1. Chapman Inc. has several outdated computers that cost a total of $8,600 and could be sold as scrap for $4,600. They could be updated for an additional $2,400 and sold. If Chapman updates the computers and sells them, net income will increase by $5,400. What amount would be considered sunk costs?
Sunk costs are the costs already incurred – so only the $8600 original cost is a sunk cost.
2. It costs Chapman Company $18.40 of variable and $3.75 of fixed costs to produce one bathroom scale, which normally sells for $47.00. A foreign wholesaler offers to purchase 4,000 scales at $26.90 each. Chapman would incur special shipping costs of $2.75 per scale if the order were accepted. Chapman has sufficient unused capacity to produce the 4,000 scales. If the special order is accepted, what will be the effect on net income?
A) $107,600 increase
B) $23,000 increase
C) $8,000 increase
D) $23,000 decrease
4000 scales x ($26.90 sale price – $18.40 variable cost – $3.75 fixed cost – $2.75 shipping) = 4000 x $2 = $8,000 increase to net income
6. Mesh Merchandising Company expects to purchase $86,000 of materials in July and $118,000 of materials in August. 21ree-quarters of all purchases are paid for in the month of purchase, and the other one-fourth are paid for in the month following the month of purchase. How much will August’s cash disbursements for materials purchases be?
July purchases paid in August = 25% x $86,000 = 21,500
+Aug. purchases paid in Aug. = 75% x 118,000 = 88,500
8. The following information is taken from the production budget for the first quarter:
Beginning inventory in units 883
Sales budgeted for the quarter 338,000
Capacity in units of production facility 350,000
How many finished goods units should be produced during the quarter if the company desires 2,100 units available to start the next quarter?
Budgeted sale 338,000 – beginning inventory 883 + desired ending inventory 2,100 = 339,217
9. Sala Co. is contemplating the replacement of an old machine with a new one. The following information has been gathered:
Old Machine New Machine
Price $300,000 $600,000
Accumulated Depreciation 90,000 -O-
Remaining useful life 10 years -O-
Useful life -0- 10 years
Animal operating costs $240,000 $180,600
If the old machine is replaced, it can be sold for $24,000.
The net advantage (disadvantage) of replacing the old machine is
Purchase price of new machine -$600,000
Salvage value of old machine +$24,000
Annual operating costs savings +(240,000 – 180,600) x 10 years = 59,400 x 10 = $594,000
= net advantage +$18,000
10. Astor Manufacturing has the following budgeted sales: January $120,000, February $180,000, and March $150,000. 40% of the sales are for cash and 60% are on credit. For the credit sales, 50% are collected in the month of sale, and 50% the next month. The total expected cash receipts during March are:
March cash sales $150,000 x 40% = $60,000
+March credit sales $150,000 x 60% x 50% = $45,000
+February credit sales $180,000 x 60% x 50% = $54,000
=total cash receipts for March $159,000
12. Comma Co. makes and sells widgets. The company is in the process of preparing its selling and administrative expense budget for the month. The following budget data are available:
Item Variable Cost Per Unit Sold Monthly Fixed Cost
Sales commissions $1 $10,000
Executive salaries $120,000
Deprecíation on office equipment $4,000
Other $2 $6,000
Expenses are paid in the month incurred. If the company has budgeted to sell 80,000 widgets in October, how much is the total budgeted selling and administrative expenses for October?
Variable costs = ($1 + $3 + $4 +$2) x 80,000 units = 10 x 80,000 = $800,000
+ Fixed costs = 10,000 + 120,000 + 4,000 +$6,000 = $140,000
13. The cost to produce Part A was $82 per unit in 2012. During 2013, it has increased to $89 per unit. In 2013, Supplier Company has offered to supply Part A for $75 per unit. For the make-or-buy decision,
A) incremental revenues are $14 per unit.
B) incremental costs are $7 per unit.
C) net relevant costs are $7 per unit.
D) differential costs are $14 per unit.
$89 in house cost- $75 outsourcing cost = $14 positive increase to revenue per unit
15. At January 1, 2013, Farley, Inc. has beginning inventory of 2,000 surfboards. Farley estimates it will seli 5,000 units during the first quarter of 2013 with a 12% increase in sales each quarter. Farley’s policy is to maintain an ending inventory equal to 25% of the next quarter’s sales. Each surfboard costs $100 and is sold for $150. How much is budgeted sales revenue for the third quarter of 2013?
Projected sales for 2nd quarter : 5,000 units x 1.12 = 5600 units
Projected sales for 3rd quarter = 5600 units x 1.12 = 6272 units
Sales revenue = $150 sales price x 6272 units = $940,800
16. If there were 68,000 pounds of raw materials on hand on January 1, 135,000 pounds are desired for inventory at January 31, and 400,000 pounds are required for January production, how many pounds of raw materials should be purchased in January?
A) 332,000 pounds
B) 197,000 pounds —
C) 535,000 pounds
D) 467,000 pounds
400,000 required + 135,000 desired ending inventory – 68,000 beginning inventory = 467,000
18. On January 1, Stranbrough Company has a beginning cash balance of $21,000. During the year, the company expects cash disbursements of $169,400 and cash receipts of $154,000. If Stranbrough requires an ending cash balance of $20,000, the company must borrow
Beg. Cash $21,000
+ cash receipts $154,000
Cash disbursements $169,400
Ending cash required $20,000
= -$14,400 required borrowing
7. Walton, Inc. is considering the following alternatives:
Revenues $120,000 $120,000
Variable costs 32,000 43,000
Fixed costs 34,000 51,000
Which of the following are relevant in choosing between the alternatives?
B) Variable costs and fixed costs
C) Fixed costs
D) Variable costs
Fixed and variable costs are relevant since they are different under each alternative.
11. Kalamoo produces several products that can be sold at the split-off point or then sold processed further.
The following results are from a recent period:
Product Sales Value At Split-Off Additional Variable Costs Sales Value After Further Processing
Green Lumber 75,200 12,000 86,200
Rough Lumber 79,500 8,000 88,500
Sawdust 45,000 20,000 67,000
Which products should be processed further?
A) All three products
B) Green lumber and rough lumber
C) Rough lumber and sawdust
D) Green lumber and sawdust
Only green lumber should not be processed further since the sales value at split-off $75,200 + additional variable costs $12,000 = $87,200 which is more than the sales value after further processing of $86,200.
19. Lytle Company reported the following information for 2013:
Octvber November December
$230,000 $220,000 $270,000
$120,000 $128,000 $144,000
All sales are on credit.
Customer amounts on account are collected 50% in the month of sale and 50% in the following month.
Cost of goods sold is 35% of sales.
Lytle purchases and pays for merchandise 60% in the month of acquisition and 40% in the following month.
Accounts payable is used only for inventory acquisitions.
How much cash will Lytle receive during November?
We need to add 50% of November sales and 50% of October sales to get the answers.
50% x $220,000 + 50% x 230,000 = 110,000 + 115,000 = $225,000
22. Walton Division has the following data:
Variable expenses 250,000
Fixed expenses 476,000
The fixed costs are not awidable and must be allocated to profitable divisions if the segment is eliminated. What will be the incrementa) effect on net income if Walton Division is eliminated?
A) $410,000 decease
B) $476,000 decrease
C) $66,000 íncrease
D) Cannot be determined from the data provided.
Sales $660,000 – variable costs $250,000 = $410,000 profit to be removed from income if Walton is eliminated.
25. A company’s unit costs based on 500,000 units are:
Variable costs $32
Fixed costs 20
The normal unit sales price per unit is $110. A special order from a foreign company has been received for 4,000 units at $90 a unit. In order to fulfill the order, 2,000 units of regular sales would have to be foregone. The opportunity cost associated with this order is
The opportunity cost is the contribution margin foregone:
2,000 units x ($110 sales price – $32 variable costs) = 2000 x $78 = $156,000
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