1. Phill and Company produces educational software.

Its current unit cost, based

upon an anticipated volume of 150,000 units, is as follows.
Selling price $150
Variable costs $60
Contribution margin $90
Fixed costs $60
Operating income $30
Sales for the coming year are estimated at 175,000 units, which is within the relevant
range of Phillip's cost structure. Cost management initiatives are expected to yield a
20% reduction in variable costs and a reduction of $750,000 in fixed costs. Phillip's
cost structure for the coming year will include a
A. variable cost ratio of 32% and operating income of $9,600,000.
B. per unit contribution margin of $72 and fixed costs of $55.
C. contribution margin ratio of 68% and operating income of $7,050,000.
D. total contribution margin of $15,300,000 and fixed costs of $8,250,000.

2. A company has decided to discontinue a product produced on a machine

purchased 4 years ago at a cost of $70,000. The machine has a current book value
of $30,000. Due to technologically improved machinery now available in the
marketplace the existing machine has no current salvage value. The company is
reviewing the various aspects involved in the production of a new product. The
engineering staff advised that the existing machine can be used to produce the new
product. Other costs involved in the production of the new product will be materials
of $20,000 and labor priced at $5,000.
Ignoring income taxes, the costs relevant to the decision to produce or not to
produce the new product would be
A. $25,000
B. $30,000
C. $55,000
D. $95,000

3. Rick Motors uses 10 units of Part No. T305 each month in the production of large
diesel engines. The cost to manufacture one unit of T305 is presented as follows.
Particulars Cost
Direct materials $2,000
Materials handling (20% of direct materials cost) $400
Direct labor $16,000
Manufacturing overhead (150% of direct labor) $24,000
Total manufacturing cost $42,400
Materials handling, which is not included in manufacturing overhead, represents the
direct variable costs of the receiving department that are applied to direct materials
and purchased components on the basis of their cost. Rick's annual manufacturing
overhead budget is one-third variable and two-thirds fixed. Simpson Castings, one of
Rick's reliable vendors, has offered to supply T305 at a unit price of $30,000.
Assume Rick Motors is able to rent all idle capacity for $50,000 per month. If Rick
decides to purchase the 10 units from Simpson Castings, Rick's monthly cost for
T305 would
A. Decrease $14,000
B. Increase $46,000.
C. Decrease $64,000.
D. Increase $96,000.

4. Rick Motors uses 10 units of Part No. T305 each month in the production of large
diesel engines. The cost to manufacture one unit of T305 is presented as follows.
Particulars Cost
Direct materials $2,000
Material handling (20% of direct material cost) $400
Direct labor $16,000
Manufacturing overhead (150% of direct labor) $24,000
Total manufacturing cost $42,400
Materials handling, which is not included in manufacturing overhead, represents the
direct variable costs of the receiving department that are applied to direct materials
and purchased components on the basis of their cost. Rick's annual manufacturing
overhead budget is one-third variable and two-thirds fixed. Simpson Castings, one of
Rick's reliable vendors, has offered to supply T305 at a unit price of $30,000.
Assume Rick Motors could use the idle capacity to manufacture another product that
would contribute $104,000 per month. If Rick chooses to manufacture the ten T305
units in order to maintain quality control, Rick's opportunity cost is
A. $8,000.
B. $68,000.
C. $(96,000).
D. $88,000.
5. Daily sales and cost data for Crawford Industries are shown below.
Sales Total
Units $ Costs
20 $2,000 $1,200
21 2,090 1,250
22 2,170 1,290
23 2,240 1,330
24 2,300 1,380
25 2,350 1,440

The marginal cost of the 23rd unit is:

A. $57.83.

B. $40.00.

C. $30.00.

D. $50.00.

6. ABC Company has fixed costs of $300,000 per month. Total output per month is
150,000 units. Minimum pay for production line workers is $5.85 per hour, and total
variable costs are currently $275,000 per month. If variable costs increase to
$350,000 per month and production output increases to 250,000 per month, what is
the marginal cost for increasing production?
A. $2.60 per unit marginal cost.

B. $1.40 per unit marginal cost.

C. $1.33 per unit marginal cost.

D. $0.75 per unit marginal cost.

7. What is the profit or loss of a decision to sell or process a product further given the
following information?
Unit production cost for a product = $8,000
Unit selling price for a product = $12,000
Incremental processing cost per unit = $1,000
New unit selling price = $14,000

A. ($1,000).

B. $1,000.

C. ($2,000).

D. $2,000.

8. LancerManufacturing uses 10 units of Part Number KJ37 each month in the

production of radar equipment. The unit cost to manufacture 1 unit of KJ37 is
presented below.
Particulars Cost
Direct materials $1,000
Materials handling (20% of direct materials cost) $200
Direct labor $8,000
Manufacturing overhead (150% of direct labor) $12,000
Total manufacturing cost $21,200
Material handling represents the direct variable costs of the Receiving Department
that are applied to direct materials and purchased components on the basis of their
cost. This is a separate charge in addition to manufacturing overhead. Leland's
annual manufacturing overhead budget is one-third variable and two-thirds fixed.
Scott Supply, one of Leland's reliable vendors, has offered to supply Part Number
KJ37 at a unit price of $15,000.
If Lancerpurchases the KJ37 units from Scott, the capacity Lancerused to
manufacture these parts would be idle. Should Lancerdecide to purchase the parts
from Scott, the unit cost of KJ37 would
A. Decrease by $6,200
B. Decrease by $3,200.
C. Increase by $4,800.
D. Change by some amount other than those given.
9. Superior Tables is a table manufacturer. The company is considering eliminating
the Easy Living product line because of losses over the past year. Results for the
year just ended for the Easy Living product line are as follows.
Sales (20,000 units) $ 6,000,000
Variable manufacturing costs 2,700,000
Fixed manufacturing costs 2,400,000
Administrative costs 2,000,000
Operating loss ($1,100,000)
None of the fixed manufacturing costs can be eliminated, but 25% of the
administrative costs are variable and can be eliminated if the product line is
eliminated. Based on the information above, should the Easy Living product line be
eliminated?
A. Yes, because eliminating the product line would increase the operating income by
$1,100,000.

B. Yes, because eliminating the product line would increase the operating income by
$1,500,000 from the saved administrative cost

C. No, because eliminating the product line would only save $500,000 of
administrative costs still resulting in an overall loss.

D. No, because eliminating the product line would increase the operating loss by
($2,800,000).

10. XYZ Company has fixed costs of $300,000 per month. Total output per month is
150,000 units. Minimum pay for production line workers is $5.85 per hour, and total
variable costs are currently $270,000 per month. If variable costs increase to
$350,000 per month and production output increases to 250,000 per month, what
are the average fixed costs before and after the increase in production?

A. $3.83 per unit before and $2.60 per unit after the increase in production.

B. $2 per unit before and $1.20 per unit after the increase in production.

C. $2 per unit before and after the increase in production.

D. $1.83 per unit before and $1.40 per unit after the increase in production.
11. A company has considerable excess manufacturing capacity. A special job
order’s cost sheet includes the following applied manufacturing overhead costs:
Fixed costs $21,000
Variable costs 33,000
The fixed costs include a normal $3,700 allocation for in-house design costs,
although no in-house design will be done. Instead, the job will require the use of
external designers costing $7,750. What is the total amount to be included in the
calculation to determine the minimum acceptable price for the job?
A. $36,700
B. $40,750
C. $54,000
D. $58,050

12. Capital Company has decided to discontinue a product produced on a machine

purchased four years ago at a cost of $70,000. The machine has a current book
value of $30,000. Due to technologically improved machinery now available in the
marketplace the existing machine has no current salvage value. The company is
reviewing the various aspects involved in the production of a new product. The
engineering staff advised that the existing machine can be used to produce the new
product. Other costs involved in the production of the new product will be materials
of $20,000 and labor priced at $5,000.
Ignoring income taxes, the costs relevant to the decision to produce or not to
produce the new product would be:

A. $25,000.

B. $95,000.

C. $55,000.

D. $30,000.
13. A retailer planned to purchase 55,000 units and sell 50,000 units, yielding the
following operating income:
Sales $50,000,000
Cost of goods sold 33,000,000
Variable selling costs 5,000,000
Fixed selling and administrative costs 7,000,000

Operating income $ 5,000,000

The company expects to receive an additional order that would allow it to sell all
55,000 units it purchased. If the company accepts this order, its operating income
will be
A. $5,500,000
B. $6,200,000
C. $6,700,000
D. $9,500,000

14. A company’s budget indicated the following cost per unit for the company’s most
popular product.
Variable manufacturing costs $64
Fixed manufacturing overhead 45
Sales commissions 3
Fixed selling and administrative costs 32
Although this product normally sells for $160 per unit, the company received a
special order from a new customer. If the company has idle capacity, its income
would increase by accepting the order if the selling price per unit for the order was
greater than
A. $64

B. $67

C. $109

D. $144
15. Reynolds Inc. manufactures several different products, including a premium lawn
fertilizer and weed killer that is popular in hot, dry climates. Reynolds is currently
operating at less than full capacity because of market saturation for lawn fertilizer.
Sales and cost data for a 40-pound bag of Reynolds lawn fertilizer is as follows.
Selling price $18.50
Production cost
Materials and labor $12.25
Variable overhead 3.75
Allocated fixed overhead 4.00 20.00
Income (loss) per bag $(1.50)

On the basis of this information, which one of the following alternatives should be
recommended to Reynolds management?
A. Continue to produce and market this product.

B. Drop this product from its product line.

C. Select a different cost driver to allocate its overhead.

D. Increase output and spread fixed overhead over a larger volume base.

16. A tennis equipment company produces two lines of tennis shoes, Professional
and Amateur. Income statement data for the tennis shoes is shown below.
Particulars Professional Amateur Total
Sales $550,000 $750,000 $1,300,000
Variable costs $275,000 $400,000 $675,000
Direct fixed costs $100,000 $300,000 $400,000
Allocated fixed costs $37,500 $112,500 $150,000
Operating income $137,500 $(62,500) $75,000
Since the Amateur line shows a loss, the company is considering eliminating this line
of tennis shoes. Based on the data provided, should the company drop the Amateur
tennis shoe line?
A. No, operating income will decrease by $50,000.
B. No, operating income will decrease by $350,000.
C. Yes, operating income will increase by $62,500.
D. Yes, operating income will increase by $25,000.
17. A company manufactures a product that has the following unit price and costs.
Selling price $300
Costs
Direct materials $40
Direct labor $30
Variable manufacturing overhead $24
Fixed manufacturing overhead $60
Variable selling $6
Fixed selling and administrative $20
Total costs $180
Operating margin $120
The company received a special order for 1,000 units of the product. The company
currently has excess capacity but has an alternative use for this capacity that will
result in a contribution margin of $20,000. What is the minimum price that the
company should charge for this special order?
A. $140, because operating margin will increase by $20,000.
B. $200, because operating margin will increase by $20,000.
C. 180, because it covers the costs of manufacturing the product and allows the
company to break even.
D. $120, because it covers the costs of manufacturing the product and allows the
company to break even

18. A company currently has a four-stage manufacturing process in the following

order: Processing, Smoothing, Shaping, and Painting. There is a market for the
output of each stage. A newly- appointed management accountant has been
examining the company’s operations, and has prepared the following information
below.
Incremental
Manufac- Total Selling
Variable Cost
turing Stage Price of Output
Per Stage
Processing $10 $8
Smoothing 12 1
Shaping 18 5
Painting 20 3
Given the above information, selling the output after which one of the following
stages will yield the greatest contribution margin?
A. Smoothing.
B. Shaping.
C. Processing.
D. Painting.
19. AndyIndustries is a multiproduct company that currently manufactures 30,000
units of Part 730 each month for use in production. The facilities now being used to
produce Part 730 have fixed monthly overhead costs of $150,000, and a theoretical
capacity to produce 60,000 units per month. If Andywere to buy Part 730 from an
outside supplier, the facilities would be idle and 40% of fixed costs would continue to
be incurred. There are no alternative uses for the facilities. The variable production
costs of Part 730 are $11 per unit. Fixed overhead is allocated based on planned
production levels.
If AndyIndustries continues to use 30,000 units of Part 730 each month, it would
realize a net benefit by purchasing Part 730 from an outside supplier only if the
supplier's unit price is less than

A. $12.50
B. $13.00.
C. $12.00.
D. $14.00.

20. A manufacturing company's primary goals include product quality and customer
satisfaction. The company sells a product, for which the market demand is strong, for
$50 per unit. Due to the capacity constraints in the Production Department, only
300,000 units can be produced per year. The current defective rate is 12% (i.e., of
the 300,000 units produced, only 264,000 units are sold and 36,000 units are
scrapped). There is no revenue recovery when defective units are scrapped. The full
manufacturing cost of a unit is $29.50, including:
Direct materials $17.50
Direct labor 4.00
Fixed manufacturing overhead 8.00
The company's designers have estimated that the defective rate can be reduced to
2% by using a different direct material. However, this will increase the direct
materials cost by $2.50 per unit to $20 per unit. The net benefit of using the new
material to manufacture the product will be:
A. $120,000
B. $(120,000)
C. $750,000
D. $1,425,000