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Exam 30: Cost-Revenue Analysis for Decision Making

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Question 21

True/False

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Common costs are allocated to each segment of a business to determine the segment's contribution margin.

A) True
B) False

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Question 22

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A segment of a business probably should be discontinued if

A) its common costs exceed its contribution margin.
B) its contribution margin exceeds its controllable fixed costs and its common costs.
C) it cannot produce a contribution margin.
D) it has a net loss.

E) A) and B)
F) A) and C)

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Question 23

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Assume that the Venus Company, which now sells its product for $75 per unit, has an opportunity to sell 3,000 units in a foreign country for $54 a unit. The order will not affect its current domestic sales. Shipping costs of $9 a unit would be incurred on the order. Current variable manufacturing costs are $31 per unit manufactured. Variable selling and administrative costs are $14 per unit sold. Included in variable selling expenses is a sales commission of $1 per unit, which would not apply to the special order. Fixed manufacturing costs are $75,000 per year and fixed selling and administrative expenses are $45,000 per year. The company is now manufacturing and selling 5,000 units per year. 1. Should the Venus Company take the order? 2. What impact would the special order have on profits?

In making a decision to replace a machine, which of the following is not relevant?

Under absorption costing, a portion of the fixed manufacturing overhead is deferred to future periods as part of the inventory value.

The data given below pertains to the operations of the Newton Products Corporation for the year ended December 31, 2013 $\begin{array} { l r } \text { Sales: } & 3,400 \text { units at } \$ 55 \text { a unit } \\\text { Variable manufacturing costs: } & 3,200 \text { units at } \$ 25 \text { a unit } \\\text { Variable selling and admin. expenses: } & \$ 5 \text { a unit } \\\text { Fixed manufacturing costs: } & \$ 24,000 \\\text { Fixed selling and admin. expenses: } & \$ 16,000 \\\text { Finished goods inventory, Jan. 1, 2013: } & 500 \text { units } \\\text { Finished goods inventory, December 31, } & 600 \text { units }\end{array}$ -Based on the information given prepare an income statement for the year using the direct costing approach. Assume that the beginning finished goods inventory had a cost of $25 per unit.

Which of the following is NOT a consideration regarding the purchase of new equipment when looking at the net income under each alternative?

Using the given information, determine the income under both the absorption and the direct (variable) costing methods for the company for the year. Explain the difference, if any. $\begin{array}{llcc} \text { Beginning Inventory } & -0- \text { units} \\ \text { Units produced } &15,000\\ \text { Ending Inventory } &2,000\\ \text {Sales price per unit } &\$44.00\\ \text { Variable manufacturing costs per unit } &19.00\\ \text { Variable selling \& administrative costs per unit} &4.00\\ \text { Fixed manufacturing costs } &\$75000\\ \text { Fixed selling and administrative costs } &\$79,950\\\end{array}$

If a decision must be made to replace a machine, the book value of the existing machine is a sunk cost.

Under ____________________ costing procedures, fixed manufacturing costs are included in the cost of goods manufactured.

The direct costing procedure is sometimes referred to as variable costing.

Which of the following is not true of the direct costing procedure?

A segment of a business shows a contribution margin of $30,000 but incurs controllable fixed costs of $26,000. Eliminating that segment will result in an increase in company-wide net income.

The excess of net sales over the cost of goods sold, based on variable costs only, is referred to as the __________________.

Which of the following is not relevant in decision making?

The increase in a cost from one alternative to another is called a(n) ____________________ cost.

The first step in the decision-making process is to determine relevant cost and revenue data.

McAdd Industries is considering whether to continue making part MPG 411 or buying the part from a supplier. The supplier can sell the needed number of parts (47,000 projected) to McAdd for an amount that is above the company's current cost to manufacture it. If McAdd decides to purchase the parts from its supplier, it will be able to reconfigure the manufacturing floor in order to allow increased production of 50 of its product for an increased contribution margin of $17,000 for the year. The old machine has a book value of $39,000, and can be sold for $4,000. Discuss this situation. What are the considerations?

Match the following descriptions with the appropriate term.

Opportunity costs are earnings or potential benefits foregone because a certain course of action is taken.