estimated at $250,000
and $210,000 respectively.
L.O. 1 Moderate
29. Karen is considering leaving her current position to open a tea shop. Karen’s
current salary is $45,000. Annual tea shop revenue and costs are estimated at
$250,000 and $210,000 respectively.
If Karen decides to open the tea shop, the change in Karen’s annual income
would be
a. $5000
b. ($5000)
c. $250,000
d. $40,000
L.O. 1 Moderate
191
30. Bull Company manufactures a part for its production cycle. The costs per unit
for 5,000 units of this part are as follows:
Direct materials $3
Direct labor 5
Variable factory overhead 4
Fixed factory overhead 2
Total costs $14
Heat Corporation has offered to sell 5,000 units of the same part to Bull
Company for $13 a unit. Assuming no other use for the facilities, Bull Company
should:
a. buy from Heat as this would save $1 per unit.
b. make the part as this would save $1 per unit.
c. buy from Heat as this would save $5 per unit.
d. make the part as this would save $5 per unit
L.O. 2 Moderate
31. Bull Company manufactures a part for its production cycle. The costs per unit
for 5,000 units of this part are as follows:
Direct materials $3
Direct labor 5
Variable factory overhead 4
Fixed factory overhead 2
Total costs $14
Assuming no other use of their facilities, the highest price that Bull Company
should be willing to pay for the part is
a. $12.
b. $14.
c. $8.
d. $11.
L.O. 2 Moderate
192
32. Bull Company manufactures a part for its production cycle. The costs per unit
for 5,000 units of this part are as follows:
Direct materials $3
Direct labor 5
Variable factory overhead 4
Fixed factory overhead 2
Total costs $14
Assume that Bull Company has been offered 5,000 units of the part from another
producer for $15 each. The facilities currently used to make the part could be
rented out to another manufacturer for $20,000 a year. Bull Company should
a. make the part as that would save $1 per unit.
b. buy the part as that would save $3 per unit.
c. buy the part as that would save $1 per unit.
d. make the part as that would save $3 per unit.
33. Bull Company manufactures a part for its production cycle. The costs per unit
for 5,000 units of this part are as follows:
Direct materials $3
Direct labor 5
Variable factory overhead 4
Fixed factory overhead 2
Total costs $14
Assume that Bull Company has been offered 5,000 units of the part from another
producer for $14 each. The facilities currently used could be used to make 5,000
units of a product that would contribute $5 a unit to fixed expenses. No
additional fixed costs would be incurred. Bull Company should
a. make the new product and buy the part to earn an extra $3 per unit
contribution to profit.
b. make the new product and buy the part to earn an extra $1 per unit
contribution to profit.
c. continue to make the part to earn an extra $1 per unit contribution to profit.
d. continue to make the part to earn an extra $3 per unit contribution to profit.
193
34. Herbert Company manufactures a part for its production cycle. The costs per
unit for 10,000 units of this part are as follows:
P. Forresterips Company has offered to sell 10,000 units of the same part to
Herbert Company for $55 a unit. Assuming no other use for the facilities,
Herbert Company should
a. make the part as this would save $4 per unit.
b. buy from P. Forresterips as this would save $6 per unit.
c. make the part as this would save $6 per unit
d. buy from P. Forresterips as this would save $4 per unit.
L.O. 2 Moderate
35. Herbert Company manufactures a part for its production cycle. The costs per
unit for 10,000 units of this part are as follows:
Assuming no other use of their facilities, the highest price that Herbert Company
should be willing to pay for the part is
a. $41.
b. $35.
c. $45.
d. $51.
L.O. 2 Moderate
194
36. Herbert Company manufactures a part for its production cycle. The costs per
unit for 10,000 units of this part are as follows:
Assume that Herbert Company can buy 10,000 units of the part from another
producer for $60 each. The facilities currently used to make the part could be
rented out to another manufacturer for $100,000 a year. Herbert Company
should
a. buy the part as that would save $2.50 per unit.
b. buy the part as that would save $1 per unit.
c. make the part as that would save $2.50 per unit.
d. make the part as that would save $1 per unit.
L.O. 2 Moderate
37. Herbert Company manufactures a part for its production cycle. The costs per
unit for 10,000 units of this part are as follows:
Assume that Herbert Company can buy 10,000 units of the part from another
producer for $56 each. The current facilities could be used to make 10,000 units
of a product that has a contribution margin of $20 per unit. No additional fixed
costs would be incurred. Herbert Company should
a. make the new product and buy the part to earn an extra $5 per unit
contribution to profit.
b. continue to make the part to earn an extra $5 per unit contribution to profit.
c. continue to make the part to earn an extra $15 per unit contribution to profit.
d. make the new product and buy the part to earn an extra $15 per unit
contribution to profit.
L.O. 2 Moderate
195
38. Cooper Company currently produces a key part at a total cost of $210,000.
Variable costs are $170,000. Of the fixed cost, $10,000 relate specifically to this
part. The remaining fixed costs are unavoidable.
Another manufacturer has offered to supply the part for $190. The facilities
currently used to manufacture the part could be used to manufacture a new
product with an expected contribution margin of $30,000. Alternately, the
facilities could be rented out at $60,000.
Given all of these alternatives, what is Cooper’s lowest net cost for the part?
a. $170,000
b. $180,000
c. $190,000
d. $130,000
L.O. 2 Moderate
39. Cooper Company currently produces 10,000 units of a key part at a total cost of
$210,000. Variable costs are $170,000. Of the fixed cost, $10,000 relate
specifically to this part. The remaining fixed costs are unavoidable.
Another manufacturer has offered to supply the part for $190 per unit. The
facilities currently used to manufacture the part could be used to manufacture a
new product with an expected contribution margin of $30,000. Alternately, the
facilities could be rented out at $60,000.
L.O. 2 Moderate
40. Trey Company currently produces 10,000 units of a key part at a total cost of
$512,000. Variable costs are $300,000. Of the fixed cost, $140,000 relate
specifically to this part. The remaining fixed costs are unavoidable.
Another manufacturer has offered to supply the part for $480 per unit. The
facilities currently used to manufacture the part could be used to manufacture a
new product with an expected contribution margin of $30,000. Alternately, the
facilities could be rented out at $60,000.
Given all of these alternatives, what is Trey’s lowest net cost per unit for the part?
a. $300
b. $480
c. $420
d. $440
L.O. 2 Moderate
41. Trey Company currently produces 10,000 units of a key part at a total cost of
196
$512,000. Variable costs are $300,000. Of the fixed cost, $140,000 relate
specifically to this part. The remaining fixed costs are unavoidable.
Another manufacturer has offered to supply the part for $480 per unit. The
facilities currently used to manufacture the part could be used to manufacture a
new product with an expected contribution margin of $30,000. Alternately, the
facilities could be rented out at $60,000.
Given all of these alternatives, what is Trey’s lowest net cost per unit for the
42. Devlin Company produces a part that is used in the manufacture of one of its
products. The costs associated with the production of 5,000 units of this part are
as follows:
Direct materials $108,000
Direct labor 156,000
Variable factory overhead 72,000
Fixed factory overhead 168,000
Total costs $504,000
Sundvold Company has offered to sell 5,000 units of the same part to Devlin for
$86.40 per unit. Assuming there is no other use for the facilities, Devlin should
a. make the part as this would save $14.40 per unit.
b. buy the part as this would save $14.40 per unit.
c. buy the part as this would save the company $72,000.
d. make the part as this would save $4.80 per unit.
L.O. 2 Moderate
197
43. Devlin Company produces a part that is used in the manufacture of one of its products.
The costs associated with the production of 5,000 units of this part are as follows:
Assuming no other use of their facilities, the highest price that Devlin should be
willing to pay for 5,000 units of the part is
a. $504,000.
b. $336,000.
c. $408,000.
d. $288,000.
L.O. 2 Challenging
44. Devlin Company produces a part that is used in the manufacture of one of its
products. The costs associated with the production of 5,000 units of this part are
as follows:
Assume that Devlin can buy 5,000 units of the part from another producer for
$105.60 each. The facilities currently used to make the part could be rented out
to another manufacturer for $96,000 a year. Devlin should
a. make the part as that would save $19.20 per unit.
b. make the part as that would save the company $24,000.
c. buy the part as that would save $14.40 per unit.
d. buy the part as that would save the company $96,000.
L.O. 2 Moderate
198
45. Devlin Company produces a part that is used in the manufacture of one of its
products. The costs associated with the production of 5,000 units of this part are
as follows:
Assume that Devlin can buy 5,000 units of the part from another producer for
$100.80 each. The current facilities could be used to make 5,000 units of a
product that has a contribution margin of $24 per unit. Fixed factory overhead
costs to produce this new product would be exactly the same as for the currently
produced part. Devlin should
a. continue to make the part and earn an extra $48,000 in profit.
b. buy the part and produce the new product and earn an extra $4.80 per unit
contribution to profit.
c. continue to make the part and earn an extra $4.80 per unit contribution to
profit.
d. buy the part and produce the new product and earn an extra $24 per
unit contribution to profit.
L.O. 2 Moderate
L.O. 2 Easy
L.O. 2 Easy
L.O. 2 Easy
199
49. Which of the following would be a consideration in a make or buy decision?
a. excess capacity
b. variable factory overhead
c. rental income from unused facilities
d. all of the above
L.O. 2 Easy
50. If a company has excess capacity, the most it would pay for buying a product that
it currently makes would be the
a. total cost of producing the product.
b. market value of the product.
c. market value less usual markup on the product.
d. total variable cost of producing the product.
L.O. 2 Moderate
51. Hogan Corporation has a joint process which produces three products, M, L and
B. Each product may be sold at split off or processed further and then sold. Joint
processing costs for a year amount to $25,000. Other relevant data are as
follows:
Separable
Processing
Sales Value Costs after Sales Value
Product at Split-off Split-off at Completion
L.O. 3 Moderate
200
52. Hogan Corporation has a joint process that produces three products, M, L and B.
Each product may be sold at split off or processed further and then sold. Joint
processing costs for a year amount to $25,000. Other relevant data are as
follows:
Separable
Processing
Sales Value Costs after Sales Value
Product at Split-off Split-off at Completion
Product L
a. should be processed further to increase profits by $6,500.
b. should be sold at split-off since processing further would only reduce profits
by $6,500.
c. should be processed further to increase profits by $19,000.
d. can be processed further or sold at split-off. There is no difference in
profit.
L.O. 3 Moderate
53. Hogan Corporation has a joint process that produces two products, A and B. Each
product may be sold at split off or processed further and then sold. Joint
processing costs for a year amount to $25,000.
Product A can be sold at split off form $32,000. Alternately, product A can be
processed further and sold for $40,000. Additional processing costs are $5,000.
In deciding whether to sell product A at the split off point or to process further.
Which of the costs is NOT relevant?
a. joint processing cost, $25,000
b. sales value at split off, $32,000
c. sales value at completion, $40,000
d. all of the costs are relevant
L.O. 3 Moderate
201
54. Bermuda Corporation has a joint process which produces three products, X, Y
and Z. Each product may be sold at split-off or processed further and then sold.
Joint processing costs for a year amount to $100,000. Other relevant data are as
follows:
Separable
Processing
Sales Value Costs after Sales Value
Product at Split-off Split-off at Completion
L.O. 3 Moderate
55. Bermuda Corporation has a joint process which produces three products, X, Y
and Z. Each product may be sold at split-off or processed further and then sold.
Joint processing costs for a year amount to $100,000. Other relevant data are as
follows:
Separable
Processing
Sales Value Costs after Sales Value
Product at Split-off Split-off at Completion
Product Y
a. should be processed further to increase profits by $26,000.
b. should be sold at split-off since processing further would only reduce profits
by $26,000.
c. should be processed further to increase profits by $76,000.
d. can be processed further or sold at split-off. There is no difference in
profit.
L.O. 3 Moderate
202
56. Bermuda Corporation has a joint process which produces three products, X, Y
and Z. Each product may be sold at split-off or processed further and then sold.
Joint processing costs for a year amount to $100,000. Other relevant data are as
follows:
Separable
Processing
Sales Value Costs after Sales Value
Product at Split-off Split-off at Completion
L.O. 3 Moderate
57. Bermuda Corporation has a joint process which produces three products, X, Y
and Z. Each product may be sold at split-off or processed further and then sold.
Joint processing costs for a year amount to $100,000. Other relevant data are as
follows:
Separable
Processing
Sales Value Costs after Sales Value
Product at Split-off Split-off at Completion
L.O. 3 Moderate
203
58. Mango Manufacturing Company produces three products using a joint process
which provides for $25,000 in joint costs. The products, A, B and C can be sold
at split-off or processed further and then sold. The production level for each
product is 10,000 units. The following unit information is also available:
Separable
Processing
Sales Value Costs after Sales Value
Product at Split-off Split-off at Completion
A $12 $9 $21
B 10 4 17
C 15 6 19
L.O. 3 Moderate
59. Mango Manufacturing Company produces three products using a joint process
that provides for $25,000 in joint costs. The products, A, B and C can be sold at
split-off or processed further and then sold. The production level for each
product is 10,000 units. The following unit information is also available:
Separable
Processing
Sales Value Costs after Sales Value
Product at Split-off Split-off at Completion
A $12 $9 $21
B 10 4 17
C 15 6 19
Product B
a. should be processed further as this will increase profits by $70,000.
b. should be sold at split-off to maximize profits.
c. should be processed further to increase profits by $3 per unit.
d. can be processed further or sold at split-off, it makes no difference.
L.O. 3 Moderate
204
60. Mango Manufacturing Company produces three products using a joint process
which provides for $25,000 in joint costs. The products, A, B and C can be sold
at split-off or processed further and then sold. The production level for each
product is 10,000 units. The following unit information is also available
Separable
Processing
Sales Value Costs after Sales Value
Product at Split-off Split-off at Completion
A $12 $9 $21
B 10 4 17
C 15 6 19
L.O. 3 Moderate
61. Mango Manufacturing Company produces three products using a joint process
which provides for $25,000 in joint costs. The products, A, B and C can be sold
at split-off or processed further and then sold. The production level for each
product is 10,000 units. The following unit information is also available:
Separable
Processing
Sales Value Costs after Sales Value
Product at Split-off Split-off at Completion
A $12 $9 $21
B 10 4 17
C 15 6 19
L.O. 3 Moderate
205
62. Mango Manufacturing Company produces three products using a joint process
which provides for $25,000 in joint costs. The products, A, B and C can be sold
at split-off or processed further and then sold. The production level for each
product is 10,000 units. The following unit information is also available:
Separable
Processing
Sales Value Costs after Sales Value
Product at Split-off Split-off at Completion
A $12 $9 $21
B 10 4 17
C 15 6 19
If Mango makes the decisions that maximize profit, Mango’s net income will be
a. $47,000
b. $32,000
c. $30,000
d. $15,000
L.O. 3 Challenging
L.O. 3 Easy
L.O.3 Moderate
65. _______________ manufacturing costs incurred after the split-off are known as.
a. Joint costs
b. Product costs
c. Split-off costs
d. Separable costs
L.O. 3 Easy
206
66. _______________ is the juncture in manufacturing where the joint products
become individually identifiable.
a. Joint processing juncture
b. Split-off point
c. Common point
d. Significant juncture
L.O. 3 Easy
67. ______________ are costs of manufacturing two or more products that are NOT
separately identifiable as individual products until their split-off point.
a. Separable costs
b. Joint costs
c. Incremental costs
d. Sunk costs
L.O. 3 Easy
68. Which of the following is NOT likely to be relevant in a decision concerning the
disposal of obsolete inventory?
a. Inventory cost
b. Expected future revenues
c. Scrap value of inventory
d. Expected future costs
L.O. 4 Moderate
L.O. 4 Moderate
70. Depreciation is
a. The periodic cost of equipment spread over the future periods in which
the equipment is expected to be used
b. the decline in equipment value due to obsolescence.
c. the difference between the original cost and current market value.
d. all of the above.
L.O. 4 Easy
L.O. 4 Easy
207
72. Eudora Company is considering replacing a machine that is presently used in the
production of its product. The following data are available:
Replacement
Old Machine Machine
L.O. 4 Moderate
73. Eudora Company is considering replacing a machine that is presently used in the
production of its product. The following data are available:
Replacement
Old Machine Machine
L.O. 4 Challenging
208
74. Eudora Company is considering replacing a machine that is presently used in the
production of its product. The following data are available:
Replacement
Old Machine Machine
The total relevant costs to consider if the old machine is kept are
a. $60,000.
b. $35,000.
c. $47,000.
d. $72,000.
L.O. 4 Challenging
75. Eudora Company is considering replacing a machine that is presently used in the
production of its product. The following data are available:
Replacement
Old Machine Machine
The difference in cost between keeping the old machine and replacing the old
machine, ignoring income taxes, is
a. $37,000 in favor of keeping the old machine.
b. $12,000 in favor of keeping the old machine.
c. $37,000 in favor of replacing the old machine.
d. $12,000 in favor of replacing the old machine.
L.O. 4 Challenging
209
76. Karesh Company is considering replacing a machine that is presently used in the
production of its product. The following data are available:
Replacement
Old Machine Machine
L.O. 4 Moderate
77. Karesh Company is considering replacing a machine that is presently used in the
production of its product. The following data are available:
Replacement
Old Machine Machine
L.O. 4 Moderate
210
78. Karesh Company is considering replacing a machine that is presently used in the
production of its product. The following data are available:
Replacement
Old Machine Machine
Ignoring income taxes, the difference in cost between the old and new machine is
a. $98,000 in favor of the old machine
b. $98,000 in favor of the new machine.
c. $40,000 in favor of the new machine
d. $12,000 in favor of the new machine
L.O. 4 Moderate
L.O. 4 Moderate
L.O. 4 Moderate
81. Thomas Company produces and sells a product that has variable costs of $9 per
unit and fixed costs of $200,000 per year.
If production decreases from 50,000 to 40,000 units, what is the change in the
cost per unit?
a. Cost per unit will increase by $1.
b. Cost per unit will decrease by $1.
c. Cost per unit will increase to $13.
d. Cost per unit will decrease to $14.
L.O.5 Easy
211
82. Bond Company produces and sells a product that has variable costs of $7 per unit
and fixed costs of $200,000 per year.
What is the cost per unit if 20,000 units per year are produced and sold?
a. $7
b. $17
c. $10
e. $12
L.O.5 Easy
83. Bond Company produces and sells a product that has variable costs of $7 per unit
and fixed costs of $200,000 per year.
What is the cost per unit if 40,000 units per year are produced and sold?
a. $7
b. $17
c. $10
d. $12
L.O.5 Moderate
84. Bond Company produces and sells a product that has variable costs of $7 per unit
and fixed costs of $200,000 per year.
If production increases from 20,000 units to 25,000 units, what is the change in
unit cost?
a. unit cost will increase by $35,000.
b. unit cost will decrease by $8 per unit.
c. unit cost will decrease by $2 per unit.
d. unit cost will not change.
L.O.5 Challenging
85. Past costs that are unavoidable and unchangeable are known as
a. fixed overhead costs.
b. operating costs.
c. product production costs.
d. sunk costs.
L.O. 4 Easy
86. How does the choice of the absorption or contribution approach affect the
manufacturing cost per unit?
a. Manufacturing cost per unit is higher if the absorption approach is used.
b. Manufacturing cost per unit is higher if the contribution approach is used.
c. Manufacturing cost per unit is the same regardless of the approach.
d. Manufacturing cost per unit is independent of the approach.
L.O. Moderate
212
87. How does the choice of the absorption or contribution approach affect a firm’s
contribution margin?
a. Contribution margin is higher if the contribution approach is used.
b. Contribution margin is lower if the contribution approach is used.
C. Contribution margin is independent of the approach.
d. Contribution margin is the same regardless of the approach.
L.O.6 Moderate
88. The absorption approach to the computation of manufacturing cost differs from
the contribution approach in that the absorption approach
a. includes variable selling and administrative costs
b. includes fixed overhead
c. includes all fixed costs
d. includes all selling and administrative costs
L.O.6 Moderate
89. Which of the statements regarding the contribution approach and the absorption
approach is correct
a. The contribution income statement provides a gross margin.
b. The absorption income statement provides a contribution margin.
c. Both statements are true.
d. neither statement is true.
L.O.6 Easy
90. Ciao Company provided the following information regarding its one and only
product, skateboards.
What is the manufacturing cost per unit if the absorption approach is used?
a. $13.00
b. $13.50
c. $14.75
d. $15.50
L.O.7 Moderate
213
91. Ciao Company provided the following information regarding its one and only
product, skateboards.
What is the manufacturing cost per unit if the contribution approach is used?
a. $13.00
b. $13.50
c. $14.75
d. $15.50
L.O.7 Moderate
92. Ciao Company provided the following information regarding its one and only
product, skateboards.
What is the difference in manufacturing cost per unit if the absorption approach
is used in place of the contribution approach?
a. Cost per unit increases by $2
b. Cost per unit decreases by $2
c. Cost per unit increases by $0.75
d. Cost per unit decreases by $0.75
L.O.7 Moderate
214
93. Aloha Company provided the following information regarding its one and only
product, rollerblades.
L.O.7 Moderate
94. Aloha Company provided the following information regarding its one and only
product, rollerblades.
L.O.7 Moderate
215
95. Aloha Company provided the following information regarding its one and only
product, rollerblades.
L.O.7 Moderate
96. Aloha Company provided the following information regarding its one and only
product, rollerblades.
What is the manufacturing cost per unit if the contribution approach is used?
a. $28
b. $30
c. $36
d. $40
L.O.7 Moderate
216
97. Aloha Company provided the following information regarding its one and only
product, rollerblades.
L.O.7 Moderate
98. Aloha Company provided the following information regarding its one and only
product, rollerblades.
L.O.7 Moderate
217
99. Aloha Company provided the following information regarding its one and only
product, rollerblades.
What is the difference in total product cost between the absorption approach and
the contribution approach?
a. $100,000
b. $150,000
c. $210,000
d. $250,000
L.O.7 Moderate
100. Aloha Company provided the following information regarding its one and only
product, rollerblades.
What is the difference in manufacturing cost per unit between the absorption
approach and contribution approach?
a. cost per unit is $10 higher if absorption cost is used.
b. cost per unit is $10 higher if contribution cost is used.
c. cost per unit is $36 higher if absorption is used.
d. cost per unit is $36 higher if contribution is used.
L.O.7 Challenging
218
Short Answer:
105. An analysis where one alternative includes all costs of a second alternative, plus
some additional costs.
Incremental cost (L.O. 1, easy)
106. Two or more manufactured products that have relatively significant sales values
and are not separately identifiable as individual products until their split-off
point.
Joint products (L.O. 3, easy)
107. The juncture in manufacturing where the joint products become individually
identifiable.
Split-off point (L.O. 3, easy)
109. The costs of manufacturing joint products prior to the split-off point.
Joint costs (L.O. 3, easy)
112. A cost that has already been incurred and is irrelevant to the decision making
process.
Sunk cost (L.O. 4, easy)
114. A costing approach that considers all factory overhead as product cost.
Absorption approach (L.O. 7, easy)
219
115. A method of internal reporting that emphasizes the distinction between variable
and fixed costs.
Contribution approach (L.O. 7, easy)
Problems:
a. Compute the opportunity cost of accepting the contract on a usual night when
15 of the rooms would normally be occupied.
c. Using the usual room rate of $120, what percentage of rooms would have to
be rented to make Downtown indifferent about accepting the offer.
Answer:
a. (30 x $60) – (15 x $120) = 0
L.O.1 Moderate
220
117. Hubbard Company purchases 5,000 units of a part that it needs for production of
its product. Notification has just been received from the supplier that a price
increase will take effect shortly which will bring the price of each part to $15.
Hubbard is considering using some idle facilities to produce the part. The
production costs to produce the needed 5,000 parts are as follows:
The idle facilities could also be rented out at an annual rent of $9,000. All the
factory overhead costs are avoidable.
Required:
Answer:
Hubbard should continue to buy the part and should rent out the idle facilities.
This would result in an $9,000 benefit as follows:
Buy part:
Make part:
L.O.2 Moderate
221
118. Forrester Company manufactures a part for its production cycle. The costs per
unit for 20,000 units of this part are as follows:
The Company has been approached by a supplier who claims it can sell Forrester
20,000 units of the same part for $940,000.
Required:
a. Assuming there is no alternative use for the facilities how much money
would Forrester save by buying the part?
b. Assuming the facilities can be rented out for $30,000 per year, should
Forrester buy the part, and if so, how much money would be saved?
Answer:
a. $15 + $12 + $20 = $47 x 20,000 units = $940,000 variable costs to produce
vs. $940,000 to buy. Forrester would be indifferent between making or
buying the part.
b. $940,000 - $30,000 = $910,000 net cost to buy vs. $940,000 to make. Buy
the part for a total savings of $30,000.
L.O.2 Moderate
222
119. Anderson Company produces a part that is used in the manufacture of one of its
products. The costs associated with the production of 10,000 units of this part
are as follows:
Required:
a. Assuming there is no alternative use for the facilities, should Anderson take
advantage of an offer from a supplier who is willing to sell Anderson 10,000
units of the same part for $12.80 per unit?
b. Would your answer to Part A change if the facilities could be rented for
$10,000 a year?
Answer:
L.O. 2 Moderate
223
120. Warner Company has a joint process which produces three products, AA, BB and
CC. Each product may be sold at split-off or processed further and then sold.
Joint processing costs for a year amount to $30,000. Other relevant data are as
follows:
Separable
Processing
Sales Value Costs after Sales Value
Product at Split-off Split-off at Completion
Required:
Answer:
a. Product AA:
Product BB:
Product CC:
L.O.2 Moderate
224
121. Jackson Corporation uses a joint process to produce products A, B and C. Each
product may be sold at split-off or processed further and then sold. Joint
processing costs for the year amounted to $100,000. Other information is
presented below:
Separable
Processing
Sales Value Costs after Sales Value
Product at Split-off Split-off at Completion
b. If all three products were processed further, what would be the effect on
profits?
Answer:
b. Product A:
Product B:
Product C:
L.O.3 Moderate
225
122. Rodman Company is considering the replacement of a machine that is presently
used to produce its single product. The following data are available:
Replacement
Old Equipment Equipment
Required:
Ignoring income taxes, prepare a cost comparison of all relevant items for the
next seven years together. Indicate the best alternative for Rodman Company.
Answer:
The cumulative effect over the seven years is $11,000 in favor of keeping the old
machine.
L.O.4 Challenging
226
123. The Hicks Corporation is contemplating the replacement of some old equipment.
The pertinent information is as follows:
Replacement
Old Equipment Equipment
Required:
Prepare a cost comparison of all relevant items for the next six years together.
Ignore income taxes. Comment on the best alternative for Hicks Corporation.
Answer:
Keep Replace Difference
The cumulative effect over the six years of $17,000 is in favor of replacing the
old equipment.
L.O.4 Challenging
227
124. Melvin Company gathered the following information regarding its one and
only product:
Required:
a. Compute the unit manufacturing cost of the product under the absorption
approach.
b. Compute the unit manufacturing cost of the product under the contribution
approach.
c. Compute the effect on net income of accepting a special order for 500 units
at $8 per unit assuming excess capacity.
Answer:
L.O. 2 Moderate
228
125 Pierce Company has been producing and selling 100,000 units per year. They
have excess capacity. The following budget was prepared for the next year
Required:
a. Prepare an income statement using the contribution approach.
b. Prepare an income statement using the absorption approach.
Answer:
a. Sales $1,250,000
Less: Variable expenses:
Direct materials 500,000
Direct labor 300,000
Variable overhead 100,000
Total variable manufacturing 900,000
Variable selling and admin. 35,000
Total Variable expenses 925,000
Contribution margin $325,000
Fixed costs:
Manufacturing 80,000
Selling and admin. 35,000 115,000
Operating income $210,000
b. Sales $1,250,000
Less: Manufacturing cost of goods sold
Direct materials 500,000
Direct labor 300,000
Variable overhead 100,000
Fixed overhead 80,000 980,000
Gross margin or Gross profit 270,000
Variable selling and admin. 25,000
Fixed selling and admin. 35,000 60,000
$210,000
L.O. 7 Moderate
229
Critical Thinking:
127. "Variable costs are irrelevant whenever they do not differ among the alternatives
at hand." Do you agree? Explain.
Answer:
L.O. 5 Easy
128. There are two major reasons why unit costs should be analyzed with care in
decision making. What are they?
Answer:
Two reasons why unit costs should be analyzed with care in decision making are:
1. Most unit costs are stable only over a certain range of output, and care must
be taken to see that allowances are made when alternatives are considered
outside that range.
2. Some unit costs are an allocation of fixed costs; thus when a higher volume
of output is being considered, unit cost will decrease proportionately, and
vice versa.
SUPPORTING CALCULATIONS
True/False:
7. Separable costs are incurred after a joint process and can be exclusively identified with
individual products.
9. The relevant information for a sell or process further decision includes the costs that
differ after the split-off point.
13. When making a decision to replace some old equipment with new, the depreciation taken
on both the old or new equipment is relevant information.
15. Future costs are irrelevant if they are the same under all feasible alternatives.
17. Conflicts in the decision making process can arise when superiors evaluate a
manager's performance using a model inconsistent with the decision model.
19. The contribution approach emphasizes the distinction between fixed and variable costs.
230
Multiple Choice:
31. $3 + $5 + $4 = $12
43. $408,000
231
56. X: ($160,000 - $128,000) - $16,000 = $16,000
Y: ($76,000 - $50,000) - $26,000 = $0
Z: ($40,000 - $25,600) - 20,000 = $(5,600)
90. ($350,000 + $170,000 + $80,000 + $20,000) / 40,000 units = $15.50 per unit
93. ($80,000 / 10,000) + (200,000 / 10,000) + (100,000 / 10,000) + (20,000 / 10,000) = $40
232