Chapter 8

Management Accounting, Cdn.
6e (Horngren/Sundem/Stratton/Beaulieu)
Chapter 8 Relevant Information and Decision Making: Marketing Decisions
1) The predicted future costs and revenues that will differ as a result of alternative courses of actions are
referred to as relevant information.
Answer: TRUE
Diff: 1
Type: TF
Page Ref: 296
Objective: 1
2) The accountant's role in decision making involves collecting the relevant information and ultimately
making the final choice.
Answer: FALSE
Diff: 1
Type: TF
Page Ref: 296
Objective: 1
3) A decision model is any method for making a choice, sometimes requiring elaborate qualitative
procedures.
Answer: TRUE
Diff: 1
Type: TF
Page Ref: 296
Objective: 1
4) The contribution margin approach helps managers in pricing decisions because the relationships
among variable costs, fixed costs and selling price changes are easier to show and understand.
Answer: TRUE
Diff: 1
Type: TF
Page Ref: 299
Objective: 3
5) In analyzing costs to decide whether to accept a special order, total fixed costs should be investigated to
see how much fixed manufacturing costs per unit will be changed by the special order.
Answer: FALSE
Diff: 1
Type: TF
Page Ref: 299
Objective: 3
6) A fixed cost element of an identical amount that is common among all alternatives is essentially
irrelevant.
Answer: TRUE
Diff: 1
Type: TF
Page Ref: 299
Objective: 3
7) Unit costs are useful for predicting fixed costs, while total costs are useful for predicting variable costs.
Answer: FALSE
Diff: 1
Type: TF
Page Ref: 299
Objective: 3
8) Unavoidable costs will not continue if an ongoing operation is changed or deleted.
Answer: FALSE
Diff: 1
Type: TF
Page Ref: 299
1
2012 Pearson Canada Inc.
Objective: 3
9) Limiting factors include labour-hours and machine-hours that limit production and hence sales in
manufacturing firms.
Answer: TRUE
Diff: 1
Type: TF
Page Ref: 307
10) Marginal cost is the additional cost resulting from producing and selling one additional unit.
Answer: TRUE
Diff: 1
Type: TF
Page Ref: 296
Objective: 1
11) If small price increases cause large volume declines, demand is inelastic.
Answer: FALSE
Diff: 1
Type: TF
Page Ref: 309
Objective: 7
12) Predatory pricing is the act of charging different prices to different customers for the same product or
service.
Answer: FALSE
Diff: 1
Type: TF
Page Ref: 311
Objective: 8
13) In the short run, the minimum price to be quoted for a product should be equal to the costs that may
be avoided by not landing the order.
Answer: TRUE
Diff: 1
Type: TF
Page Ref: 309
Objective: 7
14) In using the four popular markup formulas for pricing, the decision-maker will get four different
target prices and will pick the best one for the product.
Answer: FALSE
Diff: 1
Type: TF
Page Ref: 311
Objective: 8
15) Under the absorption approach to pricing, the decision-maker has no direct knowledge of costvolume-profit relationships.
Answer: TRUE
Diff: 1
Type: TF
Page Ref: 314
Objective: 9
16) The accountant's primary role in the decision-making process is to
A) make the decision.
B) collect relevant information.
C) report irrelevant information.
D) provide emotional support.
Answer: B
Diff: 1
Type: MC
Page Ref: 296
2
Objective: 1
17) In decision making, the key question is:
A) What are the fixed costs of each alternative?
B) What are the past costs of each alternative?
C) What difference will the choice make?
D) What are the irrelevant costs?
Answer: C
Diff: 1
Type: MC
Page Ref: 296
Objective: 1
18) The predicted future costs and revenues that will differ among alternative courses of action are
referred to as
A) relevant information.
B) sunk costs and revenues.
C) historical information.
D) predictable information.
Answer: A
Diff: 1
Type: MC
Page Ref: 296
Objective: 1
19) ________ is (are) defined as any method for making a choice.
A) A decision model
B) Irrelevant costs
C) Relevant costs
D) Prediction method
Answer: A
Diff: 1
Type: MC
Page Ref: 296
Objective: 1
20) ________ becomes a principal source of feedback.
A) Prediction method
B) Decision model
C) Implementation
D) Evaluation of performance
Answer: D
Diff: 1
Type: MC
Page Ref: 296
Objective: 1
21) ________ uses information as a basis for estimating future costs.
B) Decision model
C) Implementation
Answer: A
Diff: 1
Type: MC
Page Ref: 296
Objective: 1
3
4
22) ________ is the process of putting a decision into action.

B) Decision model
C) Implementation
Answer: C
Diff: 1
Type: MC
Page Ref: 343296
Objective: 1
23) Each week Kline Company produces 800 units of a product that has variable costs of $8 per unit. Total
fixed costs for the month are $6,800. A special order is received for 200 units of the same product at a
price of $9 per unit. In deciding to accept or reject this special order, it is appropriate to consider the
A) difference between the offered price and the variable cost per unit, or $1.00.
B) old fixed cost per unit of $8.50.
C) new fixed cost per unit of $6.80.
D) difference between the two fixed costs per unit, which is $1.70.
Answer: A
Diff: 2
Type: MC
Page Ref: 299
Objective: 3
24) Each month Barrett Company produces 4,000 units of a product that has variable costs of $10 per unit.
Total fixed costs for the month are $14,800. A special order is received which is for 625 units at a price of
$12 per unit. Relevant to the decision of whether to accept or reject this special order is the
A) old fixed cost per unit of $3.70.
B) new fixed cost per unit of $3.20.
C) difference between the offered price and the variable cost per unit, which is $2.00.
Answer: C
Diff: 2
Type: MC
Page Ref: 299
Objective: 3
25) Each quarter Comito, Inc. produces 120,000 units of a product that has variable costs of $56 per unit.
Total fixed costs for the quarter are $90,000. A special order is received which is for 30,000 units at a price
of $57 per unit. In deciding to accept or reject this special order, it is appropriate to consider the
A) old fixed cost per unit of $0.75.
B) difference between the offered price and the variable cost per unit, which is $1.00.
C) new fixed cost per unit of $0.60.
Answer: B
Diff: 2
Type: MC
Page Ref: 299
Objective: 3
5
The Chou Company provided the following information regarding its one and only product, rollers:
Direct labour
Direct materials used
Fixed factory overhead
Fixed selling and administrative expenses
Variable factory overhead
Variable selling and administrative expenses
Selling price per unit
$45,000
30,000
42,000
8,000
28,000
12,000
20
Units produced and sold
10,000
26) What is the current net income?

A) $200,000
B) $165,000
C) $35,000
D) $85,000
Answer: C
Diff: 2
Type: MC
Page Ref: 299
Objective: 3
27) Assuming there is excess capacity, what would be the effect of accepting a special order for 2,000 units
at a price of $16.00 per roller?
A) Net income would decrease by $1,000.
B) Net income would increase by $9,000.
C) Net income would decrease by $8,000.
D) Net income would increase by $3,000.
Answer: B
Diff: 2
Type: MC
Page Ref: 299
Objective: 3
Van Horn, Inc. has been producing and selling 20,000 meters a year. The company has the capacity to
produce 25,000 meters with its present facilities. The following information is also available:
Variable costs per unit:Manufacturing
Selling and Administrative
Fixed costs in total:Manufacturing
$300
$110
50
$1,280,000
560,000
28) Currently, the contribution approach cost of manufacturing one meter is

A) $174.
B) $160.
C) $224.
D) $252.
Answer: B
Diff: 2
Type: MC
Page Ref: 314
6
Objective: 9
29) Currently, the absorption approach cost of manufacturing one meter is
A) $160.
B) $224.
C) $174.
D) $252.
Answer: C
Diff: 2
Type: MC
Page Ref: 314
Objective: 1
30) If a special order is accepted for 5,000 meters at a price of $250 per unit, net income would
A) increase by $200,000.
B) increase by $136,000.
C) decrease by $500,000.
D) decrease by $260,000.
Answer: A
Diff: 2
Type: MC
Page Ref: 299
Objective: 3
The Finn Company provided the following information regarding its one and only product, phones:
Direct labour
80
120,000
180,000
112,000
48,000
168,000
32,000
10,000
31) The unit cost of a phone under the absorption approach is

A) $20.00.
B) $46.00.
C) $66.00.
D) $58.00.
Answer: D
Diff: 2
Type: MC
Page Ref: 314
Objective: 9
32) The unit cost of a phone using the contribution approach is
A) $66.00.
B) $20.00.
C) $58.00.
D) $46.00.
Answer: D
Diff: 2
Type: MC
Page Ref: 314
7
Objective: 9
33) What is the current net income?
A) $800,000
B) $660,000
C) $140,000
D) $340,000
Answer: C
Diff: 2
Type: MC
Page Ref: 314
Objective: 9
34) Assuming there is excess capacity, what would be the effect of accepting a special order for 2,000 units
at a price of $64.00 per phone?
A) Net income would decrease by $32,000.
B) Net income would increase by $640,000.
C) Net income would increase by $12,000.
D) Net income would increase by $36,000.
Answer: B
Diff: 2
Type: MC
Page Ref: 299
Objective: 3
35) In a special order decision, fixed costs that do NOT differ between two alternatives are
A) of major importance to the decision.
B) considered opportunity costs.
C) important only if they are a material dollar amount.
D) irrelevant.
Answer: D
Diff: 1
Type: MC
Page Ref: 299
Objective: 3
36) Which of the following statements regarding special order decisions is false?
A) A fixed-cost element of an identical amount that is common among all alternatives is essentially
irrelevant.
B) Fixed cost per unit is equal to total fixed costs divided by a selected volume level.
C) The contribution approach offers more detailed information than does the absorption approach.
D) Fixed cost per unit is a necessary piece of information in the decision-making process.
Answer: D
Diff: 1
Type: MC
Page Ref: 299
Objective: 3
37) A cost that will NOT continue if an ongoing operation is changed or deleted is a(n)
A) avoidable cost.
B) common cost.
C) sunk cost.
D) differential cost.
Answer: A
Diff: 1
Type: MC
Page Ref: 296
8
Objective: 1
9
38) Costs that continue even if an operation is halted are

A) common costs.
B) sunk costs.
C) unavoidable costs.
D) variable costs.
Answer: C
Diff: 1
Type: MC
Page Ref: 296
Objective: 1
Ulmer Company has three product lines, X, Y, and Z. The following information is available:
Sales
Variable costs
Contribution margin
Fixed costs: Avoidable
Fixed costs: Unavoidable
Operating income
X
$20,000
1,200
$ 8,000
3,000
2,000
$ 3,000
Z
$30,000
16,000
$14,000
$8,000
5,000
$ 3,000
6,000
3,000
$ 5,000
2,000
1,800
$( 800)
39) Ulmer Company is thinking of dropping product line Z since it is losing money. Assuming Ulmer
drops line Z and does NOT replace it, the operating income will
A) increase by $ 800.
B) increase by $1,000.
C) decrease by $1,000.
D) decrease by $1,800.
Answer: C
Diff: 2
Type: MC
Page Ref: 304
Objective: 5
40) Assuming product line Z is discontinued and the space formerly used to produce product Z is rented
for $4,000 per year, operating income will
A) increase $2,200.
B) increase $3,000.
C) increase $4,000.
D) increase $4,800.
Answer: B
Diff: 2
Type: MC
Page Ref: 304
Objective: 5
10
41) Assume that product line Z is discontinued and replaced with product line Y. This will double the
production and sales of product line Y without increasing fixed costs. Operating income will
A) increase $4,200.
B) increase $13,000.
C) increase $14,000.
D) decrease $1,000.
Answer: B
Diff: 2
Type: MC
Page Ref: 304
Objective: 5
42) Assuming Ulmer Company can increase the selling price of product Z to $10,000, all other
information remaining constant, operating income will
A) increase $1,200.
B) decrease $1,200.
C) decrease $2,000.
D) increase $2,000.
Answer: D
Diff: 2
Type: MC
Page Ref: 304
Objective: 5
Eagan Company has three product lines, A, B and C. The following information is available:
Sales
Variable costs
Contribution margin
Fixed costs: Avoidable
Fixed costs: Unavoidable
Operating income
A
$30,000
19,000
$ 11,000
B
$19,000
10,500
$ 8,500
C
$10,500
3,000
$ 3,000
5,000
2,500
$ 3,500
4,500
6,000
$ 5,000
1,000
750
$ 1,250
43) Eagan is thinking of dropping product line B since it is losing money. Assuming Eagan drops line B
and does NOT replace it, the operating income will
A) increase $ 2,000.
B) decrease $ 4,000.
C) decrease $10,500.
D) not change.
Answer: B
Diff: 2
Type: MC
Page Ref: 304
Objective: 5
11
44) Assuming product line B is discontinued and the space formerly used to produce product B is rented
for $5,000 per year, operating income will
A) increase $5,000.
B) increase $7,000.
C) increase $1,000.
D) decrease $1,000.
Answer: C
Diff: 2
Type: MC
Page Ref: 304
Objective: 5
45) Assume that product line B is discontinued and replaced with product line C. This will triple the
production and sales of product line C without increasing fixed costs. Operating income will
A) increase $2,000.
B) increase $6,000.
C) decrease $2,000.
D) not change.
Answer: A
Diff: 2
Type: MC
Page Ref: 304
Objective: 5
46) Assuming Eagan Company can increase the selling price of product B to $21,000, all other
information remaining constant, operating income will
A) decrease $ 2,000.
B) decrease $ 6,000.
C) increase $21,000.
D) increase $ 2,000.
Answer: D
Diff: 2
Type: MC
Page Ref: 304
Objective: 5
47) The item that restricts or constrains the production or sale of a product or service is the
A) limiting factor.
B) selling price.
C) unlimited resource.
D) contribution approach.
Answer: A
Diff: 2
Type: MC
Page Ref: 304
Objective: 5
48) The average number of times the inventory is sold per year is the
A) inventory shortage.
B) cost of goods sold.
C) cost of goods available for sale.
D) inventory turnover.
Answer: D
Diff: 1
Type: MC
Page Ref: 296
Objective: 1
12
Drummer produces two products, A and B. The following information is available for these two
products:

Variable cost per unit
Total fixed costs
Total production capacity
A
$14.00
12.00
$ 10,000
10,000 units
B
$10.00
6.00
49) If a maximum of 10,000 units of A and/or B can be sold, it is best to

A) produce B only.
B) produce A only.
C) produce 2,500 units of A and 7,500 units of B.
D) produce 5,000 units of A and 5,000 units of B.
Answer: A
Diff: 2
Type: MC
Page Ref: 307
50) If only 5,000 units of each product, A and B can be sold, it would be best to
A) discontinue A as it results in a net loss of $2.00 per unit, and continue producing B.
B) produce only 2,500 units of A and 5,000 units of B to maximize profits.
C) produce 5,000 units of both A and B.
D) discontinue the production of both A and B.
Answer: C
Diff: 2
Type: MC
Page Ref: 307
Beem Corporation manufactures two products, X and Y. The following information was gathered:
X
Total fixed costs
$36.00
26.00
$ 50,000
$44.00
36.00
51) Beem Corporation manufactures and sells three units of X for every two units of Y. If the company
sold 1,500 units of X, it would report operating income (loss) of
A) $23,000.
B) $15,000.
C) $(35,000).
D) $(27,000).
Answer: D
Diff: 2
Type: MC
Page Ref: 307
13
52) If Beem Corporation could produce and sell either 3,000 units of X or 2,000 units of Y at full capacity,
it should produce and sell
A) 2,000 units of Y and none of X.
B) 1,000 units of Y and 1,500 units of X.
C) 3,000 units of X and none of Y.
D) either X or Y, there is no difference.
Answer: C
Diff: 2
Type: MC
Page Ref: 307
53) Assume Beem Corporation could produce and sell any mix of product X and Y at full capacity. If
product X takes twice as long to manufacture as product Y and only 200,000 hours of plant capacity are
available, it is best for Beem to produce
A) only X.
B) only Y.
C) either X or Y, there is no difference.
D) an equal number of X and Y.
Answer: B
Diff: 2
Type: MC
Page Ref: 307
54) Which of the following is NOT a pricing decision?
A) Setting the price of a new product.
B) Responding to a special order price
C) Responding to a new price of a competitor
D) Setting the price of products sold under private labels
Answer: B
Diff: 1
Type: MC
Page Ref: 311
Objective: 8
55) The additional cost resulting from producing and selling one additional unit is called the
A) marginal cost.
B) common cost.
C) opportunity cost.
D) markup.
Answer: A
Diff: 1
Type: MC
Page Ref: 309
Objective: 7
56) The effect of price changes on sales volume is
A) marginal revenue.
B) price elasticity.
C) maximization of profits.
D) imperfect competition.
Answer: B
Diff: 1
Type: MC
Page Ref: 309
Objective: 7
14
57) In perfect competition, the profit-maximizing volume is the quantity at which

A) marginal cost equals marginal revenue.
B) marginal revenue exceeds marginal cost.
C) marginal revenue exceeds price.
D) price exceeds marginal cost.
Answer: A
Diff: 1
Type: MC
Page Ref: 309
Objective: 7
58) A firm can sell as much of a product as it can produce at a single market price in
A) perfect competition.
B) imperfect competition.
C) price elasticity.
D) a marginal cost curve.
Answer: A
Diff: 1
Type: MC
Page Ref: 309
Objective: 7
59) A firm price will influence the quantity it sells in
A) perfect competition.
B) imperfect competition.
C) price elasticity.
D) a marginal cost curve.
Answer: B
Diff: 1
Type: MC
Page Ref: 309
Objective: 7
60) ________ is the additional cost resulting from producing and selling one additional unit.
A) Perfect competition
B) Unit cost
C) Marginal cost
D) Product cost
Answer: C
Diff: 1
Type: MC
Page Ref: 309
Objective: 7
15
Van Horn, Inc. has been producing and selling 20,000 meters a year. The company has the capacity to
produce 25,000 meters with its present facilities. The following information is also available:
$300
$110
50
$1,280,000
560,000
61) The least that Van Horn would be willing to sell a meter for in the short run would be
A) $160.00.
B) $300.00.
C) $48.00.
D) $66.40.
Answer: A
Diff: 2
Type: MC
Page Ref: 314
Objective: 9
62) The product strategy in which companies first determine the price at which they can sell a new
product and then design a product that can be produced at a low enough cost to provide an adequate
profit margin is referred to as
A) full costing.
B) target costing.
C) predatory pricing.
D) discriminatory pricing.
Answer: B
Diff: 1
Type: MC
Page Ref: 311
Objective: 8
63) Predatory pricing is establishing prices so low that competitors are driven out of the market so that
the surviving company then has no significant competition and can
A) sell as much as it produces.
B) lower prices to stimulate the economy.
C) raise prices dramatically.
D) discriminate against certain customers.
Answer: C
Diff: 1
Type: MC
Page Ref: 311
Objective: 8
64) Charging different prices to different customers for the same product or service is known as
A) predatory pricing.
B) target costing.
C) full costing.
D) discriminatory pricing.
Answer: D
Diff: 1
Type: MC
Page Ref: 311
Objective: 8
16
65) The amount by which price exceeds cost is the

A) marginal cost.
B) marginal revenue.
C) full cost.
D) markup.
Answer: D
Diff: 1
Type: MC
Page Ref: 311
Objective: 8
66) The total of all manufacturing costs plus the total of all selling and administrative costs is equal to
A) marginal cost.
B) target cost.
C) full cost.
D) contribution cost.
Answer: C
Diff: 1
Type: MC
Page Ref: 309
Objective: 7
67) All of the following represent a popular markup formula for pricing EXCEPT
A) as a percentage of fixed costs.
B) as a percentage of variable manufacturing costs.
C) as a percentage of full costs.
D) as a percentage of absorption costs.
Answer: A
Diff: 1
Type: MC
Page Ref: 311
Objective: 8
68) The contribution approach to pricing involves all of the following EXCEPT
A) it assumes a given volume level.
B) it displays variable and fixed cost behaviour.
C) it emphasizes cost-volume-profit relationships.
D) it makes it easier for managers to prepare price schedules at different volume levels.
Answer: A
Diff: 1
Type: MC
Page Ref: 314
Objective: 8
17
Baker Company budgeted the following costs for the production of its one and only product, blades, for
the next fiscal year:
Direct materials
Direct labour
Total costs
$187,500
130,000
140,000
107,500
60,000
80,000
$705,000
Baker has a target profit of $150,000.

69) The average target profit percentage for setting prices as a percentage of total manufacturing costs
would be
A) 245 percent.
B) 185 percent.
C) 125 percent.
D) 51 percent.
Answer: D
Diff: 2
Type: MC
Page Ref: 320
Objective: 10
70) The average target profit percentage for setting prices as a percentage of prime costs would be
A) 54 percent.
B) 87 percent.
C) 169 percent.
D) 122 percent.
Answer: C
Diff: 2
Type: MC
Page Ref: 320
Objective: 10
71) The average target profit percentage for setting prices as a percentage of total variable costs would be
A) 328 percent.
B) 36 percent.
C) 228 percent.
D) 65 percent.
Answer: D
Diff: 2
Type: MC
Page Ref: 320
Objective: 9
18
72) The average target profit percentage for setting prices as a percentage of total costs would be
A) 328 percent.
B) 36 percent.
C) 228 percent.
D) 18 percent.
Answer: D
Diff: 2
Type: MC
Page Ref: 320
Objective: 10
73) The average target profit percentage for setting prices as a percentage of variable manufacturing costs
would be
A) 328 percent.
B) 87 percent.
C) 228 percent.
D) 65 percent.
Answer: B
Diff: 2
Type: MC
Page Ref: 320
Objective: 10
Hartwig Company prepared the following budget for 20X4 for its product:
Direct materials
Direct labour
Total costs
$30,000
62,500
42,500
62,500
55,000
70,000
$327,500
Hartwig has a target profit of $105,000 for 20X4.

74) The average target profit percentage for setting prices as a percentage of total manufacturing costs
would be
A) 293 percent.
B) 198 percent.
C) 119 percent.
D) 62 percent.
Answer: C
Diff: 3
Type: MC
Page Ref: 320
Objective: 10
19
75) The average target profit percentage for setting prices as a percentage of prime costs would be
A) 254 percent.
B) 368 percent.
C) 84 percent.
D) 39 percent.
Answer: B
Diff: 2
Type: MC
Page Ref: 320
Objective: 10
76) The average target profit percentage for setting prices as a percentage of total variable costs would be
A) 72 percent.
B) 128 percent.
C) 236 percent.
D) 344 percent.
Answer: B
Diff: 2
Type: MC
Page Ref: 320
Objective: 10
77) The average target profit percentage for setting prices as a percentage of total costs would be
A) 72 percent.
B) 32 percent.
C) 236 percent.
D) 344 percent.
Answer: B
Diff: 2
Type: MC
Page Ref: 320
Objective: 10
The Chou Company provided the following information regarding its one and only product, rollers:
Direct labour
$45,000
30,000
42,000
8,000
28,000
12,000
20
10,000
78) The unit cost of a roller under the absorption approach is

A) $5.00.
B) $11.50.
C) $16.50.
D) $14.50.
Answer: D
Diff: 2
Type: MC
Page Ref: 314
Objective: 9
20
79) The unit cost of a roller using the contribution approach is

A) $16.50.
B) $5.00.
C) $14.50.
D) $11.50.
Answer: D
Diff: 2
Type: MC
Page Ref: 314
Objective: 9
Hartwig Company prepared the following budget for 20X4 for its product:
Direct materials
Direct labour
Total costs
$30,000
62,500
42,500
62,500
55,000
70,000
$327,500
Hartwig has a target profit of $105,000 for 20X4.

80) The average target profit percentage for setting prices as a percentage of variable manufacturing costs
would be
A) 72 percent.
B) 31 percent.
C) 220 percent.
D) 344 percent.
Answer: C
Diff: 2
Type: MC
Page Ref: 314
Objective: 9
81) The predicted future costs and revenues that will differ among alternative courses of action.
Answer: Relevant information
Diff: 1
Type: SA Page Ref: 296
Objective: 1
82) Any method of making a choice, sometimes requiring elaborate quantitative procedures.
Answer: Decision model
Diff: 1
Objective: 1
83) Costs that will not continue if an ongoing operation is changed or deleted.
Answer: Avoidable costs
Diff: 1
Objective: 1
21
84) Costs that continue even if an operation is halted.

Answer: Unavoidable costs
Diff: 1
Objective: 1
85) The item that restricts or constrains the production or sale of a product or service.
Answer: Limiting factor
Diff: 1
86) A market in which a firm can sell as much of a product as it can produce, all at a single market price.
Answer: Perfect competition
Diff: 1
Objective: 7
87) The additional cost resulting from producing and selling one additional unit.
Answer: Marginal cost
Diff: 1
Objective: 5
88) The effect of price changes on sales volume.
Answer: Price elasticity
Diff: 1
Objective: 7
89) Charging different prices to different customers for the same product or service.
Answer: Discriminatory pricing
Diff: 1
Objective: 8
90) The amount by which price exceeds cost.
Answer: Markup
Diff: 1
Objective: 8
22
91) Radke, Inc. gathered the following information regarding its one and only product:
Direct labour
$14,000
24,000
28,000
18,000
30,000
16,000
5,000
$30
Required:
a. Compute the unit manufacturing cost of the product under the absorption approach.
b. Compute the unit manufacturing cost of the product under the contribution approach.
c. Compute the effect on net income of accepting a special order for 1,000 units at $20 per unit assuming
excess capacity.
Answer:
a. $14,000 + $24,000 + $28,000 + $18,000 = $84,000/5,000 = $16.80 per unit
b. $14,000 + $24,000 + $28,000 + $30,000 = $96,000/5,000 = $19.20 per unit
c. $20.00 - $19.20 = $0.80 1,000 units = $800 increase in net income
Diff: 3
Type: ES
Page Ref: 314
Objective: 9
92) A method of determining the cost of a product or service based on the price that customers are
willing to pay.
Answer: Target costing
Diff: 1
Objective: 8
23
93) Irwin Company produces one and only one product called Faxman. The following information is
available:
Direct labour
$360,000
480,000
330,000
470,000
220,000
380,000
10,000
$240
Required:
a. Compute the unit manufacturing cost of a Faxman under the absorption approach.
b. Compute the unit manufacturing cost of a Faxman under the contribution approach.
c. Compute the effect on net income of accepting a special order for 1,000 at $160 per unit.
Answer:
a. $360,000 + $480,000 + $330,000 + $470,000 = $1,640,000/10,000 = $164 per unit
b. $360,000 + $480,000 + $330,000 + $220,000 = $1,390,000/10,000 = $139 per unit
c. $160.00 - $139.00 = $21.00 1,000 units = $21,000 increase to net income
Diff: 3
Type: ES
Page Ref: 314
Objective: 9
94) Moreland, Inc. has been producing and selling 50,000 units per year. They have excess capacity. The
following budget was prepared for next year:
$50

Selling and administrative
$32
10

Selling and administrative
$160,000
70,000
Required:
a. Compute the contribution approach cost of manufacturing one unit.
b. Compute the absorption approach cost of manufacturing one unit.
c. Compute the effect on net income if a special order for 2,000 units at a price of $44 is accepted.
Answer:
a. $32 + $10 = $42
b. ($160,000/50,000) + $32.00 = $35.20
c. $44 - $42 = $2 2,000 units = $4,000 increase in net income
Diff: 3
Type: ES
Page Ref: 314
Objective: 9
24
95) Muench Company has three departments. Data for the most recent year is presented below:
Sales
Variable expenses
Fixed expenses:
Unavoidable
Avoidable
M
$2,000
640
L
$1,000
260
B
$400
170
460
580
260
520
60
270
Required:
a. Compute the operating income of the company.
b. Compute the contribution margin and operating income of each department.
c. Should any department(s) be eliminated? Which one(s) and why?
Answer:
a. [($2,000 + $1,000 + $400) - ($640 + $460 + $580 + $260 + $260 + $520 + $170 + $60 + $270)] =
$3,400 - $3,220 = $180
b. M:
$2,000 - $ 640 = $1,360 contribution margin
$1,360 - $1,040 = $ 320 operating income
L:
$1,000 - $ 260 = $ 740 contribution margin

$ 740 - $ 780 = $ (40) operating loss
B:
$ 400 - $ 170 = $ 230 contribution margin

$ 230 - $ 330 = $ (100) operating loss
c. Department B should be eliminated. Sales revenue of $400 does not cover the variable costs and the
avoidable fixed costs, which total $440. By eliminating this department, the operating income of the
company will increase $40.
Diff: 3
Type: ES
Page Ref: 314
Objective: 9
25
96) Morrow, Inc. has three departments. Data for the most recent year is presented below:
Sales
Variable expenses
Fixed expenses:
Unavoidable
Avoidable
A
$20,000
11,400
B
$15,000
8,200
C
$11,200
2,600
2,400
9,200
2,000
5,800
2,200
1,800
Required:
a. Compute the operating income of the company.
b. Compute the contribution margin and the operating income of each department.
c. Should any department(s) be eliminated? Which one(s) and why?
Answer:
a. [($20,000 + $15,000 + $11,200) - ($11,400 + $2,400 + $9,200 + $8,200 + $2,000 + $5,800 + $2,600 +
$2,200 + $1,800)] = $46,200 - $45,600 = $600
b.
A:
B:
C:
$20,000 - $11,400 = $ 8,600 contribution margin

$ 8,600 - $11,600 = $(3,000) operating loss
$15,000 - $ 8,200 = $ 6,800 contribution margin
$ 6,800 - $ 7,800 = $(1,000) operating loss
$11,200 - $ 2,600 = $ 8,600 contribution margin
$ 8,600 - $ 4,000 = $ 4,600 operating income
c. Department A should be eliminated. Sales revenue of $20,000 does not cover the variable expenses
and the avoidable fixed costs of $20,600. Operating income of the company would increase $600 if
Department A was eliminated.
Diff: 3
Type: ES
Page Ref: 314
Objective: 9
26
97) Mudd Corp. manufactures two styles of table lamps, Gold and Silver. The following data is available:

Machine hours required
Total fixed costs
Gold
Silver
$50
$70
$34
$46
1.6
3
$60,000
Mudd can sell a maximum of 10,000 units of each style of lamp. Machine hour capacity is 25,000 hours
per year.
Required:
a. Which lamp has the highest contribution margin per unit?
b. Which lamp has the highest contribution margin per hour?
c. How many lamps of each style should be produced to maximize income, and what is the maximum
income?
Answer:
a. The Silver lamp has the highest contribution margin per unit of $24.
b. The Gold lamp has the highest contribution margin per hour of $10.
c. To maximize income, Mudd should produce 10,000 units of the Gold that would use up 16,000 hours,
and 3,000 units of the Silver that would use up the other 9,000 hours. This would produce an income of
$172,000 calculated as follows:
10,000 units $16 cm =
3,000 units $24 cm =
Diff: 3
Type: ES
$160,000
72,000
$232,000 - $60,000 fixed costs = $172,000
Page Ref: 307
27
98) Hawbaker Company manufactures two styles of mops, Wood and Steel. The following information is
available:

Labour hours required
Total fixed costs
Wood
Steel
$15
$13
$6
$9
3
2
$12,000
Hawbaker can sell a maximum of 5,000 units of each style of mop. Labour hour capacity for the year is
20,000 hours.
Required:
a. Which style has the highest contribution margin per unit?
b. Which style has the highest contribution margin per hour?
c. How many of each style of mop would Hawbaker have to produce to maximize income? What would
the maximum income level be?
Answer:
a. Wood would have the highest contribution margin per unit of $9.
b. Wood would have the highest contribution margin per hour of $3.
c. Hawbaker should produce 5,000 units of Wood using up 15,000 of the labour hours and 2,500 units of
Steel using up the other 5,000 labour hours available. This would produce an income of $31,000
calculated as follows:
5,000 units $9 cm =
2,500 units $4 cm =
Diff: 3
Type: ES
$45,000
10,000
$55,000 - $12,000 fixed costs = $43,000
Page Ref: 307
28
99) Drost, Inc. has budgeted sales of $150,000 with the following budgeted costs:
Direct materials
Direct labour
Factory overhead:
Variable
Fixed
Selling and administrative expenses:
Variable
Fixed
$31,500
20,500
18,500
28,000
12,000
16,000
Compute the average target profit percentage for setting prices as a percentage of:
a. Prime costs.
b. Total costs.
c. Total variable costs.
d. Variable manufacturing costs.
e. Total manufacturing costs.
Answer:
a. $31,500 + $20,500 = $52,000 ($150,000 - $52,000)/$52,000 = 188 percent
b.
$31,500 + $20,500 + $18,500 + $28,000 + $12,000 + $16,000 = $126,500

($150,000 - $126,500)/$126,500 = 19 percent
c.
$31,500 + $20,500 + $18,500 + $12,000 = $82,500

($150,000 - $82,500)/$82,500 = 82 percent
d. $31,500 + $20,500 + $18,500 = $70,500

($150,000 - $70,500)/$70,500 = 113 percent
e.
$31,500 + $20,500 + $18,500 + $28,000 = $98,500

($150,000 - $98,500)/$98,500 = 52 percent
Diff: 3
Type: ES
Page Ref: 314
Objective: 9
29
100) Ellson Corp. has budgeted sales of $487,500 with the following budgeted costs:
Direct materials
Direct labour
Factory overhead:
Variable
Fixed
Selling and administrative expenses:
Variable
Fixed
$105,000
82,500
$ 60,000
67,500
$ 45,000
62,500
Compute the average target profit percentage for setting prices as a percentage of:
a. Total manufacturing costs.
b. Total variable costs.
c. Prime costs.
d. Total costs.
e. Variable manufacturing costs.
Answer:
a. $105,000 + $82,500 + $60,000 + $67,500 = $315,000
($487,500 - $315,000)/$315,000 = 55 percent
b. $105,000 + $82,500 + $60,000 + $45,000 = $292,500
($487,500 - $292,500)/$292,500 = 67 percent
c.
$105,000 + $82,500 = $187,500

($487,500 - $187,500)/$187,500 = 160 percent
d. $105,000 + $82,500 + $60,000 + $67,500 + $45,000 + $62,500 = $422,500

($487,500 - $422,500)/$422,500 = 15 percent
e. $105,000 + $82,500 + $60,000 = $247,500
($487,500 - $247,500)/$247,500 = 97 percent
Diff: 3
Type: ES
Page Ref: 314
Objective: 9
30

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Chapter 8

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Management Accounting, Cdn.

22) ________ is the process of putting a decision into action.

Units produced and sold

26) What is the current net income?

28) Currently, the contribution approach cost of manufacturing one meter is

Units produced and sold

31) The unit cost of a phone under the absorption approach is

38) Costs that continue even if an operation is halted are

Selling price per unit

49) If a maximum of 10,000 units of A and/or B can be sold, it is best to

57) In perfect competition, the profit-maximizing volume is the quantity at which

65) The amount by which price exceeds cost is the

Baker has a target profit of $150,000.

Hartwig has a target profit of $105,000 for 20X4.

Units produced and sold

78) The unit cost of a roller under the absorption approach is

79) The unit cost of a roller using the contribution approach is

Hartwig has a target profit of $105,000 for 20X4.

84) Costs that continue even if an operation is halted.

Variable costs per unit:Manufacturing

Fixed costs in total:Manufacturing

$1,000 - $ 260 = $ 740 contribution margin

$ 400 - $ 170 = $ 230 contribution margin

$20,000 - $11,400 = $ 8,600 contribution margin

Selling price per unit

Selling price per unit

$31,500 + $20,500 + $18,500 + $28,000 + $12,000 + $16,000 = $126,500

$31,500 + $20,500 + $18,500 + $12,000 = $82,500

d. $31,500 + $20,500 + $18,500 = $70,500

$31,500 + $20,500 + $18,500 + $28,000 = $98,500

$105,000 + $82,500 = $187,500

d. $105,000 + $82,500 + $60,000 + $67,500 + $45,000 + $62,500 = $422,500

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