Multiple Choice Quiz
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The correct answer for each question is indicated by a
Samson Company manufactures 5,000 units of a special bolt assembly each year for use in its own production. The annual costs of this
Bolt, Inc. has offered to sell Samson 5,000 units of the assembly for $15 per unit.
If Samson accepts the offer, part of the plant used to currently manufacture the part could be rented to another company at an annual
rental of $10,000. Additionally, $2 per unit of the fixed overhead applied to the assembly would be totally eliminated. Should Samson
accept the offer, and why?
No, because it would be $20,000 cheaper to make the part.
Yes, because it would be $25,000 cheaper to buy the part.
No, because it would be $10,000 cheaper to make the part.
Yes, because it would be $5,000 cheaper to buy the part.
None of the above.
Feedback: All variable costs are relevant and the fixed costs that will be eliminated are relevant. Variable costs = $60,000;
Purchase costs = 5,000 x $15 = $75,000. $75,000 - $10,000 rent – ($2 x 5,000) FC savings = $55,000 relevant costs to buy. A
$5,000 savings can be realized by buying the part.
A cost that has been incurred that cannot be changed by present or future decisions is called a:
None of the above
Feedback: Sunk costs cannot be changed by present or future decisions and, therefore, are not relevant when analyzing
alternative courses of action. An example of a sunk cost is the original purchase price of a machine.
Pesco Company, a manufacturer of candy jars, budgeted sales of 500,000 jars at $10 each in 2006. Variable manufacturing costs are $4
per unit, and fixed manufacturing costs are $2.50 per unit. Pesco received a special order offering to buy 50,000 jars for $6 each. Pesco
has sufficient plant capacity to manufacture this order. However, additional overtime labor costs of $1.00 per jar would be required to
produce the jars. No other costs would be incurred as a result of accepting the order. What would be the effect on operating income if the
special order was accepted, assuming the order did not effect normal sales?