Multiple Choice

Same information applies to question 1 & 2

Imperial Products has a budget of $600,000 in 20x1 for prevention costs. If it decides to automate a portion of its prevention activities, it will save $40,000 in variable costs. The new method will require $12,000 in training costs and $80,000 in annual equipment costs. Management is willing to adjust the budget for an amount equal to the cost of the new equipment. The budget includes a production level of 100,000 units.

Appraisal costs for the year are budgeted at $400,000. The new prevention procedures will save appraisal costs of $20,000. Internal failure costs average $10 per failed unit of finished goods. The internal failure rate is expected to be 2% of all completed items, but the proposed changes will cut the internal failure rate in half. Internal failure units are destroyed. External failure costs average $36 per failed unit, and external failures average 2% per units sold. The new procedures will reduce this rate by 80%.

1. How much do external failure costs change if the new prevention procedures fulfil expectations?

a. $57,024 decrease
b. $57,600 increase
c. $57,600 decrease
d. $72,000 decrease
e. None of the above

2. Assume management offers to implement the new procedures if they take place as anticipated and the amounts netted are less than the cost of equipment. What is the net impact of all the changes caused by the new prevention procedures?

a. $52,000
b. $(5,024)
c. $(57,024)
d. $(35,024)
e. None of the above

3. Pershing Company budgeted the following costs for the production of its one and only product, razor blades, for the next fiscal year:

Direct material 187,500
Direct labour 130,000
Factory Overhead:
Variable 140,000
Fixed 107,500
Selling and Admin
Variable 60,000
Fixed 80,000

Total costs 705,000

Pershing has a target profit of $150,000

The target rate of return for setting prices as a percentage of prime costs would be

a. 54%
b. 87%
c. 96%
d. 122%
e. 169%

Same information applies to question 4 & 5

Audio Labs collected the following information on the costs of producing 20,000 speaker units.

Direct material $32 per unit
Direct labour $4 per unit
Variable OH $16 per unit
Fixed OH - (purchasing, receiving, and setups) $8 per unit
Fixed OH- Amortization $12 per unit

Cartunes has offered to sell Audio the speakers for $64 each.

Audio labs has an option to make 10,000 CD units to sell to Stereo Sound Studios at $64 each. Costs incurred in production include:

Direct material $24 per unit
Direct labour $4 per unit
Variable OH (power, utilities) $16 per unit

4. Which of the two products should audio labs use its facilities to produce?

a. produce speakers
b. buy speakers and do not produce CD players
c. buy speakers and produce CD players for Stereo Sound Studios
d. buy speakers and indifferent to CD players
e. none of the above

5. What is the opportunity cost of making speakers if audio labs has the capacity to produce both items?

a. $160,000 lost profit
b. $80,000 profit increase
c. $40,000 profit increase
d. Zero
e. None of the above

6. First Image has a plant capacity of 80,000 units per month. Unit costs at the capacity are:

Direct material $2
Direct labour $3
Variable OH $1.50
Fixed OH $1.50
Marketing - Fixed $3.50
Marketing/distribution - Variable $1.80

Current monthly sales are 78,000 units at $12.60 each. Computer output management has contacted First Image about purchasing 2,000 units at $12.00 each. Current sales would not be affected by the special order. What will First Images change in profit be if the order is accepted?

a. 7,400 increase
b. $8,600 increase
c. $11,000 increase
d. 16,600 increase
e. None of the above