Deck 22: Short-Term Business Decisions

Question 1

Special sales orders increase profit if the revenue from the order exceeds the incremental variable and fixed costs incurred to fill the order.

Answer 1

True

Question 2

A sunk cost is a cost that was previously incurred and is irrelevant to the decision making process.

Answer 2

True

Question 3

A depreciable asset's original cost is relevant when considering whether to replace the depreciable asset.

Answer 3

False

Question 4

If a business is considering buying a new vehicle, the cost of insurance on the new vehicle is information that is relevant to the business decision.

Question 5

Which of the following are the two most important keys to short- term business decision- making?

A)Focus on costs which do not change under two alternatives and on historic costs
B)Focus on sunk costs and quantitative data only
C)Focus on qualitative data only and ignore future cash flows
D)Focus on future expected data and use the contribution margin approach

Question 6

Fixed costs are relevant to a special sales order decision if those fixed costs are subject to change as a result of the special order.

Question 7

Which of the following is irrelevant when making a decision?

A)The original cost of an asset that the company is considering replacing
B)The cost of further processing a product that could be sold as is
C)The fixed overhead costs that differ among decision alternatives
D)The expected increase in contribution margin of one product line as a result of a decision to drop a separate unprofitable product line

Question 8

Which of the following describes a sunk cost?

A)A historical cost that may be relevant to future events
B)One that is relevant to a decision because it changes depending on different courses of action
C)An outlay expected to be incurred in the future
D)A historical cost that is always irrelevant

Question 9

Which of the following pieces of information would NOT be relevant in deciding to upgrade a company's heating and air conditioning system?

A)The productivity of the old equipment compared to that of the new equipment
B)The purchase price of the old equipment compared to the purchase price of the new equipment
C)The energy efficiency of the old equipment versus the energy efficiency of the new equipment
D)The safety of the new equipment compared to the old equipment

Question 10

In making a short- term decision, which of the following is MOST important?

A)Focus on the bottom line profit
B)Focus on total costs
C)Separate variable costs from fixed costs
D)Use a conventional absorption costing approach

Question 11

Which of the following is the format of the income statement that is MOST useful in decision- making?

A)Contribution margin format
B)Absorption costing format
C)Single- step format
D)Multiple- step format

Question 12

In considering the trade- in of a vehicle, which of the following is a sunk cost?

A)Original purchase price of the old vehicle
B)Trade- in value of old vehicle
C)Depreciation on new vehicle
D)Purchase price of new vehicle

Question 13

When a business is considering whether to replace old equipment with newer equipment, the cost of operating the old equipment-compared to the cost of operating the new equipment-is information relevant to the business decision.

Question 14

Fixed costs that do NOT differ between two alternatives are:

A)irrelevant to the decision.
B)considered opportunity costs.
C)important only if they represent a material dollar amount.
D)relevant to the decision.

Question 15

All of the following are relevant to the decision to replace equipment EXCEPT the:

A)original cost of old equipment.
B)future maintenance costs of old equipment.
C)cost of new equipment.
D)selling price of old equipment.

Question 16

In deciding whether to accept a special sales order, management should consider the quantitative data ONLY and disregard qualitative factors.

Question 17

When considering whether to have a new roof installed on a building, the money spent previously on roof repairs to the old roof is information that is relevant to the business decision.

Question 18

When a company is a price- setter, that means that the company has flexibility in setting its price and may choose to use the cost- plus methodology.

Question 19

When a business is considering whether to replace old equipment with newer equipment, the original cost of the old equipment-compared to the cost of the new equipment-is information relevant to the business decision.

Question 20

Managers' decisions are based primarily on quantitative data because the qualitative factors are NOT usually relevant to the decision making process.

Question 21

A company produces 100 microwave ovens per month, each of which includes one electrical circuit. The company currently manufactures the circuit in- house but is considering outsourcing the circuits at a contract price of $28 each. Currently, the cost of producing circuits in- house includes variable costs of $26 per circuit and fixed costs of $5 000 per month.
The controller says that they could outsource production of the circuit, and then as long as they could get fixed cost reductions greater than $200 per month, it would improve earnings. Is his statement true or false?

Question 22

DC Electronics uses a standard part in the manufacture of several of its radios. The total cost of producing 30 000 parts is $90 000, which includes fixed costs of $33 000 and variable costs of $57 000. The company can buy the part from an outside supplier for $2.50 per unit, and avoid 30% of the fixed costs.
If DC Electronics decides to outsource the production of the part, how will it impact profit?

A)Up $15 000
B)Up $132 000
C)Down $132 000
D)Down $24 900

Question 23

Foster Corporation produces two products-P and Q. P sells for $4.00 per unit; Q sells for $5.25 per unit. Variable costs for P and Q are respectively, $2.50 and $3.09. There are 3 570 direct labour hours per month available for producing the two products. Product P requires 3 direct labour hours per unit and Product Q requires 4.5 direct labour hours per unit. The company can sell as many of either product as it can produce. What is the maximum monthly contribution margin that Foster can generate under the circumstances? (Please round to nearest whole dollar.)

A)$1 785
B)$2 567
C)$1 714
D)$1 650

Question 24

In a special sales order decision, incremental fixed costs which would be incurred because of an additional purchase of equipment would be considered to be:

A)opportunity costs.
B)relevant to the decision.
C)sunk costs.
D)irrelevant to the decision.

Question 25

In deciding whether to drop its electronics product line, a company's manager should consider all of the following EXCEPT:

A)how dropping the electronics product line would affect sales of its other products, like CDs.
B)the revenues it would lose from dropping the product line.
C)the amount of unavoidable fixed costs.
D)the variable and fixed costs it could save by dropping the product line.

Question 26

When a company is considering the possibility of processing their product further to achieve higher sales revenues, the rule is as follows: as long as the additional processing generates higher sales revenues, it is the preferred alternative.

Question 27

In making product mix decisions under constraining factors, a company should maximise sales of the product with the highest contribution margin per unit.

Question 28

Which of the following business strategies would NOT be consistent with a price setter?

A)Differentiate the product clearly from the competitors
B)Enter a competitive market and focus on cost cutting
C)Produce a unique product
D)Exploit the value of a fashionable brand name

Question 29

Polynesian Products sells 1 800 kayaks per year at a price of $480 per unit. Polynesian sells in a highly competitive market and uses target pricing. The company has calculated its target full cost at $729 000 per year. Fixed costs are $400 000 per year and CANNOT be reduced. How much are the target variable costs?

A)$265 000
B)$396 000
C)$329 000
D)$410 000

Question 30

Which of the following statements describes a scenario when management should consider dropping a business division?

A)The division's avoidable fixed costs are less than its contribution margin.
B)The division has consistently reported an operating loss.
C)The division's unavoidable fixed costs are greater than its operating loss.
D)The division's avoidable fixed costs are greater than its contribution margin.

Question 31

When a company is considering the possibility of processing their product further to achieve higher sales revenues, the rule is as follows: if incremental revenues exceed incremental costs, then further processing will enhance operational profits.

Question 32

Arlo Company makes bulk quantities of cleaning fluids. They currently sell 1 000 containers a month at a price of $22 per unit. If they added a newer scent, they could charge $22.75 per unit for the improved product. It would cost them a total of $700 per month to make that alteration. If they decide to process further, it will improve their profit.

Question 33

If a company wishes to be a price- setter, which of the following strategies should they take?

A)Produce a commodity and outsource the manufacturing operations
B)Produce a unique product
C)Produce a generic mass- market product
D)Enter a competitive market and boost profits by cost cutting

Question 34

If a company is a price- taker, it has considerable flexibility in setting its products' prices.

Question 35

Victory Company makes a special kind of racing tyre. Variable costs are $220, and fixed costs are
$30,000 per month. Victor sells 500 units per month at a price of $300. If Victory upgrades the quality of the tyre, they believe they can boost the price to $342. If so, the variable cost will go up to
$230 and the fixed costs will rise by 50%. The CEO wishes to increase his profit by 25%. If Victory decides to upgrade the product according to the data above, the CEO will reach his goal.

Question 36

Seven Seas Company manufactures 100 luxury yachts per month. Included in each yacht is a compact media center. Seven Seas manufactures the media center in- house, but is considering the possibility of outsourcing that function, in order to close down some of their facilities and reduce the administrative costs. At present, the variable cost per unit is $275 and the fixed costs are $39 000 per month. Assuming that if they outsource, and the fixed costs could be eliminated entirely, at what contract rate would outsourcing pay off for Seven Seas? (Please round to nearest whole dollar.)

A)At any rate lower than $844 per unit
B)At any rate lower than $775 per unit
C)At any rate lower than $665 per unit
D)At any rate lower than $796 per unit

Question 37

Paragon Products sells a special kind of navigation equipment for $1 200. Variable costs are $900 per unit. When a special order arrived from a foreign contractor to buy 40 units at a reduced price of $1 000 per unit, there was a discussion among management. The controller said that as long as the special price was less than the variable costs, the sale would contribute to the company's profits, and so it should be accepted as offered. The production manager warned that the company was already working at full capacity, and would have to add staff and equipment to accommodate the order. The sales manager urged caution because if they sold to this contractor, it might adversely affect their regular sales. The vice- president decided to decline the order. Which of the following statements is NOT valid for sound business decision making?

A)The sales manager was right because even if this sale generated profit, it may cut into future profits by reducing future sales.
B)The vice- president was wise to be cautious given the concerns about capacity and the effect on regular sales.
C)The production manager was correct because the incremental fixed costs of expanding capacity could negate the positive contribution margin of the sale.
D)The controller was correct in that the only relevant facts are the special sales price and the incremental variable costs.

Question 38

If a product line has a negative contribution margin, the product line should probably be dropped, assuming no other significant considerations.

Question 39

Foster Corporation produces two products-P and Q. P sells for $4.00 per unit; Q sells for $5.25 per unit. Variable costs for P and Q are respectively, $2.50 and $3.09. There are 3 570 direct labour hours per month available for producing the two products. Product P requires 3 direct labour hours per unit and Product Q requires 4.5 direct labour hours per unit. The company can sell up to 800 units of each kind per month. What is the maximum monthly contribution margin that Foster can generate under the circumstances? (Please round to nearest whole dollar.)

A)$1 762
B)$1 714
C)$2 567
D)$1 785

Question 40

Custom Furniture manufactures a small table and a large table. The small table sells for $800, has variable costs of $520 per table, and takes eight direct labour hours to manufacture. The large table sells for $1 200, has variable costs of $720, and takes sixteen direct labour hours to manufacture. The company has a maximum of 4 800 direct labour hours per month when operating at full capacity. If there are no constraints on sales of either product, and the company could choose any proportions of product mix that they wanted, what is the optimum product mix to maximise profit?

A)300 units of small, 200 units of large
B)900 units of small, 100 units of large
C)Zero units of small, 300 units of large
D)600 units of small, zero units of large

Question 41

Axelrod Company has fixed costs of $250 000. Highest production volume this year was in January when there were 100 000 units produced and total costs of $550 000. How much is the variable cost per unit? (Please round all amounts to the nearest cent.)

A)$5.50
B)$3.00
C)$3.50
D)$2.50

Question 42

JB Company has fixed costs of $300 000. Total costs, both fixed and variable, are $378 000 when 40 000 units are produced. If the volume increases to 50 000 units, what will the total costs be?

A)$397 500
B)$472 500
C)$330 000
D)$375 000

Question 43

Which of the following statements is CORRECT with respect to fixed costs per unit?

A)They will increase as production increases.
B)They will increase as production decreases.
C)They will decrease as production decreases.
D)They will remain the same as production levels change.

Question 44

A 15% increase in production volume will result in a:

A)15% increase in total manufacturing costs.
B)15% increase in total variable costs.
C)15% increase in the variable cost per unit.
D)15% increase in total mixed costs.

Question 45

Which of the following statements is CORRECT with respect to variable cost per unit, within the relevant range?

A)It will remain the same as production levels change.
B)It will increase as production decreases.
C)It will decrease as production increases.
D)It will decrease as production decreases.

Question 46

Seven Seas Company manufactures 100 luxury yachts per month. Included in each yacht is a compact media center. Seven Seas manufactures the media center in- house, but is considering the possibility of outsourcing that function. At present, the variable cost per unit is $275, and the fixed costs are $39 000 per month. If they outsource, fixed costs could be reduced by half, and the vacant facilities could be rented out to earn $1 000 per month of rental income. At what contract rate would the two alternatives produce the same profit?

A)$295 per unit
B)$388 per unit
C)$480 per unit
D)$499 per unit

Question 47

Arlington Company's highest point of total cost was $61 875 in June. Their point of lowest cost was $52 250 in December. The company makes a single product. Production volume in June was 12 500 units; production volume in December was 7 000 units. How much is the fixed cost per month?

A)$40 000
B)$42 500
C)$9 625
D)$21 875

Question 48

Arlington Company's highest point of total cost was $61 875 in June. Their point of lowest cost was $52 250 in December. The company makes a single product. Production volume in June was 12 500 units; production volume in December was 7 000 units. If the production volume is 9 000 units, what will the total costs be?

A)$45 600
B)$55 000
C)$55 750
D)$57 062

Question 49

Arlo Company makes bulk quantities of cleaning fluids. They currently sell 1 000 containers a month at a price of $22 per unit. If they added a newer scent, they could charge $22.75 per unit for the improved product. It would cost them a total of $700 per month to make that alteration. If so, what would be the effect on profit?

A)It would increase by $300.
B)It would decline by $800.
C)It would decline by $120.
D)It would increase by $50.

Question 50

Arlington Company's highest point of total cost was $61 875 in June. Their point of lowest cost was $52 250 in December. The company makes a single product. Production volume in June was 12 500 units; production volume in December was 7 000 units. How much is the variable cost per unit?

A)$4.95
B)$7.46
C)$1.75
D)$1.05

Question 51

JB Company has fixed costs of $300 000. Total costs, both fixed and variable, are $378 000 when 40 000 units are produced. How much is the variable cost per unit? (Please round to the nearest cent.)

A)$2.78
B)$1.95
C)$7.50
D)$9.45

Question 52

Which of the following statements is CORRECT with respect to total variable costs, within the relevant range?

A)They will decrease as production decreases.
B)They will increase as production decreases.
C)They will remain the same as production levels change.
D)They will decrease as production increases.

Question 53

Total variable costs change in response to changes in the volume of production.

Question 54

Variable costs change in direct proportion to a change in volume.

Question 55

Seven Seas Company manufactures 100 luxury yachts per month. Included in each yacht is a compact media center. Seven Seas manufactures the media center in- house, but is considering the possibility of outsourcing that function, in order to close down some of their facilities and reduce the administrative costs. At present, the variable cost per unit is $275 and the fixed costs are $39 000 per month. Assume that if they outsource, fixed costs could be reduced by 40%. The production manager advised the company to contract with a foreign supplier which offered a contract rate of $420 per unit. If they outsource, how would that affect profit?

A)Profit would improve by $4 000.
B)Profit would improve by $1 100.
C)Profit would decline by $14 500.
D)Profit would remain the same.

Question 56

Axelrod Company has fixed costs of $250 000. Highest production volume this year was in January when there were 100 000 units produced and total costs of $550 000. In June, the company produced only 60 000 units. How much was the total cost in June?

A)$414 500
B)$330 000
C)$378 000
D)$430 000

Question 57

Arlo Company makes bulk quantities of cleaning fluids. They currently sell 1 000 containers a month at a price of $22 per unit. If they added a disinfectant, they could charge $25 per unit for the improved product. It would cost them a total of $3 800 per month to make that alteration. If so, what would be the effect on profit?

A)It would increase by $3 000.
B)It would increase by $400.
C)It would decline by $1 200.
D)It would decline by $800.

Question 58

Which of the following statements is CORRECT with respect to total fixed costs, within the relevant range?

A)They will decrease as production increases.
B)They will remain the same as production levels change.
C)They will decrease as production decreases.
D)They will increase as production decreases.

Question 59

Peterson Company has both fixed and variable costs. If the volume doubles, the total of all costs combined will double.

Question 60

Which of the following is the term for a cost that changes in total in direct proportion to a change in volume?

A)Sunk cost
B)Fixed cost
C)Variable cost
D)Mixed cost

Question 61

Both the income statement approach and the contribution margin approach will yield the same answer for calculating breakeven points.

Question 62

Ace Card Company has variable costs of $0.40 per unit of product. The remainder of its production costs are fixed. In May, the volume was 12 000 units and the total production costs were $6 900. How much are the fixed costs?

A)$2 100
B)$2 025
C)$1 950
D)$2 200

Question 63

Olympus Company sells 1 400 units per month at a price of $28.00 per unit. The variable cost is $22.50 per unit. How much is the total contribution margin? (Please round to nearest whole dollar.)

A)$6 750
B)$7 700
C)$39 200
D)$9 500

Question 64

Porterhouse Company has both fixed and variable production costs. If volume goes up by 20%, how would that affect the total of all costs? (Assume all volumes are within the relevant range.)

A)Would go up 20%
B)Would go up by some amount less than 20%
C)Would remain the same
D)Would go down

Question 65

Porterhouse Company has both fixed and variable production costs. If volume goes up by 20%, how would that affect the total variable costs? (Assume all volumes are within the relevant range.)

A)Would go up by some amount less than 20%
B)Would go down
C)Would remain the same
D)Would go up 20%

Question 66

Breakeven is the point where the sales revenues are exactly equal to the fixed costs.

Question 67

Reevis Company sells hand- sewn shirts for $25 per unit, and has fixed costs of $7 500. Their contribution margin ratio is 20%. How many units do they have to sell to break even?

A)950
B)1 500
C)1 750
D)1 125

Question 68

The breakeven point represents the sales volume at which the company's net profit is zero.

Question 69

Contribution margin is defined as the sales revenue minus the fixed costs.

Question 70

Arturo Company's model A generator sells for $456, and model B sells for $390. The variable cost of model A is $404 and of model B is $320. If Arturo sells more of model B than model A, it will generate lower revenues, but higher net profit.

Question 71

Breakeven is the point where the sales revenues are exactly equal to the total variable costs plus the total fixed costs.

Question 72

Paula sells hand- knitted scarves at the flea market. Each scarf sells for $25. Paula pays $30 to rent a vending space for one day. Her variable costs are $15 per scarf. How many scarves does she need to sell to break even?

A)3
B)5
C)4
D)2

Question 73

Paula sells hand- knitted scarves at the flea market. Each scarf sells for $25. Paula pays $30 to rent a vending space for one day. Her variable costs are $15 per scarf. What total revenue amount does she need to earn to break even?

A)$85
B)$75
C)$100
D)$50

Question 74

Reevis Company sells hand- sewn shirts for $25 per unit, and has fixed costs of $7 500. Their contribution margin ratio is 20%. How much is the variable cost per unit?

A)$5
B)$20
C)$8
D)$15

Question 75

Arturo Company's model A generator sells for $456 and model B sells for $390. The variable cost of model A is $404 and of model B is $320. If Arturo Company's sales incentives reward sales of the goods with highest contribution margin, the sales force will be motivated to push sales of model A more aggressively than model B.

Question 76

Olympus Company sells 1 400 units per month at a price of $28.00 per unit. The variable cost is $22.50 per unit. Fixed costs are $6 900 per month. How much is the net profit?

A)$800
B)$32 300
C)$9 500
D)$750

Question 77

CVP analysis assumes that the ONLY factor that affects costs is change in volume.

Question 78

Reevis Company has fixed costs of $7 500. Their contribution margin ratio is 20%. What is the break- even point in sales dollars?

A)$1 500
B)$37 500
C)$22 000
D)$32 750

Question 79

Orleans Company has a normal range of production volumes between 100 000 units and 180 000 units per month. That is considered the relevant range for production cost analysis. If the company expands significantly beyond 180 000 units per month, which of the following would be the most likely expectation?

A)The fixed costs will remain the same, but the variable cost per unit may change.
B)The fixed costs and the variable cost per unit will not change.
C)Both the fixed costs and the variable cost per unit may change.
D)The fixed costs may change, but the variable cost per unit will remain the same.

Question 80

If a unit sells for $11.40 and has a variable cost of $3.80, its contribution margin per unit is $7.60.