Question : Objective 11.5 1) When deciding whether to discontinue a segment of : 1216915

 

Objective 11.5

 

1) When deciding whether to discontinue a segment of a business, managers should focus on:

A) equipment used by that segment that could become idle

B) reallocation of corporate costs

C) how total costs differ among alternatives

D) operating income per unit of the discontinued segment

 

2) When deciding whether to discontinue a segment of a business, relevant costs include all of the following EXCEPT:

A) fixed supervision costs that can be eliminated

B) variable marketing costs per unit of product sold

C) cost of goods sold

D) future administrative costs that will continue

3) Molly, Inc. is considering eliminating one of its product lines.  The fixed costs currently allocated to the product line will be allocated to other product lines upon discontinuance.  What financial effects occur if the product line is discontinued?

A) net income will decrease by the amount of the contribution margin of the product line being discontinued

B) the company’s total fixed costs will increase

C) total fixed costs will decrease by the amount of the product line’s fixed costs

D) net income will decrease by the amount of the product line’s fixed costs

 

4) Discontinuing unprofitable products will increase profitability:

A) if the resources no longer required by the discontinued product can be eliminated

B) if capacity constraints are adjusted

C) automatically

D) when a large portion of the fixed costs are unavoidable

 

5) A segment has the following data:

 

Sales$300,000

Variable costs160,000

Fixed costs155,000

 

What will be the incremental effect on net income if this segment is eliminated, assuming the fixed costs will be allocated to profitable segments?

A) $15,000 increase

B) $155,000 decrease

C) $140,000 decrease

D) $145,000 decrease

6) Camera Corner is considering eliminating Model AE2 from its camera line because of losses over the past quarter. The past three months of information for Model AE2 are summarized below:

 

Sales (1,000 units)$300,000

Manufacturing costs:

Direct materials150,000

Direct labor ($15 per hour)60,000

Overhead100,000

Operating loss($10,000)

 

Overhead costs are 70% variable and the remaining 30% is depreciation of special equipment for model AE2 that has no resale value.

 

If Model AE2 is dropped from the product line, operating income will:

A) increase by $10,000

B) decrease by $20,000

C) increase by $30,000

D) decrease by $10,000

Answer the following questions using the information below:

 

The management accountant for Giada’s Book Store has prepared the following income statement for the most current year:

CookbookTravel BookClassicsTotal

Sales$60,000$100,000$40,000$200,000

Cost of goods sold36,00065,00020,000121,000

Contribution margin24,00035,00020,00079,000

Order and delivery processing18,00021,0008,00047,000

Rent (per sq. foot used)2,0001,0003,0006,000

Allocated corporate costs7,0007,0007,00021,000

Corporate profit$ (3,000)$ 6,000$ 2,000$ 5,000

 

7) If the cookbook product line had been discontinued prior to this year, the company would have reported:

A) greater corporate profits

B) the same amount of corporate profits

C) less corporate profits

D) resulting profits cannot be determined

 

8) If the travel book line had been discontinued, corporate profits for the current year would have decreased by:

A) $35,000

B) $14,000

C) $13,000

D) $6,000

Answer the following questions using the information below:

 

Rambo Company has three products, A, B, and C. The following information is available:

 

Product AProduct BProduct C

Sales$60,000$90,000$24,000

Variable costs36,00048,00015,000

Contribution margin24,00042,0009,000

Fixed costs:

Avoidable6,00015,0004,000

Unavoidable7,0009,0005,400

Operating income$ 11,000$18,000$ (400)

 

9) Rambo Company is thinking of dropping Product C because it is reporting a loss. Assuming Rambo drops Product C and does NOT replace it, operating income will:

A) increase by $400

B) increase by $4,000

C) decrease by $5,000

D) decrease by $9,400

 

10) Assuming Product C is discontinued and the space formerly used to produce Product C is rented for $12,000 per year, operating income will:

A) increase by $4,600

B) increase by $7,000

C) increase by $12,000

D) increase by $12,400