Question 1: Derrick Enterprises (DE) makes surge protectors that are used to protect equipment in electrical storms. The costs associated with making a surge protector are shown below:
Unit-Level
Materials $7
Labor $12
Overhead $3
Batch-Level
Set up $4,000 per batch
Product Level
Engineering $50,000 per year
Advertising 120,000 per year
Derrick normally makes and sells 10,000 surge protectors per year which are made in batches containing a 1,000 units. Derrick has an opportunity to sell 1000 protectors at a special order price of $24 per unit. Ignoring qualitative factors, Derrick should
a. Except the offer because it would increase profitability by $2,000.
b. To reject the offer because it would decrease profitability by $2,000.
c. Except the offer because it would increase revenue by $240,000.
d. Reject the offer because it would decrease profitability by $4,000.
Question 2:
The following information is available for the next three (3) questions.
A production costs summary for Davidson Company follows:
Unit-level direct material $5.00/unit
Unit-level direct labor 2.00/unit
Unit-level overhead 6.00/unit
Product-level overhead 4.00/unit
Total cost per unit $17.00
Fixed facility-level selling costs are $600,000 per year and unit-level selling costs are $2. The unit-level selling costs consist primarily of shipping and packaging costs. Production capacity is 400,000 units, but Davidson only expects to produce (and sell) 250,000 units next year. The normal selling price of the product is $30 per unit. A merchant from Venice, Italy has made an offer to purchase 50,000 units at $24 each.
The relevant incremental cost per unit associated with the special order is:
a. $15
b. $13
c. $ 9
d. $11
Question 3: Is Davidson accepts a special offer, profitability will:
a. Increase by $450,000.
b. Decrease of $450,000.
c. Increase by $550,000.
d. Decrease by $550,000.
Question 4: Select the true statement from the following choices.
a. The facility-level selling costs are relevant to the special offer decision.
b. The product-level production costs are relevant to the special offer decision.
c. The unit-level selling costs are not relevant to the special offer decision.
d. All of the statements are false.
Question 5: Based on the following history of production information, which allocation base which you choose to use for your company (i.e. what is the cost driver)?
2001 2002 2003
Units Produced 20,000 40,000 80,000
Direct Labor Hours 15,000 12,000 10,000
Direct Material Costs $140,000 $130,000 $120,000
Actual Overhead Costs $40,000 $80,000 $160,000
a. Direct Material Costs.
b. Units.
c. Direct Labor Hours.
d. All three bases, material costs, labor hours, or units would be equally appropriate.