QUIZ 1 CHAPTER 18

A special order is any customer order for goods or services that is not routinely handled by a
business. A special order generally should be accepted if:
a) The revenue exceeds variable costs, regardless of available capacity.
b) Its revenue exceeds allocated fixed costs, regardless of the variable costs associated with the order.
c) Excess capacity exists and the revenue exceeds allocated fixed costs.
d) Excess capacity exists and the revenue exceeds all variable costs associated with the order.
e) The revenue exceeds total costs, regardless of available capacity.
 
For the past five years, the C Company has produced and sold electronic magnets to chemistry labs
throughout the country. Recently, a strong competitor has entered the market and C Co is considering
whether it should continue to produce and sell the electronic magnets. The following information has
been gathered to assist management in their decision:
 A) the machinery used to produce the magnet was purchased five-years ago for P500, 000.
 B) Four of the employees who produce magnets would be transferred to the magnifying glass division.
 C) The space now used to produce the magnets would be used to eliminate the need to rent warehouse
space.
 D) Sales volume (units) is estimated to drop by 50% once the competitor becomes fully operational.
 Which of the items listed above is (are) relevant to the decision to continue the production and sale of
the electronic magnets?  
a) C and D only
b) B and C only
c) A and C only
d) B, C and D only
e) A, B and D only

The cost of inventory currently owned by a firm is an example of a (n):

a) Unavoidable cost
b) Opportunity cost
c) Sunk cost
d) Differential cost
e) Relevant cost

An architecture firm currently offers services that appeal to both individuals and commercial clients.  If
the firm decides to discontinue services to individuals because of ongoing losses, which of the following
costs could the company likely avoid?
a) Variable operating costs.
b) Common corporate overhead
c) Insurance.
d) Building depreciation.
 
If there is excess capacity, the minimum acceptable price for a special order must cover 
a) variable and incremental fixed costs associated with the special order
b) Variable and fixed manufacturing costs associated with the special order.
c) All variable costs associated with the special order.
d) Variable costs and incremental fixed costs associated with the special order plus the contribution
margin usually earned on regular units.
Which of the following statements regarding special orders is (are) true?
 (A) The primary decision for special orders is determining whether the differential revenue is greater
than the differential costs associated with the order.
 (B) The differential analysis approach to pricing for special orders could lead to underpricing in the long-
run because fixed costs are not included in the analysis.  
a) Only A
b) Only B
c) Both A and B are true.
d) Neither A nor B is false.

The term "opportunity cost" is best defined as: 

a) The benefit associated with a rejected alternative when making a choice.
b) The amount of benefit paid for an item, taking inflation into account.
c) the cost that is not actually incurred by an organization but is introduced into the management
accounting records in order to ensure that the costs incurred by dissimilar operations are
comparable
d) The benefit received for an item, taking possible discounts into account.

C Company is considering whether to sell Product R at the split-off point or subject it to further
processing and produce a more refined product known as Product F.  Consider the following items:     
I. The selling price of Product F.
II. The joint processing cost of Product R.
III. The separable cost of producing Product F.
IV. The selling price of Product R.
Which of the above items is (are) relevant to C's decision to process R into F?
a) I, III and IV.
b) III only
c) I and II only
d) I, II, III and IV
e) I and III only

Which of the following costs are irrelevant to the make-or-buy decision? 

a) Variable overhead if the item is manufactured internally
b) Fixed overhead that will continue if the item is purchased
c) Fixed overhead that can be avoided if the item is purchased
d) Indirect materials and indirect labor if the item is manufactured internally

Which of the following costs should be used when choosing between two decision alternatives?

RELEVANT COST SUNK COST OPPPORTUNITY COST

a) Yes ; No ; Yes
b) Yes ; Yes ; Yes
c) No ; Yes ; No
d) Yes ; No ; No
e) No ; Yes ; Yes
Data regarding four different products manufactured by an organization are presented below. Direct
materials and direct labor are readily available from the respective resource markets. However, the
manufacturer is limited to a maximum of 3,000 machine hours per month.

  Product A Product B Product C Product D

Unit Sales Price P 15 P 18 P 20 P 25

Variable cost/unit 7 11 10 16

Units produced        

Per machine hour 3 4 2 3

The product that is the most profitable for the manufacturer in this situation is

a) Product b
b) Product a
c) Product d
d) Product c

Scarce resources can include anything that limits productive capacity, such as machine-hours or labor
hours. Fixed costs are ignored in allocating scarce resources because

a) There are no fixed costs associated with scarce resources

b) They are sunk
c) Fixed costs generally apply to long-run decisions
d) They are unaffected by allocation of scarce resources

Which of these is/are TRUE about a shutdown point?

I. A shutdown point is a level of operations at which a company experiences no benefit for continuing
operations and therefore decides to shut down temporarily—or in some cases permanently.
II. A shutdown point results from the combination of output and price where the company earns just
enough revenue to cover its total variable costs.
III. The shutdown point indicates economic benefits of continuing production. 
a) I only
b) I,II, and III
c) I and III only
d) I and II only

Scarce resource utilization decision is a judgment regarding the best use of scarce resources so as to
maximize the total net income of a business. When a scarce resource, such as space, exists in an
organization, the criterion that should be used to determine production is

a) Variable cost production

b) Contribution margin per unit of constrained resource
c) Total costs of production
 d) Contribution margin per unit
e) Selling per unit

Which of the following is correct about Target Costing?

I. A company wishes to set price in order to capture a predetermined market share.
II. It is used when a price is pre-set by market conditions.
III. It estimates product cost by subtracting anticipated costs and a desired profit margin from a
competitive market price
IV. It is an approach to determine a product's life-cycle cost which should be sufficient to develop
specified functionality and quality, while ensuring its desired profit.
a) I, II and IV only
b) I, II, III and IV
c) I and II only
d) II and IV only

Which of these is/are correct about obsolete inventories?

I. Obsolete inventory is stock a business doesn't believe it can use or sell due to a lack of demand.
II. Inventory usually becomes obsolete after a certain amount of time passes and it reaches the end of its
life cycle.
III. When inventory items become obsolete, the reality is that their realizable value is significantly higher
than their cost. 
a) I and II only
b) I only
c) I,II, and III
d) II only

Pricing is considered part of a company’s marketing strategy because it influences its relationship with
customers. Which of the following can influence a company's pricing decisions?
I. Manufacturing costs.
II. Competitors.
III. Customer demand.
IV. Pricing laws and regulations.
a) I, II and III only
b) I, III and IV only
c) I and II only
d) I, II, III and IV
The cost-plus pricing formula that takes into consideration all costs -- fixed, variable, and manufacturing,
as well as selling and administrative costs -- is called the percentage of

a) variable manufacturing costs

b) variable costs
c) Full costs.
d) manufacturing costs

 Managers who often make special pricing decisions are more likely to use which of the following cost
concepts in their work?

a) Fixed Cost
b) Total Cost
c) Variable Cost
d) Opportunity cost

Which of the following is/are TRUE?

I. The only revenues or costs that are relevant in decision making are the differential revenues or costs.
 II. Constraints may be internal to the firm or external to the firm.
 III. Management's objective should be to exploit a constraint rather than to eliminate it.
a) II and III only
b) I, II and III
c) I and II only
d) II only
e) I only

Assume a company produces three products: A, B, and C. It can only sell up to 3,000 units of each
product. Production capacity is unlimited. The company should produce the product (or products) that
has (have) the highest

a) Contribution margin per machine time...

b) Contribution margin per unit.
c) per unit sales price
d) gross margin per unit
e) gross margin per machine time
C Company manufactures 100,000 units of Part X annually for use in one of its main products. The total
manufacturing cost for 100,000 units of Part X is as follows:

                    Direct materials    P120, 000

                    Direct labor         80,000

                    Variable overhead    40,000

                    Fixed overhead      160,000

                    Total cost         P400, 000

 S Company has offered to sell C 100,000 units of Part X per year. If C accepts this offer, the facilities
used to produce Part X can be used in the production of other components. This change would save C
Co P10, 000 in rent for the leased production facility used at present to support the production of other
components. What is the maximum price that C should be willing to pay S for part X?

DM (120X / 100X) 1.2

DL (80K / 100K) 0.8

VOH (40K / 100K) 0.4

RENT (10K / 100K) 0.1

TOTAL 2.5
C Corporation is composed of five divisions, and each division is allocated a share of C overhead to make
divisional managers aware of the cost of running the corporate headquarters.  The following information
relates to the M Division:

Sales P7,500,000

Variable operating costs 5,100,000

Traceable fixed operating costs 1,900,000

Allocated corporate overhead 300,000

If the M Division is closed, 100% of the traceable fixed operating costs can be eliminated.  What will be
the impact on C's overall profitability if the M Division is closed?

7,500,000 – 5,100,000- 1,900,000 = 500,000

Decrease by 500,000

C Corporation sells a product for P18 per unit, and the standard cost card for the product shows the
following costs:

Direct material P1

Direct labor 2

Overhead (80% fixed) 7

Total P10

C received a special order for 1,000 units of the product. The only additional cost to C would be foreign
import taxes of P1 per unit.

Assume that C has sufficient idle capacity to produce the 1,000 units. If C wants to increase its operating
profit by P5, 600, what would it charge as a per-unit selling price? 11

The company would want to charge a price equal to a per unit profit of $5.60 plus variable costs per
unit of (1+2+ (7*20%)) = $4.40 and the import tax per unit of $1.00. The total price is $11.00.

Refer to Robertson Corporation. Robertson received a special order for 1,000 units of the product. The
only additional cost to Robertson would be foreign import taxes of $1 per unit. If Robertson is able to
sell all of the current production domestically, what would be the minimum sales price that Robertson
would consider for this special order? 18 + 1 import taxes = 19
Sales of 25,000 units at P7.20 per unit are made monthly. The unit cost is P5.90. Incremental costs of
P1.35 per unit to further process the units will result in the 25,000 units being sold for P8.75 each.
Which course of action should the company take? Do further processing and sell the units at 8.75

C manufactures A and B from a joint process (cost = P80, 000).  Five thousand pounds of a can be sold at
split-off for P20 per pound or processed further at an additional cost of P20, 000 and then sold for P25.
Ten thousand pounds of B can be sold at split-off for P15 per pound or processed further at an
additional cost of P20, 000 and later sold for P16.  If C decides to process B beyond the split-off point,
operating income will:

Decrease by 10,000

C Company makes and sells oak boxes for a price of P60 each. Unit costs based on anticipated monthly
sales of 1,000 boxes are as follows:

                    Direct material cost           P15

                    Direct labor cost                       12

                    Variable manufacturing overhead 3

                    Variable selling overhead         5

                    Fixed costs                           2

          A chain store has offered to buy 100 boxes per month at P58 each. To accept this special order, C
will have to restrict its sales to regular customers to only 900 boxes per monthly because its production
capacity cannot be expanded in the short run. However, no variable selling expenses will be incurred for
this special order. If C accepts the chain store's offer, its profit will

Increase by 300

C Company is currently operating at a loss of P15, 000. The sales manager has received a special order
for 5,000 units of product, which normally sells for P35 per unit. Costs associated with the product are:
direct material, P6; direct labor, P10; variable overhead, P3; applied fixed overhead, P4; and variable
selling expenses, P2. The special order would allow the use of a slightly lower grade of direct material,
thereby lowering the price per unit by P1.50 and selling expenses would be decreased by P1. If C wants
this special order to increase the total net income for the firm to P10, 000, what sales price must be
quoted for each of the 5,000 units? 23.50

OL 15,000 M (6 – 1.5) 4.5

DINCOME 1000 L 10
25000
VOH 3
DIVIDE 5000units 5 profit/ unit
VSGA (2 – 1) 1

Profit/unit 5

Total 23.5
C Company has 3 divisions: R, S, and T. Division R's income statement shows the following for the year
ended December 31:

Sales   P1,000,000 

Cost of goods sold     (800,000)

Gross profit   P  200,000 

Selling expenses P100,000  

Administrative expenses  250,000   (350,000)

Net loss   P (150,000)

Cost of goods sold is 75 percent variable and 25 percent fixed. Of the fixed costs, 60 percent are
avoidable if the division is closed. All of the selling expenses relate to the division and would be
eliminated if Division R were eliminated. Of the administrative expenses, 90 percent are applied from
corporate costs. How much is total cost traceable to Division R? 845, 000

C Corporation has been manufacturing 5,000 units of Part 10541, which is used in the manufacture of
one of its products. At this level of production, the cost per unit of manufacturing Part 10541 is as
follows:

Direct material P2

Direct labor 8

Variable overhead 4

Fixed overhead applied   6

Total P20

 
H Company has offered to sell C 5,000 units of Part 10541 for P19 a unit. C has determined that it could
use the facilities currently used to manufacture Part 10541 to manufacture Part RA and generate an
operating profit of P4, 000. C has also determined that two-thirds of the fixed overhead applied will
continue even if Part 10541 is purchased from H. The advantage of the better alternative is 

11,000

C Co is studying whether to outsource its Human Resources (H/R) activities.  Salaried professionals who
earn P390, 000 would be terminated; in contrast, administrative assistants who earn P120, 000 would
be transferred elsewhere in the organization.  Miscellaneous departmental overhead (e.g., supplies,
copy charges, overnight delivery) is expected to decrease by P30, 000, and P25, 000 of corporate
overhead, previously allocated to Human Resources, would be picked up by other departments.  If C can
secure needed H/R services locally for P410, 000, how much would the company benefit by
outsourcing? 10,000

 The following data pertain to C Company's commercial Product O:

           

Variable manufacturing cost P400

Applied fixed manufacturing cost 160

Variable selling and administrative cost 60

Allocated fixed selling and administrative cost 25

           

What is the appropriate percentage markup that will result in a price of P980 for the product if C uses
the variable manufacturing cost plus pricing method? (Round percentages to nearest one-hundredth of
a percent) 145%

C Corp. has 300 units of obsolete inventory costing P20 per unit. Variable and fixed operating expenses
are P4 per unit and P10, 000 per annum, respectively.

The company has the option to (a) sell the goods to a jobber for P 6.00 (b) recycle them at a cost of P5
per unit and subsequently sell them for P10 each.

What unit sales price to the jobber will make the company indifferent between alternatives?

C 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:

           
     Openers Statues Holders

  Sales price................... P30 P80 P42

  Variable costs.............. P20 P40 P20

  Labor hours required... 1 6 2

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

19,600

C  Company  is selling  5,000 units a month  at present  capacity for  P 25   with  variable production  and 
selling costs  at P  13  and   P 2 respectively and monthly  fixed costs of  P 60,000.  Due to an  ongoing 
construction that will last for four months,  the company estimates  that only  1,200 units a month can
be sold  at the same selling  price.  Fixed costs can be reduced by 25% should the company decides on
shutting down temporarily.  Additional costs of P 8,000 monthly shall be incurred for security and
maintenance and startup cost will amount to P 8,000.  

 How much is the amount of relevant fixed costs in this temporary shutdown problem?

60,000

C Co produces bicycles in a highly competitive market.  During the past year, the company has added a
30% markup on the P250 manufacturing cost for one of its most popular models.  A new competitor
manufactures a similar model, has established a P300 selling price, and is seriously eroding C's market
share.  Management now desires to use a target-costing approach to remain competitive and is willing
to accept a 20% return on sales.  If target costing is used, which of the following choices correctly
denotes (1) the price that C will charge and (2) company's target cost?

300 and 240

C can produce any of three products with its current production line. The heat treating equipment has
400 hours available during any given month. Per unit production, sales, and cost statistics are as follows:

                       A         B        C

                        ---      ---      ---

   Selling price:                 P15      P20      P10

   Variable cost:                 P 9      P12      P 7

   Required time in heat:    1.5 hrs.  2.5 hrs. 1.0 hrs.

   Maximum demand per month: 100      100      100

 

How many of each product should the company produce and sell?

A-100; b-100; c-0

C Company can sell all the units it can produce of either Product A or Product B but not both. Product A
has a unit contribution margin of P36 and takes two machine hours to make and Product B has a unit
contribution margin of P45 and takes three machine hours to make. If there are 1,000 machine hours
available to manufacture a product, income will be

3,000 more if product a is made

 C Co. is using the target cost approach on a new product. Information gathered so far reveals:

Expected annual sales                       400,000 units

Desired profit per unit                         P0.35

Target cost                                          P168, 000

Selling Gen and Admin Cost            P 8,000

What is the anticipated selling price per unit?

0.77

C Company normally produces and sells 30,000 units of E14 each month. E14 is a small electrical relay
used in the automotive industry as a component part in various products.

The selling price is P22 per unit, variable costs are P14 per unit, fixed manufacturing overhead costs total
P150, 000 per month, and fixed selling costs total P30, 000 per month.

Employment-contract strikes in the companies that purchase the bulk of the E14 have
caused C Company’s sales to temporarily drop to only 9,000 units per month. C Company estimates that
the strikes will last for about two months, after which time sales of E14 should return to normal. Due to
the current low level of sales, however, the

Company is thinking about closing down its own plant during the two months that the strikes are on. If C
Company does close down its plant, it is estimated that fixed manufacturing overhead costs can be
reduced to P105, 000 per month and that fixed selling costs can be reduced by 10%. Start-up costs at the
end of the shutdown period would total P8, 000. 

The net avoidable costs of a temporary shutdown will be

88,000