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1. Devlin Company has two divisions, C and D. The overall company contribution margin ratio is 30%, with sales in the two divisions totaling $500,000. If variable expenses are $300,000 in Division C, and if Division C’s contribution margin ratio is 25%, then sales in Division D must be: (Points : 2)


Question 2.2. Toxemia Salsa Company manufactures five flavors of salsa. Last year, Toxemia generated net operating income of $40,000. The following information was taken from last year’s income statement segmented by flavor (brackets indicate a negative amount): 


Toxemia expects similar operating results for the upcoming year. If Toxemia wants to maximize its profitability in the upcoming year, which flavor or flavors should Toxemia discontinue? (Points : 2)

       no flavors should be discontinued
       Wimpy and Mild
       Wimpy, Mild, and Medium

Question 3.3. Younie Corporation has two divisions: the South Division and the West Division. The corporation’s net operating income is $26,900. The South Division’s divisional segment margin is $42,800 and the West Division’s divisional segment margin is $29,900. What is the amount of the common fixed expense not traceable to the individual divisions? (Points : 2)


Question 4.4. Miscavage Corporation has two divisions: the Beta Division and the Alpha Division. The Beta Division has sales of $580,000, variable expenses of $301,600, and traceable fixed expenses of $186,500. The Alpha Division has sales of $510,000, variable expenses of $178,500, and traceable fixed expenses of $222,100. The total amount of common fixed expenses not traceable to the individual divisions is $235,500. What is the company’s net operating income? (Points : 2)


Question 5.5. Mike Corporation uses residual income to evaluate the performance of its divisions. The company’s minimum required rate of return is 14%. In January, the Commercial Products Division had average operating assets of $970,000 and net operating income of $143,700. What was the Commercial Products Division’s residual income in January? (Points : 2)


Question 6.6. Rice Corporation currently operates two divisions which had operating results last year as follows: 


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: (Points : 2)

       $15,000 higher
       $30,000 lower
       $45,000 lower
       $60,000 higher

Question 7.7. ABD Realty manages five apartment complexes in its region. Shown below are summary income statements for each apartment complex: 


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): (Points : 2)

       V, W, X, Y
       W, X, Y
       X, Y

Question 8.8. 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: 


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? (Points : 2)

       No, because it would be $5,000 cheaper to make the part.
       Yes, because it would be $10,000 cheaper to buy the part.
       No, because it would be $15,000 cheaper to make the part.
       Yes, because it would be $25,000 cheaper to buy the part.

Question 9.9. 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: 


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: (Points : 2)


Question 10.10. The following standard costs pertain to a component part manufactured by Bor Company: 


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? (Points : 2)


Question 11.11. 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: 


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? (Points : 2)


Question 12.12. Rebelo Corporation is presently making part E07 that is used in one of its products. A total of 17,000 units of this part are produced and used every year. The company’s Accounting Department reports the following costs of producing the part at this level of activity: 


An outside supplier has offered to make and sell the part to the company for $20.80 each. If this offer is accepted, the supervisor’s salary and all of the variable costs 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, none of which would be avoided if the part were purchased instead of produced internally. If management decides to buy part E07 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? (Points : 2)

       Net operating income would decline by $6,800 per year.
       Net operating income would decline by $163,200 per year.
       Net operating income would increase by $163,200 per year.
       Net operating income would increase by $6,800 per year.

Question 13.13. Banfield Corporation makes three products that use compound W, the current constrained resource. Data concerning those products appear below: 


Rank the products in order of their current profitability from most profitable to least profitable. In other words, rank the products in the order in which they should be emphasized. (Points : 2)

       WX, VP, YI
       YI, VP, WX
       WX, YI, VP
       VP, WX, YI

Question 14.14. Ouzts Corporation is considering two alternatives: A and B.  Costs associated with the alternatives listed below:

  Alternative A  Alternative B 
 Materials costs $40,000  $56,000 
 Processing costs $37,000 $37,000
 Equipment rental $13,000 $13,000
 Occupancy costs $15,000  $22,000 

Are the materials costs and processing costs relevant in the choice between alternatives A and B? (Ignore the equipment rental and occupancy costs in this question.) (Points : 2)

       Both materials costs and processing costs are relevant
       Neither materials costs nor processing costs are relevant
       Only processing costs are relevant
       Only materials costs are relevant

Question 15.15. The Draper Company is considering dropping its Doombug toy due to continuing losses.  Revenue and costs data on the toy for the past year follow:

Sales of 15,000 units $150,000
less Variable expenses $120,000
= Contribution margin $30,000
less Fixed expenses $40,000
= Net operating loss ($10,000)

If the toy were discontinued, then Draper could avoid $8,000 per year in fixed costs.

Under the given conditions, the change in annual operating income from discontinuing the production and sale of Doombugs would be: (Points : 2)

       $30,000 decrease
       $10,000 increase
       $22,000 decrease
       $18,000 increase

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