1.Elegant, Inc.

, has $125,000 of inventory that suffered minor smoke damage from a fire in
the warehouse. The company can sell the goods "as is" for $45,000; alternatively, the
goods can be cleaned and shipped to the firm's outlet center at a cost of $23,000. There
the goods could be sold for $80,000. What alternative is more desirable and what is the
relevant cost for that alternative?
A. Sell "as is," $125,000.
B. Clean and ship to outlet center, $23,000.
C. Clean and ship to outlet center, $103,000.
D. Clean and ship to outlet center, $148,000.
E. Neither alternative is desirable, as both produce a loss for the firm.
Answer: B LO: 4 Type: A, N

2.Two months ago, Victory purchased 4,500 pounds of Hydrol, paying $15,300. The market
for this product has been very strong since the acquisition, with the market price jumping
to $4.05 per pound. (Victory can buy or sell Hydrol at this price.) The company recently
received a special-order inquiry, one that would require the use of 4,200 pounds of
Hydrol. Which of the following is (are) relevant in deciding whether to accept the special
order?
A. The 300-pound remaining inventory of Hydrol.
B. The $4.05 market price.
C. The $3.40 purchase price.
D. 4,500 pounds of Hydrol.
E. More than one of the above factors are relevant.
Answer: B LO: 5 Type: A, N
3.Baxter has been approached about providing a new service to its clients. The company will
bill clients $120 per hour; the related hourly variable and fixed operating costs will be
$65 and $15, respectively. If all employees are currently working at full capacity on
other client matters, the per-hour opportunity cost of being unable to provide this new
service is:
A. $0.
B. $40.
C. $55.
D. $80.
E. $120.
Answer: C LO: 4, 5 Type: A

4. Copper Top, which has excess capacity, received a special order for 3,000 units at a price
of $14 per unit. Currently, production and sales are budgeted for 10,000 units without
considering the special order. Budget information for the current year follows.

Sales $170,000
Less: Cost of goods sold 130,000
Gross margin $ 40,000

Cost of goods sold includes $30,000 of fixed manufacturing cost. If the special order is
accepted, the company's income will:
 A. increase by $3,000.
B. increase by $12,000.
C. decrease by $3,000.
D. decrease by $12,000.
E. change by some other amount.
Answer: B LO: 5 Type: A

5. Sound, Inc., reported the following results from the sale of 24,000 units of IT-54:

Sales $528,000
Variable manufacturing costs 288,000
Fixed manufacturing costs 120,000
Variable selling costs 52,800
Fixed administrative costs 35,200
Rhythm Company has offered to purchase 3,000 IT-54s at $16 each. Sound has available
capacity, and the president is in favor of accepting the order. She feels it would be
profitable because no variable selling costs will be incurred. The plant manager is
opposed because the "full cost" of production is $17. Which of the following correctly
notes the change in income if the special order is accepted?
A. $3,000 decrease.
B. $3,000 increase.
C. $12,000 decrease.
D. $12,000 increase.
E. None of the above.
Answer: D LO: 5 Type: A

6. CompTronics, a manufacturer of computer peripherals, has excess capacity. The

company's Utah plant has the following per-unit cost structure for item no. 89:

Variable manufacturing $40

Fixed manufacturing 15
Variable selling 8
Fixed selling 11
Traceable fixed administrative 4
Allocated administrative 2
The traceable fixed administrative cost was incurred at the Utah plant; in contrast, the
allocated administrative cost represents a "fair share" of CompTronics' corporate
overhead. Utah has been presented with a special order of 5,000 units of item no. 89 on
which no selling cost will be incurred. The proper relevant cost in deciding whether to
accept this special order would be:
A. $40.
B. $59.
C. $61.
D. $80.
E. some other amount.
 Answer: A LO: 5 Type: A

7. The term "outsourcing" is most closely associated with:

A. special-order decisions.
B. make-or-buy decisions.
C. equipment replacement decisions.
D. decisions to process joint products beyond the split-off point.
E. decisions that involve limited resources.
Answer: B LO: 5 Type: RC

8. Torrey Pines is studying whether to outsource its Human Resources (H/R) activities.
Salaried professionals who earn $390,000 would be terminated; in contrast,
administrative assistants who earn $120,000 would be transferred elsewhere in the
organization. Miscellaneous departmental overhead (e.g., supplies, copy charges, long
distance) is expected to decrease by $30,000, and $25,000 of corporate overhead,
previously allocated to Human Resources, would be picked up by other departments. If
Torrey Pines can secure needed H/R services locally for $410,000, how much would the
company benefit by outsourcing?
A. $10,000.
B. $35,000.
C. $130,000.
D. $155,000.
E. None, as it would be cheaper to keep the department open.
Answer: A LO: 5 Type: A

9. Strong, a division of Milwaukee Enterprises, currently makes 100,000 units of a product

that has created a number of manufacturing problems. Strong's costs follow.

Manufacturing costs:
Variable $300,000
Fixed 100,000
Allocated corporate administrative cost 50,000

If Strong were to discontinue production, fixed manufacturing costs would be reduced by

80%. The relevant cost of deciding whether the division should purchase the product
from an outside supplier is:
A. $300,000.
B. $350,000.
C. $380,000.
D. $400,000.
E. $450,000.
Answer: C LO: 5 Type: A
10. Maddox, a division of Stanley Enterprises, currently performs computer services for
various departments of the firm. One of the services has created a number of operating
problems, and management is exploring whether to outsource the service to a consultant.
Traceable variable and fixed operating costs total $80,000 and $25,000, respectively, in
addition to $18,000 of corporate administrative overhead allocated from Stanley. If
Maddox were to use the outside consultant, fixed operating costs would be reduced by
70%. The irrelevant costs in Maddox's outsourcing decision total:
A. $17,500.
B. $18,000.
C. $25,000.
D. $25,500.
E. some other amount.
Answer: D LO: 5 Type: A

11. Which of the following statements regarding costs and decision making is correct?
A. Fixed costs must be considered only on a per-unit basis.
B. Per-unit fixed cost amounts are valid only for make-or-buy decisions.
C. Per-unit fixed costs can be misleading because such amounts appear to behave as
variable costs when, in actuality, the amounts are related to fixed expenditures.
D. Sunk costs can be misleading in make-or-buy decisions because these amounts
appear to be relevant differential costs.
E. Opportunity costs should be ignored when evaluating decision alternatives.
Answer: C LO: 5 Type: RC

12. An architecture firm currently offers services that appeal to both individuals and
commercial clients. If the firm decides to discontinue services to individuals because of
ongoing losses, which of the following costs could likely be avoided?
A. Allocated corporate overhead.
B. Building depreciation.
C. Insurance.
D. Variable operating costs.
E. Monthly installment payments on general-purpose, computer drafting equipment.
Answer: D LO: 5 Type: N

13. Occidental is contemplating dropping a product because of ongoing losses. Costs that
would be relevant in this situation would include variable manufacturing costs as well as:
A. factory depreciation.
B. avoidable fixed costs.
C. unavoidable fixed costs.
D. allocated corporate administrative costs.
E. general corporate advertising.
Answer: B LO: 5 Type: RC

14. Coastal Airlines has a significant presence at the San Jose International Airport and
therefore operates the Emerald Club, which is across from gate 36 in terminal 1. The
Emerald Club provides food and business services (e.g., data ports) for the company's
 frequent flyers. Consider the following selected costs of Club operation:
1—Receptionist and supervisory salaries
2—Catering
3—Terminal depreciation (based on square footage)
4—Airport fees (computed as a percentage of club revenue)
5—Allocated Coastal administrative overhead

Management is exploring whether to close the club and expand the seating area for gate
15. Which of the preceding expenses would the airline classify as unavoidable?
A. 3.
B. 4.
C. 5.
D. 3, 5.
E. The correct answer is not listed.
Answer: D LO: 5 Type: N

16. The Shoe Department at the Baton Rouge Department Store is being considered for
closure. The following information relates to shoe activity:

Sales revenue $350,000

Variable costs:
Cost of goods sold 280,000
Sales commissions 30,000
Fixed operating costs 90,000

If 70% of the fixed operating costs are avoidable, should the Shoe Department be closed?
A. Yes, Baton Rouge would be better off by $23,000.
B. Yes, Baton Rouge would be better off by $50,000.
C. No, Baton Rouge would be worse off by $13,000.
D. No, Baton Rouge would be worse off by $40,000.
E. None of the above.
Answer: A LO: 5 Type: A

17. Somerset Corporation is composed of five divisions, and each division is allocated a
share of Somerset overhead to make divisional managers aware of the cost of running the
corporate headquarters. The following information relates to the Metro Division:

Sales $7,500,000
Variable operating costs 5,100,000
Traceable fixed operating costs 1,900,000
Allocated corporate overhead 300,000

If the Metro Division is closed, 100% of the traceable fixed operating costs can be
eliminated. What will be the impact on Somerset's overall profitability if the Meto
Division is closed?
A. Decrease by $200,000.
 B. Decrease by $500,000.
C. Decrease by $2,100,000.
D. Decrease by $2,400,000.
E. None of the above.
Answer: B LO: 5 Type: A

18. Ortega Interiors provides design services to residential and commercial clients. The
residential services produce a contribution margin of $450,000 and have traceable fixed
operating costs of $480,000. Management is studying whether to drop the residential
operation. If closed, the fixed operating costs will fall by $370,000 and Ortega's net
income will:
A. increase by $30,000.
B. increase by $80,000.
C. increase by $340,000.
D. decrease by $80,000.
E. decrease by $340,000.

Answer: D LO: 5 Type: A

HiTech manufactures two products: cassette players and compact disc players. The results of
operations for 20x1 follow.

Cassette Compact Disc

Players Players Total
Units 10,000 3,700 13,700
Sales $240,000 $740,000 $980,000
Less: Cost of goods sold 180,000 481,000 661,000
Gross margin $ 60,000 $259,000 $319,000
Less: Selling expenses 60,000 134,000 194,000
Operating income $ -- $125,000 $125,000

Fixed manufacturing costs included in cost of goods sold amount to $3 per unit for the cassette
players and $20 per unit for the compact disc players. Variable selling expenses are $4 per unit
for the cassette players and $20 per unit for the compact disc players; remaining selling amounts
are fixed.

19. HiTech wants to drop the line of cassette players. If the line is dropped, company-wide
fixed manufacturing costs would fall by 10% because there is no alternative use of the
facilities. What would be the impact on operating income if the cassette players are
discontinued?
A. $0.
B. $10,400 increase.
C. $20,000 increase.
D. $39,600 decrease.
E. None of the above.
Answer: D LO: 5 Type: A
20. Disregard the information in the previous question. If HiTech eliminates the line of
cassette players and uses the available capacity to produce and sell an additional 1,500
compact disc players, what would be the impact on operating income?
A. $28,000 increase
B. $45,000 increase
C. $55,000 increase
D. $85,000 increase
E. None of the above.
Answer: C LO: 5 Type: A