# Practice Problems

### Practice Problems

1. Gandy Company has 5,000 obsolete desk lamps that are carried in inventory at a manufacturing cost of \$50,000. If the lamps are reworked for \$20,000, they could be sold for \$35,000. Alternatively, the lamps could be sold for \$8,000 for scrap. In a decision model analyzing these alternatives, the sunk cost would be:

A) \$8,000

B) \$15,000

C) \$20,000

* D) \$50,000

2. Otool Inc. is considering using stocks of an old raw material in a special project. The special project would require all 240 kilograms of the raw material that are in stock and that originally cost the company \$2,112 in total. If the company were to buy new supplies of this raw material on the open market, it would cost \$9.25 per kilogram. However, the company has no other use for this raw material and would sell it at the discounted price of \$8.35 per kilogram if it were not used in the special project. The sale of the raw material would involve delivery to the purchaser at a total cost of \$71.00 for all 240 kilograms. What is the relevant cost of the 240 kilograms of the raw material when deciding whether to proceed with the special project?

* A) \$1,933

B) \$2,044

C) \$2,220

D) \$2,112

240*8.25= 2,004

2004-71=1,933

3. Quikcook Microwave Company currently manufactures the doors that it uses for its microwave ovens. The annual costs to manufacture the 40,000 doors needed each year are as follows:

Total Cost

Direct material \$200,000

Direct labor 40,000

Total \$640,000

Delilah Glass Corporation has offered to provide Quikcook with all of its annual door needs for \$14 per door. If Quikcook accepts this offer, only 40% of the fixed overhead above could be totally eliminated. Also, Quikcook has no alternative use for the idle facilities if the decision was made to go with Delilah's offer. Based on this information, would Quikcook be better off to make the doors or buy the doors and by how much?

40,000*.60=24,000

24,000*14=336,000

40,000*.40=16,000

16,000*14=224,000

336,000-224,000=112,000

B) \$48,000 better to make

* D) \$112,000 better to make

4. Sardi Inc. is considering whether to continue to make a component or to buy it from an outside supplier. The company uses 17,000 of the components each year. The unit product cost of the component according to the company's cost accounting system is given as follows:

Direct materials \$8.20

Direct labor 8.30

Unit product cost \$22.00

Assume that direct labor is a variable cost. Of the fixed manufacturing overhead, 70% is avoidable if the component were bought from the outside supplier. In addition, making the component uses 2 minutes on the machine that is the company's current constraint. If the component were bought, this machine time would be freed up for use on another product that requires 4 minutes on the constraining machine and that has a contribution margin of \$7.00 per unit.

### When deciding whether to make or buy the component, what cost of making the component should be compared to the price of buying the component?

* A) \$24.21

B) \$25.50

C) \$20.71

D) \$22.00

5. Landor Appliance Company makes and sells electric fans. Each fan regularly sells for \$42. The following cost data per fan is based on a full capacity of 150,000 fans produced each period.

Direct materials \$8

Direct labor \$9

(70% variable and 30% unavoidable fixed) \$10

A special order has been received by Landor for a sale of 25,000 fans to an overseas customer. The only selling costs that would be incurred on this order would be \$4 per fan for shipping. Landor is now selling 120,000 fans through regular channels each period. What should Landor use as a minimum selling price per fan in negotiating a price for this special order?

* A) \$28

B) \$27

C) \$31

D) \$24

6. Ignace Timekeepers, Inc. manufactures and sells wrist watches. Ignace has the capacity to manufacture and sell 20,000 watches each year but is currently only manufacturing and selling 15,000. The following costs relate to annual operations at 15,000 watches:

### Total Cost

Variable manufacturing cost \$150,000

Fixed manufacturing cost \$120,000

Variable selling and administrative cost \$90,000

Fixed selling and administrative cost \$180,000

Ignace normally sells its watches for \$42 each. A discount chain is interested in purchasing Ignace's excess capacity of 5,000 watches. This special order would not affect regular sales or the cost structure above. Ignace's profits for the year will increase as long as the price on this special order exceeds:

A) \$12.00

B) \$13.50

* C) \$16.00

D) \$31.00

7. 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 materials \$6.10

Direct labor 4.20

Unit product cost \$16.20

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:

A) (\$18,600)

B) (\$16,200)

C) \$30,000

* D) \$5,400

8. A customer has requested that Lewelling Corporation fill a special order for 9,000 units of product S47 for \$20.50 a unit. While the product would be modified slightly for the special order, product S47's normal unit product cost is \$14.40:

Direct materials \$3.10

Direct labor 1.50

Unit product cost 14.40

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 S47 that would increase the variable costs by \$5.00 per unit and that would require an investment of \$36,000 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:

A) (\$9,900)

* B) \$4,500

C) \$54,900

D) (\$26,100)

9. Holden Company produces three products, with cost and selling prices as follows:

Product A Product B Product C

Selling price per unit \$30 100% \$20 100% \$15 100%

Variable costs per unit 18 60% 15 75% 6 40%

Contribution margin per unit \$12 40% \$ 5 25% \$ 9 60%

A particular machine is a bottleneck. On that machine, 3 machine hours are required to produce each unit of Product A, 1 hour is required to produce each unit of Product B, and 2 hours are required to produce each unit of Product C. In which order should it produce its products?

A) C, A, B

B) A, C, B

* C) B, C, A

D) The order of production doesn't matter.

10. Wood Carving Corporation manufactures three products. Because of a recent lack of skilled wood carvers, the corporation has had a shortage of available labor hours. The following per unit data relates to the three products of the corporation:

Letter Openers Elvis Statues Candle Holders

Sales price \$30 \$80 \$42

Variable costs \$20 \$40 \$20

Labor hours required 1 6 2

Assume that Wood Carving only has 1,800 labor hours available next month. Also assume that Wood Carving can only sell 800 units of each product in a given month. What is the maximum amount of contribution margin that Wood Carving can generate next month given this labor hour shortage?

A) \$12,000

B) \$19,000

* C) \$19,600

D) \$19,800

11. Banfield Corporation makes three products that use compound W, the current constrained resource. Data concerning those products appear below:

VP YI WX

Selling price per unit \$248.04 \$230.66 \$505.44

Variable cost per unit \$190.71 \$172.14 \$388.80

Centiliters of compound W 3.90 3.80 8.10

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.

A) WX, VP, YI

* B) YI, VP, WX

C) WX, YI, VP

D) VP, WX, YI

12. Vannorman Corporation processes sugar beets in batches. A batch of sugar beets costs \$78 to buy from farmers and \$18 to crush in the company's plant. Two intermediate products, beet fiber and beet juice, emerge from the crushing process. The beet fiber can be sold as is for \$25 or processed further for \$16 to make the end product industrial fiber that is sold for \$57. The beet juice can be sold as is for \$39 or processed further for \$22 to make the end product refined sugar that is sold for \$84. How much profit (loss) does the company make by processing one batch of sugar beets into the end products industrial fiber and refined sugar?

39+22=61

84-61=23

25+16=41

57-41=16

23-16=7

A) (\$134)

B) (\$32)

* C) \$7

D) \$39

13. Stinehelfer Beet Processors, Inc., processes sugar beets in batches. A batch of sugar beets costs \$56 to buy from farmers and \$13 to crush in the company's plant. Two intermediate products, beet fiber and beet juice, emerge from the crushing process. The beet fiber can be sold as is for \$24 or processed further for \$12 to make the end product industrial fiber that is sold for \$31. The beet juice can be sold as is for \$43 or processed further for \$29 to make the end product refined sugar that is sold for \$91. How much profit (loss) does the company make by processing the intermediate product beet juice into refined sugar rather than selling it as is?

43-24=19

* A) \$19

B) \$6

C) (\$50)

D) (\$16)

Use the following to answer questions 14-15:

Two alternatives, code-named X and Y, are under consideration at Guyer Corporation. Costs associated with the alternatives are listed below.

Alternative Alternative

X 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

14. Are the materials costs and processing costs relevant in the choice between alternatives X and Y? (Ignore the equipment rental an occupancy costs in this question.)

A) Neither materials costs nor processing costs are relevant

B) Only processing costs are relevant

* C) Only materials costs are relevant

D) Both materials costs and processing costs are relevant

15. What is the differential cost of Alternative Y over Alternative X, including all of the relevant costs?

A) \$132,000

B) \$119,000

C) \$145,000

* D) \$26,000

145,000-119,000=26,000

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