When deciding whether to discontinue a segment of a

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Accounting
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Chapter 26 / Exercise EX26-2
Accounting
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4) When deciding whether to discontinue a segment of a business, relevant costs include ________.A) auditing expenses for the whole companyB) fees paid to a management consultant to study the feasibility of the business segmentC) annual insurance costs of the company D) future administrative costs that can be eliminatedAnswer: DDiff: 2Objective: 6AACSB: Analytical thinking5) Colonial North Manufacturing, Inc. is considering eliminating one of its product lines. The fixed costs currently allocated to the product line will be allocated to other product lines upon discontinuance. What financial effects occur if the product line is discontinued?A) net income will decrease by the amount of the contribution margin of the product line being discontinuedB) the company's total fixed costs will increase by the amount of the contribution margin ofthe product line being discontinuedC) the company's total fixed costs will decrease by the amount of the product line's fixed costsD) net income will decrease by the amount of the product line's fixed costsAnswer: ADiff: 2Objective: 6AACSB: Analytical thinking
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Chapter 26 / Exercise EX26-2
Accounting
Reeve/Warren
Expert Verified
6) Discontinuing unprofitable products will ________.A) increase profitability if the resources no longer required by the discontinued product can be eliminated B) increase profitability if capacity constraints are adjusted C) decrease profitability if the fixed costs does not change after discontinuing the particular business segmentD) increase profitability when a large portion of the fixed costs are unavoidable Answer: ADiff: 2Objective: 6AACSB: Analytical thinking7) A segment has the following data:Sales$650,000Variable costs386,000Fixed costs365,500What will be the incremental effect on net income if this segment is eliminated, assuming the fixed costs will be allocated to profitable segments?A) $284,500 increaseB) $386,000 decreaseC) $264,000 decreaseD) $365,500 decreaseAnswer: CExplanation: Change in net income = $650,000 - $386,000 = $264,000 decreaseDiff: 2Objective: 6AACSB: Application of knowledge
8) State Road Fabricators Inc. is considering eliminating Model A02777 because of losses over the past quarter. The past three months of information for Model A02777 are summarized below: Sales (1,100 units)$470,000Manufacturing costs:Direct materials160,000Direct labor ($15 per hour)80,000Overhead150,000Operating loss($80,000)Overhead costs are 75% variable and the remaining 25% is depreciation of special equipment for model A02777 that has no resale value. If Model A02777 is dropped from the product line, operating income will ________.A) increase by $80,000 B) decrease by $117,500 C) increase by $37,500 D) decrease by $80,000 Answer: BExplanation: $470,000 - $160,000 - $80,000 - $112,500 = $117,500 This product contributes $117,500 toward corporate profits, therefore, discontinuing this product will decrease operating income by $117,500. Diff: 3Objective: 6AACSB: Application of knowledge

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