An avoidable cost is a cost that can be eliminated as a result of choosing one alternative over another.
A) True
B) False
2. When a company has a production constraint, the product with the highest contribution margin per unit of the constrained resource should be given highest priority.
A) True
B) False
3. Knaack Corporation is presently making part R20 that is used in one of its products.
A total of 18,000 units of this part are produced and used every year. The company's Accounting Department reports the following costs of producing the part at this level of activity: Picture An outside supplier has offered to produce and sell the part to the company for $27.70 each. If this offer is accepted, the supervisor's salary and all of the variable costs, including direct labor, can be avoided. The special equipment used to make the part was purchased many years ago and has no salvage value or other use. The allocated general overhead represents fixed costs of the entire company, none of which would be avoided if the part were purchased instead of produced internally. If management decides to buy part R20 from the outside supplier rather than to continue making the part, what would be the annual impact on the company's overall net operating income?
A) Net operating income would increase by $162,000 per year.
B) Net operating income would increase by $50,400 per year.
C) Net operating income would decline by $50,400 per year.
D) Net operating income would decline by $162,000 per year.
4. Cress Company makes four products in a single facility. Data concerning these products appear below: Picture The milling machines are potentially the constraint in the production facility. A total of 11,500 minutes are available per month on these machines. How many minutes of milling machine time would be required to satisfy demand for all four products?
A) 12,000
B) 10,800
C) 9,000
D) 11,500
5. A study has been conducted to determine if Product A should be dropped. Sales of the product total $200,000 per year; variable expenses total $140,000 per year. Fixed expenses charged to the product total $90,000 per year. The company estimates that $40,000 of these fixed expenses will continue even if the product is dropped. These data indicate that if Product A is dropped, the company's overall net operating income would:
A) decrease by $20,000 per year
B) increase by $20,000 per year
C) decrease by $10,000 per year
D) increase by $30,000 per year
6. A customer has requested that Inga Corporation fill a special order for 2,000 units of product K81 for $25.00 a unit. While the product would be modified slightly for the special order, product K81's normal unit product cost is $19.90: Picture Direct labor is a variable cost. The special order would have no effect on the company's total fixed manufacturing overhead costs. The customer would like modifications made to product K81 that would increase the variable costs by $1.20 per unit and that would require an investment of $10,000 in special molds that would have no salvage value. This special order would have no effect on the company's other sales. The company has ample spare capacity for producing the special order. If the special order is accepted, the company's overall net operating income would increase (decrease) by:
A) $13,000
B) $(9,700)
C) $10,200
D) $(2,200)
7. Part I51 is used in one of Pries Corporation's products. The company makes 18,000 units of this part each year. The company's Accounting Department reports the following costs of producing the part at this level of activity: Picture An outside supplier has offered to produce this part and sell it to the company for $15.80 each. If this offer is accepted, the supervisor's salary and all of the variable costs, including direct labor, can be avoided. The special equipment used to make the part was purchased many years ago and has no salvage value or other use. The allocated general overhead represents fixed costs of the entire company. If the outside supplier's offer were accepted, only $26,000 of these allocated general overhead costs would be avoided. If management decides to buy part I51 from the outside supplier rather than to continue making the part, what would be the annual impact on the company's overall net operating income?
A) Net operating income would decline by $81,800 per year.
B) Net operating income would decline by $55,800 per year.
C) Net operating income would decline by $119,800 per year.
D) Net operating income would decline by $29,800 per year.
8. Beilke Corporation processes sugar beets in batches that it purchases from farmers for $53 a batch. A batch of sugar beets costs $12 to crush in the company's plant. Two intermediate products, beet fiber and beet juice, emerge from the crushing process. The beet fiber can be sold as is for $20 or processed further for $10 to make the end product industrial fiber that is sold for $26. The beet juice can be sold as is for $30 or processed further for $29 to make the end product refined sugar that is sold for $79. Which of the intermediate products should be processed further?
A) beet fiber should be processed into industrial fiber; beet juice should be processed into refined sugar
B) beet fiber should NOT be processed into industrial fiber; beet juice should be processed into refined sugar
C) beet fiber should NOT be processed into industrial fiber; beet juice should NOT be processed into refined sugar
D) beet fiber should be processed into industrial fiber; beet juice should NOT be processed into refined sugar
9. Zurasky Corporation is considering two alternatives: A and B. Costs associated with the alternatives are listed below: Picture Are the materials costs and processing costs relevant in the choice between alternatives A and B?
A) Neither materials costs nor processing costs are relevant
B) Only processing costs are relevant
C) Only materials costs are relevant
D) Both materials costs and processing costs are relevant
10. Zurasky Corporation is considering two alternatives: A and B. Costs associated with the alternatives are listed below: Picture What is the differential cost of Alternative B over Alternative A, including all of the relevant costs?
A) $44,000
B) $149,000
C) $105,000