Financial And Managerial Accounting Ch 7 Flashcards
Moreland Clean Company spent €8,000 to produce Product 89, which can be sold as is for €10,000, or processed further incurring additional costs of €3,000 and then be sold for €14,000. Which amounts are relevant to the decision about Product 89?
a. €8,000, €10,000, and €14,000
b. €8,000, €10,000, €3,000 and €14,000
c. €10,000, €3,000, and €14,000
d. €8,000, €3,000, and €14,000
Moreland Clean Company spent €8,000 to produce Product 89, which can be sold as is for €10,000, or processed further incurring additional costs of €3,000 and then be sold for €14,000. Which amounts are relevant to the decision about Product 89?
c. €10,000, €3,000, and €14,000
Three steps in management’s decision making process are (1) review results of the decision (2) determine and evaluate possible courses of action (3) make the decision. The steps are prepared in the following order:
a. 1, 2, 3
b. 3, 2, 1
c. 2, 1, 3
d. 2, 3, 1
Three steps in management’s decision making process are (1) review results of the decision (2) determine and evaluate possible courses of action (3) make the decision. The steps are prepared in the following order:
d. 2, 3, 1
It costs a company 14 EUR of variable cost and 6 EUR of fixed cost to produce product Z200. Product Z200 sells for 30 EUR. A buyer offers to purchase 3000 units at 18 EUR each. The seller will incur special shipping costs of 5 EUR per unit. If the special offer is accepted and produced with unused capacity, net income will:
a. Increase 3000
b. Increase 12 000
c. Decrease 12 000
d. Decrease 3000
It costs a company 14 EUR of variable cost and 6 EUR of fixed cost to produce product Z200. Product Z200 sells for 30 EUR. A buyer offers to purchase 3000 units at 18 EUR each. The seller will incur special shipping costs of 5 EUR per unit. If the special offer is accepted and produced with unused capacity, net income will:
d. Decrease 3000
North Division has the following information:
Sales €1,200,000
Variable expenses 640,000
Fixed expenses 620,000
If this division is eliminated, the fixed expenses will be allocated to the company’s other divisions. What is the incremental effect on net income if the division is dropped?
North Division has the following information:
Sales €1,200,000
Variable expenses 640,000
Fixed expenses 620,000
If this division is eliminated, the fixed expenses will be allocated to the company’s other divisions. What is the incremental effect on net income if the division is dropped?
Answer: 560 000 decrease
It costs Garner Company €12 of variable and €5 of fixed costs to produce one bathroom scale which normally sells for €35. A foreign wholesaler offers to purchase 3,000 scales at €15 each. Garner would incur special shipping costs of €1 per scale if the order were accepted. Garner has sufficient unused capacity to produce the 3,000 scales. If the special order is accepted, what will be the effect on net income?
a. €6,000 increase
b. €6,000 decrease
c. €9,000 decrease
d. €45,000 increase
It costs Garner Company €12 of variable and €5 of fixed costs to produce one bathroom scale which normally sells for €35. A foreign wholesaler offers to purchase 3,000 scales at €15 each. Garner would incur special shipping costs of €1 per scale if the order were accepted. Garner has sufficient unused capacity to produce the 3,000 scales. If the special order is accepted, what will be the effect on net income?
a. €6,000 increase
In a make-or-buy decision, relevant costs are:
a. Manufacturing costs that will be saved
b. The purchase price of the units
c. Opportunity costs
d. All of the above
In a make-or-buy decision, relevant costs are:
d. All of the above
a. Manufacturing costs that will be saved
b. The purchase price of the units
c. Opportunity costs
Which definition best describes an opportunity cost?
a. A hypothetical cost taken into account to represent a benefit
b. A cost relating to a particular business opportunity
c. A cost that has no effect on the current decision
d. The value of the benefit sacrificed in favor of an alternative course of action
Which definition best describes an opportunity cost?
d. The value of the benefit sacrificed in favor of an alternative course of action
Kaya SA is currently operating at full capacity. It is considering buying a part from an outside supplier rather than making it in-house. If Kaya purchases the part, it can use the released production capacity to generate additional income of 30 000 from producing a different product. When conducting incremental analysis in this make-or-buy decision, the company should:
a. Ignore the 30 000
b. Add the 30 000 to other costs in the “Make” column
c. Add the 30 000 to other costs in the “Buy” column
d. Subtract the 30 000 from other costs in the “Make” column
Kaya SA is currently operating at full capacity. It is considering buying a part from an outside supplier rather than making it in-house. If Kaya purchases the part, it can use the released production capacity to generate additional income of 30 000 from producing a different product. When conducting incremental analysis in this make-or-buy decision, the company should:
b. Add the 30 000 to other costs in the “Make” column It represents lost income of continuing to make the part.
A segment of Hazard Inc. has the following data:
Sales 200 000 EUR
Variable expenses 140 000 EUR
Fixed expenses 100 000 EUR
If this segment is eliminated, what will be the effect on the remaining company? Assume that 50% of the fixed expenses will be eliminated and the rest will be allocated to the segments of the remaining company.
a. 120 000 increase
b. 10 000 decrease
c. 50 000 increase
d. 10 000 increase
A segment of Hazard Inc. has the following data:
Sales 200 000 EUR
Variable expenses 140 000 EUR
Fixed expenses 100 000 EUR
If this segment is eliminated, what will be the effect on the remaining company? Assume that 50% of the fixed expenses will be eliminated and the rest will be allocated to the segments of the remaining company.
b. 10 000 decrease
Which of these are all relevant costs?
a. Incremental, opportunity, committed
b. Cash, future, incremental
c. Sunk, cash, opportunity
d. Cash, incremental, allocated
Which of these are all relevant costs?
b. Cash, future, incremental
To complete a contract for fitting out a new shop in time for its opening, a refurbishment company has employed three temporary painters for 10 days at £45 per day and moved two carpenters who are paid £70 per day from another job for three days. The penalty for late completion of the shop is £300 but the delay to the carpenters’ current job will only cost £150. What are the relevant costs?
a. £1,650
b. £1,500
c. £1,800
d. £1,770
To complete a contract for fitting out a new shop in time for its opening, a refurbishment company has employed three temporary painters for 10 days at £45 per day and moved two carpenters who are paid £70 per day from another job for three days. The penalty for late completion of the shop is £300 but the delay to the carpenters’ current job will only cost £150. What are the relevant costs?
b. £1,500
(10 x £45 x 3 ) + £150
Incremental analysis is the process of identifying the financial data that:
a. Do not change under alternative courses of action
b. Change under alternative courses of action
c. Are mixed under alternative courses of action
d. None of the above
Incremental analysis is the process of identifying the financial data that:
b. Change under alternative courses of action
A company is considering the following alternatives:
Alternative A
Revenues 50 000
Variable costs 24 000
Fixed costs 12 000
Alternative B
Revenues 50 000
Variable costs 24 000
Fixed costs 15 000
Which of the following are relevant in choosing between these alternatives?
a. Revenues, variable and fixed costs
b. Variable costs, and fixed costs
c. Variable costs only
d. Fixed costs only
A company is considering the following alternatives:
Alternative A
Revenues 50 000
Variable costs 24 000
Fixed costs 12 000
Alternative B
Revenues 50 000
Variable costs 24 000
Fixed costs 15 000
Which of the following are relevant in choosing between these alternatives?
d. Fixed costs only
In a decision to retain or replace equipment, the book value of an old equipment is a(n):
a. Opportunity cost
b. Sunk cost
c. Incremental cost
d. Marginal cost
In a decision to retain or replace equipment, the book value of an old equipment is a(n):
b. Sunk cost
A bus company is offering cheap fares for special excursions. It has advertised its trips in newspapers and has already paid a quarter of the advertising fee, and has agreed to pay the final installment soon. Which of the following statements is correct?
a. All the advertising costs are relevant
b. Quarter of the advertising cost is relevant
c. Three-quarters of the advertising cost is relevant
d. None of the advertising costs are relevant
A bus company is offering cheap fares for special excursions. It has advertised its trips in newspapers and has already paid a quarter of the advertising fee, and has agreed to pay the final installment soon. Which of the following statements is correct?
d. None of the advertising costs are relevant As the final installment has been agreed to, it is a committed cost and is not relevant.
Der-ann is performing incremental analysis in a make-or-buy decision for Item X. If Der-ann buys Item X, he can use its released productive capacity to produce Item Z. Der-ann will sell Item Z for 360 000 EUR and incur production costs of 240 000 EUR. Der-ann’s incremental analysis should include an opportunity cost of:
a. 360 000 EUR
b. 240 000 EUR
c. 120 000 EUR
d. 0 EUR
Der-ann is performing incremental analysis in a make-or-buy decision for Item X. If Der-ann buys Item X, he can use its released productive capacity to produce Item Z. Der-ann will sell Item Z for 360 000 EUR and incur production costs of 240 000 EUR. Der-ann’s incremental analysis should include an opportunity cost of:
c. 120 000 EUR
Juanita Company must decide whether to make or buy some of its components for the appliances it produces. The costs of producing 166,000 electrical cords for its appliances are as follows.
Direct materials $90,000
Variable overhead $32,000
Direct labor 20,000
Fixed overhead 24,000
Instead of making the electrical cords at an average cost per unit of $1.00 ($166,000 ÷ 166,000), the company has an opportunity to buy the cords at $0.90 per unit. If the company purchases the cords, all variable costs and one-fourth of the fixed costs will be eliminated.
Prepare an incremental analysis showing whether the company should make or buy the electrical cords.
Juanita Company must decide whether to make or buy some of its components for the appliances it produces. The costs of producing 166,000 electrical cords for its appliances are as follows.
Direct materials $90,000
Variable overhead $32,000
Direct labor 20,000
Fixed overhead 24,000
Instead of making the electrical cords at an average cost per unit of $1.00 ($166,000 ÷ 166,000), the company has an opportunity to buy the cords at $0.90 per unit. If the company purchases the cords, all variable costs and one-fourth of the fixed costs will be eliminated.
Prepare an incremental analysis showing whether the company should make or buy the electrical cords.
Answer: Juanita Company will incur $1,400 of additional costs if it buys the electrical cords rather than making them.
Easy Does It manufactures unpainted furniture for the do-it-yourself (DIY) market. It currently sells a child’s rocking chair for $25. Production costs are $12 variable and $8 fixed. Easy Does It is considering painting the rocking chair and selling it for $35. Variable costs to paint each chair are expected to be $9, and fixed costs are expected to be $2.Prepare an analysis showing whether Easy Does It should sell unpainted or painted chairs.
Easy Does It manufactures unpainted furniture for the do-it-yourself (DIY) market. It currently sells a child’s rocking chair for $25. Production costs are $12 variable and $8 fixed. Easy Does It is considering painting the rocking chair and selling it for $35. Variable costs to paint each chair are expected to be $9, and fixed costs are expected to be $2.Prepare an analysis showing whether Easy Does It should sell unpainted or painted chairs.
Answer: sell unpainted
Jeffcoat Company is considering replacing a factory machine with a new machine. Jeffcoat Company has a factory machine that originally cost $110,000. It has a balance in Accumulated Depreciation of $70,000, so its book value is $40,000. It has a remaining useful life of four years. The company is considering replacing this machine with a new machine. A new machine is available that costs $120,000. It is expected to have zero salvage value at the end of its four-year useful life. If the new machine is acquired, variable manufacturing costs are expected to decrease from $160,000 to $125,000 and the old unit could be sold for $5,000.
Jeffcoat Company is considering replacing a factory machine with a new machine. Jeffcoat Company has a factory machine that originally cost $110,000. It has a balance in Accumulated Depreciation of $70,000, so its book value is $40,000. It has a remaining useful life of four years. The company is considering replacing this machine with a new machine. A new machine is available that costs $120,000. It is expected to have zero salvage value at the end of its four-year useful life. If the new machine is acquired, variable manufacturing costs are expected to decrease from $160,000 to $125,000 and the old unit could be sold for $5,000.
Answer: The book value of old machine does not affect the decision. Book value is a sunk cost. Costs which cannot be changed by future decisions (sunk cost) are not relevant in incremental analysis. However, any trade-in allowance or cash disposal value of the existing asset is relevant.
Rochester Roofing is faced with a decision. The company relies very heavily on the use of its 60-foot extension lift for work on large homes and commercial properties. Last year, the company spent $60,000 refurbishing the lift. It has just determined that another $40,000 of repair work is required. Alternatively, Rochester Roofing has found a newer used lift that is for sale for $170,000. The company estimates that both the old and new lifts would have useful lives of 6 years. However, the lift is more efficient and thus would reduce operating expenses by about $20,000 per year. The company could also rent out the new lift for about $2,000 per year. The old lift is not suitable for rental. The old lift could currently be sold for $25,000 if the new lift is purchased. Prepare an incremental analysis that shows whether the company should repair or replace the equipment.
Rochester Roofing is faced with a decision. The company relies very heavily on the use of its 60-foot extension lift for work on large homes and commercial properties. Last year, the company spent $60,000 refurbishing the lift. It has just determined that another $40,000 of repair work is required. Alternatively, Rochester Roofing has found a newer used lift that is for sale for $170,000. The company estimates that both the old and new lifts would have useful lives of 6 years. However, the lift is more efficient and thus would reduce operating expenses by about $20,000 per year. The company could also rent out the new lift for about $2,000 per year. The old lift is not suitable for rental. The old lift could currently be sold for $25,000 if the new lift is purchased. Prepare an incremental analysis that shows whether the company should repair or replace the equipment.
Answer: the analysis indicates that purchasing the new machine would increase net income for the 6-year period by $27,000.
Lambert, Inc. manufactures several types of accessories. For the year, the knit hats and scarves line had sales of $400,000, variable expenses of $310,000, and fixed expenses of $120,000. Therefore, the knit hats and scarves line had a net loss of $30,000. If Lambert eliminates the knit hats and scarves line, $20,000 of fixed costs will remain. Prepare an analysis showing whether the company should eliminate the knit hats and scarves line.
Lambert, Inc. manufactures several types of accessories. For the year, the knit hats and scarves line had sales of $400,000, variable expenses of $310,000, and fixed expenses of $120,000. Therefore, the knit hats and scarves line had a net loss of $30,000. If Lambert eliminates the knit hats and scarves line, $20,000 of fixed costs will remain. Prepare an analysis showing whether the company should eliminate the knit hats and scarves line.
Answer: eliminate the line
An outdoor clothing manufacturer has to make decisions about which items to make itself and which to buy-in from third party suppliers. The design costs are a fixed charge, only incurred if the product is made in-house. Which should it buy in?
Estimated sales volume (items / pairs)
Hats: 25 000. Gloves: 30 000. Scarves: 12 000
Variable cost of materials
Hats: 2,58. Gloves: 5,24. Scarves: 8,36
Variable labour per item / pair
Hats: 0,21. Gloves: 0,45. Scarves: 0,73
Overhead cost per item / pair
Hats: 0,2. Gloves: 0,2. Scarves: 0,2
Design costs
Hats: 14 000. Gloves: 7000. Scarves: 15 000
Bought-in costs per item / pair
Hats: 3,30. Gloves: 6,00. Scarves: 10,60
a. None
b. Hats and gloves
c. Hats only
d. All
An outdoor clothing manufacturer has to make decisions about which items to make itself and which to buy-in from third party suppliers. The design costs are a fixed charge, only incurred if the product is made in-house. Which should it buy in?
Estimated sales volume (items / pairs)
Hats: 25 000. Gloves: 30 000. Scarves: 12 000
Variable cost of materials
Hats: 2,58. Gloves: 5,24. Scarves: 8,36
Variable labour per item / pair
Hats: 0,21. Gloves: 0,45. Scarves: 0,73
Overhead cost per item / pair
Hats: 0,2. Gloves: 0,2. Scarves: 0,2
Design costs
Hats: 14 000. Gloves: 7000. Scarves: 15 000
Bought-in costs per item / pair
Hats: 3,30. Gloves: 6,00. Scarves: 10,60
c. Hats only
The made-in cost is 2.58 + 0.21 + (14,000/25,000) = 3.35 so it is more cost effective to buy in hats.
A company produces hand-made greetings cards. If labour is limited, in what order should these cards be produced to maximise the company’s profits?
a. New home, Birthday, Anniversary, Congratulations
b. Birthday, Congratulations, New home, Anniversary
c. Congratulations, Birthday, New home, Anniversary
d. Anniversary, New home, Birthday, Congratulations
A company produces hand-made greetings cards. If labour is limited, in what order should these cards be produced to maximise the company’s profits?
d. Anniversary, New home, Birthday, Congratulations
The contribution per labour hour is maximised by first producing anniversary cards (£2.00), then new home (£1.70), then birthday (£1.60) and finally congratulations (£1.40).
A company makes different coloured pens but has a limited supply of materials. Using the data below, in what order of priority should the pens be made:
Sales price
Blue: 17,50. Black: 21,50. Red: 23,75.
Material cost per hour
Blue: 6,40. Black: 7,20. Red: 10,50.
Labour cost per pen
Blue: 3,00. Black. 3,00. Red. 3,00.
a. Black, blue, red
b. Red, black, blue
c. Blue, black, red
d. Black, red, blue
A company makes different coloured pens but has a limited supply of materials. Using the data below, in what order of priority should the pens be made:
Sales price
Blue: 17,50. Black: 21,50. Red: 23,75.
Material cost per hour
Blue: 6,40. Black: 7,20. Red: 10,50.
Labour cost per pen
Blue: 3,00. Black. 3,00. Red. 3,00.
a. Black, blue, red
Calculate the contribution per € of materials.
A company is estimating the benefits of investing in a new machine to improve its output. Its current variable costs are £12 per unit and current fixed costs are £48,000. The new machine increases fixed costs by 20% but reduces variable costs by 10%. What is the minimum level of production when it makes sense for them to change to the new method?
A company is estimating the benefits of investing in a new machine to improve its output. Its current variable costs are £12 per unit and current fixed costs are £48,000. The new machine increases fixed costs by 20% but reduces variable costs by 10%. What is the minimum level of production when it makes sense for them to change to the new method?
Answer: 8000
Increased fixed costs (£9,600) are divided by the increase in variable cost per unit (£1.20).
Which of the following factories should be closed down?
a. South only
b. South and West
c. None
d. All
Which of the following factories should be closed down?
a. South only
Paul Bunyon Lumber Co. produces several products that can be sold at the split-off point or processed further and then sold. The following results are from a recent period:
What is the increase in profit if the APPROPRIATE products are processed further?
a. 29 800
b. 24 200
c. 96 000
d. 255 800
Paul Bunyon Lumber Co. produces several products that can be sold at the split-off point or processed further and then sold. The following results are from a recent period:
What is the increase in profit if the APPROPRIATE products are processed further?
a. 29 800
Janssen Company has old inventory on hand that cost €24,000. Its scrap value is €32,000. The inventory could be sold for €80,000 if manufactured further at an additional cost of €24,000. What should Janssen do?
a. Sell the inventory for €32,000 scrap value
b. Hold the inventory at its €24,000 cost
c. Dispose of the inventory to avoid any further decline in value
d. Manufacture further and sell it for €80,000
Janssen Company has old inventory on hand that cost €24,000. Its scrap value is €32,000. The inventory could be sold for €80,000 if manufactured further at an additional cost of €24,000. What should Janssen do?
d. Manufacture further and sell it for €80,000
