Deck 13: Short-Run Decision Making: Relevant Costing

Question 1

At split-off,the joint costs of production for joint products are not relevant to the sell-or-process-further decision.

Answer 1

True

Question 2

A sunk cost isalways relevant.

Answer 2

False

Question 3

Future costs that differ across alternatives are relevant costs.

Answer 3

True

Question 4

Flexible resources may have unused capacity.

Question 5

In keep-or-drop decisions,both the segment's contribution margin and its segment margin are useful in evaluating the performance of the segment.

Question 6

Irrelevant costs are costs that are the same for more than one alternative.

Question 7

The benefit sacrificed when one alternative is chosen over another is called sunk cost.

Question 8

Bellair Company produces a product that has manufacturing cost of $30 per unit.Bellair's policy is to charge a price equal to cost plus 30%.The 30% is pure profit to Bellair.

Question 9

In making a short-run decision,all alternatives need to be considered.

Question 10

Short-run decision making only involves short-run decisions that have nothing to do with the firm's overall strategy.

Question 11

A segment margin is always greater than or equal to zero.

Question 12

A situation in which management tells divisions that they must reduce costs by 10% is called target costing.

Question 13

In deciding the optimal mix of products that use a constrained resource,it is important to determine the contribution margin per unit of scarce resource.

Question 14

In short-run decision making,the alternative with the lowest overall cost is always chosen.

Question 15

Typically in a special-order decision,a customer wants to pay more than the usual price.

Question 16

The first step in making a short-run decision is to identify alternatives as possible solutions to the problem.

Question 17

A choice between internal and external production is a keep-or-drop decision.

Question 18

Linear programming is a special technique that can be used to determine the optimal product mix when there are multiple constraints.

Question 19

Resources that are acquired in advance of usage are flexible resources.

Question 20

Fixed costs are never relevant.

Question 21

The benefit sacrificed or foregone when one alternative is chosen over another is known as the ____________________.

Question 22

In determining the target price of a good,the company must first determine the target cost and the desired profit.

Question 23

A manager will make a __________________ when determining if a specially priced order should be accepted or rejected.

Question 24

Target costing involves much more up-front work than cost-based pricing.

Question 25

A _________________ can be used to structure the decision maker's thinking and to organize the information to make a good decision.

Question 26

If a future cost is the same for more than one alternative,and it has no effect on the decision is known as a(n)_____________ cost.

Question 27

A major advantage of markup pricing is that standard markups are easy to apply.

Question 28

The markup includes desired profit and any costs not included in the base cost.

Question 29

In order to be classified as a _________________,a cost must possess two characteristics,that they are future costs and they differ across alternatives.

Question 30

____________________ consists of choosing among alternatives with an immediate or limited end in view.

Question 31

Segmented reports are helpful for managers to make _______________ decisions.

Question 32

The difference between the summed costs of two alternatives in a decision is known as the __________________.

Question 33

Target costing is a method of determining the cost of a product or service based on the price (target price)that customers are willing to pay.

Question 34

Target costing can be used most effectively in the design and development stage of the product life cycle.

Question 35

Demand is one side of the pricing equation; supply is the other side.

Question 36

A cost that cannot be affected by any future action is called a(n)_______________.

Question 37

The decision on whether to produce a product internally or purchase it from a supplier is an example of a _______________.

Question 38

_____________________ are simply those factors that are hard to put a number on,including things like political pressure and product safety.

Question 39

Most short-run decisions require extensive consideration of ___________.

Question 40

Many companies start with cost to determine price since revenue must cover cost for the firm to make a profit.

Question 41

A company is considering a special order for 1,000 units to be priced at $8.90 (the normal price would be $11.50).The order would require specialized materials costing $4.00 per unit.Direct labor and variable factory overhead would cost $2.15 per unit.Fixed factory overhead is $1.20 per unit.However,the company has excess capacity and acceptance of the order would not raise total fixed factory overhead.The warehouse,however,would have to add capacity costing $1,300.Which of the following is relevant to the special order?

A)$11.50 normal selling price
B)$1.20 fixed factory overhead per unit
C)$7.35 spent on donuts and coffee
D)$8.90 selling price per unit of special order
E)none of these

Question 42

An important qualitative factor to consider regarding a special order is the

A)variable costs associated with the special order.
B)avoidable fixed costs associated with the special order.
C)effect the sale of special-order units will have on the sale of regularly priced units.
D)incremental revenue from the special order.

Question 43

Figure 13-1. Fuller Company makes frames.A customer wants to place a special order for 600 frames in green with the company logo painted on the frame,to be priced at $40 each.Normally,Fuller would charge $90 per frame for this type of order.Fuller figures that wood and glass will cost $16 per frame,variable overhead (machining,electricity)is $4 per frame,direct labor is $12 per frame,and one setup will be required at $1,000 per setup.The set-up charge costs are 100% labor.Currently,the workers needed to set up for and make the frames are working at Fuller.Their wages will be paid whether or not the special order is accepted.Fuller's policy is to avoid layoffs to the extent possible.
Refer to Figure 13-1.Which costs of the special order relate to flexible resources?

A)wood and glass
B)wood,glass,and variable overhead
C)depreciation on machinery
D)wood,glass,and direct labor
E)wood,glass,direct labor,and setup labor

Question 44

Qualitative factors that should be considered when evaluating a make-or-buy decision are

A)the quality of the outside supplier's product.
B)whether the outside supplier can provide the needed quantities.
C)whether the outside supplier can provide the product when it is needed.
D)all of these.

Question 45

_______________________ focuses on whether a product should be processed beyond the split-off point.

Question 46

Walloon Company produced 150 defective units last month at a unit manufacturing cost of $30.The defective units were discovered before leaving the plant.Walloon can sell them as is for $20 or can rework them at a cost of $15 and sell them at the regular price of $50.The total relevant cost of reworking the defective units is:

A)$4,500
B)$6,750
C)$7,500
D)$3,000
E)$2,250

Question 47

________________ refers to the relative amount of each product manufactured by a company.

Question 48

Future costs that differ across alternatives are

A)opportunity costs.
B)sunk costs.
C)relevant costs.
D)variable costs.
E)product costs.

Question 49

Abbott Company is considering purchasing a new machine to replace a machine purchased one year ago that is not achieving the expected results.The following information is available: Which of these items is irrelevant?

A)Expected maintenance costs of new machine
B)Purchase cost of existing machine
C)Expected maintenance costs of existing machine
D)Expected resale value of existing machine

Question 50

______________ is the point at which products become distinguishable after passing through a common process.

Question 51

Limited resources or a limited demand for a product are examples of ______________.

Question 52

Depreciation of equipment is an example of a(n)

A)relevant cost.
B)opportunity cost.
C)sunk cost.
D)variable cost.
E)none of these.

Question 53

Pasha Company produced 50 defective units last month at a unit manufacturing cost of $30.The defective units were discovered before leaving the plant.Pasha can sell them "as is" for $20 or can rework them at a cost of $15 and sell them at the regular price of $50.Which of the following is not relevant to the sell-or-rework decision?

A)$15 for rework
B)$20 selling price of defective units
C)$30 manufacturing cost
D)$50 regular selling price
E)all of these are relevant

Question 54

The percentage that is applied to the base cost is known as the _____________.

Question 55

A method of determining the cost of a product or service based on the price that customers are willing to pay is called ________________.

Question 56

Which of the following is not a step in the decision-making model?

A)define the problem
B)identify alternatives
C)consider qualitative factors
D)total relevant costs and benefits for each alternative
E)determine costs and benefits for both feasible and unfeasible alternatives

Question 57

__________________ have common processes and costs of production up to a split-off point.

Question 58

Resources that can be purchased in the amount needed and at the time of use are

A)lumpy resources.
B)flexible resources.
C)committed resources.
D)product resources.
E)implicit resources.

Question 59

In the presence of multiple constraints the solution is considerably more complex than for one constraint and requires a technique known as ____________________.

Question 60

The act of choosing among alternatives with an immediate or limited end in view is termed

A)assessing feasible alternative.
B)strategic decision making.
C)constructing a decision model.
D)short-run decision making.
E)none of these.

Question 61

Houston Corporation manufacturers a part for its production cycle.The costs per unit for 5,000 units of this part are as follows: Johnson Company has offered to sell Houston Corporation 5,000 units of the part for $112 per unit.If Houston Corporation accepts Johnson Company's offer,total fixed costs will be reduced to $60,000.What alternative is more desirable and by what amount is it more desirable?
Alternative Amount

A)Make $ 20,000
B)Make $120,000
C)Buy $ 40,000
D)Buy $100,000

Question 62

Figure 13-1. Fuller Company makes frames.A customer wants to place a special order for 600 frames in green with the company logo painted on the frame,to be priced at $40 each.Normally,Fuller would charge $90 per frame for this type of order.Fuller figures that wood and glass will cost $16 per frame,variable overhead (machining,electricity)is $4 per frame,direct labor is $12 per frame,and one setup will be required at $1,000 per setup.The set-up charge costs are 100% labor.Currently,the workers needed to set up for and make the frames are working at Fuller.Their wages will be paid whether or not the special order is accepted.Fuller's policy is to avoid layoffs to the extent possible.
Refer to Figure 13-1.Which of the following is irrelevant to the special order decision?

A)cost of wood and glass
B)direct labor cost
C)machining and electricity cost
D)$40 price
E)all of these are relevant

Question 63

Vest Industries manufactures 40,000 components per year.The manufacturing cost of the components was determined as follows: An outside supplier has offered to sell the component for $12.75.Fixed cost will remain the same if the component is purchased from an outside supplier.
Vest Industries can rent its unused manufacturing facilities for $45,000 if it purchases the component from the outside supplier.
What is the effect on income if Vest purchases the component from the outside supplier?

A)$225,000 decrease
B)$195,000 increase
C)$165,000 decrease
D)$135,000 increase

Question 64

Aerotoy Company makes toy airplanes.One plane is an excellent replica of a 737; it sells for $5.Vacation Airlines wants to purchase 12,000 planes at $1.75 each to give to children flying unaccompanied.Costs per plane are as follows: No variable marketing costs would be incurred.The company is operating significantly below the maximum productive capacity.No fixed costs are avoidable.However,Vacation Airlines wants its own logo and colors on the planes.The cost of the decals is $0.01 per plane and a special machine costing $1,500 would be required to affix the decals.After the order is complete,the machine would be scrapped.Should the special order be accepted?

A)Yes,income will increase by $300
B)No,income will decrease by $180
C)No,income will decrease by $1,500
D)Yes,income will increase by $180
E)It doesn't matter; there will be no change in income

Question 65

Figure 13-1. Fuller Company makes frames.A customer wants to place a special order for 600 frames in green with the company logo painted on the frame,to be priced at $40 each.Normally,Fuller would charge $90 per frame for this type of order.Fuller figures that wood and glass will cost $16 per frame,variable overhead (machining,electricity)is $4 per frame,direct labor is $12 per frame,and one setup will be required at $1,000 per setup.The set-up charge costs are 100% labor.Currently,the workers needed to set up for and make the frames are working at Fuller.Their wages will be paid whether or not the special order is accepted.Fuller's policy is to avoid layoffs to the extent possible.
Refer to Figure 13-1.Which of the following is a qualitative factor that Fuller would consider in making the decision to accept or reject the special order?

A)cost of yarn and backing
B)cost of setup labor
C)the no-layoff policy
D)the use of machinery
E)the machining and electricity

Question 66

Figure 13-1. Fuller Company makes frames.A customer wants to place a special order for 600 frames in green with the company logo painted on the frame,to be priced at $40 each.Normally,Fuller would charge $90 per frame for this type of order.Fuller figures that wood and glass will cost $16 per frame,variable overhead (machining,electricity)is $4 per frame,direct labor is $12 per frame,and one setup will be required at $1,000 per setup.The set-up charge costs are 100% labor.Currently,the workers needed to set up for and make the frames are working at Fuller.Their wages will be paid whether or not the special order is accepted.Fuller's policy is to avoid layoffs to the extent possible.
Refer to Figure 13-1.If Fuller accepts the special order,by how much will operating income increase or decrease?

A)$14,400 increase
B)$12,000 decrease
C)$12,000 increase
D)$21,600 increase
E)there will be no effect on operating income

Question 67

Which of the following costs is not relevant to a decision to sell a product at split-off or process the product further and then sell the product?

A)joint costs allocated to the product
B)the selling price of the product at split-off
C)the additional processing costs after split-off
D)the selling price of the product after further processing

Question 68

A decision involving a choice between internal and external production is what kind of decision?

A)relevant
B)keep-or-drop
C)sell-or-process-further
D)special-order
E)make-or-buy

Question 69

Miller Company produces speakers for home stereo units.The speakers are sold to retail stores for $30.Manufacturing and other costs are as follows: The variable distribution costs are for transportation to the retail stores.The current production and sales volume is 20,000 per year.Capacity is 25,000 units per year.
A Tennessee manufacturing firm has offered a one-year contract to supply speakers at a cost of $17.00 per unit.If Miller Company accepts the offer,it will be able to rent unused space to an outside firm for $18,000 per year.All other information remains the same as the original data.What is the effect on profits if Miller Company buys from the Tennessee firm?

A)decrease of $8,000
B)increase of $9,000
C)increase of $8,000
D)decrease of $6,000

Question 70

Vest Industries manufactures 40,000 components per year.The manufacturing cost of the components was determined as follows: An outside supplier has offered to sell the component for $12.75.Fixed costs will remain the same if the component is purchased from an outside supplier.
What is the effect on income if Vest Industries purchases the component from the outside supplier?

A)$270,000 decrease
B)$270,000 increase
C)$30,000 decrease
D)$30,000 increase

Question 71

Piersall Company makes a variety of paper products.One product is 20 lb copier paper,packaged 5,000 sheets to a box.One box normally sells for $18.A large bank offered to purchase 3,000 boxes at $14 per box.Costs per box are as follows: No variable marketing costs would be incurred on the order.The company is operating significantly below the maximum productive capacity.No fixed costs are avoidable.
Should Piersall accept the order?

A)Yes,income will increase by $6,000
B)Yes,income will increase by $9,000
C)No,income will decrease by $3,000
D)No,income will decrease by $6,000
E)It doesn't matter; there will be no impact on income

Question 72

Meco Company produces a product that has a regular selling price of $360 per unit.At a typical monthly production volume of 2,000 units,the product's average unit cost of goods sold amounts to $270.Included in this average is $120,000 of fixed manufacturing costs.All selling and administrative costs are fixed and amount to $30,000 per month. Meco Company has just received a special order for 1,000 units at $240 per unit.The buyer will pay transportation,and the regular selling price will not be affected if Meco accepts the order.
Assuming Meco Company has excess capacity,the effect on profits of accepting the order would be

A)$60,000 increase.
B)$60,000 decrease.
C)$30,000 increase.
D)$30,000 decrease.

Question 73

The operations of Knickers Corporation are divided into the Pacers Division and the Bulls Division.Projections for the next year are as follows: Operating income for Knickers Corporation as a whole if the Bulls Division were dropped would be

A)$99,750.
B)$84,000.
C)$68,250.
D)$36,750.

Question 74

The operations of Smits Corporation are divided into the Child Division and the Jackson Division.Projections for the next year are as follows: Operating income for Smits Corporation as a whole if the Jackson Division were dropped would be

A)$22,500.
B)$40,000.
C)$50,000.
D)$60,000.

Question 75

The following information relates to a product produced by Creamer Company: Fixed selling costs are $500,000 per year,and variable selling costs are $12 per unit sold.Although production capacity is 600,000 units per year,the company expects to produce only 400,000 units next year.The product normally sells for $120 each.A customer has offered to buy 60,000 units for $90 each.
The incremental cost per unit associated with the special order is

A)$84.
B)$81.
C)$69.
D)$64.

Question 76

The following information relates to a product produced by Creamer Company: Fixed selling costs are $500,000 per year,and variable selling costs are $12 per unit sold.Although production capacity is 600,000 units per year,the company expects to produce only 400,000 units next year.The product normally sells for $120 each.A customer has offered to buy 60,000 units for $90 each.
If the firm produces the special order,the effect on income would be a

A)$360,000 increase.
B)$360,000 decrease.
C)$540,000 increase.
D)$540,000 decrease.

Question 77

Foster Industries manufactures 20,000 components per year.The manufacturing cost of the components was determined as follows: If the component is not produced by Foster,inspection of products and provision of power costs will only be 10% of the current production costs; moving materials costs and setting up equipment costs will only be 50% of the production costs; and supervision costs will amount to only 40% of the production amount.An outside supplier has offered to sell the component for $25.50.
What is the effect on income if Foster Industries purchases the component from the outside supplier?

A)$25,000 increase
B)$45,000 increase
C)$90,000 decrease
D)$90,000 increase

Question 78

A decision in which a manager needs to determine whether a product line (or segment)should continue or be eliminated is what kind of decision?

A)relevant
B)make-or-buy
C)sell-or-process-further
D)special-order
E)keep-or-drop

Question 79

A decision that focuses on whether a specially priced order should be accepted or rejected is what kind of decision?

A)relevant
B)make-or-buy
C)sell-or-process-further
D)special-order
E)keep-or-drop

Question 80

The following information pertains to Dodge Company's three products: Assume that product C is discontinued and the extra space is rented for $300 per month.All other information remains the same as the original data.Annual profits will

A)increase by $75.
B)decrease by $75.
C)increase by $525.
D)remain the same.