MA2

COMPUTATIONS
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Segment Reporting Analysis & Decentralization

C 1. Toxemia Salsa Company manufactures five flavors of salsa. Last year, Toxemia
generated net operating income of $40,000. The following information was taken from last
year’s income statement segmented by flavor (brackets indicate a negative amount):
Wimpy Mild Medium Hot Atomic

Contribution Margin (2000) 45000 35000 50000 162000
Segment Margin (16000) (5000) 7000 10000 94000
Segment Margin
less Allocated
common fixed
expenses (26000) (15000) (3000) 0 84000
Toxemia expects similar operating results for the upcoming year. If Toxemia wants to
maximize its profitability in the upcoming year, which flavor or flavors should Toxemia
discontinue?
a. No flavors should be discontinued
b. Wimpy
c. Wimpy and Mild
d. Wimpy, Mild, and Medium
Solution: Segment margin is a better indication of profitability of individual products than

the segment margin less allocated common fixed expenses. The products with
negative segment margins should be discontinued to maximize profit.
D 2. Miscavage Corporation has two divisions: the Beta Division and the Alpha Division.
The Beta Division has sales of $580,000, variable expenses of $301,600, and traceable
fixed expenses of $186, 500. The Alpha Division has sales of $510,000, variable expenses
of $178,500, and traceable fixed expenses of $222,100. The total amount of common fixed
expenses not traceable to the individual divisions is $235,500. What is the company’s net
operating income?
a. $374,400
b. $201,300
c. $609,900
d. ($34,200)
Solution: Total Alpha Beta

Sales 1,090,000 510,000 580,000
Less: Variable Expenses 480,100 178,500 301,600
Contribution Margin 609,900 331,500 278,400
Less: Traceable Fixed Expenses 408,600 222,100 186,500
Divisional Segment Margin 201,300 110,400 91,900
Less: Common Fixed Expenses 235,500
Net Operating Income ($34,200)
B 3. Walsh Company has three Stores: X, Y, and Z. During August, the variable expenses
in Store X were $90,000 and the contribution margin ratio was 25%. Store Y had a
contribution margin of $27,000 and a contribution margin ratio of 20%. Store Z had variable
expenses of $120,000 and a variable expense ratio of 60% of sales. For August, Walsh
Company's sales were:
a. $318,000
b. $455,000
c. $485,000
d. $555,000
Solution Sales, X = 90,000/(10.25) = 120,000

Sales, Y = 27,000/0.2 = 135,000
Sales, Z = 120,000/0.6 = 200,000
Total 455,000
B 4. Brummitt Corporation has two divisions: the BAJ Division and the CBB Division. The
corporation’s net operating income is $10,700. The BAJ Division’s divisional segment
margin is $76,100 and the CBB Division’s divisional segment margin is $42,300. What is
the amount of the common fixed expenses not traceable to the individual divisions?
a. $86,800
b. $107,700
c. $53,000
d. $118,400
Solution: Total segment margin = 42,300 + 76,100 = 118,400

Common fixed expenses = 118,400 10,700 = 107,700
For numbers 5 to 8
The Rialto Company's income statement for May is given below:
Total Division L Division M
Sales $300,000 $165,000 $135,000
Variable expenses 153,000 99,000 54,000
Contribution margin 147,000 66,000 81,000
Traceable fixed expenses 97,000 45,000 52,000
Segment margin 50,000 $21,000 $29,000
Common fixed expenses 25,000
Net operating income $25,000
C 5. If sales for Division L increase $30,000 with a $9,000 increase in the Division's
traceable fixed expenses, the overall company net operating income should:
a. decrease by $4,000
b. increase by $21,000
c. increase by $3,000
d. increase by $5,700
Solution: Sales (100%) 195,000

VC (60%) 117,000
CM (40%) 78,000
TFC 54,000
SM 24,000 21,000 = 3,000 increase
Or: 66,000/165,000= 0.40; 0.40x30,000= 12,0009,000= 3,000 increase
B 6. During May, the sales clerks in Division L received salaries totaling $25,000. Assume
that during June the salaries of these sales clerks are discontinued and instead they are
paid a commission of 18% of sales. If sales in Division L increase by $35,000 as a result
of this change, the June segment margin for Division L should be:
a. $30,300
b. $24,000
c. $5,300
d. $60,000
Solution Sales (100%) 200,000

VC (60%) 120,000
CM (40%) 80,000
TFC (45,00025,000+(200,000*.18)) 56,000
SM 24,000
D 7. If the sales in Division M increase by 25% while traceable fixed expenses decrease by
$7,000, the segment margin for Division M should:
a. increase by $13,250
c. decrease by $17,750
d. increase by $27,250
Solution: Sales (100%) 168,750 (135,000 x 1.25)

VC (40%) 67,500
CM (60%) 101,250
TFC 45,000 (52,000 7,000)
SM 56,250 29,000 = 27,250 increase
C 8. A proposal has been made that will lower variable costs in Division M to 37% of sales.
The reduction can be accomplished only if Division M's traceable fixed costs are allowed
to increase $12,000. If this proposal is implemented, and if sales remain constant, overall
company net operating income should:
a. increase by $12,000
c. decrease by $7,950
d. decrease by $12,000
Solution: Division M
Sales $135,000
Variable expenses 49,950 (135,000 x 0.37)
Contribution margin 85,050
Traceable fixed expenses 64,000 (52,000 + 12,000)
Segment margin $21,050 29,000 = (7,950)
A 9. The following data relate to Department no. 2 of Young Corporation:
Segment contribution margin $480,000

Profit margin controllable by the segment manager 230,000
Segment profit margin 110,000
On the basis of this information, fixed costs traceable to Department no. 2 but controllable
by others are:
a. $120,000
b. $140,000
c. $250,000
d. $370,000
Solution: 230,000110,000 = $120,000
For numbers 10 to 14
The following information was taken from the segmented income statement of Restin, Inc., and the
company's three divisions:
Los Bay Central
Restin, Angeles Area Valley
Inc. Division Division Division
Revenues $750,000 $200,000 $235,000 $325,000
Variable operating expenses 410,000 110,000 120,000 180,000
Controllable fixed expenses 210,000 65,000 75,000 70,000
Noncontrollable fixed expenses 60,000 15,000 20,000 25,000
In addition, the company incurred common fixed costs of $18,000.
C 10. Bay Area's segment profit margin is:

a. $14,000
b. $18,000
c. $20,000
d. $40,000
Solution: Revenues 235,000

Variable (120,000)
Segment CM 115,000
Controllable Fixed (75,000)
Controllable Margin 40,000
Noncontrollable Fixed (20,000)
Profit Margin 20,000
D 11. The profit margin controllable by the Central Valley segment manager is:
a. $32,000
b. $44,000
c. $50,000
d. $75,000
e. $145,000
Solution: Revenues 325,000

Variable (180,000)
Segment CM 145,000
Controllable Fixed (70,000)
D 12. Assuming use of a responsibility accounting system, which of the following amounts
should be used to evaluate the performance of the Los Angeles division manager?
a. $4,000
b. $8,000
c. $10,000
d. $25,000
e. $90,000
Solution: 200,000 110,000 65,000 = 25,000
C 13. Which of the following amounts should be used to evaluate whether Restin, Inc.,
should continue to invest company resources in the Los Angeles division?
a. $4,000
b. $8,000
c. $10,000
d. $25,000
e. $90,000
Solution: 200,000 110,000 65,000 15,000 = 10,000
B 14. Assume that the Los Angeles division increases its promotion expense, a
controllable fixed cost, by $10,000. As a result, revenues increase by $50,000. If variable
expenses are tied directly to revenues, the new Los Angeles segment profit margin is:
a. $12,500
b. $22,500
c. $32,500
d. $50,000
e. $60,000
Solution: Revenues 250,000 100%

Variable (137,500) (55%)
Segment CM 112,500 45%
Controllable Fixed (75,000) (65,000 + 10,000)
Noncontrollable Fixed (15,000)
Profit Margin 22,500
Miller Company has two sales areas: North and South. In June, the contribution margin in the
North was $50,000, or 20% of sales. The segment margin in the South was $15,000, or 8% of
sales. Traceable fixed expenses are $15,000 in the North and $10,000 in the South. During June,
Miller Company reported total net operating income of $26,000.
A 15. The total fixed expenses (traceable and common) for Miller Company in June were:
a. $49,000
b. $25,000
c. $24,000
d. $50,000
Solution: North South Total

Sales 250,000 187,500 437,500
VC 200,000 162,500
CM 50,000 20% 25,000
TFC 15,000 10,000 25,000
SM 35,000 15,000 50,000
CFC 24,000
NOI 26,000
C 16. The variable costs for the South in June were:

a. $230,000
b. $185,000
c. $162,500
d. $65,000
Nantua Sunglasses Corporation has two divisions, Southern and Northern. The following
information was taken from last year's income statement segmented by division:
Total Southern Northern
Sales $4,000,000 $2,500,000 $1,500,000
Contribution margin $1,650,000 $1,050,000 $600,000
Divisional segment margin $850,000 $700,000 $150,000
Net operating income last year for Nantua Company was $400,000.
A 17. In last year's income statement segmented by division, what were Nantua's total
common fixed expenses?
a. $450,000
b. $800,000
c. $1,250,000
d. $1,300,000
Solution: SM 850,000
CFC 450,000
NOI 400,000
C 18. If the Northern Division's sales last year were $300,000 higher, how would this have
changed Nantua's net operating income? (Assume no change in the revenue or cost
structure.)
a. $30,000 increase
b. $80,000 increase
c. $120,000 increase
d. $300,000 increase
Solution: Sales 100% 1,800,000

CM 40% 720,000 600,000 = 120,000 increase
ROI / Residual Income / EVA
B 1. Zang Enterprises had a sales margin of 7%, sales of $5,000,000, and invested capital
of $4,000,000. The company’s ROI was:
a. 5.60%
b. 8.75%
c. 11.43%
d. 17.86%
e. some other figure.
Solution: ROI = 7% * (5,000,000/4,000,000) = 8.75%
C 2. Mission, Inc., reported a return on investment of 12%, a capital turnover of 5, and

income of $180,000. On the basis of this information, the company’s invested capital was:
a. $300,000
b. $900,000
c. $1,500,000
d. $7,500,000
e. some other amount.
Solution: = 180,000/(0.12/5)
= 7,500,000/5
= 1,500,000
D 3. The information that follows relates to Katz Corporation:

Sales margin: 7.5%
Capital turnover: 2
Invested capital: $20,000,000
On the basis of this information, the company’s sales revenue is:
a. $1,500,000
b. $3,000,000
c. $10,000,000
d. $40,000,000
Solution: = 20,000,000 * 2 = 40,000,000
B 4. Extron Division reported a residual income of $200,000 for the year just ended. The
division had $8,000,000 of invested capital and $1,000,000 of income. On the basis of this
information, the imputed interest rate was:
a. 2.5%
b. 10.0%
c. 12.5%
d. 20.0%
Solution: = 1,000,000 – 200,000
= 800,000 / 8,000,000 = 10%
B 5. Barber Corporation uses an imputed interest rate of 13% in the calculation of residual
income. Division X, which is part of Barber, had invested capital of $1,200,000 and an ROI
of 16%. On the basis of this information, X’s residual income was:
a. $24,960.
b. $36,000.
c. $156,000.
d. $192,000.
Solution: Residual income = (1,200,000 * 16%) (1,200,000 * 13%)
D 6. For the period just ended, United Corporation’s Delta Division reported profit of $31.9
million and invested capital of $220 million. Assuming an imputed interest rate of 12%,
which of the following choices correctly denotes Delta’s return on investment (ROI) and
residual income?
Return on Investment Residual Income
a. 12.0% $(5.5) million
b. 12.0% $5.5 million
c. 14.5% $(5.5) million
d. 14.5% $5.5 million
e. 14.5% $26.4 million
Solution: Residual income = 31,900,000 – (220,000,000 *12%) = 5,500,000

ROI = 31,900,000 / 220,000,000 = 14.5%
C 7. The following information relates to the Atlantic Division of Ocean Enterprises:

Interest rate on debt capital: 8%
Cost of equity capital: 12%
Market value of debt capital: $50 million
Market value of equity capital: $80 million
Income tax rate: 30%
On the basis of this information, Atlantic’s weightedaverage cost of capital is:
a. 7.3%
b. 8.3%
c. 9.5%
d. 10.8%
Solution: WACC = (( 80M / (50M + 80M)) * 12%) + (( 50M / (50M + 80M)) * 8% * (130%))
= 9.5%
C 8. The market value of Glendale’s debt and equity capital totals $180 million, 80% of
which is equity related. An analysis conducted by the company’s finance department
revealed a 7% aftertax cost of debt capital and a 10% cost of equity capital. On the basis
of this information, Glendale’s weightedaverage cost of capital:
a. is 7.6%
b. is 8.5%
c. is 9.4%
d. cannot be determined based on the data presented because the cost of debt
capital must be stated on a beforetax basis
e. cannot be determined based on the data presented because the cost of equity
capital must be stated on an aftertax basis.
Solution: WACC = (80% * 10%) + ( 20% * 7%) = 9.4%

Note: Aftertax cost of debt capital was already given. Thus, no need to multiply it
by (1tax rate)
B 9. Carolina Corporation has an aftertax operating income of $3,200,000 and a 9%

weighted average cost of capital. Assets total $7,000,000 and current liabilities total
$1,800,000. On the basis of this information, Carolina’s economic value added is:
a. $2,408,000
b. $2,732,000
c. $3,668,000
d. $3,992,000
Solution: EVA = 3,200,000 – ((7,000,000 – 1,800,000) * 9%) = 2,732,000
C 10. Marsh Company that had current operating assets of one million and net income
of P200,000 had an opportunity to invest in a project that requires an additional investment
of P250,000 and increased net income by P40,000. The company's required rate of return
is 12%. After the investment, the company's residual income will amount to
a. 80,000
b. 85,000
c. 90,000
d. 95,000
Solution: New Operating Profit (200,000 + 40,000) 240,000

Less: Required Returns (1,250,000 x 12%) 150,000
New Residual Income 90,000
Service Department Charges/Dual Pricing Method
A 1. Bockoven Corporation has two operating divisionsa Consumer Division and a
Commercial Division. The company's Customer Service Department provides services to
both divisions. The variable costs of the Customer Service Department are budgeted at
$46 per order. The Customer Service Department's fixed costs are budgeted at $181,500
for the year. The fixed costs of the Customer Service Department are determined based
on the peak period orders.
Percentage of Peak Period Actual

Capacity Required Orders
Consumer Division 40% 1,100
Commercial Division 60% 2,200
How much Customer Service Department cost should be charged to the Consumer
Division at the beginning of the year for performance evaluation purposes?
a. $123,200
b. $166,650
c. $111,100
d. $133,320
Solution: Customer Service Department cost charged to Consumer Division

= ($46 per order × 1,100 orders) + ($181,500 × 40%)
= $50,600 + $72,600 = $123,200
A 2. Levar Corporation has two operating divisionsa Consumer Division and a

Commercial Division. The company's Order Fulfillment Department provides services to
both divisions. The variable costs of the Order Fulfillment Department are budgeted at $73
per order. The Order Fulfillment Department's fixed costs are budgeted at $470,400 for the
year. The fixed costs of the Order Fulfillment Department are determined based on the
peak period orders.
Percentage of Peak Period Budgeted
At the end of the year, actual Order Fulfillment Department variable costs totaled
$621,600 and fixed costs totaled $473,970. The Consumer Division had a total of 1,840
orders and the Commercial Division had a total of 6,560 orders for the year. For purposes
of evaluation performance, how much Order Fulfillment Department cost should be
charged to the Commercial Division at the END of the year?
a. $831,680
b. $855,588
c. $840,918
d. $846,240
Solution: Order Fulfillment Department cost charged to Commercial Division
= ($73 per order × 6,560 orders) + ($470,400 × 75%)
= $478,880 + $352,800 = $831,680
D 3. Schabel Corporation has two operating divisionsa Consumer Division and a

Commercial Division. The company's Customer Service Department provides services to
both divisions. The variable costs of the Customer Service Department are budgeted at
$72 per order. The Customer Service Department's fixed costs are budgeted at $695,400
for the year. The fixed costs of the Customer Service Department are determined based
on the peak period orders.
Percentage of Peak Period Budgeted
At the end of the year, actual Customer Service Department variable costs totaled
$891,089 and fixed costs totaled $709,820. The Consumer Division had a total of 2,610
orders and the Commercial Division had a total of 9,580 orders for the year. For
performance evaluation purposes, how much actual Customer Service Department cost
should NOT be charged to the operating divisions at the END of the year?
a. $13,409
b. $0
c. $14,420
d. $27,829
Solution: Actual Customer Service Department cost incurred

= $891,089 + $709,820 = $1,600,909
Customer Service Department cost charged to operating divisions

= [$72 per order × (2,610 orders + 9,580 orders)] + $695,400
= [$72 per order × 12,190 orders] + $695,400
= $877,680 + $695,400 = $1,573,080
Actual Customer Service Department cost not charged to operating divisions
= $1,600,909 − $1,573,080 = $27,829
C 4. Mangiamele Corporation's Maintenance Department provides services to the

company's two operating divisionsthe Paints Division and the Stains Division. The variable
costs of the Maintenance Department are budgeted based on the number of cases
produced by the operating departments. The fixed costs of the Maintenance Department
are budgeted based on the number of cases produced by the operating departments during
the peak period. Data appear below:
Maintenance Department
Budgeted variable cost $4 per case
Budgeted total fixed cost $693,000
Paints Division
Percentage of peak period period capacity required 30%
Actual cases 18,000
Stains Division
Percentage of peak period capacity required 70%
Actual cases 59,000
For performance evaluation purposes, how much Maintenance Department cost should
be charged to the Paints Division at the end of the year?
a. $234,000
b. $500,500
c. $279,900
d. $300,300
Solution: Maintenance Department cost charged to Paints Division

= ($4 per case × 18,000 cases) + ($693,000 × 30%)
= $72,000 + $207,900 = $279,900
C 5. Tabarez Corporation's Maintenance Department provides services to the company's

two operating divisionsthe Paints Division and the Stains Division. The variable costs of
the Maintenance Department are budgeted based on the number of cases produced by the
operating departments. The fixed costs of the Maintenance Department are budgeted
based on the number of cases produced by the operating departments during the peak
period. Data appear below:
Maintenance Department
Budgeted variable cost $2 per case
Budgeted total fixed cost $1,140,000
Actual total variable cost $239,400
Actual total fixed cost $1,157,980
Paints Division
Budgeted cases 29,000
Actual cases 29,040
Stains Division
Budgeted cases 85,000
Actual cases 84,960
For performance evaluation purposes, how much Maintenance Department cost should
be charged to the Stains Division at the END of the year?
a. $989,002
b. $1,041,416
c. $967,920
d. $1,019,520
Solution: Maintenance Department cost charged to Stains Division

= ($2 per case × 84,960 cases) + ($1,140,000 × 70%)
= $169,920 + $798,000 = $967,920
For numbers 6 & 7.

Ampulla Production Studios charges the Sound Effects Department's costs to two operating
departments, Audio and Video. Charges are made on the basis of laborhours. Information
pertaining to the laborhours for the year follow:
Audio Video
Budgeted laborhours for the year 18,000 27,000
Actual laborhours for the year 14,700 27,300
Annual longrun average capacity in labor 15,000 25,000
hours
The following costs pertain to the Sound Effects Department:
Budgeted For Actual For Year

Year
Variable costs $315,000 $273,000
Fixed costs $756,000 $819,000
D 6. How much of the Sound Effects Department's variable cost should be charged to the
Video Department at yearend for performance evaluation purposes?
a. $175,000
b. $175,500
c. $177,450
d. $191,100
Solution: Variable cost charged to Video Department

= Budgeted variable cost per labhour × Actual laborhours
= [$315,000 ÷ (18,000 + 27,000)] × 27,300 = ($315,000 ÷ 45,000) × 27,300
= $7 × 27,300 = $191,100
B 7. How much of the Sound Effects Department's fixed cost should be charged to the
Audio department at yearend for performance evaluation purposes?
a. $264,600
b. $283,500
c. $302,400
d. $307,125
Solution: Fixed cost charged to Audio department

= Audio’s percent of total capacity × Budgeted fixed costs
= [15,000 ÷ (15,000 + 25,000)] × $756,000 = (15,000 ÷ 40,000) × $756,000
= 37.5% × $756,000 = $283,500
Transfer Pricing
For numbers 1 to 5
Computer Solutions Corporation manufactures and sells various hightech office automation
products. Two divisions of Office Products Inc. are the Computer Chip Division and the Computer
Division. The Computer Chip Division manufactures one product, a "super chip," that can be used
by both the Computer Division and other external customers. The following information is available
on this month's operations in the Computer Chip Division:
Selling price per chip $50

Variable costs per chip $20
Fixed production costs $60,000
Fixed SG&A costs $90,000
Monthly capacity 10,000 chips
External sales 6,000 chips
Internal sales 0 chips
Presently, the Computer Division purchases no chips from the Computer Chips Division, but
instead pays $45 to an external supplier for the 4,000 chips it needs each month.
C. 1. Refer to Computer Solutions Corporation. Assume that next month's costs and levels
of operations in the Computer and Computer Chip Divisions are similar to this month. What
is the minimum of the transfer price range for a possible transfer of the super chip from one
division to the other?
a. $50
b. $45
c. $20
d. $35
Solution: $20 is the incremental internal cost of the chip.
B. 2. Refer to Computer Solutions Corporation. Assume that next month's costs and levels
of operations in the Computer and Computer Chip Divisions are similar to this month. What
is the maximum of the transfer price range for a possible transfer of the chip from one
division to the other?
a. $50
b. $45
c. $35
d. $30
Solution: $45 is the external price paid for the chip
D. 3. Refer to Computer Solutions Corporation. Two possible transfer prices (for 4,000
units) are under consideration by the two divisions: $35 and $40. Corporate profits would
be ___________ if $35 is selected as the transfer price rather than $40.
a. $20,000 larger
b. $40,000 larger
c. $20,000 smaller
d. the same
Solution: Transfer prices are for internal use only; external profits are not affected.
D. 4. Refer to Computer Solutions Corporation. If a transfer between the two divisions is

arranged next period at a price (on 4,000 units of super chips) of $40, total profits in the
Computer Chip division will
a. rise by $20,000 compared to the prior period.
b. drop by $40,000 compared to the prior period.
c. drop by $20,000 compared to the prior period.
d. rise by $80,000 compared to the prior period.
Solution: $(40 20)/unit * 4,000 units = $80,000
C. 5. Refer to Computer Solutions Corporation. Assume, for this question only, that the
Computer Chip Division is selling all that it can produce to external buyers for $50 per unit.
How would overall corporate profits be affected if it sells 4,000 units to the computer
Division at $45? (Assume that the Computer Division can purchase the super chip from an
outside supplier for $45.)
a. no effect
b. $20,000 increase
c. $20,000 decrease
d. $90,000 increase
Solution: $5.00/unit * 4,000 units = $20,000 decrease in profit
For numbers 6 to 8
The Motor Division of Dynamic Engine Corporation uses 5,000 carburetors per month in its
production of automotive engines. It presently buys all of the carburetors it needs from two outside
suppliers at an average cost of $100. The Carburetor Division of Dynamic Engine Corporation
manufactures the exact type of carburetor that the Motor Division requires. The Carburetor Division
is presently operating at its capacity of 15,000 units per month and sells all of its output to a foreign
car manufacturer at $106 per unit. Its cost structure (on 15,000 units) is:
Variable production costs $70
Variable selling costs 10
All fixed costs 10
Assume that the Carburetor Division would not incur any variable selling costs on units that are
transferred internally.
B. 6. Refer to Dynamic Engine Corporation. What is the maximum of the transfer price
range for a transfer between the two divisions?
a. $106
b. $100
c. $90
d. $70
Solution: $100 represents the price at which the good could be obtained externally.
A. 7. Refer to Dynamic Engine Corporation. What is the minimum of the transfer price
range for a transfer between the two divisions?
a. $96
b. $90
c. $70
d. $106
Solution: $96 represents the external sales price less the selling expenses that will not be
incurred.
C. 8. Refer to Dynamic Engine Corporation. If the two divisions agree to transact with one
another, corporate profits will
a. drop by $30,000 per month.
b. rise by $20,000 per month.
c. rise by $50,000 per month.
d. rise or fall by an amount that depends on the level of the transfer price.
Solution: Selling costs of $50,000 ($10/unit) will not be incurred.
For numbers 9 to 12
Wyatts Corporation produces various products used in the construction industry. The Plumbing
Division produces and sells 100,000 copper fittings each month. Relevant information for last
month
follows:
Total sales (all external) $250,000
Expenses (all on a unit base):
Variable manufacturing $0.50
Fixed manufacturing $0.25
Variable selling $0.30
Fixed selling $0.40
Variable G&A $0.15
Fixed G&A $0.50
Total $2.10
Toplevel managers are trying to determine how a transfer price can be set on a transfer of 10,000
of the copper fittings from the Plumbing Division to the Bathroom Products Division.
C. 9. Refer to Wyatts Corporation. A transfer price based on variable cost will be set at
___________ per Unit.
a. $0.50
b. $0.80
c. $0.95
d. $0.75
Solution: Variable costs = $(0.50 + 0.30 + 0.15) = $0.95
A. 10. Refer to Wyatts Corporation. A transfer price based on full production cost would be
set at ___________ per unit.
a. $0.75
b. $2.10
c. $1.45
d. $1.60
Solution: Total manufacturing costs = $(0.50 + 0.25) = $0.75
B. 11. Refer to Wyatts Corporation. A transfer price based on market price would be set at
___________ per unit.
a. $2.10
b. $2.50
c. $1.60
d. $2.25
Solution: Market Price $250,000

External Sales 100,000 units
Price per Unit $2.50/unit
D. 12. Refer to Wyatts Corporation. If the Plumbing Division is operated as an autonomous

investment center and its capacity is 100,000 fittings per month, the perunit transfer price
is not likely to be below
a. $0.75.
b. $1.60.
c. $2.10.
d. $2.50.
Solution: $2.50 is the price that the fitting is sold to external parties.
Penn Oil Corporation has two divisions, Refining and Production. The company's primary product
is Luboil Oil. Each division's costs are provided below:
Production: Variable costs per barrel of oil $ 9
Fixed costs per barrel of oil $ 6
Refining: Variable costs per barrel of oil $30
Fixed costs per barrel of oil $36
The Refining Division has been operating at a capacity of 40,000 barrels a day and usually
purchases 25,000 barrels of oil from the Production Division and 15,000 barrels from other
suppliers at $60 per barrel.
A. 13. What is the transfer price per barrel from the Production Division to the Refining
Division, assuming the method used to place a value on each barrel of oil is 180% of
variable costs?
a. $16.20
b. $27.00
c. $54.00
d. $70.20
Solution: 1.8 × $9 = $16.20
A. 14. What is the transfer price per barrel from the Production Division to the Refining
Division, assuming the method used to place a value on each barrel of oil is 110% of full
costs?
a. $16.50 ← (9+6) * 1.1
b. $66.00
c. $72.60
d. $89.10
Solution: Revenues = ($120 × 200) $24,000

Cost = ($9 + $6 + $30 + $36) × 200 (16,200)
Operating income $7,800
Calculate the Division operating income for the AlphaShoe Company which manufactures only one
type of shoe and has two divisions, the Sole Division, and the Assembly Division. The Sole Division
manufactures soles for the Assembly Division, which completes the shoe and sells it to retailers.
The Sole Division "sells" soles to the Assembly Division. The market price for the Assembly
Division to purchase a pair of soles is $40. (Ignore changes in inventory.) The fixed costs for the
Sole Division are assumed to be the same over the range of 40,000100,000 units. The fixed costs
for the Assembly Division are assumed to be $14 per pair at 100,000 units.
Sole's costs per pair of soles are:

Direct materials $8
Direct labor $6
Variable overhead $4
Division fixed costs $2
Assembly's costs per completed pair of shoes are:

Direct materials $12
Direct labor $4
Variable overhead $2
Division fixed costs $14
C. 15. What is the marketbased transfer price per pair of soles from the Sole Division to the
Assembly Division?
a. $20
b. $32
c. $40
d. $52
Solution: given (Marketbased transfer price refers to the market price)
D. 16. Calculate and compare the difference in overall corporate net income between
Scenario A and Scenario B if the Assembly Division sells 100,000 pairs of shoes for
$120 per pair to customers.
Scenario A: Negotiated transfer price of $30 per pair of soles

Scenario B: Marketbased transfer price
a. $1,000,000 more net income under Scenario A

b. $1,000,000 of net income using Scenario B
c. $200,000 of net income using Scenario A.
d. None of these answers is correct.
A. 17. Assume the transfer price for a pair of soles is 180% of total costs of the Sole
Division and 40,000 of soles are produced and transferred to the Assembly Division. The
Sole Division's operating income is:
a. $640,000
b. $720,000
c. $800,000
d. $880,000
Solution: Revenue ((1.8 × $20) × 40,000) $1,440,000
Costs ($20 x 40,000) (800,000)
Division A sells ground veal internally to Division B, which in turn, produces veal burgers that sell
for $10 per pound. Division A incurs costs of $1.50 per pound while Division B incurs additional
costs of $5.00 per pound.
A. 18. What is Division A's operating income per pound, assuming the transfer price of the
ground veal is set at $2.50 per pound?
a. $1.00
b. $1.75
c. 2.50
d. $3.25
Solution: 2.50 1.50 = 1.00
A. 19. Which of the following formulas correctly reflects the company's operating income
per pound?
a. $10.00 ($1.50 + $5.00) = $3.50
b. $10.00 ($2.50 + $5.00) = $2.50
c. $10.00 ($1.50 + $7.50) = $1.00
d. $10.00 ($0.50 + $2.50 + $7.00) = 0
A. 20. McKennas Florida Division is currently purchasing a part from an outside supplier.
The company’s Alabama Division, which has excess capacity, makes and sells this part for
external customers at a variable cost of $22 and a selling price of $34. If Alabama begins
sales to Florida, it (1) will use the general transferpricing rule and (2) will be able to reduce
variable cost on internal transfers by $4. If sales to outsiders will not be affected, Alabama
would establish a transfer price of:
a. $18.
b. $22.
c. $30.
d. $34.
Solution: $22 $4 = $18
Bronx Corporation’s Alvin Division manufactures and sells product no. 24, which is used in
refrigeration systems. Perunit variable manufacturing and selling costs amount to $20 and $5,
respectively. The Division can sell this item to external domestic customers for $36 or, alternatively,
transfer the product to the company’s Refrigeration Division. Refrigeration is currently purchasing
a similar unit from Taiwan for $33. Assume use of the general transferpricing rule.
A. 21. If Alvin had excess capacity, what transfer price would the Division’s management
set?
a. $25
b. $20
c. $11
d. $9
Solution: Variable Manufacturing and Selling Cost = $20 + $5= $25
A. 22. If Alvin had no excess capacity, what transfer price would the Division’s management
set?
a. $36
b. $11
c. $16
d. $25
Solution: Selling Price= $36
A. 23. Assuming that Alvin was able to reduce the variable cost of internal transfers by $4
per unit. What transfer price would the Division’s management set?
a. $32
b. $30
c. $32.50
d. $35
Solution: ($20 + $5 $4) + ($36 $20 $5)
D. 24. An appropriate transfer price between two divisions of the Reno Corporation can be
determined from the following data:
Fabrication Division
Market price of subassembly P50
Variable cost of subassembly P20
Excess capacity (in units) 1,000
Assembling Division
Number of units needed 900
What is the natural bargaining range for the two divisions?

a. Between P20 and P50
b. Between P50 and P70
c. Any amount less than P50
d. P50 is the only acceptable price
Solution: The Fabrication division has excess capacity, therefore the division can transfer the
units at a minimum transfer price of P50
D. 25. Family Enterprises has two divisions: Davy and Johnny. Davy Division has a capacity
to produce 2,000 units and is expecting to sell 1,500 units. Johnny Division wants to
purchase 100 units of a product Davy produces. Davy sells the product at a selling price of
P100 per unit, the variable cost per unit is P25 and the fixed costs total P30,000. The
minimum transfer price that Davy will accept is?
a. P100
b. P43.75
c. P45
d. P25
Solution: The minimum Davy would accept is the opportunity cost to make the product, which
would be the variable cost of P25.
D. 26. The Black Division of Pluma Company produces a high quality marker. Unit
production costs (based on capacity production of 100,000 units per year) follow:
Direct materials P 60
Direct labor 25
Overhead (20% variable) 15
Other information
Sales price 120
The Black Division is producing and selling at capacity.

What is the minimum selling price that the division would consider as a “transfer price” to
the Red Division on which no variable period costs would be incurred?
a. P120
b. P 88
c. P 91
d. P117
Solution: Selling price (market price) P 120

Less avoidable selling expense 15 x 20% 3
Minimum transfer price P117
A 27. Assume that Division X has a product that can be sold either to outside customers on
an intermediate market or to Division Y of the same company for use in its production
process. The managers of the division are evaluated based on their divisional profits.
Division X:
Capacity in units 200,000
Number of units being sold on the
Intermediate market 160,000
Selling price per unit on the intermediate
Market P75
Variable Costs per unit 60
Fixed Costs per unit (based on capacity) 8
Division Y:
Number of units need for production 40,000
Purchase price per unit now being paid
to an outside supplier P74
The minimum transfer price to be charged by the Division X should be:

a. P60
b. P75
c. P68
d. P74
Solution: The minimum transfer price is P60 because the Division X has excess capacity
For number 28 and 29

Bearing Division of Phantom Corp. sells 80,000 units of Part X to the outside market. Part X sells
for P10.00 and has a variable cost of P5.50 and a fixed cost per unit of P2.50. Bearing has a
capacity to produce 100,000 units per period. Motor Division currently purchases 10,000 units of
Part X from Bearing for P10.00. Motor has been approached by an outside supplier willing to
supply the parts for P9.00.
C 28. What is the effect on XYZ’s overall profit if Bearing refuses the outside price and
Motor decides to buy outside?
a. No change
b. P20,000 decrease in Phantom profits
c. P35,000 decrease in Phantom profits
d. P10,000 increase in Phantom profits
Solution: (9.5 5.5) x 10,000 units = P35,000
A. 29. What is the effect on XYZ’s overall profit if Bearing refuses the outside price and
Motor decides to buy inside?
a. No change
b. P20,000 decrease in Phantom profits
c. P35,000 decrease in Phantom profits
d. P10,000 increase in Phantom profits
Explanation: There is no change in the profit because the Motor Division did not buy from the
outside supplier
B 30. Company Y is highly decentralized. Division X, which is operating at capacity,
produces a component that it currently sells in a perfectly competitive market for P13 per
unit. At the current level of production, the fixed cost of producing this component is P4
per unit and the variable cost is P7 per unit. Division Z would like to purchase this
component from Division X. What would be the price that Division X should charge Division
Z?
a. P 7
b. P 13
c. P 11
d. P 9
Solution: The division is operating at capacity (zero excess capacity). Any quantity of
production to be transferred to the Division Z must be at P13; Any price below P13,
as transfer price, would decrease its profit.
N & R Company transfers a product from division N to division R. Variable cost of this product is
anticipated to be P40 a unit and total fixed costs amount to P8,000. A total of 100 units are
anticipated to be produced. Actual cost, however, amounts to P50 for variable costs. Fixed costs
were same as budget. However, actual output was twice as many.
A 31. Actual cost per unit amounts to

a. P90
b. P92
c. P115
d. P120
Solution: The actual cost is the sum of unit variable cost plus fixed cost divided by actual
units produced.
50 + (8000 ÷ 200) = P90
C 32. The transfer price based on actual variable costs plus 130% markup amounts to
a. P90
b. P92
c. P115
d. P120
Solution: Variable Cost P50

Markup (50x 1.3) 65
Transfer Price P115
D 33. The transfer price based on budgeted full cost plus 30% markup amounts to
a. P117
b. P140
c. P150
d. P156
Solution: Budgeted full cost (40 + (8000/100) 120

Markup (120 x 0.3) 36
Transfer Price 156
Transfer Pricing: Multinational

For numbers 1 to 5
Walker Inc. has a Pennsylvaniabased division that produces electronic components, with a very
strong domestic market for circuit no. 222. The variable production cost is $140, and the division
can sell its entire output for $190. Walker is subject to a 30% income tax rate. Alternatively, the
Pennsylvania division can ship the circuit to a division that is located in Mississippi, to be used in
the manufacture of a global positioning system (GPS). Information about the global positioning
system and Mississippi’s costs follow.
Selling price: $380

Circuit shipping and handling fees to Mississippi: $10
Labor, overhead, and additional material costs of GPS: $120
D. 1. Assume that the transfer price for the circuit was $160. How would Pennsylvania’s
divisional manager likely react to a corporate decision to transfer the circuits to Mississippi?
Why?
a. None of the choices

b. The manager would be happy, as the division is being forced to take a quote; of
$30 per circuit ($190 vs. $160).
c. The manager would feel nothing.
d. The manager would be unhappy, as the division is being forced to take a quote; of
$30 per circuit ($190 vs. $160).
B. 2. Assume that Walker moved its GPS production facility to a division located in
Germany, which is subject to a 45% tax rate. The transfer took place at $180. Shipping
fees(absorbed by the overseas division) doubled to $20; the German division paid an
import duty equal to 10% of the transfer price; and labor, overhead, and additional material
costs were $150 per GPS. If the German selling price of the GPS amounted to $450,
calculate Pennsylvania income, German income, and income for Walker as a whole.
a. $29; $30; $90
b. $28; $45.10; $73.10
c. $25; $35; $50
d. $23; $45; $35
Solution: Pennsylvania: $180 $140 = $40; $40 ($40 x 30%)

= $28
Germany: $450 $20 $150 $180 ($180 x 10%) = $82; $82 ($82 x 45%)
= $45.10
Walker, Inc.: $28.00 + $45.10
= $73.10
A. 3. Suppose that U.S. and German tax authorities allowed some discretion in how
transfer prices were set. Given the difference in tax rates, should Walker attempt to
generate the majority of its income in Pennsylvania or Germany
a. Pennsylvania
b. Germany
c. Province of China
d. U.S.
Note: In order to generate a greater profit, choose the lower income tax rate. Tax rates are
lower in the U.S. than in Germany (30% vs. 45%). Thus, Walker would benefit if it
generated the majority of its income in Pennsylvania.
Cheney Corporation produces goods in the United States, to be sold by a separate division located
in Italy. More specifically, the Italian division imports units of product X34 from the U.S. and sells
them for $950 each. (Imports of similar goods sell for $850.) The Italian division is subject to a 40%
tax rate whereas the U.S. tax rate is only 30%. The manufacturing cost of product X34 in the United
States is $720. Furthermore, there is a 10% import duty, computed on the transfer price, that will
be paid by the Italian division and is deductible when computing Italian income.
Tax laws of the two countries allow transfer prices to be set at U.S. manufacturing cost or the
selling prices of comparable imports in Italy.
A. 4. The profitability of the division in Italy is:

a. $94.80
b. $95
c. $100
d. $93
Solution: Italy: $950 $720 ($720 x 10%) = $158; $158 ($158 x 40%) = $94.80
United States: $720 $720 = $0
Cheney Corporation: $0 + $94.80 = $94.80
Activity Based Costing

C 1. Hettich Corporation uses an activitybased costing system with the following three
activity cost pools:
Activity Cost Pool Total Activity
Fabrication 20,000 machinehours
Order processing 200 orders
Other Not applicable
The Other activity cost pool is used to accumulate costs of idle capacity and organization
sustaining costs.
The company has provided the following data concerning its costs:
Wages and salaries $480,000
Depreciation 120,000
Occupancy 200,000
Total $800,000
The distribution of resource consumption across activity cost pools is given below:
Activity Cost Pools
Fabrication Order Processing Other Total
Wages and salaries 55% 20% 25% 100%
Depreciation 10% 45% 45% 100%
Occupancy 25% 40% 35% 100%
The activity rate for the Order Processing activity cost pool is closest to:
a. $1,400 per order
b. $1,600 per order
c. $1,150 per order
d. $800 per order
Solution: ((480,000 x 20%) + (120,000 x 45%) + (200,000 x 40%))

200
A 2. Duerr Corporation uses an activitybased costing system with three activity cost pools.
The company has provided the following data concerning its costs:
Wages and salaries $400,000
Depreciation 180,000
Occupancy 200,000
Total $780,000
The distribution of resource consumption across the three activity cost pools is given
below:
Activity Cost Pools
Fabricating Order Processing Other Total
Wages and salaries 55% 20% 25% 100%
Depreciation 10% 50% 40% 100%
Occupancy 35% 40% 25% 100%
How much cost, in total, would be allocated in the firststage allocation to the Order
Processing activity cost pool?
a. $250,000
b. $286,000
c. $156,000
d. $312,000
Solution: (400,000 x 20%) + (180,000 x 50%) + (200,000 x 40%)
B 3. Rosenbrook Corporation has provided the following data from its activitybased
costing system:
Activity Cost Pool Total Cost Total Activity
Assembly $710,770 37,000 machinehours
Processing orders $39,690 1,800 orders
Inspection $119,116 1,940 inspectionhours
Data concerning one of the company’s products, Product H73N, appear below:
Selling price per unit $125.10
Direct materials cost per unit $34.94
Direct labor cost per unit $49.21
Annual unit production and sales 460
Annual machinehours 510
Annual orders 80
Annual inspections 10
According to the activitybased costing system, the product margin for

product H73N is
a. $7,275.90 per unit
b. $6,661.90 per unit
c. $18,837.00 per unit
d. $8,425.90 per unit
Solution:
Sales (125.10 * 460) 57 546
Less: DM (34.94 * 460) 16 072.4
DL (49.21 * 460) 22 636.6
Assembly ((710 770/37 000) * 510) 9 797.1
Processing orders ((39 690/1800) * 80) 1 764
Inspection ((119 116/1 940) * 10) 614
Profit (Product Margin) $6 661.9
A 4. Belsky Corporation has provided the following data from its activitybased costing
system:
Activity Cost Pool Total Cost Total Activity
Assembly $313,490 29,000 machinehours
Processing orders $49,476 1,400 orders
Inspection $73,882 1,060 inspectionhours
The company makes 490 units of product Q19S a year, requiring a total of 1,080 machine
hours, 60 orders, and 20 inspectionhours per year. The product's direct materials cost is
$46.42 per unit and its direct labor cost is $20.22 per unit.
According to the activitybased costing system, the average cost of product Q19S is
closest to:
a. $97.64 per unit
b. $66.64 per unit
c. $93.31 per unit
d. $94.79 per unit
Solution:
Assembly (313 490/29 000) * 1080 11 674.8
Processing Orders (49 476/1400) * 60 2120.4
Inspection (73 882/1060) * 20 1394
TOTAL 15189.2
Units produced 490
30.99
DM 46.42
DL 20.22
Average cost per unit $97.64
For numbers 5 to 6
Abrams Company uses activitybased costing. The company has two products: A and B. The
annual production and sales of Product A is 300 units and of Product B is 1,000 units. There are
three activity cost pools, with estimated costs and expected activity as follows:
Expected Activity
Activity Cost Pool Estimated Cost Product A Product B Total
Activity 1 $7,356 200 200 400
Activity 2 $30,555 1,400 700 2,100
Activity 3 $16,169 90 300 390
C 5. The activity rate for Activity 3 is closest to:

a. $53.906
b. $138.67
c. $41.46
d. $18.71
Solution: (16,169/390) = 41.46

B 6. The cost per unit of Product A is closest to:
a. $41.60
b. $92.60
c. $12.44
d. $68.00
Solution: ACTIVITY COST ALLOCATION COST PER UNIT

1 7,356 x (200/400) = 3678/300 12.26
2 30,555 x (1,400/2,100)=20,370/300 67.9
3 16,169*(90/390)=3,731.31/300 12.44
TOTAL 94.60
D 7. Dalrymple Company produces a special spray nozzle. The budgeted indirect total cost
of inserting the spray nozzle is $80,000. The budgeted number of nozzles to be inserted is
40,000. What is the budgeted indirect cost allocation rate for this activity?
a. $0.50
b. $1.00
c. $1.50
d. $2.00
Solution: (80,000/40,000)
For numbers 8 to 13
Mertens Company provides the following ABC costing information:
Activities Total Costs Activitycost drivers
Account inquiry hours $200,000 10,000 hours
Account billing lines $140,000 4,000,000 lines
Account verification accounts $75,000 40,000 accounts
Correspondence letters $ 25,000 4,000 letters
Total costs $440,000
The above activities are used by Departments A and B as follows:

Department A Department B
Account inquiry hours 2,000 hours 4,000 hours
Account billing lines 400,000 lines 200,000 lines
Account verification accounts 10,000 accounts 8,000 accounts
Correspondence letters 1,000 letters 1,600 letters
A 8. How much of the account inquiry cost will be assigned to Department A?

a. $40,000
b. $200,000
c. $80,000
d. None of these answers are correct.
Solution: (200,000/10,000) x 2000
C 9. How much of the account billing cost will be assigned to Department B?

a. $14,000
b. $140,000
c. $7,000
Solution: (140,000/4,000,000) x 200,000
B 10. How much of account verification costs will be assigned to Department A?

a. $15,000
b. $18,750
c. $75,000
d. $5,000
Solution: (75,000/40,000) x 10,000
D 11. How much of correspondence costs will be assigned to Department B?

a. $800
b. $6,250
c. $25,000
d. $10,000
Solution: (25,000/4,000) x 1600
A 12. How much of the total costs will be assigned to Department A?

a. $79,000
b. $40,000
c. $112,000
d. $440,000
Solution: ((200,000/10,000) x 2000) + ((140,000/4,000,000) x 400000) +

((75,000/40,000) x 10,000) + ((25,000/4,000) x 1000)
C 13. How much of the total costs will be assigned to Department B?

a. $79,000
b. $40,000
c. $112,000
d. $440,000
Solution: ((200,000/10,000) x 4000) + ((140,000/4,000,000) x 200,000) +

((75,000/40,000) x 8000) + ((25,000/4,000) x 1600)
Happy Valley Land and Snow Company provides the following ABC costing information:
Activities Total Costs Activitycost drivers
Labor hours $320,000 8,000 hours
Gas $36,000 6,000 gallons
Invoices $40,000 2,500 invoices
Total costs $396,000
The above activities used by their three departments are:

Lawn Department Bush Department Plowing Department
Labor hours 2,500 hours 1,200 hours 4,300 hours
Gas 1,500 gallons 800 gallons 3,700 gallons
Invoices 1,600 invoices 400 invoices 500 invoices
A 14. How much of the labor cost will be assigned to the Lawn Department?
a. $100,000
b. $25,600
c. $40,000
Solution: (320,000/8,000) x 2,500
B 15. How much of the gas cost will be assigned to the Plowing Department?
a. $50,000
b. $22,200
c. $30,000
Solution: (36,000/6,000) x 3700
A 16. How much of invoice cost will be assigned to the Bush Department?
a. $6,400
b. $8,000
c. $25,600
d. $40,000
Solution: (40,000/2,500) x 400
C 17. How much of the gas cost will be assigned to the Lawn Department?
a. $4,800
b. $20,000
c. $9,000
d. $22,200
Solution: (36,000/6,000) x 1,500

B 18. How much of the total cost will be assigned to the Plowing Department?
a. $396,000
b. $202.200
c. $134,600
d. $172,000
Solution: ((320,000/8,000) x 4,300) + ((36,000/6,000) x 3700) + ((40,000/2,500) x 500)
D 19. How much of the total costs will be assigned to the Lawn Department?
a. $100,000
b. $49,200
c. $200,000
d. $134,600
Solution: ((320,000/8,000) x 2,500) + ((36,000/6,000) x 1,500) + ((40,000/2,500) x 1,600)
C 20. Germie, Inc. has identified the following overhead costs and activity drivers for next
year.
Overhead Item Expected Cost Activity Driver Expected Quantity
Setup costs P100,000 Number of setups 500
Ordering costs 40,000 Number of orders 3,200
Maintenance 200,000 Machine hours 4,000
Power 20,000 Kilowatt hours 80,000
The following are two of the jobs completed during the year
Job 500 Job 501
Direct materials P1,500 P2,000
Direct labor P1,400 P2,400
Units completed 100 160
Direct labor hours 100 160
Number of setups 2 8
Number of orders 8 10
Machine hours 40 50
Kilowatt hours 60 100
The company’s normal activity is 4,000 direct labor hours.
If the four activity drivers are used to allocate overhead costs, total overhead allocated to
Job 500 would be
a. P2,766.50
b. P2,415.00
c. 2,515.00
d. 2,815.00
Solution Activity Rates:
Setup (P100,000 ÷ 500) P200.00
Ordering (P40,000 ÷ 3,200) 12.50
Maintenance (P200,000 ÷ 4,000) 50.00
Power (P20,000 ÷ 80,000) 0.25
Overhead costs assigned to Job 500:

Setup (2 x P200) P400
Ordering (8 x P12.50) 100
Maintenance (40 x P50) 2,000
Power (60 x P0.25) 15 .
Total P2,515
D 21. Wesleyan University Hospital plans to use activitybased costing to assign hospital
indirect costs to the care of patients. The hospital has identified the following activities
and activity rates for the hospital’s indirect costs:
Activity Activity Rate
Room and meals P150 per day
Radiology P 95 per image
Pharmacy P 20 per physician order
Chemistry lab P 85 per test
Operating room P550 per operating room hour
The records of two representative patients were analyzed, using the activity rates. The
activity information associated with the two patients is as follows:
Patient Flor Patient Laura
Number of days 7.0 3
Number of images 4.0 2
Number of physician orders 5.0 1
Number of tests 6.0 2
Number operating room hours 4.5 1
Determine the activity cost associated with Patient Flor:

a. P4,500
b. P4,550
c. P4,495
d. P4,515
Solution: Room and meals (7 days x P150) P1,050

Radiology (4 images x P95) 380
Pharmacy (5 orders x P20) 100
Chemistry lab (6 tests x P85) 510
Operating room (4.5 hours x P550) 2,475
Total P4,515
Special Products recently installed an activitybased relational database. Using the information
contained in the activity relational table, the following pool rates were computed:
P200 per purchase order

P12 per machine hour, process A
P15 per machine hours, process B
P40 per engineering hour
Two products are produced by Special Products: A and B. Each product has an area in the plant
that is dedicated to its production. The plant has two manufacturing processes, process A and
process B. Other processes include engineering, product handling, and procurement. The product
relational table for Special is as follows:
Activity Usage
Activity Driver # and Name Product A: Product B:
1 Units 200,000 25,000
2 Purchase orders 250 125
3 Machine hours 80,000 10,000
4 Engineering hours 1,250 1,500
D 22. How much overhead cost will be assigned to product B using process B?
a. 1,200,000
b. 960,000
c. 120,000
d. 150,000
Solution: (15 * 10 000)
D 23. What is the unit cost of Product A?

a. 4.71
b. 252.00
c. 480
d. 5.30
Solution:
Purchase orders (200 * 250) 50 000
Process A (12 * 80 000) 960 000
Engineering (40 * 1250) 50 000
TOTAL 1 060 000
Units 200 000
Unit cost $5.3
Activity Performance Measurement
C 1. Stanley Corporation takes eight hours to complete the setup process for a certain
electrical component, with the setup cost averaging $150 per hour. If the company’s
competitor can accomplish the same process in six hours, Stanley’s nonvalueadded cost
would be:
a. $0.
b. $150.
c. $300.
d. $900.
Solution: ((8 hours6 hours) x $ 150)
C 2. During a recent accounting period, Marty’s shipping department processed 26 orders.

Each order typically takes four hours to complete; however, the average time increased
to five hours because of various departmental inefficiencies. If shipping labor is paid $14
per hour, the company’s nonvalueadded cost would be:
a. $0
b. $56
c. $364.
d. $1,456.
Solution: ((5 hours 4 hours) x 26 orders x $14))
Target Costing
For numbers 1 to 2
Anjelo Factory sells a product for P150 per unit. Its market share is 25 percent. The marketing
manager feels that the market share can be increased to 33 percent with a reduction in price to
P130. The product is currently earning a profit of P24 per unit. The president of Wine Factory
feels that the P24 profit per unit must be maintained.
C 1. What is the target cost per unit?

a. P130
b. P150
c. P106
d. P126
Solution: (13024)
D 2. What is the original cost per unit?

a. P130
b. P150
c. P106
d. P126
Solution: (15024)
A 3. Y Company sells a product for P215 per unit. Its market share is 20 percent. The
marketing manager feels that the market share can be increased to 30 percent with
reduction in price to P195. The product is currently earning a profit of P45 per unit. The
president of Hristec Company feels that the P45 profit per unit must be maintained. What
is the original cost per unit?
a. P170
b. P195
c. P215
d. P150
Solution: (215 45)
C 4. Franklin Electronics currently sells a camera for $240. An aggressive competitor has
announced plans for a similar product that will be sold for $205. Franklin's marketing
department believes that if the price is dropped to meet competition, unit sales will
increase by 10%. The current cost to manufacture and distribute the camera is $175,
and Franklin has a profit goal of 20% of sales. If Franklin meets competitive selling
prices, what is the company's target cost?
a. $41
b. $48
c. $164
d. $175
e. $192
Solution: (205 (205 * 20%))
A 5. Montana produces bicycles in a highly competitive market. During the past year, the
company has added a 30% markup on the $250 manufacturing cost for one of its most
popular models. A new competitor manufactures a similar model, has established a $300
selling price, and is seriously eroding Montana's market share. Management now desires
to use a targetcosting approach to remain competitive and is willing to accept a 20% return
on sales. If target costing is used, which of the following choices correctly denotes (1) the
price that Montana will charge and (2) company's target cost?
Selling Price Target Cost
a. $300 $240
b. $300 $250
c. $325 $240
d. $325 $250
e. Some other combination of selling price and target costs
Solution: Given selling price: $300

Target cost: (300 (300 * 20%))
For numbers 6 to 7
Wagner Furniture manufactures easytoassemble wooden furniture for home andoffice. The firm
is considering modification of a bookcase, and the company's marketing department surveyed
potential buyers regarding five proposed changes (AE). The buyers' responses, in order of
preference, along with Wagner's related unit costs for the modifications, follow.
Order of Preference Change Cost

1 A $7.50
2 D 5.00
3 B 4.00
4 C 1.50
5 E 5.50
The bookcase currently costs $81 to produce and distribute, and Wagner's selling price for
this unit averages $108. An analysis of competitive products in the marketplace revealed
a variety of features, with some models having all of the changes that Wagner is
considering and other models having only a few. The current manufacturers' selling prices
on these bookcases averages $120.
C 6. If Wagner uses target costing and desires to meet the current

competitive selling price, what is the maximum cost of the modified bookcase?
a. $60
b. $40
c. $90
d. $70
Explanation: Wagner currently earns a $27 profit on each bookcase sold ($108 $81), which
translates into a 25% markup on sales ($27 / $108). The current competitive market price is $120,
which means that if Wagner maintains the 25% markup, it will earn $30 per unit. The maximum
allowable cost is therefore $90 ($120 $30).
D 7. Which of the modifications should Wagner consider?

a. A & C
b. D & B
c. A & D
d. Both A and B
Explanation: Wagner can add $9 of modifications ($90 $81), giving rise to several options.
Customers feel mostly strongly about change A, which can be adopted either by itself or in
conjunction with change C ($7.50 + $1.50 = $9.00). Alternatively, changes D and B can be
selected, also adding $9 to total cost ($5.00 + $4.00 = $9.00).
B 8. Ratner and Associates develops hotels in resort locations. The company is exploring
the construction of a new facility that would have significant meeting and banquet space
for conventions and conferences, and sleeping rooms that average 850 square feet. The
accounting department estimates that land and building costs will amount to $60 and $120
per square foot of floor area, respectively. Other expenditures during construction for
interest, real estate taxes, and general overhead are expected to total 35% of land and
construction cost.
Once basic construction is completed, Ratner anticipates perroom initial

expenditures for:
Sleeping room furnishings and accessories $16,000
Supplies 1,900
Marketing 5,500
The accounting department suggests that 10% be added to the total of all
preceding costs to allow for estimation errors. Construction is anticipated to take two years.
Ratner's pricing policy is consistent with that of industry leaders, namely, to

set a room rate equal to 1% of $1,000 of cost. Upon completion, comparable facilities are
expected to charge $240 per day.
Compute the total cost of sleeping room at the new facility?

a. $229,500
b. $252,945
c. $153,000
d. $240,000
Solution:
Construction cost (850 * (120 + 60)) 153 000
Other construction cost (35% * 153 000) 53 550
Furnishings and accessories 16 000
Supplies 1,900
Marketing 5,500
TOTAL 229 950
Estimation errors (10%) 22 995
TOTAL $252 945
For problem 9 to 11:

Argosy, Inc. uses target costing and will soon enter a very competitive marketplace in which it
will have limited influence over the prices that are charged. Management and consultants are
working to finetune the company's sole service, which hopefully will generate a 12% return
(profit) on the firm's $24,000,000 asset investment. The following information is available:
Hours of service to be provided: 34,000

Anticipated variable cost per service hour: $30
Anticipated fixed cost: $2,560,000 per year
A 9. How much profit must Argosy produce to achieve a 12% return?

a. $2 880 000
b. $2 000 000
c. $2 560 000
d. $2 5640 000
Solution: Argosy's target profit is $2,880,000 ($24,000,000 x 12%).
C 10. Calculate the revenue per hour that Argosy must generate to achieve a 12% return.
a. $240
b. $360
c. $190
d. 460
Solution: Total revenues must be sufficient to cover costs and produce the target profit.
Thus, revenues equal $6,460,000 [(34,000 hours x $30) + $2,560,000 +
$2,880,000]. The revenue per hour must be $190 ($6,460,000 ÷ 34,000 hours).
B 11. Assume that prior to entering the marketplace, management conducted a

planning exercise to determine whether a 14% return could be attained in year no. 2. Can
the company achieve this return if (a) competitive pressures dictate a maximum selling
price of $195 per hour and (b) service hours, variable cost per service hour, and fixed costs
are the same as the amounts anticipated in year no. 1? Compute for the revenue per hour.
a. $360
b. $204.12
c. $450
d. $190
Explanation: Argosy's target profit is $3,360,000 ($24,000,000 x 14%). Total revenues must
equal $6,940,000 [(34,000 hours x $30) + $2,560,000 + $3,360,000], and the
revenue per hour must be $204.12 ($6,940,000 ÷ 34,000 hours).
No. A 14% return requires that Argosy produce revenue per service hour of
$204.12, which is in excess of the $195 maximum market price.
For numbers 12 to 15:

The Razooks Company, which manufactures office equipment, is ready to introduce a new line
of portable copiers. The following copier data are available:
Variable manufacturing cost $180

Applied fixed manufacturing cost 90
Variable selling and administrative cost 60
Allocated fixed selling and administrative cost 75
C 12. What price will the company charge if the firm uses costplus pricing based on
variable manufacturing costs and a markup percentage of 220%?
a. $396.00
b. $495.00
c. $576.00
d. $643.50
e. Some other amount.
Solution: (180 x (1 + 220%))
D 13. What price will the company charge if the firm uses costplus pricing based on total
variable cost and a markup percentage of 160%?
a. $150
b. $384
c. $390
d. $624
Solution: (180 + 60) x (1 + 160%)
C 14. What price will the company charge if the firm uses costplus pricing based on
absorption cost and a markup percentage of 120%?
a. $420
b. $459
c. $594
d. $672
Solution: (180 + 90) x (1 + 120%)
C 15. What price will the company charge if the firm uses costplus pricing based on total
cost and a markup percentage of 40%?
a. $462
b. $513
c. $567
d. $594
Solution: (180 + 90 + 60 + 75) x (1 + 40%)
B 16. Albany Company has average invested capital of $800,000 and a target return on
investment of 15%. The total cost per unit is $20 based on a volume level of 25,000 units.
Albany's markup percentage on total cost is:
a. 9.375%
b. 24.0%
c. 47.5%
d. 62.5%
Solution: (800,000 x 15%) / (20 x 25,000)
B 17. Robertson, Inc. uses target costing and sells a product for $36 per unit. The company
seeks a profit margin equal to 25% of sales. If the current manufacturing cost is $29 per
unit, the firm will need to implement a cost reduction of:
a. $0
b. $2
c. $9
d. $20
Solution: (36 x 25%) (36 29)
Athens Corporation manufactures part no. 67, which is used in the production of mountain bikes.
Per unit information about part no. 67 follows:
Prevailing market price $33

Direct materials 14
Direct labor 6
Manufacturing overhead 7
Selling and administrative expenses 3
Athens has traditionally used 20% markup on total cost to arrive at a reasonable selling price. The
company, though, has noticed a sizable drop in sales volume during the last few quarters, which
it attributes to new entrants in the marketplace.
A 18. Compute the current selling price of part no. 67

a. $36
b. $33
c. $30
d. Some other amount.
Solution: Direct materials $14

Direct labor 6
Manufacturing Overhead 7
Selling & Admin Expenses 3
TOTAL COST $30 x 120% = $36
B 19. If management desired to meet the prevailing market price and maintain the current
rate of profit on sales, what must happen to the company’s total manufacturing costs? By
how much should be the reduction in costs?
a. $2.00
b. $2.50
c. $3.00
d. Some other amount
Solution: Selling Price $36 100%

Cost (30) 83.33%
Markup 6 16.67%
$33 x 16.67% = 5.5 new markup

Target selling price $33
Less: NEW markup (5.5)
Target Cost $27.5
Less: Current costs 30.0
Reduction in costs $2.50
Kaizen Standard Costing

For numbers 1 to 2
Sherry and John Enterprises are using the kaizen approach to budgeting for 2011. The budgeted
income statement for January 2011 is as follows:
Sales (168,000 units) $1,000,000
Less: Cost of goods sold 600,000
Gross margin 400,000
Operating expenses (includes $50,000 of fixed costs) 300,000
Under the kaizen approach, cost of goods sold and variable operating expenses are budgeted to
decline by 1% per month.
A 1. What is budgeted cost of goods sold for March 2011?

a. $588,060
b. $592,000
c. $600,000
d. $594,000
Solution: (600 000 (600 000 * 1%)) = 594 000 ; (594 000 (594 000 * 1%)) = 588 060
or 600,000 x 0.99 x 0.99 = 588,060
D 2. What is budgeted gross margin for March 2011?

a. $392,040
b. $396,000
c. $408,040
d. $411,940
Solution: (1,000,000 588,060) = 411 940
A 3. Allscott Company is developing its budgets for 2012 and, for the first time, will use the
kaizen approach. The initial 2012 income statement, based on static data from 2011, is as
follows:
Sales (140,000 units) $420,000
Operating expenses (includes $28,000 of depreciation) 112,000
Net income $28,000
Selling prices for 2012 are expected to increase by 8%, and sales volume in units will
decrease by 10%. The cost of goods sold as estimated by the kaizen approach will
decline by 10% per unit. Other than depreciation, all other operating costs are expected
to decline by 5%.
What is the net income generated for 20x5?

a. $73 640
b. $64 730
c. $56 740
d. $33 640
Solution: Sales (126,000 × $3.24) $408,240

Less: COGS (126,000 × $1.80) 226,800
Operating expenses ($28,000 + $79,800) 107,800
Net income $ 73,640
D 4. Corporation is using the kaizen approach to budgeting for 2011. The budgeted income
statement for January 2011 is as follows:
Sales (240,000 units) $360,000
Operating expenses (includes $32,000 of fixed costs) 96,000
Net income $ 24,000
Under the kaizen approach, cost of goods sold and variable operating expenses are
budgeted to decline by 1% per month.
What is the budgeted income generated for March 2011?

a. $60 000
b. $50 050
c. $25 000
d. $30 050
Solution Sales $360,000

Less: Cost of goods sold ($240,000 × 0.99 × 0.99) 235,224
Operating expenses [($64,000 × 0.99 × 0.99) + $32,000] 94,726
Net income $ 30,050
Life Cycle Costing

For numbers 1 to 3
Bicker, Inc.is in the process of evaluating a new product using the following information.
● A new transformer has two production runs each year, each with $10,000 in setup costs.
● The new transformer incurred $30,000 in development costs and is expected to be
produced over the next three years.
● Direct costs of producing the transformers are $40,000 per run of 5,000 transformers
each.
● Indirect manufacturing costs charged to each run are $45,000.
● Destination charges for each transformer average $1.00.
● Customer service expenses average $0.20 per transformer.
● The transformers are selling for $25 the first year and will increase by $3 each year
thereafter.
● Sales units equal production units each year.
D 1. What are estimated lifecycle revenues?

a. $250,000
b. $280,000
c. $310,000
d. $840,000
Solution: First year (5,000 x 2 runs x $25) $250,000
Second year (5,000 x 2 x $28) 280,000
Third year (5,000 x 2 x $31) 310,000
Total $840,000
A 2. What is the estimated lifecycle operating income for the first year?
a. $18,000
b. $20,000
c. $48,000
d. $119,000
Solution: Sales (5,000 units x 2 runs x $25) $250,000

Development costs $30,000
Setup costs (2 x $10,000) 20,000
Direct manufacturing costs (2 x $40,000) 80,000
Indirect manufacturing costs (2 x $45,000) 90,000
Destination charges ($1.00 x 10,000) 10,000
Customer service ($0.20 x 10,000) 2,000 232,000
Estimated lifecycle operating income for the first year $ 18,000
B 3. What is the estimated lifecycle operating income for the first three years?
a. $174,000
b. $204,000
c. $636,000
d. $840,000
For questions for 4 to 6

Neises, White, Granberry and Associates are in the process of evaluating its new client services
for the business consulting division.
Estate Planning, a new service, incurred $600,000 in development costs and
employee training.
The direct costs of providing this service, which is all labor, averages $100 per
hour.
Other costs for this service are estimated at $2,000,000 per year.
The current program for estate planning is expected to last for two years. At that
time, a new law will be in place that will require new operating guidelines for the
tax consulting.
Customer service expenses average $400 per client, with each job lasting an
average of 400 hours. The current staff expects to bill 40,000 hours for each of
the two years the program is in effect. Billing averages $140 per hour.
C 4. What are estimated lifecycle revenues?

a. $6,400,000
b. $8,000,000
c. $11,200,000
d. $22,400,000
First year (40,000 x $140) $ 5,600,000

Second year (40,000 x $140) 5,600,000
Total $11,200,000
A 5. What is the estimated lifecycle operating income for the first year?
a. $(1,040,000)
b. $(1,400,000)
c. $5,600,000
d. $6,640,000
Revenue (40,000 hours x $140) $5,600,000

Development costs $ 600,000
Direct costs (40,000 x $100) 4,000,000
Indirect costs 2,000,000
Customer service ($400 x 100 clients) 40,000 6,640,000
Operating income (loss) $(1,040,000)
A 6. What is the estimated lifecycle operating income for the first two years?
a. $(1,480,000)
b. $(1,400,000)
c. $3,200,000
d. $11,200,000
JIT Philosophy
For numbers 1 and 2
Prior to installing a JIT system, Friendly Company used machine hours to assign
maintenance costs to its three products of 4inch, 6inch, and 9inch insulation. The
maintenance costs totaled P840,000 per year. The machine hours used by each product
and the quantity produced of each product are as follows:
Machine Hours Quantity Produced
4inch 6,000 15,000 rolls
6inch 10,000 12,500 rolls
9inch 8,000 11,200 rolls
After installing JIT, three manufacturing cells were created and the cell workers were
trained to perform maintenance. Maintenance costs for the three cells still totaled
P840,000; however, these costs are now traceable to each cell.
Cell, 4inch: P220,000
Cell, 6inch: 300,000
Cell, 9inch: 320,000
C 1. The maintenance cost per roll of 4inch insulation before JIT is installed would be
a. P24.00
b. P17.50
c. P14.00
d. P13.16
Solution Maintenance cost per MH: (P840,000 ÷ 24,000)
= P35
Maintenance cost per roll, 4Inch (6,000 x P35 ÷ 15,000)
= P14
B 2. The maintenance cost per roll of 9inch insulation before JIT is installed would be
a. P17.50
b. P25.00
c. P28.57
d. P75.00
Solution: Maintenance cost per roll, 9inch (8,000 x 35 / 11,200) = 25

If AFTER JIT is installed: Maintenance cost per unit, 9Inch: (P320,000 ÷ 11,200) = P28.57
For numbers 3 to 4
At the beginning of 2005, Peterson Company installed a JIT purchasing and manufacturing
system. The following information has been gathered about one of the company's products:
Theoretical annual capacity 2,200

Actual production 2,000
Production hours available 800
Ontime deliveries 900
Total deliveries 950
D 3. The theoretical velocity is:

a. 2.32 units per hour
b. 2.44 units per hour
c. 2.5 units per hour
d. 2.75 units per hour
Solution: (2200 / 800)
A 4. . Actual velocity is:

Solution: (2000 / 800)
B 5. At the beginning of 2007, Sanchez Company installed a JIT purchasing and

manufacturing system. The following information has been gathered about one of the company's
products:

Production hours available 1,000
Number of defective units 30
The company's ontime delivery percentage is:

a. 90 percent
b. 95.7 percent
c. 94 percent
d. 104.4 percent
Cellular Manufacturing
B 1. Speedy Dress Manufacturing has two workstations, cutting and finishing. The cutting
station is limited by the speed of operating the cutting machine. Finishing is limited by the
speed of the workers.
Finishing normally waits for work from cutting. Each department works an eighthour day.
If cutting begins work two hours earlier than finishing each day, the two departments
generally finish their work at about the same time.
Not only does this eliminate the bottleneck, but also it increases finished units produced
each day by 160 units. All units produced can be sold even though the change increases
inventory stock by 20% from 400 units.
The cost of operating the cutting department two more hours each day is $1,600. The
contribution margin of the finished products is $6 each. Inventory carrying costs are $0.40
per unit per day.
What is the total production per day if the change is made?

a. 6400 units
b. 800 units
c. 880 units
d. 1600 units
Solution: Units per hour = 160/2 = 80 units per day = 80 × 10 = 800 units
C 2. Refer to the information above

What is the change in the daily contribution margin if the change is made?
a. $(608)
b. $(634)
c. $(672)
d. $800
Solution: Units per hour = 160/2 = 80 units per day = 80 × 10 = 800 units
Total contribution margin (160 × $6) $ 960

Carrying cost (80 units × $0.40) (32)
Increased costs (1,600)
Net change in contribution margin $ (672)
A 3. The Glass Shop, a manufacturer of large windows, is experiencing a bottleneck in its

plant. Setup time at one of its workstations has been identified as the culprit. A manager
has proposed a plan to reduce setup time at a cost of $72,000. The change will result in
8,000 additional windows. The selling price per window is $18, direct labor costs are $3 per
window, and the cost of direct materials is $5 per window. Assume all units produced can
be sold. The change will result in an increase in the throughput contribution of:
a. $104,000
b. $80,000
c. $32,000
d. $8,000
Solution: 8,000 × ($18 $5) = $104,000
Theory of Constraints
Quality Cost Management

Metropolitan Manufacturing expects to spend $400,000 in 20x4 in appraisal costs if it does not
change its incoming materials inspection method. If it decides to implement a new receiving
method, it will save $40,000 in fixed appraisal costs and variable costs of $0.40 per unit of finished
product. The new method involves $60,000 in training costs and an additional $160,000 in annual
equipment rental. It takes two units of material for each finished product.
Internal failure costs average $80 per failed unit of finished goods. During 20x3, 5% of all
completed items had to be reworked. External failure costs average $200 per failed unit. The
company's average external failures are 1% of units sold. The company carries no ending
inventories, because all the jobs are on a per order basis and a justintime inventory ordering
method is used.
A 1. What is the net effect on appraisal costs for 20x4, assuming the new receiving method
is implemented and that 800,000 material units are received?
a. $20,000 increase
b. $20,000 decrease
c. $200,000 decrease
d. $220,000 increase
Solution: Current costs $ 400,000

Savings: Fixed $ 40,000
Variable 160,000 (200,000)
New method: Training cost $ 60,000
Equipment cost 160,000 220,000
Net change Increase $ 20,000
D 2. How much will internal failure costs change, assuming 800,000 units of materials are
received and that the new receiving method reduces the amount of unacceptable product
units in the manufacturing process by 10%?
a. $ 20,000 increase
b. $ 25,000 decrease
c. $80,000 decrease
d. $160,000 decrease
Solution Internal failure costs [(800,000/2) x 0.05 x $80] $1,600,000

10% reduction from new method x 0.10
Savings $ 160,000
For questions 3 to 6.
Eakle Company’s quality cost report is to be based on the following data:
Supervision of testing and inspection activities $29,000
Warranty repairs and replacements $12,000
Net cost of scrap $53,000
Test and inspection of incoming materials $23,000
Technical support provided to suppliers $71,000
Disposal of defective products $94,000
Quality data gathering, analysis, and reporting $47,000
Liability arising from defective products $75,000
Depreciation of test equipment $22,000
A 3. What would be the total prevention cost appearing on the quality cost report?
a. $118,000
b. $93,000
c. $76,000
d. $59,000
Solution: Technical support provided to suppliers $71,000

Quality data gathering, analysis, and reporting $47,000
Total prevention cost $118,000
C 4. What would be the total appraisal cost appearing on the quality cost report?
a. $45,000
b. $52,000
c. $74,000
d. $76,000
Solution: Supervision of testing and inspection activities $29,000

Test and inspection of incoming materials $23,000
Depreciation of test equipment $22,000
Total appraisal cost $74,000
B 5. What would be the total internal failure cost appearing on the quality cost report?
a. $106,000
b. $147,000
c. $75,000
d. $128,000
Solution: Net cost of scrap $53,000

Disposal of defective products $94,000
Total internal failure cost $147,000
D 6. What would be the total external failure cost appearing on the quality cost report?
a. $426,000
b. $234,000
c. $106,000
d. $87,000
Solution: Warranty repairs and replacements $12,000

Liability arising from defective products $75,000
Total external failure cost $87,000
Time Measurement
C 1. Kay's Window Company has a variable demand. Historically, its demand has ranged
from 20 to 40 windows per day with an average of 30. Kay Ballard works eight hours a
day, five days a week. Each order is one window and each window takes 13 minutes.
What is the average waiting time, in minutes?
a. 1.6
b. 4.4
c. 28.2
d. 56.3
C 2. What is the cycle time for an order?
a. 13 minutes per window
b. 28.2 minutes per window
c. 41.2 minutes per window
d. 390 minutes per day
Solution: Wait Time = [30 × (13 squared)] / {[2 × [480 minutes per day (30 x 13)]}
= 28.16 minutes
Cycle time = Wait Time + Mfg Time = 28.16 + 13 = 41.16
C 3. Kay plans to add doors to its product line and anticipates that they will average 5
doors per day. Each door takes 12 minutes to install.
What is the average waiting time, in minutes, if Kay continues to be the only worker?
a. 60.0 minutes
b. 390.0 minutes
c. 96.5 minutes
d. 720.0 minutes
Dapitan, Inc. manufactures a product that experiences the following activities:

Processing (three departments) 40 hours
Moving (four moves) 18 hours
Waiting time 42 hours
Storage time (before delivery) 100 hours
C 6. The MCE for the product is

a. 5%
b. 25%
c. 20%
d. 40%
Solution: 40 / (40+18+42+100)
C 7. Sanchez Custom Yachts, Inc. manufactures and sells luxury yachts. From the time an
order is placed till the time the yacht reaches the customer averages 200 days. These
200 days are spent as follows:
Wait time 50 days
Move time 10 days
Process time 90 days
Queue time 30 days
Inspection time 20 days
What is Sanchez's manufacturing cycle efficiency (MCE) for its yachts?
a. 0.45
b. 0.50
c. 0.60
d. 0.65
Solution: 90 / (90+10+20+30)
For numbers 8 to 10
The following data pertain to operations at Quick Incorporated:
Throughput time 4 hours
Delivery cycle time 8 hours
Process time 1 hour
Queue time 2 hours
A 8. The wait time for this operation would be:

a. 4 hours
b. 2 hours
c. 8 hours
d. cannot be determined from information provided
Solution: Wait Time = Delivery Time Throughput Time

= 8 hours 4 hours
= 4 hours
B 9. The combined inspection and move time for this operation would be:
a. 4 hours
b. 1 hour
c. 2 hours
d. cannot be determined from information provided
Solution: Inspection & Move Time = Throughput Time Process Time Queue Time
= 4 hours 1 hour 1 hour
= 1 hour
C 10. The manufacturing cycle efficiency (MCE) for this operation would be:
a. 50%
b. 75%
c. 25%
d. 12%
e.
Solution: 1 / (1+1+2) = 25%
B 11. For one product that a firm produces, the manufacturing cycle efficiency is 20
percent. If the total production time is 12 hours, what is the total manufacturing time?
a. 15.0 hours
b. 60.0 hours
c. 12.0 hours
d. 2.4 hours
Solution: 12 / 20% = 60
Productivity Measurement
C 1. Ali Company provided the following information:
Budgeted input 39,000 gallons
Actual input 35,800 gallons
Budgeted production 40,000 units
Actual production 38,000 units
What is the partial productivity ratio?
a. 0.97 units per gallon
b. 1.02 units per gallon
c. 1.06 units per gallon
d. 1.12 units per gallon
Solution: Partial Productivity = 38,000/35,800 = 1.06 units per gallon
B 2. Jetters Company manufactured 100,000 motors for dehumidifiers and used 20,000
direct labor hours. The selling price of each motor is P25 and the labor cost is P10 per
hour. The labor productivity ratio is:
a. P10
b. P12.50
c. 4 motors per hour
d. 2.5 motors per hour
Solution Labor productivity ratios are operational measure (100,000/20,000 = 5 motors

per hour) or financial measure [(25 * 100,000)/(20,000 * 10) = P12.50).
B 3. At the end of 2006, Duabi Corporation implemented a new labor process and
redesigned its product with the expectation that input usage efficiency would increase.
Now, at the end of 2007, the president of the company wants an assessment of the
changes on the company's productivity. The data needed for the assessment are as
follows:
2006 2007
Output 30,000 38,000

Output prices P12 P12
Materials (lbs.) 10,000 10,400
Materials unit price P8 P7
Labor hours 14,000 15,000
Labor rate per hour P6 P7
Power (KwH) 12,000 13,000
Price per KwH P3 P4
By how much did profits change as a result of productivity changes in materials?

a. P13,000 decrease
b. P15,870 increase
c. P23,400 decrease
d. P20,800 increase
Solution: Material productivity ratio, 2006: (30,000 ÷ 10,000) 3

Actual materials (lbs), 2007 10,400
Required lbs. based on 2006: (38,000 ÷ 3) 12,667
Savings in number of pounds 2,267
Material productivitylinked to profit: (2,267 x P7) P15,870
A 4. At the end of 2006, Alban Company implemented a new labor process and
redesigned its product with the expectation that input usage efficiency would increase.
Now, at the end of 2007, the president of the company wants an assessment of the
changes on the company's productivity. The data needed for the assessment are as
follows:
2006 2007
Output 10,000 12,000
Output prices P10 P10
Change in profits P10,700
Profitlinked measurements:
Materials P4,600
Labor 3,250
Power (250)
Net P7,600
How much is the pricerecovery component?

a. P3,100
b. P(1,350)
c. P10,700
d. P7,600
Solution: Price recovery component:

Change in Profits P10,700
Deduct profitlinked productivity change 7,600
Price recovery component P 3,100
For numbers 5 to 7
Use the following:
Testing P 60,000
Rework 27,500
Training 45,000
Product liability insurance 35,000
Quality planning 43,000
Customer surveys 15,000
Reinspection and retesting 17,500
Warranty repairs 50,000
Total quality costs P293,000
Sales for 2005 were P1,000,000
D 5. What is the amount of appraisal costs?

a. P60,000
b. P92,500
c. P32,500
d. P75,000
Solution: Testing P60,000

Customer surveys 15,000
Total appraisal costs P75,000
B 6. What is the amount of external failure costs?

a. P35,000
b. P85,000
c. P50,000
d. P67,500
Solution: Product liability insurance P35,000

Warranty repairs 50,000
Total external costs P85,000
B 7. If Kurt Company is able to reduce quality costs to 2.5 percent of sales, what will
happen to profits?
a. Decrease by P25,000
b. Increase by P268,000
c. Decrease by P293,000
d. Increase by P25,000
Solution: Current quality costs P293,000

Less proposed quality costs: (0.025 x P1M) 25,000
Cost savings (increase in profits) P268,000
Strategic Profitability Analysis

For numbers 1 to 10
Following a strategy of product differentiation, Lucas Company makes a highend Appliance,
AP15. Lucas Company presents the following data for the years 20x3 and 20x4:
20x3 20x4
Units of AP15 produced and sold 20,000 21,000
Selling price $200 $220
Direct materials (square feet) 60,000 61,500
Direct materials costs per square $20 $22
Manufacturing capacity in units of AP15 25,000 25,000
Total conversion $1,000,000 $1,110,000
Conversion costs per unit of capacity $40 $44
Selling and customerservice capacity (customers) 60 58
Total selling and customerservice costs $360,000 $362,500
Selling and customerservice capacity cost per customer $6,000 $6,250
Lucas Company produces no defective units but it wants to reduce direct materials usage per unit
of AP15 in 20x4. Manufacturing conversion costs in each year depend on production capacity
defined in terms of AP15 units that can be produced. Selling and customerservice costs depend
on the number of customers that the customer and service functions are designed to support.
Lucas Company has 46 customers in 20x3 and 50 customers in 20x4. The industry market size
for highend appliances increased 5% from 20x3 to 20x4.
C 1. What is operating income for 20x3?

a. $364,500
b. $1,804,500
c. $1,440,000
d. $200,000
Solution: ($200 x 20,000) – [($20 x 60,000) + ($40 x 25,000) + ($6,000 x 60)] = $1,440,000
B 2. What is operating income in 20x4?
a. $1,440,000
b. $1,804,500
c. $364,500
d. $200,000
Solution: ($220 x 21,000) – [($22 x 61,500) + ($44 x 25,000) + ($6,250 x 58)] = $1,804,500
C 3. What is the change in operating income from 20x3 to 20x4?

a. $1,440,000 F
b. $1,804,500 F
c. $364,500 F
d. $200,000 F
Solution: $1,440,000 $1,804,500 = $364,500 F
D 4. What is the revenue effect of the growth component?

a. $220,000 F
b. $420,000 F
c. $400,000 F
d. $200,000 F
Solution: (21,000 – 20,000) x $200 = $200,000 F
A 5. What is the cost effect of the growth component?

a. $60,000 U
b. $140,000 F
c. $60,000 F
d. $200,000 F
Solution: [(63,000 60,000) x $20] + [(25,000 25,000) x $40] + [(60 60) x $6,000]
= $60,000 U
B 6. What is the net effect on operating income as a result of the growth component?
a. $60,000 U
b. $140,000 F
c. $60,000 F
d. $200,000 F
Solution: $200,000 F + $60,000 U = $140,000 F
B 7. What is the revenue effect of the pricerecovery component?

a. $220,000 F
b. $420,000 F
c. $400,000 F
d. $200,000 F
Solution: ($220 $200) x 21,000 = $420,000 F
C 8. What is the cost effect of the pricerecovery component?

a. $179,000 F
b. $179,000 U
c. $241,000 U
d. $420,000 F
Solution: [($22 $20) x 63,000] + [($44 $40) x 25,000] + [($6,250 $6,000) x 60]
= $241,000 U
A 9. What is the net effect on operating income as a result of the pricerecovery

component?
a. $179,000 F
b. $179,000 U
c. $241,000 U
d. $420,000 F
Solution: $420,000 F + $241,000 U = $179,000 F
B 10. What is the net effect on operating income as a result of the productivity component?
a. $179,000 F
b. $45,500 F
c. $241,000 U
d. $420,000 F
Solution: [(61,500 63,000) x $22] + [(25,000 25,000) x $40] + [(58 60) x $6,250]
= $45,500 F
C. 11. Frazier Company provided the following information.

Budgeted input 19,500 gallons
Actual input 17,900 gallons
Budgeted production 20,000 units
Actual production 19,000 units
What is the partial productivity ratio?

a. 0.97 units per gallon
b. 1.02 units per gallon
c. 1.06 units per gallon
d. 1.12 units per gallon
Solution: PP = 19,000 / 17,900 = 1.06 units per gallon
A 12. What is the direct manufacturing labor partial productivity, assuming 20,000 widgets
were produced during 20x1 and 80,000 direct manufacturing laborhours were
used?
a. 0.25 unit per direct manufacturing laborhour
b. 0.50 unit per direct manufacturing laborhour
c. 0.75 unit per direct manufacturing laborhour
d. 1.00 unit per direct manufacturing laborhour
Solution: 20,000 / 80,000 = 0.25
Following a strategy of product differentiation, Ernsting Corporation makes a highend computer
monitor, CM12. Ernsting Corporation presents the following data for the years 20x3 and 20x4:
20x3 20x4
Units of CM12 produced and sold 5,000 5,500
Selling price $400 $440
Direct materials (pounds) 15,000 15,375
Direct materials costs per pound $40 $44
Manufacturing capacity for CM12 (units) 10,000 10,000
Conversion costs $1,000,000 $1,100,000
Conversion costs per unit of capacity $100 $110
Selling and customerservice capacity (customers) 60 58
Total selling and customerservice costs $360,000 $362,500
Selling and customerservice capacity cost per customer $6,000 $6,250
Ernsting Corporation produces no defective units but it wants to reduce direct materials usage per
unit of CM12 in 20x4. Manufacturing conversion costs in each year depend on production capacity
defined in terms of CM12 units that can be produced. Selling and customerservice costs depend
on the number of customers that the customer and service functions are designed to support.
Ernsting Corporation has 46 customers in 20x3 and 50 customers in 20x4. The industry market
size for highend computer monitors increased 5% from 20x3 to 20x4.
A 13. What is the revenue effect of the growth component?

a. $200,000 F
b. $220,000 F
c. $200,000 U
d. $220,000 U
Solution: (5,500 5,000) x $400 = $200,000 F

B 14. What is the cost effect of the growth component?
a. $75,000 U
b. $60,000 U
c. $240,000 U
d. $60,000 F
Solution: 15,000 x 5,500 / 5,000 = 16,500; [(16,500 15,000) x $40]

+ [(10,000 10,000) x $100] + [(60 60) x $6,000] = $60,000 U
D 15. What is the net effect on operating income as a result of the growth component?
a. $150,000 F
b. $146,000 U
c. $155,000 U
d. $140,000 F
Solution: $200,000 F + $60,000 U = $140,000 F
Power Company has been unhappy with the financial accounting variances that its cost accounting
system has been producing, because its managers believe that there is more to evaluating an
operation than just examining accounting numbers. Therefore, it has started gathering data to
assist in the examination of nonfinancial results of operations. The following information relates
to the manufacture of remote control units for televisions, radios, and stereo components:
20x1 20x2
Remote control units produced and sold 40,000 50,000

Direct manufacture laborhours 6,000 6,600
Direct materials used (sets) 40,300 50,250
Direct manufacture cost per hour $18 $20
Direct materials cost per set $31 $32
D 16. What is the partial productivity of direct materials for 20x1; 20x2?
a. 1.220; 1.225
b. 0.883; 0.890
c. 0.884; 0.894
d. 0.993; 0.995
Solution: 20x1 Partial productivity of direct materials = 40,000/40,300 = 0.993

20x2 Partial productivity of direct materials = 50,000/50,250 = 0.995
D. 17. What is the partial productivity of direct manufacturing labor for 20x1; 20x2?
a. 7.57; 8.98
b. 6.23; 7.56
c. 5.23; 6.56
d. 6.67; 7.58
C 18. What will be the projected direct material and labor needs for 20x3 if remote control
units increase by 6,000 units, assuming Power Company applies the constant returns to
scale technology?
a. 68,350 sets; 8,546 hours
b. 50,560 sets; 6,690 hours
c. 56,280 sets; 7,392 hours
d. 46,360 sets; 7,482 hours
Solution: Production increase = 6,000/50,000 = 12 percent

Projected direct material sets = 50,250 x 1.12 = 56,280 sets
Projected direct manufacturing labor = 6,600 x 1.12 = 7,392 hours
Throughput Analysis
For number 1 to 2
At the beginning of 2005, Peterson Company installed a JIT purchasing and manufacturing
system. The following information has been gathered about one of the company’s products:

Production hours available 800
D 1. The theoretical velocity is:

Solution: 2,200 / 800 = 2.75
A 2. Actual velocity is:

Solution: 2,000 / 800 = 2.5
For numbers 3 to 4
Rio Hondo Company is a manufacturer of electronic components. The following manufacturing
information is available for the month of May:
Good units manufactured 40,000

Valueadded hours of manufacturing time 20,000
Total units manufactured 50,000
Total hours of manufacturing time 30,000
A 3. Refer to Rio Hondo Company. What is the throughput per hour?

a. 1.3 units (rounded)
b. 2.0 units
c. 1.8 units
d. .8 units
Solution:
C 4. Refer to Rio Hondo Company. What is the process quality yield?

a. 50%
b. 75%
c. 80%
d. 125%
Solution: 40,000/50,000 = 80%
For numbers 5 to 7
One of the products manufactured by McAllen Company is a plastic disk. The information below
relates to the Disk Production Department:
Good units produced 200,000
Units started in production 250,000
Processing time (budgeted hours) 425
Processing time (total hours) 400
Valueadded processing time 300
C 5. Refer to McAllen Company. What is the process quality yield in the Disk Production
Department?
a. 75%
b. 44%
c. 80%
d. 125%
Solution: 200,000/250,000 = 80%
B 6. Refer to McAllen Company. What is the throughput per hour in the Disk Production
Department?
a. 470 units
b. 500 units
c. 625 units
d. 667 units
Solution:
D. 7. Refer to McAllen Company. What is the process productivity in the Disk Production
Department?
a. 588
b. 625
c. 667
d. 833
Solution: 250,000/300 = 833 units
Learning Curve
B 1. To complete the first setup on a new machine took an employee 100 minutes. Using
an 80% cumulative averagetime learning curve indicates that the second setup on the new
machine is expected to take:
a. 80 minutes
b. 60 minutes
c. 40 minutes
d. 30 minutes
Solution: 100 × .80 = 80; (100 + X)/2 = 80; X = 60 minutes
A 2. To complete the first setup on a new machine took an employee 200 minutes. Using
an 80% incremental unittime learning model indicates that the second setup on the new
machine is expected to take:
a. 160 minutes
b. 120 minutes
c. 80 minutes
d. 60 minutes
Solution 200 × .80 = 160 minutes
For numbers 3 through 6

Harry’s Picture manufactures various picture frames. Each new employee takes 5 hours to make
the first picture frame and 4 hours to make the second. The manufacturing overhead charge per
hour is $20.
C 3. What is the learningcurve percentage, assuming the cumulative average method?

a. 0.85
b. 0.80
c. 0.90
d. 0.95
Solution Job Hours Cumulative Cumulative Average

1 5 5 5
2 4 9 4.5
Learning Percentage = 4.5/5 = 0.90
A 4. What is the time needed to build 8 picture frames by a new employee using the
cumulative averagetime method? You may use an index of 0.1520.
a. 3.65 hours
b. 3.50 hours
c. 4.05 hours
d. 4.5 hours
Solution Y = p Xq
= 5 × 8.1520
= 3.65 hours
Or 1 unit = 5
2 units = 5 × 0.9 = 4.5
4 units = 4.5 × 0.9 = 4.05
8 units = 4.05 × 0.9 = 3.65 hours
A 5. What is the time needed to produce the 16th frame by a new employee using the
incremental unittime method? You may use an index of 0.3219.
a. 2.05 hours
b. 2.56 hours
c. 2.50 hours
d. 2.30 hours
Solution Y = p Xq
= 5 × 160.3219
= 2.048 hours
Or 1 unit = 5
2 units = 5 × 0.8 = 4
4 units = 4 × 0.8 = 3.2
8 units = 3.2 × 0.8 = 2.56
16 units = 2.56 × .8 = 2.048 hours
C 6. How much manufacturing overhead would be charged to the 16 picture frames using
the averagetime approach?
a. $640
b. $565.63
c. $655.36
d. $655.63
Solution Total time = 2.048 × 16 = 32.768 hours
Overhead charge = 32.768 × $20 = $655.36

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COMPUTATIONS

Segment Reporting Analysis & Decentralization

Wimpy Mild Medium Hot Atomic

Solution: Segment margin is a better indication of profitability of individual products than

Solution: Total Alpha Beta

Solution Sales, X = 90,000/(1­0.25) = 120,000

Solution: Total segment margin = 42,300 + 76,100 = 118,400

Solution: Sales (100%) 195,000

Or: 66,000/165,000= 0.40; 0.40x30,000= 12,000­9,000= 3,000 increase

Solution Sales (100%) 200,000

Solution: Sales (100%) 168,750 (135,000 x 1.25)

A 9. The following data relate to Department no. 2 of Young Corporation:

Segment contribution margin $480,000

Solution: 230,000­110,000 = $120,000

In addition, the company incurred common fixed costs of $18,000.

C 10. Bay Area's segment profit margin is:

Solution: Revenues 235,000

Solution: Revenues 325,000

Solution: 200,000 ­ 110,000 ­ 65,000 ­ 15,000 = 10,000

Solution: Revenues 250,000 100%

Solution: North South Total

C 16. The variable costs for the South in June were:

Solution: Sales 100% 1,800,000

Solution: ROI = 7% * (5,000,000/4,000,000) = 8.75%

C 2. Mission, Inc., reported a return on investment of 12%, a capital turnover of 5, and

D 3. The information that follows relates to Katz Corporation:

Solution: = 20,000,000 * 2 = 40,000,000

Solution: Residual income = (1,200,000 * 16%) ­ (1,200,000 * 13%)

Solution: Residual income = 31,900,000 – (220,000,000 *12%) = 5,500,000

C 7. The following information relates to the Atlantic Division of Ocean Enterprises:

Solution: WACC = (80% * 10%) + ( 20% * 7%) = 9.4%

B 9. Carolina Corporation has an after­tax operating income of $3,200,000 and a 9%

Solution: EVA = 3,200,000 – ((7,000,000 – 1,800,000) * 9%) = 2,732,000

Solution: New Operating Profit (200,000 + 40,000) 240,000

Percentage of Peak Period Actual

Solution: Customer Service Department cost charged to Consumer Division

A 2. Levar Corporation has two operating divisions­a Consumer Division and a

D 3. Schabel Corporation has two operating divisions­a Consumer Division and a

Solution: Actual Customer Service Department cost incurred

Customer Service Department cost charged to operating divisions

C 4. Mangiamele Corporation's Maintenance Department provides services to the

Solution: Maintenance Department cost charged to Paints Division

C 5. Tabarez Corporation's Maintenance Department provides services to the company's

Solution: Maintenance Department cost charged to Stains Division

For numbers 6 & 7.

The following costs pertain to the Sound Effects Department:

Budgeted For Actual For Year

Solution: Variable cost charged to Video Department

Solution: Fixed cost charged to Audio department

Selling price per chip $50

Solution: $20 is the incremental internal cost of the chip.

Solution: $45 is the external price paid for the chip

D. 4. Refer to Computer Solutions Corporation. If a transfer between the two divisions is

Solution: $(40 ­ 20)/unit * 4,000 units = $80,000

Solution: $5.00/unit * 4,000 units = $20,000 decrease in profit

Solution: Selling costs of $50,000 ($10/unit) will not be incurred.

Solution: Variable costs = $(0.50 + 0.30 + 0.15) = $0.95

Solution: Total manufacturing costs = $(0.50 + 0.25) = $0.75

Solution: Market Price $250,000

D. 12. Refer to Wyatts Corporation. If the Plumbing Division is operated as an autonomous

Solution: 1.8 × $9 = $16.20

Solution: Revenues = ($120 × 200) $24,000

Sole's costs per pair of soles are:

Solution Sales, X = 90,000/(10.25) = 120,000

Or: 66,000/165,000= 0.40; 0.40x30,000= 12,0009,000= 3,000 increase

Solution: 230,000110,000 = $120,000

Solution: 200,000 110,000 65,000 15,000 = 10,000

Solution: Residual income = (1,200,000 * 16%) (1,200,000 * 13%)

B 9. Carolina Corporation has an aftertax operating income of $3,200,000 and a 9%

A 2. Levar Corporation has two operating divisionsa Consumer Division and a

D 3. Schabel Corporation has two operating divisionsa Consumer Division and a

Solution: $(40 20)/unit * 4,000 units = $80,000

Solution: given (Marketbased transfer price refers to the market price)

Solution: 2.50 1.50 = 1.00

Solution: $22 $4 = $18

Solution: ($20 + $5 $4) + ($36 $20 $5)

Solution: (9.5 5.5) x 10,000 units = P35,000

Solution: Pennsylvania: $180 $140 = $40; $40 ($40 x 30%)

According to the activitybased costing system, the product margin for

Solution: ((8 hours6 hours) x $ 150)

Solution: ((5 hours 4 hours) x 26 orders x $14))

Solution: (215 45)

Solution: (205 (205 * 20%))

Once basic construction is completed, Ratner anticipates perroom initial