ACCOUNTING- Lampshire Inc. is considering using stocks of an old raw material in a special project

1.

Lampshire
Inc. is considering using stocks of an old raw material in a special project.
The special project would require all 160 kilograms of the raw material that
are in stock and that originally cost the company $1,336 in total. If the
company were to buy new supplies of this raw material on the open market, it
would cost $7.35 per kilogram. However, the company has no other use for this
raw material and would sell it at the discounted price of $6.65 per kilogram
if it were not used in the special project. The sale of the raw material
would involve delivery to the purchaser at a total cost of $77 for all 160
kilograms. What is the relevant cost of the 160 kilograms of the raw material
when deciding whether to proceed with the special project?

$1,064
$987
$1,162
$1,176
2.

Part A42
is used by Elgin Corporation to make one of its products. A total of 23,000
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:

Per
Unit

Direct materials

$8.90

Direct labor

$10.30

Variable manufacturing
overhead

$6.90

Supervisor’s salary

$7.00

Depreciation of
special equipment

$9.40

Allocated general
overhead

$6.70

An
outside supplier has offered to make the part and sell it to the company for
$36.00 each. If this offer is accepted, the supervisor’s salary and all of
the variable costs, including the direct labor, 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. In addition, the space used to make
part A42 could be used to make more of one of the company’s other products,
generating an additional segment margin of $30,000 per year for that product.
What would be the impact on the company’s overall net operating income of
buying part A42 from the outside supplier?

Net operating income
would decrease by $36,700 per year.
Net operating income
would decrease by $241,400 per year.
Net operating income
would increase by $30,000 per year.
Net operating income
would decrease by $299,000 per year.

3.

Iwasaki
Inc. is considering whether to continue to make a component or to buy it from
an outside supplier. The company uses 14,200 of the components each year. The
unit product cost of the component according to the company’s absorption cost
accounting system is given as follows:

Direct materials

$
10.00

Direct labor

7.00

Variable manufacturing
overhead

2.80

Fixed manufacturing
overhead

4.80

Unit product cost

$24.60

Assume
that direct labor is a variable cost. Of the fixed manufacturing overhead,
30% is avoidable if the component were bought from the outside supplier, the
remainder is not avoidable. In addition, making the component uses 1
minutes on the machine that is the company’s current constraint. If the
component were bought, time would be freed up for use on another product that
requires 2 minutes on this machine and that has a contribution margin of
$6.40 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? (Round your intermediate calculations and final answer to 2
decimal places.)

$27.80
$24.00
$21.24
$24.44
4.

Gwinnett Barbecue Sauce
Corporation manufactures a specialty barbecue sauce. Gwinnett has the capacity
to manufacture and sell 17,500 cases of sauce each year but is currently only
manufacturing and selling 16,000. The following costs relate to annual
operations at 16,000 cases:

Total
Cost

Variable manufacturing
cost

$288,000

Fixed manufacturing
cost

$60,000

Variable selling and
administrative cost

$48,000

Fixed selling and
administrative cost

$42,000

Gwinnett
normally sells its sauce for $40 per case. A local school district is
interested in purchasing Gwinnett’s excess capacity of 1,500 cases of sauce
but only if they can get the sauce for $20 per case. This special order would
not affect regular sales or total fixed costs or variable costs per unit. If
this special order is accepted, Gwinnett’s profits for the year will:

increase by $1,200
decrease by $1,500
decrease by $16,000
decrease by $11,500
5.

Farnsworth Television makes and
sells portable television sets. Each television regularly sells for $260. The
following cost data per television are based on a full capacity of 15,000
televisions produced each period:

Direct materials

$95

Direct labor

$75

Manufacturing overhead
(80% variable, 20% unavoidable fixed)

$45

A
special order has been received by Farnsworth for a sale of 2,500 televisions
to an overseas customer. The only selling costs that would be incurred on
this order would be $10 per television for shipping. Farnsworth is now
selling 7,500 televisions through regular distributors each period. What
should be the minimum selling price per television in negotiating a price for
this special order?

$260
$206
$215
$216
6.

Wiacek Corporation has received a
request for a special order of 5,300 units of product F65 for $28.30 each.
Product F65’s unit product cost is $27.65, determined as follows:

Direct materials

$3.25

Direct labor

8.55

Variable manufacturing
overhead

7.65

Fixed manufacturing
overhead

8.20

Unit product cost

$27.65

Direct
labor is a variable cost. The special order would have no effect on the
company’s total fixed manufacturing overhead costs. The customer would like modifications
made to product F65 that would increase the variable costs by $4.60 per unit
and that would require an investment of $17,000 in special molds that would
have no salvage value.

This
special order would have no effect on the company’s other sales. The company
has ample spare capacity for producing the special order. If the special
order is accepted, the company’s overall net operating income would increase
(decrease) by:

$(37,935)
$5,525
$3,445
$(94,075)
7.

Two products, IF and RI, emerge
from a joint process. Product IF has been allocated $28,300 of the total
joint costs of $49,000. A total of 2,300 units of product IF are produced
from the joint process. Product IF can be sold at the split-off point for $12
per unit, or it can be processed further for an additional total cost of
$10,300 and then sold for $14 per unit. If product IF is processed further
and sold, what would be the effect on the overall profit of the company
compared with sale in its unprocessed form directly after the split-off
point?

$35,200 less profit
$5,700 less profit
$21,900 more profit
$22,600 more profit
8.

Tawstir Corporation has 400
obsolete personal computers that are carried in inventory at a total cost of
$576,000. If these computers are upgraded at a total cost of $110,000, they
can be sold for a total of $170,000. As an alternative, the computers can be
sold in their present condition for $40,000.

Suppose
the selling price of the upgraded computers has not been set. At what selling
price per unit would the company be as well off upgrading the computers as if
it just sold the computers in their present condition?

$55
$308
$375
$120
9.

Eley Corporation produces a single
product. The cost of producing and selling a single unit of this product at
the company’s normal activity level of 58,000 units per month is as follows:

Direct materials

$51.60

Direct labor

$9.90

Variable manufacturing
overhead

$2.90

Fixed manufacturing
overhead

$20.90

Variable selling &
administrative expense

$5.40

Fixed selling &
administrative expense

$26

The normal selling price of the
product is $122.10 per unit.

An
order has been received from an overseas customer for 3,800 units to be
delivered this month at a special discounted price. This order would have no
effect on the company’s normal sales and would not change the total amount of
the company’s fixed costs. The variable selling and administrative expense
would be $3.00 less per unit on this order than on normal sales.

Direct labor is a variable cost in
this company.

Suppose
there is ample idle capacity to produce the units required by the overseas
customer and the special discounted price on the special order is $94.40 per
unit. By how much would this special order increase (decrease) the company’s
net operating income for the month?

$(92,000)
$25,460
$104,880
$(84,740)
10.

Eley Corporation produces a single
product. The cost of producing and selling a single unit of this product at
the company’s normal activity level of 50,000 units per month is as follows:

Direct materials

$47.60

Direct labor

$9.10

Variable manufacturing
overhead

$2.10

Fixed manufacturing
overhead

$19.30

Variable selling &
administrative expense

$3.80

Fixed selling &
administrative expense

$18

The normal selling price of the
product is $106.10 per unit.

An
order has been received from an overseas customer for 3,000 units to be
delivered this month at a special discounted price. This order would have no
effect on the company’s normal sales and would not change the total amount of
the company’s fixed costs. The variable selling and administrative expense
would be $2.20 less per unit on this order than on normal sales.

Direct labor is a variable cost in
this company.

Suppose
the company is already operating at capacity when the special order is
received from the overseas customer. What would be the opportunity cost of
each unit delivered to the overseas customer?

$43.50
$18.40
$19.70
$17.20
11.

Eley Corporation produces a single
product. The cost of producing and selling a single unit of this product at
the company’s normal activity level of 60,000 units per month is as follows:

Direct materials

$52.60

Direct labor

$10.10

Variable manufacturing
overhead

$3.10

Fixed manufacturing
overhead

$21.30

Variable selling &
administrative expense

$5.80

Fixed selling &
administrative expense

$28

The normal selling price of the
product is $126.10 per unit.

An
order has been received from an overseas customer for 4,000 units to be
delivered this month at a special discounted price. This order would have no
effect on the company’s normal sales and would not change the total amount of
the company’s fixed costs. The variable selling and administrative expense
would be $3.20 less per unit on this order than on normal sales.

Direct labor is a variable cost in
this company.

Suppose
there is not enough idle capacity to produce all of the units for the
overseas customer and accepting the special order would require cutting back
on production of 1,700 units for regular customers. The minimum acceptable
price per unit for the special order is closest to:

$126.10
$102.90
$69.10
$91.56
12.

The following are the Jensen Corporation’s
unit costs of making and selling an item at a volume of 2,800 units per month
(which represents the company’s capacity):

Manufacturing:

Direct
materials

$2.80

Direct
labor

$3.80

Variable
overhead

$2.30

Fixed
overhead

$0.75

Selling and
Administrative:

Variable

$3.80

Fixed

$1.15

Present sales amount to 1,600
units per month. An order has been received from a customer in a
foreign market for 280 units. The order would not affect current sales. Fixed
costs, both manufacturing and selling and administrative, are constant within
the relevant range between 1,600 units and 2,800 units. The variable selling
and administrative expenses would have to be incurred on this special order
as well as for all other sales. Direct labor is a variable cost.

Assume the company has 90 units
left over from last year which have small defects and which will have to be
sold at a reduced price for scrap. The sale of these defective units will
have no effect on the company’s other sales. Which of the following costs is
relevant in this decision?

rev: 11_29_2014_QC_60187
$8.90 variable manufacturing cost
$9.65 unit product cost
$3.80 variable selling and administrative cost
$14.60 full cost
13.

Brown Corporation makes four
products in a single facility. These products have the following unit product
costs:

Products

A

B

C

D

Direct materials

$16.60

$20.50

$13.50

$16.20

Direct labor

18.60

22.00

16.40

10.40

Variable manufacturing
overhead

5.40

6.60

9.10

6.10

Fixed manufacturing
overhead

28.50

15.40

15.50

17.50

Unit product cost

$69.10

$64.50

$54.50

$50.20

Additional data concerning these products are listed below.

Products

A

B

C

D

Grinding minutes per
unit

2.50

1.60

1.20

0.80

Selling price per unit

$83.70

$76.10

$72.90

$67.60

Variable selling cost
per unit

$3.60

$4.10

$3.80

$4.50

Monthly demand in
units

4,000

3,000

3,000

5,000.00

The
grinding machines are potentially the constraint in the production facility.
A total of 10,500 minutes are available per month on these machines. Direct
labor is a variable cost in this company.

Which product makes the MOST profitable use of
the grinding machines?
Product B
Product A
Product C
Product D
14.

(Ignore income taxes in this
problem.) Buy-Rite Pharmacy has purchased a small auto for delivering
prescriptions. The auto was purchased for $28,000 and will have a 6-year
useful life and a $4,700 salvage value. Delivering prescriptions (which the
pharmacy has never done before) should increase gross revenues by at least
$32,700 per year. The cost of these prescriptions to the pharmacy will be
about $26,400 per year. The pharmacy depreciates all assets using the
straight-line method. The payback period for the auto is closest to:

4.4 years
3.7 years
5.2 years
4.2 years
15.

(Ignore income taxes in this problem.) The Zinger
Corporation is considering an investment that has the following data:

Year
1

Year
2

Year
3

Year
4

Year
5

Investment

$16,000

$4,600

Cash inflow

$3,600

$3,600

$8,200

$5,600

$5,600

Cash inflows occur evenly
throughout the year. The payback period for this investment is: (Round your answer to 1 decimal place)

3 years
3.9 years
4 years
4.9 years
16.

Ignore income taxes in this
problem.) The management of Helberg Corporation is considering a project that
would require an investment of $228,000 and would last for 6 years. The
annual net operating income from the project would be $108,000, which includes
depreciation of $29,000. The scrap value of the project’s assets at the end
of the project would be $15,000. The cash inflows occur evenly throughout the
year. The payback period of the project is closest to:

1.7 years
2.1 years
1.5 years
1.9 years
17.

The Jackson Company has invested
in a machine that cost $76,000, that has a useful life of eight years, and
that has no salvage value at the end of its useful life. The machine is being
depreciated by the straight-line method, based on its useful life. It will
have a payback period of five years. Given these data, the simple rate of
return on the machine is closest to: (Ignore income taxes in this
problem.) (Round your answer to 1 decimal
place.)

3.9%
5.0%
7.5%
32.5%
18.
Fimbrez Corporation has provided the following
data concerning an investment project that it is considering:

Initial investment

$230,000

Annual cash flow

$132,000

per year

Expected life of the
project

4

years

Discount rate

12%

Click here to view.mhhe.com/connect/007802563x/exhibit_13b_1.jpg”>Exhibit 13B-1 and.mhhe.com/connect/007802563x/exhibit_13b_2.jpg”>Exhibit 13B-2, to determine the appropriate discount factor(s) using
table.

The net present value of the
project is closest to: (Round discount
factor(s) to 3 decimal places, intermediate and final answers to the nearest
dollar amount.)

$171,016
$230,000
$(98,000)
$(171,016)
19.
(Ignore income taxes in this problem.) The
following data pertain to an investment proposal:

Cost of the investment

$46,000

Annual cost savings

$14,000

Estimated salvage
value

$5,000

Life of the project

5
years

Discount rate

12%

Click here to view.mhhe.com/connect/007802563x/exhibit_13b_1.jpg”>Exhibit 13B-1 and.mhhe.com/connect/007802563x/exhibit_13b_2.jpg”>Exhibit 13B-2, to determine the appropriate discount factor(s) using
table.

The net
present value of the proposed investment is closest to: (Round discount factor(s) to 3 decimal places,
intermediate and final answers to the nearest dollar amount.)

$7,305
$4,470
$2,835
$27,000
20.

The management of Urbine
Corporation is considering the purchase of a machine that would cost $380,000
would last for 5 years, and would have no salvage value. The machine would
reduce labor and other costs by $85,000 per year. The company requires a
minimum pretax return of 13% on all investment projects. (Ignore income taxes
in this problem.)

Click
here to view.mhhe.com/connect/0078111005/Exhibit/Exhibit%2013B-1.jpg”>Exhibit 13B-1 and.mhhe.com/connect/0078111005/Exhibit/Exhibit%2013B-2.jpg”>Exhibit 13B-2 to determine the appropriate discount factor(s)
using tables.

The net
present value of the proposed project is closest to: (Round discount factor(s) to 3 decimal places,
intermediate and final answers to the nearest dollar amount.)

−$81,055
−$6,055
−$121,780
−$40,330
21.

The management of Londo
Corporation is investigating buying a small used aircraft to use in making
airborne inspections of its above-ground pipelines. The aircraft would have a
useful life of 5 years. The company uses a discount rate of 14% in its
capital budgeting. The net present value of the investment, excluding the
intangible benefits, is −$395,850. (Ignore income taxes in this problem)

Click here to view.mhhe.com/connect/0078111005/Exhibit/Exhibit%2013B-2.jpg” title=”exhibit14b-2.jpg”>Exhibit 13B-2 to
determine the appropriate discount factor(s) using tables.

How large would the annual
intangible benefit have to be to make the investment in the aircraft
financially attractive? (Round discount
factor(s) to 3 decimal places and final answer to the nearest dollar amount.)

$395,850
$115,307
$79,170
$55,419
22.

(Ignore income taxes in this
problem.) The management of Stanforth Corporation is investigating automating
a process. Old equipment, with a current salvage value of $30,000, would be
replaced by a new machine. The new machine would be purchased for $396,000
and would have a 6 year useful life and no salvage value. By automating the
process, the company would save $137,000 per year in cash operating costs.
The simple rate of return on the investment is closest to:

19.4%
17.9%
34.6%
16.7%
23.

Blaine Corporation is considering
replacing a technologically obsolete machine with a new state-of-the-art
numerically controlled machine. The new machine would cost $200,000 and would
have a sixteen-year useful life. Unfortunately, the new machine would have no
salvage value. The new machine would cost $30,000 per year to operate and
maintain, but would save $62,000 per year in labor and other costs. The old
machine can be sold now for scrap for $20,000. The simple rate of return on
the new machine is closest to: (Ignore income taxes in this problem.)

9.75%
31.00%
21.67%
10.83%
24.

(Ignore income taxes in this
problem.) Baldock Inc. is considering the acquisition of a new machine that
costs $461,000 and has a useful life of 5 years with no salvage value. The
incremental net operating income and incremental net cash flows that would be
produced by the machine are:

Incremental
Net
Operating Income

Incremental
Net Cash Flows

Year 1

$69,000

$149,000

Year 2

$75,000

$150,000

Year 3

$86,000

$181,000

Year 4

$49,000

$151,000

Year 5

$91,000

$153,000

Assume cash flows occur uniformly throughout a year except for
the initial investment.
The payback period of
this investment is closest to:
2.0 years
5.0 years
4.1 years
2.9 years
25.

Shields
Company has gathered the following data on a proposed investment project:
(Ignore income taxes in this problem.)

Investment required in
equipment

$610,000

Annual cash inflows

$88,000

Salvage value

$0

Life of the investment

16
years

Required rate of
return

10%

The company uses straight-line
depreciation. Assume cash flows occur uniformly throughout a year except for
the initial investment.

The payback period for the
investment is closest to:

0.1 years
1.0 years
4.9 years
6.9 years

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