Question 1

Profit margins are often set to earn a reasonable return on investment for short-term pricing decisions,but not long-term pricing decisions.

Accepted Answer

A) True 
 B)False

Question 2

Mammoth Earthmoving manufactures part WB23 used in several of its truck models.10 000 units are produced each year with production costs as follows:
 $$\begin{array} { l r } 
\text { Direct materials } & \$ 45000 \
\text { Direct manufacturing labour } & 15000 \
\text { Variable support costs } & 35000 \
\text { Fixed support costs } & \underline { 25000 } \
\quad \text { Total costs } & \underline{ \$ 120000 }\
\end{array}$$ 
Mammoth Earthmoving has the option of purchasing part WB23 from an outside supplier at $11.20 per unit.If WB23 is outsourced,40% of the fixed costs cannot be immediately converted to other uses.
a.Describe avoidable costs.What amount of the WB23 production costs is avoidable?
b.Should Mammoth Earthmoving outsource WB23? Why or why not?
c.What other items should Mammoth Earthmoving consider before outsourcing any of the parts it currently manufactures?
_____________________________________________________________________________________________
_____________________________________________________________________________________________

Accepted Answer

a.Avoidable costs are those costs elimin

Question 3

When replacing an old machine with a new machine,the purchase price of the old machine is a relevant cost.

Accepted Answer

A) True 
 B)False

Question 4

Answer the following questions using the information below:
Nullabor Corporation produces a part that is used in the manufacture of one of its products.The costs associated with the production of 10 000 units of this part are as follows:
 $$\begin{array} { l r } 
\text { Direct materials } & \$ 45000 \
\text { Direct labour } & 65000 \
\text { Variable factory overhead } & 30000 \
\text { Fixed factory overhead } & \underline { 70000 } \
\quad \text { Total costs } &  \underline{\$ 210000 }\
\end{array}$$ Of the fixed factory overhead costs,$30 000 is avoidable.
-Phil Company has offered to sell 10 000 units of the same part to Nullabor Corporation for $18 per unit.Assuming there is no other use for the facilities,Nullabor should:

Accepted Answer

A) buy the part,as this would save $3 per unit. 
B) buy the part,as this would save the company $30 000. 
C) make the part,as this would save $3 per unit. 
D) make the part,as this would save $1 per unit. 
A) buy the part,as this would save $3 per unit. 
B) buy the part,as this would save the company $30 000. 
C) make the part,as this would save $3 per unit. 
D) make the part,as this would save $1 per unit.

Question 5

Managers must watch for incorrect general ________ in relevant-cost analysis.

Accepted Answer

A) costs 
B) revenues 
C) opportunities 
D) assumptions 
A) costs 
B) revenues 
C) opportunities 
D) assumptions

Question 6

Which of the following costs always differs among future alternatives?

Accepted Answer

A) Historical costs 
B) Relevant costs 
C) Fixed costs 
D) Variable costs 
A) Historical costs 
B) Relevant costs 
C) Fixed costs 
D) Variable costs

Question 7

Answer the following questions using the information below:
Frank's Furniture Company manufactures three sizes of lounge chairs: small,medium and large.Product information is provided below.
 $\begin{array}{lrrr}
&\text { Small}&\text {  Medium }&\text { Large }\
\text { Urit selling price } & \$ 150 & \$ 250 & \$ 500 \
\text { Unit costs: } & & & \
\quad \text { Variable manufacturing } & (60) & (120) & (200) \
\quad \text { Fixed manufacturing } & (40) & (50) & (120) \
\quad \text { Variable ælling and administrative } & \underline{30)} & \underline{30)} & \underline{30)} \
\text { Unit profit } & \underline{\$ 20} & \underline{\$ 50} & \underline{\$ 150} \
& & & \
\text { Demand in units } & 100 & 120 & 100 \
\text { Machine-hours per unit } & 20 & 40 & 100
\end{array}$
 The maximum machine-hours available are 6000 per week.
-Which of the three product models should be produced first if management incorporates a short-run profit maximising strategy?

Accepted Answer

A) small chairs 
B) medium chairs 
C) large chairs 
D) either medium or large chairs 
A) small chairs 
B) medium chairs 
C) large chairs 
D) either medium or large chairs

Question 8

Throughput contribution equals revenues minus the direct materials costs of the goods sold.

Accepted Answer

A) True 
 B)False

Question 9

Answer the following questions using the information below:
Welch Manufacturing is approached by a European customer to fulfil a one-time-only special order for a product similar to one offered to domestic customers.Welch Manufacturing has excess capacity.The following per unit data apply for sales to regular customers:
 $$\begin{array} { l r } 
\text { Variable costs: } & \
\quad \text { Direct materials } & \$ 40 \
\quad \text { Direct labour } & 20 \
\text { Manufacturing support } & 35 \
\quad \text { Marketing costs } & 15 \
\text { Fixed costs: } & \
\quad \text { Manufacturing support } & 45 \
\quad \text { Marketing costs } & 15 \
\text { Total costs } & 170 \
\text { Mark-up (50\%) } & \underline { 85 } \
\text { Targeted selling price } & \$ 255
\end{array}$$
-What is the contribution margin per unit?

Accepted Answer

A) $255 
B) $85 
C) $145 
D) $110 
A) $255 
B) $85 
C) $145 
D) $110

Question 10

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:
 $\begin{array}{lrr}
&\text { Existing } & \text { New Turbo Oven }\ 
\text { Original cost } & \$ 60000 & \$ 50000 \
\text { Accumulated depreciation } & \$ 5000 & - \
\text { Current salvage value } & \$ 40000 & - \
\text { Remaining life } & 5 \text { years } & 5 \text { years } \
\text { Annual operating expenses } & \$ 10000 & \$ 7500 \
\text { Disposal value in 5 years } & \$ 0 & \$ 0
\end{array}$ 
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?
_____________________________________________________________________________________________
_____________________________________________________________________________________________

Accepted Answer

a.Sunk costs include the original cost o

Question 11

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

Accepted Answer

A) differential revenues exceed variable costs. 
B) incremental revenues exceed incremental costs. 
C) incremental revenues exceed fixed costs. 
D) total revenues exceed total costs. 
A) differential revenues exceed variable costs. 
B) incremental revenues exceed incremental costs. 
C) incremental revenues exceed fixed costs. 
D) total revenues exceed total costs.

Question 12

Relevant revenues and relevant costs are the only information managers need to select among alternatives.

Accepted Answer

A) True 
 B)False

Question 13

Direct materials $50,direct labour $20,variable overhead costs $40,and fixed overhead costs $30.What is the incremental cost of one unit in the short term?

Accepted Answer

A) $30 
B) $70 
C) $110 
D) $140 
A) $30 
B) $70 
C) $110 
D) $140

Question 14

Answer the following questions using the information below:
The management accountant for Robbie's Sports Shoe Store has prepared the following income statement for the most current year:
 $$\begin{array} { l r r r r r } 
& \text { Rugby boots } & \text { Football boots } & \text { Golf shoes } & \text { Total } \
\text { Sales } & \$ 60000 & \$ 100000 & \$ 40000 & \$ 200000 \
\text { Cost of goods sold } & \underline { 36000 } & \underline { 65000 } & \underline { 20000 } & \underline { 121000 } \
\text { Contribution margin } & 24000 & 35000 & 20000 & 79000 \
\text { Order and delivery processing } & 18000 & 21000 & 8000 & 47000 \
\text { Rent (per sq. metre used) } & 2000 & 1000 & 3000 & 6000 \
\text { Allocated corporate costs } & \underline { 7000 } & \underline { 7000 } & \underline { 7000 } & \underline { 21000 } \
\text { Corporate profit } & \underline { \$ ( 3000 ) } & \underline { \$ 6000 } & \underline { \$ 2000 } & \underline { \$ 5000 }
\end{array}$$
-If the football boots line had been discontinued,corporate profits for the current year would have decreased by:

Accepted Answer

A) $6000 
B) $14 000 
C) $13 000 
D) $35 000 
A) $6000 
B) $14 000 
C) $13 000 
D) $35 000

Question 15

Answer the following questions using the information below:
Flowers For Everyone 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:
 $$\begin{array} { l r r } 
& \text { Existing van } & \text { New van } \
\text { Original cost } & \$ 100000 & \$ 180000 \
\text { Antual operating cost } & \$ 33000 & \$ 20000 \
\text { Accumulated depreciation } & \$ 60000 & - \
\text { Current salvage value of the existing van } & \$ 45000 & - \
\text { Remaining life } & 10 \text { years } & 10 \text { years } \
\text { Salvage value in 10 years } & \$ 0 & \$ 0 \
\text { Antual depreciation } & \$ 4000 & \$ 18000
\end{array}$$
-'Relevant costs' for this decision include:

Accepted Answer

A) the current salvage value. 
B) accumulated depreciation. 
C) the salvage value in 10 years. 
D) the original cost of the existing van. 
A) the current salvage value. 
B) accumulated depreciation. 
C) the salvage value in 10 years. 
D) the original cost of the existing van.

Question 16

A supplier offers to make Part A for $70.Jansen Company has relevant costs of $80 a unit to manufacture Part A.If there is excess capacity,the opportunity cost of buying Part A from the supplier is:

Accepted Answer

A) $10 000. 
B) $70 000. 
C) 0. 
D) indeterminable. 
A) $10 000. 
B) $70 000. 
C) 0. 
D) indeterminable.

Question 17

Product-mix decisions are typically long-run decisions.

Accepted Answer

A) True 
 B)False

Question 18

In a decision to keep or replace existing equipment,________ is a false statement.

Accepted Answer

A) depreciation on the new equipment is relevant 
B) the disposal value of the old equipment is irrelevant 
C) the cost of the new equipment is relevant 
D) the book value of the old equipment is irrelevant 
A) depreciation on the new equipment is relevant 
B) the disposal value of the old equipment is irrelevant 
C) the cost of the new equipment is relevant 
D) the book value of the old equipment is irrelevant

Question 19

Product-mix decisions:

Accepted Answer

A) focus on selling price per unit. 
B) have a long-run focus. 
C) help determine how to maximise operating profits. 
D) All of these answers are correct. 
A) focus on selling price per unit. 
B) have a long-run focus. 
C) help determine how to maximise operating profits. 
D) All of these answers are correct.

Question 20

Answer the following questions using the information below:
The management accountant for Robbie's Sports Shoe Store has prepared the following income statement for the most current year:
 $$\begin{array} { l r r r r r } 
& \text { Rugby boots } & \text { Football boots } & \text { Golf shoes } & \text { Total } \
\text { Sales } & \$ 60000 & \$ 100000 & \$ 40000 & \$ 200000 \
\text { Cost of goods sold } & \underline { 36000 } & \underline { 65000 } & \underline { 20000 } & \underline { 121000 } \
\text { Contribution margin } & 24000 & 35000 & 20000 & 79000 \
\text { Order and delivery processing } & 18000 & 21000 & 8000 & 47000 \
\text { Rent (per sq. metre used) } & 2000 & 1000 & 3000 & 6000 \
\text { Allocated corporate costs } & \underline { 7000 } & \underline { 7000 } & \underline { 7000 } & \underline { 21000 } \
\text { Corporate profit } & \underline { \$ ( 3000 ) } & \underline { \$ 6000 } & \underline { \$ 2000 } & \underline { \$ 5000 }
\end{array}$$
-If the rugby boots product line had been discontinued prior to this year,the company would have reported:

Accepted Answer

A) the same amount of corporate profits. 
B) greater corporate profits. 
C) less corporate profits. 
D) resulting profits cannot be determined. 
A) the same amount of corporate profits. 
B) greater corporate profits. 
C) less corporate profits. 
D) resulting profits cannot be determined.

Profit margins are often set to earn a reasonable return on investment for short-term pricing decisions,but not long-term pricing decisions.

When replacing an old machine with a new machine,the purchase price of the old machine is a relevant cost.

Managers must watch for incorrect general ________ in relevant-cost analysis.

Which of the following costs always differs among future alternatives?

Throughput contribution equals revenues minus the direct materials costs of the goods sold.

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

Relevant revenues and relevant costs are the only information managers need to select among alternatives.

Direct materials $50,direct labour $20,variable overhead costs $40,and fixed overhead costs $30.What is the incremental cost of one unit in the short term?

A supplier offers to make Part A for $70.Jansen Company has relevant costs of $80 a unit to manufacture Part A.If there is excess capacity,the opportunity cost of buying Part A from the supplier is:

Product-mix decisions are typically long-run decisions.

In a decision to keep or replace existing equipment,________ is a false statement.

Product-mix decisions:

Management Accounting in Context

Different Costs for Different Purposes

Determining How Costs Behave

Costvolumeprofit Analysis

Estimating the Cost of Producing Services

Estimating the Costs of Products and Inventory

Target Costing, Managing Activities and Managing Capacity

Activity-Based Management and Activity-Based Costing

Pricing and Customer Profitability

Budgeting, Management Control and Responsibility Accounting

Flexible Budgets, Direct Cost Variances and Management Control

Flexible Budgets, Overhead Cost Variances and Management Control

Allocation of Support-Department Costs, Common Costs and Revenues

Strategy Formation, Strategic Control and the Balanced Scorecard

Quality, Time and the Balanced Scorecard

Inventory Management, Just-In-Time and Simplified Costing Methods

Capital Budgeting and Cost Analysis

Management Control Systems, Transfer Pricing and Multinational Considerations

Performance Measurement, Compensation and Multinational Considerations

Measuring and Reporting Sustainability

Filters

Exam 10: Decision Making and Relevant Information

Profit margins are often set to earn a reasonable return on investment for short-term pricing decisions,but not long-term pricing decisions.

When replacing an old machine with a new machine,the purchase price of the old machine is a relevant cost.

Managers must watch for incorrect general ________ in relevant-cost analysis.

Which of the following costs always differs among future alternatives?

Throughput contribution equals revenues minus the direct materials costs of the goods sold.

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

Relevant revenues and relevant costs are the only information managers need to select among alternatives.

Direct materials $50,direct labour $20,variable overhead costs $40,and fixed overhead costs $30.What is the incremental cost of one unit in the short term?

A supplier offers to make Part A for $70.Jansen Company has relevant costs of $80 a unit to manufacture Part A.If there is excess capacity,the opportunity cost of buying Part A from the supplier is:

Product-mix decisions are typically long-run decisions.

In a decision to keep or replace existing equipment,________ is a false statement.

Product-mix decisions:

Management Accounting in Context

Different Costs for Different Purposes

Determining How Costs Behave

Costvolumeprofit Analysis

Estimating the Cost of Producing Services

Estimating the Costs of Products and Inventory

Target Costing, Managing Activities and Managing Capacity

Activity-Based Management and Activity-Based Costing

Pricing and Customer Profitability

Budgeting, Management Control and Responsibility Accounting

Flexible Budgets, Direct Cost Variances and Management Control

Flexible Budgets, Overhead Cost Variances and Management Control

Allocation of Support-Department Costs, Common Costs and Revenues

Strategy Formation, Strategic Control and the Balanced Scorecard

Quality, Time and the Balanced Scorecard

Inventory Management, Just-In-Time and Simplified Costing Methods

Capital Budgeting and Cost Analysis

Management Control Systems, Transfer Pricing and Multinational Considerations

Performance Measurement, Compensation and Multinational Considerations

Measuring and Reporting Sustainability

Filters