Ch12 – Decision Making & Relevance | Test Bank

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Horngren's Cost Accounting: A Managerial Emphasis, 17e, Global Edition by Datar/Rajan

Chapter 12 Decision Making and Relevant Information

Objective 12.1

1) A decision model involves a(n):

A) informal method of making a choice at the lower level management using sensitivity analysis

B) formal method of making a choice that often involves both quantitative and qualitative analyses

C) informal method of making a choice which is discussed in detailed in the financial reports

D) formal method of making a choice at the lower level management using advanced management techniques such as balance scorecard

Diff: 1

Objective: 1

AACSB: Analytical thinking

2) Feedback regarding previous actions may affect:

A) future predictions

B) implementation of the decision

C) the decision model

D) All of these answers are correct.

Diff: 2

Objective: 1

AACSB: Analytical thinking

3) Place the following steps from the five-step decision process in order:

A = Obtain information including historical costs

B = Evaluate performance to provide feedback

C = Make decisions choosing among alternatives

D = Make predictions about the future

E = Identify the problem and uncertainties

A) A, E, D, B, C

B) E, A, D, B, C

C) E, A, D, C, B

D) D, C, B, A, E

Diff: 2

Objective: 1

AACSB: Analytical thinking

4) The formal process of choosing between alternatives is known as a(n):

A) relevant model

B) decision model

C) alternative model

D) prediction model

Diff: 1

Objective: 1

AACSB: Analytical thinking

5) Flash City Inc. manufactures small flash drives and is considering raising the price by 75 cents a unit for the coming year. With a 75-cent price increase, demand is expected to fall by 7,000 units.

If the price increase is implemented, operating profit is projected to:

A) increase by $33,350

B) decrease by $5250

C) increase by $5250

D) decrease by $7000

Diff: 2

Objective: 1

AACSB: Application of knowledge

6) Flash City Inc. manufactures small flash drives and is considering raising the price by 75 cents a unit for the coming year. With a 75-cent price increase, demand is expected to fall by 7,000 units.

Would you recommend the 75-cent price increase?

A) No, because demand decreased.

B) No, because the selling price increases.

C) Yes, because contribution margin per unit increases.

D) Yes, because operating profits increase.

Diff: 2

Objective: 1

AACSB: Application of knowledge

7) When using the five-step decision process, which one of the following steps should be done last?

A) obtain information

B) choose an alternative

C) evaluation and feedback

D) implementing the decision

Diff: 2

Objective: 1

AACSB: Analytical thinking

8) When using the five-step decision process, which one of the following steps should be done first?

A) obtain information

B) choose an alternative

C) evaluation and feedback

D) implementing the decision

Diff: 2

Objective: 1

AACSB: Analytical thinking

9) A decision model is an informal method for making a choice, using simpler methods like surveying.

Diff: 1

Objective: 1

AACSB: Analytical thinking

10) A decision model is a formal method of making a choice, and can include quantitative as well as qualitative analysis.

Diff: 1

Objective: 1

AACSB: Analytical thinking

11) Feedback from previous decisions uses historical information and, therefore, is irrelevant for making future predictions.

Diff: 1

Objective: 1

AACSB: Analytical thinking

12) Explain the five-step decision process that managers can use to make decisions.

information, (c) Make predictions, (d) Make decisions by choosing among alternatives, and (e) Implement the decision, evaluate performance to provide feedback.

Identifying the problem and uncertainties involves finding risks, uncertainties, or other failures associated with a business which will affect the internal and external prospects of the firm.

Obtaining information involves collecting all data pertinent to the decision situation, both quantitative and qualitative, and determining which information is relevant to the decision, and determining which alternatives are being considered.

Making predictions involves using the information obtained above and attempting to predict what the future costs and benefits will be for each of the various alternatives.

Choosing an alternative involves comparing the predicted benefits of each alternative with each of the predicted costs (as well as other non-quantitative factors), and selecting an alternative that maximizes the difference between the expected benefits and the expected costs.

Implementing the decision involves actually doing the alternative selected above and making all the necessary changes in operations to support the decision. Evaluating the performance of the decision involves learning from the results of the decision and seeing which predictions were accurate and determining how to avoid any difficulties encountered in either the decision-process or the implementation.

Diff: 2

Objective: 1

AACSB: Analytical thinking

Objective 12.2

1) Which of the following is NOT true with regards to relevant costs and relevant revenues?

A) They are sunk costs and historical revenues.

B) They are expected costs and expected revenues.

C) They occur in the future.

D) The differ among alternative courses of action.

Diff: 2

Objective: 2

AACSB: Analytical thinking

2) Which of the following statements is true with regards to relevant information?

A) When judging alternatives, differences between expected future results are relevant to a decision.

B) Past (historical) costs relevant when making decisions.

C) All expected future revenues and expected future costs are relevant when making decisions.

D) A heavier weight should be given to quantitative nonfinancial factors than to qualitative factors.

Diff: 2

Objective: 2

AACSB: Analytical thinking

3) Sunk costs:

A) are future costs for decision making

B) are avoidable costs

C) are irrelevant for decision making

D) are foregone contribution by not using a limited resource in its next-best alternative use

Diff: 2

Objective: 2

AACSB: Analytical thinking

4) Sunk costs:

A) are relevant

B) are differential

C) have future implications

D) are ignored when evaluating alternatives

Diff: 1

Objective: 2

AACSB: Analytical thinking

5) Which of the following is an example of sunk costs?

A) book value of equipment

B) cost of purchasing raw materials

C) cost of an alternative investment

D) wages payable to skilled laborers to make a product

Diff: 1

Objective: 2

AACSB: Application of knowledge

6) In evaluating different alternatives, it is useful to concentrate on:

A) variable costs

B) fixed costs

C) total costs

D) relevant costs

Diff: 1

Objective: 2

AACSB: Analytical thinking

7) Which of the following costs always differ among future alternatives?

A) fixed costs

B) historical costs

C) relevant costs

D) variable costs

Diff: 1

Objective: 2

AACSB: Analytical thinking

8) Management is considering two alternatives. Alternative A has projected revenue per year of $100,000 and costs of $70,000 while Alternative B has revenue of $100,000 and costs of $60,000. Both projects require an initial investment of $250,000 of which $75,000 has already been set aside and will be used as a down payment on the project that is chosen. There are also other qualitative factors that management must consider before making a final choice. Which of the following statements is correct about relevant costs and relevant revenues?

A) The sunk cost of $75,000 is relevant.

B) The projected revenues are relevant to the decision.

C) The initial investment of $250,000, the projected revenues, and the projected costs are all relevant.

D) The only relevant item are the costs as they differ between alternatives.

Diff: 1

Objective: 2

AACSB: Analytical thinking

9) John's 8-year-old Chevrolet Trail Blazer requires repairs estimated at $9000 to make it road worthy again. His wife, Sherry, suggested that he should buy a 5-year-old used Jeep Grand Cherokee instead for $9000 cash. Sherry estimated the following costs for the two cars:

The cost NOT relevant for this decision is the:

A) acquisition cost of the Trail Blazer

B) acquisition cost of the Grand Cherokee

C) repairs to the Trail Blazer

D) annual operating costs of the Grand Cherokee

Diff: 2

Objective: 2

AACSB: Analytical thinking

10) John's 8-year-old Chevrolet Trail Blazer requires repairs estimated at $11,000 to make it road worthy again. His wife, Sherry, suggested that he should buy a 5-year-old used Jeep Grand Cherokee instead for $11,000 cash. Sherry estimated the following costs for the two cars:

What should John do? What are his savings in the first year?

A) Buy the Grand Cherokee; $13,000

B) Fix the Trail Blazer; $5980

C) Buy the Grand Cherokee; $480

D) Fix the Trail Blazer; $9813

Diff: 2

Objective: 2

AACSB: Application of knowledge

11) A relevant revenue is revenue that is a(n):

A) past revenue that differs among alternative courses of action

B) future revenue that differs among alternative courses of action

C) in-hand revenue

D) earned revenue

Diff: 2

Objective: 2

AACSB: Analytical thinking

12) A relevant cost is a cost that is a(n):

A) future cost

B) past cost

C) sunk cost

D) non-cash expense

Diff: 2

Objective: 2

AACSB: Analytical thinking

13) Which of the following is true of relevant information?

A) all fixed costs are relevant

B) all Future revenues and expenses are relevant

C) future

D) all fixed costs are not relevant

Diff: 2

Objective: 2

AACSB: Analytical thinking

14) Quantitative factors:

A) include financial information, but not nonfinancial information

B) include both financial and nonfinancial information

C) are always relevant when making decisions

D) include employee morale

Diff: 2

Objective: 2

AACSB: Analytical thinking

15) All of the following are examples of quantitative factors except:

A) cost of direct materials

B) budget for marketing activities

C) product development time

D) employee morale

Diff: 2

Objective: 2

AACSB: Analytical thinking

16) Which of the following is true of historical costs?

A) They are useful for making future predictions.

B) They are relevant for decision making.

C) They are always accounted as opportunity costs.

D) They cannot be fixed costs.

Diff: 2

Objective: 2

AACSB: Analytical thinking

17) When making decisions:

A) qualitative factors are not relevant as they can't be quantified

B) more weight should be given to quantitative factors

C) appropriate weight must be given to both quantitative and qualitative factors

D) quantitative factors are relevant but qualitative factors are rarely relevant

Diff: 2

Objective: 2

AACSB: Analytical thinking

18) Employee morale at Dos Santos, Inc., is very high. This type of information is an example of:

A) qualitative factors

B) quantitative factors

C) irrelevant factors

D) financial factors

Diff: 1

Objective: 2

AACSB: Analytical thinking

19) Each of the following are true of relevant information except:

A) past costs are helpful when making predictions but not relevant when making decisions

B) different alternatives can be compared by examining differences in expected future revenues and expected total future costs

C) significant past investment amounts are relevant to decision making

D) not all future revenues and expenses are relevant

Diff: 1

Objective: 2

AACSB: Analytical thinking

20) One-time-only special orders should only be accepted if:

A) incremental revenues exceed incremental costs

B) differential revenues exceed variable costs

C) incremental revenues exceed fixed costs

D) total revenues exceed total costs

Diff: 3

Objective: 2

AACSB: Analytical thinking

21) When deciding to accept a one-time-only special order from a wholesaler, management should:

A) consider the sunk costs and opportunity costs

B) not consider the special order's impact on future prices of their products

C) determine whether excess capacity is available

D) verify past design costs for the product

Diff: 3

Objective: 2

AACSB: Analytical thinking

22) When there is an excess capacity, it makes sense to accept a one-time-only special order for less than the current selling price if:

A) incremental revenues exceed incremental costs

B) additional fixed costs is incurred to accommodate the order

C) the company placing the order is in the same market segment as your current customers

D) incremental revenue equals incremental operating income

Diff: 3

Objective: 2

AACSB: Analytical thinking

23) Which of the following is true of special order pricing?

A) It represents a short-run pricing decision.

B) The special pricing should not be set below the regular price.

C) It represents a long-term pricing decision.

D) The special price should assure that incremental revenue covers fixed costs.

Diff: 3

Objective: 2

AACSB: Analytical thinking

24) A product cost is composed of the following:

The product sells for $65 and a 10% commission is paid to a salesperson for every unit sold. Management accountants also estimate that storage cost per unit averages $0.25 per unit. What is the full cost of the product?

A) $11

B) $19

C) $25.75

D) $25.50

Diff: 2

Objective: 2

AACSB: Analytical thinking

25) Red Rose Manufacturers Inc. is approached by a potential customer to fulfill a one-time-only special order for a product similar to one offered to domestic customers. The company has excess capacity. The following per unit data apply for sales to regular customers:

What is the full cost of the product per unit?

A) $420

B) $882

C) $630

D) $252

Diff: 3

Objective: 2

AACSB: Application of knowledge

26) Red Rose Manufacturers Inc. is approached by a potential new customer to fulfill a one-time-only special order for a product similar to one offered to domestic customers. The company has excess capacity. The following per unit data apply for sales to regular customers:

What is the contribution margin per unit?

A) $190

B) $248

C) $438

D) $620

Diff: 3

Objective: 2

AACSB: Application of knowledge

27) Red Rose Manufacturers Inc. is approached by a potential customer to fulfill a one-time-only special order for a product similar to one offered to domestic customers. The company has excess capacity. The following per unit data apply for sales to regular customers:

For Red Rose Manufacturers Inc., what is the minimum acceptable price of this special order?

A) $440

B) $306

C) $450

D) $680

Diff: 3

Objective: 2

AACSB: Analytical thinking

28) Red Rose Manufacturers Inc. is approached by a potential customer to fulfill a one-time-only special order for a product similar to one offered to domestic customers. The company has excess capacity. The following per unit data apply for sales to regular customers:

What is the change in operating profits if the one-time-only special order for 1000 units is accepted for $580 a unit by Red Rose?

A) $140,000 increase in operating profits

B) $139,330 increase in operating profits

C) $139,330 decrease in operating profits

D) $140,000 decrease in operating profits

Diff: 3

Objective: 2

AACSB: Analytical thinking

29) Excellent Manufacturers Inc. has a current production level of 20,000 units per month. Unit costs at this level are:

Current monthly sales are 18,000 units. Jax Company has contacted Excellent about purchasing 1600 units at $2.30 each. Current sales would NOT be affected by the one-time-only special order, and variable marketing/distribution costs would NOT be incurred on the special order. What is Ratzlaff Company's change in operating profits if the special order is accepted?

A) $5584.00 increase in operating profits

B) $5584.00 decrease in operating profits

C) $2240.00 increase in operating profits

D) $2240.00 decrease in operating profits

Diff: 3

Objective: 2

AACSB: Application of knowledge

30) Snapper Tool Company has plenty of excess capacity to accept a special order. Shown below is the special order "what-if" analysis. Which of the following is the correct decision and reason?

A) Yes, since the goal is to fill capacity as much as possible to keep fixed overhead variances as low as possible.

B) No, the company will only break even.

C) No, since only the employees will benefit from this in that they will earn more overtime.

D) Yes, since operating profits will most likely increase.

Diff: 3

Objective: 2

AACSB: Application of knowledge

31) Kitchens Sales Inc. is approached by Mr. Louis Cifer, a new customer, to fulfill a large one-time-only special order for a product similar to one offered to regular customers. The following per unit data apply for sales to regular customers:

Kitchens Sales Inc. has excess capacity. Mr. Cifer wants the cabinets in cherry rather than oak, so direct material costs will increase by $68 per unit. The average marketing cost of Kitchens Sales' product is $172 per order. For Kitchens, what is the full cost of the one-time-only special order?

A) $1044

B) $1180

C) $1112

D) $1352

Diff: 2

Objective: 2

AACSB: Application of knowledge

32) Kitchens Sales Inc. is approached by Mr. Louis Cifer, a new customer, to fulfill a large one-time-only special order for a product similar to one offered to regular customers. The following per unit data apply for sales to regular customers:

Kitchens Sales Inc. has excess capacity. Mr. Cifer wants the cabinets in cherry rather than oak, so direct material costs will increase by $63 per unit. The average marketing cost of Kitchens Sales' product is $171 per order. Other than price, what other items should Kitchens Sales consider before accepting this one-time-only special order?

A) reaction of shareholders

B) reaction of existing customers to the lower price offered to Mr. Louis Cifer

C) demand for cherry cabinets

D) price is the only consideration

Diff: 2

Objective: 2

AACSB: Analytical thinking

33) Kitchens Sales Inc. is approached by Mr. Louis Cifer, a new customer, to fulfill a large one-time-only special order for a product similar to one offered to regular customers. The following per unit data apply for sales to regular customers:

Kitchens Sales Inc. has excess capacity. Mr. Cifer wants the cabinets in cherry rather than oak, so direct material costs will increase by $63 per unit. The average marketing cost of Kitchens Sales' product is $179 per order. Which of the following costs is NOT considered to calculate the minimum acceptable price of a one-time-only special order?

A) marketing costs

B) direct material costs

C) indirect material costs

D) special design costs

Diff: 2

Objective: 2

AACSB: Analytical thinking

34) An example of a qualitative factor for the decision-making process is:

A) customer satisfaction as determined by written responses given by customers to survey questions

B) employee wages paid this week

C) number of clicks on a web site during a month

D) manufacturing overhead allocated to WIP

Diff: 1

Objective: 2

AACSB: Analytical thinking

35) Dantley's Furniture manufactures rustic furniture. The cost accounting system estimates manufacturing costs to be $180 per table, consisting of 80% variable costs and 20% fixed costs. The company has surplus capacity available. It is Back Forrest's policy to add a 55% markup to full costs. Dantley's Furniture is invited to bid on a one-time-only special order to supply 120 rustic tables. What is the lowest price Dantley's Furniture should bid on this special order?

A) $16,200

B) $17,280

C) $21,600

D) $29,160

Diff: 2

Objective: 2

AACSB: Application of knowledge

36) Dantley's Furniture manufactures rustic furniture. The cost accounting system estimates manufacturing costs to be $220 per table, consisting of 80% variable costs and 20% fixed costs. The company has surplus capacity available. It is Back Forrest's policy to add a 50% markup to full costs. A large hotel chain is currently expanding and has decided to decorate all new hotels using the rustic style. Dantley's Furniture Incorporated is invited to submit a bid to the hotel chain. What is the lowest price per unit Dantley's Furniture should bid on this long-term order? (Round answer to the nearest dollar.)

A) $154

B) $176

C) $220

D) $330

Diff: 2

Objective: 2

AACSB: Application of knowledge

37) Zephram Corporation has a plant capacity of 200,000 units per month. Unit costs at capacity are:

Current monthly sales are 190,000 units at $30.00 each. Q, Inc., has contacted Zephram Corporation about purchasing 2300 units at $26.00 each. Current sales would not be affected by the one-time-only special order. What is Zephram's change in operating profits if the one-time-only special order is accepted?

A) $19,320 increase

B) $26,680 increase

C) $29,900 increase

D) $40,480 increase

Diff: 3

Objective: 2

AACSB: Application of knowledge

38) Which of the following is NOT true about one-time-only special orders?

A) special orders would be accepted if they result in an increase in the contribution margin regardless of capacity and long-term implications

B) along with other criteria, there must be excess capacity to accept an order

C) along with other criteria, there must not be significant long-term negative implications of accepting a special order

D) the impact on operating income of the acceptance of a special-order must be analyzed by management before making a final decision

Diff: 1

Objective: 2

AACSB: Analytical thinking

39) Which of the following are potential problems managers face in relevant-cost analysis?

A) including only relevant costs and relevant revenues in an analysis

B) incorrect assumptions such as all variable costs are relevant and all fixed costs are not

C) considering past historical costs when making predictions about future costs

D) examining differences in expected total future revenues and expected total future costs among alternatives

Diff: 1

Objective: 2

AACSB: Analytical thinking

40) Which of the following costs is irrelevant in the decision making of a special order when there is idle production capacity - enough excess capacity to accept the order?

A) fixed manufacturing costs

B) units sold

C) material cost

D) labor hours incurred

Diff: 2

Objective: 2

AACSB: Analytical thinking

41) Which of the following is an appropriate step when identifying relevant costs to make a business decision?

A) assuming all variable costs are relevant

B) assuming all fixed costs are irrelevant

C) separating total costs into business function costs and full costs

D) separating total costs into variable and fixed components

Diff: 2

Objective: 2

AACSB: Analytical thinking

42) The best way to avoid misidentification of relevant costs is to focus on:

A) expected future costs that differ among the alternatives

B) historical costs

C) unit fixed costs

D) total unit costs

Diff: 2

Objective: 2

AACSB: Analytical thinking

43) Relevant costs are:

A) sunk costs

B) expected future costs

C) actual present costs

D) historical costs

Diff: 2

Objective: 2

AACSB: Analytical thinking

44) Direct materials are $600, direct labor is $150, variable overhead costs are $450, and fixed overhead costs are $300. The cost of one unit is:

A) $450

B) $750

C) $1200

D) $1500

Diff: 2

Objective: 2

AACSB: Application of knowledge

45) Unit cost data can most mislead decisions by:

A) not computing fixed overhead costs

B) computing labor and materials costs only

C) computing administrative costs

D) not computing unit costs at the same output level

Diff: 1

Objective: 2

AACSB: Analytical thinking

46) McMurphy Corporation produces a part that is used in the manufacture of one of its products. The costs associated with the production of 13,000 units of this part are as follows:

Of the fixed factory overhead costs, $59,000 is avoidable. Conners Company has offered to sell 13,000 units of the same part to McMurphy Corporation for $36 per unit.

Assuming there is no other use for the facilities, Schmidt should:

A) make the part, as this would save $14 per unit

B) buy the part, as this would save $14 per unit

C) buy the part, as this would save the company $182,000

D) make the part, as this would save $11 per unit

Diff: 3

Objective: 2

AACSB: Analytical thinking

47) Striker 44 Corporation produces a part that is used in the manufacture of one of its products. The costs associated with the production of 12,000 units of this part are as follows:

Of the fixed factory overhead costs, $58,000 is avoidable.

Assuming no other use of their facilities, the highest price that McMurphy should be willing to pay for 12,000 units of the part is:

A) $412,000

B) $273,000

C) $331,000

D) $353,000

Diff: 3

Objective: 2

AACSB: Analytical thinking

48) Past costs themselves are always irrelevant when making decisions.

Diff: 2

Objective: 2

AACSB: Analytical thinking

49) Equal weight must be given to qualitative factors and quantitative nonfinancial factors while making decisions.

Diff: 1

Objective: 2

AACSB: Analytical thinking

50) The rent paid for an already existing facility is an example of a sunk cost.

Diff: 1

Objective: 2

AACSB: Analytical thinking

51) A cost may be relevant for one decision, but NOT relevant for a different decision.

Diff: 1

Objective: 2

AACSB: Analytical thinking

52) Revenues that remain the same for two alternatives being examined are relevant revenues.

Diff: 1

Objective: 2

AACSB: Analytical thinking

53) Sunk costs are irrelevant to decision making.

Diff: 1

Objective: 2

AACSB: Analytical thinking

54) Marketing costs will be an irrelevant cost in the decision making of a one-time-only special order.

Diff: 1

Objective: 2

AACSB: Analytical thinking

55) A sunk cost is a relevant cost in a decision making.

Diff: 1

Objective: 2

AACSB: Analytical thinking

56) Quantitative factors, such as direct material costs, are outcomes that are measured in numerical terms.

Diff: 1

Objective: 2

AACSB: Analytical thinking

57) Qualitative factors are outcomes that can be easily measured in numerical terms, such as the costs of direct labor.

Diff: 1

Objective: 2

AACSB: Analytical thinking

58) Business function costs are the sum of all variable and fixed costs in all business functions of the value chain.

Diff: 1

Objective: 2

AACSB: Analytical thinking

59) Qualitative factors, as well as relevant revenues and relevant costs need to be considered when selecting among alternatives.

Diff: 1

Objective: 2

AACSB: Analytical thinking

60) Past costs are also called sunk costs because they are unavoidable and cannot be changed no matter what action is taken.

Diff: 1

Objective: 2

AACSB: Analytical thinking

61) Full costs of a product include variable and fixed costs in a particular business function in the value chain.

Diff: 1

Objective: 2

AACSB: Analytical thinking

62) For one-time-only special orders, fixed costs may be relevant but NOT variable costs.

Diff: 1

Objective: 2

AACSB: Analytical thinking

63) In the decision making of a one-time-only special order, it is assumed that accepting the special order is not expected to affect the selling price to other customers.

Diff: 2

Objective: 2

AACSB: Analytical thinking

64) When there is idle capacity or when sales are low, you can accept special orders as long as the incremental revenue surpasses incremental costs.

Diff: 2

Objective: 2

AACSB: Analytical thinking

65) Bid prices and costs that are relevant for regular orders are the same costs that are relevant for one-time-only special orders.

Diff: 1

Objective: 2

AACSB: Analytical thinking

66) Qualitative factors are important in the decision-making process even though they cannot be measured numerically.

Diff: 1

Objective: 2

AACSB: Analytical thinking

67) In a one-time special order situation, if the price offered by the buyer is less than the absorption cost per unit, the special order may still be profitable since absorption costs include allocated fixed manufacturing overhead.

Diff: 1

Objective: 2

AACSB: Analytical thinking

68) In relevant-cost analysis, managers should not consider all variable as relevant and all fixed costs as irrelevant.

Diff: 1

Objective: 2

AACSB: Analytical thinking

69) An incremental product cost is generally a fixed cost.

Diff: 1

Objective: 2

AACSB: Analytical thinking

70) If Option 1 costs $120 and Option 2 costs $90, then the differential cost is $30.

Diff: 1

Objective: 2

AACSB: Analytical thinking

71) Variable cost per unit is the best product cost to use for one-time-only special order decisions.

Diff: 1

Objective: 2

AACSB: Analytical thinking

72) Fluty Corporation manufactures a product that has two parts, A and B. It is currently considering two alternative proposals related to these parts.

The first proposal is for buying Part A. This would free up some of the plant space for the manufacture of more of Part B and assembly of the final product. The product vice president believes the additional production of the final product can be sold at the current market price. No other changes in manufacturing would be needed.

The second proposal is for buying new equipment for the production of Part B. The new equipment requires fewer workers and uses less power to operate. The old equipment has a net disposal value of zero.

Required:

Tell whether the following items are relevant or irrelevant for each proposal. Treat each proposal independently.

a. Total variable manufacturing overhead, Part A

b. Total variable manufacturing overhead, Part B

c. Cost of old equipment for manufacturing Part B

d. Cost of new equipment for manufacturing Part B

e. Total variable selling and administrative costs

f. Sales revenue of the product

g. Total variable costs of assembling final products

h. Total direct manufacturing materials, Part A

i. Total direct manufacturing materials, Part B

j. Total direct manufacturing labor, Part A

k. Total direct manufacturing labor, Part B

Proposal 1 Proposal 2

a. R I

b. R R

c. I I

d. I R

e. R I

f. R I

g. R I

h. R I

i. R I

j. R I

k. R R

Diff: 2

Objective: 2

AACSB: Application of knowledge

73) Swan Manufacturing is approached by a customer to fulfill a one-time-only special order for a product similar to one offered to domestic customers. The following per unit data apply for sales to regular customers:

Direct materials $1,825

Direct labor 900

Variable manufacturing support 1,300

Fixed manufacturing support 3,000

Total manufacturing costs $7,025.00

Markup (50%) 3,512.50

Targeted selling price $ 10,537.50

Swan Manufacturing has excess capacity.

Required:

a. What is the full cost of the product per unit if the marketing costs is $3,000?

b. What is the contribution margin per unit?

c. Which costs are relevant for making the decision regarding this one-time-only special order? Why?

d. For Swan Manufacturing, what is the minimum acceptable price of this one-time-only special order?

e. For this one-time-only special order, should Parker and Spitzer Manufacturing consider a price of $5,400 per unit? Why or why not?

a. Full cost of the product = $10,025

b. Contribution margin = $6,512.50 = Selling price $10,537.50 - Variable costs ($1,800 + $900 + $1,300).

c. Relevant costs for decision making are those costs that differ between alternatives, which in this situation are the incremental costs. The incremental costs total $4,025 = Variable costs ($1,800+ $900 + $1,300).

d. The minimum acceptable price is $4,025 = Variable costs (($1,800 + $900 + $1,300), which are the incremental costs in the short term.

e. Yes, because this price is greater than the minimum acceptable price of this special order determined in (d).

Diff: 3

Objective: 2

AACSB: Application of knowledge

74) Loft Lake Cabinets is approached by Ms. Jenny Zhang, a new customer, to fulfill a large one-time-only special order for a product similar to one offered to regular customers. The following per unit data apply for sales to regular customers:

Direct materials $50.00

Direct labor 62.50

Variable manufacturing support 30.00

Fixed manufacturing support 37.50

Total manufacturing costs 180.00

Markup (60%) 108.00

Targeted selling price $288.00

Loft Lake Cabinets has excess capacity. Ms. Zhang wants the cabinets in cherry rather than oak, so direct material costs will increase by $15 per unit.

Required:

a. For Loft Lake Cabinets, what is the minimum acceptable price of this one-time-only special order?

b. Other than price, what other items should Loft Lake Cabinets consider before accepting this one-time-only special order?

c. How would the analysis differ if there was limited capacity?

a. $157.70 = Variable costs ($50 + $62.50 + $30) + $15 additional cost for cherry.

b. Loft Lake Cabinets should also consider the impact on current customers when these customers hear that another customer was offered a discounted price, and the impact on the competition and if they might choose to meet the discounted price.

c. Currently, the incremental costs total $157.50. If additional capacity is needed to process this order, these incremental costs will increase by the cost of adding capacity.

Diff: 3

Objective: 2

AACSB: Application of knowledge

75) Fairhaven Company needs 1,000 motors in its manufacture of boats. It can buy the motors from Asian Motors for $1,250 each. Southwestern's plant can manufacture the motors for the following costs per unit:

Direct materials $ 600

Direct manufacturing labor 250

Variable manufacturing overhead 200

Fixed manufacturing overhead 350

Total $1,400

If Southwestern buys the motors from Jinx, 70% of the fixed manufacturing overhead applied will not be avoided.

Required:

a. Should the company make or buy the motors?

b. What additional factors should Southwestern consider in deciding whether or NOT to make or buy the motors?

a. Cost to buy the part: (1,000 × $1,250) $1,250,000

Relevant costs to make:

Variable costs:

Direct materials (1,000 × $600) $600,000

Direct manufacturing. labor (1,000 × $250) 250,000

Variable manufacturing overhead (1,000 × $200) 200,000

Total $1,050,000

Avoidable fixed costs: ($350 × 1,000 × 0.30) 105,000 1,155,000

Savings if part is manufactured $ 95,000

b. Management should consider several qualitative factors in deciding whether to make or buy the motors.

∙ Quality controls - The company's ability to manufacture quality motors versus that of the supplier.

∙ Delivery - Can they make them when needed versus Jinx delivering them when needed?

∙ Reputation - What is the overall reputation of Jinx?

∙ Term - Is Jinx willing to make long-term commitments for delivery of the motors?

∙ Facilities - What are the opportunity costs of using the space and equipment to manufacture other items?

Diff: 3

Objective: 2

AACSB: Application of knowledge

76) Sarasota Bicycles has been manufacturing its own wheels for its bikes. The company is currently operating at 100% capacity, and variable manufacturing overhead is charged to production at the rate of 30% of direct labor cost. The direct materials and direct labor cost per unit to make the wheels are $3.00 and $3.60 respectively. Normal production is 200,000 wheels per year.

A supplier offers to make the wheels at a price of $8 each. If the bicycle company accepts this offer, all variable manufacturing costs will be eliminated, but the $84,000 of fixed manufacturing overhead currently being charged to the wheels will have to be absorbed by other products.

Required:

a. Prepare an incremental analysis for the decision to make or buy the wheels.

b. Should Sarasota Bicycles buy the wheels from the outside supplier? Justify your answer.

a. Make Buy

Direct materials (200,000 × $3.00) $600,000 -0-

Direct labor (200,000 × $3.60) 720,000 -0-

Variable manufacturing costs

($720,000 × 30%) 216,000 -0-

Purchase price (200,000 × $8) -0- 1,600,000

Total annual cost $1,536,000 $1,600,000

b. The wheels should continue to be manufactured by Sarasota Bicycles. The company's net income would decrease $64,000 by purchasing the wheels.

Diff: 3

Objective: 2

AACSB: Application of knowledge

77) Explain what revenues and costs are relevant when choosing among alternatives.

Diff: 2

Objective: 2

AACSB: Analytical thinking

78) Explain why sunk costs are not considered relevant when choosing among alternatives with example.

Diff: 2

Objective: 2

AACSB: Analytical thinking

79) Assume you are a sophomore in college and are committed to earning an undergraduate degree. Your current decision is whether to finish college in four consecutive years or take a year off and work for some extra cash.

a. Identify at least two revenues or costs that are relevant to making this decision. Explain why each is relevant.

b. Identify at least two costs that would be considered sunk costs for this decision.

c. Identify at least two opportunity costs for this decision.

d. Comment on at least one qualitative consideration for this decision.

a. Relevant revenues/costs are those that differ between the alternatives of continuing with college or taking a year off from college and working. Relevant costs for continuing your college education without a break include:

1. Earnings lost next year due to the hours you are not able to work because of classes and homework.

2. As a result of graduating a year earlier, higher wages will be earned a year earlier as well.

b. Sunk costs for this decision include:

1. Amounts paid for college tuition and books during the past two years.

2. Accommodation costs

c. Opportunity costs for this decision:

1. Earnings from the employment

2. Return from the investment of tuition fees and other college expenses

d. A qualitative consideration would include having different activities and priorities than your friends who are students, graduating later than students who started college the same time you did, and retaining information over the year off from school.

Diff: 3

Objective: 2

AACSB: Application of knowledge

80) A restaurant is deciding whether it wants to update its image or not. It currently has a cozy appeal with an outdated decor that is still in good condition, menus and carpet that need to be replaced anyway, and loyal customers.

Identify for the restaurant management

a. those costs that are relevant to this decision,

b. those costs that are not differential,

c. and qualitative considerations.

a. Relevant costs include a one-time cost of the renovation for the updated image, and a change in future sales which includes an increase in sales due to the updated image, decrease in sales due to loss of that cozy appeal, and loss of sales due to being closed or having a limited serving area during renovation.

b. Costs that are not differential include replacing the menus and the carpet since they need to be replaced whether the image is updated or not.

c. Qualitative considerations include whether the restaurant will lose that cozy appeal it currently has, if the restaurant needs to be closed for renovations it may result in loss of customers, and new customers may not be the type of customer they want to attract.

Diff: 3

Objective: 2

AACSB: Application of knowledge

81) Are relevant revenues and relevant costs the only information needed by managers to select among alternatives? Explain using examples.

Diff: 2

Objective: 2

AACSB: Analytical thinking

82) Under what conditions might a manufacturing firm sell a product for less than its long-term price? Why?

Diff: 2

Objective: 2

AACSB: Analytical thinking

Objective 12.3

1) Relevant data in a make-or-buy decision of a part include which of the following?

A) the portion of fixed costs that would be incurred whether the product is made or purchased

B) some portion of fixed costs that would be saved if the product is outsourced

C) annual plant insurance costs

D) management consultant fees to restructure the organization framework of the company and improve overall strategic planning

Diff: 2

Objective: 3

AACSB: Analytical thinking

2) In a make-or-buy decision, which of the following would NOT be relevant?

A) the quality of the product

B) the portion of fixed costs that could be eliminated by outsourcing

C) a lease that could be discontinued upon accepting the "buy proposal"

D) property taxes on the plant that will still be necessary even if the product is outsourced

Diff: 2

Objective: 3

AACSB: Analytical thinking

3) An incremental cost is:

A) an additional total cost for an activity

B) a cost that has already been incurred

C) the difference in total costs between two alternatives

D) always related to fixed costs

Diff: 2

Objective: 3

AACSB: Analytical thinking

4) Which of the following is a relevant cost to be included in a make-or-buy decision?

A) fixed salaries that will not be incurred if the part is outsourced

B) pension costs to the current employees

C) increase in the cost of repairing of all equipment of the firm

D) material-handling costs that cannot be eliminated even if the product is outsourced

Diff: 2

Objective: 3

AACSB: Analytical thinking

5) Which of following is a firm's risk of outsourcing the production of a part?

A) fluctuation in the manufacturing costs

B) leakage of intellectual property

C) increased need of skilled workers

D) scarcity of indirect labor

Diff: 2

Objective: 3

AACSB: Analytical thinking

6) Which of the following minimizes the risks of outsourcing?

A) the use of short-term contracts that specify price

B) shifting the firm's responsibility for on-time delivery to the supplier

C) building close partnerships with the supplier

D) increasing the contract price

Diff: 2

Objective: 3

AACSB: Analytical thinking

7) The cost to produce Part A was $20 per unit in 2013 and in 2014 it has increased to $22 per unit. In 2014, Supplier ABC has offered to supply Part A for $18 per unit. For the make-or-buy decision:

A) incremental revenues are $4 per unit

B) incremental costs are $2 per unit

C) net relevant costs are $2 per unit

D) differential costs are $4 per unit

Diff: 2

Objective: 3

AACSB: Application of knowledge

8) When evaluating a make-or-buy decision, which of the following needs to be considered?

A) alternative uses of the production capacity

B) the original cost of the production equipment

C) pension costs to the current employees

D) material-handling costs that cannot be eliminated

Diff: 2

Objective: 3

AACSB: Analytical thinking

9) For make-or-buy decisions, a supplier's ability to maintain secrecy of intellectual property is considered a(n):

A) qualitative factor

B) irrelevant cost

C) differential factor

D) opportunity cost

Diff: 1

Objective: 3

AACSB: Analytical thinking

10) Vien's Fashion Company retains the services of Kennywood Textiles to perform stain control treatments on its women's dresses. This is practice is known as:

A) insourcing

B) outsourcing

C) fragmentation

D) in-housing

Diff: 1

Objective: 3

AACSB: Analytical thinking

11) Producing on schedule, quality of supplier products or services, reliability, along with costs are all important considerations when:

A) when deciding to insource

B) making outsourcing decisions

C) when executing right-shoring

D) making decisions based on quantitative factors

Diff: 1

Objective: 3

AACSB: Analytical thinking

12) Which of the following would be considered in a make-or-buy decision?

A) fixed costs that will still be incurred

B) prepaid rent expense for warehousing finished goods and inventories

C) potential rental income from space occupied by the production area

D) unchanged supervisory costs

Diff: 2

Objective: 3

AACSB: Analytical thinking

13) W.T. Ginsburg Engine Company manufactures part ACT30107 used in several of its engine models. Monthly production costs for 1100 units are as follows:

It is estimated that 6% of the fixed overhead costs assigned to ACT30107 will no longer be incurred if the company purchases ACT30107 from the outside supplier. W.T Ginsburg Engine Company has the option of purchasing the part from an outside supplier at $96.75 per unit.

If the company accepts the offer from the outside supplier, the monthly avoidable costs (costs that will no longer be incurred) total:

A) $88,140

B) $87,000

C) $106,000

D) $107,140

Diff: 2

Objective: 3

AACSB: Analytical thinking

14) W.T. Ginsburg Engine Company manufactures part ACT31107 used in several of its engine models. Monthly production costs for 1000 units are as follows:

It is estimated that 7% of the fixed overhead costs assigned to ACT31107 will no longer be incurred if the company purchases ACT31107 from the outside supplier. W.T. Ginsburg Engine Company has the option of purchasing the part from an outside supplier at $94.75 per unit.

If W.T. Ginsburg Engine Company purchases 1000 ACT31107 parts from the outside supplier per month, then its monthly operating income will: (Round any intermediary calculations and your final answer to the nearest cent.)

A) increase by $9350

B) increase by $21,650

C) decrease by $9350

D) decrease by $21,650

Diff: 2

Objective: 3

AACSB: Analytical thinking

15) W.T. Ginsburg Engine Company manufactures part ACT31107 used in several of its engine models. Monthly production costs for 1050 units are as follows:

It is estimated that 8% of the fixed overhead costs assigned to ACT31107 will no longer be incurred if the company purchases ACT31107 from the outside supplier. W.T. Ginsburg Engine Company has the option of purchasing the part from an outside supplier at $95.75 per unit.

The maximum price that W.T. Ginsburg Engine Company should be willing to pay the outside supplier is:

A) $83 per ACT31107 part

B) $84.23 per ACT31107 part

C) $100 per ACT31107 part

D) $101.37 per ACT31107 part

Diff: 2

Objective: 3

AACSB: Analytical thinking

16) If a company does not use one of its limited resources in the best possible way, the lost contribution to income could be called a(n):

A) business function cost

B) carrying cost

C) opportunity cost

D) sunk cost

Diff: 1

Objective: 3

AACSB: Analytical thinking

17) Opportunity costs is defined as:

A) the cost of manufacturing a one-time-only special order when a firm has excess capacity to make more products

B) the contribution to operating income that is forgone by not using a limited resource in its next-best alternative use

C) the sum of variable and fixed costs in a particular business function of the value chain, such as manufacturing costs or marketing costs

D) the sum of variable and fixed costs in all business functions of the value chain, such as manufacturing costs or marketing costs

Diff: 2

Objective: 3

AACSB: Analytical thinking

18) Which of the following is true of an opportunity cost?

A) It is the income foregone by not using a resource in an alternative way.

B) The higher the opportunity costs, the lower is the relevant cost.

C) It is recorded as an expense in the accounting records.

D) It is an unavoidable cost that cannot be changed no matter what action is taken.

Diff: 2

Objective: 3

AACSB: Analytical thinking

19) Which of the following is true regarding relevant costs?

A) Carrying cost of inventory is a type of opportunity cost and is relevant to outsourcing.

B) All variable costs are relevant.

C) All fixed costs are irrelevant.

D) Opportunity costs are relevant to financial accounting.

Diff: 2

Objective: 3

AACSB: Analytical thinking

20) Which of the following would be a consideration in a make-or-buy decision?

A) excess capacity

B) wages to CEO

C) marketing costs

D) audit expenses

Diff: 2

Objective: 3

AACSB: Analytical thinking

21) If a company has excess capacity, the most it would pay for buying a product that it currently makes would be the:

A) total variable cost of producing the product

B) full cost of producing the product

C) total cost of producing the product

D) business function cost of the product

Diff: 2

Objective: 3

AACSB: Analytical thinking

22) For make-or-buy decisions, relevant costs include:

A) incremental costs plus sunk costs

B) incremental costs plus opportunity costs

C) differential costs plus fixed costs

D) incremental costs plus differential costs

Diff: 2

Objective: 3

AACSB: Analytical thinking

23) A study by a consultant shows that a company that had $1,000,000 of inventory was holding excess inventory of $100,000 that could be eliminated with a few process improvements. It also has $400,000 in marketable securities that yield 4% per year. What is the estimated annual opportunity cost of holding the excess inventory?

A) $4000

B) $40,000

C) $16,000

D) $20,000

Diff: 2

Objective: 3

AACSB: Analytical thinking

24) Rubium Micro Devices currently manufactures a subassembly for its main product. The costs per unit are as follows:

Crayola Technologies Inc. has contacted Rubium with an offer to sell 6000 of the subassemblies for $141.00 each. Rubium will eliminate $92,000 of fixed overhead if it accepts the proposal. What are the relevant costs for Rubium?

A) $656,000

B) $650,000

C) $896,000

D) $1,130,000

Diff: 2

Objective: 3

AACSB: Application of knowledge

25) Rubium Micro Devices currently manufactures a subassembly for its main product. The costs per unit are as follows:

Crayola Technologies Inc. has contacted Rubium with an offer to sell 10,000 of the subassemblies for $140.00 each. Rubium will eliminate $93,000 of fixed overhead if it accepts the proposal. Should Rubium make or buy the subassemblies? What is the difference between the two alternatives?

A) buy; savings = $93,000

B) buy; savings = $107,000

C) make; savings = $67,000

D) make; savings = $243,000

Diff: 3

Objective: 3

AACSB: Application of knowledge

26) A recent college graduate has the choice of buying a new car for $37,500 or investing the money for four years with an 11% expected annual rate of return. He has an investment of $43,000 in equities and bonds which yields 10% expected annual rate of return. If the graduate decides to purchase the car, the best estimate of the opportunity cost of that decision is:

A) $4300

B) $16,500

C) $43,000

D) $18,920

Diff: 2

Objective: 3

AACSB: Application of knowledge

27) A supplier offers to make Part A for $34. Altec Services Corporation has relevant costs of $45 a unit to manufacture 1010 units of Part A. If there is excess capacity, the opportunity cost of buying Part A from the supplier is:

A) $0

B) $45,450

C) $34,340

D) $79,790

Diff: 2

Objective: 3

AACSB: Application of knowledge

28) Altec Services Corporation has relevant costs of $41 per unit to manufacture 1090 units of Part A. A current supplier offers to make Part A for $30 per unit. Alternatively, the company can rent out the capacity for $28,000. If capacity is constrained, the opportunity cost of buying Part A from the supplier is:

A) $0

B) $11,990

C) $39,990

D) $28,000

Diff: 2

Objective: 3

AACSB: Application of knowledge

29) Opportunity costs are not recorded in financial accounting systems because historical record keeping is limited to transactions involving alternatives that managers actually selected rather than alternatives that they rejected.

Diff: 2

Objective: 3

AACSB: Analytical thinking

30) For decision making, differential costs assist in choosing between alternatives.

Diff: 1

Objective: 3

AACSB: Analytical thinking

31) International outsourcing adds another factor to relevant cost analysis as the decision to outsource production to an overseas partner can increase exchange rate risk.

Diff: 1

Objective: 3

AACSB: Analytical thinking

32) Differential revenue is the additional total revenue from an activity.

Diff: 1

Objective: 3

AACSB: Analytical thinking

33) Outsourcing is purchasing from outside vendors parts and other goods instead of producing your own and contracting for services instead of providing them yourself.

Diff: 1

Objective: 3

AACSB: Analytical thinking

34) Planet Furniture, Inc. is currently producing well below its full capacity. The Swansea Company has approached Plant with an offer to buy 5,000 tools at $17.50 each. Planet sells its end table for $18.50 each; the average cost per unit is $18.30, of which $2.70 is fixed costs. If Planet accepts the order, the increase in operating income will be $7,500.

Diff: 1

Objective: 3

AACSB: Analytical thinking

35) Outsourcing is risk free to the manufacturer because the supplier now has the responsibility of producing the part.

Diff: 1

Objective: 3

AACSB: Analytical thinking

36) Decisions about whether a producer of goods or services will insource or outsource are also called make-or-buy decisions.

Diff: 1

Objective: 3

AACSB: Analytical thinking

37) In a make-or-buy decision when there are alternative uses for capacity, the opportunity cost of idle capacity is relevant.

Diff: 1

Objective: 3

AACSB: Analytical thinking

38) An incremental cost is the difference in total irrelevant costs between two alternatives.

Diff: 1

Objective: 3

AACSB: Analytical thinking

39) Under the opportunity-cost approach, the relevant cost of any alternative is the incremental of the alternative plus the opportunity cost of the profit foregone from choosing the alternative.

Diff: 1

Objective: 3

AACSB: Analytical thinking

40) When capacity is constrained, relevant costs equal incremental costs plus opportunity costs.

Diff: 1

Objective: 3

AACSB: Analytical thinking

41) Incremental revenue is the sum of differential revenues of two alternatives.

Diff: 1

Objective: 3

AACSB: Analytical thinking

42) Under the opportunity cost approach, the cost of each alternative includes the incremental costs and the opportunity cost.

Diff: 1

Objective: 3

AACSB: Analytical thinking

43) When capacity is constrained, the relevant revenues and costs of any alternative equal the incremental future revenues and costs plus the opportunity cost.

Diff: 2

Objective: 3

AACSB: Analytical thinking

44) H.J. Manufacturing produces 10,000 units of a part that is used in their assembly process. The production costs are as follows:

Direct materials $ 50,000

Direct manufacturing labor 20,000

Variable support costs 35,000

Fixed support costs 25,000

Total costs $130,000

H.J. Manufacturing has the option of purchasing these units from an outside supplier at $10.75 per unit. If the part is outsourced, 40% of the fixed costs cannot be immediately converted to other uses.

a. Describe avoidable costs. What amount of the part's production costs is avoidable?

b. Should H.J. outsource the part? Why or why not?

c. What other items should H.J. consider before outsourcing any of the parts it currently manufactures?

a. Avoidable costs are those costs eliminated when a part, product, product line, or business segmented is discontinued. Avoidable production costs for part total $120,000, which are all but the $10,000 ($25,000 × 40%) of fixed costs that cannot be immediately converted to other uses.

b. Based on the financial considerations given, H/J should outsource the part because the $107,000 (10,000 units × $10.75 per part) outsourced cost is less than the $120,000 reduction in annual production costs. In other words, the outsourcing would save H.J an additional $12,500 annually.

c. Other factors to consider include the supplier's ability to meet expected quality and delivery standards, and the likelihood of suppliers increasing prices of components in the future.

Diff: 3

Objective: 3

AACSB: Application of knowledge

45) Rockford Company manufactures a part for use in its production of hats. When 10,000 items are produced, the costs per unit are:

Direct materials $0.75

Direct manufacturing labor 3.00

Variable manufacturing overhead 1.50

Fixed manufacturing overhead 1.60

Total $6.85

Angel Company has offered to sell to Rockford Company 10,000 units of the part for $6.00 per unit. The plant facilities could be used to manufacture another item at a savings of $9,000 if Rockford accepts the offer. In addition, $1.00 per unit of fixed manufacturing overhead on the original item would be eliminated.

Required:

a. What is the relevant per unit cost for the original part?

b. Which alternative is best for Rockford Company? By how much?

a. Direct materials $0.75

Direct manufacturing labor 3.00

Variable manufacturing overhead 1.50

Avoidable fixed manufacturing overhead 1.00

Total relevant per unit costs $6.25

b. Make Buy Effect of Buying

Purchase price $60,000 $(60,000)

Savings in space (9,000) 9,000

Direct materials $7,500 7,500

Direct mfg. labor 30,000 30,000

Variable overhead 15,000 15,000

Fixed overhead saved (10,000) 10,000

Totals $52,500 $41,000 $11,500

The best alternative is to buy the part.

Diff: 2

Objective: 3

AACSB: Application of knowledge

46) What are opportunity costs? Explain why opportunity costs are not recorded in financial accounting systems.

Opportunity costs are not recorded in financial accounting systems because historical record keeping is limited to transactions involving alternatives that managers actually selected rather than alternatives that they rejected. Rejected alternatives do not produce transactions and are not recorded.

Diff: 2

Objective: 3

AACSB: Analytical thinking

47) Factors used to decide whether to outsource a part include:

A) the supplier's cost of direct materials

B) if the supplier is reliable

C) the original cost of equipment currently used for production of that part

D) past design costs used to develop the current composition of the part

Diff: 2

Objective: 3

AACSB: Analytical thinking

Objective 12.4

1) Determining which products should be produced when the plant is operating at full capacity is referred to as a(n):

A) outsourcing analysis

B) total alternative approach

C) product-mix decision

D) short-run focus decision

Diff: 1

Objective: 4

AACSB: Analytical thinking

2) Product mix decisions:

A) have a long-run focus

B) help determine how to maximize operating profits

C) focus on selling price per unit

D) help maximizing opportunity costs

Diff: 2

Objective: 4

AACSB: Analytical thinking

3) Capacity constraints include:

A) increased demand of warranty services for a pharmaceutical product

B) increased need of display space for a retailer

C) decreased demand for a pharmaceutical product

D) increased fuel efficiency of cars

Diff: 1

Objective: 4

AACSB: Analytical thinking

4) With a constraining resource, managers should choose the product with the:

A) lowest contribution margin per unit of the constraining resource

B) highest sales price

C) highest contribution margin per unit of the constraining resource

D) highest gross profit

Diff: 1

Objective: 4

AACSB: Analytical thinking

5) A company has three products possible products that it can produce in a machine intensive production process. Capacity is constrained by the number of hours the machines can run during a period and the products are so popular that all units produced will be sold. Here is additional information:

Which of the following would be an accurate conclusion based on these facts?

A) A balanced mix of 1/3 A, 1/3 B, and 1/3 C should be the goal when maximizing operating income in the short-run.

B) Since Product C has the greatest contribution margin per unit and therefore emphasizing its production and sales will lead to the highest operating income in the short-run.

C) Since A takes less time to produce, maximization of operating income will occur by emphasizing production and sales of A.

D) Product B should be emphasized if the goal is to maximize contribution margin.

Diff: 3

Objective: 4

AACSB: Analytical thinking

6) For managers attempting to maximize operating income for a product offering with a great deal of variety, product-mix decisions must usually take into account:

A) more than one constraining resource

B) just those products with the greatest contribution margin per constraining resource

C) products that produce a profit above the full costs of the product

D) how to maximize the selling price of all the products

Diff: 3

Objective: 4

AACSB: Analytical thinking

7) Springer Products manufactures three different product lines, Model X, Model Y, and Model Z. Considerable market demand exists for all models. The following per unit data apply:

Which model has the greatest contribution margin per unit?

A) Model X

B) Model Y

C) Model Z

D) Both Model X and Model Y have the highest and same contribution margin per unit

Diff: 2

Objective: 4

AACSB: Application of knowledge

8) Springer Products manufactures three different product lines, Model X, Model Y, and Model Z. Considerable market demand exists for all models. The following per unit data apply:

Which model has the greatest contribution margin per machine-hour?

A) Model X

B) Model Y

C) Model Z

D) Both Model X and Model Y have the highest and same contribution margin per machine-hour

Diff: 2

Objective: 4

AACSB: Application of knowledge

9) Springer Products manufactures three different product lines, Model X, Model Y, and Model Z. Considerable market demand exists for all models. The following per unit data apply:

If there is excess capacity, which model is the most profitable to produce?

A) Model X

B) Model Y

C) Model Z

D) Both Model X and Model Y have same and highest profitability

Diff: 3

Objective: 4

AACSB: Application of knowledge

10) Springer Products manufactures three different product lines, Model X, Model Y, and Model Z. Considerable market demand exists for all models. The following per unit data apply:

If there is a machine breakdown, which model is the most profitable to produce?

A) Model X

B) Model Y

C) Model Z

D) Both Model X and Model Y have same and highest profitability

Diff: 3

Objective: 4

AACSB: Application of knowledge

11) Springer Products manufactures three different product lines, Model X, Model Y, and Model Z. Considerable market demand exists for all models. The following per unit data apply:

How can Lisa Dynondo encourage her salespeople to promote the more profitable model?

A) Put all sales persons on fixed salary.

B) Provide higher sales commissions for higher priced items.

C) Provide higher sales commissions for items with the greatest contribution margin per constrained resource.

D) Provide higher sales commissions for items which has the lowest cost and lower sales commissions for items with highest cost.

Diff: 2

Objective: 4

AACSB: Analytical thinking

12) Kinnane's Fine Furniture manufactures two models, Standard and Premium. Weekly demand is estimated to be 110 units of the Standard Model and 72 units of the Premium Model. The following per unit data apply:

The contribution per machine-hour is:

A) $24 for Standard, $30 for Premium

B) $144 for Standard, $150 for Premium

C) $18 for Standard, $25 for Premium

D) $4 for Standard, $6 for Premium

Diff: 2

Objective: 4

AACSB: Application of knowledge

13) Kinnane's Fine Furniture manufactures two models, Standard and Premium. Weekly demand is estimated to be 100 units of the Standard Model and 72 units of the Premium Model. The following per unit data apply:

If there are 495 machine-hours available per week, how many rockers of each model should Kinnane produce to maximize profits?

A) 100 units of Standard and 39 units of Premium

B) 45 units of Standard and 72 units of Premium

C) 100 units of Standard and 72 units of Premium

D) 83 units of Standard and 50 units of Premium

Diff: 2

Objective: 4

AACSB: Application of knowledge

14) Kinnane's Fine Furniture manufactures two models, Standard and Premium. Weekly demand is estimated to be 103 units of the Standard Model and 71 units of the Premium Model. The following per unit data apply:

If there are 720 machine-hours available per week, how many rockers of each model should Kinnane produce to maximize profits?

A) 103 units of Standard and 47 units of Premium

B) 71 units of Standard and 71 units of Premium

C) 103 units of Standard and 71 units of Premium

D) 83 units of Standard and 62 units of Premium

Diff: 2

Objective: 4

AACSB: Application of knowledge

15) A.C. Tech Manufacturing Appliances manufactures three sizes of kitchen appliances: small, medium, and large. Product information is provided below.

The maximum machine-hours available are 6500 per week.

What is the contribution margin per machine-hour for a medium appliance?

A) $0.50

B) $1.30

C) $5.80

D) $10.70

Diff: 2

Objective: 4

AACSB: Application of knowledge

16) A.C. Tech Manufacturing Appliances manufactures three sizes of kitchen appliances: small, medium, and large. Product information is provided below.

The maximum machine-hours available are 6500 per week.

Which of the three product models should be produced first if management incorporates a short-run profit maximizing strategy?

A) small appliance

B) medium appliance

C) large appliance

D) both medium and large appliance

Diff: 2

Objective: 4

AACSB: Application of knowledge

17) A. C .Tech Manufacturing Appliances manufactures three sizes of kitchen appliances: small, medium, and large. Product information is provided below.

The maximum machine-hours available are 6200 per week.

How many of each product should be produced per month using the short-run profit maximizing strategy?

A) 0 120 7

B) 4 120 0

C) 170 170 0

D) 170 50 50

Diff: 3

Objective: 4

AACSB: Application of knowledge

18) Granfield Corporation manufactures two products, Product A and Product B. The following information was available:

If Granfield Corporation could produce and sell either 10,600 units of Product A or 5800 units of Product B at full capacity, it should produce and sell:

A) 10,600 units of A and none of B

B) 3667 units of B and 2444 units of A

C) 5800 units of B and none of A

D) 8700 units of A and 5800 units of b

Diff: 3

Objective: 4

AACSB: Application of knowledge

19) Product-mix decisions usually have only a short-run focus because they typically arise in the context of capacity constraints that can be relaxed in the long run.

Diff: 2

Objective: 4

AACSB: Analytical thinking

20) For short-run product-mix decisions, managers should focus on minimizing total fixed costs.

Diff: 2

Objective: 4

AACSB: Analytical thinking

21) For short-run product-mix decisions, maximizing contribution margin will also result in maximizing operating income.

Diff: 2

Objective: 4

AACSB: Analytical thinking

22) To maximize profits, managers should produce more of the product with the greatest contribution margin per unit of the constraining resource.

Diff: 2

Objective: 4

AACSB: Analytical thinking

23) When there is a constraining resource, a firm should attempt to maximize sales of the product or service with the greatest contribution margin per unit.

Diff: 2

Objective: 4

AACSB: Analytical thinking

24) Lewis S. Gray Inc. manufactures a part for use in its production of art deco furniture. When 10,000 items are produced, the costs per unit are:

Direct materials $ 15

Direct manufacturing labor 60

Variable manufacturing overhead 25

Fixed manufacturing overhead 32

Total $132

Colonial Accents Company has offered to sell to Lewis S. Gray 10,000 units of the part for $125 per unit. The plant facilities could be used to manufacture another part at a savings of $180,000 if Lewis S. Gray accepts the supplier's offer. In addition, $30 per unit of fixed manufacturing overhead on the original part would be eliminated.

Required:

a. What is the relevant per unit cost for the original part?

b. Which alternative is best for Lewis S. Gray Company? By how much?

a. Direct materials $15

Direct manufacturing labor 60

Variable manufacturing overhead 25

Avoidable fixed manufacturing overhead 30

Total relevant per unit costs $130

b. Make Buy Effect of Buying

Purchase price $1,250,000 $(1,250,000)

Savings in space (180,000) 180,000

Direct materials $150,000 150,000

Direct manufacturing labor 600,000 600,000

Variable overhead 300,000 300,000

Fixed overhead saved (300,000) 300,000

Totals $1,050,000 $770,000 $280,000

The best alternative is to buy the part.

Diff: 2

Objective: 4

AACSB: Application of knowledge

25) Canary's Products Inc. manufactures three different product lines, Basic, Better, and Best. Considerable market demand exists for all models. The following per unit data apply:

Basic Better Best

Selling price $170 $190 $210

Direct materials 60 60 60

Direct labor ($20 per hour) 30 30 40

Variable support costs ($10 per machine-hour) 10 20 20

Fixed support costs 40 40 40

a. For each model, compute the contribution margin per unit.

b. For each model, compute the contribution margin per machine-hour.

c. If there is excess capacity, which model is the most profitable to produce? Why?

d. If there is a machine breakdown, which model is the most profitable to produce? Why?

e. How can Canary encourage its sales people to promote the more profitable model?

a. The contribution margin per unit is:

$70 for Model X ($170 - $90 - $30 - $10),

$80 for Model Y ($190 - $60 - $30 - $20),

and $90 for Model Z ($210 - $60 - $40 - $20).

b. The contribution margin per machine-hour is

$70 for Model X ($70 contribution margin / 1.0 machine-hour per unit),

$40 for Model Y ($80 / 2.0), and

$45 for Model Z ($90 / 2.0).

c. When there is excess capacity, the Best model is the most profitable because it has the greatest contribution margin per unit.

d. When there are machine-hour capacity constraints, the Basic model is the most profitable because it has the greatest contribution margin per constrained resource.

e. To encourage sales persons to promote specific products, Canary may want to provide marketing incentives such as higher sales commissions for products contributing the most to profits. Canary may also want to educate salespeople about the effects of constrained resources.

Diff: 3

Objective: 4

AACSB: Application of knowledge

26) How does a manager go about choosing which of three products to produce and sell when each product uses a single machine with a limited capacity?

Diff: 2

Objective: 4

AACSB: Analytical thinking

27) A company is forecasting that demand for its various product will exceed its ability to meet the demand for many of its most popular offerings. Other than capital investment to add capacity, in the short-run briefly discuss what should management examine in light of this forecast?

Diff: 2

Objective: 4

AACSB: Analytical thinking

28) A company is looking at strategies to decrease bottleneck constraints and considers the following actions:

• Finding ways to decrease idle time in the factory

• Providing additional training for direct laborers

• Outsourcing some assembly work.

• Spending more time to set up processes at the start of the manufacturing process as part of a quality control initiative

Comment on how you think each if the possible actions might decrease constraints or if you think the action might not impact constraints.

Diff: 2

Objective: 4

AACSB: Application of knowledge

Objective 12.5

1) The theory of constraints (TOC) defines throughput margin as:

A) operating income minus the direct material costs of the goods sold

B) operating income minus the direct labor costs of the goods sold

C) revenues minus the direct material costs of the goods sold

D) revenues minus the full costs of the goods sold

Diff: 3

Objective: 5

AACSB: Analytical thinking

2) Based on the theory of constraints, investments equal:

A) the sum of material costs in direct and indirect materials, work-in-process, and finished goods inventories; R&D costs; and business function costs

B) the sum of material costs in direct materials, work-in-process, and finished goods inventories; R&D costs; and capital costs of equipment and buildings

C) the sum of material costs in direct and indirect materials, work-in-process, and finished goods inventories; R&D costs; and full costs

D) the sum of material costs in direct materials, work-in-process, and finished goods inventories; R&D costs; sunk costs, full costs, and business function costs

Diff: 3

Objective: 5

AACSB: Analytical thinking

3) The objective of the Theory of Constraints is to increase throughput margin while increasing investment in plant and equipment.

Diff: 1

Objective: 5

AACSB: Analytical thinking

4) The theory of constraints is more useful for the long-run management of costs since it takes a long-run

perspective and focuses on improving processes by eliminating non-value-added activities and reducing the costs of performing value-added activities.

Diff: 1

Objective: 5

AACSB: Analytical thinking

5) Activity based costing (ABC) systems are less useful than the theory of constraints (TOC) for long-run pricing, cost control, and capacity management.

Diff: 2

Objective: 5

AACSB: Analytical thinking

6) Compare and contrast the theory of constraints and activity based costing. Which is more useful in short-run and long-run management of costs?

In contrast, activity based costing (ABC) systems take a long-run perspective and focus on improving processes by eliminating non-value-added activities and reducing the costs of performing value-added activities. ABC systems are therefore more useful than TOC for long-run pricing, cost control, and capacity management. The short-run TOC emphasis on maximizing contribution margin by managing bottlenecks complements the long-run strategic-cost-management focus of ABC.

Diff: 2

Objective: 5

AACSB: Analytical thinking

7) Delicious Preserves currently makes jams and jellies and a variety of decorative jars used for packaging. An outside supplier has offered to supply all of the needed decorative jars. For this make-or-buy decision, a cost analysis revealed the following avoidable unit costs for the decorative jars:

The relevant cost per jar is:

A) $0.64 per jar

B) $0.91 per jar

C) $1.64 per jar

D) $2.23 per jar

Diff: 2

Objective: 5

AACSB: Application of knowledge

8) Delicious Preserves currently makes jams and jellies and a variety of decorative jars used for packaging. An outside supplier has offered to supply all of the needed decorative jars. For this make-or-buy decision, a cost analysis revealed the following avoidable unit costs for the decorative jars:

The maximum price that Delicious Preserves should be willing to pay for the decorative jars is:

A) $0.70 per jar

B) $0.90 per jar

C) $0.46 per jar

D) $2.19 per jar

Diff: 2

Objective: 5

AACSB: Application of knowledge

9) Throughput margin is equal to revenues minus direct materials and direct labor of the cost of goods sold.

Diff: 2

Objective: 5

AACSB: Analytical thinking

Objective 12.6

1) Which of the following is an irrelevant cost when considering where to drop a customer?

A) cost of goods sold

B) marketing support

C) depreciation

D) sales order and delivery processing

Diff: 2

Objective: 6

AACSB: Analytical thinking

2) When deciding to lease a new cutting machine or continue using the old machine, the irrelevant cost is:

A) $50,000, cost of the old machine

B) $20,000, cost of the new machine

C) $10,000, selling price of the old machine

D) $3,000, annual savings in operating costs if the new machine is purchased

Diff: 2

Objective: 6

AACSB: Analytical thinking

3) Which of the following is true of depreciation cost?

A) Depreciation cost on equipment is irrelevant in decision making because depreciation on equipment that has already been purchased is a past cost.

B) Depreciation cost on equipment is relevant in decision making because depreciation on equipment that has already been purchased is an opportunity cost.

C) Depreciation cost on equipment is irrelevant in decision making because there is no cash transaction.

D) Depreciation cost on equipment is irrelevant in decision making because depreciation on equipment that has already been purchased is an opportunity cost.

Diff: 1

Objective: 6

AACSB: Analytical thinking

4) When deciding whether to discontinue a segment of a business, relevant costs include:

A) auditing expenses for the whole company

B) fees paid to a management consultant to study the feasibility of the business segment

C) annual insurance costs of the company

D) future administrative costs that can be eliminated

Diff: 2

Objective: 6

AACSB: Analytical thinking

5) Colonial North Manufacturing, 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 by the amount of the contribution margin of the product line being discontinued

C) the company's 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

Diff: 2

Objective: 6

AACSB: Analytical thinking

6) Discontinuing unprofitable products will:

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

B) increase profitability if capacity constraints are adjusted

C) decrease profitability if the fixed costs does not change after discontinuing the particular business segment

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

Diff: 2

Objective: 6

AACSB: Analytical thinking

7) A segment has the following data:

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) $314,500 increase

B) $346,000 decrease

C) $314,000 decrease

D) $345,500 decrease

Diff: 2

Objective: 6

AACSB: Application of knowledge

8) State Road Fabricators Inc. is considering eliminating Model A02777 because of losses over the past quarter. The past three months of information for Model A02777 are summarized below:

Overhead costs are 60% variable and the remaining 40% is depreciation of special equipment for model A02777 that has no resale value.

If Model A02777 is dropped from the product line, operating income will:

A) increase by $10,000

B) decrease by $46,000

C) increase by $56,000

D) decrease by $10,000

Diff: 3

Objective: 6

AACSB: Application of knowledge

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

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

Diff: 3

Objective: 6

AACSB: Application of knowledge

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

If the travel book line had been discontinued, corporate profits for the current year would have decreased by: (Assume there is not an alternative use for the space rented.)

A) $33,000

B) $11,000

C) $10,000

D) $2000

Diff: 3

Objective: 6

AACSB: Application of knowledge

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

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

A) increase by $3400

B) increase by $5000

C) decrease by $6000

D) decrease by $14,400

Diff: 3

Objective: 6

AACSB: Application of knowledge

12) A company is analyzing whether to discontinuing selling its product to a particular customer. In performing its analysis, it considers the allocated cost of corporate headquarters it usually associates with each of its customers irrelevant and well as the cost of the space (rent) dedicated to the storage of the work-in-process products earmarked for the delivery to the customer. The company does consider the costs of deliveries and special customer services as relevant costs. Which of the following statements about the treatment of these cost are factual?

A) Depreciation is not considered relevant because it is a noncash expense.

B) The cost allocation of headquarter expenses is irrelevant because it those costs will be incurred whether the customer account is dropped or maintained.

C) Delivery and customer services costs may not be relevant because they are not part of the production function or included in cost of goods sold.

D) Rent, even though it is a measure of the cost of the space dedicated to storage of products to be shipped to the customer, unless the company can reduce its rental costs because of the loss of the customer.

Diff: 2

Objective: 6

AACSB: Application of knowledge

13) Overhead costs allocated to the sales office and individual customers are always relevant when deciding whether to drop a customer.

Diff: 1

Objective: 6

AACSB: Analytical thinking

14) Avoidable variable and fixed costs should be considered relevant when deciding whether to discontinue a product, product line, business segment, or customer.

Diff: 1

Objective: 6

AACSB: Analytical thinking

15) Depreciation allocated to a product line is a relevant cost when deciding to discontinue that product.

Diff: 2

Objective: 6

AACSB: Analytical thinking

16) In a decision as to whether or not to drop a product, fixed costs that have been allocated to that product are generally not relevant unless there is a savings of fixed costs as a result of dropping the product.

Diff: 2

Objective: 6

AACSB: Analytical thinking

17) A company is considering adding a fourth product to use available capacity. A relevant factor to consider is that corporate costs can now be allocated over four products rather than only three.

Diff: 3

Objective: 6

AACSB: Analytical thinking

18) A decision to drop products or customers may because the company does not have the capacity to meet all demand and therefore certain products may have to be discontinued or customers may have to be dropped.

Diff: 2

Objective: 6

AACSB: Analytical thinking

19) Cassidy Products Inc.is considering eliminating Model EOS1 from its product line because of losses over the past quarter. The past three months of information for model EOS1 is summarized below:

Sales (1,000 units) $225,000

Manufacturing costs:

Direct materials 80,000

Direct labor ($15 per hour) 70,000

Support 100,000

Operating loss ($25,000)

Support costs are 70% variable and the remaining 30% is depreciation of special equipment for model EOS1 that has no resale value.

Should Cassidy eliminate Model EOS1 from its product line? Why or why not?

Sales (1,000 units) $225,000

Manufacturing costs:

Direct materials 80,000

Direct labor 70,000

Variable support ($100,000 × 70%) 70,000

Contribution margin $5,000

Diff: 2

Objective: 6

AACSB: Application of knowledge

20) The management accountant for the Chocolate S'more Company has prepared the following income statement for the most current year:

Chocolate Other Candy Fudge Total

Sales $40,000 $25,000 $35,000 $100,000

Cost of goods sold 26,000 15,000 19,000 60,000

Contribution margin 14,000 10,000 16,000 40,000

Delivery and ordering costs 2,000 3,000 2,000 7,000

Rent (per sq. foot used) 3,000 3,000 2,000 8,000

Allocated corporate costs 5,000 5,000 5,000 15,000

Corporate profit $4,000 $(1,000) $7,000 $10,000

a. Do you recommend discontinuing the Other Candy product line? Why or why not?

b. If the Chocolate product line had been discontinued, corporate profits for the current year would have decreased by what amount?

a. No, I would not recommend discontinuing the Other Candy product line because this product line contributes $4,000 towards corporate costs and profits.

$25,000 - $15,000 - $3,000 - $3,000 = $4,000

Without the Other Candy product line, corporate profits would be $4,000 less than currently reported.

b. If the Chocolate product line were discontinued, corporate profits would immediately decrease by $9,000.

$40,000 - $26,000 - $2,000 - $3,000 = $9,000

Diff: 3

Objective: 6

AACSB: Application of knowledge

21) Biden Company sells two items, product A and product B. The company is considering dropping product B. It is expected that sales of product A will increase by 40% as a result. Dropping product B will allow the company to cancel its monthly equipment rental costing $200 per month. The other existing equipment will be used for additional production of product A. One employee earning $500 per month can be terminated if product B production is dropped. Biden's other fixed costs are allocated and will continue regardless of the decision made. A condensed, budgeted monthly income statement with both products follows:

Product A Product B Total

Sales $10,000 $ 8,000 $18,000

Direct materials 2,500 2,000 4,500

Direct labor 2,000 1,200 3,200

Equipment rental 300 2,600 2,900

Other allocated overhead 1,000 2,100 3,100

Operating income $4,200 $ 100 $ 4,300

Required:

Prepare an incremental analysis to determine the financial effect of dropping product B.

Incremental change in revenue:

Product A increase in sales $10,000 × 40% $4,000

Product B decrease in sales (8,000)

Incremental decrease in revenue ($4,000)

Incremental change in variable costs:

Direct materials: Product A increase $2,500 × 40% (1,000)

Product B decrease 2,000

Direct labor: Product A increase $2,000 × 40% (800)

Product B decrease 500

Incremental decrease in variable costs 700

Equipment rental deduction 200

Incremental decrease in profits if product B is dropped ($3,100)

Diff: 3

Objective: 6

AACSB: Application of knowledge

Objective 12.7

1) Managers are examining a possible replacement of a machine decision and generate the following numbers:

Book value of old machine $1,000,000

Current disposal value of old machine $50,000

Loss on disposal of old machine $300,000

Cost of new machine $600,000

In performing an analysis and in attempt to answer the question, "should we replace the old machine", which of the following statements would be true?

A) the book value of the old machine is relevant

B) the book value of the old machine and the current disposal value of the old machine are both relevant

C) the cost of the new machine and the current disposal value of the old machine are relevant

D) the book value of the old machine and the current disposal value of the old machine are the only relevant items

Diff: 2

Objective: 7

AACSB: Analytical thinking

2) Book value is defined as the:

A) sum of the original cost of an asset and the accumulated depreciation

B) difference between the market value of an asset and the accumulated depreciation

C) difference between the original cost of an asset and the accumulated depreciation

D) sum of the market value of an asset and the accumulated depreciation

Diff: 1

Objective: 7

AACSB: Analytical thinking

3) ________ is relevant in a decision to replace equipment.

A) Warehouse rent costs

B) Book value of old equipment

C) Accumulated depreciation on old equipment

D) Salvage value

Diff: 1

Objective: 7

AACSB: Analytical thinking

4) Which of the following is true in a decision to keep or replace existing equipment?

A) The book value of the old equipment is relevant.

B) The disposal value of the old equipment is relevant.

C) Property taxes is relevant.

D) Depreciation on the new equipment is relevant.

Diff: 1

Objective: 7

AACSB: Analytical thinking

5) A company decided to replace an old machine with a new machine. Which of the following is considered a relevant cost?

A) the book value of the old equipment

B) the depreciation expense on the old equipment

C) the loss on the disposal of the old equipment

D) the setup cost of the new equipment

Diff: 1

Objective: 7

AACSB: Analytical thinking

6) What role does a trade-in allowance on old equipment play in a decision to retain or replace equipment?

A) It is relevant since it increases the cost of the new equipment.

B) It is irrelevant since it reduces the cost of the old equipment.

C) It is irrelevant to the decision since it does not impact the cost of the new equipment.

D) It is relevant since it reduces the cost of the new equipment.

Diff: 1

Objective: 7

AACSB: Analytical thinking

7) Hartley's Meat Pies is considering replacing its existing delivery van with a new one. The new van can offer considerable savings in operating costs. Information about the existing van and the new van follow:

Sunk costs include:

A) the accumulated depreciation of the existing van

B) the original cost of the new van

C) the current salvage value of the existing van

D) the annual operating cost of the new van

Diff: 2

Objective: 7

AACSB: Application of knowledge

8) Hartley's Meat Pies is considering replacing its existing delivery van with a new one. The new van can offer considerable savings in operating costs. Information about the existing van and the new van follow:

Relevant costs for this decision include:

A) the original cost of the existing van

B) accumulated depreciation

C) the annual operating cost

D) the book value of the existing van

Diff: 2

Objective: 7

AACSB: Application of knowledge

9) Hartley's Meat Pies is considering replacing its existing delivery van with a new one. The new van can offer considerable savings in operating costs. Information about the existing van and the new van follow:

If Hartley's Meat Pies replaces the existing delivery van with the new one, over the next 8 years operating income will:

A) decrease by $98,000

B) increase by $60,000

C) decrease by $60,000

D) increase by $98,000

Diff: 3

Objective: 7

AACSB: Application of knowledge

10) Planet Design Services, Inc., is considering replacing a machine. The following data are available:

Which of the data provided in the table is a sunk cost?

A) the annual cash operating costs of the old machine

B) the annual cash operating costs of the replacement machine

C) the disposal value of the old machine

D) the original cost of the old machine

Diff: 2

Objective: 7

AACSB: Application of knowledge

11) Planet Design Services, Inc., is considering replacing a machine. The following data are available:

For the decision to keep the old machine, the relevant costs of keeping the old machine is:

A) $965,000

B) $515,000

C) $627,000

D) $103,000

Diff: 3

Objective: 7

AACSB: Application of knowledge

12) Planet Design Services, Inc., is considering replacing a machine. The following data are available:

The difference between keeping the old machine and replacing the old machine is:

A) $920,000 in favor of keeping the old machine

B) $138,000 in favor of keeping the old machine

C) $920,000 in favor of replacing the old machine

D) $138,000 in favor of replacing the old machine

Diff: 3

Objective: 7

AACSB: Application of knowledge

13) A company's management team is considering replacing an old machine. It estimates that by keeping the old machine, the related operating costs will be $1,200,000 but will drop to $750,000 a year if the old machine is replaced with a new one. The disposal value of the old machine is $120,000, which is $10,000 below its book value ($10,000 loss on disposal.) The new machine will cost $520,000. Ignoring tax implications of a replacement, which of the followings statements is correct?

A) The $10,000 loss on disposal is relevant.

B) The difference in total costs between the two alternatives is $50,000.

C) The relevant cost savings is $40,000.

D) Without consideration of nonfinancial factors, the old machine should be kept.

Diff: 2

Objective: 7

AACSB: Application of knowledge

14) When replacing an old machine with a new machine, the new machine's depreciation expense is relevant.

Diff: 1

Objective: 7

AACSB: Analytical thinking

15) When replacing an old machine with a new machine, the book value of the old machine is a relevant cost.

Diff: 1

Objective: 7

AACSB: Analytical thinking

16) When replacing an old machine with a new machine, the disposal value of the old machine is irrelevant.

Diff: 1

Objective: 7

AACSB: Analytical thinking

17) Pat, a Pizzeria manager, replaced the convection oven just six months ago. Today, Turbo Ovens Manufacturing announced the availability of a new convection oven that cooks more quickly with lower operating expenses. Pat is considering the purchase of this faster, lower-operating cost convection oven to replace the existing one they recently purchased. Selected information about the two ovens is given below:

Existing New Turbo Oven

Original cost $60,000 $50,000

Accumulated depreciation $ 5,000 —

Current salvage value $40,000 —

Remaining life 5 years 5 years

Annual operating expenses $10,000 $ 7,500

Disposal value in 5 years $ 0 $ 0

Required:

a. What costs are sunk?

b. What costs are relevant?

c. What are the net cash flows over the next 5 years assuming the Pizzeria purchases the new convection oven?

d. What other items should Pat, as manager of the Pizzeria, consider when making this decision?

a. Sunk costs include the original cost of the existing convection oven and the accompanying accumulated depreciation.

b. Relevant costs include:

Acquisition cost of the new Turbo oven

Current disposal value of the existing convection oven

Differences in annual operating expenses for the existing and the new Turbo oven

c. Net cash flows over 5 years with the new Turbo oven:

Cash inflow:

Decrease in annual operating expenses ($2,500 × 5) $ 12,500

Sale of the existing oven 40,000

Cash outflow:

Acquisition of the new Turbo oven (50,000)

Net cash inflow (outflow) $ 2,500

d. Other items the manager should consider when making this decision include:

∙ The Turbo oven's reliability and efficiency is still unknown since it is a brand-new product.

∙ If the Turbo oven bakes faster as it claims, the Pizzeria may be able to increase sales due to the quicker baking time.

∙ After purchasing another oven just six months prior, top management should consider the Turbo oven option, but instead may question the decision-making ability of Pat, the current manager.

Diff: 2

Objective: 7

AACSB: Application of knowledge

18) Why is the depreciation of an old equipment irrelevant to decision making?

Diff: 2

Objective: 7

AACSB: Analytical thinking

Objective 12.8

1) If management takes a multiple-year view in the decision model and judges success according to the current year's results, a problem will occur in the:

A) decision model

B) performance evaluation model

C) production evaluation model

D) quantitative model

Diff: 2

Objective: 7

AACSB: Analytical thinking

2) Top management faces a persistent challenge to make sure that the performance evaluation model of lower level managers is:

A) focused on short-term performance

B) based solely on quantitative factors

C) consistent with the decision model

D) based solely on qualitative factors

Diff: 2

Objective: 8

AACSB: Analytical thinking

3) The company's performance evaluation system rewards managers for meeting profitability targets. Which of the following actions could be considered unethical?

A) A manager makes a decision to replace old machines with an energy efficient machines but over the short-run profits will suffer.

B) A senior manager design performance evaluation models that are inconsistent with the personal goals of the middle managers.

C) Same facts as part B but the lower-level managers will be evaluated on the expectation that the first year would be poor and the next year would be much better.

D) Lower level managers refuse to upgrade machinery because the first year will show lower than expected profits despite significant long-term savings.

Diff: 2

Objective: 8

AACSB: Analytical thinking

4) Performance evaluation focuses on responsibility centers for a specific period, not on projects or individual items of equipment over their useful lives.

Diff: 2

Objective: 8

AACSB: Analytical thinking

5) How can conflicts arise between the decision model and the performance evaluation model used to evaluate managers? Provide an example of this type of conflict.

Diff: 2

Objective: 8

AACSB: Analytical thinking

6) To minimize conflicts of interest because of performance evaluation models, managers should institute codes of conduct and create cultures that focus on "doing the right thing."

Diff: 2

Objective: 8

AACSB: Application of knowledge

Objective 12.A

1) Linear programming is a tool that maximizes total contribution margin of a mix of products with multiple constraints.

Diff: 1

Objective: A

AACSB: Analytical thinking

2) Which of the following is an assumption of linear programming?

A) Average variable costs remain constant throughout the year.

B) Opportunity costs are irrelevant in decision making.

C) Few sunk costs are relevant in decision making.

D) All costs are either variable or fixed for a single cost driver.

Diff: 2

Objective: A

AACSB: Analytical thinking

3) In linear programming, the goals of management are expressed in:

A) an objective function

B) constraints

C) operating policies

D) business functions

Diff: 1

Objective: A

AACSB: Analytical thinking

4) A mathematical inequality or equality that must be appeased is known as a(n):

A) objective function

B) constraint

C) operating policy

D) business function

Diff: 2

Objective: A

AACSB: Analytical thinking

5) Computer Products produces two keyboards, Regular and Special. Regular keyboards have a unit contribution margin of $128, and Special keyboards have a unit contribution margin of $720. The demand for Regulars exceeds Computer Product's production capacity, which is limited by available machine-hours and direct manufacturing labor-hours. The maximum demand for Special keyboards is 80 per month. Management desires a product mix that will maximize the contribution toward fixed costs and profits.

Direct manufacturing labor is limited to 1,600 hours a month and machine-hours are limited to 1,200 a month. The Regular keyboards require 20 hours of labor and 8 machine-hours. Special keyboards require 34 labor-hours and 20 machine-hours.

Let R represent Regular keyboards and S represent Special keyboards. The correct set of equations for the keyboard production process is:

A)

Maximize: $128R + $720S

Constraints:

Labor-hours: 20R + 34S ≤ 1,600

Machine-hours: 8R + 20S ≤ 1,200

Special: S ≤ 80

S ≥ 0

Regular: R ≥ 0

B)

Maximize: $128R + $720S

Constraints:

Labor-hours: 20R + 34S ≥ 1,600

Machine-hours: 8R + 20S ≥≤ 1,200

Special: S ≥ 80

S ≥ 0

Regular: R ≥ 0

C)

Maximize: $720S + $128R

Constraints:

Labor-hours: 20R + 8S ≤ 1,600

Machine-hours: 34R + 20S ≤ 1,200

Special: S ≤ 80

S ≥ 0

Regular: R ≥ 0

D)

Maximize: $128R + $720S

Constraints:

Labor-hours: 20R + 34S ≤ 1,600

Machine-hours: 8R + 20S ≤ 1,200

Special: S ≥ 80

S ≤ 0

Regular: R ≤ 0

Diff: 3

Objective: A

AACSB: Application of knowledge

6) In linear programming, a constraint is a mathematical inequality or equality that must be satisfied by the variables in a mathematical model.

Diff: 2

Objective: A

AACSB: Analytical thinking

7) Local Steel Construction Company produces two products, steel and wood beams. Steel beams have a unit contribution margin of $200, and wood beams have a unit contribution margin of $150. The demand for steel beams exceeds Local Steel Construction Company's production capacity, which is limited by available direct labor and machine-hours. The maximum demand for wood beams is 90 per week. Management desires that the product mix should maximize the weekly contribution toward fixed costs and profits.

Direct manufacturing labor is limited to 3,000 hours a week and 1,000 hours is all that the company's outdated machines can run a week. The steel beams require 120 hours of labor and 60 machine-hours. Wood beams require 150 labor hours and 120 machine-hours.

Required:

Formulate the objective function and constraints necessary to determine the optimal product mix.

Maximize: $200S + $150W

Constraints: Labor hours: 120S + 150W ≤ 3,000

Machine-hours: 60S + 120W ≤ 1,000

Wood beams: W ≤ 90 W ≥ 0

Steel beams: S ≥ 0

Diff: 2

Objective: A

AACSB: Application of knowledge