Achievement Test 4: Chapters 7-8 Name ___________________________

Managerial Accounting, 5e Instructor ________________________

Section # _________ Date __________

Part I II III IV V Total

Points 20 10 26 20 24 100

Score

PART I — MULTIPLE CHOICE (20 points)

Instructions: Designate the best answer for each of the following questions.

____ 1. A relevant cost

a. is a sunk cost.
b. is a past cost.
c. costs that differ across alternatives.
d. is an opportunity cost.

____ 2. The Molding Division of White Corporation manufactures plastic molds and then sells
them to customers for $40 per unit. Its variable cost is $15 per unit, and its fixed cost
per unit is $5. Management would like the Molding Division to transfer 15,000 of these
molds to another division within the company at a price of $23. The Molding Division
has available capacity to produce the 15,000 units for the other division. What is the
minimum transfer price the Molding Division should accept?
a. $20
b. $15
c. $23
d. $40

____ 3. HIT Company provides the following cost information related to its production of its
primary product:
Per Unit
Variable manufacturing cost $40
Fixed manufacturing cost 40
Variable selling and administrative expenses 10
Fixed selling and administrative expenses 12
Desired ROI per unit 14
What is the markup percentage, assuming that HIT Company uses absorption costing?
a. 27.5%
b. 17.5%
c. 45%
d. 260%
AT4- 2 Test Bank for Managerial Accounting, Fifth Edition

____ 4. Peters, Inc. produces chocolate chip cookies. Costs for producing one batch appear
below:
Direct materials $12
Direct labor 4
Variable overhead 2
Fixed overhead 6
An outside supplier has offered to produce the cookies for $21 per batch. If Peters
decided to buy instead of making the cookies, what is the maximum price it would
pay?
a. $24
b. $18
c. $20
d. $21

____ 5. Cost-plus pricing means that

a. selling price = fixed costs + (markup percentage × variable costs).
b. selling price = cost + (markup percentage × cost).
c. selling price = variable costs + (markup percentage × fixed costs).
d. selling price = cost + (markup percentage × variable costs).

Use the following information for questions 6 and 7.

Rusty Company is considering developing a new product. The company has gathered the
following information on this product:
Expected total unit cost $20
Estimated investment for new product $700,000
Desired ROI 5%
Expected number of units to be produced and sold 1,000

____ 6. The desired selling price is

a. $35.
b. $50.
c. $15.
d. $55.

____ 7. The desired markup percentage is

a. 275%.
b. 75%.
c. 175%.
d. 100%.

____ 8. The following information is provided by Bullet Corporation for a new product it
recently introduced:
Total unit cost $50
Desired ROI per unit $15
Target selling price $65
What would be Bullet Corporation’s percentage markup on cost?
a. 30%
b. 77%
c. 23%
d. 70%
 Achievement Test 4 AT4- 3

____ 9. Target costing assumes

a. the market price is known and works to achieve an acceptable cost.
b. the cost is known and works to achieve an acceptable market price.
c. the desired profit is known and works to achieve an acceptable market price.
d. the desired profit is known and works to achieve an acceptable cost.

____ 10. The Molding Division of White Corporation manufactures plastic molds and then sells
them to customers for $40 per unit. Its variable cost is $15 per unit, and its fixed cost
per unit is $5. Management would like the Molding Division to transfer 15,000 of these
molds to another division within the company at a price of $23. The Molding Division is
operating at full capacity. What is the minimum transfer price the Molding Division
should accept?
a. $23
b. $20
c. $40
d. $25

PART II — TRUE/FALSE (10 points)

Instructions: Designate whether each of the following statements is true or false by circling the T
or F.

T F 1. A sunk cost is the potential benefit that may be obtained by following an alternative
course of action.

T F 2. A company should process further as long as the incremental costs of further

production exceed the incremental revenue of further production.

T F 3. Joint costs are all costs incurred prior to the point at which two products are
separately identified.

T F 4. Sunk costs are relevant costs that differ across alternatives.

T F 5. In the minimum transfer price formula, variable cost is defined as the variable cost
of units sold internally.
AT4- 4 Test Bank for Managerial Accounting, Fifth Edition

PART III — INCREMENTAL ANALYSIS (26 points)

This problem consists of two independent mini-problems.
A. Pep Manufacturing produces Product K in batches of 4,000 gallons at $.60 per gallon.
Product K can be sold without further processing for $0.80 per gallon. Product K can be
processed further to yield Product G, which can be sold for $1.25 per gallon. Product G
requires additional processing costs at $1,650 per batch.
Instructions
Compute the incremental income from further production of one batch of Product K.

B. Parker Manufacturers produces can openers. For the first six months of 2011, the company
reported the following operating results while operating at 80% of plant capacity.
Sales $4,000,000
Cost of goods sold 2,500,000
Gross profit 1,500,000
Operating expenses 1,000,000
Net income $ 500,000

Cost of goods sold was 70% variable and 30% fixed. Operating expenses were 70% variable
and 30% fixed. In September 2011, Parker Manufacturers receives a special order for 15,000
can openers at $7.50 from a foreign company. The can openers normally sell for $8.00.
Acceptance of the special order would result in $5,000 of shipping costs but no increase in
fixed operating expenses.
Instructions
Prepare an incremental analysis for the special order.
 Achievement Test 4 AT4- 5

PART IV — PRODUCT COSTING (20 points)

Brock Company provides the following information related to the production of its primary product:
Per Unit
Variable manufacturing cost $14.50
Fixed manufacturing cost $.50
Variable selling and administrative expenses $1.50
Fixed selling and administrative expenses $.20
Desired ROI per unit $5.00

A. What is the markup percentage, assuming that Brock Company uses absorption costing?

B. What is the markup percentage, assuming that Brock Company uses variable costing?

PART V — COST-PLUS PRICING (24 points)

Samson Corporation is in the process of setting a selling price for a new product it has just
designed. The following data relate to this product for a budgeted volume of 50,000 units.
Per Unit Total
Direct materials $ 50
Direct labor 70
Variable manufacturing overhead 25
Fixed manufacturing overhead $1,800,000
Variable selling and administrative expenses 15
Fixed selling and administrative expenses 1,200,000

Samson uses cost-plus pricing to set its target selling price. The markup on total unit cost is 25%.

Instructions
Compute each of the following for the new product:
1. Total variable cost per unit, total fixed cost per unit, and total cost per unit.
2. Desired ROI per unit.
3. Target selling price.
AT4- 6 Test Bank for Managerial Accounting, Fifth Edition

Solutions — Achievement Test 4: Chapters 7-8

PART I — MULTIPLE CHOICE (20 points)

1. c 6. d
2. b 7. c
3. c 8. a
4. b 9. a
5. b 10. c

PART II — TRUE/FALSE (10 points)

1. F 4. F
2. F 5. T
3. T

PART III — INCREMENTAL ANALYSIS (26 points)

A. 4,000 gallons × ($1.25 – $0.80) = $1,800 incremental revenue
Incremental costs of further processing = $1,650
Incremental income from further processing = $1,800 – $1,650 = $150

B. Revenue from special order (15,000 × $7.50) $112,500

Variable costs from special order (15,000 × $3.50)* 52,500
Variable operating expenses from special order (15,000 × $1.40)** 21,000
Contribution margin from special order 39,000
Fixed costs from special order 5,000
Net income from special order $ 34,000

*$2,500,000 × .7 = $1,750,000
$4,000,000 ÷ $8.00/unit = 500,000 units
$1,750,000 ÷ 500,000 units = $3.50 variable cost per unit sold

**1,000,000 × .7 = $700,000
$700,000 ÷ 500,000 units = $1.40 variable operating expenses per unit

PART IV — PRODUCT COSTING (20 points)

$5.00 + $1.50 + $.20 $6.70

A. = = 44.7%
$14.50 + $.50 $15

$5.00 + $.50 + $.20 $5.70

B. = = 35.6%
$14.50 + $1.50 $16
 Achievement Test 4 AT4- 7

PART V — COST-PLUS PRICING (24 points)

1. Direct materials $ 50
Direct labor 70
Variable manufacturing overhead 25
Variable selling and administrative expenses 15
Variable cost per unit $160

Budgeted Cost
Total Costs Volume Per Unit
Fixed manufacturing overhead $1,800,000 ÷ 50,000 = $36
Fixed selling and administrative expenses 1,200,000 ÷ 50,000 = 24
Fixed cost per unit $60

Total cost per unit: $160 + $60 = $220

2. Total cost per unit $220

Markup × 25%
Desired ROI per unit $ 55

3. Total cost per unit $220

Desired ROI per unit 55
Target selling price $275