CHAPTER5:SHORTTERMDECISIONSANDACCOUNTINGINFORMATION

MultipleChoice
[Link]
testis
[Link].
[Link].
[Link].
[Link].
[Link]
[Link].
[Link].
[Link].
[Link].
[Link]
thefollowingsayings?
[Link],nothinggained.
[Link].
[Link].
[Link].

[Link]
[Link].
[Link].
[Link].
[Link].

[Link]
customersunless
[Link]
costs.
[Link].
[Link].
[Link]'sstate.

[Link]
[Link].
[Link].
[Link].
[Link]'sproductline.
[Link],oneof
whichcanbeprocessedfurtherintoadifferentproduct,theothertwo
[Link]
[Link].
[Link].
54

[Link].
[Link].

55

[Link]$35,[Link]
$30,000andallocatedunavoidablefixedcostsare$9,000,leavinga
$4,[Link],
[Link]$35,000tototalprofits.
[Link]$5,000.
[Link].
[Link]
enoughtoincreasesalesby$4,000.

[Link]
[Link].
[Link].
[Link].
[Link].
[Link]?
[Link]
tothedecision.
[Link]
otheruseisthecriticalfactorinthedecision.
[Link].
[Link]
thantheperunitvariablecosttomakethecomponent.
[Link]
jointproductsatsplitofforprocessthemfurther?
[Link].
[Link].
[Link].
[Link].
[Link]
[Link].
[Link].
[Link].
[Link].
[Link]
costsarenotrelevant?
[Link].
[Link].
[Link].
[Link].
c14. Whichofthefollowingisatruestatement?
a. TheoryofConstraintsisusefulforidentifyingphysicalconstraints
butcannotincorporatenonphysicalconstraints.
b. TheoryofConstraintsisusefulinanalyzinginternalconstraintsbut
cannotidentifyexternalconstraints.
c. Constraintsmaybeeitherinternalorexternal.
d. Internalconstraintsarephysicalwhileexternalconstraintsare
imaginary.

56

[Link]
[Link]
[Link].
[Link].
[Link].
[Link].
[Link]
costtoproducethemwas$[Link]$1.75
eachanditwouldcost$[Link]
usedtomakeaproductforaspecialorder,theirrelevantcostis
a.$1.75.
b.$7.60.
c.$10.00.
[Link].
[Link],whichofthefollowingistrue?
[Link].
[Link].
[Link].
[Link].
[Link]
[Link]
accountingrecords.
[Link]
accountingrecords.
[Link]
records.
[Link]
accountingrecords.
[Link]
[Link].
[Link].
[Link].
[Link].
[Link]
[Link].
[Link].
[Link].
[Link].
[Link]
[Link].
[Link].
[Link].
[Link].
[Link]
[Link].
[Link].
[Link].
57

[Link].

58

b23. WhichofthefollowingstatementspertainingtotheTheoryof
Constraintsistrue?
a. Inventoryisevilandshouldneverbekept.
b. Inventoryisimportanttokeepimmediatelybeforeabottleneck
process.
c. Inventoryshouldbekeptbeforeeverymachiningprocesstoprevent
anydowntime.
d. Noneoftheabovearetrue.
[Link]
decisionmaking?
[Link].
[Link]
[Link].
[Link].
[Link]
jointproductbeyonditssplitoffpoint?
[Link].
[Link].
[Link].
[Link].
[Link]
producethemwas$[Link]$3eachandit
wouldcost$[Link]$8each
andsoldfor$[Link]
overthenextbestaction?
a.$600.
b.$1,000.
c.$1,200.
d.$2,000.
[Link]$[Link]$[Link]
couldacceptaspecialorderfor1,000unitsat$[Link]
theorder,howmanyunitscoulditloseattheregularpricebeforethe
decisionbecameunwise?
a.1,000.
b.500.
c.200.
d.0.
[Link]?
[Link].
[Link].
[Link].
[Link].
[Link]
[Link].
[Link].
[Link].
[Link].

59

[Link]
neededintheproductionofmorethanoneproductisafunctionofwhich
ofthefollowing?
[Link].
[Link].
[Link].
[Link].
[Link]
parttheentityusesinsomeofitsproducts?
[Link].
[Link].
[Link]'sperunitvariablecosttomakethepart.
[Link].
[Link]
dropasegment?
[Link].
[Link].
[Link].
d."Noneoftheabove"isthebestanswerbecausealloftheaboveare
relevant.
[Link]
manufacturingcompaniesto
[Link].
[Link].
[Link].
[Link].
[Link]
[Link]
theproductionofProductZandoneotherofthecompany'sproducts.
[Link],ajointproduct,atsplitofforprocess
itfurtherintoanothersalableproduct.
[Link].
[Link].
c35.BuchananCompanycurrentlysells4,000unitsofproductQfor$1each.
Capacityis5,[Link]$0.40andavoidablefixed
costsare$[Link]$0.80perunitfor400units
[Link],thechangeinincomewillbea
a.$60decrease.
b.$80decrease.
c.$160increase.
d.$480increase.
a36.TylerCompanycurrentlysells1,000unitsofproductMfor$1each.
Variablecostsare$0.40andavoidablefixedcostsare$[Link]
storehasoffered$[Link]
managersbelievethatiftheyacceptthespecialorder,theywilllose
[Link]
couldlosebeforetheorderbecameunprofitable.
a.267units
60

b.500units
c.600units
[Link].
[Link]:A,B,[Link]
[Link],salesdemands,and
timeonthemachine(inminutes)areasfollows:
timeon
Demand
CM
machine

A
100
$25
10
B
80
18
5
C
150
30
10
[Link]
manyunitsshouldbeproducedandsoldtomaximizetheweekly
contribution?
ABC
a.10080150
b.5080150
c.900150
d.10080100
[Link]:A,B,[Link]
[Link],salesdemands,andtime
onthemachine(inminutes)areasfollows:
timeon
Demand
CM
machine

A
120
$20
5
B
80
36
10
C
100
50
15
[Link]
manyunitsshouldbeproducedandsoldtomaximizetheweekly
contribution?
ABC
a.12080100
b.2080100
c.12030100
d.1208066

61

[Link]$60
each.Unitcostsbasedonanticipatedmonthlysalesof1,000boxes
areasfollows:
Directmaterialcost
$15
Directlaborcost 12
Variablemanufacturingoverhead
3
Variablesellingoverhead
5
Fixedcosts 2
Achainstorehasofferedtobuy100boxespermonthat$58each.
Toacceptthisspecialorder,BlackOakwillhavetorestrictits
salestoregularcustomerstoonly900boxespermonthlybecause
itsproductioncapacitycannotbeexpandedintheshortrun.
However,novariablesellingexpenseswillbeincurredforthis
[Link]'soffer,its
profitwill
[Link]$300.
[Link]$500.
[Link]$200.
[Link]$500.
[Link]
manufacture20,[Link]
pertainstotheproductioncostsatcapacity:
Variablecosts$160,000
Fixedcosts240,000

Totalcosts$400,000
=========
Asupplierhasofferedtosell4,[Link]
[Link]
Medfordindifferentbetweenthe"make"and"buy"options?
a.$8
b.$12
c.$20
d.$0

62

b41.DJHCompanyproduces1,[Link]
manufacturingcostsofthepartareasfollows:
Directmaterials$10,000
Directlabor15,000
Variableoverhead5,000
Fixedoverhead30,000

Totalmanufacturingcost$60,000
=======
Anoutsidesupplierhasofferedtosupplythepartat$[Link]
isestimatedthat20%ofthefixedoverheadassignedtoPartXwillno
longerbeincurredifthecompanypurchasesthepartfromtheoutside
supplier.IfDJHCompanypurchases1,000unitsofPartXfromthe
outsidesupplierpermonth,thenitsmonthlyoperatingincomewill
[Link]$20,000.
[Link]$4,000.
[Link].
[Link]$20,000.
c42.DJHCompanyproduces1,[Link]
manufacturingcostsofthepartareasfollows:
Directmaterials$10,000
Directlabor15,000
Variableoverhead5,000
Fixedoverhead30,000

Totalmanufacturingcost$60,000
=======
Anoutsidesupplierhasofferedtosupplythepartat$[Link]
isestimatedthat20%ofthefixedoverheadassignedtoPartXwillno
longerbeincurredifthecompanypurchasesthepartfromtheoutside
[Link]
topaytheoutsidesupplier?
a.$60
b.$40
c.$36
d.$25

63

[Link]
$100,[Link]:
CoststoSellingPrice
SellingPriceProcessAfterFurther
UnitsatSplitoffFurtherProcessing

A10,000$35$70,000$40
B20,000$40$30,000$45
C30,000$20$90,000$25
Whichproductsshouldbeprocessedfurther?
[Link].
[Link].
[Link].
d.A,B,andC.
[Link]
$100,[Link]:
CoststoSellingPrice
SellingPriceProcessAfterFurther
UnitsatSplitoffFurtherProcessing

A2,000$25$60,000$50
B3,000$30$60,000$45
C5,000$40$80,000$60
Whichproductsshouldbesoldwithoutfurtherprocessing?
[Link].
[Link].
[Link].
d.A,B,andC.
[Link]
productionlevelof10,000units:
Directmaterials$100,000
Directlabor120,000
Variableoverhead60,000
Fixedoverhead30,000
Thesellingpriceis$[Link]
fullcapacityof10,000units.Capacitycanbeincreasedto13,000units
[Link]$14perunitfor
[Link]
[Link]
wholesalerwhohasofferedtobuy1,000unitsat$[Link]
incrementalcostassociatedwiththisspecialorder?
a.$14,000
b.$28,000
c.$42,000
d.$45,000

64

[Link]
productionlevelof10,000units:
Directmaterials$100,000
Directlabor120,000
Variableoverhead60,000
Fixedoverhead30,000
Thesellingpriceis$[Link]
fullcapacityof10,000units.Capacitycanbeincreasedto13,000units
[Link]$14perunitfor
[Link]
[Link]
wholesalerwhohasofferedtobuy1,000unitsat$[Link]
impactonColfax'soperatingincomeifthisspecialorderisaccepted?
a.$17,000increase
b.$3,000increase
[Link]
d.$5,000decrease
c47.GMHCompanymanufactures100,000unitsofPartXannuallyforuseinone
ofitsmainproducts.Thetotalmanufacturingcostfor100,000unitsof
PartXisasfollows:

Directmaterials$120,000
Directlabor80,000
Variableoverhead40,000
Fixedoverhead160,000

Totalcost$400,000
========
SelinCompanyhasofferedtosellGMH100,000unitsofPartXperyear.
IfGMHacceptsthisoffer,thefacilitiesusedtoproducePartXcanbe
[Link]
$10,000inrentfortheleasedproductionfacilityusedatpresentto
[Link]
relevantcostsforthismakeorbuydecision?
a.$200,000
b.$240,000
c.$250,000
d.$400,000

65

d48.GMHCompanymanufactures100,000unitsofPartXannuallyforuseinone
ofitsmainproducts.Thetotalmanufacturingcostfor100,000unitsof
PartXisasfollows:

Directmaterials$120,000
Directlabor80,000
Variableoverhead40,000
Fixedoverhead160,000

Totalcost$400,000
========
SuttonCompanyhasofferedtosellGMH100,000unitsofPartXperyear.
IfGMHacceptsthisoffer,thefacilitiesusedtoproducePartXcanbe
[Link]
$10,000inrentfortheleasedproductionfacilityusedatpresentto
[Link]
thatGMHshouldbewillingtopaySuttonforpartX?
a.$1.20
b.$2.00
c.$2.40
d.$2.50
[Link],Inc.,producesthreeproducts:A,B,[Link]
[Link],salesdemands,
andtimeoneachmachine(inminutes)isasfollows:
time
time
Demand
CM

onM1

onM2
A
100
$12
5
10
B
80
18
10
5
C
100
25
15
5
Thereare2,[Link]
manyunitsshouldbeproducedandsoldtomaximizetheweekly
contribution?
ABC
a.10080100
b.2080100
c.10040100
d.1008073

66

[Link],Inc.,producesthreeproducts:A,B,[Link]
[Link],salesdemands,
andtimeoneachmachine(inminutes)isasfollows:
time
time
Demand
CM

onM1

onM2
A
100
$12
5
10
B
80
18
10
5
C
150
25
5
10
Thereare2,[Link]
manyunitsshouldbeproducedandsoldtomaximizetheweekly
contribution?
ABC
a.10080150
b.5080150
c.900150
d.10080100

TrueFalse
[Link],therehasbeen
anerrorinthedecisionmakingprocess.
[Link].
[Link].
[Link],thesmallerthesegmentbeingconsideredinadecision,the
fewertheavoidablecosts.
[Link]
onedecisionandcommonandirrelevantforthepurposeofanother
decisioninthesamecompany.
[Link].
[Link]
irrelevanttodecisionsforoneofthosesegments.
[Link]
differentialrevenuesorcosts.
[Link].
[Link]'sobjectiveshouldbetoexploitaconstraintratherthanto
eliminateit.

67

Problems
[Link],withoutconsideringanyof
thechangesdescribedbelow.
ProductAProductBTotal

Sales$100$300$400
Variablecosts40100140

Contributionmargin$60$200$260
Fixedcostsavoidable(20)(30)(50)
unavoidable(50)(100)(150)

Profit(loss)$(10)$70$60
=============

Theunavoidablecostsareallocatedbasedonunitsalesof1,000Aand
2,[Link].

[Link]'sincomeifproductAisdropped.

[Link]
30%,whatwouldthecompany'sincomebe?

[Link],C,whichwould
haveavoidablefixedcostsof$[Link]$0.60,have
variablecostsof$0.20,[Link]
Wilson'sincomeifAwerereplacedbyC.

[Link]
[Link]
materials,labor,[Link]
productBwereprocessedfurtheratadditionalcostsof$90andsoldfor
$350.

SOLUTION:
[Link]'sincome:$20($200CMfromB$30$150)
[Link]'sincome:$80($260CMfromB$30$150)
[Link]'sincome:$130[$20+400($0.60$0.20)$50]
[Link]'sincome:$20($60CMfromA+$50incrementalrevenue
$90incrementalcost)

68

[Link]
costofthejointprocessis$10,[Link]
products.
SalesValueSalesValueCostsof
atifFurtherAdditional
ProductSplitoffPointProcessedProcessing

A$8,000$12,000$2,500
B$9,000$10,000$2,000
C$0$2,500$1,000

[Link](s)shouldbesoldatthesplitoffpoint?

[Link]
[Link].

SOLUTION:
[Link].
[Link]:$9,000($12,000+$10,000+$2,500$2,500$2,000$1,000
$10,000)

[Link],B,C,andDemerge
fromthatprocess,eachofwhichcanbesoldimmediatelyorprocessed
further.Monthlyoutputis50,000gallons;50%isB,30%isC,and20%is
[Link].
BCD

Pergallonsplitoffprice$8$9$6
Pergallonpriceafterfurther
processing$13$15$12
Pergallonvariablecostof
furtherprocessing$4$2$4
Avoidabledirectfixedcostsof
furtherprocessing,permonth$35,000$45,000$18,000
Unavoidabledirectfixedcosts
offurtherprocessing,permonth$18,000$40,000$7,000
Whichproduct(s),ifany,shouldbesoldatsplitoff?

SOLUTION:
Bshouldbesoldatsplitoff.
B:[50,000x50%]x[$13$8$4]$35,000=$10,000
C:[50,000x30%]x[$15$9$2]$45,000=$15,000
D:[50,000x20%]x[$12$6$4]$18,000=$2,000

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[Link]:A,B,[Link]
[Link],salesdemands,andtimeon
eachmachine(inminutes)isasfollows:

A
B
C

Demand
100
80
60

time

onM1

10
10
5

CM
$45
$30
$40

time

onM2

15
5
10

time
onM3
12
8
5

Thereare2,[Link]
materialsneededarereadilyavailableonajustintimebasis.
a. Whataretheloadfactorsforeachofthethreemachines?
b. Whichmachineisthebottleneck?
c. HowmanyunitsofA,B,andCshouldbeproducedduringtheweek?

SOLUTION:
a. M1:87.5%[(10x100)+(10x80)+(5x60)]/2,400
M2:104.2%[(15x100)+(5x80)+(10x60)]/2,400
M3:89.2%[(12x100)+(8x80)+(5x60)]/2,400
b. ThebottleneckisM2asidentifiedbytheloadfactorexceeding100%
c. A:93,B:80,C:60
A:$45/15=$3
B:$30/5=$6
C:$40/10=$4
Timeavailable2,400
ProduceBfirst80x5=400
Timeremaining2,000
ProduceC:60x10=600
Timeremaining1,400
ProduceA93x151,395
Timeremaining5

70

[Link],withoutconsideringanyof
thechangesdescribedbelow.
ProductAProductBTotal

Sales$1,000$3,000$4,000
Variablecosts4001,0001,400

Contributionmargin$600$2,000$2,600
Fixedcostsavoidable(200)(300)(500)
unavoidable(500)(1,000)(1,500)

Profit(loss)$(100)$700$600
=================

Theunavoidablecostsareallocatedbasedonunitsalesof1,000Aand
2,[Link]$0.80perunitfor200unitsofA.
[Link],assumingno
lossofregularsales.

[Link],theywill
[Link]
theycouldlosebeforetheorderbecameunprofitable.
c.Themanagersbelievethattheywilllose80unitsattheregularprice
[Link]
specialordertoincreaseincomeby$50.

SOLUTION:
[Link]:$80increase[200x($0.80$0.40variablecostper
unit)]
[Link]:133units[$80/($1.00$0.40)]=133
[Link]:$0.89
Lostcontributionmargin(80x$0.60)$48.0
Desiredprofit50.0

Contributionmarginrequiredfromspecialorder$98.0
Dividedby20.units200

Equalscontributionmarginperunit$0.49
Plusvariablecost0.40

Equalsrequiredprice$0.89
=====

71

6.MaysCompanymanufactures200,[Link]
informationhasbeencollected:
Materials$200,000
Directlabor110,000
Variableoverhead50,000
Fixedoverhead100,000

Totalcosts$460,000
========
ClemensCompanyhasofferedtoprovidepartXYZfor$[Link]
otherproductiveuseofthespaceexists.
[Link]?
[Link]?

SOLUTION:
a.$40,000lessprofits($360,000make$400,000buy)
Costtobuythepart:200,000x$2=$240,000
Costtomakethepart:$200,000+110,000+50,000=$360,000
b.$1.80($360,000/200,000)

[Link]
line.Theheattreatingequipmenthas400hoursavailableduringanygiven
[Link],sales,andcoststatisticsareasfollows:
ABC

Sellingprice$15$20$10
Variablecost$9$12$7
Requiredtimeinheattreat1.5hrs2.5hrs.1.0hrs
Maximumdemandpermonth100100100
[Link]?
[Link]$[Link]
productshouldGonzalezproduceandsell?

SOLUTION:
a.100A,100B,0C
A:($159)/1.5=$4.00/hr100x1.5hrs=150.0hrs
B:($2012)/2.5=$3.20/hr100x2.5hrs=250.0
C:($107)/1.0=$3.00/hr0(nohoursremaining)
b.100A,60B,100C
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C:($127)/1.0=$5.00/hr100x1.0hrs=100.0hrs
A:($159)/1.5=$4.00/hr100x1.5hrs=150.0
B:($2012)/2.5=$3.20/hr(400100150)/2.5hrs=60units
[Link]:
ABC
Unitdemandpermonth2,0003,0004,000
Sellingprice$500$600$800
Materials150300350
Laborandoverhead180210300
Salescommission5075100
Laborandoverheadareappliedtoeachproductatarateof$30permachine
[Link].
a. Scottsocurrentlyhas60,000hoursavailableforproductioneachmonth.
Howmanyunitsshouldbeproducedandsoldforeachproduct?
b. AnexporterhasapproachedScottsowithanoffertopurchase500units
[Link]
[Link]
priceScottsoshouldaccept?

SOLUTION:
a.A:2,000B:1,142C:4,000
Throughput/hourforA:$50[(50015050)/(180/30)]
Throughput/hourforB:$32.14[(60030075)/(210/30)]
Throughput/hourforC:$35[(800350100)/(300/30)]
Hoursavailable60,000
ProduceA:2,000x612,000
Timeremaining48,000
ProduceC:4,000x1040,000
Timeremaining8,000
ProduceB:1,142x77,994
Timeremaining6
b.$575
LostthroughputofB:$32.14x7hours=$225
Materials350
Minimumprice$575

73

9.MiamiCompanycurrentlysells3,000unitsofproductAfor$1.25each.
Variablecostsare$0.60,avoidablefixedcostsare$750,andunavoidable
allocatedfixedcostsare$1,[Link]$0.90perunit
for800unitsofproductA.
[Link]
affectingcurrentsales.

[Link],theywill
[Link]
theycouldlosebeforetheorderbecameunprofitable.
c.Themanagersbelievethattheywilllose270unitsattheregularprice
[Link]
specialordertoincreaseincomeby$200.

SOLUTION:
[Link]:$240increase[800x($0.90$0.60)]
[Link]:369units[$240/($1.25$0.60)]=369
[Link]:$1.07
Lostcontributionmargin(270x$0.65)$175.5
Desiredprofit200.0

Contributionmarginrequiredfromspecialorder$375.5
Dividedby800units800

Equalscontributionmarginperunit$0.47rounded
Plusvariablecost0.60

Equalsrequiredprice$1.07
=====

74

10.ArpeggioCompanymanufactures1,[Link]
followinginformationhasbeencollected:
Materials$200,000
Directlabor110,000
Variableoverhead50,000
Fixedoverhead100,000

Totalcosts$460,000
========
MobileCompanyhasofferedtoprovidepartXYZfor$[Link]
Arpeggioacceptstheofferanotherproductwillbemovedintothespace
vacated,saving$60,000ayearinrent.
[Link]?
[Link]?

SOLUTION:
a.$20,000moreprofits($420,000make$400,000buy)
Costtobuythepart:1,000x$400=$400,000
Costtomakethepart:$200,000+110,000+50,000=$360,000+60,000rent
=$420,000
b.$420($420,000/1,000)

75