relevant costs.doc

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Chapter 013, Relevant Costs for Decision Making Key

True / False Questions

1. The book value of ol e!uip"ent is not a relevant cost in a ecision.TRUE

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#. $ne of the angers of allocating co""on fi%e costs to a pro uct line is that suchallocations can "ake the line appear less profitable than it really is.TRUE

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3. & ifferential cost is a variable cost.FALSE


'. &ll future costs are relevant in ecision "aking.FALSE


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). *ariable costs are al+ays relevant costs.FALSE


. & sunk cost is a cost that has alrea y been incurre but that can be avoi e at least in partepen ing on the action a "anager takes.

FALSE


-. & cost that +ill be incurre regar less of +hich course of action a "anager takes is relevantto the "anager s ecision.FALSE


/. $pportunity costs are recor e in the accounts of an organi ation.FALSE

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. 2n a ecision to rop a seg"ent, the opportunity cost of the space occupie by the seg"ent+oul be the profit that coul be erive fro" the best alternative use of the space.TRUE

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10. $nly the variable costs i entifie +ith a pro uct are relevant in a ecision concerning+hether to eli"inate the pro uct.FALSE

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11. Managers shoul pay little attention to bottleneck operations because they have li"itecapacity for pro ucing output.FALSE

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1#. Defective units shoul be etecte an scrappe or re+orke after the bottleneckoperation rather than before it.FALSE

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13. &ll other things e!ual, it is profitable to continue processing a oint pro uct after the split(off point so long as the incre"ental revenue fro" further processing e%cee s the incre"entalcosts of further processing.TRUE

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1'. T+o or "ore ifferent pro ucts that are "anufacture in the sa"e pro uction perio arekno+n as oint pro ucts.FALSE

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1). & "erchan ising co"pany that buys all of its inventory fro" outsi e suppliers is ane%a"ple of a co"pany that is vertically integrate .FALSE

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Multiple Choice Questions

1 . 4or +hich of the follo+ing ecisions are opportunity costs relevant5

A. Choice &6. Choice 6C. Choice CD. Choice D


1-. 7hich of the follo+ing costs are al+ays irrelevant in ecision "aking5&. avoi able costsB. sunk costsC. opportunity costsD. fi%e costs


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1/. 4or +hich of the follo+ing ecisions are sunk costs relevant5&. the ecision to keep an ol "achine or buy a ne+ one.6. the ecision to sell a pro uct at the split(off point or after further processing.C. the ecision to accept or re ect a special or er offer.

D. all of these.E. none of these.


1 . The opportunity cost of "aking a co"ponent part in a factory +ith e%cess capacity for

+hich there is no alternative use is8&. the variable "anufacturing cost of the co"ponent.6. the total "anufacturing cost of the co"ponent.C. the fi%e "anufacturing cost of the co"ponent.D. ero.

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#0. &llocate co""on fi%e costs8A. can "ake a pro uct line appear to be unprofitable.6. are al+ays incre"ental costs.C. are al+ays relevant in ecisions involving ropping a pro uct line.D. responses &, 6, an C are all correct.

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#1. 2n eci ing +hether to "anufacture a part or buy it fro" an outsi e supplier, +hich of thefollo+ing costs are irrelevant5

&. Choice &6. Choice 6C. Choice CD. Choice D

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##. Consi er a ecision facing a co"pany of either accepting or re ecting a special offer forone of its pro ucts. & cost that is not relevant is8&. irect "aterials.

6. variable overhea .C. fi%e overhea that +ill be avoi e if the special offer is accepte .D. co""on fi%e overhea that +ill continue if the special offer is not accepte .

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#3. 7hich pro uct +oul be selecte in a ecision that involves the utili ation of aconstraine resource5&. the pro uct +ith the lo+est total cost per unit.6. the pro uct +ith the lo+est variable cost per unit.

C. the pro uct that uses the least a"ount of constraine resource per unit.D. the pro uct +ith the highest contribution "argin per unit.E. the pro uct +ith the highest contribution "argin per unit of the constraine resource.

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#'. 2n a plant operating at capacity8&. every "achine an person in the plant is +orking at the "a%i"u" possible rate.B. only so"e specific "achines or processes are operating at the "a%i"u" rate possible.C. profits are "a%i"i e .D. "anagers shoul pro uce those pro ucts +ith the highest contribution "argin in or er to

eal +ith the constraine resource.

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#). 9nite 2n ustries "anufactures a nu"ber of pro ucts at its highly auto"ate factory. The pro ucts are very popular, +ith e"an far e%cee ing the factory s capacity. To "a%i"i e profit, "anage"ent shoul rank pro ucts base on their8&. gross "argin6. contribution "arginC. selling priceD. contribution "argin per unit of the constraine resource

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# . :heela Dairy Corporation buys unprocesse co+s "ilk fro" local far"ers. &t the airy,this unprocesse "ilk is broken o+n into crea" an lo+(fat "ilk. The crea" can be sol atthis point or can be further processe into butter. 7hich of the follo+ing +oul be relevant inthe ecision to further process the crea" into butter5

&. the a"ount pai to the far"ers to purchase the unprocesse "ilk.6. the cost of breaking o+n the unprocesse "ilk into crea" an lo+(fat "ilk.C. the portion of corporate fi%e e%penses that are currently being allocate to crea".D. none of these.

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#-. Consi er the follo+ing state"ents82. & vertically integrate co"pany is "ore epen ent on its suppliers than a co"pany that isnot vertically integrate .22. Many co"panies feel they can control !uality better by "aking their o+n parts.222. & vertically integrate co"pany reali es profits fro" the parts it is ;"aking; instea of;buying; as +ell as profits fro" its regular operations.7hich of the above state"ents represent a vantages to a co"pany that is verticallyintegrate 5&. $nly 26. $nly 222C. $nly 2 an 22D. $nly 22 an 222

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#/. <6 =u"ber Corporation is o+nsi ing operations an has to eci e +hich of its largesa+s shoul be sol . <6 currently has four sa+s but only nee s to keep three. &ll four sa+shave a re"aining useful life of 3 years an +ill all have a salvage value of ero at the en ofthose 3 years. &lso, all four sa+s have e!ual annual operating costs an output efficiency.

2nfor"ation relate to the four sa+s is provi e belo+8

2n or er to "a%i"i e profits for the ne%t three years, +hich "achine +oul be "ost beneficialfor <6 to sell5&. 16. #C. 3D. '

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# . Degner 2nc. has so"e "aterial that originally cost >1 ,)00. The "aterial has a scrap valueof >13,300 as is, but if re+orke at a cost of >#,100, it coul be sol for >1',000. 7hat +oul

be the incre"ental effect on the co"pany s overall profit of re+orking an selling the "aterialrather than selling it as is as scrap5

&. (>#0, 006. >11, 00C. (>-, 00D. (>1,'00

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30. Cora o Corporation has in stock --,000 kilogra"s of "aterial ? that it bought five yearsago for >-.1) per kilogra". This ra+ "aterial +as purchase to use in a pro uct line that has

been iscontinue . Material ? can be sol as is for scrap for >'.)0 per kilogra". &nalternative +oul be to use "aterial ? in one of the co"pany s current pro ucts, M01@, +hich

currently re!uires # kilogra"s of a ra+ "aterial that is available for >-.1) per kilogra".Material ? can be "o ifie at a cost of >0. ' per kilogra" so that it can be use as asubstitute for this "aterial in the pro uction of pro uct M01@. Ao+ever, after "o ification, 'kilogra"s of "aterial ? is re!uire for every unit of pro uct M01@ that is pro uce . Cora oCorporation has no+ receive a re!uest fro" a co"pany that coul use "aterial ? in its

pro uction process. &ssu"ing that Cora o Corporation coul use all of its stock of "aterial ?to "ake pro uct M01@ or the co"pany coul sell all of its stock of the "aterial at the currentscrap price of >'.)0 per kilogra", +hat is the "ini"u" acceptable selling price of "aterial ?to the co"pany that coul use "aterial ? in its o+n pro uction process5&. >1./6. >#. '

C. >'.)#D. >'.)0

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31. Mcneilly 2nc. is consi ering using stocks of an ol ra+ "aterial in a special pro ect. Thespecial pro ect +oul re!uire all ##0 kilogra"s of the ra+ "aterial that are in stock an thatoriginally cost the co"pany >1,/0' in total. 2f the co"pany +ere to buy ne+ supplies of thisra+ "aterial on the open "arket, it +oul cost >/.)) per kilogra". Ao+ever, the co"pany

has no other use for this ra+ "aterial an +oul sell it at the iscounte price of >-.-) perkilogra" if it +ere not use in the special pro ect. The sale of the ra+ "aterial +oul involveelivery to the purchaser at a total cost of > -.00 for all ##0 kilogra"s. 7hat is the relevant

cost of the ##0 kilogra"s of the ra+ "aterial +hen eci ing +hether to procee +ith thespecial pro ect5&. >1,-0)6. >1,//1C. >1,/0'D. >1, 0/


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3#. Kne ler Corporation is preparing a bi for a special or er that +oul re!uire -#0 liters of"aterial C01D. The co"pany alrea y has #00 liters of this ra+ "aterial in stock thatoriginally cost > . 0 per liter. Material C01D is use in the co"pany s "ain pro uct an isreplenishe on a perio ic basis. The resale value of the e%isting stock of the "aterial is > . 0

per liter. ?e+ stocks of the "aterial can be rea ily purchase for >10.10 per liter. 7hat is therelevant cost of the -#0 liters of the ra+ "aterial +hen eci ing ho+ "uch to bi on thespecial or er5&. >-,#3#B. >-,#-#C. > , 1#D. > , -#

Relevant cost of the ra+ "aterial B -#0 liters % >10.10 B >-,#-#


33. =ounsberry 2nc. regularly uses "aterial $)) an currently has in stock 3 0 liters of the"aterial for +hich it pai >#,'/' several +eeks ago. 2f this +ere to be sol as is on the open"arket as surplus "aterial, it +oul fetch > .3) per liter. ?e+ stocks of the "aterial can be

purchase on the open "arket for > . 0 per liter, but it "ust be purchase in lots of 1,000liters. @ou have been aske to eter"ine the relevant cost of /00 liters of the "aterial to beuse in a ob for a custo"er. The relevant cost of the /00 liters of "aterial $)) is8&. >),0/06. >),3##C. >),)#0D. > , 00

Relevant cost of the ra+ "aterial B /00 liters % > . 0 B >),)#0


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3). ?o+ak Corporation is a specialty co"ponent "anufacturer +ith i le capacity.Manage"ent +oul like to use its e%tra capacity to generate a itional profits. & potentialcusto"er has offere to buy 1, 00 units of co"ponent 4A6. Each unit of 4A6 re!uires /units of "aterial ? ) an 1 unit of "aterial K-/. Data concerning these t+o "aterials follo+8

Material ? ) is in use in "any of the co"pany s pro ucts an is routinely replenishe .Material K-/ is no longer use by the co"pany in any of its nor"al pro ucts an e%istingstocks +oul not be replenishe once they are use up.

7hat +oul be the relevant cost of the "aterials, in total, for purposes of eter"ining a"ini"u" acceptable price for the or er for pro uct 4A65&. > ), )/6. > 1,#-C. > #,13)D. > ',1 0


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3 . & stu y has been con ucte to eter"ine if one of the epart"ents in arry Co"panyshoul be iscontinue . The contribution "argin in the epart"ent is >)0,000 per year. 4i%ee%penses charge to the epart"ent are > ),000 per year. 2t is esti"ate that >'0,000 of thesefi%e e%penses coul be eli"inate if the epart"ent is iscontinue . These ata in icate that

if the epart"ent is iscontinue , the co"pany s overall net operating inco"e +oul 8&. ecrease by >#),000 per year 6. increase by >#),000 per year C. ecrease by >10,000 per year D. increase by >10,000 per year

The co"pany s overall net operating inco"e +oul ecrease by the a"ount of the seg"ent"argin of the epart"ent +ere to be iscontinue .

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3-. *anikoro Corporation currently has t+o ivisions +hich ha the follo+ing operatingresults for last year8

:ince the Rubber Division sustaine a loss, the presi ent of *anikoro is consi ering theeli"ination of this ivision. &ll of the fi%e costs for the ivision coul be eli"inate if the

ivision +as roppe . 2f the Rubber Division +as roppe at the beginning of last year, ho+"uch higher or lo+er +oul *anikoro s total net operating inco"e have been for the year5&. >10,000 higher B. >'0,000 lo+er C. >)0,000 higher D. >100,000 lo+er

The seg"ent "argin of the Rubber Division represents the a"ount by +hich the co"pany soverall net inco"e +oul rop if the Rubber Division +ere to be roppe .

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3/. The "anage"ent of &ustin Corporation is consi ering ropping pro uct R -C. Data fro"the co"pany s accounting syste" appear belo+8

2n the co"pany s accounting syste" all fi%e e%penses of the co"pany are fully allocate to pro ucts. 4urther investigation has reveale that >3',000 of the fi%e "anufacturing e%pensesan >#0,000 of the fi%e selling an a "inistrative e%penses are avoi able if pro uct R -C is

iscontinue . 7hat +oul be the effect on the co"pany s overall net operating inco"e if pro uct R -C +ere roppe 5&. $verall net operating inco"e +oul increase by >#0,000.6. $verall net operating inco"e +oul increase by >10,000.C. $verall net operating inco"e +oul ecrease by >#0,000.D. $verall net operating inco"e +oul ecrease by >10,000.

The co"pany s net operating inco"e +oul ecrease by the seg"ent "argin, >#0,000, if

pro uct R -C +ere roppe .


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3 . ro uct =#/? has been consi ere a rag on profits at 6eets Corporation for so"e ti"ean "anage"ent is consi ering iscontinuing the pro uct altogether. Data fro" theco"pany s accounting syste" appear belo+8

2n the co"pany s accounting syste" all fi%e e%penses of the co"pany are fully allocate to pro ucts. 4urther investigation has reveale that >'1,000 of the fi%e "anufacturing e%pensesan >#),000 of the fi%e selling an a "inistrative e%penses are avoi able if pro uct =#/? is

iscontinue . 7hat +oul be the effect on the co"pany s overall net operating inco"e if pro uct =#/? +ere roppe 5A. $verall net operating inco"e +oul ecrease by >-3,000.6. $verall net operating inco"e +oul increase by >10,000.C. $verall net operating inco"e +oul ecrease by >10,000.D. $verall net operating inco"e +oul increase by >-3,000.


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'0. reen Co"pany pro uces 1,000 parts per year, +hich are use in the asse"bly of one ofits pro ucts. The unit pro uct cost of these parts is8

The part can be purchase fro" an outsi e supplier at >#0 per unit. 2f the part is purchasefro" the outsi e supplier, t+o thir s of the fi%e "anufacturing costs can be eli"inate . Theannual i"pact on the co"pany s net operating inco"e as a result of buying the part fro" theoutsi e supplier +oul be8&. >1,000 increase6. >1,000 ecreaseC. >),000 increaseD. >#,000 ecrease

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'1. & year ago, Crunchy Cola Corporation bought a sta"ping "achine to "ake the cans forits cola. The cost of the "achine +as > 0,000. The "achine has a useful life of ) years an asalvage value of ero at the en of those five years. &nnual epreciation on the "achine is>1#,000. $ne year of epreciation has been recor e . The variable "anufacturing cost of

pro ucing the cans is >0.0) per can. The only fi%e "anufacturing cost is the annualepreciation of >1#,000 on the sta"ping "achine. Crunchy nee s #00,000 cans annually.Dag"ar :ta"ping Co"pany recently gave Crunchy an offer to supply all of its can nee s forthe ne%t four years at >0.0- per can. 2f Crunchy buys fro" Dag"ar, the sta"ping "achine+oul not be nee e an +oul be sol for >3),000. 2f Crunchy buys fro" Dag"ar, +hat +ill

be the total ollar increase or ecrease in inco"e for the ne%t four years5&. >1 ,000 ecreaseB. >1 ,000 increaseC. ># ,000 ecreaseD. >3#,000 increase

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'#. Curly 2nc. is consi ering +hether to continue to "ake a co"ponent or to buy it fro" anoutsi e supplier. The co"pany uses 1 ,000 of the co"ponents each year. The unit pro uctcost of the co"ponent accor ing to the co"pany s cost accounting syste" is given as follo+s8

&ssu"e that irect labor is a variable cost. $f the fi%e "anufacturing overhea , 30F isavoi able if the co"ponent +ere bought fro" the outsi e supplier. 2n a ition, "aking theco"ponent uses 1 "inutes on the "achine that is the co"pany s current constraint. 2f theco"ponent +ere bought, this "achine ti"e +oul be free up for use on another pro uct thatre!uires # "inutes on the constraining "achine an that has a contribution "argin of >/.10

per unit.7hen eci ing +hether to "ake or buy the co"ponent, +hat cost of "aking the co"ponentshoul be co"pare to the price of buying the co"ponent5&. >#0. 06. >1-.)#C. >#'. )D. >#1.)-

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'3. art <// is use in one of Guinney Corporation s pro ucts. The co"pany "akes 3,000units of this part each year. The co"pany s &ccounting Depart"ent reports the follo+ing costsof pro ucing the part at this level of activity8

&n outsi e supplier has offere to pro uce this part an sell it to the co"pany for >3#.10each. 2f this offer is accepte , the supervisor s salary an all of the variable costs, inclu ing

irect labor, can be avoi e . The special e!uip"ent use to "ake the part +as purchase"any years ago an has no salvage value or other use. The allocate general overhearepresents fi%e costs of the entire co"pany. 2f the outsi e supplier s offer +ere accepte , only>3,000 of these allocate general overhea costs +oul be avoi e .2f "anage"ent eci es to buy part <// fro" the outsi e supplier rather than to continue"aking the part, +hat +oul be the annual i"pact on the co"pany s overall net operatinginco"e5&. ?et operating inco"e +oul ecline by >##,#00 per year.6. ?et operating inco"e +oul ecline by >1 ,#00 per year.C. ?et operating inco"e +oul ecline by >),'00 per year.D. ?et operating inco"e +oul ecline by >1 ,#00 per year.

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''. Crick Corporation "akes 11,000 units of part 7#/ each year. This part is use in one ofthe co"pany s pro ucts. The co"pany s &ccounting Depart"ent reports the follo+ing costs of

pro ucing the part at this level of activity8

&n outsi e supplier has offere to "ake an sell the part to the co"pany for >#).)0 each. 2fthis offer is accepte , the supervisor s salary an all of the variable costs, inclu ing irectlabor, can be avoi e . The special e!uip"ent use to "ake the part +as purchase "any yearsago an has no salvage value or other use. The allocate general overhea represents fi%ecosts of the entire co"pany. 2f the outsi e supplier s offer +ere accepte , only >1/,000 ofthese allocate general overhea costs +oul be avoi e . 2n a ition, the space use to

pro uce part 7#/ +oul be use to "ake "ore of one of the co"pany s other pro ucts,generating an a itional seg"ent "argin of >1#,000 per year for that pro uct.7hat +oul be the i"pact on the co"pany s overall net operating inco"e of buying part 7#/fro" the outsi e supplier5

&. ?et operating inco"e +oul ecline by > ),000 per year.B. ?et operating inco"e +oul increase by >),/00 per year.C. ?et operating inco"e +oul ecline by >/ ,000 per year.D. ?et operating inco"e +oul increase by >1#,000 per year.

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' . art ?1 is use by Malouf Corporation to "ake one of its pro ucts. & total of -,000 unitsof this part are pro uce an use every year. The co"pany s &ccounting Depart"ent reportsthe follo+ing costs of pro ucing the part at this level of activity8

&n outsi e supplier has offere to "ake the part an sell it to the co"pany for >#'.)0 each. 2fthis offer is accepte , the supervisor s salary an all of the variable costs, inclu ing the irectlabor, can be avoi e . The special e!uip"ent use to "ake the part +as purchase "any yearsago an has no salvage value or other use. The allocate general overhea represents fi%ecosts of the entire co"pany, none of +hich +oul be avoi e if the part +ere purchaseinstea of pro uce internally. 2n a ition, the space use to "ake part ?1 coul be use to"ake "ore of one of the co"pany s other pro ucts, generating an a itional seg"ent "arginof >#),000 per year for that pro uct. 7hat +oul be the i"pact on the co"pany s overall netoperating inco"e of buying part ?1 fro" the outsi e supplier5A. ?et operating inco"e +oul ecline by >#1, 00 per year.6. ?et operating inco"e +oul ecline by > 0,-00 per year.C. ?et operating inco"e +oul ecline by >10,-00 per year.D. ?et operating inco"e +oul increase by >#),000 per year.

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'-. :cales Corporation has receive a re!uest for a special or er of ,000 units of pro uct @')for >13.-0 each. ro uct @') s unit pro uct cost is >11.)0, eter"ine as follo+s8

Direct labor is a variable cost. The special or er +oul have no effect on the co"pany s total

fi%e "anufacturing overhea costs. The custo"er +oul like "o ifications "a e to pro uct@') that +oul increase the variable costs by >/.10 per unit an that +oul re!uire aninvest"ent of >#0,000 in special "ol s that +oul have no salvage value.This special or er +oul have no effect on the co"pany s other sales. The co"pany has a"plespare capacity for pro ucing the special or er. 2f the special or er is accepte , the co"pany soverall net operating inco"e +oul increase H ecreaseI by8A. H># , 00I6. >13,#00C. H>)),'00ID. H>#1,300I

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'/. & custo"er has re!ueste that Daleske Corporation fill a special or er for #,000 units of pro uct D/' for >#0.30 a unit. 7hile the pro uct +oul be "o ifie slightly for the specialor er, pro uct D/' s nor"al unit pro uct cost is >1/.)08

Direct labor is a variable cost. The special or er +oul have no effect on the co"pany s totalfi%e "anufacturing overhea costs. The custo"er +oul like "o ifications "a e to pro uctD/' that +oul increase the variable costs by >#.)0 per unit an that +oul re!uire aninvest"ent of >-,000 in special "ol s that +oul have no salvage value.This special or er +oul have no effect on the co"pany s other sales. The co"pany has a"plespare capacity for pro ucing the special or er. 2f the special or er is accepte , the co"pany soverall net operating inco"e +oul increase H ecreaseI by8&. H>1', 00IB. H>),/00IC. >3, 00D. H>/,'00I

AACSB: Anal$tic

AICPA BB: Critical Thinking AICPA FN: Measurement Learning O !ective: / Level: #as$

13(30




' . :upre"e Celery Corporation "anufactures four celery base pro ucts. 4loo s an fire onthe +est coast are going to cause a shortage of celery for :upre"e ne%t "onth. 2nfor"ationrelate to the four celery pro ucts that it pro uces are sho+n belo+. The nu"bers relate to thecost per case an the a"ount of celery per case of pro uct8

To "a%i"i e profit ne%t "onth, in +hat or er +oul it be best for :upre"e to sche ule pro uction Hfirst to lastI5&. <elly, Cracker :prea , :oup, :nack 6ars6. <elly, :nack 6ars, Cracker :prea , :oupC. Cracker :prea , :nack 6ars, <elly, :oupD. :nack 6ars, <elly, :oup, Cracker :prea

AACSB: Anal$tic AICPA BB: Critical Thinking AICPA FN: Measurement Learning O !ective: ' Level: (ar%

13(31




)0. Aobbins Corporation "akes three pro ucts that use co"poun 7, the current constraineresource. Data concerning those pro ucts appear belo+8

Rank the pro ucts in or er of their current profitability fro" "ost profitable to least profitable. 2n other +or s, rank the pro ucts in the or er in +hich they shoul be e"phasi e .&. 9T,RC,DG6. DG,RC,9TC. RC,DG,9TD. 9T,DG,RC

AACSB: Anal$tic AICPA BB: Critical Thinking AICPA FN: Measurement Learning O !ective: ' Level: #as$

13(3#




)1. &n auto"ate turning "achine is the current constraint at reenleaf Corporation. Three pro ucts use this constraine resource. Data concerning those pro ucts appear belo+8

Rank the pro ucts in or er of their current profitability fro" "ost profitable to least profitable. 2n other +or s, rank the pro ucts in the or er in +hich they shoul be e"phasi e .A. DK,6 ,G96. DK,G9,6C. G9,6 ,DK D. 6 ,G9,DK


13(33




)#. The constraint at 6ul"an Corporation is ti"e on a particular "achine. The co"pany"akes three pro ucts that use this "achine. Data concerning those pro ucts appear belo+8

&ssu"e that sufficient ti"e is available on the constraine "achine to satisfy e"an for all but the least profitable pro uct. 9p to ho+ "uch shoul the co"pany be +illing to pay toac!uire "ore of the constraine resource5&. >#/.31 per unitB. >1#.#0 per "inuteC. >1'. 0 per "inuteD. > .)' per unit

The co"pany shoul be +illing to pay up to >1#.#0 per "inute to obtain "ore of theconstraine resource since this is the value to the co"pany of using this constraine resourceto "ake "ore of pro uct @$. 6y assu"ption, the other pro ucts +ill alrea y have been

pro uce up to e"an .

AACSB: Anal$tic AICPA BB: Critical Thinking AICPA FN: Measurement Learning O !ective: ' Level: Me%ium

13(3'




)3. ro ucts &, 6, an C are pro uce fro" a single ra+ "aterial input. The ra+ "aterialcosts > 0,000, fro" +hich ),000 units of &, 10,000 units of 6, an 1),000 units of C can be

pro uce each perio . ro uct & can be sol at the split(off point for ># per unit, or it can be processe further at a cost of >1#,)00 an then sol for >) per unit. ro uct & shoul be8

&. sol at the split(off point, since further processing +oul result in a loss of >0.)0 per unit.B. processe further, since this +ill increase profits by >#,)00 each perio .C. sol at the split(off point, since further processing +ill result in a loss of >#,)00 each

perio .D. processe further, since this +ill increase profits by >1#,)00 each perio .

AACSB: Anal$tic AICPA BB: Critical Thinking AICPA FN: Measurement Learning O !ective: ) Level: Me%ium

)'. Cybil 6aunt ust inherite a 1 )/ Chevy 2"pala fro" her late &unt <oop. &unt <oop purchase the car #) years ago for >),000. Cybil is either going to sell the car for >#,000 orhave it restore an sell it for >1 ,000. The restoration +ill cost >10,000. Cybil +oul be

better off by8A. >',000 to have the vehicle restore6. > ,000 to have the vehicle restoreC. > ,000 to have the vehicle restoreD. >11,000 to have the vehicle restore


13(3)




)). T+o pro ucts, TD an 26, e"erge fro" a oint process. ro uct TD has been allocate>31,#00 of the total oint costs of >'/,000. & total of ),000 units of pro uct TD are pro ucefro" the oint process. ro uct TD can be sol at the split(off point for >#' per unit, or it can

be processe further for an a itional total cost of >1),000 an then sol for ># per unit. 2f

pro uct TD is processe further an sol , +hat +oul be the effect on the overall profit of theco"pany co"pare +ith sale in its unprocesse for" irectly after the split(off point5A. >),000 less profit6. >11),000 "ore profitC. >3 ,#00 less profitD. ># ,#00 "ore profit

AACSB: Anal$tic AICPA BB: Critical Thinking AICPA FN: Measurement Learning O !ective: ) Level: Me%iumS+urce: CIMA, a%a-te%

13(3




)-. u ger Corporation processes sugar cane in batches. The co"pany purchases a batch ofsugar cane for >)3 fro" far"ers an then crushes the cane in the co"pany s plant at the costof >10. T+o inter"e iate pro ucts, cane fiber an cane uice, e"erge fro" the crushing

process. The cane fiber can be sol as is for ># or processe further for >1) to "ake the en

pro uct in ustrial fiber that is sol for > 0. The cane uice can be sol as is for >3/ or processe further for >## to "ake the en pro uct "olasses that is sol for >)#. 7hich of theinter"e iate pro ucts shoul be processe further5A. Cane fiber shoul be processe into in ustrial fiberJ Cane uice shoul ?$T be processeinto "olasses6. Cane fiber shoul ?$T be processe into in ustrial fiberJ Cane uice shoul be processeinto "olassesC. Cane fiber shoul ?$T be processe into in ustrial fiberJ Cane uice shoul ?$T be

processe into "olassesD. Cane fiber shoul be processe into in ustrial fiberJ Cane uice shoul be processe into"olasses

AACSB: Anal$tic AICPA BB: Critical Thinking AICPA FN: Measurement Learning O !ective: ) Level: #as$

13(3/




)/. 6a al Corporation processes sugar beets in batches. & batch of sugar beets costs >)) to buy fro" far"ers an >1/ to crush in the co"pany s plant. T+o inter"e iate pro ucts, beetfiber an beet uice, e"erge fro" the crushing process. The beet fiber can be sol as is for >#0or processe further for >1 to "ake the en pro uct in ustrial fiber that is sol for >)3. The

beet uice can be sol as is for >33 or processe further for >#3 to "ake the en pro uctrefine sugar that is sol for > 0. Ao+ "uch profit HlossI oes the co"pany "ake by processing one batch of sugar beets into the en pro ucts in ustrial fiber an refine sugar5&. H>#0I6. >#1C. >1D. H>11#I

AACSB: Anal$tic AICPA BB: Critical Thinking AICPA FN: Measurement

Learning O !ective: ) Level: #as$

13(3




0. 2saac Corporation processes sugar beets in batches that it purchases fro" far"ers for >'-a batch. & batch of sugar beets costs >1' to crush in the co"pany s plant. T+o inter"e iate

pro ucts, beet fiber an beet uice, e"erge fro" the crushing process. The beet fiber can besol as is for >## or processe further for >13 to "ake the en pro uct in ustrial fiber that is

sol for >'#. The beet uice can be sol as is for >') or processe further for >#- to "ake theen pro uct refine sugar that is sol for > -. 7hich of the inter"e iate pro ucts shoul be processe further5&. beet fiber shoul ?$T be processe into in ustrial fiberJ beet uice shoul ?$T be

processe into refine sugar 6. beet fiber shoul ?$T be processe into in ustrial fiberJ beet uice shoul be processeinto refine sugar C. beet fiber shoul be processe into in ustrial fiberJ beet uice shoul ?$T be processeinto refine sugar D. beet fiber shoul be processe into in ustrial fiberJ beet uice shoul be processe intorefine sugar


13('1




The Tolar Co"pany has '00 obsolete esk calculators that are carrie in inventory at a totalcost of ># ,/00. 2f these calculators are upgra e at a total cost of >10,000, they can be solfor a total of >30,000. &s an alternative, the calculators can be sol in their present con itionfor >11,#00.

1. The sunk cost in this situation is8&. >10,000B. ># ,/00C. >11,#00D. >0

AACSB: Anal$tic

AICPA BB: Critical Thinking AICPA FN: Measurement Learning O !ective: " Level: #as$

#. 7hat is the net a vantage or isa vantage to the co"pany fro" upgra ing thecalculators5A. >/,/00 a vantage6. >1/,000 isa vantageC. >#0,000 a vantageD. >/,000 isa vantage

AACSB: Anal$tic AICPA BB: Critical Thinking AICPA FN: Measurement Learning O !ective: " Level: Me%ium

13('#




3. &ssu"e that Tolar eci es to upgra e the calculators. &t +hat selling price per unit +oulthe co"pany be as +ell off as if it ust sol the calculators in their present con ition5&. >/6. >30

C. >)3D. > -

Cost per calculator to upgra e B >10,000 '00 calculators B >#):elling price ( Cost to upgra e B >#/:elling price ( >#) B >#/:elling price B >)3


13('3




Mccubbin Corporation is consi ering t+o alternatives8 & an 6. Costs associate +ith thealternatives are liste belo+8

'. &re the "aterials costs an processing costs relevant in the choice bet+een alternatives &an 65 H2gnore the e!uip"ent rental an occupancy costs in this !uestion.I&. ?either "aterials costs nor processing costs are relevantB. 6oth "aterials costs an processing costs are relevantC. $nly processing costs are relevantD. $nly "aterials costs are relevant

AACSB: Anal$tic AICPA BB: Critical Thinking AICPA FN: Measurement Learning O !ective: " Level: #as$

13(''




). 7hat is the ifferential cost of &lternative 6 over &lternative &, inclu ing all of therelevant costs5&. >1 1,0006. >131,)00

C. >) ,000D. >10#,000


13(')




T+o alternatives, co e(na"e an @, are un er consi eration at Donat Corporation. Costsassociate +ith the alternatives are liste belo+.

. &re the "aterials costs an processing costs relevant in the choice bet+een alternatives an @5 H2gnore the e!uip"ent rental an occupancy costs in this !uestion.IA. 6oth "aterials costs an processing costs are relevant6. $nly "aterials costs are relevantC. $nly processing costs are relevantD. ?either "aterials costs nor processing costs are relevant


13('




-. 7hat is the ifferential cost of &lternative @ over &lternative , inclu ing all of therelevant costs5&. >1'0,0006. >1#3,000

C. >3',000D. >10 ,000


The Cle"son Co"pany reporte the follo+ing results last year for the "anufacture an saleof one of its pro ucts kno+n as a Ta".

Cle"son Co"pany is trying to eter"ine +hether or not to iscontinue the "anufacture ansale of Ta"s. The operating results reporte above for last year are e%pecte to continue in theforeseeable future if the pro uct is not roppe . The fi%e "anufacturing overhea representsthe costs of pro uction facilities an e!uip"ent that the Ta" pro uct shares +ith other

pro ucts pro uce by Cle"son. 2f the Ta% pro uct +ere roppe , there +oul be no change inthe fi%e "anufacturing costs of the co"pany.

13('-




/. &ssu"e that iscontinuing the "anufacture an sale of Ta"s +ill have no effect on thesale of other pro uct lines. 2f the co"pany iscontinues the Ta" pro uct line, the change inannual operating inco"e Hor lossI shoul be8&. >)),000 ecrease6. > ),000 ecrease

C. > 0,000 ecreaseD. >-0,000 increase


13('/




. &ssu"e that iscontinuing the Ta" pro uct +oul result in a >1#0,000 increase in thecontribution "argin of other pro uct lines. Ao+ "any Ta"s +oul have to be sol ne%t yearfor the co"pany to be as +ell off as if it ust roppe the line an en oye the increase incontribution "argin fro" other pro ucts5

&. ),000 units6. ,000 unitsC. ,)00 unitsD. -,000 units

Contribution "argin per Ta"8 >3 0,000 ,)00 B > 0:ales of Ta"s to be as +ell off as if it roppe Ta"s8 >30,000 > 0 B )00 L ,)00 B -,000units


Learning O !ective: & Level: (ar%

The "anage"ent of orrilla Corporation is consi ering ropping pro uct R10C. Data fro"the co"pany s accounting syste" appear belo+8

&ll fi%e e%penses of the co"pany are fully allocate to pro ucts in the co"pany s accountingsyste". 4urther investigation has reveale that >'#,000 of the fi%e "anufacturing e%pensesan >'/,000 of the fi%e selling an a "inistrative e%penses are avoi able if pro uct R10C is

iscontinue .

13('




-0. &ccor ing to the co"pany s accounting syste", +hat is the net operating inco"e earne by pro uct R10C5A. H>#/,000I6. >#/,000C. >13),000

D. H>13),000I

&ccor ing to the co"pany s accounting syste", the pro uct s net operating loss is >#/,000.


13()0




-1. 7hat +oul be the effect on the co"pany s overall net operating inco"e if pro uct R10C+ere roppe 5&. $verall net operating inco"e +oul ecrease by >#/,000.B. $verall net operating inco"e +oul ecrease by >'),000.

C. $verall net operating inco"e +oul increase by >#/,000.D. $verall net operating inco"e +oul increase by >'),000.

?et operating inco"e +oul ecline by >'),000 if pro uct R10C +ere roppe . Therefore,the pro uct shoul not be roppe .


13()1




The "anage"ent of Dorl Corporation has been concerne for so"e ti"e +ith the financial perfor"ance of its pro uct 2)'< an has consi ere iscontinuing it on several occasions.Data fro" the co"pany s accounting syste" appear belo+8

2n the co"pany s accounting syste" all fi%e e%penses of the co"pany are fully allocate to pro ucts. 4urther investigation has reveale that > ),000 of the fi%e "anufacturing e%pensesan >/),000 of the fi%e selling an a "inistrative e%penses are avoi able if pro uct 2)'< is

iscontinue .

-#. &ccor ing to the co"pany s accounting syste", +hat is the net operating inco"e earne by pro uct 2)'<5&. >1',0006. H>3)-,000IC. H>1',000ID. >3)-,000

&ccor ing to the co"pany s accounting syste", the pro uct s net operating loss is >1',000.


13()#




-3. 7hat +oul be the effect on the co"pany s overall net operating inco"e if pro uct 2)'<+ere roppe 5A. $verall net operating inco"e +oul ecrease by >1--,000.6. $verall net operating inco"e +oul increase by >1--,000.

C. $verall net operating inco"e +oul increase by >1',000.D. $verall net operating inco"e +oul ecrease by >1',000.

?et operating inco"e +oul ecline by >1--,000 if pro uct 2)'< +ere roppe . Therefore,the pro uct shoul not be roppe .


13()3




Ro+ena Corporation "anufactures laser printers. Ro+ena currently "anufactures the 3#,000i"aging ru"s that it uses in its printers. The annual costs to "anufacture these 3#,000 ru"sare as follo+s8

Aar +are :olutions, 2nc. has offere to provi e Ro+ena +ith all of its i"aging ru" nee sfor >-# per ru". 2f Ro+ena accepts this offer, -0F of the fi%e "anufacturing cost abovecoul be totally eli"inate . &lso, Ro+ena +ill be able to use the free up space to generate>#'0,000 of inco"e each year in the pro uction of alternative pro ucts.

-'. 6ase on the infor"ation presente , +oul Ro+ena be better off to "ake the ru"s or buy the ru"s an by ho+ "uch5&. >11#,000 better to "akeB. >1#/,000 better to buyC. >)# ,'00 better to buyD. >-0',000 better to "ake

AACSB: Anal$tic

AICPA BB: Critical Thinking AICPA FN: Measurement Learning O !ective: . Level: Me%ium

13()'




Kleff"an Corporation is presently "aking part 31 that is use in one of its pro ucts. & totalof #,000 units of this part are pro uce an use every year. The co"pany s &ccountingDepart"ent reports the follo+ing costs of pro ucing the part at this level of activity8

&n outsi e supplier has offere to pro uce an sell the part to the co"pany for >#3.'0 each. 2f this offer is accepte , the supervisor s salary an all of the variable costs, inclu ing irectlabor, can be avoi e . The special e!uip"ent use to "ake the part +as purchase "any yearsago an has no salvage value or other use. The allocate general overhea represents fi%ecosts of the entire co"pany. 2f the outsi e supplier s offer +ere accepte , only >1,000 of theseallocate general overhea costs +oul be avoi e .

13()




- . 2f "anage"ent eci es to buy part 31 fro" the outsi e supplier rather than to continue"aking the part, +hat +oul be the annual i"pact on the co"pany s overall net operatinginco"e5&. ?et operating inco"e +oul ecline by >), 00 per year.B. ?et operating inco"e +oul ecline by >1,/00 per year.

C. ?et operating inco"e +oul ecline by >', 00 per year.D. ?et operating inco"e +oul ecline by > , 00 per year.


13()-




--. 2n a ition to the facts given above, assu"e that the space use to pro uce part 31 coul be use to "ake "ore of one of the co"pany s other pro ucts, generating an a itionalseg"ent "argin of >#3,000 per year for that pro uct. 7hat +oul be the i"pact on theco"pany s overall net operating inco"e of buying part 31 fro" the outsi e supplier an

using the free space to "ake "ore of the other pro uct5&. ?et operating inco"e +oul increase by >1-,'00 per year.B. ?et operating inco"e +oul increase by >#1,#00 per year.C. ?et operating inco"e +oul ecline by >#/, 00 per year.D. ?et operating inco"e +oul increase by >#3,000 per year.


13()/




=ibbee Corporation is presently "aking part 2)0 that is use in one of its pro ucts. & total of/,000 units of this part are pro uce an use every year. The co"pany s &ccountingDepart"ent reports the follo+ing costs of pro ucing the part at this level of activity8

&n outsi e supplier has offere to pro uce an sell the part to the co"pany for >#'.)0 each. 2f this offer is accepte , the supervisor s salary an all of the variable costs, inclu ing irectlabor, can be avoi e . The special e!uip"ent use to "ake the part +as purchase "any yearsago an has no salvage value or other use. The allocate general overhea represents fi%ecosts of the entire co"pany, none of +hich +oul be avoi e if the part +ere purchaseinstea of pro uce internally.

13()




-/. 2f "anage"ent eci es to buy part 2)0 fro" the outsi e supplier rather than to continue"aking the part, +hat +oul be the annual i"pact on the co"pany s overall net operatinginco"e5&. ?et operating inco"e +oul ecline by > ,'00 per year.B. ?et operating inco"e +oul ecline by >3#,/00 per year.

C. ?et operating inco"e +oul increase by >3#,/00 per year.D. ?et operating inco"e +oul increase by > ,'00 per year.


13( 0




- . 2n a ition to the facts given above, assu"e that the space use to pro uce part 2)0 coul be use to "ake "ore of one of the co"pany s other pro ucts, generating an a itionalseg"ent "argin of >#',000 per year for that pro uct. 7hat +oul be the i"pact on theco"pany s overall net operating inco"e of buying part 2)0 fro" the outsi e supplier an

using the free space to "ake "ore of the other pro uct5&. ?et operating inco"e +oul increase by >#',000 per year.6. ?et operating inco"e +oul increase by >1-, 00 per year.C. ?et operating inco"e +oul ecline by >/,/00 per year.D. ?et operating inco"e +oul ecline by >30,'00 per year.

AACSB: Anal$tic

AICPA BB: Critical Thinking AICPA FN: Measurement Learning O !ective: . Level: Me%ium

13( 1




Kava 2nc. "anufactures in ustrial co"ponents. $ne of its pro ucts, +hich is use in theconstruction of in ustrial air con itioners, is kno+n as K ). Data concerning this pro uct aregiven belo+8

The above per unit ata are base on annual pro uction of ',000 units of the co"ponent.Direct labor can be consi ere to be a variable cost.:ource8 CM&, a apte

/0. The co"pany has receive a special, one(ti"e(only or er for )00 units of co"ponent K ).There +oul be no variable selling e%pense on this special or er an the total fi%e"anufacturing overhea an fi%e selling an a "inistrative e%penses of the co"pany +oulnot be affecte by the or er. &ssu"ing that Kava has e%cess capacity an can fill the or er+ithout cutting back on the pro uction of any pro uct, +hat is the "ini"u" price per unit onthe special or er belo+ +hich the co"pany shoul not go5&. >1/0B. >3/C. >)D. >-/

AACSB: Anal$tic AICPA BB: Critical Thinking AICPA FN: Measurement Learning O !ective: / Level: Me%ium

13( #




/1. The co"pany has receive a special, one(ti"e(only or er for )00 units of co"ponent K ).There +oul be no variable selling e%pense on this special or er an the total fi%e"anufacturing overhea an fi%e selling an a "inistrative e%penses of the co"pany +oulnot be affecte by the or er. Ao+ever, assu"e that Kava has no e%cess capacity an this

special or er +oul re!uire 10 "inutes of the constraining resource, +hich coul be useinstea to pro uce pro ucts +ith a total contribution "argin of >11,000. 7hat is the "ini"u" price per unit on the special or er belo+ +hich the co"pany shoul not go5A. > 06. >/1C. >100D. >##

AACSB: Anal$tic AICPA BB: Critical Thinking AICPA FN: Measurement Learning O !ective: / Learning O !ective: ' Level: (ar%

13( 3




/#. Refer to the original ata in the proble". 7hat is the current contribution "argin per unitfor co"ponent K ) base on its selling price of >1/0 an its annual pro uction of ',000units5&. >1'#

6. >10#C. >'0D. >1'0


13( '




The follo+ing are the 7yeth Co"pany s unit costs of "aking an selling an ite" at a volu"eof 10,000 units per "onth H+hich represents the co"pany s capacityI8

resent sales a"ount to ,000 units per "onth. &n or er has been receive fro" a custo"er ina foreign "arket for 1,000 units. The or er +oul not affect current sales. 4i%e costs, both"anufacturing an selling an a "inistrative, are constant +ithin the relevant range bet+een

/,000 an 10,000 units per "onth. The variable selling an a "inistrative costs +oul have to be incurre for this special or er as +ell as all other sales. &ssu"e irect labor is a variablecost.

13( )




/3. Ao+ "uch +ill the co"pany s net operating inco"e be increase or H ecrease I if it prices the 1,000 units in the special or er at > each5&. >H)00I6. >'00C. >#,)00

D. >1,000


/'. &ssu"e the co"pany has )0 units left over fro" last year +hich have s"all efects an+hich +ill have to be sol at a re uce price as scrap. This +oul have no effect on theco"pany s other sales. 7hat cost is relevant as a gui e for setting a "ini"u" price on these

efective units5&. > .)06. >).00C. >1.)0D. >3.)0

$nly the variable selling cost per unit is relevant, since all other costs are sunk.


13(




Elgot Co"pany pro uces a single pro uct. The cost of pro ucing an selling a single unit ofthis pro uct at the co"pany s nor"al activity level of 30,000 units per "onth is as follo+s8

The nor"al selling price of the pro uct is >)1.10 per unit.&n or er has been receive fro" an overseas custo"er for 3,000 units to be elivere this"onth at a special iscounte price. This or er +oul have no effect on the co"pany s nor"alsales an +oul not change the total a"ount of the co"pany s fi%e costs. The variable sellingan a "inistrative e%pense +oul be >0.)0 less per unit on this or er than on nor"al sales.Direct labor is a variable cost in this co"pany.

13( -




/). :uppose there is a"ple i le capacity to pro uce the units re!uire by the overseascusto"er an the special iscounte price on the special or er is >''.-0 per unit. 6y ho+"uch +oul this special or er increase H ecreaseI the co"pany s net operating inco"e for the"onth5&. >),100

6. >H1',100IC. >3 , 00D. >H1-,-00I


13( /




/ . :uppose the co"pany is alrea y operating at capacity +hen the special or er is receivefro" the overseas custo"er. 7hat +oul be the opportunity cost of each unit elivere to theoverseas custo"er5&. > .'0

6. >#.#0C. >1.-0D. >1/.#0

AACSB: Anal$tic AICPA BB: Critical Thinking AICPA FN: Measurement Learning O !ective: / Level: (ar%

13(




/-. :uppose there is not enough i le capacity to pro uce all of the units for the overseascusto"er an accepting the special or er +oul re!uire cutting back on pro uction of 1,#00units for regular custo"ers. The "ini"u" acceptable price per unit for the special or er isclosest to8

&. >)1.10B. >3 . /C. >'0. 0D. >' .'0


13(-0




6rubacher Co"pany "akes four pro ucts in a single facility. These pro ucts have thefollo+ing unit pro uct costs8

The grin ing "achines are potentially the constraint in the pro uction facility. & total of#0,)00 "inutes are available per "onth on these "achines.Direct labor is a variable cost in this co"pany.

13(-1




//. Ao+ "any "inutes of grin ing "achine ti"e +oul be re!uire to satisfy e"an for allfour pro ucts5&. 1',0006. 1/, 00C. #0,)00

D. ##,'00


/ . 7hich pro uct "akes the =E&:T profitable use of the grin ing "achines5A. ro uct &6. ro uct 6C. ro uct CD. ro uct D


13(-#




0. 7hich pro uct "akes the M$:T profitable use of the grin ing "achines5&. ro uct &6. ro uct 6C. ro uct C

D. ro uct D


13(-3




1. 9p to ho+ "uch shoul the co"pany be +illing to pay for one a itional "inute ofgrin ing "achine ti"e if the co"pany has "a e the best use of the e%isting grin ing "achinecapacity5 HRoun off to the nearest +hole cent.I&. >0.00

6. >1/.30C. >1#.#1D. >10.00

The co"pany shoul be +illing to pay up to >1#.#1 per "inute to obtain "ore of theconstraine resource since this is the value to the co"pany of using this constraine resourceto "ake "ore of pro uct &. 6y assu"ption, the other pro ucts +ill alrea y have been



13(-'




Creel"an Co"pany "akes four pro ucts in a single facility. Data concerning these pro uctsappear belo+8

The "illing "achines are potentially the constraint in the pro uction facility. & total of 13,000"inutes are available per "onth on these "achines.

#. Ao+ "any "inutes of "illing "achine ti"e +oul be re!uire to satisfy e"an for allfour pro ucts5&. 13,0006. 11, 00C. -,000D. 1),000


13(-)




3. 7hich pro uct "akes the =E&:T profitable use of the "illing "achines5&. ro uct &B. ro uct 6C. ro uct C

D. ro uct D


13(-




'. 7hich pro uct "akes the M$:T profitable use of the "illing "achines5A. ro uct &6. ro uct 6C. ro uct C

D. ro uct D


13(--




). 9p to ho+ "uch shoul the co"pany be +illing to pay for one a itional "inute of"illing "achine ti"e if the co"pany has "a e the best use of the e%isting "illing "achinecapacity5 HRoun off to the nearest +hole cent.I&. >10.'0

6. >13./0C. >0.00D. >'.-'

The co"pany shoul be +illing to pay up to >'.-' per "inute to obtain "ore of theconstraine resource since this is the value to the co"pany of using this constraine resourceto "ake "ore of pro uct 6. 6y assu"ption, the other pro ucts +ill alrea y have been


AACSB: Anal$tic AICPA BB: Critical Thinking

AICPA FN: Measurement Learning O !ective: ' Level: Me%ium

13(-/




6ritt"an Corporation "akes three pro ucts that use the current constraint(a particular type of "achine. Data concerning those pro ucts appear belo+8

. Rank the pro ucts in or er of their current profitability fro" "ost profitable to least profitable. 2n other +or s, rank the pro ucts in the or er in +hich they shoul be e"phasi e .&. 2 ,@D,?26. @D,?2,2C. @D,2 ,?2

D. ?2,@D,2


13(-




-. &ssu"e that sufficient constraint ti"e is available to satisfy e"an for all but the least profitable pro uct. 9p to ho+ "uch shoul the co"pany be +illing to pay to ac!uire "ore ofthe constraine resource5A. >13.)0 per "inute

6. >1).)0 per "inuteC. >-/. ) per unitD. >3 .1) per unit

The co"pany shoul be +illing to pay up to >13.)0 per "inute to obtain "ore of theconstraine resource since this is the value to the co"pany of using this constraine resourceto "ake "ore of pro uct 2 . 6y assu"ption, the other pro ucts +ill alrea y have been



13(/0




The constraint at &rtis Corporation is ti"e on a particular "achine. The co"pany "akesthree pro ucts that use this "achine. Data concerning those pro ucts appear belo+8

/. Rank the pro ucts in or er of their current profitability fro" "ost profitable to least profitable. 2n other +or s, rank the pro ucts in the or er in +hich they shoul be e"phasi e .A. CT,=?,:26. :2,CT,=?C. CT,:2,=?

D. =?,:2,CT


13(/1




101. 7hat is the net "onetary a vantage H isa vantageI of processing ro uct @ beyon thesplit(off point5&. >3 , 006. >)1,000

C. >13,000D. >1, 00


10#. 7hat is the "ini"u" a"ount the co"pany shoul accept for ro uct if it is to be solat the split(off point5&. >'0,000B. >#3,)00C. >1/,#00D. >'),300

2f the co"pany +ere to accept less than >#3,)00 at the split(off point, they +oul be better off processing further.

AACSB: Anal$tic AICPA BB: Critical Thinking AICPA FN: Measurement Learning O !ective: ) Level: (ar%

13(/3




$ran Refiners, 2nc., processes sugar cane that it purchases fro" far"ers. :ugar cane is processe in batches. & batch of sugar cane costs >- to buy fro" far"ers an >1/ to crush inthe co"pany s plant. T+o inter"e iate pro ucts, cane fiber an cane uice, e"erge fro" thecrushing process. The cane fiber can be sol as is for >#1 or processe further for >1# to "ake

the en pro uct in ustrial fiber that is sol for >'3. The cane uice can be sol as is for >'- or processe further for >#1 to "ake the en pro uct "olasses that is sol for >//.

103. Ao+ "uch profit HlossI oes the co"pany "ake by processing one batch of sugar caneinto the en pro ucts in ustrial fiber an "olasses5&. H>1#-I6. >30C. H># ID. >'


13(/'




10'. Ao+ "uch profit HlossI oes the co"pany "ake by processing the inter"e iate pro uctcane uice into "olasses rather than selling it as is5&. H>#-I6. H>-'I

C. >#0D. >#


13(/)




10). 7hich of the inter"e iate pro ucts shoul be processe further5A. Cane fiber shoul be processe into in ustrial fiberJ Cane uice shoul be processe into"olasses6. Cane fiber shoul be processe into in ustrial fiberJ Cane uice shoul ?$T be processe

into "olassesC. Cane fiber shoul ?$T be processe into in ustrial fiberJ Cane uice shoul ?$T be processe into "olassesD. Cane fiber shoul ?$T be processe into in ustrial fiberJ Cane uice shoul be processeinto "olasses


13(/




Aayase Corporation processes sugar beets that it purchases fro" far"ers. :ugar beets are processe in batches. & batch of sugar beets costs >3) to buy fro" far"ers an >1' to crush inthe co"pany s plant. T+o inter"e iate pro ucts, beet fiber an beet uice, e"erge fro" thecrushing process. The beet fiber can be sol as is for >#- or processe further for >11 to "ake

the en pro uct in ustrial fiber that is sol for >'0. The beet uice can be sol as is for >3 or processe further for >#1 to "ake the en pro uct refine sugar that is sol for >' .

10 . Ao+ "uch profit HlossI oes the co"pany "ake by processing one batch of sugar beetsinto the en pro ucts in ustrial fiber an refine sugar5&. H>/1I6. >1'C. >)D. H> I


13(/-




10-. Ao+ "uch profit HlossI oes the co"pany "ake by processing the inter"e iate pro uct beet uice into refine sugar rather than selling it as is5A. H>11I6. H>#)I

C. H>3 ID. H> 0I


10/. 7hich of the inter"e iate pro ucts shoul be processe further5&. beet fiber shoul ?$T be processe into in ustrial fiberJ beet uice shoul ?$T be

processe into refine sugar 6. beet fiber shoul be processe into in ustrial fiberJ beet uice shoul be processe intorefine sugar C. beet fiber shoul be processe into in ustrial fiberJ beet uice shoul ?$T be processeinto refine sugar D. beet fiber shoul ?$T be processe into in ustrial fiberJ beet uice shoul be processeinto refine sugar


13(//




Essay Questions

10 . Rackett Corporation is consi ering t+o alternatives that are co e(na"e M an ?. Costsassociate +ith the alternatives are liste belo+8

Re!uire 8

a. 7hich costs are relevant an +hich are not relevant in the choice bet+een these t+oalternatives5

b. 7hat is the ifferential cost bet+een the t+o alternatives5


13(/




110. Costs associate +ith t+o alternatives, co e(na"e G an R, being consi ere by =angCorporation are liste belo+8

Re!uire 8

a. 7hich costs are relevant an +hich are not relevant in the choice bet+een these t+oalternatives5

b. 7hat is the ifferential cost bet+een the t+o alternatives5


13( 0




111. 7hen Mr. Ding =. 6erry, presi ent an chief e%ecutive of 6erry, 2nc., first sa+ theseg"ente inco"e state"ent belo+, he fle+ into his usual rage8 ;7hen +ill +e ever startsho+ing a real profit5 2 " starting i""e iate steps to eli"inate those t+o unprofitable linesN;

OThese traceable e%penses coul be eli"inate if the pro uct lines to +hich they are trace+ere iscontinue .

Re!uire 8

Reco""en +hich seg"ents, if any, shoul be eli"inate . repare a report in goo for" tosupport your ans+er.

& seg"ente inco"e report, +ithout the allocation of co""on fi%e e%penses, +ill provi ethe basis for eci ing +hich seg"ents to rop.

The only seg"ent that possibly shoul be eli"inate is seg"ent 7, +hich sho+s a negativeseg"ent "argin of >#,000.


13( 1




11#. The "anage"ent of The+s Corporation is consi ering ropping pro uct E#/2. Data fro"the co"pany s accounting syste" appear belo+8

&ll fi%e e%penses of the co"pany are fully allocate to pro ucts in the co"pany s accountingsyste". 4urther investigation has reveale that >/ ,000 of the fi%e "anufacturing e%pensesan > -,000 of the fi%e selling an a "inistrative e%penses are avoi able if pro uct E#/2 is

iscontinue .

Re!uire 8

a. 7hat is the net operating inco"e earne by pro uct E#/2 accor ing to the co"pany saccounting syste"5 :ho+ your +orkN

b. 7hat +oul be the effect on the co"pany s overall net operating inco"e of ropping pro uct E#/25 :houl the pro uct be roppe 5 :ho+ your +orkN

a. &ccor ing to the co"pany s accounting syste", the pro uct s net operating loss is >10,000.

b. ?et operating inco"e +oul ecline by >1#),000 if pro uct E#/2 +ere roppe . Therefore,

the pro uct shoul not be roppe .


13( #




113. T el"elan Corporation is consi ering ropping pro uct :/)9. Data fro" the co"pany saccounting syste" appear belo+8

&ll fi%e e%penses of the co"pany are fully allocate to pro ucts in the co"pany s accountingsyste". 4urther investigation has reveale that >)),000 of the fi%e "anufacturing e%pensesan >-1,000 of the fi%e selling an a "inistrative e%penses are avoi able if pro uct :/)9 is

iscontinue .

Re!uire 8

a. &ccor ing to the co"pany s accounting syste", +hat is the net operating inco"e earne by pro uct :/)95 :ho+ your +orkN

b. 7hat +oul be the effect on the co"pany s overall net operating inco"e of ropping pro uct :/)95 :houl the pro uct be roppe 5 :ho+ your +orkN

a. &ccor ing to the co"pany s accounting syste", the pro uct s net operating loss is >11,000.

b. ?et operating inco"e +oul ecline by >- ,000 if pro uct :/)9 +ere roppe . Therefore,

the pro uct shoul not be roppe .


13( 3




11'. The "anage"ent of Dru""er Corporation is consi ering ropping pro uct D/'=. Datafro" the co"pany s accounting syste" appear belo+8

&ll fi%e e%penses of the co"pany are fully allocate to pro ucts in the co"pany s accountingsyste". 4urther investigation has reveale that >#01,000 of the fi%e "anufacturing e%pensesan >1) ,000 of the fi%e selling an a "inistrative e%penses are avoi able if pro uct D/'=is iscontinue .

Re!uire 8

7hat +oul be the effect on the co"pany s overall net operating inco"e if pro uct D/'=+ere roppe 5 :houl the pro uct be roppe 5 :ho+ your +orkN

?et operating inco"e +oul ecline by >3,000 if pro uct D/'= +ere roppe . Therefore, the pro uct shoul not be roppe .


AICPA FN: Measurement Learning O !ective: & Level: #as$

13( '




11). 4ouch Co"pany "akes 30,000 units per year of a part it uses in the pro ucts it"anufactures. The unit pro uct cost of this part is co"pute as follo+s8

&n outsi e supplier has offere to sell the co"pany all of these parts it nee s for >)1. 0 aunit. 2f the co"pany accepts this offer, the facilities no+ being use to "ake the part coul beuse to "ake "ore units of a pro uct that is in high e"an . The a itional contribution"argin on this other pro uct +oul be >#1 ,000 per year.2f the part +ere purchase fro" the outsi e supplier, all of the irect labor cost of the part+oul be avoi e . Ao+ever, > .#0 of the fi%e "anufacturing overhea cost being applie tothe part +oul continue even if the part +ere purchase fro" the outsi e supplier. This fi%e"anufacturing overhea cost +oul be applie to the co"pany s re"aining pro ucts.

Re!uire 8

a. Ao+ "uch of the unit pro uct cost of >)#.30 is relevant in the ecision of +hether to "akeor buy the part5

b. 7hat is the net total ollar a vantage H isa vantageI of purchasing the part rather than"aking it5

c. 7hat is the "a%i"u" a"ount the co"pany shoul be +illing to pay an outsi e supplier per unit for the part if the supplier co""its to supplying all 30,000 units re!uire each year5

13( )





13(




11 . <aneiro :kate, 2nc. currently "anufactures the +heels that it uses for its in(line skates.The annual costs to "anufacture the 1)0,000 +heels nee e each year are as follo+s8

Kasba Rubber Co"pany has offere to provi e <aneiro +ith all of its annual +heel nee s for>3.)0 per +heel. 2f <aneiro accepts this offer, -)F of the fi%e overhea above coul betotally eli"inate . &lso, <aneiro +oul be able to rent out the free up space an coulgenerate >-#,000 of inco"e annually.

Re!uire 8

6ase on this infor"ation, +oul <aneiro be better off to continue "aking the +heels or to buy the" fro" Kasba5 :A$7 @$9R C$M 9T&T2$?:.

2t +oul be better by >'#,000 to buy.H>1 ),000 L >'),000 L > 0,000 L >##),000 L >-#,000I PH>3.)0 % 1)0,000I


13( -




11-. Tingstro" 2nc. "akes a range of pro ucts. The co"pany s pre eter"ine overhea rate is>#0 per irect labor(hour, +hich +as calculate using the follo+ing bu gete ata8

Co"ponent 6 is use in one of the co"pany s pro ucts. The unit cost of the co"ponentaccor ing to the co"pany s cost accounting syste" is eter"ine as follo+s8

&n outsi e supplier has offere to supply co"ponent 6 for >- each. The outsi e supplier iskno+n for !uality an reliability. &ssu"e that irect labor is a variable cost, variable"anufacturing overhea is really riven by irect labor(hours, an total fi%e "anufacturingoverhea +oul not be affecte by this ecision. Tingstro" chronically has i le capacity.

Re!uire 8

2s the offer fro" the outsi e supplier financially attractive5 7hy5

13( /




Direct "aterials, irect labor, an variable "anufacturing overhea are relevant in thisecision. 4i%e "anufacturing overhea is not relevant since it +oul not be affecte by theecision. The variable portion of the "anufacturing overhea rate is co"pute as follo+s8

:ince the outsi e supplier has offere to sell the co"ponent for >- .00 each, but it only coststhe co"pany >)-. 0 to "ake the co"ponent internally, this is not a financially attractive offer.

AACSB: Anal$tic AICPA BB: Critical Thinking AICPA FN: Measurement Learning O !ective: . Level: (ar% S+urce: CIMA, a%a-te%

13(





11 . art 4-- is use in one of 7ilcutt Corporation s pro ucts. The co"pany s &ccountingDepart"ent reports the follo+ing costs of pro ucing the -,000 units of the part that arenee e every year.

&n outsi e supplier has offere to "ake the part an sell it to the co"pany for >#/.30 each. 2fthis offer is accepte , the supervisor s salary an all of the variable costs, inclu ing irectlabor, can be avoi e . The special e!uip"ent use to "ake the part +as purchase "any yearsago an has no salvage value or other use. The allocate general overhea represents fi%ecosts of the entire co"pany. 2f the outsi e supplier s offer +ere accepte , only > ,000 of theseallocate general overhea costs +oul be avoi e .

Re!uire 8

a. repare a report that sho+s the effect on the co"pany s total net operating inco"e of

buying part 4-- fro" the supplier rather than continuing to "ake it insi e the co"pany. b. 7hich alternative shoul the co"pany choose5

13(101




b. The total cost of the "ake alternative is lo+er by ># ,000. Thus, net operating inco"e+oul ecline by ># ,000 if the offer fro" the supplier +ere accepte . Therefore, theco"pany shoul continue to "ake the part itself.


13(10#




1#0. <ulison Co"pany pro uces a single pro uct. The cost of pro ucing an selling a singleunit of this pro uct at the co"pany s nor"al activity level of 0,000 units per "onth is asfollo+s8

The nor"al selling price of the pro uct is >- ./0 per unit.&n or er has been receive fro" an overseas custo"er for #,000 units to be elivere this"onth at a special iscounte price. This or er +oul have no effect on the co"pany s nor"alsales an +oul not change the total a"ount of the co"pany s fi%e costs. The variable sellingan a "inistrative e%pense +oul be >0.30 less per unit on this or er than on nor"al sales.Direct labor is a variable cost in this co"pany.

Re!uire 8

a. :uppose there is a"ple i le capacity to pro uce the units re!uire by the overseas custo"er an the special iscounte price on the special or er is >-1. 0 per unit. 6y ho+ "uch +oulthis special or er increase H ecreaseI the co"pany s net operating inco"e for the "onth5

b. :uppose the co"pany is alrea y operating at capacity +hen the special or er is receivefro" the overseas custo"er. 7hat +oul be the opportunity cost of each unit elivere to theoverseas custo"er5

c. :uppose there is not enough i le capacity to pro uce all of the units for the overseascusto"er an accepting the special or er +oul re!uire cutting back on pro uction of -00units for regular custo"ers. 7hat +oul be the "ini"u" acceptable price per unit for thespecial or er5

13(103





13(10'




1#1. accagnino Corporation "akes a range of pro ucts. The co"pany s pre eter"ineoverhea rate is >1' per irect labor(hour, +hich +as calculate using the follo+ing bu gete

ata8

Manage"ent is consi ering a special or er for 300 units of pro uct D03C at >11 each. Thenor"al selling price of pro uct D03C is >1)- an the unit pro uct cost is eter"ine asfollo+s8

2f the special or er +ere accepte , nor"al sales of this an other pro ucts +oul not beaffecte . The co"pany has a"ple e%cess capacity to pro uce the a itional units. &ssu"e that

irect labor is a variable cost, variable "anufacturing overhea is really riven by irectlabor(hours, an total fi%e "anufacturing overhea +oul not be affecte by the specialor er.

Re!uire 8

2f the special or er +ere accepte , +hat +oul be the i"pact on the co"pany s overall profit5

13(10)




Direct "aterials, irect labor, an variable "anufacturing overhea are relevant in thisecision. 4i%e "anufacturing overhea is not relevant since it +oul not be affecte by theecision. The variable portion of the "anufacturing overhea rate is co"pute as follo+s8


S+urce: CIMA, a%a-te%

13(10




1##. 6iello Co. "anufactures an sells "e als for +inners of athletic an other events. 2ts"anufacturing plant has the capacity to pro uce 1),000 "e als each "onthJ current "onthly

pro uction is 1',#)0 "e als. The co"pany nor"ally charges >11) per "e al. Cost ata forthe current level of pro uction are sho+n belo+8

The co"pany has ust receive a special one(ti"e or er for 00 "e als at >10# each. 4or this particular or er, no variable selling an a "inistrative costs +oul be incurre . This or er+oul also have no effect on fi%e costs.

Re!uire 8

:houl the co"pany accept this special or er5 7hy5

$nly the irect "aterials an irect labor costs are relevant in this ecision. To "ake theecision, +e "ust co"pute the average irect "aterials an irect labor cost per unit.

:ince price on the special or er is >10# per "e al an the relevant cost is only >/-, theco"pany +oul earn a profit of >1) per "e al. Therefore, the special or er shoul beaccepte .

AACSB: Anal$tic

AICPA BB: Critical Thinking AICPA FN: Measurement Learning O !ective: / Level: Me%iumS+urce: CMA, a%a-te%

13(10-




1#3. Manning Co. "anufactures an sells trophies for +inners of athletic an other events. 2ts"anufacturing plant has the capacity to pro uce 1/,000 trophies each "onthJ current "onthly

pro uction is 1),300 trophies. The co"pany nor"ally charges >1'1 per trophy. Cost ata forthe current level of pro uction are sho+n belo+8

The co"pany has ust receive a special one(ti"e or er for 00 trophies at >-3 each. 4or this particular or er, no variable selling an a "inistrative costs +oul be incurre . This or er+oul also have no effect on fi%e costs.

Re!uire 8

:houl the co"pany accept this special or er5 7hy5

$nly the irect "aterials an irect labor costs are relevant in this ecision. To "ake theecision, +e "ust co"pute the average irect "aterials an irect labor cost per unit.

:ince price on the special or er is >-3 per trophy an the relevant cost is >/1, the co"pany+oul suffer a loss of >/ per trophy. Therefore, the special or er shoul not be accepte .

AACSB: Anal$tic AICPA BB: Critical Thinking AICPA FN: Measurement Learning O !ective: / Level: Me%iumS+urce: CMA, a%a-te%

13(10/




1#'. Ries Corporation has receive a re!uest for a special or er of /,000 units of pro uct R3'for >3'.#0 each. The nor"al selling price of this pro uct is >3).-0 each, but the units +oulnee to be "o ifie slightly for the custo"er. The nor"al unit pro uct cost of pro uct R3' isco"pute as follo+s8

Direct labor is a variable cost. The special or er +oul have no effect on the co"pany s totalfi%e "anufacturing overhea costs. The custo"er +oul like so"e "o ifications "a e to

pro uct R3' that +oul increase the variable costs by > .30 per unit an that +oul re!uire aone(ti"e invest"ent of >'0,000 in special "ol s that +oul have no salvage value. Thisspecial or er +oul have no effect on the co"pany s other sales. The co"pany has a"plespare capacity for pro ucing the special or er.

Re!uire 8

Deter"ine the effect on the co"pany s total net operating inco"e of accepting the specialor er. :ho+ your +orkN


AICPA FN: Measurement Learning O !ective: / Level: #as$

13(10




1#). & custo"er has aske Clougherty Corporation to supply ',000 units of pro uct M -,+ith so"e "o ifications, for >'0.10 each. The nor"al selling price of this pro uct is >'/.00each. The nor"al unit pro uct cost of pro uct M - is co"pute as follo+s8

Direct labor is a variable cost. The special or er +oul have no effect on the co"pany s totalfi%e "anufacturing overhea costs. The custo"er +oul like so"e "o ifications "a e to

pro uct M - that +oul increase the variable costs by >).-0 per unit an that +oul re!uire aone(ti"e invest"ent of >31,000 in special "ol s that +oul have no salvage value. Thisspecial or er +oul have no effect on the co"pany s other sales. The co"pany has a"plespare capacity for pro ucing the special or er.

Re!uire 8

Deter"ine the effect on the co"pany s total net operating inco"e of accepting the specialor er. :ho+ your +orkN


13(110




1# . loster Co"pany "akes three pro ucts in a single facility. These pro ucts have thefollo+ing unit pro uct costs8

The "i%ing "achines are potentially the constraint in the pro uction facility. & total of #-,'00"inutes are available per "onth on these "achines.Direct labor is a variable cost in this co"pany.

Re!uire 8

a. Ao+ "any "inutes of "i%ing "achine ti"e +oul be re!uire to satisfy e"an for allthree pro ucts5

b. Ao+ "uch of each pro uct shoul be pro uce to "a%i"i e net operating inco"e5 HRounoff to the nearest +hole unit.I

c. 9p to ho+ "uch shoul the co"pany be +illing to pay for one a itional hour of "i%ing"achine ti"e if the co"pany has "a e the best use of the e%isting "i%ing "achine capacity5HRoun off to the nearest +hole cent.I

13(111




c. The co"pany shoul be +illing to pay up to the contribution "argin per "inute for the"arginal ob, +hich is >'.) .


13(11#




1#-. Aon Co"pany "akes three pro ucts in a single facility. Data concerning these pro uctsfollo+8

The "i%ing "achines are potentially the constraint in the pro uction facility. & total of #',)00"inutes are available per "onth on these "achines.Direct labor is a variable cost in this co"pany.

Re!uire 8

a. Ao+ "any "inutes of "i%ing "achine ti"e +oul be re!uire to satisfy e"an for allthree pro ucts5

b. Ao+ "uch of each pro uct shoul be pro uce to "a%i"i e net operating inco"e5 HRounoff to the nearest +hole unit.I

c. 9p to ho+ "uch shoul the co"pany be +illing to pay for one a itional hour of "i%ing"achine ti"e if the co"pany has "a e the best use of the e%isting "i%ing "achine capacity5HRoun off to the nearest +hole cent.I

13(113




c. The co"pany shoul be +illing to pay up to the contribution "argin per "inute for the"arginal ob, +hich is >'./ .


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1#/. 7itch s 6re+ Co"pany "anufactures an sells three potions that all use gargoyleeyelashes as an ingre ient. The high e"an for all three of these potions e%cee s the supplyof gargoyle eyelashes that 7itch s 6re+ is able to buy fro" its suppliers. 2nfor"ation relateto the three potions is provi e belo+8

Each year, 7itch s 6re+ is only able to buy ,000 gargoyle eyelashes. &nnual fi%e costs at7itch s 6re+ are >'),000.

Re!uire 8

6ase on these restrictions, +hat is the "a%i"u" annual net operating inco"e that 7itch s6re+ can "ake each year5

9se #,000 eyelashes to "ake 1,000 bottles of assion otion an use the re"aining ',000eyelashes to "ake :"art otion.',000 eyelashes leftQ) eyelashes per bottle of :"art otion B /00 bottles of :"art otionH1000 % >30I L H/00 % >-0I B >/ ,000>/ ,000 ( >'),000 B >'1,000


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1# . Closter Corporation "akes three pro ucts that use the current constraint, +hich is a particular type of "achine. Data concerning those pro ucts appear belo+8

Re!uire 8

a. Rank the pro ucts in or er of their current profitability fro" the "ost profitable to the least profitable. 2n other +or s, rank the pro ucts in the or er in +hich they shoul be e"phasi e .:ho+ your +orkN

b. &ssu"e that sufficient constraint ti"e is available to satisfy e"an for all but the least profitable pro uct. 9p to ho+ "uch shoul the co"pany be +illing to pay to ac!uire "ore ofthe constraine resource5

b. The co"pany shoul be +illing to pay up to >1#.)0 per "inute to obtain "ore of theconstraine resource since this is the value to the co"pany of using this constraine resourceto "ake "ore of pro uct A*. 6y assu"ption, the other pro ucts +ill alrea y have been



Learning O !ective: ' Level: #as$

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130. The constraint at Cru"e y 2nc. is an e%pensive "illing "achine. The three pro uctsliste belo+ use this constraine resource.

Re!uire 8

a. Rank the pro ucts in or er of their current profitability fro" the "ost profitable to the least profitable. 2n other +or s, rank the pro ucts in the or er in +hich they shoul be e"phasi e .:ho+ your +orkN

b. &ssu"e that sufficient constraint ti"e is available to satisfy e"an for all but the least profitable pro uct. 9p to ho+ "uch shoul the co"pany be +illing to pay to ac!uire "ore ofthe constraine resource5

b. The co"pany shoul be +illing to pay up to >10.-0 per "inute to obtain "ore of theconstraine resource since this is the value to the co"pany of using this constraine resourceto "ake "ore of pro uct *. 6y assu"ption, enough of the other t+o pro ucts +ill alrea yhave been pro uce to fully satisfy e"an .


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131. 2acollia Co"pany "akes t+o pro ucts fro" a co""on input. <oint processing costs upto the split(off point total >'-, 00 a year. The co"pany allocates these costs to the oint

pro ucts on the basis of their total sales values at the split(off point. Each pro uct "ay be solat the split(off point or processe further. Data concerning these pro ucts appear belo+8

Re!uire 8

a. 7hat is the net "onetary a vantage H isa vantageI of processing ro uct beyon thesplit(off point5

b. 7hat is the net "onetary a vantage H isa vantageI of processing ro uct @ beyon thesplit(off point5

c. 7hat is the "ini"u" a"ount the co"pany shoul accept for ro uct if it is to be sol atthe split(off point5

. 7hat is the "ini"u" a"ount the co"pany shoul accept for ro uct @ if it is to be sol atthe split(off point5

AACSB: Anal$tic AICPA BB: Critical Thinking AICPA FN: Measurement Learning O !ective: ) Level: (ar%

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13#. *eron Corporation purchases potatoes fro" far"ers. The potatoes are then peele , pro ucing t+o inter"e iate pro ucts(peels an epeele spu s. The peels can then be processe further to "ake a cocktail of organic nutrients. &n the epeele spu s can be processe further to "ake fro en french fries. & batch of potatoes costs >3) to buy fro"

far"ers an >1 to peel in the co"pany s plant. The peels pro uce fro" a batch can be solas is for ani"al fee for >#' or processe further for >1' to "ake the cocktail of nutrients thatare sol for >'/. The epeele spu s can be sol as is for >3' or processe further for ># to"ake fro en french fries that are sol for >)).

Re!uire 8

a. &ssu"ing that no other costs are involve in processing potatoes or in selling pro ucts, ho+"uch "oney oes the co"pany "ake fro" processing one batch of potatoes into the cocktailof organic nutrients an fro en french fries5 :ho+ your +orkN

b. :houl each of the inter"e iate pro ucts, peels an epeele spu s, be sol as is or processe further into an en pro uct5 E%plain.

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133. olicastro Corporation pro uces t+o inter"e iate pro ucts, & an 6, fro" a co""oninput. 2nter"e iate pro uct & can be further processe into en pro uct . 2nter"e iate

pro uct 6 can be further processe into en pro uct @. The co""on input is purchase in batches that cost >-1 each an the cost of processing a batch to pro uce inter"e iate pro ucts

& an 6 is >10. 2nter"e iate pro uct & can be sol as is for ># or processe further for >1'to "ake en pro uct that is sol for >3 . 2nter"e iate pro uct 6 can be sol as is for >') or processe further for ># to "ake en pro uct @ that is sol for > 1.

Re!uire 8

a. &ssu"ing that no other costs are involve in processing potatoes or in selling pro ucts, ho+"uch "oney oes the co"pany "ake fro" processing one batch of the co""on input into theen pro ucts an @5 :ho+ your +orkN

b. :houl each of the inter"e iate pro ucts, & an 6, be sol as is or processe further into an

en pro uct5 E%plain.

relevant costs.doc

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