chapter 13 test bank use this one copydoc

Chapter 13 Relevant Costs for Decision Making
Multiple Choice Questions
16. Costs which can be eliminated in whole or in part if a particular business segment
is discontinued are called:
A) sunk costs.
B) opportunity costs.
C) avoidable costs.
D) irrelevant costs.
17. Consider the following statements:
I.
II.
III.

Assemble all costs associated with each alternative being considered.
Eliminate those costs that are sunk.
Eliminate those costs that differ between alternatives.

Which of the above statements does not represent a step in identifying the relevant
costs in a decision problem?
A) Only I
B) Only II
C) Only III
D) Only I and III
18. Which of the following cash flows is relevant in a decision about accepting
Alternative X or Alternative Y?
A) a cash inflow for Alternative X that is not a cash inflow for Alternative Y.
B) a cash inflow that is lost if Alternative X is accepted and is not lost if Alternative
Y is accepted.
C) a cash outflow that is avoided if Alternative X is accepted and is not avoided if
Alternative Y is accepted.
D) all of the above.

19. Which of the following best describes an opportunity cost:
A) it is a relevant cost in decision making, but is not part of the traditional
accounting records.
B) it is not a relevant cost in decision making, but is part of the traditional
accounting records.
C) it is a relevant cost in decision making, and is part of the traditional accounting
records.
D) it is not a relevant cost in decision making, and is not part of the traditional
accounting records.

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition

13-5


Chapter 13 Relevant Costs for Decision Making
20. Consider the following statements:
I.

A division's net operating income, after deducting both traceable and allocated
common corporate costs, is negative.
II.
The division's avoidable fixed costs exceed its contribution margin.
III.
The division's traceable fixed costs plus its allocated common corporate costs
exceed its contribution margin.
Which of the above statements give an economic reason for eliminating the division?
A) Only I
B) Only II
C) Only III

D) Only I and II
21. The Jabba Company manufactures the “Snack Buster” which consists of a wooden
snack chip bowl with an attached porcelain dip bowl. Which of the following would
be relevant in Jabba's decision to make the dip bowls or buy them from an outside
supplier?

A)
B)
C)
D)

Fixed overhead cost
The variable
that can be eliminated if
selling
the bowls are purchased
cost of the
from the outside supplier Snack Buster
Yes
Yes
Yes
No
No
Yes
No
No

22. The acceptance of a special order will improve overall net operating income so
long as the revenue from the special order exceeds:
A) the contribution margin on the order.

B) the incremental costs associated with the order.
C) the variable costs associated with the order.
D) the sunk costs associated with the order.
23. Kinsi Corporation manufactures five different products. All five of these products
must pass through a stamping machine in its fabrication department. This machine is
Kinsi's constrained resource. Kinsi would make the most profit if it produces the
product that:
A) uses the lowest number of stamping machine hours.
B) generates the highest contribution margin per unit.
C) generates the highest contribution margin ratio.
D) generates the highest contribution margin per stamping machine hour.

13-6

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition


Chapter 13 Relevant Costs for Decision Making
24. In a sell or process further decision, consider the following costs:
I.
II.
III.

A variable production cost incurred prior to split-off.
A variable production cost incurred after split-off.
An avoidable fixed production cost incurred after split-off.

Which of the above costs is (are) not relevant in a decision regarding whether the
product should be processed further?
A) Only I

B) Only III
C) Only I and II
D) Only I and III
25. Gandy Company has 5,000 obsolete desk lamps that are carried in inventory at a
manufacturing cost of $50,000. If the lamps are reworked for $20,000, they could
be sold for $35,000. Alternatively, the lamps could be sold for $8,000 for scrap. In
a decision model analyzing these alternatives, the sunk cost would be:
A) $8,000
B) $15,000
C) $20,000
D) $50,000
26. Hodge Inc. has some material that originally cost $74,600. The material has a scrap
value of $57,400 as is, but if reworked at a cost of $1,500, it could be sold for
$54,400. What would be the incremental effect on the company's overall profit of
reworking and selling the material rather than selling it as is as scrap?
A) -$79,100
B) -$21,700
C) -$4,500
D) $52,900
Solution:
Incremental revenue from reworking ($54,400 − $1,500).
$52,900
Less incremental revenue from selling as scrap................
57,400
Net loss from reworking.................................................... ($ 4,500)
27. Milford Corporation has in stock 16,100 kilograms of material R that it bought five
years ago for $5.75 per kilogram. This raw material was purchased to use in a product
line that has been discontinued. Material R can be sold as is for scrap for $3.91 per
kilogram. An alternative would be to use material R in one of the company's current
products, S88Y, which currently requires 2 kilograms of a raw material that is

available for $7.60 per kilogram. Material R can be modified at a cost of $0.77 per
kilogram so that it can be used as a substitute for this material in the production of
product S88Y. However, after modification, 4 kilograms of material R is required for
every unit of product S88Y that is produced. Milford Corporation has now received a

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition

13-7


Chapter 13 Relevant Costs for Decision Making
request from a company that could use material R in its production process. Assuming
that Milford Corporation could use all of its stock of material R to make product S88Y
or the company could sell all of its stock of the material at the current scrap price of
$3.91 per kilogram, what is the minimum acceptable selling price of material R to the
company that could use material R in its own production process?
A) $0.88
B) $3.03
C) $4.57
D) $3.91
Solution:
Product S88Y:
Current cost (2 kg @ $7.60): $15.20
If material R were used, 4 kilograms would be needed. It currently costs $15.20 for
Product S88Y; to maintain this same cost, material R would need to cost $3.03 per
kilogram [($15.20 ÷ 4 kg) − $0.77]. The company should sell material R for $3.91 per
kilogram.
28. Otool Inc. is considering using stocks of an old raw material in a special project. The
special project would require all 240 kilograms of the raw material that are in stock
and that originally cost the company $2,112 in total. If the company were to buy new

supplies of this raw material on the open market, it would cost $9.25 per kilogram.
However, the company has no other use for this raw material and would sell it at the
discounted price of $8.35 per kilogram if it were not used in the special project. The
sale of the raw material would involve delivery to the purchaser at a total cost of
$71.00 for all 240 kilograms. What is the relevant cost of the 240 kilograms of the raw
material when deciding whether to proceed with the special project?
A) $1,933
B) $2,004
C) $2,220
D) $2,112
Solution:
Opportunity cost of sales foregone if special project is
undertaken ($8.35 × 240)...............................................
$2,004
Less: delivery cost..............................................................
71
Relevant cost of 240 kilograms of raw material................
$1,933
29. Hamby Corporation is preparing a bid for a special order that would require 780
liters of material W34C. The company already has 640 liters of this raw material in
stock that originally cost $8.30 per liter. Material W34C is used in the company's main
product and is replenished on a periodic basis. The resale value of the existing stock of
the material is $7.60 per liter. New stocks of the material can be readily purchased for
$8.35 per liter. What is the relevant cost of the 780 liters of the raw material when
deciding how much to bid on the special order?

13-8

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition

Chapter 13 Relevant Costs for Decision Making
A) $6,481
B) $6,376
C) $6,513
D) $5,928
Solution:
Relevant cost = $8.35 per liter × 780 liters = $6,513
30. Schickel Inc. regularly uses material B39U and currently has in stock 460 liters of the
material for which it paid $3,128 several weeks ago. If this were to be sold as is on the
open market as surplus material, it would fetch $5.95 per liter. New stocks of the
material can be purchased on the open market for $6.45 per liter, but it must be
purchased in lots of 1,000 liters. You have been asked to determine the relevant cost of
760 liters of the material to be used in a job for a customer. The relevant cost of the
760 liters of material B39U is:
A) $4,902
B) $4,672
C) $4,522
D) $6,450
Ans: A AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Decision Making; Reporting LO: 1 Level: Hard
Source: CIMA, adapted
Solution:
Relevant cost = $6.45 per liter × 760 liters = $4,902

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition

13-9

Chapter 13 Relevant Costs for Decision Making
31. Munafo Corporation is a specialty component manufacturer with idle capacity.
Management would like to use its extra capacity to generate additional profits. A
potential customer has offered to buy 6,500 units of component VGI. Each unit of VGI
requires 1 unit of material I57 and 5 units of material M97. Data concerning these two
materials follow:
Current
Original Market Disposal
Units in Cost Per
Price
Value
Material
Stock
Unit
Per Unit Per Unit
I57........
2,400
$9.10
$9.40
$8.95
M97......
33,960
$4.70
$4.70
$3.50
Material I57 is in use in many of the company's products and is routinely replenished.
Material M97 is no longer used by the company in any of its normal products and
existing stocks would not be replenished once they are used up.
What would be the relevant cost of the materials, in total, for purposes of determining
a minimum acceptable price for the order for product VGI?

A) $174,850
B) $213,130
C) $213,850
D) $171,925
Ans: A AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Decision Making; Reporting LO: 1 Level: Hard
Source: CIMA, adapted
Solution:
# Required
Relevant
Material
per unit
price
I57................
1×
$9.40 =
M97..............
5×
$3.50 =
Total per unit relevant cost......................

Total
$ 9.40
17.50
$26.90

Minimum acceptable price for 6,500 units of VGI =
$26.90 per unit × 6,500 units = $174,850

13-10

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition


Chapter 13 Relevant Costs for Decision Making
32. Winder Corporation is a specialty component manufacturer with idle capacity.
Management would like to use its extra capacity to generate additional profits. A
potential customer has offered to buy 3,000 units of component QEA. Each unit of
QEA requires 5 units of material F85 and 5 units of material E71. Data concerning
these two materials follow:
Original
Current
Disposal
Units in
Cost Per
Market Price
Value Per
Material
Stock
Unit
Per Unit
Unit
F85.............
740
$4.90
$4.75
$4.20
E71.............
13,680
$5.00

$4.70
$3.60
Material F85 is in use in many of the company's products and is routinely replenished.
Material E71 is no longer used by the company in any of its normal products and
existing stocks would not be replenished once they are used up.
What would be the relevant cost of the materials, in total, for purposes of determining
a minimum acceptable price for the order for product QEA?
A) $126,702
B) $141,750
C) $126,295
D) $145,965
Ans: A AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Decision Making; Reporting LO: 1 Level: Hard
Source: CIMA, adapted
Solution:

Total needed
(3,000 × 5) =
F85............. 15,000

Inventory

# of units to
purchase on
market

Total cost

$4.75

$ 71,250

$4.70
13,680
$3.60
Minimum acceptable price for 3,000 units of QEA...........

6,204
49,248
$126,702

(3,000 × 5) =
E71............. 15,000

15,000

Relevant
price

(15,000 −
13,680) = 1,320

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition

13-11


Chapter 13 Relevant Costs for Decision Making
33. Rice Corporation currently operates two divisions which had operating results last
year as follows:

Sales...........................................................
Variable costs.............................................
Contribution margin...................................
Traceable fixed costs..................................
Allocated common corporate costs............
Net operating income (loss).......................

West
Division
$600,000
310,000
290,000
110,000
90,000
$ 90,000

Troy
Division
$300,000
200,000
100,000
70,000
45,000
($ 15,000)

Since the Troy Division also sustained an operating loss in the prior year, Rice's
president is considering the elimination of this division. Troy Division's traceable
fixed costs could be avoided if the division were eliminated. The total common
corporate costs would be unaffected by the decision. If the Troy Division had been

eliminated at the beginning of last year, Rice Corporation's operating income for last
year would have been:
A) $15,000 higher
B) $30,000 lower
C) $45,000 lower
D) $60,000 higher
Ans: B AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Decision Making; Reporting LO: 2 Level: Medium
Source: CPA, adapted
Solution:
Troy Division:
Contribution margin...........................................................
Less: traceable fixed costs.................................................
Segment margin of Troy Division......................................

$100,000
70,000
$ 30,000

Rice Corporation’s operating income would have been $30,000 less without the
segment margin contributed by the Troy Division.

13-12

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition


Chapter 13 Relevant Costs for Decision Making
34. Beaver Company (a multi-product firm) produces 5,000 units of Product X each year.
Each unit of Product X sells for $8 and has a contribution margin of $5. If Product X

is discontinued, $18,000 of fixed overhead would be eliminated. As a result of
discontinuing Product X, the company's overall operating income would:
A) decrease by $25,000
B) increase by $43,000
C) decrease by $7,000
D) increase by $7,000
Ans: C AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Decision Making; Reporting LO: 2 Level: Medium
Solution:
Fixed overhead savings if Product X is eliminated...........
Less: contribution margin lost if Product X is
discontinued ($5 × 5,000)...............................................
Decrease in overall operating income if Product X is
eliminated.......................................................................

$18,000
25,000
($ 7,000)

35. Milli Company plans to discontinue a division that generates a total contribution
margin of $20,000 per year. Fixed overhead associated with this division is $50,000,
of which $5,000 cannot be eliminated. The effect of this discontinuance on Milli's
operating income would be an increase of:
A) $5,000
B) $20,000
C) $25,000
D) $30,000
Ans: C AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Decision Making; Reporting LO: 2 Level: Medium
Source: CPA, adapted

Solution:
Fixed overhead savings if division is discontinued...........
Less: contribution margin lost if division is eliminated.....
Increase in operating income if division is eliminated......

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition

$45,000
20,000
$25,000

13-13


Chapter 13 Relevant Costs for Decision Making
36. ABD Realty manages five apartment complexes in its region. Shown below are
summary income statements for each apartment complex:
Rental income...........
Expenses...................
Operating income......

U
$1,000
800
$ 200

V
W
X
Y

$1,210 $2,347 $1,878 $1,065
1,300
2,600
2,400
1,300
($ 90) ($ 253) ($ 522) ($ 235)

Included in the expenses is $1,200 of common corporate expenses that have been
allocated to the apartment complexes based on rental income. These common
corporate expenses would have to be incurred regardless of how many apartment
complexes ABD Realty manages. The apartment complex(es) that ABD Realty should
consider dropping is (are):
A) V, W, X, Y
B) W, X, Y
C) X, Y
D) X
Ans: C AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Decision Making; Reporting LO: 2 Level: Hard
Source: CMA, adapted
Solution:
Total rental income = $1,000 + $1,210 + $2,347 + $1,878 + $1,065 = $7,500
U
V
Rental income........... $1,000
$1,210
Less expenses............
800
1,300
Add back proportional
share of common

expenses [(Rental
income in each
column ÷ Total
rental income of
$7,500) × $1,200]*
160
194
Apartment complex
margin
$ 360
$ 104
*expenses rounded to nearest whole dollar

W
$2,347
2,600

X
$1,878
2,400

Y
$1,065
1,300

376

300

170

$ 123

($222)

($ 65)

Since complexes X and Y have negative margins, ABD Realty should consider
dropping those two divisions.

13-14

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition


Chapter 13 Relevant Costs for Decision Making
37. The following information relates to next year's projected operating results of the
Children's Division of Grunge Clothing Corporation:
Contribution margin...........
Fixed expenses...................
Net operating loss..............

$200,000
500,000
($300,000)

If Children's Division is dropped, half of the fixed costs above can be eliminated.
What will be the effect on Grunge's profit next year if Children's Division is dropped
instead of being kept?
A) $50,000 increase

B) $250,000 increase
C) $250,000 decrease
D) $550,000 increase
Ans: A AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Decision Making; Reporting LO: 2 Level: Medium
Solution:
Contribution margin.......................
Fixed expenses...............................
Net operating income (loss)...........

Keep the
Division
$200,000
500,000
($300,000)

Drop the
Division
Difference
$
0 ($200,000)
250,000
250,000
($250,000) ($ 50,000)

Net operating income would increase by $50,000 if the Children’s Division were
dropped. Therefore, the division should be dropped.

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition

13-15


Chapter 13 Relevant Costs for Decision Making
38. The management of Furrow Corporation is considering dropping product L07E. Data
from the company's accounting system appear below:
Sales.......................................................................
Variable expenses...................................................
Fixed manufacturing expenses...............................
Fixed selling and administrative expenses.............

$830,000
$365,000
$291,000
$166,000

In the company's accounting system all fixed expenses of the company are fully
allocated to products. Further investigation has revealed that $186,000 of the fixed
manufacturing expenses and $106,000 of the fixed selling and administrative expenses
are avoidable if product L07E is discontinued. What would be the effect on the
company's overall net operating income if product L07E were dropped?
A) Overall net operating income would increase by $8,000.
B) Overall net operating income would decrease by $173,000.
C) Overall net operating income would decrease by $8,000.
D) Overall net operating income would increase by $173,000.
Ans: B AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Decision Making; Reporting LO: 2 Level: Easy
Solution:
Sales...............................................
Variable expenses...........................

Contribution margin.......................
Fixed expenses:
Fixed manufacturing expenses....
Fixed selling and administrative
expenses..................................
Total fixed expenses.......................
Net operating income (loss)...........

Keep the
Product
$830,000
365,000
465,000

Drop the
Product
$
0
0
0

Difference
($830,000)
365,000
(465,000)

291,000

*105,000

186,000

166,000
457,000
$ 8,000

**60,000
106,000
165,000
292,000
($165,000) ($173,000)

Net operating income would decline by $173,000 if product L07E were dropped.
Therefore, the product should not be dropped.
*$291,000 − $186,000 = $105,000
**$166,000 − $106,000 = $60,000

13-16

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition


Chapter 13 Relevant Costs for Decision Making
39. Product U23N has been considered a drag on profits at Jinkerson Corporation
for some time and management is considering discontinuing the product
altogether. Data from the company's accounting system appear below:
Sales.......................................................................
Variable expenses...................................................
Fixed manufacturing expenses...............................
Fixed selling and administrative expenses.............

$730,000
$350,000
$234,000
$161,000

In the company's accounting system all fixed expenses of the company are fully
allocated to products. Further investigation has revealed that $144,000 of the fixed
manufacturing expenses and $93,000 of the fixed selling and administrative expenses
are avoidable if product U23N is discontinued. What would be the effect on the
company's overall net operating income if product U23N were dropped?
A) Overall net operating income would increase by $15,000.
B) Overall net operating income would increase by $143,000.
C) Overall net operating income would decrease by $143,000.
D) Overall net operating income would decrease by $15,000.
Solution:
Keep the
Drop the
Product
Product
Difference
Sales...............................................
$730,000
$
0 ($730,000)
Variable expenses...........................
350,000
0
350,000
Contribution margin.......................

380,000
0 ( 380,000)
Fixed expenses:
Fixed manufacturing expenses....
234,000
*90,000
144,000
Fixed selling and administrative
expenses..................................
161,000
**68,000
93,000
Total fixed expenses.......................
395,000
158,000
237,000
Net operating income (loss)........... ($ 15,000) ($ 158,000) ($143,000)
Net operating income would decline by $143,000 if product U23N were dropped.
Therefore, the product should not be dropped.
*$234,000 − $144,000 = $90,000
**$161,000 − $93,000 = $68,000

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition

13-17


Chapter 13 Relevant Costs for Decision Making
40. Supler Company produces a part used in the manufacture of one of its products. The
unit product cost is $18, computed as follows:

Direct materials.......................................... $ 8
Direct labor................................................
4
Variable manufacturing overhead..............
1
Fixed manufacturing overhead..................
5
Unit product cost........................................ $18
An outside supplier has offered to provide the annual requirement of 4,000 of the parts
for only $14 each. It is estimated that 60 percent of the fixed overhead cost above
could be eliminated if the parts are purchased from the outside supplier. Based on
these data, the per-unit dollar advantage or disadvantage of purchasing from the
outside supplier would be:
A) $1 disadvantage
B) $1 advantage
C) $2 advantage
D) $4 disadvantage
Ans: C AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Decision Making; Reporting LO: 3 Level: Medium
Solution:
Relevant cost per unit:
Direct materials................................................
Direct labor......................................................
Variable manufacturing overhead....................
Fixed manufacturing overhead ($5 × 0.60).....
Relevant manufacturing cost...........................
Net advantage (disadvantage):
Relevant manufacturing cost savings.........
Less: cost from outside supplier................
Net advantage.............................................

13-18

$ 8
4
1
3
$16
$16
14
$ 2

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition


Chapter 13 Relevant Costs for Decision Making
41. Sharp Company produces 8,000 parts each year, which are used in the production of
one of its products. The unit product cost of a part is $36, computed as follows:
Variable production costs.........
Fixed production costs.............
Unit product cost......................

$16
20
$36

The parts can be purchased from an outside supplier for only $28 each. The space in
which the parts are now produced would be idle and fixed production costs would be
reduced by one-fourth. If the parts are purchased from the outside supplier, the annual
impact on the company's operating income will be:

A) $24,000 increase
B) $24,000 decrease
C) $56,000 increase
D) $56,000 decrease
Ans: D AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Decision Making; Reporting LO: 3 Level: Medium
Solution:
Relevant cost per unit:
Variable production costs.................................
Fixed manufacturing overhead ($20 × 0.25)...
Relevant manufacturing cost...........................

$16
5
$21

Relevant manufacturing cost savings ($21 × 8,000)............
Less: cost to purchase from outside supplier ($28 × 8,000).
Net disadvantage of purchasing from outside supplier.........

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition

$168,000
224,000
($ 56,000)

13-19


Chapter 13 Relevant Costs for Decision Making

42. Motor Company manufactures 10,000 units of Part M-l each year for use in its
production. The following total costs were reported last year:
Direct materials..........................................
Direct labor................................................
Variable manufacturing overhead..............
Fixed manufacturing overhead..................
Total manufacturing cost............................

$ 20,000
55,000
45,000
70,000
$190,000

Valve Company has offered to sell Motor 10,000 units of Part M-l for $18 per unit. If
Motor accepts the offer, some of the facilities presently used to manufacture Part M-l
could be rented to a third party at an annual rental of $15,000. Additionally, $4 per unit
of the fixed overhead applied to Part M-l would be totally eliminated. Should Motor
Company accept Valve Company's offer, and why?
A) No, because it would be $5,000 cheaper to make the part.
B) Yes, because it would be $10,000 cheaper to buy the part.
C) No, because it would be $15,000 cheaper to make the part.
D) Yes, because it would be $25,000 cheaper to buy the part.
Ans: A AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Decision Making; Reporting LO: 3 Level: Hard
Source: CPA, adapted
Solution:
Relevant cost of manufacturing:
Direct materials......................................................
Direct labor............................................................

Variable manufacturing overhead..........................
Fixed manufacturing overhead ($4 × 10,000).......
Relevant manufacturing cost.................................
Net advantage (disadvantage):
Relevant manufacturing cost savings............
Annual rental of manufacturing facilities
given up if manufacture Part M-1.............
Cost of purchasing the part ($18 × 10,000). .
Net disadvantage of purchasing part M-1.....

13-20

$ 20,000
55,000
45,000
40,000
$160,000
$160,000

15,000
( 180,000)
($ 5,000)

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition


Chapter 13 Relevant Costs for Decision Making
43. Kingston Company needs 10,000 units of a certain part to be used in its production
cycle. The following information is available concerning Kingston's unit product cost:
Direct materials..........................................

Direct labor................................................
Variable manufacturing overhead..............
Fixed manufacturing overhead..................
Unit product cost........................................

$6
24
12
15
$57

Utica Company has offered to supply Kingston's entire annual requirements of the part
for $53 each. If Kingston buys the part from Utica instead of making it, Kingston
would have no other use for the facilities and 60 percent of the fixed manufacturing
overhead would continue. In deciding whether to make or buy the part, the total
relevant costs to make the part internally are:
A) $342,000
B) $480,000
C) $530,000
D) $570,000
Ans: B AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Decision Making; Reporting LO: 3 Level: Medium
Source: CPA, adapted
Solution:
Relevant cost per unit:
Direct materials................................................
Direct labor......................................................
Variable manufacturing overhead....................
Fixed manufacturing overhead ($15 × 0.40)....
Relevant manufacturing cost............................

$ 6
24
12
6
$48

Total relevant costs to make the part internally ($48 × 10,000) = $480,000

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition

13-21


Chapter 13 Relevant Costs for Decision Making
44. The following standard costs pertain to a component part manufactured by Bor
Company:
Direct materials........................
Direct labor..............................
Manufacturing overhead..........
Standard cost per unit...............

$4
10
40
$54

An outside supplier has offered to supply all of the parts needed by Bor Company for
$50 each. The 60% of the manufacturing overhead cost that is fixed would be
unaffected by this decision. In the decision to “make or buy,” what is the relevant unit

cost to make the part internally?
A) $54
B) $38
C) $30
D) $5
Ans: C AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Decision Making; Reporting LO: 3 Level: Medium
Source: CPA, adapted
Solution:
Relevant cost per unit:
Direct materials..........................................
Direct labor................................................
Manufacturing overhead ($40 × 0.40).......
Relevant manufacturing cost......................

13-22

$ 4
10
16
$30

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition


Chapter 13 Relevant Costs for Decision Making
45. Gordon Company produces 1,000 units of a part per year which are used in the
assembly of one of its products. The unit cost of producing these parts is:
Variable manufacturing cost..........
Fixed manufacturing cost...............

Total manufacturing cost................

$15
12
$27

The part can be purchased from an outside supplier at $20 per unit. If the part is
purchased from the outside supplier, two thirds of the total fixed costs incurred in
producing the part can be eliminated. The annual increase or decrease on the
company's operating incomes as a result of buying the part from the outside supplier
would be:
A) $3,000 increase
B) $1,000 decrease
C) $7,000 increase
D) $5,000 decrease
Ans: A AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Decision Making; Reporting LO: 3 Level: Medium
Solution:
Relevant cost per unit:
Variable production costs.................................
Fixed manufacturing overhead ($12 × 2/3).....
Relevant manufacturing cost...........................
Net advantage (disadvantage) per unit:
Manufacturing cost savings.......................
Cost of purchasing the part........................
Net advantage (disadvantage)....................

$15
8
$23

$23
20
$ 3

Total = $3 × 1,000 units = $3000 increase

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition

13-23


Chapter 13 Relevant Costs for Decision Making
46. Quikcook Microwave Company currently manufactures the doors that it uses for its
microwave ovens. The annual costs to manufacture the 40,000 doors needed each year
are as follows:
Direct material..................................
Direct labor.......................................
Variable manufacturing overhead.....
Fixed manufacturing overhead.........
Total..................................................

Total Cost
$200,000
40,000
80,000
320,000
$640,000

Delilah Glass Corporation has offered to provide Quikcook with all of its annual door
needs for $14 per door. If Quikcook accepts this offer, only 40% of the fixed overhead

above could be totally eliminated. Also, Quikcook has no alternative use for the idle
facilities if the decision was made to go with Delilah's offer. Based on this
information, would Quikcook be better off to make the doors or buy the doors and by
how much?
A) $48,000 better to buy
B) $48,000 better to make
C) $112,000 better to buy
D) $112,000 better to make
Ans: D AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Decision Making; Reporting LO: 3 Level: Medium
Solution:

13-24

Relevant cost:
Direct materials.......................................................
Direct labor..............................................................
Variable manufacturing overhead............................
Fixed manufacturing overhead ($320,000 × 0.40). .
Relevant manufacturing cost...................................

$200,000
40,000
80,000
128,000
$448,000

Net advantage (disadvantage):
Manufacturing cost savings.....................................
Cost of purchasing the part ($14 × 40,000).............

Net advantage (disadvantage) of buying.................

$448,000
( 560,000)
($112,000)

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition


Chapter 13 Relevant Costs for Decision Making
47. Sardi Inc. is considering whether to continue to make a component or to buy it from an
outside supplier. The company uses 17,000 of the components each year. The unit
product cost of the component according to the company's cost accounting system is
given as follows:
Direct materials..........................................
Direct labor................................................
Variable manufacturing overhead..............
Fixed manufacturing overhead..................
Unit product cost........................................

$ 8.20
8.30
1.20
4.30
$22.00

Assume that direct labor is a variable cost. Of the fixed manufacturing overhead, 70%
is avoidable if the component were bought from the outside supplier. In addition,
making the component uses 2 minutes on the machine that is the company's current
constraint. If the component were bought, this machine time would be freed up for use

on another product that requires 4 minutes on the constraining machine and that has a
contribution margin of $7.00 per unit.
When deciding whether to make or buy the component, what cost of making the
component should be compared to the price of buying the component?
A) $24.21
B) $25.50
C) $20.71
D) $22.00
Ans: A AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Decision Making; Reporting LO: 3 Level: Hard
Source: CIMA, adapted
Solution:
Relevant cost per unit:
Direct materials................................................... $ 8.20
Direct labor.........................................................
8.30
Variable manufacturing overhead.......................
1.20
Fixed manufacturing overhead ($4.30 × 0.70)...
3.01
Relevant manufacturing cost.............................. $20.71
Add contribution margin lost*............................
3.50
$24.21
*$7.00 ÷ 4 minutes = $1.75 per minute; $1.75 per minute × 2 minutes = $3.50

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition

13-25

Chapter 13 Relevant Costs for Decision Making
48. Part S51 is used in one of Haberkorn Corporation's products. The company makes
12,000 units of this part each year. The company's Accounting Department reports the
following costs of producing the part at this level of activity:
Direct materials..........................................
Direct labor................................................
Variable manufacturing overhead..............
Supervisor’s salary.....................................
Depreciation of special equipment.............
Allocated general overhead........................

Per Unit
$6.30
$5.70
$4.80
$7.00
$8.60
$7.20

An outside supplier has offered to produce this part and sell it to the company for
$37.70 each. If this offer is accepted, the supervisor's salary and all of the variable
costs, including direct labor, can be avoided. The special equipment used to make the
part was purchased many years ago and has no salvage value or other use. The
allocated general overhead represents fixed costs of the entire company. If the outside
supplier's offer were accepted, only $17,000 of these allocated general overhead costs
would be avoided.
If management decides to buy part S51 from the outside supplier rather than to
continue making the part, what would be the annual impact on the company's overall
net operating income?

A) Net operating income would decline by $5,800 per year.
B) Net operating income would decline by $22,800 per year.
C) Net operating income would decline by $149,800 per year.
D) Net operating income would decline by $39,800 per year.
Ans: C AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Decision Making; Reporting LO: 3 Level: Easy

13-26

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition


Chapter 13 Relevant Costs for Decision Making
Solution:
Direct materials (12,000 units @ $6.30 per unit).....
Direct labor (12,000 units @ $5.70 per unit)............
Variable overhead (12,000 units @ $4.80 per unit). .
Supervisor’s salary (12,000 units @ $7.00 per unit)
Depreciation of special equipment (not relevant).....
Allocated general overhead (avoidable only)...........
Outside purchase price (12,000 units @ $37.70 per
unit).......................................................................
Total cost...................................................................

Make
$ 75,600
68,400
57,600
84,000
0

17,000
$302,600

Buy

$452,400
$452,400

The total cost of the make alternative is lower by $149,800 ($302,600 − $452,400).
Thus, net operating income would decline by $149,800 if the offer from the supplier
were accepted. Therefore, the company should continue to make the part itself.

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition

13-27


Chapter 13 Relevant Costs for Decision Making
49. Norgaard Corporation makes 8,000 units of part G25 each year. This part is used in
one of the company's products. The company's Accounting Department reports the
following costs of producing the part at this level of activity:
Direct materials..........................................
Direct labor................................................
Variable manufacturing overhead..............
Supervisor’s salary.....................................
Depreciation of special equipment.............
Allocated general overhead........................

Per Unit
$6.70

$8.10
$1.10
$2.00
$4.20
$2.10

An outside supplier has offered to make and sell the part to the company for $21.20
each. If this offer is accepted, the supervisor's salary and all of the variable costs,
including direct labor, can be avoided. The special equipment used to make the part
was purchased many years ago and has no salvage value or other use. The allocated
general overhead represents fixed costs of the entire company. If the outside supplier's
offer were accepted, only $2,000 of these allocated general overhead costs would be
avoided. In addition, the space used to produce part G25 would be used to make more
of one of the company's other products, generating an additional segment margin of
$16,000 per year for that product.
What would be the impact on the company's overall net operating income of buying
part G25 from the outside supplier?
A) Net operating income would decline by $8,400 per year.
B) Net operating income would increase by $16,000 per year.
C) Net operating income would decline by $8,000 per year.
D) Net operating income would decline by $40,000 per year.
Ans: A AACSB: Analytic AICPA BB: Critical Thinking
AICPA FN: Decision Making; Reporting LO: 3 Level: Medium

13-28

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition


Chapter 13 Relevant Costs for Decision Making

Solution:
Direct materials (8,000 units @ $6.70 per unit).......
Direct labor (8,000 units @ $8.10 per unit)..............
Variable overhead (8,000 units @ $1.10 per unit)....
Supervisor’s salary (8,000 units @ $2.00 per unit). .
Depreciation of special equipment (not relevant).....
Allocated general overhead (avoidable only)...........
Outside purchase price (8,000 units @ $21.20 per
unit).......................................................................
Opportunity cost........................................................
Total cost...................................................................

Make
$ 53,600
64,800
8,800
16,000
0
2,000

$145,200

Buy

$169,600
( 16,000)
$153,600

The total cost of the make alternative is lower by $8,400 ($145,200 − $153,600). Thus,
net operating income would decline by $8,400 if the offer from the supplier were

accepted. Therefore, the company should continue to make the part itself.

Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition

13-29