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Differential Cost Analysis
Differential Cost Analysis
1. The type of cost presented to management for an equipment replacement decision should be
limited to
a. Relevant costs
b. Controllable costs
c. Standard costs
d. Conversion costs
A
2. In a make or buy decision
a. Only variable costs are relevant
b. Fixed costs that can be avoided in the future are relevant
c. Fixed costs that will continue regardless of the decisions are relevant
d. Only conversion costs are relevant
B
3. In deciding whether to manufacture a part or buy it from an outside vendor, a cost that is
irrelevant to the short-run decision is
a. Direct labor
b. Variable overhead
c. Fixed overhead that will be avoided if the part is bought from outside vendor
d. Fixed overhead that will continue if the part is bought from outside vendor
D
4. Which of the following cost allocation methods would be used to determine the lowest price
that could be quoted for a special order that would utilize idle capacity within a production area?
a. Job order costing
b. Process costing
c. Variable costing
d. Standard costing
C
5. In considering a special order situation that will enable a company to make use of presently idle
capacity, which of the following costs would be irrelevant?
a. Raw materials
b. Depreciation
c. Direct labor
d. Variable overhead
B
6. The measurable value of an alternative use of resources is referred to as a (an)
a. Opportunity cost
b. Differential costs
c. Imputed cost
d. Sunk cost
A
7. A company manufactures two joint products at a joint costs of 10, 000. Those products can be
sold when split-off or when further processed at an additional cost and sold as higher quality
items. The decisions to sell at split-off or further process should be based on
a. Assumption that the 10, 000 joint cost is irrelevant
b. Allocation of the 10, 000 joint cost using the relative sales- value approach
c. Assumption that the 10, 000 joint cost must be allocated using a physical measure approach
d. Allocation of the 10, 000 joint cost using any equitable and rational allocation basis
A
8. A cost incurred in the past and hence irrelevant for current decision making is a
a. Fixed cost
b. Discretionary cost
c. Sunk cost
d. Direct cost
C
9. Which type of cost is a vital part of decision making process, but omitted from conventional
accounting records?
a. Out-of-pocket costs
b. Sunk cost
c. Opportunity cost
d. Direct cost
C
10. A company owns equipment that is used to manufacture important parts for its production
process. The company plans to sell the equipment for 10, 000 and to select one of the following
alternatives: (1) acquire new equipment for 80, 000 (2) purchase the important parts from an
outside company at 4. 00 per part. The company should quantitatively analyze the alternatives
by comparing the cost of manufacturing the parts
a. Plus 80, 000 to the cost of buying the parts less 10, 000
b. To the cost of buying the parts less 10, 000
c. Less 10, 000to the cost of buying the parts
d. To the cost of buying the parts
D
11. A company is deciding whether to exchange an old asset for a new asset. Within the context of
the exchange decision, and ignoring income tax considerations, the undepreciated book balance
of the old asset would be considered as a (an)
Sunk Cost Irrelevant Cost
a. No No
b. Yes No
c. No Yes
d. Yes Yes
D
12. Which of the following is often subject to further processing in order to be saleable?
By- products Scrap
a. No No
b. No Yes
c. Yes Yes
d. Yes No
D
13. The salary or wage that you could be earning while you are reviewing for the CPA licensure
examination is
a. An opportunity cost
b. An incremental cost
c. A sunk cost
d. A joint cost
A
14. The role of sunk cost in decision making can be summed up in which of the following sayings?
a. Nothing ventured, nothing gained
b. By gones are by gones
c. A peso saved is a peso earned
d. The love of money is the root of all evil
B
15. A product should be dropped if
a. It has a negative incremental profit
b. It has a negative contribution margin
c. Dropping it will increase the total profit of the company
d. It is not essential to the company’s product line
C
16. A major factor in evaluating a special orders is
a. The expected contribution margin on the order
b. The possible effects on sales at regular prices
c. The availability of capacity to produce the additional units
d. All of the above
D
17. Which of the following is true for a make-or-buy decision?
a. The reliability of the outside supplier of the component is important to the decision
b. Depreciation on equipment used in making the component and having no other use is the
critical factor in the decision
c. Opportunity costs are irrelevant
d. The company should make the component if the purchase price is less than the per unit
variable cost to make the component
A
18. A manufacturing process that invariably produces two or more products is
a. Is a complementary process
b. Is a joint process
c. Normally has only fixed cost
d. Usually have primarily variable costs
B
19. To be classified as short term, a decision should normally involve
a. No change in selling price
b. A period of one year or less
c. The introduction of a new product
d. A situation in which a company is operating at less than full capacity
B
20. In a make-or-buy decision, which of the following is true?
a. Variable costs are the only relevant cost
b. Allocated fixed cost are relevant
c. Alternative uses of space and machinery are relevant
d. Making is the correct decision when there is idle capacity
C
21. A sunk cost is
a. Not avoidable
b. Avoidable under one alternative but not in another
c. Joint or common
d. Direct to a segment
A
22. A common cost
a. Relates to a process that produces more than one product
b. Should be allocated to the segments of a company
c. Can usually be avoided in its entirety by dropping a segment
d. None of the above
A
23. The analysis on which a decision is based is faulty if
a. It omits one of the available alternative courses of action
b. One of the alternatives considered is to do exactly what had been planned
c. Joint or common
d. Direct to a segment
A
24. Which of the following is not relevant in deciding whether to process a joint product beyond its
split- off point?
a. The split off value
b. The price after additional processing
c. The cost of further processing
d. The cost of operating the joint process
D
25. Which of the following is not a short term decision?
a. Accept a special order
b. Make or buy a component
c. Replace a machine
d. Sell a joint product at split off or process further
C
26. The kind of cost that can be ignored in short term decision making is
a. A differential cost
b. An opportunity
c. A relevant cost
d. A sunk cost
D
27. From its refining process an oil company obtains three products, one of which can be processed
further into a different product, the other two of which can be sold after further refining. The
refining process is
a. A joint process
b. A mixed cost process
c. An unavoidable process
d. A process whose costs should be allocated to the resulting products
A
28. Which of the following costs is relevant in deciding whether to sell joint products at split off or
process them further?
a. The unavoidable costs of further processing
b. The additional costs of further processing
c. The variable cost of operating the joint process
d. The cost of materials used to make the joint products
B
29. Which of the following is short term decision in which opportunity costs are not relevant?
a. Make or buy decision
b. Special order decision
c. Drop a segment decision
d. None of them
D
30. A company has space that it uses to make a component. It could rent the space to another
company. The rent is
a. A sunk cost
b. An opportunity cost
c. A joint cost
d. An avoidable cost
B
31. The best characterization of an opportunity cost is that it is
a. Relevant to decision making but is not usually reflected in the accounting records
b. Not relevant to decision making but is not usually reflected in the accounting records
c. Relevant to decision making but is usually reflected in the accounting records
d. Not relevant to decision making but is usually reflected in the accounting records
A
32. Differential costs are costs that are:
a. Not avoidable
b. Avoidable under one alternative but not under another
c. Joint or common
d. Not direct to a segment
B
33. An opportunity cost commonly associated with a special order is
a. The contribution margin on lost sales
b. The variable costs of the order
c. Additional Fixed costs related to the increased output
d. Any of the above
A
34. Which of the following cost classification schemes is most relevant to decision making?
a. Fixed ---- variable
b. Joint --- common
c. Avoidable --- unavoidable
d. Direct --- common
C
35. The most profitable use of a resource that has limited capacity and is needed in the production
of more than one product is a function of which of the following?
a. The number of more than one product the company can sell
b. The contribution margin of each product
c. The amount of resource-use required for each unit of each product
d. All of the above
D
1. Jordan Company budgeted sales of 400, 000 calculators at 40 for 2004. Variable
manufacturing costs were budgeted at 16 per unit and fixed manufacturing costs at 10 per
unit. A special order offering to buy 40, 000 calculators for 23 each were received by Jordan
in October 2004. Jordan has sufficient plant capacity to manufacture the additional quantity;
however, the production would have to be done on an overtime basis at an estimated
additional cost of 3 per calculator. Acceptance of the special order will not affect Jordan’s
normal sales and no selling expenses would be incurred.
What would be the effect on operating profit if the special order were accepted?
a. 120, 000 increase
b. 240, 000 decrease
c. 160, 000 increase
d. 280, 000 decrease
C. Sales from special order (40, 000x 23) 920, 000
Incremental costs:
Variable Mfg. Costs (40, 000 x 16) 640, 000
Additional costs (40, 000 x 3) 120, 000 760, 000
Increase in operating profit 160, 00
2. Spencer Company’s regular selling price for its product is 10 per unit. Variable costs are 6 per
unit. Fixed costs total 1 per unit based on 100, 000 units, and remain constant within the
relevant range of 50, 000 units to a total capacity of 200, 000 units. After sales of 80, 000
units were projected for 2004, a special order was received for an additional 10, 000 units.
To increase its operating income by 10, 000 what price per unit should Spencer charge for
this special order?
a. 7. 00 b. 8. 00 c. 10. 00 d. 11. 00
Factory overhead is applied at P1 per standard machine hour. Fixed capacity cost is 60%
of applied factory overhead and is not affected by any “make or buy” decision. It would
cost 25 per unit to buy the part from an outside supplier. In the decision to make or buy,
what is the total relevant unit cost to be considered?
a. 2. 00 b. 15. 00 c. 19. 00 d. 27. 00
B. Total relevant unit cost (2 + 5) + (20 x 40%) = 15. 00
4. Wagner Company sells product A at a selling price of 21 per unit. Wagner’s cost per unit
based on the full capacity of 200, 000 units is as follows:
A special order offering to buy 20, 000 unit was received from a foreign distributor. The
only selling costs that would be incurred on this order would be 3 per unit for shipping. Wagner
has sufficient excess capacity to produce the additonal units. In negotiating a price for the
special order, Wagner should consider that the minimum selling price per unit should be
a. 14. 00 b. 15. 00 c. 16. 00 d. 18. 00
A. Minimum Selling price (4+ 5 + 3) + (6x 1/3) = 14. 00
5. Kern Company prepared the following forecast concerning product A for 2004:
Sales 500, 000 selling price per unit P5. 00
Variable costs 300, 000 Fixed costs 150, 000
A study made by the sales manager disclosed that the unit selling price could be
increased by 20%, with an expected volume decrease of only 10%. Assuming Kern used
these changes in its forecast, what should be the operating income from product A?
a. 66, 000 b. 90, 000 c. 120, 000 d. 145, 000
C. Sales (100, 000 x 90%) x (5 x 120%) = 540, 000
Variable costs at (90, 000 x 3 per unit) = 270, 000
Contribution margin 270, 000
Fixed costs 150, 000
Operating income 120, 000
6. Kingston Company needs 10, 000 units of a certain part to be used in its production cycle.
The following information is available:
If Kingston buys the part from Ultica instead of making it, Kingston could not use the
released facilities in another manufacturing activity. Sixty percent of the fixed overhead
applied will continue regardless of what decision is made. In deciding whether to make or
buy the part, the total relevant costs to make the parts are
a. 342, 000 b. 480, 000 c. 530, 000 d. 570, 000
B. Relevant cost (6 + 24 + 12) + (15 x 40%) = 48. 00
Units needed x 10, 000
Relevant cost to make 480, 000
7. Lincoln Company, a glove manufacturer, has enough idle capacity available to accept a
special order of 20, 000 pairs of gloves at 12. 00 a pair. Variable manufacturing costs are
9.00 a pair and fixed manufacturing cost are 3.00 a pair. Lincoln will not incur any selling
expenses as a result of the special order. What would be the effect on operating income if
the special order could be accepted without affecting normal sales?
a. None
b. 60, 000 increase
c. 180, 000 increase
d. 240, 000 increase
B. Incremental cost = 20, 000 x (12-9) 60, 000
8. Pitt Company is considering a proposal to replace existing machinery used for the
manufacture of product A. The new machines are expected to cause increased annual fixed
costs of 120, 000; however, variable costs should decrease by 20% due to reduction in direct
labor hours and more efficient usage of direct materials. Before this change was under
consideration, Pitt had budgeted product A sales and costs for 2004 as follows.
Sales = 2, 000, 000; Variable costs = 70% of sales; Fixed costs= 400, 000
Assuming that Pitt implemented the above proposal by January 1, 2004, what would the
increase be in budgeted operating profit for product A for 2004?
a. 160, 000 b. 280, 000 c. 360, 000 d. 480, 000
9. Plainfield Company manufactures Part G for used in its production cycle. The cost per unit
for 10, 000 units of Part G are as follows:
Direct materials P3 Direct labor P15
Variable overhead P6 Fixed overhead P 8
Verona Company has offered to sell Plainfield 10, 000 units of Part G for 30 per unit. If
Plainfield accepts Verona’s offer, the released facilities could be save 45, 000 in relevant
cists in the manufacture of Part H. In addition, 5 per unit of fixed overhead applied to
part G would be totally eliminated.
Alternative Amount
a. Manufacture 10, 000
b. Manufacture 15, 000
c. Buy 35, 000
d. Buy 65, 000
C. Cost to buy: (10, 000x 30) 300, 000
Less: Savings on released facilities 45, 000
Net cost to buy 255, 000
Cost to make: 10, 000 x (3+15+6+5) 290, 000
Savings to buy Part G 35, 000
10. Argus Company, a manufacturer of lamps, budgeted sales of 400, 000 lamps at 20. 00 per
unit of 2004. Variable manufacturing costs were budgeted at 8. 00 per unit and fixed
manufacturing costs at 5. 00 per unit. A special order offering to buy 40, 000 lamps for 11. 50
each was received by Argus in October 2004. Argus has sufficient plant capacity to
manufacture the additional quantity of lamps; however, the production would have to be
done by the present work force on an overtime basis at an estimated additional cost of 1. 50
per lamp. Argus will not incur any selling expenses as a result of the special order. What
should be the effect on operating income if the special order could be accepted without
affecting normal sales?
a. 60, 000 decrease
b. 80, 000 increase
c. 120, 000 decrease
d. 140, 000 increase
11. The Blade division of Day Company produces hardened steel blades. One- third of the Blade
division’s output is sold to the Lawn products division of day; the remainder is sold to
outside customers. Blade Division’s estimated sales and standard costs data for the fiscal
year ending June 30, 2004 are as follows:
Lawn products Outsiders
Sales P15, 000 P40, 000
Variable costs (10, 000) (20, 000)
Fixed cost (3, 000) (6, 000)
Gross margin P 2, 000 P 14, 000
The Lawn Products Division has an opportunity to purchase 10, 000 identical
quantity blades from an outside supplier at a cost of 1. 25 per unit on a continuing basis. Assume
that the Blade Division cannot sell any additional products to outside customers. Should Day
allow its Lawn Products division to purchase the blades form the outside supplier, and why?
a. Yes, because buying the blades would save Day Company 500
b. No, because making the blades would save Day Company 1, 500
c. Yes, because buying the blades would save Day Company 2, 500
d. No, because making the blades would save Day Company 2, 500
D. Savings to make the blades (10, 000 x 1.25) – 10, 000 = 2, 500
12. Light Company has 2, 000 obsolete light fixtures that are carried in inventory at a
manufacturing cost of 30, 000. If the fixtures are reworked for 10, 000, they could be sold for
18, 000. Alternatively, the light fixtures could be sold for 3, 000 to a jobber located in a
distant city. In a decision model analyzing these alternatives, the opportunity cost would be
a. 3, 000 b. 10, 000 c. 13, 000 d. 30, 000
A. The opportunity cost is the sales price given up to rework 3, 000
13. Motor Company manufactures 10, 000 units of part M1 for use in its production annually.
The following costs are reported:
Direct materials P20, 000 Direct labor P55, 000
Variable overhead P45, 000 Fixed overhead P 70, 000
Valve Company has offered to sell Motor 10, 000 units of Part M1 for 18 per unit. If
motor accepts the offer, some of the facilities presently used to manufacture M1 could
be rented to a third party at an annual rental of 15, 000. Additionally, P4 per unit of the
fixed overhead applied to Part M1 would be totally eliminated. Should Motor accept
Valve’s offer and why?
a. No, because it would be 5, 000 cheaper to make the part
b. Yes, because it would be 10, 000 cheaper to buy the part
c. No, because it would be 15, 000 cheaper to make the product
d. Yes, because it would be 25, 000 cheaper to buy the product
A. Cost to buy the parts: (10, 000x 18) 180, 000
Less: Rent Income on released facilities 15, 000 165, 000
Cost to make the parts:
(20, 000+55, 000+45, 000)+ (10, 000 x4) = 160, 000
Savings to make the parts 5, 000
14. The Reno Company manufactures Part 498 for use in its production cycle. The cost per unit
for 20, 000 units of Part 498 are as follows:
The tray Company has offered to sell 20, 000 units of Part 498 to Reno for 60 per unit.
Reno will make the decision to buy the part from Tray if there is a savings of 25, 000 for Reno. If
Reno will accept Tray’s offer, 9 per unit of the fixed overhead applied would totally be
eliminated. Furthermore, Reno has determined that the released facilities could be used to save
relevant costs in the manufacture of Part 575. In order to have a savings of 25, 000, the amount
of relevant costs that would be saved by using the released facilities in the manufacture of Part
575 would have to be
a. 80, 000 b. 85, 000 c. 125, 000 d. 140, 000
B. Cost to buy the parts: (20, 000x 60) 1, 200, 000
a. None
b. 30, 000 increase
c. 90, 000 increase
d. 120, 000 increase
B. Incremental Income 20, 000 x (6. 00 – 4. 50) 30, 000
16. Boyer Company makes basketballs. The forecasted income statement for the year before any
special orders is as follows:
Amount Per unit
Sales 4, 000, 000 10. 00
Manufacturing Cost of sales 3, 200, 000 8. 00
Gross profit 800, 000 2. 00
Selling expenses 300, 000 . 75
Operating income 500, 000 1. 25
Fixed costs included in the above forecasted income statement are 1, 200, 000 in
manufacturing costs of sales and 100, 000 in selling expenses. A special order offering to
buy 50, 000 basketballs for 7. 50 each was made to Boyer. There will be no additional
selling expenses if the special order is accepted. Assuming Boyer has sufficient capacity
to produce 50, 000 or more basketballs; by what amount would operating income be
increased or decreased as a result of accepting the special order?
a. 25, 000 decrease
b. 62, 500 decrease
c. 100, 000 increase
d. 125, 000 increase
D. Total manufacturing costs 3, 200, 000
Less: Fixed costs 1, 200, 000 2, 000, 000
Incremental sales (50, 000x 7.50) 375, 000
Incremental costs (2, 000, 000/ 400, 000) x 50, 000 = 250, 000
Incremental income 125, 000
17. Cardinal Company needs 20, 000 units of a certain part to use in its production cycle. The
following information is available:
Cost to make the part: Cost to buy the part
Direct materials P4 from Oriole Company P36
Direct labor 16
Variable overhead 8
Fixed overhead applied 10 P38
If Cardinal buys the part from Oriole Company instead of manufacturing it, Cardinal could
not use the released facilities in another production activity. 60% of the fixed overhead
applied will continue regardless of what decision is made. In deciding whether to make or
buy the part, the total relevant costs to make the parts are
a. 560, 000 b. 640, 000 c. 720, 000 d. 760, 000
B. Relevant unit cost to make(4+16+8) + (10x 40%) = 32. 00
Units needed x 20, 000
Total relevant costs 640, 000
18. The Lantern Corporation has 1, 000 obsolete lanterns that are carried in inventory at a
manufacturing cost of 20, 000. If the lanterns are reworked for 5, 000 they could be sold for
9, 000. If the lanterns are scrapped, they could be sold for 1, 000. What alternative is more
desirable and what are the total relevant costs of the alternative?
a. Rework and 5, 000
b. Rework and 25, 000
c. Scrap and 20, 000
d. Neither, as there is an overall loss under each alternative
A. Advantage to rework (9, 000 – 5, 000*) – 1, 000 = 3, 000
*relevant cost to rework 5, 000
19. Relay Corporation manufactures batons. Relay can manufacture 300, 000 batons a year at a
variable cost of 750, 000 and fixed cost of 450, 000. Based on Relay’s predictions, 240, 000
batons will be sold at the regular price of 5. 00 each. In addition, a special order was placed
for 60, 000 batons to be sold at a 40% discount off the regular price. By what amount would
income before income taxes be increased or decreased as a result of the special order?
a. 60, 000 decrease
b. 30, 000 increase
c. 36, 000 increase
d. 180, 000 increase
B. Revenue from special order (5x 605) x 60, 000 180, 000
Variable costs 60, 000 x (750, 000/ 300, 000) 150, 000
Increase in income 30, 000
20. Buck Company manufactures Part 1700 for use in its production cycle. The cost per unit of
5, 000 units of part 1700 are as follows:
Hollow Company has offered to sell Buck 5, 000 units of part 1700 for 27 per unit. If Buck
accepts the offer, some of the facilities presently used to manufacture part 1700 could
be used to help with the manufacture of part 1211 and thus save 40, 000 in relevant
costs, and 3 per unit applied to part 1700 would be totally eliminated. By what amount
would net relevant costs be increased or decreased if Buck accepts Hollow’s offer?
a. 35, 000 decrease
b. 20, 000 decrease
c. 15, 000 decrease
d. 5, 000 increase
C. Net cost to purchase (5, 000 x 27& - 40, 000 95, 000
Cost to make 5, 000 x (2 +12+ 5+ 3) 110, 000
Net relevant cost to purchase (decrease) 15, 000
21. Maxwell Company has an opportunity to acquire new machine to replace one of its present
machines. The new machine would cost 90, 000, have a five-year life, and no salvage value.
Variable operating costs would be 100, 000 per year. The present machine has a book value
of 50, 000 a remaining life of five-years and disposal value now of 5, 000. Variable operating
costs would be 125, 000 per year. Ignoring present value calculations and income taxed, and
considering five years in total, what would be the difference in profit before income taxes by
acquiring the new machine as opposed to retaining the present one?
a. 10, 000 decrease
b. 15, 000 decrease
c. 35, 000 increase
d. 40, 000 increase
D. Relevant costs to keep (125, 000 x 5 years) 625, 000
Relevant cost to replace (100, 000 x 5)+ 90, 000- 5, 000 585, 000
Difference in profit 40, 000
22. Yardley Company uses a joint process to produce products A, B, C. Each product may be sold
at its split off point or processed further. Additional processing costs are entirely variable and
are traceable to the respective products produced. Joint production costs for 2004 were 50,
000 and are allocated by Yardley using the relative sales- value approach at split off. Relevant
data follow:
23. The White Company has been incurring losses in the past years during the third quarter of
the year. Management is considering to shutdown operations during this period to avoid
continued losses. Allocated fixed operational monthly costs were determined from the
records amount to 60, 000. Average monthly sales during the year except the third quarter
are 10, 000 units.
The company averages only 2, 500 units monthly during the third quarter. Units are sold at a
price of 30 each. Variable costs to produce and sell
The units are 18 per unit. If management decides to shutdown operations they would save
on allocated fixed costs 40%, but will incur additional shutdown costs of 4, 000 per month.
What would be the advantage of continued operations?
a. 120, 000
b. 90, 000
c. 60, 000
d. 30, 000
D. Total shutdown costs: (180, 000 x 60%) + (4, 000 x 3 mos.) 120, 000
Sales (2, 500 x 3) x 30 225, 000
Variable costs: (2, 500 x 3) x 18 135, 000
Contribution margin 90, 000
Fixed costs (60, 000 x 3) 180, 000
Loss under continued operations (90, 000)
Advantage of continued operations 30, 000
24. The management of Blue Company is considering eliminating Product Line C. The records of
the company showed the following information:
A B C
Sales 10, 000 30, 000 20, 000
Variable costs 5, 000 10, 000 15, 000
Contribution Margin 5, 000 20, 000 5, 000
Fixed costs:
Avoidable 2, 000 10, 000 1, 000
Unavoidable 1, 000 2, 000 5, 000
Net income 2, 000 8, 000 (1, 000)
25. L. Reyes Company manufactures Part X for use in its production cycle. The per
unit cost per unit cost for 2, 000 units of Part X are as follows:
Maldonado Company has offered to sell L. Reyes Company 2, 000 units of Part X for 50
per unit. If L. Reyes accepts Maldonado’s offer, the released facilities could be used to save
30, 000 in relevant costs in its manufacture of part X. In addition, 10 per unit of fixed overhead
applied to part X would be totally eliminated. The alternative that is more desirable and the
corresponding net savings is
ALTERNATIVE SAVINGS
a. Buy 20, 000
b. Manufacture10, 000
c. Buy 30, 000
d. Manufacture 30, 000
C. Cost to buy the parts: (2, 000 units x 50) 100, 000
Less: Savings on released facilities 30, 000
Net cost to buy 70, 000
Cost to make: 2, 000 x (5+ 25+10+10) 100, 000
Net Savings to buy 30, 000
26. Polk Company has 100 units of an obsolete part. The variable cost to produce them was 40
per unit. They could now be sold for 30 each and it would cost 60 to make them now. The
parts could be reworked for 80 each and sold for 170. What is the monetary advantage of
reworking the parts over the next best action?
a. 3, 000 b. 5, 000 c. 6, 000 d. 10, 000
C. Advantage of reworking [(170 – 80) x 100] – (30 x 100) = 6, 000
27. Garfield Company sells a product for 300. Variable cost is 160. Garfield could accept a special
order for 10, 000 units at 230. If Garfield accepted the order, how many units could it lose at
the regular price before the decision became unwise?
a. 10, 000 b. 5, 000 c. 2, 000 d. 1, 000
C. Units it could lose [(230- 160) x 10, 000] / (300 – 160) = 5, 000
28. Tyler Company currently sells 10, 000 units of product M for 10. 00 each. Variable costs are
4. 00 and avoidable fixed costs are 4, 000. A discount store has offered 8. 00 per unit for 4,
000 units of product M. The managers believe that if they accept the special order, they will
lose some sales at the regular price. Determine the number of units they could lose before
the order became unprofitable.
a. 2, 667 b. 5, 000 c. 2, 000 d. 1, 000
C. Units it could lose [(8. 00 – 4. 00) x 4, 000]/(10. 00 – 4. 00) = 2, 667
29. EGO Company produces three products, A, B, C. A machine is used to produce the products.
The contribution margin, sales demands and time of the machine (in minutes) are as follows:
DEMAND CM MACHINE TIME
Product A 1, 200 P10 5
Product B 800 18 10
Product C 1, 000 25 15
There are 24, 000 minutes available on the machine during the week. How many units
should be produced and sold to maximize the weekly contribution margin?
A B C
a. 1, 200 800 1, 000
b. 200 800 1, 000
c. 1, 200 300 1, 000
d. 1, 200 800 667
D. A- CM per minute (10/5) = 2. 00 1, 200 x 5 = 6, 000 minutes
B- CM per minute (18/ 10) = 1. 80 800 x 10= 8, 000 minutes
C- CM per minute (25/ 15) = 1.67 667 x 15 = 10, 000 minutes
24, 000 minutes
Note: The product with the higher CM per minute has the priority.
30. EGG Company produces three products A, B, C. A machine is used to produce the products.
The contribution margin, sales demands and time of the machine (in minutes) are as follows:
DEMAND CM MACHINE TIME
Product A 1, 000 P20 10
Product B 800 18 5
Product C 1, 500 25 10
There are 400 hours available on the machine during the week. How many units should
be produced and sold to maximize the weekly contribution margin?
A B C
a. 1, 000 800 1, 500
b. 500 800 1, 500
c. 900 0 1, 500
d. 1, 000 800 1,000
B. A- CM per minute (20/10) = 2. 00 (500x10) / 60 = 83. 33 hours
B- CM per minute (18/ 5) = 3. 60 (800 x5)/ 60 = 6.67 hours
C- CM per minute (25/ 10) = 2. 50 (1, 500x 10) / 60 = 250. 00 hours
400. 00 hours