Question : 71. Sparrow Co. currently operating at 80% of capacity and currently : 1239642

71. Sparrow Co. is currently operating at 80% of capacity and is currently purchasing a part used in its manufacturing operations for $8.00 a unit. The unit cost for Sparrow Co. to make the part is $9.00, which includes $.60 of fixed costs. If 4,000 units of the part are normally purchased each year but could be manufactured using unused capacity, what would be the amount of differential cost increase or decrease for making the part rather than purchasing it? 
A. $12,000 cost decrease
B. $4,000 cost increase
C. $20,000 cost decrease
D. $1,600 cost increase

72. Heston and Burton, CPAs, currently work a five-day week. They estimate that net income for the firm would increase by $75,000 annually if they worked an additional day each month. The cost associated with the decision to continue the practice of a five-day work week is an example of: 
A. differential revenue
B. sunk cost
C. differential income
D. opportunity cost

73. Starling Co. is considering disposing of a machine with a book value of $12,500 and estimated remaining life of five years. The old machine can be sold for $1,500. A new high-speed machine can be purchased at a cost of $25,000. It will have a useful life of five years and no residual value. It is estimated that the annual variable manufacturing costs will be reduced from $26,000 to $23,500 if the new machine is purchased. The total net differential increase or decrease in cost for the new equipment for the entire five years is: 
A. decrease of $11,000
B. decrease of $15,000
C. increase of $11,000
D. increase of $15,000

74. Nighthawk Inc. is considering disposing of a machine with a book value of $22,500 and an estimated remaining life of three years. The old machine can be sold for $6,250. A new machine with a purchase price of $68,750 is being considered as a replacement. It will have a useful life of three years and no residual value. It is estimated that the annual variable manufacturing costs will be reduced from $43,750 to $20,000 if the new machine is purchased. The net differential increase or decrease in cost for the entire three years for the new equipment is: 
A. $8,750 increase
B. $31,250 decrease
C. $8,750 decrease
D. $2,925 decrease

75. Falcon Co. produces a single product. Its normal selling price is $30.00 per unit. The variable costs are $19.00 per unit. Fixed costs are $25,000 for a normal production run of 5,000 units per month. Falcon received a request for a special order that would not interfere with normal sales. The order was for 1,500 units and a special price of $20.00 per unit. Falcon Co. has the capacity to handle the special order and, for this order, a variable selling cost of $1.00 per unit would be eliminated.

If the order is accepted, what would be the impact on net income? 
A. decrease of $750
B. decrease of $4,500
C. increase of $3,000
D. increase of $1,500

76. Falcon Co. produces a single product. Its normal selling price is $30.00 per unit. The variable costs are $19.00 per unit. Fixed costs are $25,000 for a normal production run of 5,000 units per month. Falcon received a request for a special order that would not interfere with normal sales. The order was for 1,500 units and a special price of $20.00 per unit. Falcon Co. has the capacity to handle the special order and, for this order, a variable selling cost of $1.00 per unit would be eliminated.

Should the special order be accepted? 
A. Cannot determine from the data given
B. Yes
C. No
D. There would be no difference in accepting or rejecting the special order

77. Mighty Safe Fire Alarm is currently buying 50,000 motherboard from MotherBoard, Inc. at a price of $65 per board. Mighty Safe is considering making its own boards. The costs to make the board are as follows: Direct Materials $32 per unit, Direct labor $10 per unit, Variable Factory Overhead $16.00, Fixed Costs for the plant would increase by $75,000. Which option should be selected and why? 
A. Buy – $75,000 more in profits
B. Make – $275,000 increase in profits
C. Buy – $275,000 more in profits
D. Make – $350,000 increase in profits

78. Super Security Company manufacturers home alarms. Currently it is manufacturing one of its components at a variable cost of $45 and fixed costs of $15 per unit. An outside provider of this component has offered to sell Safe Security the component for $50. Determine the best plan and calculate the savings. 
A. $5 savings per unit – Manufacture
B. $5 savings per unit – Purchase
C. $10 savings per unit – Manufacture
D. $15 savings per unit – Purchase

79. Discontinuing a product or segment is a huge decision that must be carefully analyzed. Which of the following would be a valid reason not to discontinue an operation? 
A. The losses are minimal.
B. The variable costs are less than revenues.
C. The variable costs are more than revenues.
D. The allocated fixed costs are more than revenues.

80. Which of the following would be considered a sunk cost? 
A. Purchase price of new equipment
B. Equipment rental for the production area
C. Net book value of equipment that has no market value
D. Warehouse lease expense