1.

Lusk
Corporation produces and sells 15,700 units of Product X each month. The
selling price of Product X is $27 per unit, and variable expenses are $21 per
unit. A study has been made concerning whether Product X should be
discontinued. The study shows that $72,000 of the $107,000 in fixed expenses
charged to Product X would not be avoidable even if the product was
discontinued. If Product X is discontinued, the company’s overall net
operating income would:

decrease
by $59,200 per month

increase
by $12,800 per month

increase
by $47,800 per month

decrease
by $47,800 per month

2.

Barrus
Corporation makes 38,000 motors to be used in the productions of its power
lawn mowers. The average cost per motor at this level of activity is as
follows:

Direct materials

$9.70

Direct labor

$8.70

Variable manufacturing
overhead

$3.55

Fixed manufacturing
overhead

$4.50

This motor
has recently become available from an outside supplier for $24.55 per motor.
If Barrus decides not to make the motors, none of the fixed manufacturing
overhead would be avoidable and there would be no other use for the
facilities. If Barrus decides to continue making the motor, how much higher
or lower will the company’s net operating income be than if the motors are
purchased from the outside supplier? Assume that direct labor is a variable
cost in this company.

$72,200
lower

$233,700
higher

$98,800
higher

$171,000
higher

3.

Gwinnett
Barbecue Sauce Corporation manufactures a specialty barbecue sauce. Gwinnett
has the capacity to manufacture and sell 12,500 cases of sauce each year but
is currently only manufacturing and selling 11,000. The following costs
relate to annual operations at 11,000 cases:

Total
Cost

Variable manufacturing
cost

$165,000

Fixed manufacturing
cost

$48,000

Variable selling and
administrative cost

$22,000

Fixed selling and
administrative cost

$30,000

Gwinnett
normally sells its sauce for $30 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 $15 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 $60

decrease by $3,000

decrease by $22,000

decrease by $19,000

4.

Nesmith
Corporation is considering two alternatives: A and B. Costs associated with
the alternatives are listed below:

Alternative
A

Alternative
B

Materials costs

$46,000

$63,000

Processing costs

$52,000

$52,000

Equipment rental

$12,200

$29,100

Occupancy costs

$20,100

$31,200

What is the
differential cost of Alternative B over Alternative A, including all of the
relevant costs?

$45,000

$175,300

$130,300

$154,600

5.

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 $130,000, they can be sold for a total of $190,000. As an alternative, the
computers can be sold in their present condition for $40,000.

What is the
net advantage or disadvantage to the company from upgrading the computers
rather than selling them in their present condition?

$590,000
disadvantage

$60,000
advantage

$150,000
advantage

$20,000
advantage

6.

The
management of Kabanuck Corporation is considering dropping product V41B. Data
from the company’s accounting system appear below:

Sales

$940,000

Variable expenses

$419,000

Fixed manufacturing
expenses

$354,000

Fixed selling and
administrative expenses

$261,000

All fixed
expenses of the company are fully allocated to products in the company’s
accounting system. Further investigation has revealed that $221,000 of the
fixed manufacturing expenses and $132,000 of the fixed selling and
administrative expenses are avoidable if product V41B is discontinued.

According to
the company’s accounting system, what is the net operating income earned by
product V41B? Include all costs in this calculation—whether relevant or not.

$94,000

$(521,000)

$(94,000)

$521,000

7.

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 43,000 units per month is as follows:

Direct materials

$44.10

Direct labor

$8.40

Variable manufacturing
overhead

$1.40

Fixed manufacturing
overhead

$17.90

Variable selling &
administrative expense

$2.40

Fixed selling &
administrative expense

$11

The normal selling price of the
product is $92.10 per unit.

An order has been received from an overseas customer for
2,300 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 $1.50 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 $79.40 per unit. By how much would this special order
increase (decrease) the company’s net operating income for the month?

$(27,000)

$15,410

$56,580

$(13,340)