1. A company operates numerous vending machines in a variety of locations. The company is expanding, needs more machines, and is deciding whether to move machines from unprofitable segments to meet this need. Abbreviated income statements of the two possible unprofitable segments are shown below. The other segments, not shown, are profitable with income over $200,000.
Non-Chain Motels
Local Parks
Sales $250,000 $100,000
Cost of goods sold 130,000 50,000
Travel to service/refill machines 125,000 45,000
Allocated corporate costs 70,000 30,000
Income (loss) $(75,000) $(25,000)
Which segment(s) should be discontinued?
A. Non-chain motels only.
B. Local parks only.
C. Both non-chain motels and local parks.
D. Neither non-chain motels nor local parks.
In differential cost analysis, which one of the following best fits the description of a sunk cost?
A. Direct materials required in the manufacture of a table.
B. Purchasing department costs incurred in acquiring material.
C. Cost of the forklift driver to move the material to the manufacturing floor.
D. Cost of a large crane used to move materials.
Current business segment operations for Whitman, a mass retailer, are presented below.
Merchandise Automotive Restaurant Total
Sales $500,000 $400,000 $100,000 $1,000,000
Variable costs 300,000 200,000 70,000 570,000
Fixed costs 100,000 100,000 50,000 250,000
Operating income (loss) $100,000 $100,000 $(20,000) $ 180,000
Management is contemplating the discontinuance of the Restaurant segment since "it is losing money." If this segment is discontinued, $30,000 of its fixed costs will be eliminated. In addition, Merchandise and Automotive sales will decrease 5% from their current levels.
What will Whitman's total contribution margin be if the Restaurant segment is discontinued?
A. $160,000
B. $220,000
C. $367,650
D. $380,000
When a company decides to divest a segment, the underlying reason for this decision could be any one of the following except
A. The segment is a chronic loser and the company is unwilling to commit the resources to make it profitable.
B. Another company is willing to pay a higher price for the segment than its present value to the current owner.
C. As a result of a change in the company's long-range strategy, what was once a good fit is no longer a good fit.
D. The realization of economies of scale where average cost declines as volume increases.
A company has a portfolio of four products and incurs $175,000 of allocated fixed costs per year. Financial data for the four products are shown below:
Product A Product B Product C Product D
Units sold 25,000 18,750 3,750 2,500
Revenue $750,000 $600,000 $150,000 $100,000
Unit variable costs 24 24 37 41
Which product should the company discontinue?
A. Product A.
B. Product B.
C. Product C.
D. Product D.
Listed below are a company's monthly unit costs to manufacture and market a particular product.
Manufacturing costs:
Direct materials $2.00
Direct labor 2.40
Variable indirect 1.60
Fixed indirect 1.00
Marketing costs:
Variable 2.50
Fixed 1.50
The company must decide to continue making the product or buy it from an outside supplier. The supplier has offered to make the product at the same level of quality that the company can make it. Fixed marketing costs would be unaffected, but variable marketing costs would be reduced by 30% if the company were to accept the proposal. What is the maximum amount per unit that the company can pay the supplier without decreasing operating income?
A. $8.50
B. $6.75
C. $7.75
D. $5.25
Leland Manufacturing uses 10 units of Part Number KJ37 each month in the production of radar equipment. The unit cost to manufacture 1 unit of KJ37 is presented below.
Direct materials $ 1,000
Materials handling (20% of direct materials cost) 200
Direct labor 8,000
Manufacturing overhead (150% of direct labor) 12,000
Total manufacturing cost $21,200
Materials handling represents the direct variable costs of the Receiving Department that are applied to direct materials and purchased components on the basis of their cost. This is a separate charge in addition to manufacturing overhead. Leland's annual manufacturing overhead budget is one-third variable and two-thirds fixed. Scott Supply, one of Leland's reliable vendors, has offered to supply Part Number KJ37 at a unit price of $15,000.
Assume Leland Manufacturing is able to rent all idle capacity for $25,000 per month. If Leland decides to purchase the 10 units from Scott Supply, Leland's monthly cost for KJ37 would
A. Increase $48,000.
B. Increase $23,000.
C. Decrease $7,000.
D. Change by some amount other than those given.
Stewart Industries has been producing two bearings, components B12 and B18, for use in production.
B12 B18
Machine hours required per unit 2.5 3.0
Standard cost per unit:
Direct material $ 2.25 $ 3.75
Direct labor 4.00 4.50
Manufacturing overhead:
Variable (See Note 1) 2.00 2.25
Fixed (See Note 2) 3.75 4.50
$12.00 $15.00
Stewart's annual requirement for these components is 8,000 units of B12 and 11,000 units of B18. Recently, Stewart's management decided to devote additional machine time to other product lines resulting in only 41,000 machine hours per year that can be dedicated to the production of the bearings. An outside company has offered to sell Stewart the annual supply of the bearings at prices of $11.25 for B12 and $13.50 for B18. Stewart wants to schedule the otherwise idle 41,000 machine hours to produce bearings so that the company can minimize its costs (maximize its net benefits).
Note 1: Variable manufacturing overhead is applied on the basis of direct labor hours.
Note 2: Fixed manufacturing overhead is applied on the basis of machine hours.
The net benefit (loss) per machine hour that would result if Stewart accepts the supplier's offer of $13.50 per unit for Component B18 is
A. $.50
B. $(1.00)
C. $(1.75)
D. Some amount other than those given.
Directions: Select the best answer.
Costs relevant to an insourcing vs. outsourcing decision include variable manufacturing costs as well as
A. Avoidable fixed costs.
B. Factory depreciation.
C. Property taxes.
D. Factory management costs.
A company makes fine glassware that is sold in high-end retail stores. Sales tend to be seasonal, with peaks occurring during winter holidays and the spring wedding season. The company's output is constrained by the scarcity of skilled labor to create designs on the bowls and vases. The company is preparing the annual budget and has gathered the following data:
Bowls
Vases
Average selling price $300 $ 250
Labor hours per unit 3.5 2.8
Cost per unit less labor $183 $150.40
Annual sales forecast in units 800 1,000
Available labor hours = 3,600
Labor rate per hour = $22
The most profitable allocation of the scarce resource next year would be to manufacture
A. 400 bowls and 500 vases.
B. 800 bowls and 285 vases.
C. 800 bowls and 1,000 vases.
D. 228 bowls and 1,000 vases.
A company's approach to an insourcing vs. outsourcing decision
A. Depends on whether the company is operating at or below normal volume.
B. Involves an analysis of avoidable costs.
C. Should use absorption (full) costing.
D. Should use activity-based costing.
A company has decided to discontinue a product produced on a machine purchased 4 years ago at a cost of $70,000. The machine has a current book value of $30,000. Due to technologically improved machinery now available in the marketplace the existing machine has no current salvage value. The company is reviewing the various aspects involved in the production of a new product. The engineering staff advised that the existing machine can be used to produce the new product. Other costs involved in the production of the new product will be materials of $20,000 and labor priced at $5,000.
Ignoring income taxes, the costs relevant to the decision to produce or not to produce the new product would be
A. $25,000
B. $30,000
C. $55,000
D. $95,000
A company plans to sell 12,000 units of product XT and 8,000 units of product RP. The company has a capacity of 12,000 productive machine hours. The unit cost structure and machine hours required for each product are as follows:
Unit costs: XT RP
Materials $37 $24
Direct labor 12 13
Variable overhead 6 3
Fixed overhead 37 38
Machine hours required 1.0 1.5
The company can purchase 12,000 units of XT at $60 and/or 8,000 units of RP at $45. Based on the above, which one of the following actions should be recommended to the company's management?
A. Produce XT internally and purchase RP.
B. Produce RP internally and purchase XT.
C. Purchase both XT and RP.
D. Produce both XT and RP.
A furniture manufacturer currently has three divisions: Maple, Oak, and Cherry. The oak furniture line does not seem to be doing well, and the president of the manufacturer is considering dropping this line. If it is dropped, the revenues associated with the Oak Division will be lost and the related variable costs saved. Also, 50% of the fixed costs allocated to the oak furniture line would be eliminated. The income statements, by divisions, are as follows:
Maple Oak Cherry
Sales $55,000 $85,000 $100,000
Variable costs 40,000 72,000 82,000
Contribution margin $15,000 $13,000 $ 18,000
Fixed costs 10,000 14,000 10,200
Operating profit (loss) $ 5,000 $ (1,000) $ 7,800
Which one of the following options should be recommended to the president of the manufacturer?
A. Continue operating the Oak Division as discontinuance would result in a total operating loss of $1,200.
B. Continue operating the Oak Division as discontinuance would result in a $6,000 decline in operating profits.
C. Discontinue the Oak Division which would result in a $1,000 increase in operating profits.
D. Discontinue the Oak Division which would result in a $7,000 increase in operating profits.