Posted: April 13th, 2016

What would be the price for a product that has a cost of $500, assuming that the markup is based on cost of goods sold?

8. Which of the following costs is NOT relevant to a make-or-buy decision?
a. $10,000 of direct labor used to manufacture the parts
b. $30,000 of depreciation on the plant used to manufacture the parts
c. the supervisor’s salary of $25,000 that will be avoided if the part is purchased from an outside supplier
d. $15,000 in rent from leasing the production space to another company if the part is purchased from an outside supplier

9. Foster Industries manufactures 20,000 components per year. The manufacturing cost of the components was determined as follows:

Direct materials $150,000
Direct labor 240,000
Inspecting products 60,000
Providing power 30,000
Providing supervision 40,000
Setting up equipment 60,000
Moving materials 20,000
Total $600,000

If the component is not produced by Foster, inspection of products and provision of power costs will only be 10 percent of the production costs; moving materials costs and setting up equipment costs will only be 50 percent of the production costs; and supervision costs will amount to only 40 percent of the production amount. An outside supplier has offered to sell the component for $25.50.

What is the effect on income if Foster Industries purchases the component from the outside supplier?
a. $25,000 increase
b. $45,000 increase
c. $90,000 decrease
d. $90,000 increase

10. Foster Industries manufactures 20,000 components per year. The manufacturing cost of the components was determined as follows:

Direct materials $150,000
Direct labor 240,000
Variable manufacturing overhead 90,000
Fixed manufacturing overhead 120,000
Total $600,000

An outside supplier has offered to sell the component for $25.50.

Foster Industries can rent its unused manufacturing facilities for $45,000 if it purchases the component from the outside supplier.

What is the effect on income if Foster purchases the component from the outside supplier?
a. $45,000 increase
b. $15,000 increase
c. $75,000 decrease
d. $105,000 increase

11. Jamie Corporation had the following information:

Revenues $250,000
Cost of goods sold:
Direct materials $50,000
Direct labor 37,500
Overhead 62,500 150,000
Gross profit $100,000
Selling and administrative expenses 37,500
Operating income $ 62,500

What would be the price for a product that has a cost of $500, assuming that the markup is based on cost of goods sold?
a. $834
b. $625
c. $708
d. $2,000

12. Gage Company had the following information:
Revenues $600,000
Cost of Goods Sold 60%
Selling and administrative expenses $130,000
What is the markup on Cost of Goods sold?
a. .1833
b. .6667
c. .3611
d. none of these

ANS: B
Support:
Cost of Goods Sold = .60 ? $600,000 = $360,000
Operating Income = $600,000 – $360,000 – $130,000 = $110,000
Markup on COGS = (selling and administrative expenses + operating income) / COGS
.6667 = ($130,000 + $110,000) / $360,000

PTS: 1 DIF: Difficult OBJ: 18-2 NAT: AACSB Analytic