Deck 13: Relevant Information for Special Decisions

Question 1

Qualitative information is only relevant for decision making if it can be quantified.

Answer 1

False

Question 2

Differential revenues are expected future revenues that vary among the alternatives under consideration.

Answer 2

True

Question 3

Direct labor is an example of a product-level cost.

Answer 3

False

Question 4

A company that provides services (not goods) to its customers may incur costs that are appropriately classified as product-level costs.

Question 5

Costs that are not related to any specific product, batch, or unit of production are referred to as facility-level costs.

Question 6

Sunk costs are sometimes relevant for decision-making purposes.

Question 7

Relevant costs are frequently called unavoidable costs.

Question 8

Monica paid $12 for a music CD for which she later was offered $15. After that someone offered her $18 for the CD. If Monica keeps the CD, the amount of her opportunity cost is $33.

Question 9

The decision to accept a lower than normal selling price may depend on the availability of excess capacity.

Question 10

Grady Corporation is evaluating two decision alternatives. Alternative One has costs of $2,000 and revenues of $3,000 while Alternative Two has costs of $3,200 and revenues of $4,000. The amount of differential revenue is $1,000.

Question 11

For decision-making purposes, qualitative factors are relevant if they differ among the alternatives and relate to the future.

Question 12

An alternative under consideration involves incurring $50 in costs to generate $60 in revenue. The differential revenue for this alternative is $10.

Question 13

Mary must decide between two alternatives for the weekend: babysitting or yard work. If she babysits, she will receive $40 and will incur $15 in transportation costs. If she does yard work, she will receive $40 and will incur $3 in lawn mower gas and oil costs and $5 in transportation costs. The payment she would receive for the jobs is relevant in deciding which alternative to select.

Question 14

One of the potential dangers from outsourcing is the possible occurrence of low-ball pricing.

Question 15

Natalie purchased a concert ticket recently for $50. She is trying to decide whether to drive, take a taxi, or ride the public transit bus. The cost of driving to the concert is a sunk cost because Natalie purchased her car several years ago.

Question 16

Although opportunity costs are not recorded in the financial records, they nevertheless are useful for decision making.

Question 17

Variable costs are always relevant in decision making.

Question 18

Fixed costs are relevant for decision making if they vary among the alternatives and are future-oriented.

Question 19

Only variable costs are relevant for decision making.

Question 20

The practice of buying goods and services from other companies is commonly known as vertical integration.

Question 21

Outsourcing reduces the extent of a company's vertical integration.

Question 22

Relevant costs are often referred to as:

A) Unavoidable costs.
B) Differential costs.
C) Sunk costs.
D) All of these answers are correct.

Question 23

Which of the following is not a possible alternate term for costs that can be eliminated by taking a specified course of action?

A) Avoidable costs
B) Opportunity costs
C) Relevant costs
D) Differential costs

Question 24

Segment reports are used to evaluate the true profitability of a company's business segments.

Question 25

Select the correct statement regarding relevant revenues.

A) Relevant revenues must not differ among the alternatives being considered.
B) Past or future revenues may be relevant.
C) Relevant revenues must make a difference in the decision under consideration.
D) Revenues are not considered relevant in the same way as relevant costs.

Question 26

Select the correct statement regarding relevant costs and revenues.

A) Relevant costs are also known as unavoidable costs.
B) Relevant costs are only those that are based on past experience.
C) Relevant revenues must differ among the alternatives.
D) All of these answers are correct.

Question 27

The market value of equipment owned by a company is a sunk cost and should not be taken into account in deciding whether or not to replace the equipment.

Question 28

Equipment should be evaluated for possible replacement only as it nears the end of its useful life.

Question 29

Alex brought his lunch today but now a coworker has asked him to go to the deli across the street. Select the correct statement from the following.

A) The cost of the lunch Alex had brought is relevant to Alex's decision to have lunch with his friend.
B) The cost of the lunch that Alex had brought has nothing to do with his current decision.
C) The cost to buy lunch at the deli is not relevant because it has not yet been incurred.
D) The cost of the lunch Alex already has represents the opportunity cost of dining with his friend.

Question 30

The book value of equipment generally is one of the most important factors to consider in deciding to replace the equipment.

Question 31

A potential danger from outsourcing is that a company may become too dependent on the supplier.

Question 32

Bates Company plans to add a new item to its line of consumer product offerings. Two possible products are under consideration. Each unit of Product A costs $6 to produce and has a contribution margin of $3, while each unit of Product B costs $12 and has a contribution margin of $4. What is the differential revenue for this decision?

A) $7
B) $1
C) $6
D) $9

Question 33

Which of the following statements is true?

A) Fixed costs are sometimes relevant for decision making.
B) Opportunity costs are never relevant for decision making.
C) Information must be exactly accurate to be relevant for decision making.
D) A cost that is relevant in one decision context is relevant in other decision contexts.

Question 34

For purposes of decision making, avoidable costs are costs that:

A) were incurred in the past.
B) will not be incurred in the future, regardless of the alternative chosen.
C) differ among alternatives.
D) None of these answers are correct.

Question 35

Scholastic Tours is trying to decide which one of two tours it will introduce. The costs and revenues associated with each alternative are listed below: $\begin{array}{lcc}&\text { Eastern Tour}&\text { Western Tour }\\\text { Projected revenue } & \$ 8,000 & \$ 11,000 \\\text { Variable costs } & 1,000 & 6,000\\\text { Fixed costs } & \underline{4,000 }&\underline{ 4,000} \\\text { Profit } &\underline{ \$ 3,000} &\underline{ \$ 1,000}\end{array}$
What are the incremental (differential) costs of the Western Tour?

A) $3,000
B) $4,000
C) $5,000
D) None of these answers are correct.

Question 36

Taylor Company is considering whether or not to replace a drill press that is several years old. The current market value of the old equipment is an opportunity cost of replacing the drill press.

Question 37

Ann is trying to decide which one of two job offers she will accept. Several items are presented below: $\begin{array}{lcc}&\text { Job offer A}&\text { Job offer B}\\\text { (1) Base salary } & \$ 50,000 & \$ 50,000 \\\text { (2) Overtime compensation } & \text { Comp. time } & \text { Hourly rate } \\\text { (3) Moving allowance } & \$ 3,000 & \$ 3,000\\\text {(4) Signing bonus}& \$ 2,000 &\$0\\\text { (5) Job search costs incurred } & \$ 300& \$500\end{array}$ Select the items that are irrelevant to Ann's decision.

A) (1), (2), (3), (4), (5)
B) (2), (3), (4)
C) (1), (3), (5)
D) (2), (4)

Question 38

A business segment should be eliminated if the revenue generated by the segment exceeds only its fixed costs.

Question 39

Scholastic Tours is trying to decide which one of two tours it will introduce. The costs and revenues associated with each alternative are listed below: $\begin{array}{lcc}&\text { Eastern Tour}&\text { Western Tour }\\\text { Projected revenue } & \$ 14,000 & \$ 18,000 \\\text { Variable costs } & 2,000 & 10,000\\\text { Fixed costs } & \underline{6,000 }&\underline{ 6,000} \\\text { Profit } &\underline{ \$ 6,000} &\underline{ \$ 2,000}\end{array}$
What are the incremental (differential) costs of the Western Tour?

A) $4,000.
B) $6,000.
C) $8,000.
D) None of these answers are correct.

Question 40

Facility-level costs are not involved in decisions to eliminate a segment of a business.

Question 41

The benefits sacrificed when one alternative is chosen over another are referred to as:

A) Avoidable costs.
B) Opportunity costs.
C) Sacrificial costs.
D) Beneficial costs.

Question 42

Great Outdoors Company operates a store in downtown Denver that has five departments including a fishing department. If the fishing department is closed, the store manager's position will not be affected, but if the entire store is closed, the manager will be terminated. Which of the following lessons should be learned from this example?

A) Opportunity costs are always present.
B) Sunk costs cannot be avoided.
C) Relevance of costs is context sensitive.
D) Information does not have to be precisely accurate in order to be relevant.

Question 43

Jason is trying to decide which one of two job offers he will accept. Several items are presented below: $\begin{array}{lcc}&\text { Job offer } A&\text { Job offer } B\\\text { (1) Base salary } & \$ 40,000 & \$ 40,000 \\\text { (2) Overtime compensation } & \text { Comp. time } & \text { Hourly rate } \\\text { (3) Moving allowance } & \$ 2,000 & \$ 2,000\\\text { 4) Signing bonus}& \$ 1,000 &\$0\\\text { (5) Job search costs incured }&\$500&\$500\end{array}$ Which of the above items would be considered relevant costs?

A) (1), (3), (5)
B) (2), (4)
C) (5)
D) None of these answers are correct.

Question 44

Ethan paid $3 for a bottle of ThirstAid. Later, while on a hiking trip, he was offered $8 for the ThirstAid. Select the correct statement from the following:

A) The $8 offer is not relevant if Ethan refuses to sell the ThirstAid.
B) If Ethan drinks the ThirstAid, no opportunity cost is associated with his decision.
C) The $3 original purchase price is irrelevant to his decision to sell the ThirstAid.
D) All of these answers are correct.

Question 45

Select the correct statement regarding opportunity costs.

A) Opportunity costs need not be considered in decision making.
B) Opportunity costs are not recorded in a firm's financial accounting records.
C) Opportunity costs represent sunk costs.
D) All of these answers are correct.

Question 46

Select the incorrect statement regarding sunk costs.

A) Sunk costs cannot be avoided.
B) Sunk costs are relevant if they differ among the alternatives.
C) Sunk costs are costs that have been incurred in past transactions.
D) Sunk costs include historical costs such as equipment acquisition costs.

Question 47

Which of the following items is qualitative?

A) Cost of new machine
B) Depreciation of existing machine
C) Book value of the existing machine
D) Degree to which the new machine can be integrated with existing machinery

Question 48

QRC Company is trying to decide which one of two alternatives it will accept. The costs and revenues associated with each alternative are listed below: $\begin{array}{lrc}&\text {Alternative A}&\text {Alternative B}\\\text { Projected revenue } & \$ 62,500& \$75,000 \\\text { Unit-level costs } & 12,500 & 18,000 \\\text { Batch-level costs } & 6,500 & 12,000 \\\text { Croduct-level costs } &7,500 & 8,500 \\\text { Tacility-level costs } & 5,000 & 6,250\end{array}$ What is the differential revenue for this decision?

A) $25,000
B) $12,500
C) $62,500
D) $75,000

Question 49

Expected future revenues that differ among the alternatives under consideration are often referred to as:

A) Alternative revenues.
B) Preferential revenues.
C) Relative revenues.
D) Differential revenues.

Question 50

QRC Company is trying to decide which one of two alternatives it will accept. The costs and revenues associated with each alternative are listed below:
$\begin{array}{lrc}&\text {Alternative A}&\text {Alternative B}\\\text { Projected revenue } & \$ 185,000 & \$ 250,000 \\\text { Unit-level costs } & 35,000 & 46,000 \\\text { Batch-level costs } & 22,500 & 34,000 \\\text { Croduct-level costs } & 25,000 & 27,000 \\\text { Tacility-level costs } & 20,000 & 22,500\end{array}$ What is the differential revenue for this decision?

A) $90,000
B) $65,000
C) $185,000
D) $250,000

Question 51

Rachel is deciding whether to remain in the home she has lived in for the past ten years, which is located very near her work, or to move into a newer home that is located in the suburbs farther from her job. The old house was purchased for $160,000 and has a market value of $220,000. The new home can be purchased for $285,000. Which of the following is not relevant to Rachel's decision?

A) Driving distance to work
B) Cost of the old house
C) Market value of the old house
D) Cost of the new house

Question 52

Qualitative information is relevant when:

A) it makes a difference in the decision and it differs among the alternatives.
B) it differs among the alternatives only.
C) it makes a difference in the decision only.
D) None of these answers are correct.

Question 53

Select the incorrect statement regarding relevant costs and revenues.

A) To be relevant, a cost or revenue must be future-oriented and must differ among the alternatives.
B) Sunk costs are never relevant for decision-making purposes.
C) Differential revenues are expected future revenues that differ from past revenues.
D) Avoidable costs are also known as differential costs.

Question 54

Select the correct statement regarding relevant costs and revenues.

A) Sunk costs are relevant for decision-making purposes.
B) Relevant costs are frequently called unavoidable costs.
C) Direct labor is an example of a unit-level cost.
D) Only variable costs are relevant for decision making.

Question 55

Lindsay purchased a raffle ticket for $27. Just before the grand prize drawing two people tried to buy her ticket. The first person offered $120, and another offered $155. What is Lindsay's opportunity cost of keeping the raffle ticket?

A) $54
B) $155
C) $147
D) $182

Question 56

Stephenson Company is trying to decide which one of two contracts it will accept. The costs and revenues associated with each are listed below: $\begin{array}{lcc}&\text {contract x }&\text {contract z }\\\text { Contract Revenue } & \$ 200,000 & \$ 260,000 \\\text { Materials } & 10,000 & 10,000 \\\text { Labor } &88,000 & 120,000 \\\text { Depreciation on Equipment } & 88,000 & 10,000\\\text { Cost Incurred for Consulting Advice}&\underline{1,500}&\underline{1,500}\\\text { Allocated Portion of Overhead}&\underline{5,000}&\underline{5,000}\end{array}$ The equipment was purchased last year and has no resale value. Which of these amounts is relevant for the selection of one contract over another?

A) Contract revenue and labor costs
B) Materials, consulting advice, and allocated overhead
C) Cost of consulting advice and allocated overhead
D) Contract revenue, labor costs, and depreciation on equipment

Question 57

Lindsay purchased a raffle ticket for $5. Just before the grand prize drawing two people tried to buy her ticket. The first person offered $30, and another offered $65. What is Lindsay's opportunity cost of keeping the raffle ticket?

A) $60
B) $65
C) $90
D) $95

Question 58

Select the correct statement regarding quantitative and qualitative information.

A) To be relevant, qualitative data need not be quantified.
B) Relevant information cannot have both quantitative and qualitative characteristics.
C) Qualitative data should only be considered when quantitative data are inconclusive.
D) To be relevant, qualitative data need not differ among the alternatives but must be future-oriented.

Question 59

Osprey Company is trying to decide between the following two alternatives: $\begin{array}{lrc}&\text { Alternative A }&\text { Alternative B }\\\text { Projected revenue } & \$ 50,000 & \$ 60,000 \\\text { Direct material } & 6,000 & 12,000 \\\text { Assembly labor } & 9,000 & 9,000 \\\text { Production supervisor's salary } & 10,000 & 10,000\\\text { Facility-related costs}&\underline{10,000}&\underline{15,000}\\\text { Profit}&\underline{\$15,000}&\underline{\$14,000}\end{array}$ Which of the following conclusions can be drawn from this example?

A) Variable costs are always relevant for decision making.
B) Fixed costs are sunk and thus are never relevant for decision making.
C) Relevant costs may include variable costs and fixed costs.
D) None of these answers are correct.

Question 60

Select the incorrect statement concerning opportunity costs.

A) Opportunity costs are relevant costs.
B) Opportunity costs are cumulative.
C) Opportunity costs are future-oriented.
D) Opportunity costs are not recorded in the books.

Question 61

Which of the following costs is an example of a product-level cost?

A) Machine setup costs
B) Patent filing costs
C) Materials and labor costs
D) Shipping and handling costs

Question 62

The cost that is avoided when a company eliminates a single item of a product or service is a:

A) Unit-level cost.
B) Facility-level cost.
C) Product-level cost.
D) Batch-level cost.

Question 63

The costs and revenues associated with two alternatives are listed below: $\begin{array}{lrc}&\text {Alternative 1}&\text {Alternative 2}\\\text { Projected revenue } & \$ 100,000& \$125,000 \\\text { Unit-level costs } & 20,000 & 30,000 \\\text { Batch-level costs } &20,000 & 25,000 \\\text { Croduct-level costs } &15,000 &15,000 \\\text { Tacility-level costs } &10,000 & 10,000\end{array}$ Which alternative should be selected based on this information?

A) Alternative 2 because it has a higher profit.
B) Alternative 2 because it has the same product- and facility-level costs.
C) Alternative 1 because it has fewer unit-level costs.
D) Alternative 1 because it has a higher profit.

Question 64

The Mansfield Company manufactures and sells two lines of fishing rods. During the most recent accounting period, the Pro line and the Novice line sold 15,000 and 2,000 units, respectively. The company's most recent financial statements are shown below: Based on this information, the company should:

A) Eliminate the Novice line because it is operating at a loss.
B) Keep the Novice line because it contributes $40,000 to total profitability.
C) Keep the Novice line because it contributes $55,000 to total profitability.
D) It is impossible to determine with the given information.

Question 65

The Page Turner Publishing Company is trying to decide whether to accept a special order for its latest blockbuster. In making this decision, which level of costs will most likely be relevant to the decision?

A) Batch-level costs.
B) Facility-level costs.
C) Unit-level costs.
D) None of these answers are correct.

Question 66

Benitez Company currently outsources a relay switch that is a component in one of its products. The switches cost $20 each. The company is considering making the switches internally at the following projected annual production costs: $\begin{array}{llr} \text { Unlt-level materlal cost } &\$3\\ \text { Unit-level labor cost } &\$2\\ \text { Unit-level overhead } &\$1\\ \text { Batch-level set-up cost ( 5,000 units per batch) } &\$25,000\\ \text {Product-level supervisory salaries } &\$37,500\\ \text { allocated facilitv-level costs } &\$20,000\\\end{array}$
The company expects an annual need for 5,000 switches. If the company makes the product, it will have to utilize factory space currently being leased to another company for $1,500 a month. If the company decides to make the parts, total costs will be:

A) $10,500 more than if the switches are purchased.
B) $27,000 less than if the switches are purchased.
C) $20,000 less than if the switches are purchased.
D) $30,500 more than if the switches are purchased.

Question 67

Engineering design costs are generally referred to as:

A) Batch-level costs.
B) Facility-level costs.
C) Unit-level costs.
D) Product-level costs.

Question 68

The Mighty Music Company produces and sells a desktop speaker for $100. The company has the capacity to produce 50,000 speakers each period. At capacity, the costs assigned to each unit are as follows: $$\begin{array} { l c } \text { Unit level costs } & \$ 45 \\\text { Product level costs } & \$ 15 \\\text { Facility level costs } & \$ 5\end{array}$$ The company has received a special order for 500 speakers. If this order is accepted, the company will have to spend $15,000 on additional costs. Assuming that no sales to regular customers will be lost if the order is accepted, at what selling price will the company be indifferent between accepting and rejecting the special order?

A) $95
B) $45
C) $75
D) $60

Question 69

Mountain Gear has been using the same machines to make its name-brand clothing for the last five years. A cost efficiency consultant has suggested that production costs may be reduced by purchasing more technologically advanced machinery. The old machines cost the company $250,000. The old machines presently have a book value of $125,000 and a market value of $17,000. They are expected to have a five-year remaining life and zero salvage value. The new machines would cost the company $150,000 and have operating expenses of $17,000 a year. The new machines are expected to have a five-year useful life and no salvage value. The operating expenses associated with the old machines are $35,000 a year. The new machines are expected to increase quality, justifying a price increase and thereby increasing sales revenue by $15,000 a year. Select the true statement.

A) The company will be $32,000 better off over the 5-year period if it replaces the old equipment.
B) The company will be $33,000 better off over the 5-year period if it replaces the old equipment.
C) The company will be $50,000 better off over the 5-year period if it keeps the old equipment.
D) The company will be $17,000 better off over the 5-year period if it replaces the old equipment.

Question 70

The Mighty Music Company produces and sells a desktop speaker for $320. The company has the capacity to produce 72,000 speakers each period. At capacity, the costs assigned to each unit are as follows: $$\begin{array} { l c } \text { Unit level costs } & \$ 155 \\\text { Product level costs } & \$ 37 \\\text { Facility level costs } & \$ 27\end{array}$$ The company has received a special order for 23,000 speakers. If this order is accepted, the company will have to spend $32,000 on additional costs. Assuming that no sales to regular customers will be lost if the order is accepted, at what selling price will the company be indifferent between accepting and rejecting the special order? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

A) $206.39
B) $163.89
C) $156.39
D) $166.89

Question 71

All of the following are variables that could be considered in a decision to outsource a component that is currently being produced in-house. Which of the following is not likely to be relevant?

A) The impact on employee morale
B) The book value of equipment used in making the component
C) The importance of vertical integration to the company
D) The reliability of the supplier

Question 72

Benitez Company currently outsources a relay switch that is a component in one of its products. The switches cost $28 each. The company is considering making the switches internally at the following projected annual production costs: $\begin{array}{llr} \text { Unlt-level materlal cost } &\$4\\ \text { Unit-level labor cost } &\$3\\ \text { Unit-level overhead } &\$2\\ \text { Batch-level set-up cost ( 6,000 units per batch) } &\$43,000\\ \text {Product-level supervisory salaries } &\$46,500\\ \text { allocated facilitv-level costs } &\$38,000\\\end{array}$
The company expects an annual need for 6,000 switches. If the company makes the product, it will have to utilize factory space currently being leased to another company for $3,300 a month. If the company decides to make the parts, total costs will be:

A) $15,100 more than if the switches are purchased.
B) $53,100 more than if the switches are purchased.
C) $31,400 less than if the switches are purchased.
D) $38,000 less than if the switches are purchased.

Question 73

Safety Products currently outsources an electrical switch that is a component in its sprinkler systems. The switches are purchased for $20 each. The company is considering making the switches internally and has conducted a study to determine the costs involved. The costs below are projected annual production costs: $\begin{array}{llr} \text { Unlt-level materlal cost } &\$3\\ \text { Unit-level labor cost } &\$2\\ \text { Unit-level overhead } &\$1\\ \text { Batch-level set-up cost ( 5,000 units per batch) } &\$5,000\\ \text {Product-level supervisory salaries } &\$37,500\\ \text { allocated facilitv-level costs } &\$20,000\\\end{array}$
Assume that the company needs 15,000 of the switches, which would be produced in three batches. Assume also that the company will still be operating within the relevant range. If Safety decides to make the parts under these conditions, the total relevant costs will be:

A) $132,500.
B) $162,500.
C) $105,000.
D) $142,500.

Question 74

Which of the following costs is an example of a batch-level cost?

A) Assembly setup costs.
B) Materials handling costs.
C) Shipping and handling costs to ship an order to a customer.
D) All of these answers are correct.

Question 75

Hancock Company manufactures and sells two lines of furniture, case goods and upholstery. During the most recent accounting period, the Case Goods and Upholstery Divisions sold 15,000 and 2,000 units, respectively. The company's most recent financial statements are shown below: (Do not round intermediate calculations.) If unit sales for both divisions increased 10%, the company would report which of the following?

A) A $52,000 increase in net income for the Upholstery Division
B) A 10% increase in total net income of the company
C) A decline in profit for the Upholstery Division.
D) A net income for the Upholstery Division of $9,000

Question 76

ServicePro provides two kinds of services. During the most recent accounting period, the two service lines produced the following operating results: $\begin{array}{lrl}&\text { Service } 1&\text { Service } 2\\\text { Service revenue } & \$ 80,000 & \$ 20,000 \\\text { Unit-level materials } & \$(20,000) & \$(2,000) \\\text { Unit-level labor } & \$(30,000) & \$(14,000) \\\text { Product-level selling \& administrative costs } & \$(10,000) & \$(2,500)\\\text { Company wide facility-level costs } & \underline{\$(5,000) }&\underline{\$(5,000)}\\\text { Net income (loss) } & \underline{\$ 15,000}&\underline{\$(3,500)}\end{array}$ If the company stops providing Service 2:

A) The company's income will decrease by $1,500 per year.
B) The company's income will increase by $1,500 per year.
C) The company's income will decrease by $3,500 per year.
D) The company's income will increase by $3,500 per year.

Question 77

Clean, Inc. cleans and waxes floors for commercial customers. The company is presently operating at less than capacity, with equipment and employees idle at times. The company recently received an order from a potential customer outside the company's normal geographic service region for a price of $4,500. The size of the proposed job is 11,000 square feet. The company's normal service costs are as follows: $$\begin{array} { l l } \text { Unit-level materials } & \$ 0.18 \text { per squar foot } \\\text { Unit-level labor } & \$ 0.25 \text { per square foot } \\\text { Unit-level variable overhead } & \$ 0.08 \text { per square foot } \\\text { Facility-level overhead } & \text { Allocated at } \$ 0.10 \text { per square foot }\end{array}$$ If the company accepts the special offer:

A) The company will lose $1,110 on the job.
B) The company will lose $2,210 on the job.
C) The company will lose $230 on the job.
D) The company will earn $2,520 on the job.

Question 78

ServicePro provides two kinds of services. During the most recent accounting period, the two service lines produced the following operating results: $\begin{array}{lrl}&\text { Service } 1&\text { Service } 2\\\text { Service revenue } & \$ 120,000 & \$ 48,000 \\\text { Unit-level materials } & \$(28,000) & \$(10,000) \\\text { Unit-level labor } & \$(38,000) & \$(22,000) \\\text { Product-level selling \& administrative costs } & \$(18,000) & \$(11,500)\\\text { Company wide facility-level costs } & \underline{\$(6,000) }&\underline{\$(6,000)}\\\text { Net income (loss) } & \underline{\$ 30,000}&\underline{\$(1,500)}\end{array}$ If the company stops providing Service 2:

A) The company's income will decrease by $4,500 per year.
B) The company's income will increase by $4,500 per year.
C) The company's income will increase by $5,500 per year.
D) The company's income will decrease by $5,500 per year.

Question 79

Safety Products currently outsources an electrical switch that is a component in its sprinkler systems. The switches are purchased for $24 each. The company is considering making the switches internally and has conducted a study to determine the costs involved. The costs below are projected annual production costs: $\begin{array}{llr} \text { Unlt-level materlal cost } &\$5\\ \text { Unit-level labor cost } &\$4\\ \text { Unit-level overhead } &\$2\\ \text { Batch-level set-up cost ( 7,000 units per batch) } &\$13,000\\ \text {Product-level supervisory salaries } &\$41,500\\ \text { allocated facilitv-level costs } &\$28,000\\\end{array}$
Assume that the company needs 14,000 of the switches, which would be produced in two batches. Assume also that the company will still be operating within the relevant range. If Safety decides to make the parts under these conditions, the total relevant costs will be:

A) $263,500.
B) $222,500.
C) $250,500.
D) $235,500.

Question 80

Clean, Inc. cleans and waxes floors for commercial customers. The company is presently operating at less than capacity, with equipment and employees idle at times. The company recently received an order from a potential customer outside the company's normal geographic service region for a price of $25,000. The size of the proposed job is 38,000 square feet. The company's normal service costs are as follows: $$\begin{array} { l l } \text { Unit-level materials } & \$ 0.34 \text { per squar foot } \\\text { Unit-level labor } & \$ 0.41 \text { per square foot } \\\text { Unit-level variable overhead } & \$ 0.24 \text { per square foot } \\\text { Facility-level overhead } & \text { Allocated at } \$ 0.26 \text { per square foot }\end{array}$$ If the company accepts the special offer:

A) The company will lose $12,620 on the job.
B) The company will lose $22,500 on the job.
C) The company will lose $3,500 on the job.
D) The company will earn $12,080 on the job.