Deck 17: Accounting for Decision Making: With and Without Resource Constraints

Question 1

The selection of a special order will improve net profit when the order's income exceeds:

A) the direct labour cost of the order.
B) the replacement cost of the order.
C) the incremental cost of the order.
D) the opportunity cost of the order.

Answer 1

C

Question 2

Which of the following is not a relevant cost or benefit when determining a contribution margin?

A) Income
B) Cost of goods sold
C) Unavoidable costs
D) Net sales

Answer 2

C

Question 3

The contribution is also known as the internal opportunity cost, and reflects the cost of using the resource within the organisation itself due to competing opportunities.

Answer 3

True

Question 4

An opportunity cost is the maximum benefit that could be obtained from a resource if it were to be used for some other purpose.

Question 5

The potential to damage customer loyalty or employee morale is a qualitative factor that needs to be considered in decision analysis.

Question 6

A department generates income of $20 000 and has variable costs of $14 000 and avoidable fixed costs of $7500. This indicates that the costs directly attributable to the department exceed its income and the department should be closed.

Question 7

Sunk costs are costs that have been incurred, or whose payment cannot be avoided; they are irrelevant to future decisions.

Question 8

When making comparisons using relevant cost and benefit analysis with traditional analysis based on actual costs, the result will depend on the particular circumstances of the firm making the decision.

Question 9

Unavoidable costs will be incurred regardless of the decision made and are therefore relevant to decision making.

Question 10

Opportunity costs are economic measures and therefore not relevant to accounting decision making.

Question 11

James is considering replacing his worn-out machines. Which of the following is not a relevant cost for James when considering various available options?

A) Costs of electricity consumed by current machines
B) Changes in costs of labour needed to operate the new machines
C) Costs of delivering the new machine
D) Costs of replacing old machines

Question 12

Fixed costs are irrelevant to a decision if they remain the same regardless of the decision.

Question 13

Avoidable costs are those costs that will not be incurred if a particular decision is taken, therefore avoidable costs are relevant to decision making.

Question 14

Incremental or differential costs are the increases in costs or benefits between alternative opportunities available to an entity.

Question 15

In deciding whether to close a department or division, the general rule to follow is that if the department/division makes a positive contribution, then it should not be closed, where the contribution is at least equal or greater than the income less the variable costs.

Question 16

In a situation where a division has variable costs and avoidable fixed costs, and these costs combined exceed income, then based only on the financials the division should be closed.

Question 17

When there are resource constraints, the objective that should be applied is to establish the optimum output within the constraints to maximise contribution and thus profits.

Question 18

Relevant costs are those costs that relate to the future and are additional costs that will be incurred or result from a decision.

Question 19

Sunk costs are:

A) costs of replacing an item today.
B) costs incurred and no longer recoverable.
C) costs of an item discounted at an appropriate rate.
D) equivalent to the historical cost of an item.

Question 20

Where an entity faces resource constraints, the appropriate selection of what to produce should be based on the contribution per unit of resource constraint, as this will optimise output and profits.

Question 21

Constraints restricting a manufacturing firm's ability to meet the demand for its products or services could include all of the following except shortage of:

A) qualified sales staff.
B) labour skills.
C) space for machinery.
D) raw materials.

Question 22

X Ltd has the operating capacity to produce either product A or B: From the information above, which product should X Ltd manufacture and why?

A) Product A, lower breakeven
B) Product B, lower breakeven
C) Product B, higher profit
D) Product A, higher profit

Question 23

Ausco Products provides the following information: If the market will only accept a total of 400 units of any of the three products combined, which product(s) should Ausco Products produce?

A) Product X and Z.
B) Product Y only.
C) 300 units of Product Y and 100 units of Product Z.
D) 200 units of Product Y and 200 units of Product Z.

Question 24

Jack received $560 from his grandmother. He decided to shop for a gift for himself and spent $7 for his bus fares. Jack decided to purchase a new bike for $560. For the same amount, he could have purchased a model GH-200 aeroplane that he adored and that would have provided $120 more benefit than the new bike. Jack was also considering a trip to Melbourne to visit his aunt, although he was not too keen about it. He was also interested in pursuing a course leading to a private pilot's licence, although he is a bit scared of heights. One month later, the price of the bike Jack purchased from Hut Ltd had gone down by $100. The bike had cost Hut Ltd $260 of labour and $170 of plant and equipment. The replacement cost for the bike is:

A) $100.
B) $430.
C) $460.
D) $560.

Question 25

Jack received $560 from his grandmother. He decided to shop for a gift for himself and spent $7 for his bus fares. Jack decided to purchase a new bike for $560. For the same amount, he could have purchased a model GH-200 aeroplane that he adored and that would have provided $120 more benefit than the new bike. Jack was also considering a trip to Melbourne to visit his aunt, although he was not too keen about it. He was also interested in pursuing a course leading to a private pilot's licence, although he is a bit scared of heights. One month later, the price of the bike Jack purchased from Hut Ltd had gone down by $100. The bike had cost Hut Ltd $260 of labour and $170 of plant and equipment. The unavoidable cost is:

A) $7.
B) $120.
C) $430.
D) $560.

Question 26

Company A prints and distributes licensed T-shirts, which wholesale at $16 each. A major retail chain store has asked to be supplied with 3000 T-shirts at $14 each; these shirts would carry the store's brand name. To process the order, Company A would need to reconfigure the printing program to print the brand name. This would cost $4000 and would not be reusable. There would be no other additional costs. The current cost structure is: Should the special order be accepted, and why?

A) Yes, additional profit of $3 per shirt is made.
B) Yes, new equipment is purchased.
C) Yes, additional profit of $1.67 per shirt is made.
D) No, a loss of $4000 is incurred.

Question 27

Consider the following information. The contribution margins for Product X and Product Y are:

A) $1.50 and $2.50 respectively.
B) $2.00 and $0.50 respectively.
C) $2.00 and $2.50 respectively.
D) $3.00 and $3.50 respectively.

Question 28

Jack received $560 from his grandmother. He decided to shop for a gift for himself and spent $7 for his bus fares. Jack decided to purchase a new bike for $560. For the same amount, he could have purchased a model GH-200 aeroplane that he adored and that would have provided $120 more benefit than the new bike. Jack was also considering a trip to Melbourne to visit his aunt, although he was not too keen about it. He was also interested in pursuing a course leading to a private pilot's licence, although he is a bit scared of heights. One month later, the price of the bike Jack purchased from Hut Ltd had gone down by $100. The bike had cost Hut Ltd $260 of labour and $170 of plant and equipment. The differential benefit of the aeroplane is:

A) $7.
B) $120.
C) $430.
D) $560.

Question 29

Ausco Products provides the following information: The total labour availability is limited to 1000 hours at these costs. Which products should Ausco Products produce?

A) Product X only.
B) Product Y only.
C) Product Z only.
D) Product X and Y.

Question 30

Finefurniture Ltd has the opportunity to purchase componentry in sufficient quantities at $5.50 per chair. Currently Finefurniture Ltd makes the components for 7000 chairs at the following costs: A saving of 20% of fixed overhead would occur if the components were bought. Should the component be bought, and why?

A) No, increased cost of $0.36 per chair.
B) No, increased cost of $1.50 per chair.
C) Yes, cost savings of $1 per chair.
D) Yes, cost savings of $0.50 per chair.

Question 31

Jack received $560 from his grandmother. He decided to shop for a gift for himself and spent $7 for his bus fares. Jack decided to purchase a new bike for $560. For the same amount, he could have purchased a model GH-200 aeroplane that he adored and that would have provided $120 more benefit than the new bike. Jack was also considering a trip to Melbourne to visit his aunt, although he was not too keen about it. He was also interested in pursuing a course leading to a private pilot's licence, although he is a bit scared of heights. One month later, the price of the bike Jack purchased from Hut Ltd had gone down by $100. The bike had cost Hut Ltd $260 of labour and $170 of plant and equipment. The opportunity cost is most likely to be the cost of:

A) the aeroplane.
B) the trip to Melbourne.
C) Hut Ltd's plant and equipment.
D) the private pilot's licence.

Question 32

A supplier of components for the automotive industry has the opportunity to purchase a job lot of parts which it would normally manufacture. The purchase price is $80 000. The production costs for the same number of units are: Should the parts be purchased and why?

A) Yes, because it saves $80 000.
B) Yes, because it saves $20 000.
C) No, because it costs $100 000.
D) No, because it costs $20 000.

Question 33

Consider the following information. Which of the following is true? Product X:

A) contributes more to profit than Product Y.
B) has higher variable costs than Product Y.
C) produces lower profits than Product Y.
D) has higher fixed costs that Product Y.

Question 34

The following information relates to the production cost of product PX 244. What is the contribution per unit of PX 244?

A) $9
B) $25
C) $37
D) $43

Question 35

Consider the following information. The breakeven in units for Product X and Product Y are:

A) 12 000 and 16 000 respectively.
B) 2700 and 12 800 respectively.
C) 2500 and 12 400 respectively.
D) 200 and 400 respectively.

Question 36

With respect to a decision, a relevant cost is:

A) one that does not change if the decision to go ahead is made.
B) one that changes if the decision to go ahead is made.
C) one that does not change if the decision not to go ahead is made.
D) All costs currently incurred by the organisation are relevant.

Question 37

The Northern Division of CPP Corporation supplies parts to its Southern Division. These parts are also available in the market from other suppliers. Northern Division is operating at 80% capacity, with a variable cost per unit of $6. Because of a personality conflict between the two division managers, however, Southern has elected to buy the part from outside suppliers at $7 per unit. As a result of this action, CPP Corporation will be:

A) better off.
B) worse off.
C) forced to close Northern Division.
D) forced to close Southern Division.

Question 38

The following information has been supplied regarding three products. Assuming that the current restriction on labour is 7000 hours, what is the total cost of labour per unit that needs to be considered before management can decide whether to employ additional labour or not? (Hint: First calculate the contribution per unit of labour and determine which products will be produced at the current available hours.)

A) $1
B) $4.60
C) $3.60
D) $2

Question 39

Jack received $560 from his grandmother. He decided to shop for a gift for himself and spent $7 for his bus fares. Jack decided to purchase a new bike for $560. For the same amount, he could have purchased a model GH-200 aeroplane that he adored and that would have provided $120 more benefit than the new bike. Jack was also considering a trip to Melbourne to visit his aunt, although he was not too keen about it. He was also interested in pursuing a course leading to a private pilot's licence, although he is a bit scared of heights. One month later, the price of the bike Jack purchased from Hut Ltd had gone down by $100. The bike had cost Hut Ltd $260 of labour and $170 of plant and equipment. The variable and fixed costs for producing the bike are:

A) $560 and $260 respectively.
B) $260 and $170 respectively.
C) $170 and $560 respectively.
D) $170 and $260 respectively.

Question 40

Which of the following can be constraints for manufacturers?

A) II only
B) I and II only
C) I and III only
D) I, II and III

Question 41

What are incremental costs, and when are they relevant costs?

Question 42

How might a manager identify the relevant costs or revenue for a particular decision?

Question 43

The Moony Company, which makes and sells two products, boys' and girls' bikes, has $30 000 to spend on advertising. The company has estimated that using the $30 000 to advertise boys' bikes would increase sales of that product by 1000 units. Moony is uncertain, however, how many additional girls' bikes could be sold by spending $30 000 on that product. Boys' bikes have a contribution margin of $40 per unit and girls' bikes have a contribution margin of $30 per unit.
Required:
Prepare an analysis to answer each of the following independent questions.

Question 44

Hartly Company manufactures three products: A, B, and C.

The same raw material is used in all three products. The company has only 5000 kilograms of material on hand and will not be able to obtain any more for several weeks. Management is trying to decide on which products to concentrate on next week to fill its backlog of orders. Material cost is $8.00 per kilogram. There are no beginning or ending inventories except the raw materials on hand mentioned above.

Question 45

The Multiproducts Company currently purchases a component for $30 each. The company has excess capacity and is considering the possibility of making the component. The Cost Accounting Department estimates that the following costs would be incurred to make each unit of the component:
Additionally, if Multiproducts decides to make the component, additional foremen, custodial personnel, and material handlers are required at a total cost of $150 000 per year.

Question 46

Pronto Ltd manufactures photo frames and photo albums but 15 000 units of photo frames could be purchased for $5.00 each. The per-unit costs of production for these frames are: Should the frames be purchased instead of being made?

A) No, because it saves $1.50 per unit.
B) No, because it saves $0.50 per unit.
C) Yes, because it saves $2.00 per unit.
D) Yes, because it saves $5.00 per unit.

Question 47

Qualitative factors in the make or buy decisions include:

A) quality.
B) reliability of supplies.
C) after-sales service.
D) all of the above.

Question 48

Pronto Ltd manufactures photo frames and photo albums but 15 000 units of photo frames could be purchased for $5.00 each. The per-unit costs of production for these frames are: Pronto is considering whether to make or buy the photo frames. The costs that are irrelevant to this decision are:

A) opportunity costs.
B) variable costs.
C) available costs.
D) fixed costs.

Question 49

The Transporter Company produces material-handling equipment for use in commercial manufacturing. As part of its operations, Transporter has three distinct product lines: belts, conveyors, and elevators. The company is currently considering the elimination of the belt product line. The belt line's sales average $850 000 annually. Annual variable manufacturing costs and variable selling costs total $320 000 and $140 000, respectively. Annual fixed costs total $450 000, of which $120 000 are considered to be unavoidable.

Question 50

What are avoidable costs, and when are they relevant costs?

Question 51

Which of the following is not a qualitative factor considered by an organisation?

A) Employee wages
B) Employee-employer relations
C) Long-term retention of employees
D) Employee-related benefits

Question 52

Which of the following statements about qualitative factors is not true?

A) Qualitative factors are easily quantified in terms of costs and revenue.
B) The natures of qualitative factors in decision making vary with circumstances related to the opportunities under consideration.
C) Qualitative factors stem from non-financial objectives.
D) Qualitative factors should be considered by management when making a decision.

Question 53

For many years, Condor Company has produced a small part that it uses in the production of its standard line of equipment. The company's cost of producing one part, based on a production level of 50 000 parts per year, is:
An outside supplier has offered to supply the part to Condor for $29 per part. Condor has determined that 40% of the fixed overhead represents salaries and other costs which can be eliminated if the parts are purchased.
Required:
Prepare an analysis to determine whether Condor should accept the supplier's offer.

Question 54

The following information is available for the three product lines produced by Pitts Ltd: The labour availability is limited to 400 hours at these costs and before overtime payments are necessary.
If the market will only accept a maximum total of 200 units of any of the three product lines combined, which product(s) should Pitts produce?

A) Product A and C
B) Products A and B
C) Product B
D) Product C

Question 55

Pronto Ltd manufactures photo frames and photo albums but 15 000 units of photo frames could be purchased for $5.00 each. The per-unit costs of production for these frames are: If the frames were purchased and later sold by Pronto at normal prices, the overall profits would:

A) decrease relative to those from making the frames.
B) increase relative to those from making the frames.
C) remain the same as those from making the frames.
D) increase for the first three months and decrease thereafter.

Question 56

What are opportunity costs, and when are they relevant costs?