Chapter 11: Practice Exercise

1. It costs a company $14 of variable costs and $6 of fixed costs to produce product Z200 that sells for $30. A foreign buyer offers to purchase 3,000 units at $18 each. The seller will incur special shipping costs of $5 per unit. If the special offer is accepted and produced with unused capacity, and none of the fixed costs are affected, then net income will:

a. increase $3,000. b. increase $12,000. c. decrease $12,000. d. decrease $3,000.

2. Jobart Company is currently operating at full capacity. It is considering buying a part from an outside supplier rather than making it in-house. If Jobart purchases the part, it can use the released productive capacity to generate additional income of $30,000 from producing a different product. When conducting incremental analysis in this make-or-buy decision, the company should:

a. ignore the $30,000. b. add $30,000 to other costs in the Cost to Make column. c. add $30,000 to other costs in the Cost to Buy column. d. subtract $30,000 from the other costs in the Costs to Make column.

3. A segment of Hazard Inc. has the following data. Sales $200,000 Variable expense $140,000 Fixed expenses $100,000 If this segment is eliminated, what will be the effect on the remaining company? Assume that 50% of the fixed expenses will be eliminated and the rest will be allocated to the segments of the remaining company.

a. $120,000 increase. b. $10,000 decrease. c. $50,000 increase. d. $10,000 increase.

4. Mendosa Company produces three products. All the products use a furnace operation, which has a maximum number of 10,000 hours available for production of all three products. The following information is available: Product 1 Product 2 Product 3 Unit demand monthly 1,000 1,500 1,000 Per unit information: Sales $35.00 $33.00 $29.00 Variable Costs 15.00 15.00 15.00 Furnace hours 4 3 2 From a profitability perspective, what order of production and amount would maximize profit?

Mendosa should produce the three products in the following order and amount: Product 1: 1,000 units, then Product 2: 1,500 units, then Product 3: 750 units

b. Mendosa should produce the three products in the following order and amount: Product 3: 1,000 units, then Product 2: 1,500 units, then Product 1: 875 units

c. Mendosa should produce the three products in the following order and amount: Product 1: 1,000 units, then Product 2: 1,500 units, then Product 3: 1,000 units

d. Mendosa should produce the three products in the following order and amount: Product 2: 1,500 units, then Product 1: 1,000 units, then Product 3: 750 units

5. Lowe Company produces 1,000 units of a Part A with the following costs: DM $24,000 DL 16,000 Variable Overhead 4,000 Fixed Overhead 7,000 None of Lowe Companys fixed overhead costs can be reduced, but another product could be made that would increase contribution margin by $8,000 if Part A were acquired externally. If cost minimization is the major consideration and the company would prefer to buy the components, what is the maximum external price that Lowe Company would be willing to accept to acquire the 1,000 units externally?

a. $43,000 b. $55,000 c. $48,000 d. $52,000

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