ACCT2460
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Supplementary 1
AMA Problems
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Relevant Costing
Problem 1: Northern Company incurs the following costs per unit in producing 500,000 units of product N-1: Variable manufacturing cost $5.00 Sales Commission $1.00 Fixed manufacturing cost $2.00 Fixed non-manufacturing cost $1.00 Total Cost per unit $9.00 The normal selling price for N-1 is $10.00 per unit. Southern Company has placed a special order with Northern to buy 10,000 units for $7.00 per unit. The production and sale to Southern would not displace any regular sales of N1, and no sales commissions would be paid on Southern's order. Northern is operating about the break-even point. By how much would the profit of Northern increase or decrease if Southern's order is accepted? Problem 2: Chicago Company manufactures part no. 118 for use in the production of its final product. The costs per unit for 10,000 units of part no. 118 are as follows: Direct materials $4.00 Direct labour $24.00 Variable overhead $10.00 fixed overhead applied $8.00 Total costs per unit $46.00 New York Company has offered to sell Chicago Company 10,000 units of part no. 118 for $43 per unit. If Chicago Company accepts the offer, some of the facilities presently used to manufacture part no. 118 could be used to manufacture part no. 119. This would save $40,000 of relevant costs in the manufacture of part no. 119, and $3 per unit of fixed overhead applied to part no. 118 would be eliminated. By what amount would net relevant costs be increased or decreased if Chicago Company decides to buy part no. 118 from New York Company? Problem 3: Star Company has obsolete light fixtures in inventory with manufacturing cost of $60,000. The company can rework the fixtures for $20,000 and then sell them for $36,000. Alternatively, it can sell them as scrap for $12,000. Which alternative should Star Company choose? Problem 4: Computer Company manufactures 10,000 units of part C-1 annually for use in the production of minicomputers. The following costs are incurred at 10,000 units of production: Direct materials $20,000 Direct labour $50,000 Variable overhead $40,000 Fixed overhead $80,000 Total Cost $190,000 Disk Drive Company has offered to sell 10,000 units of C-1 to Computer Company for $14 per unit. If Computer Company accepts this offer, some of the facilities presently used to manufacture C-1 could be rented to a third party at an annual rental of $16,000. Should Computer Company accept Disk Drive Company's offer? Problem 5: Southeast Company has an annual plant capacity of 2,000 units of product X, and the plant is currently operating at 50% of capacity (i.e., 1,000 units). Southeast is operating above the break-even point. Annual costs at a production level of 1,000 units are as follows: Variable manufacturing cost $10 per unit Fixed manufacturing cost $5 per unit Variable selling cost $1 per unit Fixed selling and administrative costs $5,000 per year The normal selling price per unit for product X is $25. Central Company has offered to buy 100 units of product X for $20 per unit. The sale of 100 units to Central Company would not displace any normal sales of product X. Southeast Company would incur variable selling costs of $1 per unit for the sale of 100 units. There is no alternative use for the idle capacity at Southeast Company in the short run. Should Southeast Company accept Central Company's offer?
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Problem 6: Micro Company currently manufactures 20,000 units of part #15 at the following costs: direct materials $120,000, direct labour, $600,000, variable overhead, $240,000, and fixed overhead, $300,000 Alpha Company offers to manufacture part no. 15 for Micro Company for $60 per unit. If Micro accepts Alpha's offer, Micro will eliminate $180,000 of fixed overhead. In addition, Micro will able to rent for $85,000 per year the factory capacity presently used in the production of part no. 15. Should Micro accept Alpha's offer? Problem 7: A truck with a cost of $20,000 is totally destroyed during its first day of use. Unfortunately, the truck was uninsured. The truck can be sold as scrap for $3,000 cash and replaced with a new truck costing $20,500, or it can be rebuilt for $16,000. Which alternative should be selected? Problem 8: Digit Company currently buys 5,000 units of subcomponent part for $20 per unit. The management of Digit feels that some of the company's idle capacity can be utilized to produce the part in-house. Following are the estimated costs of manufacturing the subcomponent. Per unit Total Direct materials $5.00 $25,000 Direct labour $10.00 $50,000 Variable overhead $2.00 $10,000 Fixed overhead $5.00 $25,000 Total costs $22.00 $110,000 Assuming that there is no opportunity cost of using its idle capacity, and no additional fixed overhead costs will be incurred if the part is made in-house, should Digit Company make or buy the subcomponent part? Problem 9: Big city Motors is trying to decide whether it should keep its existing car washing machine or purchase a new one that has technological advantages (which translates into cost savings) over the existing machine. Information on each machine follows: Old Machine New Machine Original Cost--------------------------------------- $10,000 $20,000 Remaining Life------------------------------------- 10 yrs 10yrs Accumulated depreciation------------------------ $5,000 0 Annual cash operating costs---------------------- $9,000 $4,000 Current salvage value of old machine----------- $2,000 Salvage value in 10 years------------------------- $500 $1,000 Problem 10: K Co. uses 10,000 units of part in its production process. The cost to make a part is: direct materials, $12; direct labour, $25; variable overhead, $13' and applied fixed overhead, $30. K Co. has received a quote of $55 from a potential supplier for this part. If K Co. buys the part, 70% of the applied fixed overhead would continue. K Co. would be better off by? Problem 11: P Co. only has 25,000 hours of machine time each month to manufacture its two products. Products X has a contribution margin of $50 and Product Y has a contribution margin of $64. Product X requires 5 hours of machine time and Product Y requires 8 hours of machine time. If P wants to dedicate 80% of its machine time to the product that will provide the most income, P will have a contribution margin of? Problem 12: Down Co. has 3 divisions: R, S, and T. Division R's income statement shows the following for the year ended December 31, 1990. Sales---------------------------------------------------------------------------------$1,000,000 Cost of Goods Sold----------------------------------------------------------------$ 800,000 Gross Profit-------------------------------------------------------------------------$ 200,000 Selling Expenses----------------------$100,000 Administrative expenses-------------$250,000 $ 350,000 Net Loss-----------------------------------------------------------------------------$(150,000)
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Cost of Goods Sold is 75% variable and 25% fixed. Of the fixed COGS, 60% is avoidable if the division is closed. All of the selling expenses are variable. Of the administrative expenses (all of which are fixed), 90% are an allocation of head office costs so that only 10% could be avoided. Show whether the company would be better off to eliminate Division R. Problem 13: Sandow Co. is currently operating at a loss of $15,000. The sales manager has received a special order for 5,000 units of product, which normally sells for $35 per unit. Costs associated with the product are normally: direct materials, $6; direct labour, $10; variable overhead, $3; applied fixed overhead, $4; and variable selling expenses, $2. The special order would allow the use of a slightly lower grade of direct material, thereby lowering the price per unit by $1.50 and selling expenses would be decreased by $1. If Sandow wants this special order to increase the total net income for the firm to $10,000, what sales price must be quoted for each of? Problem 14: Q Co. produces a part which has the following costs per unit: Direct materials $8.00 Direct labour $3.00 Variable overhead $1.00 Fixed overhead $5.00 Total $17.00 Z Corp. can provide the part to Q for $19/unit. Q Co. has determined that 60% of its fixed overhead would continue if it purchased the part. However, if Q no longer produces the part, it can rent that portion of the plant facilities for $60,000/year. Q Co. currently produces 10,000 parts/year. Which alternative is preferable and by what margin? Problem 15: Armstrong Co. has 15,000 units in inventory that had a production cost of $3/unit. These units cannot be sold through normal channels due to a significant technology change. These units could be reworked at a total cost of $23,000 and sold for $28,000. Another alternative is to sell the units to a junk dealer for $8,500. Show the relevant cost analysis to indicate what decision Armstrong should make. Problem 16: Refer to the information in the preceding problem, and assume that R has sufficient idle capacity to produce the 1,000 units. If R wants to increase its operating profit by $5,600 it would charge a per unit selling price of? Problem 17: Handy Combs, Inc. makes and sells brushes and combs. It can sell all of either product it can make. The following data are pertinent to each respective product: Brushes Combs Units of output/machine hour 8 12 Selling price/ unit $12 $1 Product cost/ unit Direct materials $1.00 $0.20 Direct Labour $2.00 $0.10 Variable overhead $0.50 $0.05 Total fixed overhead is $380,000. The company has 40,000 machine hours available for production. What sales mix will maximize profits? Problem 18: Boston Shoe Cobblers has been asked to submit a bid on supplying 1,000 pairs of military dress boots to the Pentagon. The company's costs per pair of boots are as follows: Direct Materials $8.00 Direct Labour $6.00 Variable overhead $3.00 Variable selling cost (commission) $3.00 Fixed overhead (allocated) $2.00 Fixed selling and administrative cost $1.00 Assuming that there would be no commission on this potential sale, the lowest price the firm can bid is some price greater than?
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Problem 19: Mini Company annually produces 10,000 disk drives, which it sells to computer manufacturers for $200 each. The cost per unit of manufacturing each disk drive is as follows: Direct Materials $75 Direct Labour $25 Variable overhead $25 Fixed overhead $50 Totals $175 Mini Company has enough idle capacity, in the short run, to produce an additional 1,000 units of disk drives. A computer repair service, CRD Company (which is not a regular customer of Mini), has offered to buy 1,000 disk drives for $150 each. Should Mini Company accept this offer? Problem 20: Assume the same facts as presented in problem 11, except that Mini Company could rent its idle capacity to Computer Company in the short run for $40,000. Should Mini Company sell the 1,000 units to CRS Company for $150 each? Problem 21: Bill has just returned from a duck hunting trip. He has brought home eight ducks. Bill's wife detests cleaning ducks, and to discourage him from further duck hunting, she has presented him with the following estimated cost estimate per duck: Camper and equipment Cost, $12,000; usable for eight seasons; 10 hunting trips per season -------$150 Travel Expense (pickup truck) 100 miles at $0.12 per mile (gas, oil, and tires-$0.07 per mile; depreciation and insurance- $0.05 per mile) ----------------------------------- $ 12 Shot gun shells (two boxes)---------------------------------------------------------- $ 20 Boat Cost, $320; usable for eight seasons; 10 hunting trips per season -----------$ 4 Fine paid for speeding in the way to the river--------------------------------------$ 25 Hunting License Cost, $30 for the season; 10 hunting trips per season --------------------------- $ 3 Money lost playing poker Loss, $18 (Bill plays poker every weekend) ------------------------------------$ 18 A fifth of Old Grandad (bourbon whisky) Cost, $8 (used to ward off the cold)-----------------------------------------------$ 8 Total Cost--------------------------------------------------------------$240 Cost per duck ($240 8 ducks) ------------------------------------------------------$ 30 Required 1. Assuming that the duck hunting trip Bill has just completed is typical, what costs are relevant to a decision as the whether Bill should go duck hunting again this season? 2. Discuss the wife's computation of the cost per duck. Problem 22: The Artistate Manufacturing Company presents the following data for a machine it owns: Net Book Value--------------------------------------------------------------------$ 32,000 Present scrap Value----------------------------------------------------------------$ 12,000 Estimated remaining useful life-------------------------------------------------- 8 years Predicted scrap value at end of useful life-------------------------------------- none Annual cash operating costs------------------------------------------------------$11,000
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A new machine with the same productive capacity is available as follows: Purchase Price----------------------------------------------------------------------$ 43,000 Estimated useful life--------------------------------------------------------------- 8 years Predicted scrap value at the end of useful life--------------------------------- none Annual cash operating costs----------------------------------------------------- $ 6,000 Ignoring income taxes and the time value of money, make the computations on a total cost basis to determine which of the two alternatives the company should select: keep the old machine or replace it with the new machine. Problem 23 accessories. Karry, Inc. incurs the following costs in making the basket for the "sun-fun" line of picnic Cost Per Unit $5 $6 $2 $6 $19
Total Cost For 20,000 Units Direct Materials--------------------------------------- $100,000 Direct Labour------------------------------------------ $ 120,000 Variable factory overhead--------------------------- $ 40,000 Fixed factory overhead------------------------------- $ 120,000 Total Costs------------------------------------ $ 380,000
Another manufacturer offers to sell Karry the same basket for $17 per unit for 20,000 units. Determine whether Karry should make or buy the basket, assuming the capacity now used to make the basket would become idle if it were purchased and that $60,000 of the fixed overhead could be avoided by not making the basket, Problem 24: The Compu-Right Company has a monthly plant capacity of 1,500 product units. Its predicted operations for the month are: Sales (1,000 units)---------------------------------------------------------------$ 51,000 Manufacturing costs: Fixed---------------------------------------------------------------------$ 18,000 Variable----------------------------------------------------------------- 17 per unit Selling and Administrative expenses: Fixed---------------------------------------------------------------------$ 4,500 Variable (sales commission)----------------------------------------- $3 per unit If the company accepts a special order from a customer for 200 units at selling price for $18 each, how would the total predicted net income for the month be affected, assuming no effect on regular sales at regular prices? No sales commissions would be required by the special order, but an extra delivery cost of $350 would be required. Indicate the amount and whether it is an increase or a decrease. (Ignore income taxes). Problem 25 Magic Stores own and operates eighty-seven retail stores. Expected annual operating results for one of the these stores as follows: Sales revenues------------------------------------------------------------------$520,000 Cost of goods sold and other direct cash operating expenses------------$ 490,000 Use the opportunity-cost concept in deciding whether to continue operations of this store or to lease to store building to a non-competing retailer for $4,000 per month. Building ownership costs are $19,000 annually.
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Problem 26 Manifold Company annually produces Products T and W from a joint production process costing $195,000 per year. Each product can be sold at the split-off point or further processed before being sold: Selling Prices per Unit Product T W Quantity 40,000 20,000 At Split-Off $6 $4 At Completion $9 $5 Separable Processing Costs after Split-Off $52,000 $47,000
Make an analysis to determine whether the individual products should be processed beyond the split-off point. Problem 27 Dale Stone Corporation has 4,500 hours of plant capacity per month available for manufacturing two products with the following characteristics: Bafflers Hatches Selling prices per unit--------------------------$ 40.00 $50.00 Variable costs per unit-------------------------$ 30.00 $35.00 Units that can be manufactured In one hour (Bafflers or Hatches)------------ 9 units 5 units Compute the number of its 4,500 available production hours that this company should allocate to the manufacture of each product: Problem 28 Lighthouse Stores has three product lines: Washer, Dryers and Freezers. The company furnished the following data for its most recent year (in thousands): Washers Dryers Freezers Total Sales----------------------------- $900 $700 $300 $1,900 Avoidable fixed expenses---- $100 $ 80 $ 60 $ 240 Unavoidable fixed expenses, Allocated equally-------------- $100 $100 $100 $300 Variable expenses------------- $500 $400 $200 $1,100 Net income (loss)------------- $ 200 $ 120 $(60) $260 On the basis of the statement you have prepared, you would advise the elimination of the Freezers product line? Problem 29: Given for Wild-Flowers Products: Plant capacity per month---------------------------------------------25,000 units Current production per month---------------------------------------20,000 units Special order received from a mail-order house------------------ 4,000 units Average full cost per product unit for current production------- $ 24.00 Proposed selling price per unit for special order------------------ $ 18.00 Average full cost per product unit for current Production plus special order---------------------------------------- $ 22.50
1. Compute the incremental cost per unit of the special order---------------$________
2. Assuming that the special order sales would have no effect on regular current sales, compute the incremental profit (or loss) from accepting the special order $________
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Problem 30: Redbird Corporation has 1,300 hours of plant capacity available during a certain period for manufacturing two products with the following characteristics: C Selling Price per unit--------------------------$ 40 Variable expenses per unit------------------- $18 Units that can be manufactures in One hour (C or D)---------------------------- 9 $85 $35 5 D
Compute the number of its 1,300 available production hours that this company should devote to the manufacture of each product: C_____________________________ D__________________________
Problem 31: Cody Corporation has an annual plant capacity of 2,800 product units, its predicted operations for the year are: Sales (2,000 units at $40 each)------------------------------------$80,000 Manufacturing Costs: Variable-----------------------------------------------------$ 23 per unit Fixed-------------------------------------------------------- $ 18,000 Selling and Administrative expenses: Variable (sales commission)-----------------------------$ 4 per unit Fixed-------------------------------------------------------- $ 2,000 Should the company accept a special order for 600 units at a selling price of $30 each and subject to half the usual sales commission rate per unit, assuming no effect on regular sales at regular prices? Show supporting computations. Multiple Choice Questions
1. Mira Enterprise manufactures motorized dust pans. The following cost data relates to Mira's internal
production of the motors used in the dust pans: Direct Materials------------------------------Direct Labour---------------------------------Variable manufacturing overhead---------Fixed manufacturing overhead-------------Total Cost per motor-------------------------Per Motor $2.00 $2.00 $5.00 $15.00 $24.00
An outside company offered to sell motors to Mira for $20.00 per motor. Twenty percent of the fixed manufacturing overhead will not be affected by any decision of Mira's to buy from an outside supplier. Mira uses 3,000 motors annually. If Mira buys from the supplier, the facilities currently use to produce motors could be used to generate a segment margin of $15,000. What is the total annual dollar advantage or disadvantage for Mira if the decision is made to buy the motors from an outside supplier? a) $3,000 advantage b) $3,00 disadvantage c) $9,000 disadvantage d) $18,000 advantage e) none of the above
2. Which of following is an advantage of making a part rather than buying from an outside supplier?
8 a.a) a.b) a.e)
Cost per part will always be less. Inventory control is usually enhanced. a.c) Vertical integration will usually decrease a.d) Relationships with outside supplier will usually be served. All of the above
3. Crisp Cutlery manufactures and distributes chain saw steak knives. Crisp currently manufactures its own
chains but is looking into the possibility if buying chains from an outside supplier. Crisp uses 40,000 chains annually. The following cost data relates to Crisp's annual production of 40,000 chains: Direct materials---------------------------------- $48,800 Direct labour------------------------------------- $36,000 Variable overhead------------------------------- $25,000 Fixed overhead: Equipment depreciation--------------$16,800 Chain production supervisor salary-$22,000 Allocated portion of factory rent, Insurance, and property taxes-------$ 9,200 If Crisp buys its chain from an outside supplier, none of the production space or equipment used to produce chains has an alternative use or value. What is the relevant cost per chain that Crisp should use in deciding whether or not to buy from an outside supplier?
a) b) c) d) e)
$2.76 $3.18 $3.41 $3.73 none of the above
4. Which of the following items related to obsolete inventory are relevant in a decision to dispose of the inventory? Manufacturing Disposal Sales Costs Costs Value a) Relevant Relevant Relevant b)Relevant Irrelevant Relevant c) Relevant Relevant Irrelevant d)Irrelevant Relevant Relevant e))Irrelevant Irrelevant Irrelevant 5. Lipro, Inc. is considering the production and sale of three new products. Lipro's only scarce resource is machine hour capacity. Lipro has unlimited demand for all three products. Which of the following rules would guarantee that Lipro would maximize its profits? a) Produce equal amounts of all three products. b) Produce the product with the highest contribution margin per unit. c) Produce the product with the highest contribution margin ratio. d) Produce the product with the highest contribution margin per machine hour. 6. "Jewelry by Morley" is considering the production and sale of three new profitable products as shown below. The only problem is that Morley only has 1,800 excess labour hours each month. Per unit of data for the three products and expected monthly demand in units is provided below: Toenail Ankle Navel Earrings Bracelets Rubies Selling price $3.00 $5.00 $16.00 Variable cost/unit $1.20 $3.40 $10.00 Labour hrs/unit 1.2 hrs 2.0 hrs 5.0 hrs
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Max. monthly demand 500 units 600 units 240 units
Find the number of units of each product the company should make to maximize profits. Toenail Ankle Navel Earrings Bracelets Rubies a) 500 -0240 b) 500 300 120 c) -0300 240 d) 1,500 -0-0e) None of the above 7. Last weekend, three students, Marty, John, and Jeff were at a wild party. Their accounting instructor, Tom, paid $30 to get all the juicy details about what happened at this party. Tom could blackmail each student now and get $8 of revenue from each of them. Alternatively, Tom could buy more dirt on each student and get a higher amount. More dirt on Marty would cost $5 but Tom could get $10 revenue in total from him. More dirt on John would also cost $5, but Tom could get total revenue of $15 from him. More dirt on Jeff would cost $10 but could get a total of $16 in revenue from him. When should Tom blackmail these students to maximize his profit? Now After More Dirt a) Marty, John, Jeff --b) Marty, Jeff John c) John Marty, Jeff d) Marty John, Jeff e) -Marty, John, Jeff 8. Which of the following is NOT a sunk cost? a) The cost of an asset purchased five years ago. b) This year's depreciation on an asset purchased five years ago. c) The current book value on an asset purchased to replace an asset purchased five years ago. d) The cost of a new asset that may be purchased to replace an asset purchased five years ago. e) All of the above are sunk costs. 9. One of the products that Azul Snack Company manufactures is fudge frosted macadamia nuts. To increase sales, Azul is considering replacing the fudge frosting with blue almond frosting. Blue almond frosting costs the same but is more popular. Which of the following would be relevant factors in Azul's frosting decision? Cost of the Cost of the Increase Fudge Frosting Blue Almond frosting in Sales a) Relevant Relevant Relevant b) Irrelevant Irrelevant Relevant c) Relevant Irrelevant Irrelevant d) Irrelevant Relevant Irrelevant e) Irrelevant Irrelevant Irrelevant 10. Dr. Omar Finkley, poultry dentist, was recently approached by Pat Rufolo, a slick-talking traveling salesperson. Pat told Omar that he could achieve "substantial" savings in operating costs if he replaced his old poultry chair with her new semi-automated chair. Selected information on the old and new chairs is given below: Old New Original cost new-------------------------------------- $40,000 $60,000 Accumulated depreciation to date------------------- $10,000 --Current salvage value--------------------------------- $12,000 --Remaining useful life--------------------------------- 5 years 5 years Estimated salvage value in 5 years------------------ Zero Zero
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Omar uses the straight-line method of depreciation. Ignoring any qualitative factors, at what amount of annual operating cost savings is Dr. Finkley indifferent between the two chairs? (Ignore the time of value of money and taxes.) a) $4,000 per year b) $6,000 per year c) $9,600 per year d) $12,000 per year e) $15,600 per year 11. Which of the following statements are TRUE? I. Opportunity costs are relevant costs. II. A cost that is avoidable in one decision may not be avoidable in another decision. III. Common fixed costs are avoidable when a product line is dropped. a) None of the above b) I only c) II only d) I and II only e) I, II, and III 12. A cost to be incurred in the future that differs among alternatives under consideration would be: a) Relevant and avoidable b) Irrelevant and unavoidable c) Sunk. d) Irrelevant, but not sunk e) None of the above. Use the information below for questions 13 and 14. Twinkle Trivia, Inc. manufactures and sells two products: the Square Dancing trivia game and the Horseradish trivia game. Last quarter's operating results for the company broken down by product line are as follows: Square Dancing Horseradish Sales--------------------------------------- $11,000 $6,600 Less: Variable costs----------------------$ 4,400 $3,000 Contribution margin----------------------$ 6,600 $3,600 Less: Fixed costs--------------------------$ 2,750 $4,200 Net income (loss) -------------------------$ 3,850 $ (600) 13. Forty percent of the fixed costs shown for the Horseradish Trivia game would have been avoided if the game had not been produced and sold. If the Horseradish Trivia game had been discounted before the beginning of the last quarter, net income for Twinkle would have been: a) $600 greater b) $1,080 greater c) $1,920 less d) $3,600 less e) None of the above 14. The fixed costs of the Square Dancing Trivia game can be broken down as follows: Direct advertising for product line---------------------------------------------------$ 300 Company advertising allocated to The product line------------------------------------------------------------------------$ 200 Rent on the factory building (60% of total)---------------------------------------$ 400 Depreciation on production equipment--------------------------------------------$1,100 Insurance on production equipment------------------------------------------------$ 250
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Company administrative expenses allocated to the product line---------------$ 500 Total---------------------------------------------------------------------------$2,750 The factory building is used to produce both products. The production equipment of the Square Dancing Trivia game and has no salvage value and no other use. What is the total amount of relevant fixed costs if the Square Dancing Trivia game were discontinued at the beginning of last quarter? (Assume the Horseradish Trivia game has not been discontinued) a) $ 550 b) $1,650 c) $2,050 d) $2,200 e) none of the above 15. An avoidable cost is: a) An irrelevant cost. b) A cost that management should avoid when making a decision. c) A cost that management can eliminate by choosing one alternative over another. d) Any cost that is the same for all alternatives under consideration. e) Both A and D above. 16. Costs that are always irrelevant in decision making are: a) Opportunity costs. b) Sunk costs c) Future costs that do not differ between the alternatives at hand. d) Both B and C above e) all of the above 17. A sunk cost is: a) A cost that is relevant in making a decision. b) A past cost. c) A cost that cannot by avoided d) Both B and C above e) all of the above. 18. . Which of the following would be relevant in a decision to replace an old machine with a new machine? (Ignore income taxes.) Annual Disposal Depreciation Cost of Cost of value Expense Old New of Old for New a) Yes Yes Yes Yes b) Yes No Yes Yes c) No Yes No Yes d) No Yes Yes Yes e) Yes No Yes No 19. Dvorak Fashion Band-Aids is contemplating the purchase of a new semi-automated machine to replace the current machine used in the production of the popular band aids. Selected cost data pertaining to the two machines is provided below: Old New Purchase price---------------------------------- $14,000 $22,000 Accumulated depreciation to date----------- $2,800 --Accumulated depreciation in 4 years------- $14,000 $ 17,600
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Current salvage value------------------------- $ 7,000 Estimated salvage value in 4 years---------- Zero Estimated annual direct materials cost----- $ 32,000 Estimated annual direct labour cost-------- $ 44,000 --$ 3,000 $ 32,000 $ 41,500
Fashion band aids are expected to be out of the style in four years, and all machinery related to band aid production will be disposed of at that time. What will be the total effect on cash flow over the next four years if Dvorak buys the new machine? (Ignore time value of money and taxes)
a) b) c) d) e)
$ 2,000 decrease $ 6,200 decrease $ 7,600 decrease $ 10,000 increase none of the above
20. Which of the following items related to a product line would be relevant in a decision on whether or not to discontinue that product? Sales Revenue Irrelevant Irrelevant Relevant Relevant Relevant Variable Costs Irrelevant Irrelevant Relevant Relevant Relevant Avoidable Fixed Costs Irrelevant Irrelevant Irrelevant Relevant Relevant Unavoidable Fixed Costs Irrelevant Relevant Relevant Irrelevant Relevant
a) b) c) d) e)
21. McKinney Cycle Accessories had the following operating results last year related to the production and sale of 16,000 air conditioned motorcycle helmets: Sales-------------------------------------------------------------------$ 1, 920, 000 Variable manufacturing cost---------------------------------------$ 880,000 Fixed manufacturing cost------------------------------------------ $ 272,000 Variable selling and admin. Cost--------------------------------- $ 128,000 Fixed selling and admin cost-------------------------------------- $ 224,000 McKinney expects the same operating results this year. The Plankton Lovers of American Motorcycle Club have offered to buy 1,500 helmets this year but only if they can get them for $60 each. McKinney has sufficient idle capacity to fill this order. This special order would not change McKinney's cost structure of affect regular sales. If McKinney accepts this offer, how much will its profits increase or decrease this year?
a) b) c) d) e)
$ 4,500 decrease $ 7,500 increase $ 18,000 decrease $ 90,000 decrease none of the above