1. Sharp Company produces 8,000 parts each year, which are used in the production of one of its products. The unit product cost of a part is $36, computed as follows:
The parts can be purchased from an outside supplier for only $28 each. The space in which the parts are now produced would be idle and fixed production costs would be reduced by one-fourth. If the parts are purchased from the outside supplier, the annual impact on the company's operating income will be: (Points : 2)
$24,000 increase
$24,000 decrease
$56,000 increase
$56,000 decrease
2. Gallerani Corporation has received a request for a special order of 6,000 units of product A90 for $21.20 each. Product A90's unit product cost is $16.20, determined as follows:
Direct labor is a variable cost. The special order would have no effect on the company's total fixed manufacturing overhead costs. The customer would like modifications made to product A90 that would increase the variable costs by $4.20 per unit and that would require an investment of $21,000 in special molds that would have no salvage value.
This special order would have no effect on the company's other sales. The company has ample spare capacity for producing the special order. If the special order is accepted, the company's overall net operating income would increase (decrease) by:
- ($18,600)
- ($16,200)
- $30,000
- $5,400
3. An automated turning machine is the current constraint at Jordison Corporation. Three products use this constrained resource. Data concerning those products appear below:
Rank the products in order of their current profitability from most profitable to least profitable. In other words, rank the products in the order in which they should be emphasized.
- LN, JQ, RQ
- RQ, LN, JQ
- RQ, JQ, LN
- JQ, RQ, LN
14. Two alternatives, code-named X and Y, are under consideration at Guyer Corporation. Costs associated with the alternatives are listed below.
- Alternative X Alternative Y
- Materials costs $41,000 $59,000
- Processing costs $45,000 $45,000
- Equipment rental $17,000 $17,000
- Occupancy costs $16,000 $24,000
Are the materials costs and processing costs relevant in the choice between alternatives X and Y? (Ignore the equipment rental and occupancy costs in this question.)
- Neither materials costs nor processing costs are relevant
- Only processing costs are relevant
- Only materials costs are relevant
- Both materials costs and processing costs are relevant
15. The management of Bonga Corporation is considering dropping product D74F. Data from the company's accounting system appear below:
- Sales $830,000
- Variable expenses $390,000
- Fixed manufacturing expenses $266,000
- Fixed selling and administrative expenses $232,000
All fixed expenses of the company are fully allocated to products in the company's accounting system. Further investigation has revealed that $111,000 of the fixed manufacturing expenses and $103,000 of the fixed selling and administrative expenses are avoidable if product D74F is discontinued.
What would be the effect on the company's overall net operating income if product D74F were dropped? (Points : 2)
- Overall net operating income would increase by $226,000.
- Overall net operating income would increase by $58,000.
- Overall net operating income would decrease by $226,000.
- Overall net operating income would decrease by $58,000.