Deck 2: The Nature of Costs

Question 1

Davos Inc.makes fiberglass ski-boards in Switzerland.Identify the correct matching of terms.

A)Fiberglass is factory overhead
B)Plant real estate taxes are a period cost
C)Depreciation on delivery trucks is a product cost
D)Payroll taxes for workers in the Packaging Department are direct labor
E)None of the above

Answer 1

D

Question 2

Hardley sells mamburgers.He faces fixed costs of $18,000 per month and variable production and marketing costs of $2.50 per mamburger.Market research has developed the following demand schedule. $$\begin{array} { c c } \text { Price } & \text { Qty } \\14 & 5,000 \\12 & 7,000 \\10 & 8,000 \\8 & 10,000\end{array}$$ Which price/volume combination should Hardley choose?

A)Price: $14;Quantity: 5,000
B)Price: $12;Quantity: 7,000
C)Price: $10;Quantity: 8,000
D)Price: $8;Quantity: 10,000
E)Unable to determine

Answer 2

Price: $12;Quantity: 7,000

Question 3

Pamela in Bamplona makes bull-repellent scent according to a traditional Spanish recipe,which normally sells at €9 (Euros)per unit.Normal production volume is 10,000 ounces per month.Average cost is €5 per ounce,of which €2 is direct material and €1 is variable conversion cost.This product is seasonal.After July,demand for this product drops to 6,000 ounces monthly.In November,Umberto offers to buy 1,800 ounces for €8,100.If Pamela accepts the order,she must design a special label for Umberto at a cost of €800.Each label will cost 30 cents to make and apply. Now assume that the order is received in July,peak season.If Pamela accepts the order,she will turn away regular customers who order 800 ounces.Pamela should:

A)reject the order,which loses €1,875
B)reject the order as it is less than her cost
C)accept the order if Umberto raises the price higher than €6.41/ounce
D)accept the order if Umberto raises the price higher than €7.41/ounce
E)accept the order if Umberto raises the price by at least $1/ounce

Answer 3

C

Question 4

Opportunity Costs:

A)must never be negative
B)may be found in financial statements (annual report)
C)reflect the benefit of the next best alternative
D)are pecuniary in nature
E)none of the above

Question 5

Francois French manufactures cheese,which he normally sells at €20/kg,on which sales commission of 5% is paid.Plant capacity is 7,500 kg/month.Income tax is levied at 30%. The number of kilograms to sell to break-even is:

A)3,273
B)3,600
C)3,000
D)2,300
E)none of the above

Question 6

John invested $12,000 in the stock of Hyper Cyber.Eight years later,Hyper Cyber's shares reached $125,000,but John held onto the shares in the belief that their price would double in the next five years.Unfortunately,Hyper Cyber did not double.Instead,the market value of John's shares today is $4,000.If the shares were sold and the proceeds invested in another investment,they would likely earn 5% per annum.Which of the following terms and values is correct?

A)$125,000 is the opportunity cost of selling the shares today
B)$12,000 is a sunk cost
C)$125,000 is a sunk cost and is not relevant
D)$6,250 is the opportunity cost of not selling the shares earlier
E)None of the above

Question 7

The Mojave Water Agency (MWA)sets water policy and water rates for a desert area that faces a severe water shortage.It has 200,000 customers who are charged $100 per month for the first 20,000 cubic feet (cu.ft)and 1 cent per cu.ft thereafter.The average customer bill is $200 per month.It costs the agency ¼ cent per cu.ft to monitor and bill for usage.The MWA wants to cut costs by replacing metered billing with a flat fee which would be added to each property owner's real estate tax bill.Which is true?

A)The proposed policy will be more expensive to operate and will lead to decreased water usage
B)The proposed policy will be cheaper to operate and will lead to increased water usage
C)The proposed policy will be cheaper to operate and will lead to decreased water usage
D)The most that the MWA should pay the County Real Estate Department for handling the proposed billing process is $6,000,000
E)mostly B and D above

Question 8

Francois French manufactures cheese,which he normally sells at €20/kg,on which sales commission of 5% is paid.Plant capacity is 7,500 kg/month.Income tax is levied at 30%. Francois French wants to increase after-tax profits to €35,000.Assuming sufficient demand,which strategy achieves this goal?

A)Sell 7,100 kgs at the present price
B)Pay the dairy €1/kg less and sell 7,500 kgs
C)Sell 8,000 kgs at €20.79/kg
D)Sell 7,500 kgs at the present price and eliminate the sales commission
E)None of the above

Question 9

Bertie's Burritos,a fast food enterprise,wants to understand his cost structure.He collected data,which appears below,to analyze costs using the high-low method. $$\begin{array} { l c c } \text { Nonth } & \text { Valume } & \text { Total casts } \\\text { Jaramy } & 5,000 & \$ 2,700 \\\text { February } & 7,000 & \$ 3,700 \\\text { Nerch } & 6,000 & \$ 3,400\end{array}$$ Which is true?

A)Estimated variable costs are 70 cents per burrito
B)Fixed costs cannot be estimated
C)Estimated fixed costs are $200
D)Total costs at volume of 8,000 are estimated at $4,200
E)C and D only

Question 10

Which of the following can be an opportunity cost?

A)Interest on cost of inventory
B)Cost of idle capacity
C)Cost of underutilized labor
D)The decline in an asset's value
E)All of the above

Question 11

Pamela in Bamplona makes bull-repellent scent according to a traditional Spanish recipe,which normally sells at €9 (Euros)per unit.Normal production volume is 10,000 ounces per month.Average cost is €5 per ounce,of which €2 is direct material and €1 is variable conversion cost.This product is seasonal.After July,demand for this product drops to 6,000 ounces monthly.In November,Umberto offers to buy 1,800 ounces for €8,100. If Pamela accepts the order,she must design a special label for Umberto at a cost of €800.Each label will cost 30 cents to make and apply.Pamela should:

A)accept the order,at a gain of €625
B)reject the order,at a loss of €1,875
C)reject the order,at a loss of €2,375
D)accept the order,at a gain of €1,360
E)reject the order,the new selling price is less than the average cost per ounce

Question 12

Francois French manufactures cheese,which he normally sells at €20/kg,on which sales commission of 5% is paid.Plant capacity is 7,500 kg/month.Income tax is levied at 30%. If sales are 5,000 kgs,which of the following is true?

A)Total contribution margin is €50,000
B)Ratio of total contribution margin to net income before taxes is 3.57
C)Taxes payable are €4,200
D)Operating leverage is 42%
E)All of the above