Accounting for Decision Making and Control 9th Edition Zimmerman - Test Bank

Multiple Choice Questions 1. The firm's information system: A. is always a single integrated system B. includes only financial information C. may include other information such as customer satisfaction surveys, in addition to financial information D. is less important as a firm grows in size E. none of the above 2. Identify all the correct statements: A. Managers naturally seek to maximize shareholders' wealth B. Managers act in their own interests, and so there is no way to align their interests with those of the owners C. To motivate managers in non-profit firms, no employee incentives are needed D. To align the interests of managers and owners, owners must design systems to monitor and reward management behavior that increases the firm's profits E. none of the above 3. An internal accounting system should: A. provide information to enable costs to be minimized B. provide financial accounting data for external reporting purposes C. provide management accounting information for decision-making D. provide data for tax purposes E. all of the above 1-1 Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Chapter 01 Introduction 4. Economic Darwinism: A. explains why firms persist in inefficient behavior B. explains why some inefficient accounting practices persist C. explains why marmots eat bears D. explains why bears eat marmots E. none of the above 5. Management accountants: A. are internal consultants B. are mainly score- keepers C. focus on calculating product costs D. are ‘corporate cops' E. mostly a) and d) 6. Internal control systems: A. are the responsibility of the external auditor B. include anti-fraud measures C. are designed to allow financial misrepresentation D. require that one person perform all aspects of a task E. all of the above 1-2 Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 7. Performance measures: A. are critical in designing a reward system B. are unimportant in designing a reward system C. always influence people to achieve them D. are always worded vaguely E. are not needed to provide incentives because employees always want to do the right thing 8. Micro Enterprises has the capacity to produce 10,000 widgets a month, and currently makes and sells 9,000 widgets a month. Widgets normally sell for $6 each, and cost an average of $5 to make, including fixed costs. The monthly fixed costs are $18,000. Coyote Corp. has offered to buy 1,000 widgets at $4 each. What is the "cost" per unit in the context of evaluating the offer from Coyote Corp.? A.$ 2 B.$ 3 C. $ 4 D.$ 5 E. $ 6 9. Micro Enterprises has the capacity to produce 10,000 widgets a month, and currently makes and sells 9,000 widgets a month. Widgets normally sell for $6 each, and cost an average of $5 to make, including fixed costs. The monthly fixed costs are $18,000. Coyote Corp. has offered to buy 1,000 widgets at $4 each. On this information alone, should Micro accept the offer? A. No, because it will lose $1 per unit B. No, because it will lose $2 per unit C. No, because it will exceed capacity D. Yes, because it makes $1 per unit in the short run E. Unable to determine 1-3 Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 10. Micro Enterprises has the capacity to produce 10,000 widgets a month, and currently makes and sells 9,000 widgets a month. Widgets normally sell for $6 each, and cost an average of $5 to make, including fixed costs. The monthly fixed costs are $18,000. Coyote Corp. has offered to buy 1,000 widgets at $4 each. What other factors should be taken into consideration? A. The impact on the normal selling price of $6 B. Will an additional shift be needed to complete the order? C. Are future orders from Coyote likely? D. Does the special price comply with the Robinson- Patman Act? E. All of the above 11. Micro Enterprises has the capacity to produce 10,000 widgets a month, and currently makes and sells 9,000 widgets a month. Widgets normally sell for $6 each, and cost an average of $5 to make, including fixed costs. The monthly fixed costs are $18,000. Coyote Corp. has offered to buy 1,000 widgets at $4 each. Assuming the same story, but Coyote's offer is for 1,500 units (all or nothing), should the offer be accepted? A. No, because it will lose $1 per unit B. No, because the opportunity costs outweigh the gains C. No, (indifferent or worse) because the opportunity costs equal the gains D. Yes, because it makes $1 per unit in the short run E. Unable to determine Essay Questions 1-4 Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 12. Accounting and Control The controller of a small private college is complaining about the amount of work she must do at the beginning of each month. The president of the university requires the controller to submit a monthly report by the fifth day of the following month. The monthly report contains pages of financial data from operations. The controller was heard saying, "Why does the president need all this information? He probably doesn't read half of the report. He's an English professor and probably doesn't know the difference between a cost and a revenue." Required: a. What is the probable role of the monthly report? b. What is the controller's responsibility with respect to a president who doesn't know much accounting? 1-5 Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Chapter 01 Introduction Answer Key Multiple Choice Questions 1. The firm's information system: A. is always a single integrated system B. includes only financial information C. may include other information such as customer satisfaction surveys, in addition to financial information D. is less important as a firm grows in size E. none of the above The firm's information system includes many kinds of financial and non-financial information. AACSB: Knowledge Application AICPA: BB Industry AICPA: FN Leveraging Technology Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Topic: Managerial Accounting: Decision Making and Control 2. Identify all the correct statements: A. Managers naturally seek to maximize shareholders' wealth B. Managers act in their own interests, and so there is no way to align their interests with those of the owners C. To motivate managers in non-profit firms, no employee incentives are needed D. To align the interests of managers and owners, owners must design systems to monitor and reward management behavior that increases the firm's profits E. none of the above To minimize conflicts between the economic interests of managers and owners, the owners need both systems to monitor the manager's performance and systems of rewards or incentives. AACSB: Knowledge Application AICPA: BB Industry 1-6 Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. AICPA: FN Decision Making AICPA: FN Risk Analysis Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Topic: Management Accountant's Role in the Organization Topic: Managerial Accounting: Decision Making and Control 3. An internal accounting system should: A. provide information to enable costs to be minimized B. provide financial accounting data for external reporting purposes C. provide management accounting information for decision-making D. provide data for tax purposes E. all of the above A well designed internal accounting system should provide data for external purposes, such as financial reporting and tax, as well as internal purposes such as cost control, assessing performance and determining rewards. It is economically inefficient to maintain multiple accounting systems. 4. Economic Darwinism: A. explains why firms persist in inefficient behavior B. explains why some inefficient accounting practices persist C. explains why marmots eat bears D. explains why bears eat marmots E. none of the above Inefficient accounting systems may continue to exist either because they have proved better than other systems or because better systems have not been yet discovered. AACSB: Knowledge Application AICPA: BB Marketing 1-7 Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. AACSB: Knowledge Application AICPA: BB Industry AICPA: FN Decision Making Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Topic: Design and Use of Cost Systems 5. Management accountants: A. are internal consultants B. are mainly score- keepers C. focus on calculating product costs D. are ‘corporate cops' E. mostly a) and d) While score-keeping and product costing are tasks performed by today's management accountants, these usually are considered minor. The major roles they perform are internal consultant in terms of providing information to aid other's decision making and corporate cop in terms of providing control systems to prevent fraud and performance measures for incentive systems. AACSB: Knowledge Application AICPA: BB Industry AICPA: FN Decision Making Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Topic: Management Accountant's Role in the Organization 6. Internal control systems: A. are the responsibility of the external auditor B. include anti-fraud measures C. are designed to allow financial misrepresentation D. require that one person perform all aspects of a task E. all of the above The internal control system is designed to safeguard assets, protect the integrity of the accounting information system, and to prevent fraud. A key practice is the separation of duties to ensure that critical tasks are performed by two or more people. AACSB: Knowledge Application AICPA: BB Industry 1-8 Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. AICPA: FN Risk Analysis Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Topic: Marmots and Grizzly Bears 7. Performance measures: A. are critical in designing a reward system AICPA: FN Decision Making Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Topic: Management Accountant's Role in the Organization B. are unimportant in designing a reward system C. always influence people to achieve them D. are always worded vaguely E. are not needed to provide incentives because employees always want to do the right thing Performance measures are critical in designing a reward system. If poorly specified, they may promote dysfunctional behavior or encourage managers to undertake actions not in the best interest of the organization. If managers' performance is not measured and not rewarded, it is unlikely that managers will focus on enhancing the owner's wealth. AACSB: Knowledge Application AICPA: BB Industry AICPA: FN Decision Making Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Topic: Evolution of Management Accounting: A Framework for Change 1-9 Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 8. Micro Enterprises has the capacity to produce 10,000 widgets a month, and currently makes and sells 9,000 widgets a month. Widgets normally sell for $6 each, and cost an average of $5 to make, including fixed costs. The monthly fixed costs are $18,000. Coyote Corp. has offered to buy 1,000 widgets at $4 each. What is the "cost" per unit in the context of evaluating the offer from Coyote Corp.? A. $ 2 B. $ 3 C. $ 4 D. $ 5 E. $ 6 The "cost" per unit in this case is the variable cost that must be covered. Since Micro has excess capacity, the only cost the firm incurs to produce an additional 1,000 widgets is the variable cost. The average cost of $5 includes the fixed cost per unit of $2 ($18,000/9000 units). Hence, the variable cost per widget is just the average cost of $5 less the fixed cost per widget of $2, or $3. AACSB: Knowledge Application AICPA: BB Industry AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 3 Hard Topic: Vortec Medical Probe Example 1-10 Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 9. Micro Enterprises has the capacity to produce 10,000 widgets a month, and currently makes and sells 9,000 widgets a month. Widgets normally sell for $6 each, and cost an average of $5 to make, including fixed costs. The monthly fixed costs are $18,000. Coyote Corp. has offered to buy 1,000 widgets at $4 each. On this information alone, should Micro accept the offer? A. No, because it will lose $1 per unit B. No, because it will lose $2 per unit C. No, because it will exceed capacity D. Yes, because it makes $1 per unit in the short run E. Unable to determine The average fixed cost is NOT relevant, as fixed costs will not change in the short run. The offer's contribution margin (sales price $4 minus variable cost $3) is positive, and in the absence of other information should be accepted. AACSB: Communication AACSB: Knowledge Application AICPA: BB Industry AICPA: FN Decision Making Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 3 Hard Topic: Vortec Medical Probe Example 1-11 Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 10. Micro Enterprises has the capacity to produce 10,000 widgets a month, and currently makes and sells 9,000 widgets a month. Widgets normally sell for $6 each, and cost an average of $5 to make, including fixed costs. The monthly fixed costs are $18,000. Coyote Corp. has offered to buy 1,000 widgets at $4 each. What other factors should be taken into consideration? A. The impact on the normal selling price of $6 B. Will an additional shift be needed to complete the order? C. Are future orders from Coyote likely? D. Does the special price comply with the Robinson- Patman Act? E. All of the above All of the factors mentioned are relevant. Answers to a), b) and d) could have a negative effect on the decision to accept the offer. Future orders from Coyote could be viewed favorably, provided that they do not utilize factory resources devoted to the regular, more profitable, customers. AACSB: Knowledge Application AICPA: BB Industry AICPA: FN Decision Making Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Topic: Vortec Medical Probe Example 1-12 Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 11. Micro Enterprises has the capacity to produce 10,000 widgets a month, and currently makes and sells 9,000 widgets a month. Widgets normally sell for $6 each, and cost an average of $5 to make, including fixed costs. The monthly fixed costs are $18,000. Coyote Corp. has offered to buy 1,000 widgets at $4 each. Assuming the same story, but Coyote's offer is for 1,500 units (all or nothing), should the offer be accepted? A. No, because it will lose $1 per unit B. No, because the opportunity costs outweigh the gains C. No, (indifferent or worse) because the opportunity costs equal the gains D. Yes, because it makes $1 per unit in the short run E. Unable to determine At 1500 units, Coyote's offer brings in a total of $1,500 (contribution margin of $1 per unit * 1,500 units). To accept the order, 500 regular customers must be displaced (9,000 normal + 1500 Coyote units exceeds the maximum capacity of 10,000 units). Each displaced customer costs the firm $3 ($6 normal selling price minus $3 variable costs), so the firm must give up $1,500 from the regular customers. At best, the firm is indifferent between the two choices. In practice, the negative impact on existing customers, sacrificed for no financial gain, would lead to a rejection of the offer. AACSB: Knowledge Application AICPA: BB Industry AICPA: FN Decision Making Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 3 Hard Topic: Vortec Medical Probe Example Essay Questions 1-13 Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 12. Accounting and Control The controller of a small private college is complaining about the amount of work she must do at the beginning of each month. The president of the university requires the controller to submit a monthly report by the fifth day of the following month. The monthly report contains pages of financial data from operations. The controller was heard saying, "Why does the president need all this information? He probably doesn't read half of the report. He's an English professor and probably doesn't know the difference between a cost and a revenue." Required: a. What is the probable role of the monthly report? b. What is the controller's responsibility with respect to a president who doesn't know much accounting? a. There are two possible roles for the monthly report: facilitating planning decisions and control. Monthly reports provide more timely information than annual reports. With monthly reports the president can identify problem areas more quickly and make corrective actions. The president may also use the monthly reports to evaluate the work of his managers. The monthly reports provide information about how managers are performing. b. If the president of the university is unfamiliar with accounting numbers, the controller must adapt the monthly report to make it more comprehensible. The controller may even want to highlight areas in the report that might need attention. AACSB: Communication AACSB: Knowledge Application AICPA: BB Industry AICPA: FN Decision Making Blooms: Understand Difficulty: 2 Medium Topic: Design and Use of Cost Systems Topic: Management Accountant's Role in the Organization Multiple Choice Questions 1. The firm's information system: A. is always a single integrated system B. includes only financial information C. may include other information such as customer satisfaction surveys, in addition to financial information D. is less important as a firm grows in size E. none of the above 2. Identify all the correct statements: A. Managers naturally seek to maximize shareholders' wealth B. Managers act in their own interests, and so there is no way to align their interests with those of the owners C. To motivate managers in non-profit firms, no employee incentives are needed D. To align the interests of managers and owners, owners must design systems to monitor and reward management behavior that increases the firm's profits E. none of the above 3. An internal accounting system should: A. provide information to enable costs to be minimized B. provide financial accounting data for external reporting purposes C. provide management accounting information for decision-making D. provide data for tax purposes E. all of the above 1-1 Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Chapter 01 Introduction 4. Economic Darwinism: A. explains why firms persist in inefficient behavior B. explains why some inefficient accounting practices persist C. explains why marmots eat bears D. explains why bears eat marmots E. none of the above 5. Management accountants: A. are internal consultants B. are mainly score- keepers C. focus on calculating product costs D. are ‘corporate cops' E. mostly a) and d) 6. Internal control systems: A. are the responsibility of the external auditor B. include anti-fraud measures C. are designed to allow financial misrepresentation D. require that one person perform all aspects of a task E. all of the above 1-2 Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 7. Performance measures: A. are critical in designing a reward system B. are unimportant in designing a reward system C. always influence people to achieve them D. are always worded vaguely E. are not needed to provide incentives because employees always want to do the right thing 8. Micro Enterprises has the capacity to produce 10,000 widgets a month, and currently makes and sells 9,000 widgets a month. Widgets normally sell for $6 each, and cost an average of $5 to make, including fixed costs. The monthly fixed costs are $18,000. Coyote Corp. has offered to buy 1,000 widgets at $4 each. What is the "cost" per unit in the context of evaluating the offer from Coyote Corp.? A.$ 2 B.$ 3 C. $ 4 D.$ 5 E. $ 6 9. Micro Enterprises has the capacity to produce 10,000 widgets a month, and currently makes and sells 9,000 widgets a month. Widgets normally sell for $6 each, and cost an average of $5 to make, including fixed costs. The monthly fixed costs are $18,000. Coyote Corp. has offered to buy 1,000 widgets at $4 each. On this information alone, should Micro accept the offer? A. No, because it will lose $1 per unit B. No, because it will lose $2 per unit C. No, because it will exceed capacity D. Yes, because it makes $1 per unit in the short run E. Unable to determine 1-3 Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 10. Micro Enterprises has the capacity to produce 10,000 widgets a month, and currently makes and sells 9,000 widgets a month. Widgets normally sell for $6 each, and cost an average of $5 to make, including fixed costs. The monthly fixed costs are $18,000. Coyote Corp. has offered to buy 1,000 widgets at $4 each. What other factors should be taken into consideration? A. The impact on the normal selling price of $6 B. Will an additional shift be needed to complete the order? C. Are future orders from Coyote likely? D. Does the special price comply with the Robinson- Patman Act? E. All of the above 11. Micro Enterprises has the capacity to produce 10,000 widgets a month, and currently makes and sells 9,000 widgets a month. Widgets normally sell for $6 each, and cost an average of $5 to make, including fixed costs. The monthly fixed costs are $18,000. Coyote Corp. has offered to buy 1,000 widgets at $4 each. Assuming the same story, but Coyote's offer is for 1,500 units (all or nothing), should the offer be accepted? A. No, because it will lose $1 per unit B. No, because the opportunity costs outweigh the gains C. No, (indifferent or worse) because the opportunity costs equal the gains D. Yes, because it makes $1 per unit in the short run E. Unable to determine Essay Questions 1-4 Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 12. Accounting and Control The controller of a small private college is complaining about the amount of work she must do at the beginning of each month. The president of the university requires the controller to submit a monthly report by the fifth day of the following month. The monthly report contains pages of financial data from operations. The controller was heard saying, "Why does the president need all this information? He probably doesn't read half of the report. He's an English professor and probably doesn't know the difference between a cost and a revenue." Required: a. What is the probable role of the monthly report? b. What is the controller's responsibility with respect to a president who doesn't know much accounting? 1-5 Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Chapter 01 Introduction Answer Key Multiple Choice Questions 1. The firm's information system: A. is always a single integrated system B. includes only financial information C. may include other information such as customer satisfaction surveys, in addition to financial information D. is less important as a firm grows in size E. none of the above The firm's information system includes many kinds of financial and non-financial information. AACSB: Knowledge Application AICPA: BB Industry AICPA: FN Leveraging Technology Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Topic: Managerial Accounting: Decision Making and Control 2. Identify all the correct statements: A. Managers naturally seek to maximize shareholders' wealth B. Managers act in their own interests, and so there is no way to align their interests with those of the owners C. To motivate managers in non-profit firms, no employee incentives are needed D. To align the interests of managers and owners, owners must design systems to monitor and reward management behavior that increases the firm's profits E. none of the above To minimize conflicts between the economic interests of managers and owners, the owners need both systems to monitor the manager's performance and systems of rewards or incentives. AACSB: Knowledge Application AICPA: BB Industry 1-6 Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. AICPA: FN Decision Making AICPA: FN Risk Analysis Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Topic: Management Accountant's Role in the Organization Topic: Managerial Accounting: Decision Making and Control 3. An internal accounting system should: A. provide information to enable costs to be minimized B. provide financial accounting data for external reporting purposes C. provide management accounting information for decision-making D. provide data for tax purposes E. all of the above A well designed internal accounting system should provide data for external purposes, such as financial reporting and tax, as well as internal purposes such as cost control, assessing performance and determining rewards. It is economically inefficient to maintain multiple accounting systems. 4. Economic Darwinism: A. explains why firms persist in inefficient behavior B. explains why some inefficient accounting practices persist C. explains why marmots eat bears D. explains why bears eat marmots E. none of the above Inefficient accounting systems may continue to exist either because they have proved better than other systems or because better systems have not been yet discovered. AACSB: Knowledge Application AICPA: BB Marketing 1-7 Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. AACSB: Knowledge Application AICPA: BB Industry AICPA: FN Decision Making Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Topic: Design and Use of Cost Systems 5. Management accountants: A. are internal consultants B. are mainly score- keepers C. focus on calculating product costs D. are ‘corporate cops' E. mostly a) and d) While score-keeping and product costing are tasks performed by today's management accountants, these usually are considered minor. The major roles they perform are internal consultant in terms of providing information to aid other's decision making and corporate cop in terms of providing control systems to prevent fraud and performance measures for incentive systems. AACSB: Knowledge Application AICPA: BB Industry AICPA: FN Decision Making Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Topic: Management Accountant's Role in the Organization 6. Internal control systems: A. are the responsibility of the external auditor B. include anti-fraud measures C. are designed to allow financial misrepresentation D. require that one person perform all aspects of a task E. all of the above The internal control system is designed to safeguard assets, protect the integrity of the accounting information system, and to prevent fraud. A key practice is the separation of duties to ensure that critical tasks are performed by two or more people. AACSB: Knowledge Application AICPA: BB Industry 1-8 Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. AICPA: FN Risk Analysis Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Topic: Marmots and Grizzly Bears 7. Performance measures: A. are critical in designing a reward system AICPA: FN Decision Making Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Topic: Management Accountant's Role in the Organization B. are unimportant in designing a reward system C. always influence people to achieve them D. are always worded vaguely E. are not needed to provide incentives because employees always want to do the right thing Performance measures are critical in designing a reward system. If poorly specified, they may promote dysfunctional behavior or encourage managers to undertake actions not in the best interest of the organization. If managers' performance is not measured and not rewarded, it is unlikely that managers will focus on enhancing the owner's wealth. AACSB: Knowledge Application AICPA: BB Industry AICPA: FN Decision Making Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Topic: Evolution of Management Accounting: A Framework for Change 1-9 Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 8. Micro Enterprises has the capacity to produce 10,000 widgets a month, and currently makes and sells 9,000 widgets a month. Widgets normally sell for $6 each, and cost an average of $5 to make, including fixed costs. The monthly fixed costs are $18,000. Coyote Corp. has offered to buy 1,000 widgets at $4 each. What is the "cost" per unit in the context of evaluating the offer from Coyote Corp.? A. $ 2 B. $ 3 C. $ 4 D. $ 5 E. $ 6 The "cost" per unit in this case is the variable cost that must be covered. Since Micro has excess capacity, the only cost the firm incurs to produce an additional 1,000 widgets is the variable cost. The average cost of $5 includes the fixed cost per unit of $2 ($18,000/9000 units). Hence, the variable cost per widget is just the average cost of $5 less the fixed cost per widget of $2, or $3. AACSB: Knowledge Application AICPA: BB Industry AICPA: FN Measurement Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 3 Hard Topic: Vortec Medical Probe Example 1-10 Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 9. Micro Enterprises has the capacity to produce 10,000 widgets a month, and currently makes and sells 9,000 widgets a month. Widgets normally sell for $6 each, and cost an average of $5 to make, including fixed costs. The monthly fixed costs are $18,000. Coyote Corp. has offered to buy 1,000 widgets at $4 each. On this information alone, should Micro accept the offer? A. No, because it will lose $1 per unit B. No, because it will lose $2 per unit C. No, because it will exceed capacity D. Yes, because it makes $1 per unit in the short run E. Unable to determine The average fixed cost is NOT relevant, as fixed costs will not change in the short run. The offer's contribution margin (sales price $4 minus variable cost $3) is positive, and in the absence of other information should be accepted. AACSB: Communication AACSB: Knowledge Application AICPA: BB Industry AICPA: FN Decision Making Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 3 Hard Topic: Vortec Medical Probe Example 1-11 Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 10. Micro Enterprises has the capacity to produce 10,000 widgets a month, and currently makes and sells 9,000 widgets a month. Widgets normally sell for $6 each, and cost an average of $5 to make, including fixed costs. The monthly fixed costs are $18,000. Coyote Corp. has offered to buy 1,000 widgets at $4 each. What other factors should be taken into consideration? A. The impact on the normal selling price of $6 B. Will an additional shift be needed to complete the order? C. Are future orders from Coyote likely? D. Does the special price comply with the Robinson- Patman Act? E. All of the above All of the factors mentioned are relevant. Answers to a), b) and d) could have a negative effect on the decision to accept the offer. Future orders from Coyote could be viewed favorably, provided that they do not utilize factory resources devoted to the regular, more profitable, customers. AACSB: Knowledge Application AICPA: BB Industry AICPA: FN Decision Making Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Topic: Vortec Medical Probe Example 1-12 Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 11. Micro Enterprises has the capacity to produce 10,000 widgets a month, and currently makes and sells 9,000 widgets a month. Widgets normally sell for $6 each, and cost an average of $5 to make, including fixed costs. The monthly fixed costs are $18,000. Coyote Corp. has offered to buy 1,000 widgets at $4 each. Assuming the same story, but Coyote's offer is for 1,500 units (all or nothing), should the offer be accepted? A. No, because it will lose $1 per unit B. No, because the opportunity costs outweigh the gains C. No, (indifferent or worse) because the opportunity costs equal the gains D. Yes, because it makes $1 per unit in the short run E. Unable to determine At 1500 units, Coyote's offer brings in a total of $1,500 (contribution margin of $1 per unit * 1,500 units). To accept the order, 500 regular customers must be displaced (9,000 normal + 1500 Coyote units exceeds the maximum capacity of 10,000 units). Each displaced customer costs the firm $3 ($6 normal selling price minus $3 variable costs), so the firm must give up $1,500 from the regular customers. At best, the firm is indifferent between the two choices. In practice, the negative impact on existing customers, sacrificed for no financial gain, would lead to a rejection of the offer. AACSB: Knowledge Application AICPA: BB Industry AICPA: FN Decision Making Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 3 Hard Topic: Vortec Medical Probe Example Essay Questions 1-13 Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 12. Accounting and Control The controller of a small private college is complaining about the amount of work she must do at the beginning of each month. The president of the university requires the controller to submit a monthly report by the fifth day of the following month. The monthly report contains pages of financial data from operations. The controller was heard saying, "Why does the president need all this information? He probably doesn't read half of the report. He's an English professor and probably doesn't know the difference between a cost and a revenue." Required: a. What is the probable role of the monthly report? b. What is the controller's responsibility with respect to a president who doesn't know much accounting? a. There are two possible roles for the monthly report: facilitating planning decisions and control. Monthly reports provide more timely information than annual reports. With monthly reports the president can identify problem areas more quickly and make corrective actions. The president may also use the monthly reports to evaluate the work of his managers. The monthly reports provide information about how managers are performing. b. If the president of the university is unfamiliar with accounting numbers, the controller must adapt the monthly report to make it more comprehensible. The controller may even want to highlight areas in the report that might need attention. AACSB: Communication AACSB: Knowledge Application AICPA: BB Industry AICPA: FN Decision Making Blooms: Understand Difficulty: 2 Medium Topic: Design and Use of Cost Systems Topic: Management Accountant's Role in the Organization distribution without the prior written consent of McGraw-Hill Education.