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Chapter 7. Business Environment and Conc... > Module 45 Planning, Control, and Ana...

Module 45 Planning, Control, and Analysis

Multiple-Choice Questions (1-83)

1.At the breakeven point, the contribution margin equals total
  1. Variable costs.

  2. Sales revenues.

  3. Selling and administrative costs.

  4. Fixed costs.

2.The most likely strategy to reduce the breakeven point, would be to
  1. Increase both the fixed costs and the contribution margin.

  2. Decrease both the fixed costs and the contribution margin.

  3. Decrease the fixed costs and increase the contribution margin.

  4. Increase the fixed costs and decrease the contribution margin.

3.Del Co. has fixed costs of $100,000 and breakeven sales of $800,000. What is its projected profit at $1,200,000 sales?
  1. $ 50,000

  2. $150,000

  3. $200,000

  4. $400,000

4.[**]Associated Supply, Inc. is considering introducing a new product that will require a $250,000 investment of capital. The necessary funds would be raised through a bank loan at an interest rate of 8%. The fixed operating costs associated with the product would be $122,500 while the contribution margin percentage would be 42%. Assuming a selling price of $15 per unit, determine the number of units (rounded to the nearest whole unit) Associated would have to sell to generate earnings before interest and taxes (EBIT) of 32% of the amount of capital invested in the new product.

[**] CMA adapted

  1. 35,318 units.

  2. 32,143 units.

  3. 25,575 units.

  4. 23,276 units.

5.During 2004, Thor Lab supplied hospitals with a comprehensive diagnostic kit for $120. At a volume of 80,000 kits, Thor had fixed costs of $1,000,000 and a profit before income taxes of $200,000. Due to an adverse legal decision, Thor’s 2005 liability insurance increased by $1,200,000 over 2004. Assuming the volume and other costs are unchanged, what should the 2005 price be if Thor is to make the same $200,000 profit before income taxes?
  1. $120.00

  2. $135.00

  3. $150.00

  4. $240.00

6.Breakeven analysis assumes that over the relevant range
  1. Unit revenues are nonlinear.

  2. Unit variable costs are unchanged.

  3. Total costs are unchanged.

  4. Total fixed costs are nonlinear.

7.Product Cott has sales of $200,000, a contribution margin of 20%, and a margin of safety of $80,000. What is Cott’s fixed cost?
  1. $16,000

  2. $24,000

  3. $80,000

  4. $96,000

8.On January 1, 2005, Lake Co. increased its direct manufacturing labor wage rates. All other budgeted costs and revenues were unchanged. How did this increase affect Lake’s budgeted breakeven point and budgeted margin of safety?

 Budgeted Breakeven pointBudgeted margin of safety
a.IncreaseIncrease
b.IncreaseDecrease
c.DecreaseDecrease
d.DecreaseIncrease


Items 9 and 10 are based on the following:

The diagram below is a cost-volume-profit chart.

9.At point A compared to point B, as a percentage of sales revenues

 Variable costs areFixed costs are
a.GreaterGreater
b.GreaterThe same
c.The sameThe same
d.The sameGreater


10.If sales dollars are used to measure activity levels, total costs and total revenues may be read from the X and Y axis as follows:

 Total costsTotal revenues
a.X or YX or Y
b.X or YX only
c.Y onlyX or Y
d.Y onlyX only


11.[**]Which one of the following is and advantage of using variable costing?
  1. Variable costing complies with the US Internal Revenue Code.

  2. Variable costing complies with generally accepted accounting principles.

  3. Variable costing makes cost-volume relationships more easily apparent.

  4. Variable costing is most relevant to long-run pricing strategies.

12.In the profit-volume chart below, EF and GH represent the profit-volume graphs of a single-product company for 2004 and 2005, respectively.

If 2004 and 2005 unit sales prices are identical, how did total fixed costs and unit variable costs of 2005 change compared to 2004?

 2005 total fixed costs2005 unit variable costs
a.DecreasedIncreased
b.DecreasedDecreased
c.IncreasedIncreased
d.IncreasedDecreased


13.Thomas Company sells products X, Y, and Z. Thomas sells three units of X for each unit of Z, and two units of Y for each unit of X. The contribution margins are $1.00 per unit of X, $1.50 per unit of Y, and $3.00 per unit of Z. Fixed costs are $600,000. How many units of X would Thomas sell at the breakeven point?
  1. 40,000

  2. 120,000

  3. 360,000

  4. 400,000

14.In calculating the breakeven point for a multi-product company, which of the following assumptions are commonly made when variable costing is used?
  1. Sales volume equals production volume.

  2. Variable costs are constant per unit.

  3. A given sales mix is maintained for all volume changes.

    1. I and II.

    2. I and III.

    3. II and III.

    4. I, II, and III.

15.In the budgeted profit/volume chart below, EG represents a two-product company’s profit path. EH and HG represent the profit paths of products #1 and #2, respectively.

Sales prices and cost behavior were as budgeted, actual total sales equaled budgeted sales, and there were no inventories. Actual profit was greater than budgeted profit. Which product had actual sales in excess of budget, and what margin does OE divided by OF represent?

 Product with excess salesOE/OF
a.#1Contribution margin
b.#1Gross margin
c.#2Contribution margin
d.#2Gross margin


16.In its first year of operations, Magna Manufacturers had the following costs when it produced 100,000 and sold 80,000 units of its only product:

Manufacturing costsFixed$180,000
 Variable160,000
Selling and admin. costsFixed90,000
 Variable40,000


How much lower would Magna’s net income be if it used variable costing instead of full absorption costing?

  1. $36,000

  2. $54,000

  3. $68,000

  4. $94,000

17.Using the variable costing method, which of the following costs are assigned to inventory?

 Variable selling and administrative costsVariable factory overhead costs
a.YesYes
b.YesNo
c.NoNo
d.NoYes


18.At the end of Killo Co.’s first year of operations, 1,000 units of inventory remained on hand. Variable and fixed manufacturing costs per unit were $90 and $20, respectively. If Killo uses absorption costing rather than variable (direct) costing, the result would be a higher pretax income of
  1. $0

  2. $20,000

  3. $70,000

  4. $90,000

19.A manufacturing company prepares income statements using both absorption and variable costing methods. At the end of a period actual sales revenues, total gross profit, and total contribution margin approximated budgeted figures, whereas net income was substantially greater than the budgeted amount. There were no beginning or ending inventories. The most likely explanation of the net income increase is that, compared to budget, actual
  1. Manufacturing fixed costs had increased.

  2. Selling and administrative fixed expenses had decreased.

  3. Sales prices and variable costs had increased proportionately.

  4. Sales prices had declined proportionately less than variable costs.

20.A single-product company prepares income statements using both absorption and variable costing methods. Manufacturing overhead cost applied per unit produced in 2005 was the same as in 2004. The 2005 variable costing statement reported a profit whereas the 2005 absorption costing statement reported a loss. The difference in reported income could be explained by units produced in 2005 being
  1. Less than units sold in 2005.

  2. Less than the activity level used for allocating overhead to the product.

  3. In excess of the activity level used for allocating overhead to the product.

  4. In excess of units sold in 2005.

21.Which of the following is an output of a financial planning model?
  1. Strategic plan.

  2. Actual financial results.

  3. Projected financial statements.

  4. Variance analysis.

22.Mien Co. is budgeting sales of 53,000 units of product Nous for October 2005. The manufacture of one unit of Nous requires four kilos of chemical Loire. During October 2005, Mien plans to reduce the inventory of Loire by 50,000 kilos and increase the finished goods inventory of Nous by 6,000 units. There is no Nous work in process inventory. How many kilos of Loire is Mien budgeting to purchase in October 2005?
  1. 138,000

  2. 162,000

  3. 186,000

  4. 238,000

23.The master budget
  1. Shows forecasted and actual results.

  2. Reflects controllable costs only.

  3. Can be used to determine manufacturing cost variances.

  4. Contains the operating budget.

Items 24 and 25 are based on the following information:

Operational budgets are used by a retail company for planning and controlling its business activities. Data regarding the company’s monthly sales for the last 6 months of the year and its projected collection patterns are shown below.

The cost of merchandise averages 40% of its selling price. The company’s policy is to maintain an inventory equal to 25% of the next month’s forecasted sales. The inventory balance at cost is $80,000 as of June 30.

Forecasted Sales  
July$775,000 
August750,000 
September825,000 
October800,000 
November850,000 
December900,000 
Types of Sales  
Cash sales20%
Credit sales80%
Collection Pattern for Credit Sales  
In the month of sale40%
In the first month following the sale57%
Uncollectible  
 3%


24.[*]The budgeted cost of the company’s purchases for the month of August would be

[*] CIA adapted

  1. $302,500

  2. $305,000

  3. $307,500

  4. $318,750

25.[*]The company’s total cash receipts from sales and collections on account that would be budgeted for the month of September would be
  1. $757,500

  2. $771,000

  3. $793,800

  4. $856,500

26.[**]Which of the following best describes tactical profit plans?
  1. Detailed, short-term, broad responsibilities, qualitative.

  2. Broad, short-term, responsibilites at all levels, quantitative.

  3. Detailed, short-term, responsibilities at all levels, quantitative.

  4. Broad, long-term, broad responsibilities, qualitative.

27.Which of the following budgeting systems focuses on improving operations?
  1. Responsibility budgeting.

  2. Activity-based budgeting.

  3. Operational budgeting.

  4. Kaizen budgeting.

28.Which of the following is included in a firm’s financial budget?
  1. Budgeted income statement.

  2. Capital budget.

  3. Production schedule.

  4. Cost of goods sold budget.

29.Rolling Wheels purchases bicycle components in the month prior to assembling them into bicycles. Assembly is scheduled one month prior to budgeted sales. Rolling pays 75% of component costs in the month of purchase and 25% of the costs in the following month. Component cost included in budgeted cost of sales are

AprilMayJuneJulyAugust
$5,000$6,000$7,000$8,000$8,000


What is Rolling’s budgeted cash payment for components in May?

  1. $5,750

  2. $6,750

  3. $7,750

  4. $8,000

30.A 2005 cash budget is being prepared for the purchase of Toyi, a merchandise item. Budgeted data are

Cost of goods sold for 2005$300,000
Accounts payable 1/1/0520,000
Inventory—1/1/0530,000
12/31/0542,000


Purchases will be made in twelve equal monthly amounts and paid for in the following month. What is the 2005 budgeted cash payment for purchases of Toyi?

  1. $295,000

  2. $300,000

  3. $306,000

  4. $312,000

31.[**]Trumbull Company budgeted sales on account of $120,000 for July, $211,000 for August, and $198,000 for September. Collection experience indicates that 60% of the budgeted sales will be collected the month after the sale, 36% the second month, and 4% will be uncollectible. The cash from accounts receivable that should be budgeted for September would be
  1. $169,800

  2. $194,760

  3. $197,880

  4. $198,600

32.Cook Co.’s total costs of operating five sales offices last year were $500,000, of which $70,000 represented fixed costs. Cook has determined that total costs are significantly influenced by the number of sales offices operated. Last year’s costs and number of sales offices can be used as the bases for predicting annual costs. What would be the budgeted costs for the coming year if Cook were to operate seven sales offices?
  1. $700,000

  2. $672,000

  3. $614,000

  4. $586,000

33.[*]In regression analysis, which of the following correlation coefficients represents the strongest relationship between the independent and dependent variables?
  1. 1.03

  2. –.02

  3. –.89

  4. .75

34.[*]The internal auditor of a bank has developed a multiple regression model which has been used for a number of years to estimate the amount of interest income from commercial loans. During the current year, the auditor applies the model and discovers that the r2 value has decreased dramatically, but the model otherwise seems to be working okay. Which of the following conclusions are justified by the change?
  1. Changing to a cross-sectional regression analysis should cause r2 to increase.

  2. Regression analysis is no longer an appropriate technique to estimate interest income.

  3. Some new factors, not included in the model, are causing interest income to change.

  4. A linear regression analysis would increase the model’s reliability.

35.[*]All of the following are useful for forecasting the needed level of inventory except:
  1. Knowledge of the behavior of business cycles.

  2. Internal accounting allocations of costs to different segments of the company.

  3. Information about seasonal variations in demand.

  4. Econometric modeling.

Items 36 thru 38 are based on the following information:

In preparing the annual profit plan for the coming year, Wilkens Company wants to determine the cost behavior pattern of the maintenance costs. Wilkens has decided to use linear regression by employing the equation y = a + bx for maintenance costs. The prior year’s data regarding maintenance hours and costs, and the result of the regression analysis are given below.

Average cost per hour$9.00
a684.65
b7.2884
Standard error of a49.515
Standard error of b.12126
Standard error of the estimate34.469
R2.99724


 Hours of activityMaintenance costs
January480$ 4,200
February3203,000
March4003,600
April3002,820
May5004,350
June3102,960
July3203,030
August5204,470
September4904,260
October4704,050
November3503,300
December3403,160
Sum4,800$43,200
Average400$ 3,600


36.[*]In the standard regression equation y = a + bx, the letter b is best described as a(n)
  1. Independent variable.

  2. Dependent variable.

  3. Constant coefficient.

  4. Variable coefficient.

37.[*]The letter x in the standard regression equation is best described as a(n).
  1. Independent variable.

  2. Dependent variable.

  3. Constant coefficient.

  4. Coefficient of determination.

38.[*]Based upon the data derived from the regression analysis, 420 maintenance hours in a month would mean the maintenance costs (rounded to the nearest dollar) would be budgeted at
  1. $3,780

  2. $3,600

  3. $3,790

  4. $3,746

Items 39 thru 42 are based on the following information:

Lackland Ski Resort uses multiple regression to predict ski lift revenue for the next week based on the forecasted number of dates with temperatures above 10 degrees and predicted number of inches of snow. The following function has been developed:

Sales = 10,902 + (255 × no. of days predicted above 10 degrees) + (300 × no. of inches of snow predicted)

Other information generated from the analysis include

Coefficient of determination (Adjusted r squared).6789
Standard error1,879
F-Statistic6.279 with a significance of .049


39.Which variables(s) in this function is(are) the dependent variable(s)?
  1. Predicted number of days above 10 degrees.

  2. Predicted number of inches of snow.

  3. Revenue.

  4. Predicted number of days above 10 degrees and predicted number of inches of snow.

40.Assume that management predicts the number of days above 10 degrees for the next week to be 6 and the number of inches of snow to be 12. Calculate the predicted amount of revenue for the next week.
  1. $10,902

  2. $11,362

  3. $16,032

  4. $20,547

41.Which of the following represents an accurate interpretation of the results of Lackland’s regression analysis?
  1. 6.279% of the variation in revenue is explained by the predicted number of days above 10 degrees and the number of inches of snow.

  2. The relationships are not significant.

  3. Predicted number of days above 10 degrees is a more significant variable than number of inches of snow.

  4. 67.89% of the variation in revenue is explained by the predicted number of days above 10 degrees and the number of inches of snow.

42.Assume that Lackland’s model predicts revenue for a week to be $13,400. Calculate the 95% confidence interval for the amount of revenue for the week. (The 95% confidence interval corresponds to the area representing 2.3436 deviations from the mean.)
  1. $13,400 ± 6,279

  2. $13,400 ± 4,404

  3. $13,400 ± 6,786

  4. $13,400 ± 8,564

43.Which of the following is a quantitative approach used to develop sales forecasts based on analysis of consumer behavior?
  1. Markov techniques.

  2. Regression analysis.

  3. Econometric models.

  4. Exponential smoothing.

44.Which of the following is a quantitative approach to developing a sales forecast?
  1. Delphi technique.

  2. Customer surveys.

  3. Moving average.

  4. Executive opinions.

45.[**]A forecasting technique that is a combination of the last forecast and the last observed value is called
  1. Delphi.

  2. Least squares.

  3. Regression.

  4. Exponential smoothing.

46.Using regression analysis, Fairfield Co. graphed the following relationship of its cheapest product line’s sales with its customers’ income levels:

If there is a strong statistical relationship between the sales and customers’ income levels, which of the following numbers best represents the correlation coefficient for this relationship?

  1. -9.00

  2. -0.93

  3. +0.93

  4. +9.00

47.The basic difference between a master budget and a flexible budget is that a master budget is
  1. Only used before and during the budget period and a flexible budget is only used after the budget period.

  2. For an entire production facility and a flexible budget is applicable to single departments only.

  3. Based on one specific level of production and a flexible budget can be prepared for any production level within a relevant range.

  4. Based on a fixed standard and a flexible budget allows management latitude in meeting goals.

48.A flexible budget is appropriate for a

 Marketing budgetDirect material usage budget
a.NoNo
b.NoYes
c.YesYes
d.YesNo


49.When production levels are expected to increase within a relevant range, and a flexible budget is used, what effect would be anticipated with respect to each of the following costs?

 Fixed costs per unitVariable costs per unit
a.DecreaseDecrease
b.No changeNo change
c.No changeDecrease
d.DecreaseNo change


50.Controllable revenue would be included in a performance report for a

 Profit centerCost center
a.NoNo
b.NoYes
c.YesNo
d.YesYes


51.The following is a summarized income statement of Carr Co.’s profit center No. 43 for March 2005:

Contribution margin $70,000
Period expenses:  
 Manager’s salary$20,000 
 Facility depreciation8,000 
 Corporate expense allocation5,00033,000
Profit center income $37,000


Which of the following amounts would most likely be subject to the control of the profit center’s manager?

  1. $70,000

  2. $50,000

  3. $37,000

  4. $33,000

52.Wages earned by machine operators in producing the firm’s product should be categorized as

 Direct laborControllable by the machine operators’ foreman
a.YesYes
b.YesNo
c.NoYes
d.NoNo


53.Companies in what type of industry may use a standard cost system for cost control?

 Mass production industryService industry
a.YesYes
b.YesNo
c.NoNo
d.NoYes


54.In connection with a standard cost system being developed by Flint Co., the following information is being considered with regard to standard hours allowed for output of one unit of product:

 Hours
Average historical performance for the past three years1.85
Production level to satisfy average consumer demand over a seasonal time span1.60
Engineering estimates based on attainable performance1.50
Engineering estimates based on ideal performance1.25


To measure controllable production inefficiencies, what is the best basis for Flint to use in establishing standard hours allowed?

  1. 1.25

  2. 1.50

  3. 1.60

  4. 1.85

55.Which of the following standard costing variances would be least controllable by a production supervisor?
  1. Overhead volume.

  2. Overhead efficiency.

  3. Labor efficiency.

  4. Material usage.

56.The standard direct material cost to produce a unit of Lem is four meters of material at $2.50 per meter. During May 2005, 4,200 meters of material costing $10,080 were purchased and used to produce 1,000 units of Lem. What was the material price variance for May 2005?
  1. $400 favorable.

  2. $420 favorable.

  3. $ 80 unfavorable.

  4. $ 480 unfavorable.

57.Dahl Co. uses a standard costing system in connection with the manufacture of a “one size fits all” article of clothing. Each unit of finished product contains two yards of direct material. However, a 20% direct material spoilage calculated on input quantities occurs during the manufacturing process. The cost of the direct material is $3 per yard. The standard direct material cost per unit of finished product is
  1. $4.80

  2. $6.00

  3. $7.20

  4. $7.50

58.Carr Co. had an unfavorable materials usage variance of $900. What amounts of this variance should be charged to each department?

 PurchasingWarehousingManufacturing
a.$0$0$900
b.$0$900$0
c.$300$300$300
d.$900$0$0


59.Yola Co. manufactures one product with a standard direct manufacturing labor cost of four hours at $12.00 per hour. During June, 1,000 units were produced using 4,100 hours at $12.20 per hour. The unfavorable direct labor efficiency variance was
  1. $1,220

  2. $1,200

  3. $ 820

  4. $ 400

60.The following direct manufacturing labor information pertains to the manufacture of product Glu:

Time required to make one unit2 direct labor hours
Number of direct workers50
Number of productive hours per week, per worker40
Weekly wages per worker$500
Workers’ benefits treated as direct manufacturing labor costs20% of wages


What is the standard direct manufacturing labor cost per unit of product Glu?

  1. $30

  2. $24

  3. $15

  4. $12

61.On the diagram below, the line OW represents the standard labor cost at any output volume expressed in direct labor hours. Point S indicates the actual output at standard cost, and Point A indicates the actual hours and actual cost required to produce S.

Which of the following variances are favorable or unfavorable?

 Rate varianceEfficiency variance
a.FavorableUnfavorable
b.FavorableFavorable
c.UnfavorableUnfavorable
d.UnfavorableFavorable


62.The following were among Gage Co.’s 2005 costs:

Normal spoilage$5,000
Freight out 10,000
Excess of actual manufacturing costs over standard costs 20,000
Standard manufacturing costs 100,000
Actual prime manufacturing costs 80,000


Gage’s 2005 actual manufacturing overhead was

  1. $ 40,000

  2. $ 45,000

  3. $ 55,000

  4. $120,000

63.Baby Frames, Inc. evaluates manufacturing overhead in its factory by using variance analysis. The following information applies to the month of May:

 ActualBudgeted
Number of frames manufactured19,00020,000
Variable overhead costs$4,100$2 per direct labor hour
Fixed overhead costs$22,000$20,000
Direct labor hours2,1000.1 hour per frame


What is the fixed overhead spending variance?

  1. $1,000 favorable.

  2. $1,000 unfavorable.

  3. $2,000 favorable.

  4. $2,000 unfavorable.

64.Under the 2-variance method for analyzing overhead, which of the following variances consists of both variable and fixed overhead elements?

 Controllable (budget) varianceVolume variance
a.YesYes
b.YesNo
c.NoNo
d.NoYes


65.During 2005, a department’s 3-variance overhead standard costing system reported unfavorable spending and volume variances. The activity level selected for allocating overhead to the product was based on 80% of practical capacity. If 100% of practical capacity had been selected instead, how would the reported unfavorable spending and volume variances be affected?

 Spending varianceVolume variance
a.IncreasedUnchanged
b.IncreasedIncreased
c.UnchangedIncreased
d.UnchangedUnchanged


66.The following information pertains to Roe Co.’s 2005 manufacturing operations:

Standard direct manufacturing labor hours per unit2
Actual direct manufacturing labor hours10,500
Number of units produced5,000
Standard variable overhead per standard direct manufacturing labor hour$3
Actual variable overhead$28,000


Roe’s 2005 unfavorable variable overhead efficiency variance was

  1. $0

  2. $1,500

  3. $2,000

  4. $3,500

67.Which of the following variances would be useful in calling attention to a possible short-term problem in the control of overhead costs?

 Spending varianceVolume variance
a.NoNo
b.NoYes
c.YesNo
d.YesYes


Items 68 and 69 are based on the following:

The diagram below depicts a factory overhead flexible budget line DB and standard overhead application line OA. Activity is expressed in machine hours with Point V indicating the standard hours required for the actual output in September 2005. Point S indicates the actual machine hours (inputs) and actual costs in September 2005.

68.Are the following overhead variances favorable or unfavorable?

 Volume (capacity) varianceEfficiency variance
a.FavorableFavorable
b.FavorableUnfavorable
c.UnfavorableFavorable
d.UnfavorableUnfavorable


69.The budgeted total variable overhead cost for C machine hours is
  1. AB

  2. BC

  3. AC minus DO

  4. BC minus DO

70.Lanta Restaurant compares monthly operating results with a static budget. When actual sales are less than budget, would Lanta usually report favorable variances on variable food costs and fixed supervisory salaries?

 Variable food costsFixed supervisory salaries
a.YesYes
b.YesNo
c.NoYes
d.NoNo


71.Cuff Caterers quotes a price of $60 per person for a dinner party. This price includes the 6% sales tax and the 15% service charge. Sales tax is computed on the food plus the service charge. The service charge is computed on the food only. At what amount does Cuff price the food?
  1. $56.40

  2. $51.00

  3. $49.22

  4. $47.40

72.Based on potential sales of 500 units per year, a new product has estimated traceable costs of $990,000. What is the target price to obtain a 15% profit margin on sales?
  1. $2,329

  2. $2,277

  3. $1,980

  4. $1,935

73.Briar Co. signed a government construction contract providing for a formula price of actual cost plus 10%. In addition, Briar was to receive one-half of any savings resulting from the formula price being less than the target price of $2,200,000. Briar’s actual costs incurred were $1,920,000. How much should Briar receive from the contract?
  1. $2,060,000

  2. $2,112,000

  3. $2,156,000

  4. $2,200,000

74.Vince, Inc. has developed and patented a new laser disc reading device that will be marketed internationally. Which of the following factors should Vince consider in pricing the device?
  1. Quality of the new device.

  2. Life of the new device.

  3. Customers’ relative preference for quality compared to price.

    1. I and II only.

    2. I and III only.

    3. II and III only.

    4. I, II, and III.

75.The budget for Klunker Auto Repair Shop for the year is as follows:

Direct labor per hour$30
Total labor hours 10,000
Overhead costs:  
 Materials handling and storage$10,000
 Other (rent, utilities, depreciation, insurance)$120,000
Direct materials cost$500,000


Klunker allocates materials handling and storage costs per dollar of direct materials cost. Other overhead is allocated based on total labor hours. In addition, Klunker adds a charge of $8 per labor hour to cover profit margin. Tardy Trucking Co. has brought one of its trucks to Klunker for an engine overhaul. If the overhaul requires twelve labor hours and $800 parts, what price should Klunker charge Tardy for these repair services?

  1. $1,160

  2. $1,256

  3. $1,416

  4. $1,472

76.Ajax Division of Carlyle Corporation produces electric motors, 20% of which are sold to Bradley Division of Carlyle and the remainder to outside customers. Carlyle treats its divisions as profit centers and allows division managers to choose their sources of sale and supply. Corporate policy requires that all interdivisional sales and purchases be recorded at variable cost as a transfer price. Ajax Division’s estimated sales and standard cost data for the year ending December 31, 2005, based on the full capacity of 100,000 units, are as follows:

 BradleyOutsiders
Sales$ 900,000$ 8,000,000
Variable costs(900,000)(3,600,000)
Fixed costs(300,000)(1,200,000)
Gross margin$(300,000)$3,200,000
Unit sales20,00080,000


Ajax has an opportunity to sell the above 20,000 units to an outside customer at a price of $75 per unit during 2005 on a continuing basis. Bradley can purchase its requirements from an outside supplier at a price of $85 per unit.

Assuming that Ajax Division desires to maximize its gross margin, should Ajax take on the new customer and drop its sales to Bradley for 2005, and why?

  1. No, because the gross margin of the corporation as a whole would decrease by $200,000.

  2. Yes, because Ajax Division’s gross margin would increase by $300,000.

  3. Yes, because Ajax Division’s gross margin would increase by $600,000.

  4. No, because Bradley Division’s gross margin would decrease by $800,000.

77.The management of James Corporation has decided to implement a transfer pricing system. James’ MIS department is currently negotiating a transfer price for its services with the four producing divisions of the company as well as the marketing department. Charges will be assessed based on number of reports (assume that all reports require the same amount of time and resources to produce). The cost to operate the MIS department at its full capacity of 1,000 reports per year is budgeted at $45,000. The user subunits expect to request 250 reports each this year. The cost of temporary labor and additional facilities used to produce reports beyond capacity is budgeted at $48.00 per report. James could purchase the same services from an external Information Services firm for $70,000. What amounts should be used as the ceiling and the floor in determining the negotiated transfer price?
  1. Floor, $36.00; Ceiling $56.00.

  2. Floor, $45.60; Ceiling $56.00.

  3. Floor, $48.00; Ceiling $70.00.

  4. Floor, $57.00; Ceiling $82.00.

78.[**]Systematic evaluation of the trade-offs between product functionality and product cost while still satisfying customer needs is the definition of
  1. Activity-based management.

  2. Theory of constraints.

  3. Total quality management.

  4. Value engineering.

79.Which of the following statements regarding transfer pricing is false?
  1. When idle capacity exists, there is no opportunity cost to producing intermediate products for another division.

  2. Market-based transfer prices should be reduced by any costs avoided by selling internally rather than externally.

  3. No contribution margin is generated by the transferring division when variable cost-based transfer prices are used.

  4. The goal of transfer pricing is to provide segment managers with incentive to maximize the profits of their divisions.

80.Clay Co. has considerable excess manufacturing capacity. A special job order’s cost sheet includes the following applied manufacturing overhead costs:

Fixed costs$21,000
Variable costs33,000


The fixed costs include a normal $3,700 allocation for in-house design costs, although no in-house design will be done. Instead the job will require the use of external designers costing $7,750. What is the total amount to be included in the calculation to determine the minimum acceptable price for the job?

  1. $36,700

  2. $40,750

  3. $54,000

  4. $58,050

81.For the year ended December 31, 2005, Abel Co. incurred direct costs of $500,000 based on a particular course of action during the year. If a different course of action had been taken, direct costs would have been $400,000. In addition, Abel’s 2005 fixed costs were $90,000. The incremental cost was
  1. $ 10,000

  2. $ 90,000

  3. $100,000

  4. $190,000

82.Mili Co. plans to discontinue a division with a $20,000 contribution margin. Overhead allocated to the division is $50,000, of which $5,000 cannot be eliminated. The effect of this discontinuance on Mili’s pretax income would be an increase of
  1. $ 5,000

  2. $20,000

  3. $25,000

  4. $30,000

83.[**]Following are the operating results of the two segments of Parklin Corporation

 Segment ASegment BTotal
Sales$10,000$15,000$25,000
Variable cost of goods sold 4,000 8,500 12,500
Fixed cost of goods sold 1,500 2,500 4,000
Gross margin 4,500 4,000 8,500
Variable selling and administrative 2,000 3,000 5,000
Fixed selling and administrative 1,500 1,500 3,000
Operating income (loss)$1,000$(500)$500


Fixed costs of goods sold are allocated to each segment based on the number of employees. Fixed selling and administrative expenses are allocated equally. If Segment B is eliminated, $1,500 of fixed costs of goods sold would be eliminated. Assuming Segment B is closed, the effect on operating income would be

  1. An increase of $500.

  2. An increase of $2,000.

  3. A decrease of $2,000.

  4. A decrease of $2,500.

Multiple-Choice Answers

1.

d____


2.

c____


3.

a____


4.

b____


5.

b____


6.

b____


7.

b____


8.

b____


9.

d____


10.

c____


11.

c____


12.

a____


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b____


14.

c____


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a____


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a____


17.

d____


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b____


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b____


20.

a____


21.

c____


22.

c____


23.

d____


24.

c____


25.

b____


26.

c____


27.

d____


28.

b____


29.

c____


30.

c____


31.

a____


32.

b____


33.

c____


34.

c____


35.

b____


36.

d____


37.

a____


38.

d____


39.

c____


40.

c____


41.

d____


42.

b____


43.

a____


44.

c____


45.

d____


46.

b____


47.

c____


48.

c____


49.

d____


50.

c____


51.

a____


52.

a____


53.

a____


54.

b____


55.

a____


56.

b____


57.

d____


58.

a____


59.

b____


60.

a____


61.

d____


62.

a____


63.

d____


64.

b____


65.

c____


66.

b____


67.

c____


68.

b____


69.

d____


70.

b____


71.

c____


72.

a____


73.

c____


74.

d____


75.

c____


76.

c____


77.

b____


78.

d____


79.

d____


80.

b____


81.

c____


82.

c____


83.

c____
1st: __/83 = __%
2nd: __/83 = __%



  

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