Deck 13: Cost Management and Decision Making

Question 1

An analysis of outsourcing requires an analysis of quality as well as costs.

Answer 1

True

Question 2

To properly use price-led costing, a company needs to study only its cost.

Answer 2

False

Question 3

Most not-for-profit organizations have a zero overall target profit.

Answer 3

True

Question 4

Charging varying prices for the same product is always illegal because it is discriminatory.

Question 5

To achieve target costing, organizations are often required to redesign their systems.

Question 6

The target price is found by multiplying the target cost times one plus the target profit percentage.

Question 7

It is important in decision making to focus only on future decisions; decisions made in the past should not be considered.

Question 8

In decision making, feedback is important because it enhances learning.

Question 9

Because facility costs are fixed and do not change with volume changes, these cost are never relevant in considering alternatives.

Question 10

Target pricing can be found at the intersection of the demand and supply curve.

Question 11

Tangible Objectives are abstract goals of the organization.

Question 12

Not-for-profit organizations do not need goals and objectives.

Question 13

The target profit equals the desired return on sales times the contribution margin.

Question 14

Cost management is a powerful activity including a proactive attitude.

Question 15

Variable costs are always relevant in decision making and are the only costs that should be considered.

Question 16

Avoidable costs are often a good approximation of the relevant costs between alternatives.

Question 17

In accepting a special order, it is important to consider unused capacity.

Question 18

Relevant costs and revenues are those costs and revenues that occur in the future and are the same among alternatives.

Question 19

Some costs will continue to be incurred if the company outsources a particular function.

Question 20

Costs that could be avoided if a business unit is dropped are not relevant to the decision.

Question 21

Price discrimination involves temporarily setting a price below cost to broaden demand for a product and injure competition.

Question 22

A business has complete freedom when setting prices for products and services.

Question 23

In making special order pricing decisions, generally only unit costs and batch-costs need to be considered assuming excess capacity exists.

Question 24

When using a decision tree, the outcomes of each decision are shown with their costs and benefits.

Question 25

Because it lacks complete objectivity, subjective information is not useful in good decision making.

Question 26

Which of the following costs are relevant in the decision to drop a business unit?

A) Unavoidable Costs
B) Avoidable Costs
C) Both of the above
D) None of the above

Question 27

When deciding on special order pricing, it is important to consider

A) Alternative capacity uses
B) The reaction of other customers
C) The potential for future sales
D) All of the above

Question 28

To be useful for decision making, information must be

A) Accurate
B) Timely
C) Relevant
D) All of the above

Question 29

The first step in the decision making process is to

A) Determine the consequences of outcomes
B) Determine the decision rule
C) Define the goals and objectives
D) All of the above

Question 30

In differential analysis, changes in the cost of direct materials among alternatives is an example of

A) Price discrimination
B) Relevant data
C) Batch-level costs
D) None of the above

Question 31

You purchase baseball tickets last month when the team was doing poorly. You paid $100 a non-refundable ticket. Your best friend offered you $130 for the ticket now that the team is doing well. The opportunity cost of going to the game is

A) $30
B) $70
C) $130
D) None of the above

Question 32

TwoWheels (TW) manufactures hi-tech bicycles that sell for $600 each. They sell 1,000 bicycles per year. Fixed higher-level costs amount to $100,000. Break-even for TW is 300 bicycles. TW's margin safety is

A) $50,000
B) $180,000
C) $360,000
D) $420,000

Question 33

Bommarito Company plans to introduce an automatic vacuum cleaner that senses dirt, turns its motor on, vacuums the dirt and shuts the motor off. Because they will have no competition, they believe they can set prices very high. In setting the price they should consider

A) The Robinson-Patman Act
B) Life Cycle Costs
C) Sunk Costs
D) All of the above

Question 34

Relevant costs exclude

A) Fixed costs
B) Costs that change from year to year
C) Costs that do not change based upon the alternative choices
D) All of the above

Question 35

When making decisions based upon relevant costs, it is important to ignore

A) Qualitative objective costs
B) Fixed costs allocated based upon a cost driver that does not change
C) Quantitative subjective costs
D) All of the above

Question 36

Box Industries (BI) produces computers. They believe the market will not longer support their current price. A new price of $900 per computer is suggested by the marketing department. BI requires
A 25% return on sales. BI can produce and expects to sell 11,000 units. Their current costs are as follows:
To achieve their target profit, BI must

A) Reduce their fixed higher level manufacturing costs to $2,500,000
B) Reduce variable costs of goods sold by $25 per unit
C) Reduce fixed selling & administrative costs to $1,250,000
D) All of the above will allow them to reach their target profit

Question 37

Karl Kady, the controller of a nation wide manufacturing company is considering closing a plant in Texas. The plant manufactures containers for their products. All of the following would be relevant except

A) Costs paid for material on hand
B) Opportunity cost of alternative uses for the plant
C) Costs to buy externally
D) All of the above are relevant

Question 38

Rosenblatt Enterprises used decision tree analysis and cost-benefit analysis in their decision to keep open their current plant. The quantitative costs of keeping the plant open were $5,000,000, while the quantitative benefits of keeping the plant open were only $3,000,000. Rosenblatt decides to keep the plant open. The decision to keep the plant open is appropriate if:

A) Additional qualitative benefits exceed $2,000,000
B) The relevant costs less the benefits of closing the plant were greater than $2,000,000
C) It would never be appropriate
D) Both A & B

Question 39

Consider the following case:
Management is considering purchasing a Model B300 machine to use in addition to the company's present Model B100 machine. This will increase the company's production and sales. The increase in volume will be large enough to require increases in fixed selling expenses and in general administrative overhead, but not in the fixed manufacturing overhead.
Which of the following items would be considered relevant to the case?

A) Variable manufacturing overhead
B) Depreciation - Model B100 machine
C) Both of the above
D) None of the above

Question 40

Edison Company has 5,000 obsolete desk lamps that are carried in inventory at a manufacturing cost of $45000. If the lamps are reworked for $20,000, they could be sold for $37,000. Alternatively, the lamps could be sold for $9,000 for scrap. In a decision model analyzing these alternatives, the sunk cost would be:

A) $9,000
B) $8,000
C) $43,000
D) $45,000

Question 41

Use the following to answer questions:
Rams Company needs 20,000 units of a certain part to use in its production cycle. If Rams buys the part from Steelers Company instead of making it, Rams cannot use the excess capacity for another manufacturing activity. Forty percent of the fixed overhead will continue regardless of what decision is made.

Cost to Rams to make the part: (per unit)
Cost to buy the part from Steelers Company - $42 per unit

-In deciding whether to make or buy the part, Rams' total relevant costs to make the part are:

A) $760,000
B) $840,000
C) $880,000
D) $960,000

Question 42

Use the following to answer questions:
Rams Company needs 20,000 units of a certain part to use in its production cycle. If Rams buys the part from Steelers Company instead of making it, Rams cannot use the excess capacity for another manufacturing activity. Forty percent of the fixed overhead will continue regardless of what decision is made.

Cost to Rams to make the part: (per unit)
Cost to buy the part from Steelers Company - $42 per unit

-What decision should Rams make, and what is the total cost advantage that would result?

A) Make, $40,000
B) Make, $120,000
C) Buy, $80,000
D) Buy, $40,000

Question 43

Albert Company plans to discontinue a division that generates a total contribution margin of $20,000 per year. Fixed overhead associated with this division is $50,000, of which $5,000 cannot be eliminated.
If the division is discontinued, how would Albert's operating income is affected?

A) Have no effect on operating income
B) Decrease operating income by $15,000
C) Increase operating income by $25,000
D) Increase operating income by $30,000

Question 44

Use the following to answer questions:
Hoffman Corp. currently sells 40,000 dental tools to its normal customers, but it has a capacity to produce 50,000 tools. Its product sells for $30 per tool and the variable costs incurred in manufacturing and selling the product are as follows on a per tool basis:
Direct materials - $8; Direct labor - $4; Sales commission - $2.
A customer has proposed a special order to purchase 10,000 tools at a special price of $20 per unit. If Hoffman accepts the order, the company would not have to pay its sales people their normal commission of $2 per unit, but the company would incur a shipping cost of $3 per unit.

-If Hoffman accepts the special order, how would operating income is affected?

A) Decrease by $80,000
B) Decrease by $120,000
C) Increase by $30,000
D) Increase by $50,000

Question 45

Use the following to answer questions:
Hoffman Corp. currently sells 40,000 dental tools to its normal customers, but it has a capacity to produce 50,000 tools. Its product sells for $30 per tool and the variable costs incurred in manufacturing and selling the product are as follows on a per tool basis:
Direct materials - $8; Direct labor - $4; Sales commission - $2.
A customer has proposed a special order to purchase 10,000 tools at a special price of $20 per unit. If Hoffman accepts the order, the company would not have to pay its sales people their normal commission of $2 per unit, but the company would incur a shipping cost of $3 per unit.

-What is the minimum price per unit below which Hoffman should reject the order?

A) $12
B) $15
C) $31
D) $33

Question 46

When analyzing relevant information which items should not be included in the decision?

A) The increase in additional fixed costs of manufacturing
B) The increase in costs per unit manufactured
C) Future changes in set-up and facility costs
D) Depreciation on existing machines

Question 47

You purchased baseball tickets last month when your team was doing well. You paid $75 for the non-refundable tickets. The team is doing poorly and a friend offered you $30 for the ticket. The opportunity cost of going to the game is

A) $30
B) $45
C) $75
D) $105

Question 48

Which of the following costs are relevant to decision making?

A) Sunk costs
B) Opportunity costs
C) Both of the above
D) None of the above

Question 49

Abrams Corporation sells a product for $75 per unit. Its market share is 20 percent. The market share can be increased to 30 percent with a reduction in price to $63. The product is currently earning a profit of $12 per unit. The president of Abrams feels that the $12 profit per unit must be maintained.
What is the target price per unit?

A) $53
B) $63
C) $65
D) $75

Question 50

_____ involves temporarily setting a price below cost to broaden demand for a product and injure competition.

A) Price discrimination
B) Predatory pricing
C) Loss leader pricing
D) None of the above

Question 51

What act prohibits price discrimination?

A) Robinson-Patman Act
B) Sherman Act
C) Clayton Act
D) Fair Consumer Act

Question 52

Use the following to answer questions:
Richardson Motors uses ten units of part Number T305 each month in the production of large Diesel engines. The cost to manufacture one unit of T305 is presented below:

Material handling, which is not included in manufacturing overhead, represents the direct variable costs of the receiving department that are applied to direct materials and purchased components on the basis of their costs. Richardson's annual manufacturing overhead budget is one-third variable and two-thirds fixed) Simpson Castings, one of Richardson's reliable vendors, has offered to supply T305 at a unit price of $30,000.

-If Richardson Motors purchases the ten T305 units from Simpson Castings, the capacity Richardson used to manufacture these parts would be idle. Should Richardson decide to purchase the parts from Simpson, the out-of-pocket cost per unit of T305 would:

A) Increase $3,600
B) Increase $9,600
C) Decrease $4,400
D) Decrease $12,400

Question 53

Use the following to answer questions:
Richardson Motors uses ten units of part Number T305 each month in the production of large Diesel engines. The cost to manufacture one unit of T305 is presented below:

Material handling, which is not included in manufacturing overhead, represents the direct variable costs of the receiving department that are applied to direct materials and purchased components on the basis of their costs. Richardson's annual manufacturing overhead budget is one-third variable and two-thirds fixed) Simpson Castings, one of Richardson's reliable vendors, has offered to supply T305 at a unit price of $30,000.

-Assume Richardson Motors is able to rent all idle capacity for $50,000 per month. If Richardson decides to purchase the ten units from Simpson Castings, Richardson's monthly
Cost for T305 would:

A) Decrease $14,000
B) Increase $46,000
C) Decrease $34,000
D) Decrease $64,000

Question 54

Use the following to answer questions:
Richardson Motors uses ten units of part Number T305 each month in the production of large Diesel engines. The cost to manufacture one unit of T305 is presented below:

Material handling, which is not included in manufacturing overhead, represents the direct variable costs of the receiving department that are applied to direct materials and purchased components on the basis of their costs. Richardson's annual manufacturing overhead budget is one-third variable and two-thirds fixed) Simpson Castings, one of Richardson's reliable vendors, has offered to supply T305 at a unit price of $30,000.

-Assume the rental opportunity does not exist and Richardson Motors could use the idle Capacity to manufacture another product that would contribute $104,000 per month. If Richardson chooses to manufacture the ten T305 units in order to maintain quality control, Richardson's opportunity cost is:

A) $8,000
B) $36,000
C) $56,000
D) $68,000

Question 55

Faulk Industries (FI) produces low cost digital cameras that sell for $100. FI requires a 25% return on sales. Currently feasible costs are $5,160,000 and a cost reduction of $660,000 is required to meet their target. FI assumes they will sell ____ cameras.

A) 60,000
B) 75,000
C) 85,000
D) None of the above

Question 56

Use the following to answer questions:
Juarez Healthcare Center receives reimbursement from C. H.E.A.T.E.M. insurance company. Juarez receives $20 per physical therapy session. Each session lasts 15 minutes. Because of a shortage of physical therapists, Juarez often finds it necessary to use a temporary service to provide therapists. Assume collections and other variable cost amount to $5 per visit and all other facility costs are fixed.

-What is the most Juarez should pay for physical therapists?

A) $15 per hour
B) $25 per hour
C) $60 per hour
D) $80 per hour

Question 57

Use the following to answer questions:
Juarez Healthcare Center receives reimbursement from C. H.E.A.T.E.M. insurance company. Juarez receives $20 per physical therapy session. Each session lasts 15 minutes. Because of a shortage of physical therapists, Juarez often finds it necessary to use a temporary service to provide therapists. Assume collections and other variable cost amount to $5 per visit and all other facility costs are fixed.

-What other qualitative factors should Juarez consider before using a temporary service?

A) What is the training of the employees?
B) Will Juarez builds relationships with the employees and has a potential source of new therapists?
C) Can Juarez uses the temporary service as a means to screen employees for a good match with the company?
D) All of the above

Question 58

Titan Snow Shovel Company (TSSC) has a pricing policy of cost plus 40% to cover all costs. They base their costing on the expectation that they will sell 50,000 shovels at $98 each. Unit level costs are $40 per unit. Product and batch level costs together equal $500,000. Facility level costs are

A) $20.00 per unit
B) $58.00 per unit
C) $17.00 per unit
D) None of the above

Question 59

Use the following to answer questions:
McCoy Industries (MI) produces ice cream supplies including bowls, scoops and shake makers. MI is considering outsourcing their shake makers. Juan Hernandez, the controller complied the following

information.
Mr. Hernandez assumes 100,000 shake makers will be sold. If the shake maker is outsourced, product level costs will increase by $35,000 to cover the increased cost of maintaining the relationship with the supplier. Other product level and facility level costs will not change.

-What is the most MI should pay for the shake makers from an independent supplier?

A) $6.60
B) $6.95
C) $8.70
D) $11.20

Question 60

Use the following to answer questions:
McCoy Industries (MI) produces ice cream supplies including bowls, scoops and shake makers. MI is considering outsourcing their shake makers. Juan Hernandez, the controller complied the following

information.
Mr. Hernandez assumes 100,000 shake makers will be sold. If the shake maker is outsourced, product level costs will increase by $35,000 to cover the increased cost of maintaining the relationship with the supplier. Other product level and facility level costs will not change.

-Given the facts above, assume that MI can use the space now devoted to shake makers as storage. Because they will no longer need to rent a warehouse, they can save $120,000 in rental. What is the most MI should pay for the shake makers from an independent supplier?

A) $5.40
B) $5.75
C) $7.50
D) $10.00

Question 61

Use the following to answer questions:
McCoy Industries (MI) produces ice cream supplies including bowls, scoops and shake makers. MI is considering outsourcing their shake makers. Juan Hernandez, the controller complied the following

information.
Mr. Hernandez assumes 100,000 shake makers will be sold. If the shake maker is outsourced, product level costs will increase by $35,000 to cover the increased cost of maintaining the relationship with the supplier. Other product level and facility level costs will not change.

-What other factors should Mr. Hernandez consider in outsourcing the shake makers?

A) The potential loss in control from outsourcing
B) The potential loss in innovation from outsourcing
C) The potential loss in quality from outsourcing
D) All of the above

Question 62

The Sheila Cabot Construction Company (SCCC) is building a local stadium. They need an office at the stadium site. SCCC can build the office themselves with material costing $50,000 and labor costs of $13,000. When the company takes apart the building at the end of the project, 20% of the material would be reusable. Alternatively, SCCC can rent a pre-fabricated building at a cost of $1000 per month with no set-up or dismantling costs. It will benefit SCCC to build the office if it expects the stadium project to exceed

A) 36 months
B) 50 months
C) 53 months
D) 63 months

Question 63

Chisel Inc currently produces 30,000 hammers per year with variable costs of $90,000 and fixed costs of $40,000 per year. The hammers sell for $5 per unit. Currently, the company has no excess capacity as it is able to sell all of the hammers it produces. Jacob Maccabi, head salesman received a special order for an additional 5,000 units at the same price. Producing the extra units will require the company to rent an additional machine for increased capacity. The cost of the increased machine is $12,500. Should the company accept the special order - explain your answer.

Question 64

Travis Corporation sells a product for $100 per unit. Its market share is 32 percent. The market share can be increased to 40 percent with a reduction in price to $87. The product is currently earning a profit of $23 per unit. The president of Travis Corporation feels that the company needs to maintain the same profit level per unit. The total market consists of $1,000,000 (10,000 units).
Compute the following items:
(1) How many units does Travis Corporation currently sell of the product? __________
(2) What is the target price per unit? __________
(3) What is the original cost per unit? __________
(4) What is the target cost per unit? _____

Question 65

Sanders Company needs 10,000 units of a certain part to use in its production cycle. If Sanders buys the part from Rodman Company instead of making it, Sanders cannot use the excess capacity for another manufacturing activity. Forty percent of the overhead will continue regardless of what decision is made.
Cost to Sanders to make the part (per unit) Cost to buy the part from Rodman - $65 (per unit) Required:
(1) In deciding whether to make or buy the part, what are Sanders' total relevant costs to make the part?
__________
(2) What decision should Sanders make, and what is the total cost advantage that would result?
__________
(3) What is the total dollar value of costs that are not relevant to this decision? _____

Question 66

Jones Corp. currently sells 50,000 units to its normal customers, but it has a capacity to produce 60,000 units. Its product sells for $60 per unit and the variable costs incurred in manufacturing and selling the product are as follows on a per unit basis: Direct materials - $12; Direct labor - $20; Sales commission - $4. A customer has proposed a special order to purchase 10,000 units at a special price of $45 per unit. If Jones accepts the order, the company would not have to pay its sales people their normal commission, but the company would incur a shipping cost of $7 per unit.
Required:
(1) If Jones accepts the special order, how would operating income is affected? __________
(2) What is the minimum price per unit below which Jones should reject the order? __________
(3) Assume that Jones is operating at full capacity. What is the minimum price per unit below which Jones should reject the order? _____

Question 67

(CMA adapted) Regis Company manufactures plugs used in its manufacturing cycle at a cost of $36 per unit that includes $8 of fixed overhead.
Regis needs 30,000 of these plugs annually, and Orlan Company has offered to sell these units to Regis at $33 per unit. If Regis decides to purchase the plugs, $60,000 of the annual fixed overhead applied will be eliminated, and the company may be able to rent the facility previously used for manufacturing the plugs. Required:
(1) If Regis purchases the plugs but does not rent the unused facility, how much would the company save or lose per unit? __________
(2) If the plugs are purchased and the facility rented, Regis Company wishes to realize $100,000
in savings annually. To achieve this goal, what must the minimum annual rent on the facility be?
______

Question 68

Brewer Corp. is considering dropping its talking dog product line due to continuing losses. Revenue and cost data for the talking dog line for the past year
follow:
If the talking dog is discontinued, then Brewer could avoid $110,000 per year in fixed costs.
Required:
(1) What is the change in annual operating income from discontinuing the talking dog product line?
___________
(2) Assuming all other conditions stay the same, at what level of annual sales of the talking dog (in units) should Brewer be indifferent at to discontinuing or continuing the product line?
___________
(3) Suppose that if the talking dog is dropped, the production and sale of other products would increase so as to generate a $15,000 increase in the contribution margin received from the other products. If all other conditions are the same, what is the change in annual operating income from dropping the talking dog?
_____

Question 69

issue.
Conwell Candies (CC) makes three types of chocolate candy bars. The head of marketing, Grant Wistrom found the chart below and believes CC should drop the Almond line. He asks controller Vivian King to review the situation and determine the fate of the Almond Line.
Required:
1) Review the information below and determine the fate of the Almond Line. Prepare your answer in good form. Note-facility and product level costs are fixed and will not change; they are allocated based upon sales.
2) Prepare a memo defending your position on this important

Question 70

Ellis Enterprises produces high quality blankets sold to hotels and resorts. Blankets must be well made because of frequent washings. Currently, Holt sells 10,000 blankets at $60 each with the capacity to produce 12,000 blankets. Ellis is considering a special order from a hotel chain in Kenya for 1,000 blankets at a price of $45. Currently, Ellis has the following
costs:
If Ellis accepts the special order, they will incur an additional $2 per blanket in foreign currency transaction costs. No other product or facility costs will change.
Required:
1) Determine the impact of the special order on Ellis. Prepare your analysis in good form.
2) What other factors should Ellis consider in taking the special order?