Week 6 Homework
Sample Q’s for Quiz
Question 1 / (1 point)SaveSterling Products, a manufacturer of aircraft landing gear, makes 1,000 units each year of a special valve used in assembling one of its products. The unit cost of producing this valve includes variable costs of $70 and fixed costs of $60. The valves could be purchased from an outside supplier at $77 each. If the valve were purchased from the outside supplier, 40% of the total fixed costs incurred in producing this valve could be eliminated. Buying the valves from the outside supplier instead of making them would cause the company's operating income to:
/ Decrease by $9,000./ Decrease by $29,000.
/ Increase by $17,000.
/ Increase by $26,000.
Question 2 / (1 point)Save
By choosing to go into business for himself, Joe Green foregoes the possibility of getting a highly paid job with a large company. This is called a (n)
/ Joint Cost/ Opportunity cost
/ Sunk cost
/ Out-of-pocket cost
Question 3 / (1 point)Save
Universal Chemical Company (UCC) manufactures two products as part of a joint process: A1 and B1. Joint costs up to the split-off point total $20,000. The joint costs are allocated to A1 and B1 in proportion to their relative sales values. At the split-off point, product A1 can be sold for $40,000, whereas product B1 can be sold for $60,000. Product A1 can be processed further to make product A2, at an incremental cost of $35,000. A2 can be sold for $80,000. Product B1 can be processed further to make product B2, at an incremental cost of $45,000. B2 can be sold for $90,000.
The net change in operating income resulting from a decision to manufacture product A2 is:
/ $5,000 (increase).
/ $45,000 (increase).
/ $15,000 (increase).
Question 4 / (1 point)Save
Pete's Cycle Company manufactures annually 20,000 units of SoftSeat, a bicycle seat used on many of the company's products, and also sold directly to retailers for $33 per unit. At the current level of production, the cost per unit to produce SoftSeat consists of the above:
It has come to the attention of management that a seat of similar quality can be purchased from outside suppliers.
Assume that Pete's fixed costs remain unchanged if the seats are purchased from an outside supplier. In order to operate more profitably by buying the seats rather than manufacturing them, Pete must negotiate a price per unit from the outside supplier that is less than:
/ $33.
/ $17.
/ $13.
Question 5 / (1 point)Save
Classic Furniture produced a batch of 2,000 coffee tables at a cost of $325,000. It is discovered that the entire batch was finished improperly. Classic can sell the tables as seconds for $275,000 or spend an additional $285,000 to refinish them and sell them for $575,000.
In deciding whether to rework the tables or sell them as is, management should:
/ Compare the $575,000 possible revenue from refinished tables with the total cost of $325,000 plus $285,000 to refinish.
/ Compare the $285,000 cost to refinish the tables with the incremental revenue of $300,000 possible if the tables are refinished.
/ Eliminate any alternative that results in a loss on the sale of the product.
Question 6 / (1 point)Save
Products which emerge from a shared manufacturing process are referred to as:
/ Joint products./ Codependent products.
/ Complementary products.
/ Contributory products.
Question 7 / (1 point)Save
The Point-N-Write Company currently produces all of the components for its one product an electric pencil sharpener. The unit costs of manufacturing the motor for this pencil sharpener are above:
The company is considering the possibility of buying this motor from a subcontractor and has been quoted a price of $3.80 per unit. The relevant cost of manufacturing the motor to be considered in reaching the decision is:
/ $4.00.
/ $3.85.
/ $3.30.
Question 8 / (1 point)Save
Royal Corporation produces three lines of desks from wood: classic, royal, and standard. Cost and revenue data pertaining to each product are shown above:
Classic desks require five square yards of wood, royal require ten square yards, and standard require three square yards. High demand for each product line far exceeds the company's production capacity.
If Royal Corporation has an unlimited supply of wood available, which products should it produce:
/ Classic only.
/ Classic and royal.
/ Royal only.
Question 9 / (1 point)Save
John Stag Corporation manufactures and sells 1,000 tractors each month. The primary component in each tractor is the motor. John Stag has the monthly capacity to produce 1,300 motors. The variable costs associated with manufacturing each motor are shown above:
Fixed manufacturing overhead per month (for up to 1,300 units of production) averages $26,000. Mary Doe, Inc., has offered to purchase 200 motors from John Stag per month to be used in its own outboard motors.
Assuming John Stag wants to earn a pretax profit of $10,000 on this special order, what price must it charge Mary Doe?
/ $75
/ $94.
/ Some other amount.
Question 10 / (1 point)Save
John Stag Corporation manufactures and sells 1,000 tractors each month. The primary component in each tractor is the motor. John Stag has the monthly capacity to produce 1,300 motors. The variable costs associated with manufacturing each motor are shown below:
Direct Materials: $22
Direct Labor: $14
Variable Manufacturing Overhead: $27
Fixed manufacturing overhead per month (for up to 1,300 units of production) averages $26,000. Mary Doe, Inc., has offered to purchase 200 motors from John Stag per month to be used in its own outboard motors.
What is the incremental cost of producing each additional motor?
/ $26.
/ Some other amount.
/ $63.
Chapter 21 Incremental Analysis -- Chapter Review Questions
Week 6 Lesson Synopsis
The short-run planning problems covered in Chapter 21 are a natural extension of cost-volume-profit analysis from the previous chapter. The chapter begins with a simple illustration to explain the nature of relevant cost information. We also define the concepts of opportunity cost and sunk costs at this point, and emphasize the irrelevance of sunk costs to decision-making.
The chapter goes on to explore a variety of decision-making situations. The first of these illustrates the use of idle capacity to fill special orders priced below full cost. The analysis recalls the importance of contribution margin to planning. Production with a resource constraint highlights contribution margin somewhat differently stressing CM per unit of the limiting input. Make-or buy decisions are explored next. Such problems are particularly interesting given the recent prevalence of outsourcing. This section closes with an examination of the options regarding defective units of output.
The chapter concludes with an explanation of joint products and the allocation of joint costs. Of the many approaches to joint cost allocation, only relative sales value is explored. We also consider the decision to further process the products beyond the split-off point.
Chapter 21 Learning Objectives
1. Explain what makes information relevant to a particular business decision.
2. Discuss the relevance of opportunity costs, sunk costs, and out-of-pocket costs in making business decisions.
3. Use incremental analysis in common business decisions.
4. Discuss how contribution margin can be maximized when one factor limits productive capacity.
5. Identify nonfinancial considerations and creatively search for better courses of action.