1. 1. T-Bone Steaks and Prime Rib Are Two Joint Costs of Cows

Chapter 7-1 Monday, October 15, 2007

1. 1. T-bone steaks and prime rib are two joint costs of cows. A. True B. False

2. The book value of an old machine is a (n)______A. incremental cost. B. sunk cost. C. opportunity cost. D. relevant cost.

3. Each year, Knight Motors surveys 7,500 former and prospective customers regarding satisfaction and brand awareness. For the current year, the company is considering outsourcing the survey to RBG Associates, who have offered to conduct the survey and summarize results for $30,000. Craig Knight, the President of Knight Motors, believes that RBG will do a higher quality job than his company has been doing, but is unwilling to spend more than $10,000 dollars above current costs. The head of bookkeeping for Knight has prepared the following summary of costs related to the survey in the prior year. Mailing $16,000 Printing $4,500 Salary of Pat Fisher (stuffs envelopes and $1,500 summarize data) Share of depreciation of computer & software $1,100 Share of electricity, phone, etc. $500 Total $23,600 What is the incremental cost of going outside versus conducting the survey as in the past? Will Craig accept the RBG offer?

4. For most construction projects, Bradley Heating and Cooling buys sheet metal and forms the metal into heating/cooling ducts as needed. The company estimates the costs of making and installing ductwork for the Kerry Park shopping mall to be as follows: Materials $30,000 Labor to form ductwork 2,000 Labor to install ductwork 8,000 Misc. variable costs 1,000 Fixed costs allocated based on labor hrs 2,500 Total cost $43,500 The fixed costs relate to the company’s building, equipment, and office staff. The company plans on billing the Kerry Park developer $60,000 for services. Bradley is currently behind schedule on other projects and is paying a late penalty of $1,000 per day. Walt Bradley, the owner of Bradley Heating and Cooling, is considering ordering prefabricated ductwork for the Kerry Park job. The prefabricated ductwork will cost $34,000 (including the cost of sheet metal). If Walt buys the prefabricated ductwork he’ll be able to reassign workers to another project and avoid 5 days of late fees. Should Bradley make the ductwork or buy it prefabricated?