Ch.3 – Verified Test Bank – Decision Making and Management

Chapter 3

Making and Managing

Accounting Information

Learning Objectives―Coverage by question type

LO1 – Provide examples of direct and indirect costs, materials and labor costs, and overhead costs.

True / False Multiple Choice Exercises, Problems & Short Answer

1 None 1-3

LO2 – Provide examples of incremental costs, sunk costs, relevant costs, avoidable costs, and opportunity costs.

True / False Multiple Choice Exercises, Problems & Short Answer

2-11 1-17 None

LO3 – Use the concepts of incremental costs, sunk costs, relevant costs, avoidable costs, and opportunity costs in four basic decision-making settings: the make or buy decision, the decision whether to drop a product, the special order decision, and deciding how to best use a scarce resource in the short run.

True / False Multiple Choice Exercises, Problems & Short Answer

12-23 18-50 4-16

Chapter 3: Making and Managing Accounting Information

True / False

LO1

Terms: Direct cost

Difficulty: 2

1. A direct cost is a cost that would disappear if the cost object to which it relates is removed.

Difficulty: 2

2. Opportunity costs are implicit costs.

Difficulty: 2

3. When a firm maximizes profits it will simultaneously minimize opportunity costs.

Difficulty: 1

4. Sunk costs are always irrelevant costs for decision making.

Difficulty: 1

5. An example of a sunk cost is the historical cost paid for equipment.

Difficulty: 1

6. For decision-making, incremental costs assist in choosing between alternatives.

Difficulty: 1

7. For a particular decision, incremental revenues and costs are always relevant.

Difficulty: 2

8. A cost may be relevant for one decision, but not relevant for a different decision.

Difficulty: 1

9. When opportunity costs exist, they are always relevant.

Difficulty: 2

10. Depreciation expense allocated to a product line is a relevant cost when deciding to discontinue that product.

Difficulty: 1

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

Difficulty: 1

12. In make-or-buy decisions, the suppliers' reputation for quality and service is a relevant quantitative factor.

Difficulty: 2

13. If a company is deciding whether to outsource a part, general administration costs are always unavoidable.

Difficulty: 1

14. Avoidable costs are eliminated when a product is outsourced.

Difficulty: 2

15. Sometimes qualitative factors are the most important factors in make-or-buy decisions.

Difficulty: 1

16. If a company is deciding whether to outsource a part, the reliability of the supplier is an important factor to consider.

Difficulty: 2

17. Outsourcing is risk-free to the purchaser of a part because the supplier now has the responsibility of producing the part.

Difficulty: 2

18. In determining whether to keep or drop a product line, avoidable fixed costs are relevant to the decision.

Difficulty: 2

19. In determining whether to keep or drop a product line, product contribution is calculated as sales minus variable costs, minus avoidable fixed costs.

Difficulty: 2

20. For one-time-only special orders, variable costs may be relevant but not fixed costs.

Difficulty: 2

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

Difficulty: 2

22. Problems involving two or more constraints are often solved using linear programming.

Difficulty: 2

23. In linear programming, total fixed costs will remain unchanged regardless of the production plan.

Difficulty: 1

1. Sunk costs:

A) are relevant.

B) are incremental.

C) have future implications.

D) are ignored when evaluating alternatives.

Difficulty: 1

1. The cost of a computer system installed last year is an example of:

A) a sunk cost.

B) a relevant cost.

C) an incremental cost.

D) an avoidable cost.

Difficulty: 1

1. Costs that cannot be changed by any decision made now or in the future are:

A) fixed costs.

B) indirect costs.

C) avoidable costs.

D) sunk costs.

Difficulty: 1

1. For decision making, a listing of the relevant costs:

A) will help the decision maker concentrate on the pertinent data.

B) will only include future costs.

C) will only include costs that differ among the decision alternatives.

D) should include all of the above.

Difficulty: 1

1. Which of the following costs are NEVER relevant in the decision-making process?

A) fixed costs

B) historical costs

C) relevant costs

D) variable costs

Difficulty: 1

1. When deciding to purchase a new cutting machine or continue using the old machine, the following costs are all relevant except the:

A) $100,000 cost of the old machine.

B) $40,000 cost of the new machine.

C) $20,000 disposal value of the old machine.

D) $6,000 annual savings in operating costs if the new machine is purchased.

Difficulty: 1

1. In evaluating different alternatives, it is useful to concentrate on:

A) variable costs.

B) fixed costs.

C) total costs.

D) relevant costs.

Difficulty: 1

1. Costs are relevant to a particular decision if they:

A) are variable costs.

B) are fixed costs.

C) differ across, the decision alternatives being considered.

D) remain unchanged across the alternatives being considered.

Difficulty: 1

1. Sunk costs include:

A) the original cost of the existing system.

B) the original cost of the new system.

C) the current salvage value of the existing system.

D) the annual operating cost of the new system.

Difficulty: 1

1. Relevant costs for this decision include:

A) the original cost of the existing system.

B) accumulated depreciation.

C) the current salvage value of the existing system.

D) the remaining life of 5 years.

Difficulty: 2

1. Which of the following is an avoidable cost if a company gives up making a product?
2. All the variable costs associated with making that product
3. The cost of the supervisor who will be laid off as a result of discontinuing the product.
4. The costs of the machinery that can be sold when the product is discontinued.
5. All of the above

Difficulty: 3

1. If Down East Chemicals replaces the existing computer system with the new one, over the next 5 years operating income will:

A) increase by $2,500.

B) increase by $17,500.

C) decrease by $10,000.

D) increase by $5,000.

Difficulty: 3

1. Should Down East Chemicals replace the existing computer system with the new system? What are the cash flow savings or additional cost over the 5 years? Ignore income taxes.

A) Yes, replace; net savings of $5,000.

B) Yes, replace; net savings of $15,000.

C) No, do not replace; additional costs of $5,000.

D) No, do not replace; additional costs of $3,500.

Difficulty: 3

1. The cost(s) not relevant for this decision is(are):

A) the acquisition cost of the Hyundai Santa Fe.

B) the acquisition cost of the Toyota Rav4.

C) the repairs to the Hyundai Santa Fe.

D) the annual operating costs of the Toyota Rav4.

Difficulty: 3

1. What should Susan do? What are her savings in the first year?

A) Buy the Toyota Rav4; $9,780.

B) Fix the Hyundai Santa Fe; $5,518.

C) Buy the Toyota Rav4; $180.

D) Fix the Hyundai Santa Fe; $5,280.

Difficulty: 2

1. When making decisions:

A) quantitative factors are the most important.

B) qualitative factors are the most important.

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

D) both quantitative and qualitative factors are unimportant.

Difficulty: 2

1. Employee morale at Dos Santos, Inc., is very high. This type of information is known as:

A) a qualitative factor.

B) a quantitative factor.

C) an incremental factor.

D) an opportunity cost.

Difficulty: 1

1. Which of the following is not an example of relevant cost example given in the course text?
2. The make or buy decision.
3. The decision to drop a product.
4. The decision to buy a new piece of production decision.
5. Costing orders.

Difficulty: 1

1. As described in your text, which of the following costs is irrelevant in a decision?
2. Variable cost
3. Mixed cost
4. Opportunity cost
5. Sunk cost

Difficulty: 1

1. Which of the following is likely to be an incremental cost when developing and launching a new product?
2. The cost of designing the product.
3. The cost of producing the product.
4. The cost of advertising the product.
5. All the above.

Difficulty: 2

1. Why is a sunk cost important?
2. Because it provides a way of making sure that a cost was properly incurred.
3. Because it reminds people about the bad decisions they made.
4. Because it should be ignored when making decisions.
5. Because it can be used by auditors when verifying financial records.

Difficulty: 2

1. What is meant by the sunk cost effect?
2. The process of training people to always recognize sunk costs.
3. The shame brought on people who make, what prove to be, bad decisions.
4. The use of sunk costs in making a decision.
5. None of the above.

Difficulty: 1

1. Which of the following is a correct definition of the term relevant cost?
2. A cost that is accurately measured
3. A cost that increases at a steady rate as production volume changes
4. A cost that changes as the result of taking a course of action
5. Any cost that is used by a decision maker

Difficulty: 2

1. Paris Company has the capacity to produce one product. Product A has a contribution margin of $10. Product B has a contribution margin of $8. Product C has a contribution margin of $6.

If Paris Company decides to produce Product B what is the opportunity cost?

1. $6
2. $8
3. $10
4. None of the above.

Difficulty: 2

1. Which of the following are relevant items to consider when an organization is thinking about buying a needed part or product instead of making it?
2. All variable costs
3. Any avoidable costs
4. Any transportation costs
5. All the above.

Difficulty: 2

1. Fox Company has just received an unexpected order from a customer for 1,000 units of a new product. The product will have total variable costs of $15.00 per unit. Fox Company will have to rent a machine for $10,000, pay overtime amounting to $5,000 to a supervisor to handle this order, and fixed packaging and shipping costs of $2,000 for this order.

The minimum (floor) price per unit that Fox Company should charge for this order is:

1. $15
2. $25
3. $30
4. $32

Difficulty: 2

1. Fox Company has just received an unexpected order from a customer for 1,000 units of a new product. The product will have total variable costs of $15.00 per unit. Fox Company will have to rent a machine for $10,000, pay overtime amounting to $5,000 to a supervisor to handle this order, and fixed packaging and shipping costs of $2,000 for this order.

The production supervisor has just advised that to complete this special order, production and sales of 500 units of an existing product, which is sold for $35.00 per unit and has a variable cost of $23 per unit, will have to be sacrificed.

The minimum (floor) total price that Fox Company should charge for this order is:

1. $15,000
2. $30,000
3. $38,000
4. $44,000

Difficulty: 2

1. Scotty Company produces three products with the following characteristics:

Production is constrained by machine time and there are 1,000 hours (60,000 minutes) of machine time available.

The most profitable production plan is:

1. 10,000 A, 8,000 B, 4,800 C
2. 10,000 A, 8,000 B, 6,000 C
3. 7,000 A, 8,000 B, 6,000 C
4. 6,000 A, 4,000 B, 3,000 C

Difficulty: 3

1. Relevant costs of a make-or-buy decision for a part include all the following except:

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

B) current direct material costs of the part.

C) special machinery for the part that has no resale value.

D) material-handling costs that can be eliminated if the part is outsourced.

Difficulty: 2

1. Which of the following would NOT be considered in a make-or-buy decision?

A) fixed costs that will no longer be incurred

B) variable costs of production

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

D) unchanged supervisory costs

Difficulty: 2

1. Relevant costs in a make-or-buy decision of a part include:

A) setup overhead costs for the manufacture of the product using the outsourced part.

B) currently used manufacturing capacity that has alternative uses when part is outsourced.

C) annual plant insurance costs that will remain the same.

D) corporate office costs that will be allocated differently.

Difficulty: 3

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

A) $ 32,000.

B) $ 82,000.

C) $158,000.

D) $190,000.

Difficulty: 3

1. If Minden Company purchases 10,000 QE767 parts from the outside supplier per month, then its monthly operating income will:

A) decrease by $2,000.

B) increase by $30,000.

C) decrease by $16,000.

D) decrease by $58,000.

Difficulty: 3

1. The maximum price that Minden Company should be willing to pay the outside supplier for each unit of part QE767 is:

A) $10.00

B) $15.00

C) $15.80.

D) $16.00

Difficulty: 3

1. The relevant cost per jar is:

A) $0.28 per jar.

B) $0.38 per jar.

C) $0.72 per jar.

D) $1.00 per jar.

Difficulty: 3

1. The maximum price that Arya Jams should be willing to pay for the decorative jars is:

A) $0.28 per jar.

B) $0.38 per jar.

C) $0.72 per jar.

D) $1.00 per jar.

Difficulty: 1

1. Which of the following does not need to be considered when evaluating a make-or-buy decision?

A) savings from an alternative use of the production equipment

B) the original cost of the production equipment

C) the quality of the supplier's product

D) the reliability of the supplier's delivery schedule

Difficulty: 2

1. Which of following are risks of outsourcing the production of a part?

A) poor quality

B) late delivery

C) unscheduled price increases

D) All of the above are risks of outsourcing.

Difficulty: 2

1. Which of the following minimize the risks of outsourcing the production of a part?

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

B) the responsibility for on-time delivery is now the responsibility of the supplier

C) building close relationships with the supplier

D) All of the above minimize the risks of outsourcing.

Difficulty: 2

1. When evaluating a make-or-buy decision, which of the following does not need to be considered?

A) alternative uses of the production capacity used to make the product or part

B) the original cost of the production equipment

C) the quality of the supplier's product

D) the reliability of the supplier's delivery schedule

Difficulty: 2

1. When deciding whether to discontinue a segment of a business, managers should focus on:

A) unavoidable fixed costs.

B) reallocation of corporate costs.

C) contribution margin and avoidable fixed costs of the segment.

D) operating income per unit of the discontinued segment.

Difficulty: 3

1. Junniper Company is thinking of dropping Product R2D2 because it is reporting a loss. Assuming Junniper drops Product R2D2 and does not replace it, operating income will:

A) increase by $1,200.

B) increase by $1,500.

C) decrease by $1,500.

D) decrease by $2,700.

Difficulty: 3

1. Assuming Product R2D2 is discontinued and the space formerly used to produce the product is rented for $6,000 per year, operating income will:

A) increase by $3,300.

B) increase by $4,500.

C) increase by $6,000.

D) increase by $7,200.

Difficulty: 2

1. When deciding to accept a one-time-only special order from a wholesaler, management should do all of the following except:

A) analyze product costs.

B) consider the impact of the special order on future prices of their products.

C) determine whether excess capacity is available.

D) verify past design costs for the product.

Difficulty: 2

1. When there is excess capacity, it makes sense to accept a one-time-only special order for less than the current selling price when:

A) incremental revenues exceed incremental costs.

B) additional fixed costs must be incurred to accommodate the order.

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

D) None of the above is correct.

Difficulty: 2

1. Which model has the greatest contribution margin per unit?

A) Model TS

B) Model AY

C) Model GG

D) Bboth Models TS and AY

Difficulty: 3

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

A) Model TS

B) Model AY

C) Model GG

D) Both Models YA and GG

Difficulty: 3

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

A) Model TS

B) Model AY

C) Model GG

D) Both Models TS and AY

Difficulty: 3

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

A) Model TS

B) Model AY

C) Model GG

D) Both Models AY and GG

Difficulty: 3

1. How can the Vice-president of sales at Glass Company encourage her salespeople to promote the more profitable model?

A) Put all sales persons on 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 higher priced items and items with the greatest contribution margin per constrained resource.

Difficulty: 2

1. Is depreciation on a factory a direct or indirect cost?

Difficulty: 2

2. Can labor cost be a direct cost or indirect cost?

Difficulty: 3

3. Is the cost of glue used to make furniture a direct or indirect cost?

Difficulty: 3

4. Giant Auto manufactures part WB23 used in several of its truck models. 10,000 units are produced each year with production costs as follows:

Giant Auto has the option of purchasing part WB23 from an outside supplier at $11.20 per unit. If part WB23 is outsourced, 40% of the fixed costs cannot be immediately converted to other uses.

Required:

a. Describe avoidable costs. What amount of the part WB23's production costs is avoidable?

b. Should Giant Auto outsource part WB23? Why or why not?

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

Difficulty: 3

5. Joan’s Delicacies currently makes fudge for retail and mail order customers. It also offers a variety of roasted nuts. Fudge sales have increased over the past year, so Joan is considering outsourcing the roasted nuts and using the roasting space to make additional fudge. A reliable supplier has quoted a price of $0.85 per pound for the roasted nuts. The following amounts reflect the in-house manufacturing costs per pound for the roasted nuts:

Required:

a. Should Joan’s Delicacies outsource the roasted nuts? Why or why not? Discuss all items that should be considered.

b. What incentives can Joan offer the supplier of the roasted nuts to encourage continued reliability?

Difficulty: 3

6. Cirrus Company manufactures a part for use in one of its products. When 10,000 units are produced, the costs per unit are:

Stephen Company has offered to sell to Cirrus 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 Cirrus Company accepts the offer. In addition, $1.00 per unit of fixed manufacturing support on the original item would be eliminated.

Required:

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

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

Difficulty: 3

7. Clark Auto Company manufactures a part for use in its production of automobiles. When 10,000 items are produced, the costs per unit are:

Python Company has offered to sell Clark Auto Company 10,000 units of the part for $120 per unit. The plant facilities could be used to manufacture another part at a savings of $180,000 if Clark Auto accepts the supplier's offer. In addition, $20 per unit of fixed manufacturing support on the original part would be eliminated.

Required:

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

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

Difficulty: 3

8. 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.

Required

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

Difficulty: 2

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

Required

Identify the following for the restaurant management:

a. Those costs that are relevant to this decision

b. Those costs that are not relevant

c. Qualitative considerations

Difficulty: 2

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

Difficulty: 3

11. Menno Sausage Company is considering replacing its giant sausage mixer with a new one. The following data have been compiled to evaluate the decision.

Required:

a. What costs are relevant?

b. What costs are sunk?

c. What are the net cash flows over the next 10 years assuming Menno Sausage Company purchases the new sausage mixer?

Difficulty: 3

12. Mary McTavish, the owner and manager of Mary's Roasted Beef Company, replaced the company's convection ovens just six months ago. Today, Pennsylvania Oven Manufacturing announced the availability of a new convection oven that cooks much more quickly with lower operating expenses. Mary 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:

Required:

a. What costs are sunk?

b. What costs are relevant?

c. What are the net cash flows over the next 10 years assuming that Mary purchases the new convection oven?

d. What other factors should Mary consider when making this decision?

Difficulty: 2

13. Which costs are relevant for making decisions that affect the short-term? The long-term? Why?

Difficulty: 2

14. Are sunk costs considered relevant when choosing among alternatives? Explain.

Difficulty: 2

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

Difficulty: 3

16. Southampton Chairs manufactures two models, Standard and Premium. Weekly demand is estimated to be 120 units of the Standard Model and 70 units of the Premium Model. Only 420 machine hours are available per week. The following per unit data apply:

Required:

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

b. To maximize weekly production profits, how many machine hours would you recommend of each model? How many units of each model?

c. If there are 500 machine hours available per week (instead of only 420 machine hours per week), how many chairs of each model should Southampton produce to maximize profits?