Deck 4: Relevant Costs and Benefits for Decision Making

Question 1

Relevant costs are future costs that differ between competing decision alternatives.

Answer 1

True

Question 2

Outlay costs are costs that have been incurred in the past, such as the purchase of a new piece of equipment for an outlay cost of $8,000.

Answer 2

False

Question 3

All outlay costs are relevant.

Answer 3

False

Question 4

Sunk costs are the result of past decisions; therefore, they are always relevant to future decisions.

Question 5

An opportunity cost is any benefit foregone as a result of rejecting one opportunity in favor of another opportunity.

Question 6

Opportunity costs are usually relevant in relevant cost analysis, but not always.

Question 7

Differential analysis is an approach to the analysis of relevant costs that focuses on the costs that differ under alternative actions.

Question 8

In deciding whether to sell a joint product or to process it further, any costs incurred prior to the split-off point are sunk costs and are, therefore, irrelevant costs.

Question 9

Joint Costs are costs associated with joint products that are incurred subsequent to the split-off point.

Question 10

The theory of constraints states that every process has a bottleneck and production cannot take place faster than it is processed through the bottleneck.

Question 11

If a cost is identical under each alternative under consideration within a given decision context, the cost is considered:

A) A sunk cost
B) An opportunity cost
C) An outlay cost
D) An irrelevant cost

Question 12

___________ are costs that require future expenditures of cash or other resources.

A) Sunk costs
B) Committed costs
C) Opportunity costs
D) Outlay costs

Question 13

The external acquisition of services or components is called:

A) Avoidable costing
B) Conversion
C) Outsourcing
D) Networking

Question 14

Future costs that differ among competing alternatives are:

A) Absorption costs
B) Relevant costs
C) Replacement costs
D) Variable overhead costs

Question 15

The Southern Bell Company manufactures 2,000 telephones per year. The full manufacturing costs per telephone are as follows:
The Illinois Bell Company has offered to sell Southern Bell Company 2,000 telephones for $15 per unit. If Southern Bell Company accepts the offer, $10,000 of fixed overhead will be eliminated.
Southern Bell should:

A) Make the telephones; the savings is $2,000
B) Buy the telephones; the savings is $24,000
C) Buy the telephones; the savings is $12,000
D) Make the telephones; the savings is $12,000

Question 16

The Textile Milling Company manufactures an intermediate product identified as Y3. Variable manufacturing costs per unit of Y3 are as follows:
Indigo Company has offered to sell Textile Milling 5,000 units of Y3 for $20 per unit. If Textile Milling accepts the offer, $25,000 of fixed manufacturing overhead will be eliminated.
Applying differential analysis to the situation, Textile Milling should:

A) Buy Y3; the savings is $50,000
B) Buy Y3; the savings is $5,000
C) Make Y3; the savings is $50,000
D) Make Y3; the savings is $5,000

Question 17

If a trucking company were operating at capacity, but had an opportunity to fill a one-time high volume special order, which of the following ramifications could occur?

A) Lost revenues from regular customers
B) Long-term revenue loss from customers who change service to competitors
C) Questions from regular customers about commitment to service
D) All of the above

Question 18

A company loses revenues from regular customers by accepting a special order when operating at capacity. The loss of revenue just described is an example of which of the following?

A) A revenue cost
B) A sunk cost
C) An opportunity cost
D) An unavoidable cost

Question 19

A(n) ____________ cost is the net cash inflow that could be obtained if the resources committed to one action were used in the most desirable other alternative.

A) Avoidable
B) Contribution margin
C) Outlay
D) Opportunity

Question 20

Organizations may manufacture products or provide services they can obtain at lower costs elsewhere in order to:

A) Control quality
B) Have an assured source of supply
C) Maintain a core competency
D) All of the above

Question 21

In deciding whether to sell a joint product or to process it further, any costs incurred prior to the split-off point should be:

A) Allocated by size of the product
B) Allocated by weight of the product
C) Considered as a sunk cost
D) Subtracted from joint revenues

Question 22

In deciding whether to sell a joint product or to process it further, management should consider:

A) All joint costs and separately identifiable costs
B) Only joint costs that vary with production volume
C) The separately identifiable costs of the product under consideration
D) Variable joint and variable separately available costs

Question 23

Black Horse Corporation manufactures a product with the following full unit costs at a volume of 2,000 units:
A company recently approached Black Horse's management with an offer to purchase 225 units for $275 each. Black Horse currently sells the product to dealers for $400 each. Black Horse's capacity is sufficient to produce the extra 225 units. No selling expenses would be incurred on the special order.
If Black Horse's management accepts the offer, profits will:

A) Decrease by $60,000
B) Increase by $33,400
C) Increase by $24,412.50
D) Decrease by $24,412.50

Question 24

Firms are more likely to accept a special order for one of their products at a reduced price if:

A) All costs are variable
B) Excess capacity exists
C) The order is small
D) The buyer plans to compete in the markets of the firm's regular customers

Question 25

Bounce Company has collected the following information:
What level of production is needed for Bounce to be indifferent between making or buying the part, assuming it can eliminate $75,000 of fixed costs?

A) 12,500 units
B) 16,250 units
C) 15,000 units
D) 13,000 units

Question 26

Atlanta Manufacturing Company produces products W, X, Y, and Z through a joint process. The joint costs amount to $250,000.
If W is processed further, profits of W will:

A) Decrease by $23,000
B) Increase by $5,000
C) Increase by $2,500
D) Increase by $12,500

Question 27

Joint costs are:

A) Costs incurred prior to the split-off point when producing products that appear simultaneously
B) Most often found in companies that further process the final output of other manufacturing firms
C) Relevant to decisions to sell joint products or to process them further
D) Separately identifiable at the split-off point

Question 28

Aloe Corporation sells 1,000 units of product A per day at $1.00 per unit. Aloe has the option of processing the product further for additional costs of $400 per day to produce product B, which sells for $1.45 per unit.
If Aloe processes product A further to produce product B, the company's net income will:

A) Decrease by $450 per day
B) Decrease by $50 per day
C) Increase by $50 per day
D) Increase by $450 per day

Question 29

_______________ are the net cash inflows that could be obtained if the resources committed to one action were used in the most desirable other alternative.

A) Gross profits
B) Outlay costs
C) Opportunity costs
D) Net contributions

Question 30

The external acquisition of services or components is called:

A) Downsizing
B) Outsourcing
C) Profit maximization
D) Total cost analysis

Question 31

In an effort to achieve short-run profit maximization, limited resources should first be allocated to the product with:

A) The highest contribution margin per unit
B) The highest contribution per unit of constraining factor
C) The highest selling price per unit of constraining factor
D) The lowest cost per unit of constraining factor

Question 32

This theory states: "Every process has a bottleneck and production cannot take place faster than it is processed through the bottleneck."

A) Eaves Theory of Manufacturing
B) Porter's Four Forces
C) The Theory of Integrated Workflow
D) The Theory of Constraints

Question 33

Sales revenue minus the costs of direct materials is known as:

A) Conversion costs
B) Contribution margin
C) Outlay costs
D) Throughput

Question 34

According to the theory of constraints management should not:

A) Discourage buildup of excess inventory
B) Encourage factory throughput
C) Encourage the full utilization of non-bottleneck resources
D) Measure utilization of the bottleneck

Question 35

The goal of the theory of constraints is to maximize:

A) Bottlenecks
B) Product level activity
C) Revenues
D) Throughput

Question 36

Johnson and Johnson Company is considering a new drilling machine for its production plant to replace an old drilling machine that originally cost $10,000 and has $7,000 of accumulated depreciation.
The new machine can be purchased at a cash cost of $16,000, but the distributor of the new drilling machine has offered to take the old machine in as a trade-in, thereby reducing the cost of the new machine to $14,000.
Based only on this information, calculate the total relevant cost of acquiring the new machine.

A) $16,000, or the gross cost of the new machine
B) $14,000, or the net cash paid plus the book value ($3,000) of the old machine
C) $14,000, or the net cash paid to the distributor
D) $16,000, or the gross cost of the new machine minus the $1,000 loss on disposing of the old machine

Question 37

Anderson produces color cartridges for inkjet printers. Suppose cartridges are sold to mail-order distributors for $12 each and that manufacturing and other costs are as follows:
The variable distribution costs are for transportation to mail-order distributors. Also assume the current monthly production and sales volume is 20,000 and monthly capacity is 25,000 units.
If the sales price per unit increases by $2.00 and unit sales decrease by 2,000 units, Anderson's monthly profit would:

A) Decrease by $22,000
B) Not change
C) Increase by $36,000
D) Increase by $22,000

Question 38

Soda Company makes three products (Orange Soda, Cream Soda, and Cherry Soda), all of which use a very rare ingredient called Nutra Sugar. Soda Company can purchase only 500 ounces of Nutra Sugar per month from a South American source. Below are data for the three products:
How should Soda Company allocate the 500 ounces of Nutra Sugar, assuming it can sell unlimited quantities of all three produces?

A) All 500 ounces should be allocated to Orange Soda
B) All 500 ounces should be allocated to Cream Soda
C) All 500 ounces should be allocated to Cherry Soda
D) None of the above

Question 39

Miramax Company makes a semi-finished car parts for the automobile industry that has a unit contribution margin of $125 to Miramax. A major customer, Delphi Car Parts, has been purchasing 50 units per month from Miramax for many years, but has indicated that it would prefer to purchase them already machined to its specifications. Delphi has offered to pay an additional $25 per unit for the finished units. To meet those specifications, Miramax would have to rent additional equipment at a cost of $1,000 per month and incur labor and other direct costs of $8 per unit.
Calculate advantage or disadvantage of further processing for Miramax.

A) $350 advantage
B) $150 advantage
C) $500 advantage
D) $150 disadvantage

Question 40

Colorado Ski Company makes downhill ski equipment. Assume that New Mexico Ski Company has offered to produce ski poles for Colorado Ski Company for $18 per pair. Colorado Ski Company needs 100,000 pairs of poles per period. Colorado Ski Company can only avoid $125,000 of fixed costs if it outsources; the remaining fixed costs are unavoidable.
Colorado Ski Company currently has the following costs at a production level of 100,000 pairs of poles:
Colorado Ski Company should:

A) Outsource production because operating income would increase by $325,000
B) Not outsource production because operating income would decline by $325,000
C) Outsource production because operating loss would decline by $325,000
D) Not outsource production because operating loss would increase by 325,000

Question 41

Joe's Soup plant is running at 52% of its monthly capacity. Joe's Soup plant has just received a special order to produce 400 cases of mushroom noodle soup for a statewide supermarket. The supermarket will sell the soup under its own private brand label. The soup will be the same in all respects, except for the label, which will cost Joe's Soup plant an extra $500 in total to design. The supermarket has offered to pay only $19.00 per case, which is well under Joe's normal sales price.
Costs at the current production level (450 cases) are as follows:
If Joe's Soup plant accepts the offer, profits will:

A) Decrease by $1,100
B) Increase by $1,600
C) Decrease by $1,600
D) Increase by $1,100

Question 42

The Steel Can Company has 100,000 obsolete cans in inventory at a cost of $5,000. The cans can be cut in half to make candle holders for $1,000. The candle holders can be sold for $1,750 in total. If the cans are scrapped, they could be sold for $450.
Which alternative should the Steel Can Company accept and what is the relevant profit from the alternative?

Question 43

Jansung Company manufactures 5,000 telephones per year. The full manufacturing costs per telephone are as follows:
Telecom America has offered to sell Jansung Company 5,000 telephones for $20 per unit. If Jansung Company accepts the offer, $12,500 of fixed overhead will be eliminated.
Applying differential analysis to the situation, should Jansung Company make or buy the phones?

Question 44

Carmen manufactures a unit called A2. Variable manufacturing costs per unit of A2 are as follows:
The Don Company has offered to sell Carmen 5,000 units of Y2 for $22 per unit. If Carmen accepts the offer, $70,000 of fixed manufacturing overhead will be eliminated.
Applying differential analysis to the situation, what should Carmen do?

Question 45

International Paper Corporation manufactures 10,000 rolls of paper each period. The paper is used as an input for producing several other products that International Paper manufactures. The full manufacturing costs for a batch of 50 rolls of paper are as follows:
The fixed manufacturing overhead is comprised of depreciation expenses related to prior investments in facilities and equipment that are used in the manufacturing of the paper. These assets have no other use than for the manufacturing of the paper. An outside supplier has offered to sell International Paper the 10,000 rolls of paper necessary to meet production needs this period for a lump-sum of $72,500.
What should International Paper Corporation do if it wants to maximize its profit for the period?

Question 46

Southern Production Company has 100 labor-hours available. There is no limit on machine-hours. Southern can sell all of B it wants, but it can only sell 45 units and 20 units of A and C, respectively.
What is the contribution margin per labor-hour for Product B?

Question 47

Northern Production Company has 200 labor-hours available. There is no limit on machine-hours. Northern can sell all of Y it wants, but it can only sell 45 units and 20 units of X and Z, respectively.
To maximize profits, how many units of each product should Northern produce?

Question 48

The Copper Company manufactures 5,000 rolls of cable each period. The cable is used as an input for producing several other products that Copper manufactures. The full manufacturing costs for a batch of 50 rolls of cable are:
The fixed manufacturing overhead is comprised of depreciation expenses related to prior investments in facilities and equipment that are used in the manufacturing of the cable. These assets have no other use than for the manufacturing of the cable. An outside supplier has offered to sell Copper the 5,000 rolls of cable necessary to meet production needs this period for a lump-sum of $225,000.
If Copper accepts this outside supplier's offer, how much better or worse off will the company be?

Question 49

The Yellow Corporation's management is evaluating a special order from a regular customer. The customer has offered to purchase 3,000 units of a Yellow Corporation product at a price that would provide a contribution margin of $2.5 per unit. Yellow's management wants to accept the offer because so doing would allow them to keep its current work force fully employed. Otherwise, Yellow will lay-off 10 workers for a week, depriving the workers of their weekly $250 wages. Accepting the offer will tie up approximately 500 square feet of a building leased at an annual cost of $30 per square foot. At the present time, Yellow Corporation has no alternative use for this portion of the facilities.
Based on just the information presented above, how much is the Yellow Corporation's opportunity costs associated with accepting this special order from the customer?

Question 50

The Herman Company uses a joint process to produce products W, X, Y and Z. Each product may be sold at its split-off point or processed further. Joint processing costs for a single batch of joint products are $32,500. Other relevant data are as follows:
Calculate the effect on profits of processing Product W further beyond the split-off point.

Question 51

A limitation of 1,500 machine-hours per week prevents Glen Oaks Manufacturing Company from meeting the sales demands for its products. The product information is as follows:
Assuming unlimited demand for each product, determine what is the best short-run profit maximizing strategy?

Question 52

The Manhattan Manufacturing Company produces four different tables: models R1, R2, R3, and R4. A limitation of 995 machine-hours per week prevents Manhattan Manufacturing Company from meeting the sales demands for its products. The product information is as follows:
Assume the maximum weekly demand for each product is as follows:
Under these circumstances, how many units of each product should the company produce per week to maximize short-run profits?

Question 53

Lorraine manufactures a single product with the following full unit costs for 3,000 units:
A company recently approached Lorraine with a special order to purchase 500 units for $300. Lorraine currently sells the models to dealers for $550. Capacity is sufficient to produce the extra 1,000 units. No selling expenses would be incurred on the special order.
Required:
a. Ignoring the special order, determine Lorraine's profit on production and sales of 3,000 units. Ignore taxes in these analyses.
b. Should Lorraine accept the special order if its goal is to maximize short-run profits? Determine the impact on profit of accepting the order.
c. Determine the minimum price Lorraine would want, to increase before tax profits by $80,000 on the special order.
d. When making a special order decision, what non-quantitative aspects of the decision should Lorraine consider?

Question 54

Alpine produces a single product. The company's March 2018 income statement is as follows:
There were no beginning or ending inventories of work-in-process or finished goods. Alpine's full manufacturing costs were as follows:
Selling and administrative expenses are all fixed. Alpine just received a special order from a firm in Canada to purchase 450 units at $55 each. The order will not affect the selling price to regular customers.
Required:
a. Prepare a differential analysis of the relevant costs and revenues associated with the decision to accept or reject the special order, assuming Regal has excess capacity.
b. Determine the net advantage or disadvantage (profit increase or decrease) of accepting the order, assuming Regal does not have excess capacity.

Question 55

XM Company currently buys 15,000 units of a part used to manufacture its product at $39 per unit. The supplier recently informed XM Company that a 20 percent increase will take effect next year. XM has some additional space and could produce the units for the following per-unit costs (based on 15,000 units):
If XM purchases the units from the supplier, XM can rent out the plant for $22,500 per year.
Should XM Company buy the part externally or make it internally? Use differential analysis to support your answer.

Question 56

The Freemont Company uses 2,500 units of Part 501 each year. The full manufacturing cost of one unit of Part 501 at this volume is:
An outside supplier has offered to sell Freemont unlimited quantities of Part 501 at a unit cost of $10.00. If Freemont accepts this offer, it can eliminate 60 percent of the fixed costs assigned to Part 501. Furthermore, the space devoted to the manufacture of Part 501 can be rented to another company for $5,000 per year.
Determine in dollars, the increase or decrease of annual profits from Freemont accepting the offer of the outside supplier.

Question 57

Volleyball Products manufactures a single product with the following full unit costs at a volume of 1,000 units:
A company recently approached Volleyball's management about buying 100 units of product. Volleyball currently sells its product to dealers for $1,300 per unit. Capacity is sufficient to produce the extra 100 units. No selling expenses would be incurred on the special order.
What is the minimum price Baseball should charge just to break even on the special order?

Question 58

The Santa Fe Company uses a joint process to produce products W, X, Y, and Z. Each product may be sold at its split-off point or processed further. Joint processing costs for a single batch of joint products are $60,000. Other relevant data are as follows:
Determine which products should be processed further.

Question 59

Stanley Manufacturing produces three products: A, B, and C. A limitation of 195 labor-hours per week prevents Stanley from meeting the sales demands for its products. The product information is as follows:
In addition, the maximum weekly demand for each product is:
Determine the weekly production schedule for products A, B, and C under a short-run profit maximizing strategy.

Question 60

The Justin Manufacturing Company produces products A, B, and C. Although Justin could sell up to 25 units of A, 30 units of B, and 25 units of C each week, a limitation of 179 machine-hours per week prevents Viking from meeting these sales demands. The product information is as follows:
There are no fixed selling or administrative expenses. Fixed manufacturing costs are $1,000 per week.
Required:
a. Develop a schedule indicating the order in which Viking should allocate machine-hours to each product.
b. Develop a schedule indicating the number of units of each product that Viking should produce each week.
c. Develop a schedule indicating Viking's weekly profit or loss from implementing this production schedule.