The markup percentage on full cost to arrive at the target (exisitng) selling price is

(Points: 5)
       25%
       75%
       80%
       20%

15. (TCO 8) Transfer prices should be judged by whether they promote: (Points: 5)
       goal congruence.
       the balanced scorecard method.
       a high level of subunit autonomy in decision making.
       Both 1 and 2 are correct.

There is a mistake in number 15.  the correct answer should be 1 & 3

16. (TCO 8) Division A sells soybean paste internally to Division B, which in turn, produces soybean burgers that sell for $5 per pound. Division A incurs costs of $0.75 per pound while Division B incurs additional costs of $2.50 per pound. Which of the following formulas correctly reflects the company’s operating income per pound? (Points: 5)
       $5.00 – ($1.25 + $2.50) = $1.25
       $5.00 – ($0.75 + $2.50) = $1.75
       $5.00 – ($0.75 + $3.75) = $0.50
       $5.00 – ($0.25 + $1.25 + $3.50) = 0

17. (TCO 8) When companies do not want to use market prices or find it too costly, they typically use ________ prices, even though suboptimal decisions may occur. (Points: 5)
       short-run average cost
       long-run cost
       average-cost
       full-cost

18. (TCO 9) To guide cost allocation decisions, the benefits-received criterion: (Points: 5)
       may use an allocation base of division revenues to allocate advertising costs
       is the primarily used criterion in activity-based costing
       results in subsidizing products that are not profitable
       generally uses the cost driver as the cost allocation base

19. (TCO 9) The Hassan Corporation has an Electric Mixer Division and an Electric Lamp Division. Of a $20,000,000 bond issuance, the Electric Mixer Division used $14,000,000 and the Electric Lamp Division used $6,000,000 for expansion. Interest costs on the bond totaled $1,500,000 for the year. What amount of interest costs should be allocated to the Electric Mixer Division? (Points: 5)
       $4,200,000
       $14,000,000
       $1,050,000
       $450,000

20. (TCO 10) The net present value method focuses on: (Points: 5)
       cash inflows
       accrual-accounting net income
       cash outflows
       Both 1 and 3 are correct

21. (TCO 10) The Zeron Corporation wants to purchase a new machine for its factory operations at a cost of $950,000. The investment is expected to generate $350,000 in annual cash flows for a period of four years. The required rate of return is 14%. The old machine can be sold for $50,000. The machine is expected to have zero value at the end of the four-year period. What is the net present value of the investment? Would the company want to purchase the new machine? Income taxes are not considered. (Points: 5)
       $119,550; yes
       $326,750; no
       $1,019,550; yes
       $69,550; no

22. (TCO 11) The four cost categories in a cost of quality program are (Points: 5)
       product design, process design, internal success, and external success
       prevention, appraisal, internal failure, and external failure.
       design, conformance, control and process.
       design, process specification, on-time delivery, and customer satisfaction.

23. (TCO 11) Regal Products has a budget of $900,000 in 20X6 for prevention costs. If it decides to automate a portion of its prevention activities, it will save $60,000 in variable costs. The new method will require $18,000 in training costs and $120,000 in annual equipment costs. Management is willing to adjust the budget for an amount up to the cost of the new equipment. The budgeted production level is 150,000 units. Appraisal costs for the year are budgeted at $600,000. The new prevention procedures will save appraisal costs of $30,000. Internal failure costs average $15 per failed unit of finished goods. The internal failure rate is expected to be 3% of all completed items. The proposed changes will cut the internal failure rate by one-third. Internal failure units are destroyed. External failure costs average $54 per failed unit. The company’s average external failures average 3% of units sold. The new proposal will reduce this rate by 50%. Assume all units produced are sold and there are no ending inventories. How much will internal failure costs change if the internal product failures are reduced by 50% with the new procedures? (Points: 5)
       $500,000 decrease
       $750,000 decrease
       $33,750 decrease
       $67,500 decrease

24. (TCO 12) Obsolescence is an example of which cost category? (Points: 5)
       ordering costs
       carrying costs
       labor costs
       quality costs

25. (TCO 12) Liberty Celebrations, Inc., manufactures a line of flags. The annual demand for its flag display is estimated to be 100,000 units. The annual cost of carrying one unit in inventory is $1.60, and the cost to initiate a production run is $30. There are no flag displays on hand but Liberty had scheduled 60 equal production runs of the display sets for the coming year, the first of which is to be run immediately. Liberty Celebrations has 250 business days per year. Assume that sales occur uniformly throughout the year and that production is instantaneous. If Liberty Celebrations does not maintain a safety stock, the estimated total carrying cost for the flag displays for the coming year is the estimated total setup cost for the flag displays for the coming year is (Points: 5)
       $1,800
       $2,000
       $1,600.
       $1,500.

(TCO 5) Robert’s Medical Equipment Company manufactures hospital beds. Its most popular model, Deluxe, sells for $5,000. It has variable costs totaling $2,800 and fixed costs of $1,000 per unit, based on an average production run of 5,000 units. It normally has four production runs a year, with $400,000 in setup costs each time. Plant capacity can handle up to six runs a year for a total of 30,000 beds.

A competitor is introducing a new hospital bed similar to Deluxe that will sell for $4,000. Management believes it must lower the price to compete. Marketing believes that the new price will increase sales by 25% a year. The plant manager thinks that production can increase by 25% with the same level of fixed costs. The company currently sells all the Deluxe beds it can produce.

Question 1:  What is the annual operating income from Deluxe at the current price of $5,000?

            Sales (20,000 x $5,000)                                                                        $100,000,000

                  Costs:

                       Variable costs (20,000 x $2,800)             $56,000,000

                       Fixed costs ($1,000 x 5,000 x 4)               20,000,000

                       Setup costs ($400,000 x 4)                          1,600,000                  77,600,000

                  Operating income                                                                            $  22,400,000

Question 2:  What is the annual operating income from Deluxe if the price is reduced to $4,000 and sales in units increase by 25%?

Sales (25,000 x $4,000)                                                                                    $100,000,000

                  Costs:

                    Variable costs (25,000 x $2,800)                $70,000,000

                    Fixed costs, same                                          20,000,000

                    Setup costs ($400,000 x 5)                             2,000,000                  92,000,000

                  Operating income                                                                             $   8,000,000

 (TCO 7) Grace Greeting Cards Incorporated is starting a new business venture and are in the process of evaluating its product lines. Information for one new product, traditional parchment grade cards, is as follows:

∙       Sixteen times each year, a new card design will be put into production. Each new design will require  $600 in setup costs.

∙       The parchment grade card product line incurred $75,000 in development costs and is expected to be   produced over the next four years.

∙       Direct costs of producing the designs average $0.50 each.

∙       Indirect manufacturing costs are estimated at $50,000 per year.

∙       Customer service expenses average $0.10 per card.

∙       Current sales are expected to be 2,500 units of each card design. Each card sells for $3.50.

∙       Sales units equal production units each year.

What is the estimated life-cycle operating income for the first year?

Please check the attached excel sheet for computations

4. (TCO 8) Sportswear Company manufactures socks. The Athletic Division sells its socks for $6 a pair to outsiders. Socks have manufacturing costs of $2.50 each for variable and $1.50 for fixed. The division’s total fixed manufacturing costs are $105,000 at the normal volume of 70,000 units.

The European Division has offered to buy 15,000 socks at the full cost of $4. The Athletic Division has excess capacity and the 15,000 units can be produced without interfering with the current outside sales of 70,000. The 85,000 volume is within the division’s relevant operating range.

Explain whether the Athletic Division should accept the offer.  Support your decision showing all calculations.

(Points: 25)

Sales                $4.00

Less: VC         $2.50

CM                  $1.50

         Yes, the proposal should be accepted since it would contribute $1.50 per unit to fixed costs and profits.  This would increase the overall division’s operating income by $22,500 = ($1.50 x 15,000 units).