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Garrison (Asian Edition) Practice Exam Chapter 14

Print these pages. Answer each of the following questions, explaining your answers or showing your work, as appropriate, and then compare your solutions to those provided at the end of the practice exam. 1. The management of Bernese Company is considering whether one of the departments in its retail stores should be eliminated. The contribution margin in the department is $150,000 per year. Fixed expenses allocated to the department are $130,000 per year. It is estimated that $120,000 of these fixed expenses will be eliminated if the department is discontinued. Part (a) Which costs, if any, are irrelevant to this decision?

Part (b) If the department is eliminated, what will be the impact on the companys overall net operating income?

2. Warren Company, which manufactures a single product, is operating at full capacity of 20,000 units per month. The follow unit costs relate to the manufacture of this product: Manufacturing: Direct materials Direct labor Variable overhead Fixed overhead !elling and administrative: Variable Fixed $2.00 4.00 1.00 1. 0 ".00 1.200

The company has 100 units left over from last year which have small defects and which will have to be sold at a reduced price as scrap. This would have no effect on the company's other sales. The variable selling and administrative costs would have to be incurred to sell the defective units. What cost is relevant as a guide for setting a minimum price on these defective units?

3. Composite Company produces 2,000 parts per year, which are used in the assembly of one of its products. The unit product cost of these parts is: Variable manufacturing cost Fixed manufacturing cost $nit %roduct cost $#4 "# $100

The part can be purchased from an outside supplier at $80 per unit. If the part is purchased from the outside supplier, two-thirds of the fixed manufacturing costs can be eliminated. Part (a) What costs, if any, are relevant to this decision? Which costs are irrelevant?

Part (b) What would the annual impact on the companys net operating income be as a result of buying the part from the outside supplier?

4. Ginger Company sells its product for $42 per unit. The companys unit product cost based on the full capacity of 400,000 units is as follows: Direct materials Direct labor Manufacturing overhead $nit %roduct cost $ 10 12 $"0

A special order offering to buy 40,000 units has been received from a foreign distributor. The only selling costs that would be incurred on this order would be $6 per unit for shipping. The company has sufficient idle capacity to manufacture the additional units. Two-thirds of the manufacturing overhead is fixed and would not be affected by this order. Assume that direct labor is an avoidable cost in this decision. In negotiating a price for the special order, what is the minimum acceptable selling price per unit?

5. Wriggly Company is a small family business that produces wooden plaques and trophies: !elling %rice %er unit Variable cost %er unit *ontribution margin %er unit *ontribution margin ratio &la'ues $1 12 $ # "", (ro%hies $1) $ + 4+,

The company only has one machine, a sander, to sand the wood that is used for the plaques or the trophies. Generally, the wood required for each plaque takes 0.25 hour to sand, while the word required for each trophy takes 0.50 hour to sand. Based on the constraint related to the machine time, which product should be emphasized if only limited machine time is available-

GNBCY Practice Exam Solutions Chapter 14


1 Part (a) Solution (!earnin" #$%ecti&e 1)' (he common fixed costs of $10.000 /or $1"0.000 0 $120.0001 are irrelevant to this decision. Part (a) Solution (!earnin" #$%ecti&e ()' *M that 2ould be lost if de%artment is discontinued 3ess fixed costs that can be avoided if de%artment is discontinued 4ncrease /decrease1 in net o%erating income $/1)0.0001 120.000 $ /"0.0001

5ased on this information alone. because the com%an67s net o%erating income 2ould decrease b6 $"0.000 %er 6ear. management should not eliminate this de%artment. ( Solution (!earnin" #$%ecti&e ))' 8 relevant cost is a cost that differs bet2een alternatives in a decision0ma9ing situation. !ince the variable selling and administrative ex%enses of $".00 %er unit 2ould need to be incurred to sell the defective units. the6 are relevant to the decision and should be used as a guide for setting the minimum %rice on these defective units. :ote that none of the other %er unit costs 2ould be relevant as a guide for setting the minimum %rice on the defective units. (he four t6%es manufacturing costs listed above are sun9 costs /i.e.. a cost that has alread6 been incurred and that cannot be changed b6 an6 decision made no2 or in the future1 and. as such. are not relevant to this decision. (he fixed selling and administrative ex%enses is a common fixed cost /i.e.. a cost that su%%orts the o%erations of more than one segment of an organi;ation and is not avoidable in 2hole or in %art b6 eliminating an6 one segment1 and. as such. are not relevant to this decision.1 ) Part (a) Solution (!earnin" #$%ecti&e ))' (he %roduct costs related to ma9ing the %arts that can be eliminated are the variable manufacturing costs /$#4 %er unit1 and t2o0thirds of the fixed manufacturing costs /2<" x $"# = $241 for a total of $ /or $#4 > $241 %er unit. (hose are the costs that are relevant to the ?ma9e@ decision. (he cost that is relevant to the ?bu6@ decision is the %urchase %rice of $ 0 %er unit. !ince one0third of the fixed manufacturing costs cannot be eliminated. the6 are irrelevant to this decision.

Part ($) Solution (!earnin" #$%ecti&e ))' (he annual im%act on the com%an67s net o%erating income as a result of bu6ing the %art from the outside su%%lier is determined as follo2s: &roduction ?*ost@ %er $nit $ #4 "# $100 $#4 $ $ 0 /241 $)# $12 .00 0 $1#.000 $1#0.000 /4 .0001 $112.000 &er $nit Differential *osts Ma9e 5u6 $#4 (otal Differential *ostsA2.000 $nits Ma9e 5u6 $12 .00 0

Variable manufacturing costs Fixed manufacturing costs Butside %urchase %rice Fixed manufacturing costs eliminated (otal cost Difference in favor of %urchasing 4

Solution (!earnin" #$%ecti&e 4)' (he minimum acce%table selling %rice %er unit is determined as follo2s: Direct materials Direct labor Variable manufacturing overhead /$12 x 1<"1 Variable selling costs /shi%%ing1 Minimum selling %rice $ 10 4 # $2

Solution (!earnin" #$%ecti&e *)' (o evaluate a situation 2here there is a constrained resource /?bottlenec9@1. the contribution margin %er unit of constrained resource should be calculated. Chile at first it a%%ears the tro%hies should be em%hasi;ed based on the data given above. 2hen the contribution margin %er machine hour is com%uted. it a%%ears the %la'ues should be em%hasi;ed. as follo2s: *ontribution margin /*M1 %er unit Machine hours %er unit /MD1 *M %er machine hour /*M E MD1 &la'ues (ro%hies $ # $ + .2) .)0 $ 24 $ 14

4n other 2ords. for each hour of machine time. the 2ood for four %la'ues can be sanded 2ith a *M of $# %er %la'ue. for a total of $24 *M %er machine hour. 8lternativel6. for each hour of machine time. the 2ood for t2o tro%hies can be sanded 2ith a *M of $+ %er tro%h6. for a total of $14 *M %er hour of machine time. !o 2ith limited machine time. the %la'ues should be em%hasi;ed since more *M %er machine hour 2ill be reali;ed.