Question

MULTIPLE CHOICE QUESTIONS

1. Kayaks-For-Fun produces two kayak models, "River" and "Sea". The River model sells for $500 and has variable costs of $100 per unit. The Sea model sells for $600 and has variable costs of $450 per unit. Allocated fixed costs per unit are $300 for the River model and $50 for the Sea model per unit. Which statement about their production and sales mix is true?

A. They would prefer to produce and sell the River model because its unit contribution margin is highest.

B. They would prefer to produce and sell the River model because it has the highest selling price.

C. They are indifferent about which model to produce and sell because the full cost is the same for both models.

D. They would prefer to produce and sell the Sea model because its unit contribution is highest.

E. None of the other answers are correct.

2. Kayaks-For-Fun produces two kayak models, "River" and "Sea". The River model sells for $500 and has variable costs of $100 per unit. The Sea model sells for $600 and has variable costs of $450 per unit. Allocated fixed costs per unit are $300 for the River model and $50 for the Sea model per unit. Kayaks-For-Fun has a total of 320 labor hours available each month. The specialized skills required to build the kayaks makes it difficult for management to find additional workers. Assume the River model requires 4 labor hours per unit and the Sea model requires 1 labor hour per unit (most of the variable cost for the Sea model is related to expensive materials required for production). Kayaks-For-Fun sells everything it produces. Which statement is true?

A. None of the other answers are correct

B. They would be indifferent between selling the River and the Sea model.

C. 20% of their sales should be the Sea model and 80% should be the River model.

D. They would prefer to sell the River model.

E. They would prefer to sell the Sea model

3. Kayaks-For-Fun produces two kayak models, "River" and "Sea". The River model sells for $500 and has variable costs of $100 per unit. The Sea model sells for $600 and has variable costs of $450 per unit. Allocated fixed costs per unit are $300 for the River model and $50 for the Sea model per unit.Assume Kayaks-For-Fun found additional labor, thereby eliminating that resource constraint. However, the company now faces limited available machine hours. It has a total of 3,000 machine hours available each month. The River model requires 16 machine hours per unit, and the Sea model requires 10 machine hours per unit. Kayaks-For-Fun sells everything it produces.Which statement is true about Kayaks-For-Fun?

A. It would prefer to sell the River model.

B. It would be indifferent about which model it sells.

C. None of the other answers are correct

D. It would prefer to sell the Sea model.

E. Machine hours should be used for allocating fixed manufacturing overhead.

4. Which of the following statements regarding relevant costs and sunk costs is incorrect?

A. Isolating relevant costs is desirable because only rarely will enough information be available to prepare a detailed income statement for multiple alternatives.

B. A sunk cost is a cost which cannot be avoided because it has already been incurred.

C. The type of cost presented to management for an equipment replacement decision should be limited to relevant costs.

D. Relevant costs can be studied using a differential approach but should not be considered with a total approach.

Answer 1

1.

River Model -

Sales - Variable Cost = Contribution Margin

500 - 100 = 400

Contribution Margin - Fixed Cost = Profit Margin

400 - 300 = 100

Sea Model -

Sales - Variable Cost = Contribution Margin

600 - 450 = 150

Contribution Margin - Fixed Cost = Profit Margin

150 - 50 = 100

A. They would prefer to produce and sell the River model because its unit contribution margin is highest. Also, the profit margin per unit in % is higher than sea model with the given constraints.

However, none of the other answers are correct can be the other option if profit margin amount is looked at as it is the same for both and hence they will be indifferent.

2.

E. They would prefer to sell the Sea model

This is because the Sea model takes only 1 hour to produce and both the products have same profit margin in terms of amount i.e. 100. This way in 320 hours 320 Sea Models can be produced.

3.

D. It would prefer to sell the Sea model.

This is because there are a total of 3000 machines hours and the Sea Model still takes 6 hours less than the River Model. More number of Sea Models can be produced as both River and Sea Model give the same amount of Profit margin amount.

4.

D. Relevant costs can be studied using a differential approach but should not be considered with a total approach.

We can either use the differential cost approach or total cost approach.