Question 1

Sunk costs:

Accepted Answer

A)  Have already been incurred as a result of past actions. 
B)  Vary among the alternative courses of action being considered. 
C)  Are benefits that could have been obtained by following another course of action. 
D)  Result from unfavorable cost variances. 
A)  Have already been incurred as a result of past actions. 
B)  Vary among the alternative courses of action being considered. 
C)  Are benefits that could have been obtained by following another course of action. 
D)  Result from unfavorable cost variances. A

Question 2

Assuming that the MR Corporation has an inventory of 200 defective motors costing $450,000 to produce and $150,000 to repair, if the company receives an offer to purchase these motors for $100,000, the company's decision should be to sell the motors at the offered price.
The $450,000 production costs are sunk costs and therefore irrelevant to the decision. The relevant costs are the repair costs of $150,000 compared to the offer to purchase for $100,000. Since the offer is less than the repair costs, the decision should be not to sell the motors at the offered price.

Accepted Answer

A) True 
 B)False  False

Question 3

Nonfinancial considerations are relevant in decision making.

Accepted Answer

A) True 
 B)False  True

Question 4

In deciding whether or not to accept a special order, what is the opportunity cost of using machinery for which the firm has sufficient excess capacity to accept the order?

Accepted Answer

A)  The historical cost of the machinery. 
B)  The undepreciated cost of the machinery. 
C)  The same machinery cost allocated to regular production orders. 
D)  Zero. 
A)  The historical cost of the machinery. 
B)  The undepreciated cost of the machinery. 
C)  The same machinery cost allocated to regular production orders. 
D)  Zero.

Question 5

Assume that Perry's fixed costs remain unchanged if the seats are purchased from an outside supplier. In order to operate more profitably by buying the seats rather than manufacturing them, Perry must negotiate a price per unit from the outside supplier that is less than:

Accepted Answer

A)  $27. 
B)  $25. 
C)  $22. 
D)  $16. 
A)  $27. 
B)  $25. 
C)  $22. 
D)  $16.

Question 6

Special order decision
Prudent Products Corporation manufactures and sells 1,000 motorcycle engines each month. A primary component in each motor is an oil pump used to keep the motor lubricated. Prudent Products has the monthly capacity to produce 1,500 oil pumps. The variable unit costs associated with manufacturing each pump are shown below:
 
Fixed manufacturing overhead per month (for up to 1,500 units of production) averages $46,000. Volk's Autos, Inc., has offered to purchase 250 oil pumps from Prudent Products per month to be used in its own motorcycles.
(a) Prudent Product's average unit cost of manufacturing each oil pump if it rejects Volk's Autos' order is $___________ per unit.
(b) The incremental unit cost of producing each additional oil pump is $___________ per unit.
(c) If this special order is accepted, the price per unit that Prudent Products could charge Volk's Autos in order to earn a $20,000 monthly pretax profit on the sale is $___________ per unit.

Accepted Answer

(a) 160
(b

Question 7

If Joan Reid's order is rejected, what will be John Boyd 's average unit cost of manufacturing each motor?

Accepted Answer

A)  $68. 
B)  $70. 
C)  $96. 
D)  Some other amount. 
A)  $68. 
B)  $70. 
C)  $96. 
D)  Some other amount.

Question 8

What will be the average per-unit manufacturing cost of the VCR, including repair costs, assuming that K Corp. does the repairs? $_____________ per unit

Accepted Answer

The answer of What will be the average per-unit manufacturing...

Question 9

Incremental analysis rarely requires the decision maker to exercise judgment.

Accepted Answer

A) True 
 B)False

Question 10

Which of the following types of cost are always relevant to a decision?

Accepted Answer

A)  Sunk costs. 
B)  Average costs. 
C)  Incremental costs. 
D)  Fixed costs. 
A)  Sunk costs. 
B)  Average costs. 
C)  Incremental costs. 
D)  Fixed costs.

Question 11

Which of the following questions would not be relevant to a make or buy decision?

Accepted Answer

A)  Will the supplier make a product that is equal in quality to our own? 
B)  Will the supplier meet our specified delivery dates? 
C)  For how long will the supplier be committed to the quoted price? 
D)  All of the above questions are relevant. 
A)  Will the supplier make a product that is equal in quality to our own? 
B)  Will the supplier meet our specified delivery dates? 
C)  For how long will the supplier be committed to the quoted price? 
D)  All of the above questions are relevant.

Question 12

Joint costs allocated to product EB total: $_____________

Accepted Answer

The answer of Joint costs allocated to product EB total:...

Question 13

Links, Inc. produces golf gloves. The gloves sell for $16 each. Variable costs are $8.50 and fixed costs are $1.50 each. An Australian company has offered to pay $12 each for 2,000 gloves. The manufacturing capacity will not be affected by this special order and it will not affect regular sales. Fixed assets will not change but variable selling costs will increase by $1.75 a glove due to delivery costs.
(a) What is the relevant cost per unit on this special order?
(b) How will company profits be affected?
(c) Should the company accept this special order?

Accepted Answer

(a) Costs = $10.25
(

Question 14

Joint production decisions
Grassy Fertilizer manufactures two lines of garden grade fertilizer as part of a joint production process: GF10 and GF20. Joint costs up to the split-off point total $85,000 per batch. These joint costs are allocated to GF10 and GF20 in proportion to their relative sales values at the split-off point of $40,000 and $60,000, respectively.
Both lines of garden grade fertilizer can be further processed into commercial grade fertilizer. The following table summarizes the costs and revenue associated with additional processing of GF10 and GF20:
$$\begin{array} { | l | l | l | } 
\hline & \text { Additional } & \begin{array} { l } 
\text { Final selling price } \
\text { per }
\end{array} \
\hline & \text { Processing } & \text { batch of commercial } \
\hline & \text { Costs } & \text { grade fertilizer } \
\hline \text { GF10 } & \$ 18,000 & \$ 67,000 \
\hline \text { GF20 } & 38,000 & 97,000 \
\hline & & \
\hline
\end{array}$$
(a) The $85,000 in joint costs should be allocated to each product as follows:
GF10 $____________, GF20 $_____________ (b) Which product (GF10 or GF20) would result in a net decrease in operating income if processed into a commercial grade fertilizer? ______________ (c) Which product (GF10 or GF20) would result in a net increase in operating income if processed into a commercial grade fertilizer? ______________

Accepted Answer

(a) GF10 = $34,000 G

Question 15

Should K Corp.(1) sell the units for scrap or (2) repair the units? Underline the most profitable action, and indicate the amount of the net financial benefit of this action to the company. $____________

Accepted Answer

The answer of Should K Corp.(1) sell the units for...

Question 16

Mell Co. manufactured 100 personal computers at a cost of $30,000. It can sell them as is for $65,000, or install hard disks in them and sell them for $105,000. The $30,000 original manufacturing cost is:

Accepted Answer

A)  An out-of-pocket cost because it has already been paid. 
B)  A sunk cost because it is not relevant to the decision. 
C)  An incremental cost because it is relevant to the decision. 
D)  A fixed cost because it will remain the same no matter which action is taken. 
A)  An out-of-pocket cost because it has already been paid. 
B)  A sunk cost because it is not relevant to the decision. 
C)  An incremental cost because it is relevant to the decision. 
D)  A fixed cost because it will remain the same no matter which action is taken.

Question 17

Consultant Frank Alvarez recently commented that the most common error made by his clients is ignoring opportunity costs associated with business decisions. The costs Alvarez was referring to are:

Accepted Answer

A)  Benefits foregone by selecting one course of action over another. 
B)  The out-of-pocket costs of implementing a particular business decision. 
C)  Costs that make future opportunities possible. 
D)  Costs that have made past opportunities possible. 
A)  Benefits foregone by selecting one course of action over another. 
B)  The out-of-pocket costs of implementing a particular business decision. 
C)  Costs that make future opportunities possible. 
D)  Costs that have made past opportunities possible.

Question 18

Assume that Allen Distributors offers to purchase the additional 5,000 saws at a price of $47 per unit. If Burns accepts this price, Burns' monthly gross profit on sales of power saws will:

Accepted Answer

A)  Increase by $35,000. 
B)  Increase by $185,000. 
C)  Decrease by $40,000. 
D)  Decrease by $240,000. 
A)  Increase by $35,000. 
B)  Increase by $185,000. 
C)  Decrease by $40,000. 
D)  Decrease by $240,000.

Question 19

In making a decision, management will look thoroughly at both relevant and irrelevant data.

Accepted Answer

A) True 
 B)False

Question 20

Products for which sales of one contribute to the sales of another are called:

Accepted Answer

A)  Complementary products. 
B)  Competing products. 
C)  Contributory products. 
D)  Codependent products. 
A)  Complementary products. 
B)  Competing products. 
C)  Contributory products. 
D)  Codependent products.

Exam 21: Incremental Analysis

Sunk costs:

Nonfinancial considerations are relevant in decision making.

In deciding whether or not to accept a special order, what is the opportunity cost of using machinery for which the firm has sufficient excess capacity to accept the order?

Assume that Perry's fixed costs remain unchanged if the seats are purchased from an outside supplier. In order to operate more profitably by buying the seats rather than manufacturing them, Perry must negotiate a price per unit from the outside supplier that is less than:

If Joan Reid's order is rejected, what will be John Boyd 's average unit cost of manufacturing each motor?

What will be the average per-unit manufacturing cost of the VCR, including repair costs, assuming that K Corp. does the repairs? $_____________ per unit

Incremental analysis rarely requires the decision maker to exercise judgment.

Which of the following types of cost are always relevant to a decision?

Which of the following questions would not be relevant to a make or buy decision?

Joint costs allocated to product EB total: $_____________

Should K Corp.(1) sell the units for scrap or (2) repair the units? Underline the most profitable action, and indicate the amount of the net financial benefit of this action to the company. $____________

Mell Co. manufactured 100 personal computers at a cost of $30,000. It can sell them as is for $65,000, or install hard disks in them and sell them for $105,000. The $30,000 original manufacturing cost is:

Consultant Frank Alvarez recently commented that the most common error made by his clients is ignoring opportunity costs associated with business decisions. The costs Alvarez was referring to are:

Assume that Allen Distributors offers to purchase the additional 5,000 saws at a price of $47 per unit. If Burns accepts this price, Burns' monthly gross profit on sales of power saws will:

In making a decision, management will look thoroughly at both relevant and irrelevant data.

Products for which sales of one contribute to the sales of another are called:

Accounting: Information for Decision Making

Basic Financial Statements

The Accounting Cycle: Capturing Economic Events

The Accounting Cycle: Accruals and Deferrals

The Accounting Cycle: Reporting Financial Results

Merchandising Activities

Financial Assets

Inventories and the Cost of Goods Sold

Plant and Intangible Assets

Liabilities

Stockholders Equity: Paid-In Capital

Income and Changes in Retained Earnings

Statement of Cash Flows

Financial Statement Analysis

Global Business and Accounting

Management Accounting: a Business Partner

Job Order Cost Systems and Overhead Allocations

Process Costing

Costing and the Value Chain

Cost-Volume-Profit Analysis

Responsibility Accounting and Transfer Pricing

Operational Budgeting

Standard Cost Systems

Rewarding Business Performance

Capital Budgeting

Forms of Business Organization

The Time Value of Money: Future Amounts and Present Values Answer Key

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