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Exam 30: Cost-Revenue Analysis for Decision Making

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Question 1

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A company has sales of $100,000, ending finished goods inventory of $9,000, variable manufacturing costs of $50,000, and fixed manufacturing costs of $28,000 for the year. Assuming the company uses direct costing, the cost of goods sold for the year is

A) $22,000.
B) $31,000.
C) $59,000.
D) $13,000.

E) B) and C)
F) B) and D)

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Question 2

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The data given below is taken from the budgeted income statement of the Arrow Corporation for 2013. It shows the projected net income or loss for each of the firm's three products. Management is concerned about the budgeted loss for Product C and wants to discontinue it. Prepare an analysis indicating the effects of discontinuing Product C. Based on the analysis, indicate the decision that should be made. $\begin{array}{c}\begin{array}{lr}& \text { Product A }\\\text { Sales }&\underline{ \$ 35,000} \\\text { Cost of Goods Sold } & \\\text { Direct Materials } &\$5,000 \\\text { Direct Labor } & \$ 7,000 \\\text { Mfg. Overhead } & \underline{3,500} \\\text { Total } &\underline{ \$ 15,500 }\\\text { Gross Profit on Sales } & \$ 19,500 \\\text { Operating Expenses } & \underline{13,000} \\\text { Net Income or (Loss) } &\underline{ \$ 6,500}\end{array}\begin{array}{c}\text { Product B}\\ \underline{ \$ 90,000 }\\\\\$ 11,000 \\16,000\\ \underline{8,000}\\ \underline{\$ 35,000} \\ \$ 55,000 \\ \underline{24,000}\\ \underline{\$ 31,000} \end{array}\begin{array}{c}\text { Product C}\\ \underline{ \$ 20,000 }\\\\\$ 4,000 \\6,000\\ \underline{3,000}\\ \underline{\$ 13,000} \\ \$ 7,000 \\ \underline{10,000}\\ \underline{(\$ 3,000)} \end{array}\begin{array}{c}\text { Total}\\ \underline{ \$ 145,000 }\\\\\$ 20,000 \\29,000\\ \underline{14,500}\\ \underline{\$ 63,500} \\ \$ 81,500 \\ \underline{47,000}\\ \underline{(\$ 34,500)} \end{array}\end{array}$ Additional information: (a.) Materials and labor are variable costs. (b.) Total manufacturing overhead is applied at 50 percent of the direct labor costs. (c.) Variable overhead is 10 percent of the direct labor costs. (d.) Fixed overhead totals $11,600 a year. (e.) Operating expenses include variable costs at 20 percent of sales dollars. (f.) Fixed operating expenses total $18,000. (g.) Fixed overhead costs and fixed operating expenses are expected to continue if Product C is eliminated.

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Decision: The analysis indica...

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Question 3

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If the finished goods inventory increases during the period, the reported net income will be larger under direct costing than under absorption costing.

A segment of a business probably should be discontinued if it cannot produce a(n) __________________.

Using the absorption method, cost of goods manufactured for the year is:

A segment of a business reported a contribution margin of $36,000 and controllable fixed costs of $12,000. If the segment had been eliminated, the company-wide net income would have been

Which inventory costing system is not acceptable for financial reporting purposes?

Using direct costing, the manufacturing margin is:

In deciding whether to manufacture or to purchase a product, fixed costs are generally ignored.

The Sloan Corporation is considering the purchase of a new factory machine at a cost of $30,000. The machine would perform a function that is now being performed by hand. The new machine would have a life of five years and would produce 5,000 units a year (the current output). Direct labor costs would be reduced by $1.10 a unit. Variable overhead costs would be reduced by $0.35 a unit. Fixed costs, other than depreciation, would increase by $2,500 a year. 1. Should the machine be purchased? 2. What impact would the decision have on net income?

The variable operating expenses are deducted from the manufacturing margin to arrive at the ____________________ on sales.

On an income statement prepared with a direct costing approach, the excess of sales over the cost of goods sold, based on variable costs only, is referred to as

A segment of a business reported a contribution margin of $36,000 and common costs of $12,000. If the segment had been eliminated, the company-wide net income would have been

The direct costing procedure is not used for financial reporting.

The difference in cost between one alternative and another is called a(n) ____________________ cost.

Under direct costing, all fixed manufacturing overhead is charged off as a current expense.

The data given below pertains to the operations of the Newton Products Corporation for the year ended December 31, 2013 $\begin{array} { l r } \text { Sales: } & 3,400 \text { units at } \$ 55 \text { a unit } \\\text { Variable manufacturing costs: } & 3,200 \text { units at } \$ 25 \text { a unit } \\\text { Variable selling and admin. expenses: } & \$ 5 \text { a unit } \\\text { Fixed manufacturing costs: } & \$ 24,000 \\\text { Fixed selling and admin. expenses: } & \$ 16,000 \\\text { Finished goods inventory, Jan. 1, 2013: } & 500 \text { units } \\\text { Finished goods inventory, December 31, } & 600 \text { units }\end{array}$ -Based on the information given prepare an income statement for the year using the absorption costing approach. Assume that the beginning finished goods inventory had a cost of $35 per unit.

Under the contribution margin approach, common costs are deducted from the total of all segment contributions to determine the company's profit.

Which of the following should NOT be a consideration when deciding whether to make or buy a part?

Before deciding whether to purchase new equipment, a firm should consider employee morale and the quality of the new equipment's output.