Short Term Decisions
Easy Practice Test
Introduction to Accounting
Easy Practice Test
Click the “Check Your Answer” box below each question to reveal the correct answer and explanation.
1. The opportunity cost of a company with no excess capacity is
b. total fixed cost
c. total manufacturing costs
d. the benefit lost from not choosing a better alternative use for the capacity
Answer
2. A company with a production constraint effecting all products should
b. make more of the products with the highest contribution margin per the restrained resource
c. make more of the products with the highest contribution margin ratio
d. make more of the products with the highest fixed costs
Answer
3. Which of the following is not relevant to deciding if you should accept a special order?
b. direct material used to make the product that is part of the order
c. fixed costs that are allocated to all products
d. opportunity costs related to the order
Answer
4. When deciding to make or buy a product part, you should not consider
b. direct labor used to make the part
c. equipment costs that are avoidable if the parts are purchased
d. costs associated with the general operation of the manufacturing facility
Answer
5. If there is excess capacity, the price to the customer for a special order should be equal to or higher than
b. variable costs plus any added fixed costs associated with the order
c. variable costs plus unavoidable fixed costs
d. all unavoidable costs
Answer
6. A joint product should be process further if added revenue after processing further is higher than
b. the total sales dollars after processing further
c. allocated joint costs plus added further processing costs
d. fixed costs to produce the final product
Answer
7. The store manager’s salary is a differential cost when the decision at hand is
b. how to reduce variable costs
c. whether or not to close the store
d. whether or not to add square feet to the store
Answer
8. A product line that consistently incurs losses should
b. be dropped if the contribution to overall profits is negative
c. be dropped if the contribution margin is positive and unavoidable fixed costs are lower than contribution margin
d. be dropped if direct and allocated fixed costs are less than contribution margin
Answer
9. Income from renting space that would not be used if a part was purchased rather than made is
b. a joint company revenue
c. an opportunity cost
d. an avoidable cost
Answer
10. When making a short-term decision, you should first
b. do a customer survey
c. identify unavoidable costs to use in the decision
d. identify incremental costs that won’t be used in the decision
Answer
11. A manufacturing company has determined that a particular product has the following costs:
| Direct materials | $300,000 |
| Direct labor | $250,000 |
| Manufacturing overhead: | |
| Manager salaries | $100,000 |
| Benefits for direct labor | $ 70,000 |
| Depreciation | $ 50,000 |
| Allocated Insurance | $ 10,000 |
| Allocated Rent | $ 20,000 |
| Total Costs | $800,000 |
The product had sales of $750,000 consisting of 75,000 units.
Should the company stop producing and selling this product?
Answer
| Sales | $750,000 |
| – Variable Costs: | |
| Direct materials | $300,000 |
| Direct labor | $250,000 |
| Benefits for direct labor | $ 70,000 |
| =Contribution Margin lost if discontinued | $130,000 |
| – Fixed costs avoided if discontinued: | |
| Manager salaries | $100,000 |
| Product operating income | $ 30,000 |
In this case, the company will lose $130,000 in contribution margin and save $100,000 in fixed costs, giving a total company net loss of $30,000 if the product line is dropped. Direct fixed costs are lower than contribution margin, so keep the product line.
Relevant information is sales, all variable costs, and direct fixed costs.
Allocated fixed costs are not relevant and should not be considered because they will be incurred by the company regardless.
Depreciation is a sunk cost and is never relevant.
12. A manufacturing company makes the motors that are used to produce small
motorcycles marketed to 10 to 15-year old boys. The costs for the current production
level of 10,000 units are as follows:
| Direct materials | $72 per unit |
| Direct labor | $58 per unit |
| Variable manufacturing overhead | $ 8 per unit |
| Fixed M/OH avoidable | $10 |
| Fixed M/OH unavoidable | $30 |
| Fixed selling costs | $95,000 |
| Variable selling costs | $12 per unit |
The purchasing manager has located a supplier who will supply the motor to the company for a cost of $160 per unit.
What would be the change in operating income if the company buys the motor from the supplier at $160 per unit.
Answer
| Make | Buy |
| $72 | $160 |
| $58 | ($10) |
| $ 8 | $150 |
| $138 per unit | |
| x 10,000 units | x 10,000_units |
| $1,380,000 | $1,500,000 |
The company’s operating income will be $120,000 less if the motor is purchased. Income will be less because the cost will be higher.
Relevant costs are those listed above under make and buy.
Irrelevant costs that are ignored are unavoidable and selling costs.
Selling costs are will be incurred to sell the product regardless.
13. A manufacturing company makes and sells portable arm band radios. Each radio normally sells for $15 to the retailer. The following costs are incurred at production levels of 50,000:
| Direct materials | $2 per unit |
| Direct labor | $4 per unit |
| Variable manufacturing overhead | $0.25 per unit |
| Fixed Manufacturing overhead: | $300,000 |
| 20% direct to radios | |
| 80% allocated to ratios | |
| Salesman sales commission | $0.60 per unit |
| Fixed selling and administration costs | $275,000 |
The company has received a special order to manufacture radios with a YMCA logo on them. The national YMCA office is offering to pay the company $11 per radio for 10,000 radios. The order would be bulk shipped to national headquarters at a cost of $3,600. The additional cost of putting the logo on the radio is $0.30 per unit. The company will pay no sales commission because the order came unsolicited.
What would be the change in operating income given the company has the capacity to produce the order if the order is accepted?
Answer
| Sales $ per unit | $11 |
| – Variable cost per unit | $6.55 (2+4+.25+.30) |
| = CM per unit | $4.45 |
| x Total units | 10,000 |
| = Total contribution margin | $44,500 |
| – Additional total fixed costs | $ 3,600 |
| = Impact on profits | $40,900 Accept the order |
All fixed overhead costs and the fixed selling and administration costs are not considered because they will not change and are therefore not relevant.
Sales commission will not be incurred, so it is not part of variable costs.
Accepting the order will increase total profits by $40,900.
14. A company makes two products which are made from materials that are in very short supply. The company can purchase 10,000 yards of this material each month. Information related to the two products is as follows:
| Product D | Product G | |
| Contribution margin per unit | $10 | $15 |
| Yards required per unit | 2 | 4 |
| Market demand in unit | 8,000 | 16,000 |
What is the maximum contribution margin the company can achieve for the month?
Answer
To determine this, you must first determine the contribution margin per yard.
| Product D | Product G | |
| CM per units | $10 | $15 |
| Divided by yards required | 2 | 4 |
| = Contribution margin per yard | $5 | $3.75 |
The company should make as many as it can, and not exceed demand, of the product with the highest CM per yard, the constrained resource.
The company can make 5,000 units of product D and sell all of them
(10,000 total yards available / 2 yards for each unit)
Maximum contribution margin will be:
5,000 units of product D
x $10 CM per unit
= $50,000 total CM
15. The manufacturing company produces 3 products from a joint process.
Budgeted information is as follows:
|
Product
|
||||
|
A
|
B
|
C
|
||
| Units produced |
1,000
|
2,000
|
3,000
|
|
| Further processing costs |
$10
|
$12
|
$15
|
|
| Sales value at split-off |
$22
|
$27
|
$12
|
|
| Sales value – process further |
$36
|
$32
|
$30
|
|
| Total fixed costs per unit |
$8
|
$10
|
$12
|
|
| Total variable costs per unit |
$5
|
$7
|
$3
|
|
Determine which of the products should be sold at split off and which products should be sold after further processing.
Answer
|
Product
|
||||
| Use the common format: |
A
|
B
|
C
|
|
| Final Sales $ after further processing |
$36
|
$32
|
$30
|
|
| Less Sales $ at the split-off point |
$22
|
$27
|
$12
|
|
| Incremental Revenue from further processing |
$14
|
$5
|
$18
|
|
| Less Cost of further processing |
$10
|
$12
|
$15
|
|
| Profit or Loss from further processing |
$4
|
($7)
|
$3
|
|
The company should process further products A and C.
Product B should be sold at split off.
Fixed costs will not change and are irrelevant, ignored them. Total variable costs are not relevant as they will be included in joint and process further costs and you can’t determine how much is where so it is not usable information.
Units produced does not matter because if it is more profitable per unit to process further it will be more profitable in total no matter how many units are processed.
16. A hardware store is considering adding a new line of carpet to its current product lines. The company has estimated the following revenues and costs from the line of carpet.
| Average sales price per yard |
$3.50
|
||
| Variable costs per yard |
|
||
| Purchase price: |
$1.30
|
||
| Selling |
$0.25
|
||
| Fixed costs: |
|
||
| Avoidable |
$15,000
|
||
| Unavoidable – allocated |
$6,000
|
||
| Allocated administrative costs |
$8,000
|
||
| Expected sales in yards |
5,000
|
||
What is the expected change to operating income if the new line of carpets is added? Should the company add the carpet product line?
Answer
| Sales | $3.50 |
| – All variable costs | $1.55 (1.30+0.25) |
| = CM per unit | $1.95 |
| x units | 5,000 |
| = Total CM | $9,750 |
| – Added fixed costs | ($15,000) |
| = Change in income | ($5,250) |
Use only relevant costs: variable costs plus added direct fixed costs.
Allocated costs are not relevant as they will be incurred by the company by some product line regardless.
Avoidable means it won’t be incurred if the line is not added, so it is relevant.
Avoidable means the same thing as direct to the product line.
Company total profits will be $5,250 less if the line of carpets is added.
Do not add the product line.