Accounting Review

Review Chapter 13

36. A study has been conducted to determine if one of the departments in Parry Company should be discontinued. The contribution margin in the department is $50,000 per year. Fixed expenses charged to the department are $65,000 per year. It is estimated that $40,000 of these fixed expenses could be eliminated if the department is discontinued. These data indicate that if the department is discontinued, the company’s overall net operating income would:
A. decrease by $25,000 per year
B. increase by $25,000 per year
C. decrease by $10,000 per year
D. increase by $10,000 per year

37. Vanikoro Corporation currently has two divisions which had the following operating results for last year:

Since the Rubber Division sustained a loss, the president of Vanikoro is considering the elimination of this division. All of the fixed costs for the division could be eliminated if the division was dropped. If the Rubber Division was dropped at the beginning of last year, how much higher or lower would Vanikoro’s total net operating income have been for the year?
A. $10,000 higher
B. $40,000 lower
C. $50,000 higher
D. $100,000 lower

38. The management of Austin Corporation is considering dropping product R97C. Data from the company’s accounting system appear below:

In the company’s accounting system all fixed expenses of the company are fully allocated to products. Further investigation has revealed that $34,000 of the fixed manufacturing expenses and $20,000 of the fixed selling and administrative expenses are avoidable if product R97C is discontinued. What would be the effect on the company’s overall net operating income if product R97C were dropped?
A. Overall net operating income would increase by $20,000.
B. Overall net operating income would increase by $10,000.
C. Overall net operating income would decrease by $20,000.
D. Overall net operating income would decrease by $10,000.

39. Product L28N has been considered a drag on profits at Beets Corporation for some time and management is considering discontinuing the product altogether. Data from the company’s accounting system appear below:

In the company’s accounting system all fixed expenses of the company are fully allocated to products. Further investigation has revealed that $41,000 of the fixed manufacturing expenses and $25,000 of the fixed selling and administrative expenses are avoidable if product L28N is discontinued. What would be the effect on the company’s overall net operating income if product L28N were dropped?
A. Overall net operating income would decrease by $73,000.
B. Overall net operating income would increase by $10,000.
C. Overall net operating income would decrease by $10,000.
D. Overall net operating income would increase by $73,000.

40. Green Company produces 1,000 parts per year, which are used in the assembly of one of its products. The unit product cost of these parts is:

The part can be purchased from an outside supplier at $20 per unit. If the part is purchased from the outside supplier, two thirds of the fixed manufacturing costs can be eliminated. The annual impact on the company’s net operating income as a result of buying the part from the outside supplier would be:
A. $1,000 increase
B. $1,000 decrease
C. $5,000 increase
D. $2,000 decrease

43. Part J88 is used in one of Quinney Corporation’s products. The company makes 3,000 units of this part each year. The company’s Accounting Department reports the following costs of producing the part at this level of activity:

An outside supplier has offered to produce this part and sell it to the company for $32.10 each. If this offer is accepted, the supervisor’s salary and all of the variable costs, including 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. If the outside supplier’s offer were accepted, only $3,000 of these allocated general overhead costs would be avoided.
If management decides to buy part J88 from the outside supplier rather than to continue making the part, what would be the annual impact on the company’s overall net operating income?
A. Net operating income would decline by $22,200 per year.
B. Net operating income would decline by $16,200 per year.
C. Net operating income would decline by $5,400 per year.
D. Net operating income would decline by $19,200 per year.

44. Crick Corporation makes 11,000 units of part W28 each year. This part is used in one of the company’s products. The company’s Accounting Department reports the following costs of producing the part at this level of activity:

An outside supplier has offered to make and sell the part to the company for $25.50 each. If this offer is accepted, the supervisor’s salary and all of the variable costs, including 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. If the outside supplier’s offer were accepted, only $18,000 of these allocated general overhead costs would be avoided. In addition, the space used to produce part W28 would be used to make more of one of the company’s other products, generating an additional segment margin of $12,000 per year for that product.
What would be the impact on the company’s overall net operating income of buying part W28 from the outside supplier?
A. Net operating income would decline by $65,000 per year.
B. Net operating income would increase by $5,800 per year.
C. Net operating income would decline by $89,000 per year.
D. Net operating income would increase by $12,000 per year.

45. Outram Corporation is presently making part I14 that is used in one of its products. A total of 8,000 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:

An outside supplier has offered to make and sell the part to the company for $14.80 each. If this offer is accepted, the supervisor’s salary and all of the variable costs 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. If management decides to buy part I14 from the outside supplier rather than to continue making the part, what would be the annual impact on the company’s overall net operating income?
A. Net operating income would decline by $15,200 per year.
B. Net operating income would increase by $15,200 per year.
C. Net operating income would increase by $52,800 per year.
D. Net operating income would decline by $52,800 per year.

46. Part N19 is used by Malouf Corporation to make one of its products. A total of 7,000 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:

An outside supplier has offered to make the part and sell it to the company for $24.50 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 N19 could be used to make more of one of the company’s other products, generating an additional segment margin of $25,000 per year for that product. What would be the impact on the company’s overall net operating income of buying part N19 from the outside supplier?
A. Net operating income would decline by $21,900 per year.
B. Net operating income would decline by $60,700 per year.
C. Net operating income would decline by $10,700 per year.
D. Net operating income would increase by $25,000 per year.
47. Scales Corporation has received a request for a special order of 6,000 units of product Y45 for $13.70 each. Product Y45’s unit product cost is $11.50, determined as follows:

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 Y45 that would increase the variable costs by $8.10 per unit and that would require an investment of $20,000 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:
A. ($26,600)
B. $13,200
C. ($55,400)
D. ($21,300)

48. A customer has requested that Daleske Corporation fill a special order for 2,000 units of product D84 for $20.30 a unit. While the product would be modified slightly for the special order, product D84’s normal unit product cost is $18.50:

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 D84 that would increase the variable costs by $2.50 per unit and that would require an investment of $7,000 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:
A. ($14,900)
B. ($5,800)
C. $3,600
D. ($8,400)

50. Hobbins Corporation makes three products that use compound W, the current constrained resource. Data concerning those products appear below:

Rank the products in order of their current profitability from most profitable to least profitable. In other words, rank the products in the order in which they should be emphasized.
A. UT,RC,DQ
B. DQ,RC,UT
C. RC,DQ,UT
D. UT,DQ,RC