Deck 16: Costs for Decision Making

Question 1

Relevant costs in decision-making:

A) are future costs that represent differences between decision alternatives.
B) result from past decisions.
C) should not influence the decision.
D) None of these.

Answer 1

A

Question 2

The method of evaluating financial data that change under different courses of action is called:

A) financial statement analysis.
B) break-even analysis.
C) incremental analysis.
D) cost-benefit analysis.

Answer 2

C

Question 3

A cost classified "for decision-making purposes" would include:

A) period cost.
B) opportunity cost.
C) controllable cost.
D) inventoriable cost.

Answer 3

B

Question 4

Braizen, Inc. produces a product with a $30 per-unit variable cost and an $80 per-unit sales price. Fixed manufacturing overhead costs are $100,000. The firm has a one-time opportunity to sell an additional 1,000 units at $60 each that would not affect its current sales. Assuming the company has sufficient capacity to produce the additional units, how would the acceptance of the special order affect net income?

A) Income would decrease by $30,000.
B) Income would increase by $30,000.
C) Income would increase by $140,000.
D) Income would increase by $40,000.

Question 5

A sunk cost is a cost that:

A) has been incurred and cannot be eliminated.
B) is never relevant in decision-making.
C) is never a differential cost.
D) all of these.

Question 6

If a cost is irrelevant to a decision, the cost could not be a:

A) fixed cost.
B) sunk cost.
C) differential cost.
D) variable cost.

Question 7

_____________ is a cost management technique in which the firm determines the required cost for a product or service in order to earn a desired profit when the marketplace establishes the product's selling price:

A) Relevant costing
B) Product costing
C) Differential costing
D) Target costing

Question 8

Which of the following qualitative factors favors the buy option in the make or buy decision?

A) Production scheduling.
B) Utilization of idle capacity.
C) Ability to control quality.
D) Technical expertise of supplier.

Question 9

A cost is considered relevant if:

A) it is positive.
B) it is sunk.
C) it makes a difference.
D) if it can't be changed.

Question 10

Opportunity costs are:

A) included in inventory.
B) foregone benefits.
C) sunk costs.
D) included in cost of goods sold.

Question 11

The key to analyzing a sell as is or process further decision is to determine that:

A) opportunity costs exceed sunk costs.
B) incremental revenues exceed incremental costs.
C) differential costs do not exist.
D) all allocated costs are included in the decision.

Question 12

______________ can be measured as the income that could have been earned on an asset, based on the potential rate of return that is lost or sacrificed when one alternative use of the asset is chosen over another:

A) Target cost
B) Sunk cost
C) Opportunity cost
D) Allocated cost

Question 13

_____________ costs between two alternative projects are those that would result from selecting one alternative instead of the other:

A) Allocated
B) Differential
C) Sunk
D) Irrelevant

Question 14

Product Z sells for $18 per unit as is, but if enhanced it can be sold for $24 per unit. The enhancement process will cost $50,000 for 10,000 units. If the 10,000 units of Product Z are sold as is without further processing, the company:

A) will incur an incremental profit of $10,000.
B) will incur an opportunity cost of $10,000.
C) will incur an incremental profit of $1 per unit.
D) will incur an incremental loss of $6 per unit.

Question 15

In considering whether to accept a special order at a price less than the normal selling price of the product and where the additional sales will make use of present idle capacity, which of the following costs will not be relevant?

A) Direct labor.
B) Direct materials.
C) Variable manufacturing overhead.
D) Fixed manufacturing overhead that cannot be avoided.

Question 16

Greenland Sports, Inc. has been asked to submit a bid to the National Hockey League on supplying 1,000 pairs of professional quality skates. The cost per pair of skates has been determined as follows: $\begin{array}{ll}\text { Direct materials } & \$ 80 \\\text { Direct labor } & 60 \\\text { Variable overhead } & 30 \\\text { Fixed overhead (allocated) } & 20\end{array}$
Other non-manufacturing costs associated with each pair of skates are: $\begin{array} { l l } \text {Variable selling cost (commission)}& \$25\\\text { Fixed selling and administrative cost } & 10 \end{array}$ Assume the commission on the sale of skates to the National Hockey League would be reduced to $15 per pair and that available production capacity exists to produce the 1,000 pairs of skates, the lowest price the firm can bid is some price greater than:

A) $185.
B) $190.
C) $215.
D) $225.

Question 17

In a make or buy decision, which of the following costs would be considered relevant?

A) avoidable costs.
B) unavoidable costs.
C) sunk costs.
D) allocated costs.

Question 18

A(n) _____________ is the minimum cost that can be incurred, which when subtracted from the selling price, allows for a desired profit to be earned.

A) relevant cost
B) opportunity cost
C) incremental cost
D) target cost

Question 19

The potential rental value of space used in the manufacturing process:

A) is a variable production cost.
B) is an unavoidable production cost.
C) is a sunk production cost.
D) is an opportunity cost if production is not outsourced.

Question 20

Which of the following cost classifications would not be considered relevant in comparing decision alternatives?

A) opportunity cost.
B) differential cost.
C) sunk cost.
D) None of these.

Question 21

Depreciation expense is not a cash flow item but it will affect the calculation of which cash flow item?

A) initial investment.
B) income taxes.
C) salvage value.
D) working capital.

Question 22

When the present value analysis of a proposed investment results in an indication that the proposal has a rate of return greater than the cost of capital, the investment might not be made because:

A) the quantitative analysis indicates that it should not be made.
B) management's assessment of qualitative factors overrides the quantitative analysis.
C) the timing of the cash flows of the investment will not be as assumed in the present value calculation.
D) post-audits of prior investments have revealed that cash flow estimates were consistently less than actual cash flows realized.

Question 23

The decision for solving production mix problems involving multiple products and scarce production resources should focus on:

A) gross profit of each product.
B) sales price of each product.
C) contribution margin per unit of scarce resource.
D) contribution margin of each product.

Question 24

A principal difference between operational budgeting and capital budgeting is the time frame of the budget. Because of this difference, capital budgeting:

A) is an activity that involves only the financial staff.
B) is done on a rolling budget period basis.
C) focuses on the present value of cash flows from investments.
D) is concerned with a long-term net income forecast.

Question 25

The present value ratio of a proposed investment will be:

A) less than 1.0 if the net present value is positive.
B) negative if the proposed investment meets the cost of capital target.
C) less than 1.0 if the net present value is negative.
D) greater than 1.0 if the cost of capital exceeds the internal rate of return.

Question 26

Capital expenditure analysis, which leads to the capital budget, attempts to determine the impact of a proposed capital expenditure on the organization's:

A) segment margin.
B) contribution margin.
C) ROI.
D) cost of capital.

Question 27

If the net present value of the investment is $8,510, then:

A) the rate of return is less than the cost of capital.
B) the present value of the cash flows are more than the investment.
C) the cost of capital is higher than the internal rate of return.
D) the present value of the cash flows is $8,510 less than the investment.

Question 28

The decision to continue or discontinue a segment of the business should focus on:

A) sales minus total variable expenses and total fixed expenses.
B) sales minus total variable expenses and avoidable fixed expenses of the segment.
C) sales minus total variable expenses and allocated fixed expenses of the business.
D) None of these.

Question 29

Discounting a future cash inflow at an 8% discount rate will result in a higher present value than discounting it at a:

A) 7% rate.
B) 8% rate.
C) 9% rate.
D) all of these.

Question 30

In order to calculate the net present value of a proposed investment, it is necessary to know:

A) the cash flows expected from the investment.
B) the net income expected from the investment.
C) the interest rate paid on funds borrowed to make the investment.
D) the cash dividends paid on the stock each year.

Question 31

Which of the following costs are not relevant in a decision to continue or discontinue a segment of the organization?

A) avoidable costs.
B) unavoidable costs.
C) opportunity costs.
D) differential costs.

Question 32

For most firms, the cost of capital is probably in the range of:

A) the prime rate, plus or minus 2 percentage points.
B) less than 10%.
C) between 10% and 20%.
D) more than 20%.

Question 33

The cost of capital used in the capital budgeting analytical process is primarily a function of:

A) ROE.
B) ROI.
C) the cost of acquiring the funds that will be invested.
D) the discount rate.

Question 34

The principal weakness of the payback method for evaluating proposed investments is that it does not:

A) provide a way of ranking projects in order of desirability.
B) consider cash flows that continue after the investment has been recovered.
C) result in an easily understood "answer".
D) recognize the time value of money.

Question 35

Capital budgeting differs from operational budgeting because:

A) depreciation calculations are required.
B) it considers the time value of money.
C) operating expenses are not relevant.
D) capital budgets don't affect cash flow.

Question 36

Which of the following is not an important qualitative factor to consider in the capital budgeting decision?

A) regulations that mandate investment to meet safety, environmental, or access requirements.
B) technological developments within the industry may require new facilities to maintain customers or market share at the cost of lower ROI for a period of time.
C) commitment to a segment of the business that requires capital investments to achieve or regain competitiveness even though that segment does not have as great an ROI as others.
D) all of these are important qualitative factors to consider.

Question 37

If a project promises to generate a higher rate of return than the firm's cost of capital, accepting the project will:

A) increase ROI.
B) decrease ROI.
C) increase payback.
D) decrease payback.

Question 38

Which of the following is typically not important when calculating the net present value of a project?

A) Timing of cash flows from the project.
B) Income tax effect of cash flows from the project.
C) Method of financing the project.
D) Amount of cash flows from the project.

Question 39

If the net present value of a proposed investment is positive:

A) the investment not will be made.
B) the cost of capital is higher than the internal rate of return.
C) the cost of capital is positive.
D) the cost of capital is lower than the internal rate of return.

Question 40

Product X sells for $80 per unit in the marketplace and ABC Company requires a 35% minimum profit margin on all product lines. In order to compete in this market, the target cost for Product X must be equal to or lower than:

A) $28.
B) $45.
C) $52.
D) $80.

Question 41

Which of the following is a true statement regarding the internal rate of return in capital budgeting?

A) It provides the same basic information as the net present value method.
B) It calculates the net present value of future cash flows.
C) It calculates the proposal's rate of return.
D) It doesn't consider the time value of money.

Question 42

A capital budgeting decision method that considers the time value of money is the

A) accounting rate of return method.
B) return on stockholders' equity method.
C) cash payback method.
D) internal rate of return method.

Question 43

Use the appropriate factors from Table 6-2 or Table 6-3 to answer the following question.
(a.) Vincent Co.'s common stock is expected to have a dividend of $7 per share for each of the next five years, and it is estimated that the market value per share will be $65 at the end of five years. If an investor requires a return on investment of 14%, what is the maximum price the investor would be willing to pay for a share of Vincent Co. common stock today?
(b.) Aliyana bought a bond with a face amount of $1,000, a stated interest rate of 14%, and a maturity date 20 years in the future for $990. The bond pays interest on a semi-annual basis. Eight years have gone by and the market interest rate is now 12%. What is the market value of the bond today?

Question 44

Which of the following is a true statement regarding the net present value method in capital budgeting?

A) It provides the same basic information as the accounting rate of return.
B) It calculates the present value of future cash flows.
C) It calculates the proposal's rate of return.
D) It doesn't consider the time value of money.

Question 45

If an asset costs $16,000, has an expected useful life of 8 years, is expected to have a $2,000 salvage value and generates net annual cash inflows of $2,000 a year, the cash payback period is

A) 8 years.
B) 7 years.
C) 6 years.
D) 5 years.

Question 46

Marshall, Inc., produces three products but weekly demand for the three products exceed the available amount of machine time. Following is information about each product:
B.
Note that with only 1,000 machine hours available, given the current demand for each product, Product A would not be included in the production mix.
C.
Step 2: Use the remaining 600 machine hours to produce Product

Question 47

Which of the following statements are true regarding the payback period?

A) The time value of money is considered when calculating the payback.
B) The payback analysis is more accurate than the net present value analysis.
C) The payback period is less accurate than the accounting rate of return.
D) The time value of money is not considered when calculating the payback.

Question 48

The following production costs are provided for Glenislay Co., a manufacturer of high quality headphones.
Manufacturing Costs:

Question 49

Sometimes when management decisions are reached, the investment project with the highest NPV or IRR is not selected. This occurs because:

A) a lower IRR is a less risky investment.
B) the highest NPV is not necessarily the highest IRR.
C) qualitative factors override quantitative analysis techniques.
D) sometimes management makes the wrong decision.

Question 50

Use the appropriate factors from Table 6-4 or Table 6-5 to answer the following questions.
(a.) Yoko Co.'s common stock is expected to have a dividend of $3 per share for each of the next four years, and it is estimated that the market value per share will be $42 at the end of four years. If an investor requires a return on investment of 12%, what is the maximum price the investor would be willing to pay for a share of Yoko Co. common stock today?
(b.) Lashana bought a bond with a face amount of $1,000, a stated interest rate of 10%, and a maturity date 20 years in the future for $1,025. The bond pays interest on a semi-annual basis. Five years have gone by and the market interest rate is now 12%. What is the market value of the bond today?

Question 51

An advantage of the net present value method for evaluating investment proposals over the internal rate of return method is that:

A) only one set of present value calculations using a required discount rate is made.
B) the actual rate of return on the project is calculated.
C) projects can be ranked in order of profitability using the net present value amount.
D) estimates of future cash flows do not have to be made.

Question 52

Boccardi Inc., has invested in new pasta manufacturing equipment at a cost of $48,000. The equipment has an estimated useful life of eight years. Estimated annual sales and operating expenses related to the pasta equipment follow: $$\begin{array} { l c } \text { Annual sales } & \$ 88,000 \\\text { Labor costs } & ( 72,000 ) \\\text { Depreciation of equipment } & \underline { ( 6,000 ) } \\\text { Operating income } & \$ 10,000 \\\text { Income taxes } & \underline { ( 4,000 ) } \\\text { Net income } &\underline{\underline{ \$ 6,000}}\end{array}$$ The estimated payback of the investment in the pasta equipment is:

A) 3.0 years.
B) 4.0 years.
C) 6.0 years.
D) 8.0 years.

Question 53

Digger Company realizes three products from a single mining process: Products J1, A2, and V3. Each product may be sold as is in its raw form or processed further into a more refined state. The additional processing requires no expanded capacity and production costs are entirely variable. Sales values and cost information are presented below:

Question 54

The accounting rate of return method for evaluating proposed investments:

A) is based on cash receipts and disbursements related to the investment.
B) uses accounting net income from the operating budget.
C) does not recognize the time value of money.
D) is easier to use than the net present value method.

Question 55

The market price for low-end laser printers is well established at $400 per unit. ABC Technologies is considering entering this market and has enough available space in its plant to accommodate a new production line. However, several pieces of new manufacturing equipment would be required which are estimated to cost $28,000,000. ABC Technologies requires a minimum ROI of 15% on any product line investment and estimate that it can capture 100,000 units of the low-end laser printer market at the prevailing market price.
(a.) Calculate the target cost per unit for ABC Technologies if it is to enter the low-end laser printer market while earning the minimum 15% ROI.

Question 56

In a capital budgeting decision, if a firm uses the net present value method and a 12% discount rate, what does a negative net present value indicate?

A) The proposal's rate of return exceeds 12%.
B) The proposal's rate of return is less than the minimum rate required.
C) The proposal earns a rate of return between 10% and 12%.
D) None of these.

Question 57

The capital budgeting analytical technique that calculates the rate of return on the investment based on the impact of the investment on the financial statements is known as the:

A) internal rate of return.
B) accounting rate of return.
C) payback period.
D) net present value.

Question 58

The following data have been collected by capital budgeting analysts at Condel Brothers Oil Co. concerning the drilling and production of known reserves at an off-shore location:

Question 59

The following product line information is for the Swiss Watch Company. The company is considering dropping its Children's product line due to poor operating income performance. Fixed expenses are allocated to each product line based on sales revenue.

Question 60

Boccardi Inc., has invested in new pasta manufacturing equipment at a cost of $48,000. The equipment has an estimated useful life of eight years. Estimated annual sales and operating expenses related to the pasta equipment follow: $$\begin{array} { l c } \text { Annual sales } & \$ 88,000 \\\text { Labor costs } & ( 72,000 ) \\\text { Depreciation of equipment } & \underline { ( 6,000 ) } \\\text { Operating income } & \$ 10,000 \\\text { Income taxes } & \underline { ( 4,000 ) } \\\text { Net income } &\underline{\underline{ \$ 6,000}}\end{array}$$ The estimated accounting rate of return is:

A) 12.5%.
B) 18.0%.
C) 25.0%.
D) 33.3%.

Question 61

The following data have been collected by capital budgeting analysts at Halda, Inc. concerning an investment in an expansion of the company's product line. Analysts estimate that an investment of $210,000 will be required to initiate the project at the beginning of 2013. Estimated cash returns from the new product line are summarized in the following table; assume that the returns will be received in lump sum at the end of each year.

Question 62

Lynn Co. is considering the investment of $90,000 in a new machine. The machine will generate cash flow of $10,000 per year for each year of its 15 year life and will have a salvage value of $5,000 at the end of its life. Lynn Co.'s cost of capital is 8%.
(a.) Calculate the net present value of the proposed investment. Ignore income taxes, and round all answers to the nearest $1.
(b.) Calculate the present value ratio of the investment.
(c.) What will the internal rate of return on this investment be relative to the cost of capital? Explain your answer.
(d.) Calculate the payback period of the investment.

Question 63

The following data have been collected by capital budgeting analysts at Erica, Inc. concerning a new product line currently under consideration by management:

Question 64

Macy Co. is considering the investment of $86,000 in a new machine. The machine will generate cash flow of $18,500 per year for each year of its six-year life and will have a salvage value of $5,000 at the end of its life. Macy Co.'s cost of capital is 10 percent.
(a.) Calculate the net present value of the proposed investment. Ignore income taxes, and round all answers to the nearest $1.
(b.) What will the internal rate of return on this investment be relative to the cost of capital? Explain your answer.

Question 65

SOFT Micro Co., sells part #1973 for $240 per unit and the standard cost of producing each unit of part #1973 is determined as follows:

Question 66

Delta, Inc. is considering the investment of $75,000 in a new machine. The machine will generate cash flow of $16,800 per year for each year of its seven-year life and will have a salvage value of $12,000 at the end of its life. Delta Inc.'s cost of capital is 14% percent.
(a.) Calculate the net present value of the proposed investment. Ignore income taxes, and round all answers to the nearest $1.
(b.) What will the internal rate of return on this investment be relative to the cost of capital? Explain your answer.

Question 67

Digital Devices, Inc. has received a special order to manufacture 10,000 CD ROM drives for an Italian computer manufacturer. Digital determines that the order will not affect its current domestic sales of CD ROM drives and because of the special nature of the order no sales commission would be paid. However, to process the order for export, an additional handling cost of $10 per unit is estimated. The order indicates that the price of the drives cannot exceed $200.
The company has the capacity to produce 100,000 units annually but is currently operating at 75% of available capacity. Unit selling price and costs, based on estimated actual capacity being utilized, are as follows: