Question

QUESTION 1

Bonita Industries produces 1000 units of a necessary component with the following costs:

Direct Materials               $32,000

Direct Labor    21,000

Variable Overhead    2,000

Fixed Overhead 7,000

None of Bonita Industries‘s fixed overhead costs can be reduced, but another product could be made that would increase profit contribution by $8000 if the components were acquired externally. If cost minimization is the major consideration and the company would prefer to buy the components, what is the maximum external price that Bonita Industries would be willing to accept to acquire the 1000 units externally?

	a.	$61,000
	b.	$63,000
	c.	$68,000
	d.	$58,000

QUESTION 2

Canosta, Inc. determined that it must expand its capacity to accept a special order. Which situation is likely?

	a.	Both variable and fixed costs will be relevant.
	b.	Fixed costs will not be relevant.
	c.	The company should accept the order.
	d.	Unit variable costs will increase.

QUESTION 3

Sheffield Corp. incurs the following costs to produce 9500 units of a subcomponent:

Direct materials                $ 7,980

Direct labor    10,735

Variable overhead 11,970

Fixed overhead                 16,200

An outside supplier has offered to sell Sheffield the subcomponent for $2.85 a unit.

If Sheffield could avoid $3000 of fixed overhead by accepting the offer, net income would increase (decrease) by

		$610
		$(2,380)
		$(5,755)
		$6,610

QUESTION 4

A company is within plant capacity. It is contemplating whether a special order should be accepted. The order will not impact regular sales. If the company accepts the special order, what will occur?

	a.	There are no incremental revenues.
	b.	Net income will increase if the special sales price per unit exceeds the unit variable costs.
	c.	Incremental costs will not be affected.
	d.	Both fixed and variable costs will increase

Answer 1

Q-1 b. $63000

what is the maximum external price that Bonita Industries would be willing to accept to acquire the 1000 units externally?

Maximum external acceptable price = Direct material + Direct labour + Variable overhead + Additional Contribution margin of new product

= 32000 + 21000 + 2000 + 8000 = 63000

Q-2

Canosta, Inc. determined that it must expand its capacity to accept a special order. Which situation is likely?

a. Both variable and fixed costs will be relevant.

for expanding capacity, fixed cost will incure so both the variable and fixed costs will be relevant.

Q-3

net income would increase (decrease) by D. $6610

Total cost of production = $46885

total Cost if purchase from outside = Purchase cost + Unavoidable fixed costs = $2.85 * 9500 + 13200 = 27075 + 13200 = $40275

Net income increase by 46885 - 40275 = $6610

Q-4

If the company accepts the special order, what will occur?

b. Net income will increase if the special sales price per unit exceeds the unit variable costs.