QUESTION: 120 Topic 3: Part 3 Sec Three (106 to 176)

Polar Company sells refrigeration components both in the U.S. and to a subsidiary located in France. One of the components, Part No. 456, has a variable manufacturing cost of $30. The part can be sold domestically or shipped to the French subsidiary for use in the manufacture of a residential subassembly. Relevant data with regard to Part No. 456 are shown below.

* lf deemed preferable, these units could be sold in the U.S. Polar's applicable income tax rates are 40% in the U.S. and 70% in France.Polar will transfer Part No. 456 to the French subsidiary at either variable manufacturing cost or the domestic market price. On the basis of this information, which one of the following strategies should be recommended to Polar's management?

Transfer 150,000 units at $30 and the French subsidiary pays the shipping costs.
Transfer 150,000 units at $65 and the French subsidiary pays the shipping costs.
Sell 150,000 units in the U.S. and the French subsidiary obtains Part No. 456 in France.
Transfer 150,000 units at $65 and have the U.S. company absorb the shipping costs.

Answer(s): C

Explanation:

If the 150,000 components are sold separately in the U.S., the after-tax profit per unit will be $21 [($65-$30)x.6]. The French subsidiary will then purchase150,000 components domestically to include in the subassembly. The per-unit profit on sales of the subassembly will be $12 [($170-$75-$55)x.3]. The total per-unit profit for the consolidated entity from these transactions will therefore be $33 ($21 + $12).

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QUESTION: 121 Topic 3: Part 3 Sec Three (106 to 176)

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Listed below are a company's monthly unit costs to manufacture and market a particular product.

The company must decide to continue making the product or buy it from an outside supplier. The supplier has offered to make the product at the same level of quality that the company can make it. Fixed marketing costs would be unaffected, but variable marketing costs would be reduced by 30% if the company were to accept the proposal. What is the maximum amount per unit that the company can pay the supplier without decreasing operating income?

$8.50
$6.75
$7.75
$5.25

Answer(s): B

Explanation:

The key to this question is, what costs will the company avoid if it buys from the outside supplier? It will no longer incur the $2.00 of direct materials, nor the $240 of direct labor, nor the $1.60 of variable overhead, nor $0.75 ($2.50 x 30%) of the variable marketing costs (regardless of whether the company makes or buys, it will still incur 70% of the variable marketing costs). The firm will therefore avoid costs of $6.75 ($2.00 + $240 +$1.60 +$0.75). Hence, it will at least break even by paying no more than $6.75.

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QUESTION: 122 Topic 3: Part 3 Sec Three (106 to 176)

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In a make-ver
The overhead is 40% fixed. Of the fixed overhead, $25,000 is the salary of the cafeteria supervisor. The remainder of the fixed overhead has been allocated from total company overhead. Assuming the cafeteria supervisor will remain and Laurel will continue to pay his/her salary, the maximum cost Laurel will be willing to pay an outside firm to service the cafeteria is

$285,000
$175,000
$219,000
$241,000

Answer(s): D

Explanation:

Given that overhead is 40% fixed, $66,000 ($1 10,000 x 60%) is variable, and $44,000 is fixed. Of the latter amount, $25,000 is attributable to the supervisor's salary. The $19,000 remainder is allocated from total company overhead and is unavoidable. Assuming the company will continue to pay the supervisor's salary if an outside firm services the cafeteria, the total fixed overhead is not an avoidable (incremental) cost. Thus, the total avoidable cost of the cafeteria's operation is $241 ,000 ($100,000 food + $75,000 labor + $66,000 VOH). This amount is the savings from hiring an outside firm. Accordingly, it is also the maximum that Laurel should be willing to pay the outside firm.

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QUESTION: 122 Topic 3: Part 3 Sec Three (106 to 176)

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In a make-versus-buy decision, the relevant costs include variable manufacturing costs as well as

Factory management costs.
General office costs.
Avoidable fixed costs.
Depreciation costs.

Answer(s): C

Explanation:

The relevant costs in a make-versus-buy decision are those that differ between the two decision choices. These costs include any variable costs plus any avoidable fixed costs. Avoidable fixed costs will not be incurred if the "buy" decision is selected.

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QUESTION: 120 Topic 3: Part 3 Sec Three (106 to 176)

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QUESTION: 121 Topic 3: Part 3 Sec Three (106 to 176)

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QUESTION: 122 Topic 3: Part 3 Sec Three (106 to 176)

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QUESTION: 122 Topic 3: Part 3 Sec Three (106 to 176)

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