Solutions Essay

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Practice Problems Chapter 14 Managerial Accounting Spring 2012 Solutions to In-class Problems – Chapter 14 1. The City of Miami is about to replace an old fire truck with a new vehicle in an effort to save maintenance and other operating costs. Which of the following items, all related to the transaction, would not be considered in the decision? A. Purchase price of the new vehicle. B. Purchase price of the old vehicle. C. Savings in operating costs as a result of the new vehicle. D. Proceeds from disposal of the old vehicle. E. Future depreciation on the new vehicle. Answer: B The purchase price of the old vehicle is not relevant to the decision and will not be considered because it is a sunk cost that had been incurred in the past. 2. A special order generally should be accepted if: A. its revenue exceeds allocated fixed costs, regardless of the variable costs associated with the order. B. excess capacity exists and the revenue exceeds all variable costs associated with the order. C. excess capacity exists and the revenue exceeds allocated fixed costs. D. the revenue exceeds total costs, regardless of available capacity. E. the revenue exceeds variable costs, regardless of available capacity. Answer: B The revenues costs that will be considered in case of the special order are – revenues, variable costs and fixed costs (only if incremental fixed costs have to be incurred). If the firm has excess capacity, it need not incur any additional fixed costs to fulfill the order and thus, the only items relevant are revenues and variable costs. 3. Donnelly, a division of Dakota Enterprises, currently makes 100,000 units of a product that has created a number of manufacturing problems. Donnelly's costs follow. Manufacturing costs: Variable Fixed Allocated corporate administrative cost $420,000 150,000 70,000 If

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