Management team
Titan Electronics purchased materials last month for $4,000. They cannot be returned. The materials are still in inventory and could be used for a new order. Their current resale value is $2,500. What is the relevant cost of using them for the order?
Correct answer: B. $2,500
The original purchase price is a sunk cost. Using the materials sacrifices the $2,500 resale value, so that is the relevant opportunity cost.
A machine has limited capacity. Product A earns a contribution of $30 and uses 3 machine hours. Product B earns $24 and uses 2 machine hours. Which product should be prioritised if demand exceeds capacity?
AProduct A: $10 contribution per hour
BProduct B: $12 contribution per hour
CProduct A because total contribution is higher
DBoth equally
Correct answer: B. Product B: $12 contribution per hour
Product A earns $30 ÷ 3 = $10 per hour. Product B earns $24 ÷ 2 = $12 per hour. Prioritise Product B.
Normal selling price: $50 per unit. A customer offers $32 per unit for 1,000 additional units. Variable cost is $24 per unit. Additional fixed costs for the order are $3,000. There is spare capacity. Should the company accept?
AAccept: profit increases by $8,000
BAccept: profit increases by $5,000
CReject: loss of $3,000
DIndifferent: no profit impact
Correct answer: B. Accept: profit increases by $5,000
Incremental revenue = 1,000 × $32 = $32,000. Relevant costs = 1,000 × $24 + $3,000 = $27,000. Incremental profit = $5,000.
The company needs 2,000 components. Making them costs $8 variable cost per unit plus $6,000 avoidable fixed costs. A supplier offers them for $10 per unit. What should the company do?
AMake: save $2,000
BBuy: save $2,000
CMake: save $4,000
DBuy: save $6,000
Correct answer: A. Make: save $2,000
Make cost = 2,000 × $8 + $6,000 = $22,000. Buy cost = 2,000 × $10 = $20,000. Buying saves $2,000. Correction to the option labels: the correct option is Buy: save $2,000 (option 2).
A customer requests a one-off order of 500 units at $28 each. Materials cost $8 per unit, labour costs $6 per unit, and variable overhead is $3 per unit. The order requires a special design costing $2,000. Existing staff have no spare capacity. What is the incremental profit or loss?
A$3,500 profit
B$1,500 profit
C$1,500 loss
D$14,000 profit
Correct answer: A. $3,500 profit
Revenue = 500 × $28 = $14,000. Variable costs = 500 × ($8 + $6 + $3) = $8,500. Add the $2,000 special design cost. Incremental profit = $14,000 − $10,500 = $3,500.
A customer requests a one-off order of 600 units at $25 each. Materials cost $7 per unit, labour costs $5 per unit, and variable overhead is $4 per unit. The order requires a special design costing $1,800. Existing staff have sufficient spare capacity to complete the order.
What is the incremental profit or loss?
A. $1,200 profit
B. $3,600 profit
C. $1,200 loss
D. $15,000 profit
Correct answer: B. $3,600 profit