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Exam 7: The Use of Cost Information in Management Decision Making

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Question 41

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State University is considering hiring an outside company for its grounds maintenance.In this regard, State University has received a bid from Mackin Services.Mackin states that its bid of $410,000 will cover all services and planting materials required to "keep State University's grounds in a condition comparable to prior years." State University's cost for grounds maintenance in the preceding year was $412,000 as follows: $\begin{array} { l r } \text { Salary of three full-time gardeners } & \$ 295,000 \\\text { Plant materials } & 80,000 \\\text { Fertilizer } & 9,000 \\\text { Fuel } & 8,000 \\\text { Depreciation of other equipment } & 5,000 \\\text { Depreciation of tractor and mowers } & 15,000 \\\text { Total } & \$ 412,000\end{array}$ If State University hires Mackin, it will be able to sell its other equipment for $30,000, and the three gardeners will be laid off.What is the first year financial impact of hiring the outside company for its grounds maintenance?

A) $13,000 additional cost
B) $2,000 savings
C) $17,000 savings
D) $30,000 savings

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Question 42

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Watson Wheels currently makes 6,000 wheels annually that are used in other products it manufactures.Current unit costs for the wheels are as follows: $\begin{array} { l r } \text { Direct materials } & \$ 22.00 \\\text { Direct labor } & 16.00 \\\text { Variable manufacturing overhead } & 12.00 \\\text { Fixed manufacturing overhead } & 15.00 \\\text { Total } & \$ 65.00\end{array}$ The company has an offer from a manufacturer to produce the wheels for $60 per wheel.If the company decides to buy the wheels, the empty warehouse space could be rented for $22,000 annually.In addition, half of the fixed manufacturing overhead costs would be avoided if the company decides to buy the wheels.If the company decides to accept the offer, what is the incremental effect on the company's net income?

A) A savings of $7,000
B) A savings of $37,000
C) A decrease in net income of $15,000
D) An increase in net income of $52,000

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Question 43

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Production of all the joint products should cease if

In a make-or-buy decision, the original purchase price of equipment that is currently used in the manufacturing process is usually a relevant cost because the equipment can be sold for its salvage value.

Which of the following is a cost that was incurred in the past that will never be incremental?

State University is considering hiring an outside company for its grounds maintenance.In this regard, State University has received a bid from Mackin Services.Mackin states that its bid of $410,000 will cover all services and planting materials required to "keep State University's grounds in a condition comparable to prior years." State University's cost for grounds maintenance in the preceding year was $412,000 as follows: $\begin{array} { l r } \text { Salary of three full-time gardeners } & \$ 295,000 \\\text { Plant materials } & 80,000 \\\text { Fertilizer } & 9,000 \\\text { Fuel } & 8,000 \\\text { Depreciation of other equipment } & 5,000 \\\text { Depreciation of tractor and mowers } & 15,000 \\\text { Total } & \$ 412,000\end{array}$ If State University hires Mackin, it will be able to sell its other equipment for $30,000, and the three gardeners will be laid off.What will savings be in the second year?

Soren Company makes two products from a joint input that have the following information: $\begin{array}{rrrrr}&&\text { Sales Value }&\text {Total Additional}&\text { Sales Value }\\&\text { Units } & \text { Per Unit } & \text { Processing } & \text { Per Unit After }\\&\text { Produced} & \text { At Split-Off }& \text { Costs} & \text { Additional Processing }\\\hline\text { Product A } & 40,000 & \$ 10 & \$ 400,000 & \$ 15 \\\text { Product B } & 150,000 & 4 & 300,000 & 7\end{array}$ The joint cost incurred to produce the two products to the split-off point is $600,000.How much joint cost should be allocated to Product A using the relative sales value at split-off as the allocation method?

Which of the following is most likely relevant in a make-or-buy decision?

Which of the following is never considered in incremental analysis?

Hurley Processors processes clay into two joint products, molding foam and craft blocks.When processed, each pound of clay yields 20 units of foam and 80 units of blocks.Foam sells for $2 per unit and blocks sells for $1.50 per unit.The total cost to process a 100-pound batch of clay is $35.If the physical quantities method is used to allocate the joint costs, how much will be allocated to each batch of craft blocks?

A product line should be dropped when

Which of the following is quite often not incremental?

Mel's Diner owns a single restaurant, which has a cantina primarily used to seat patrons while they wait on their tables.The company is considering eliminating the cantina.Segmented contribution income statements are as follows and fixed costs applicable to both segments are allocated on the basis of square footage. $\begin{array}{lrrr}&\text { Restaurant }& \text { Cantina } &\text { Total }\\\text { Sales } & \$ 800,000 & \$ 200,000 & \$ 1,000,000 \\\text { Variable costs } & 475,000 & 160,000 & 635,000 \\\text { Direct fixed costs } & 50,000 & 15,000 & 65,000 \\\text { Allocated fixed costs } & 212,500 & 37,500 & 250,000 \\\text { Net income } & \$ 62,500 & (\$ 12,500) & \$ \$ 50,000\end{array}$ What effect will occur if Mel's Diner eliminates the cantina if there is no effect on restaurant sales?

One advantage of using an outside supplier is the possibility that the outside supplier is particularly efficient at manufacturing the needed part or component.

If a company decides to eliminate a product, fixed costs allocated to that product line will be avoided.

Which of the following is a common input resulting in joint products?

Fanatic Footwear has two store locations, midtown and at the beach.During October, the company reported net income of $80,000 on sales of $450,000.Sales in the midtown store were $170,000 and variable costs in the beach store were 40% of sales.The contribution margin in the midtown store was $85,000.If total direct fixed costs are $40,000, how much are total fixed costs for Fanatic Footwear?

Conviser Tools manufactures a number of products from the same raw material.Joint processing costs total $10,000.Product A could be sold at the cut-off point for $18,000 or it can be further processed at a cost of $9,000 and then sold for $35,000.Conviser should:

Avoidable costs are always relevant.

Zanatech's market for its remote control has changed significantly, and Zanatech has had to drop the selling price per unit from $45 to $38.There are some units in the work in process inventory that have costs of $30 per unit associated with them.Zanatech can sell these units in their current state for $22 each.It will cost Zanatech $11 per unit to rework these units so that they can be sold for $38 each.How much is the financial impact if the units are processed furthur?