Deck 8: Relevant Costs for Short-Term Decisions

Question 1

"Contribution margin per unit" is best described by which of the following?

A)Sales price per unit minus fixed cost per unit
B)Sales price per unit minus variable cost unit
C)Sales price per unit minus fixed and variable costs per unit
D)Units sold time contribution margin ratio

Answer 1

B

Question 2

Management accountants gather and analyze relevant information to compare alternatives.

Answer 2

True

Question 3

Which of the following is irrelevant when making a decision?

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

Answer 3

B

Question 4

Costs that differ between alternatives are irrelevant.

Question 5

Which of the following is a sunk cost?

A)Operating costs for a new vehicle
B)Trade in value of old vehicle
C)Purchase price of vehicle to be traded in
D)Purchase price of new vehicle

Question 6

An "opportunity cost" is best described by which of the following?

A)Benefits foregone by choosing a particular alternative course of action
B)Costs that were incurred in the past and cannot be changed
C)The distribution of all products to be sold
D)Expected future costs that differ among alternatives

Question 7

Expected future data that differs among alternative courses of action are referred to as

A)relevant information.
B)historical information.
C)predictable information.
D)irrelevant information.

Question 8

Relevant information is future data that do not differ among alternatives.

Question 9

A sunk cost is described as which of the following?

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

Question 10

One key to analyzing short-term business decisions is to use a contribution margin approach that separates variable costs from fixed costs.

Question 11

A "relevant cost" is best described by which of the following?

A)A factor that restricts production or sales of a product
B)Cost of developing, producing, and delivering a product or service
C)Costs that were incurred in the past and can not be changed
D)Expected future costs that differ among alternatives

Question 12

One cost that is irrelevant in decision making is a sunk cost.

Question 13

Fixed costs that may be avoided in the future are referred to as

A)relevant costs.
B)opportunity costs.
C)replacement costs.
D)sunk costs.

Question 14

Relevant information is expected future data that will not differ among alternatives.

Question 15

Managers' decisions are based solely on quantitative factors.

Question 16

Fixed costs that do not differ between two alternatives are

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

Question 17

Irrelevant costs are costs that do not affect short-term decisions.

Question 18

Which of the following best describes a "sunk cost"?

A)Costs that were incurred in the past and cannot be changed
B)Benefits foregone by choosing a particular alternative course of action
C)A factor that restricts the production or sale of a product
D)Expected future data that differ among alternatives

Question 19

The effect of a plant closing on employee morale is an example of which of the following?

A)A qualitative factor
B)A quantitative factor
C)A sunk cost
D)A variable cost

Question 20

One key to analyzing short-term business decisions is to focus on relevant revenues, costs and profits.

Question 21

When deciding whether to accept a special order, managers need to consider whether they have available excess capacity.

Question 22

Which would be a consideration for making special orders?

A)Available capacity to fill the order
B)If price will cover incremental costs of filling the order
C)If the order will affect regular sales in the long run
D)All of the above

Question 23

All of the following are relevant to the decision to replace equipment except the

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

Question 24

Which of the following is most important in making a short-term special decision?

A)Focus on total costs
B)Separate variable from fixed costs
C)Use a conventional absorption costing approach
D)Calculating the fixed cost per unit

Question 25

In a special sales order decision, incremental fixed costs that will be incurred if the special order is accepted are considered to be

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

Question 26

In deciding whether to accept a special sales order, any fixed costs that would remain unchanged are considered relevant data.

Question 27

A manager should always reject a special order if

A)the special order price is less than the variable costs of the order.
B)there is available excess capacity.
C)the special order price is less than the regular sales price.
D)the special order will require variable nonmanufacturing expenses.

Question 28

Ida Enterprises is considering replacing a machine that is presently used in its production process. The following information is available: Which of the information provided in the table is irrelevant to the replacement decision?

A)The annual operating cost of the old machine
B)The original cost of the old machine
C)The current disposal value of the old machine
D)Both A and C

Question 29

What is the difference between relevant and irrelevant information for making decisions. Provide examples of each.

Question 30

Managers should consider all of the following when deciding whether to accept a special order, except

A)available excess capacity.
B)the variable costs associated with the special order.
C)the effect of the order on regular sales.
D)fixed costs that will not be affected by the order.

Question 31

A special order occurs when a customer requests a one-time order at an increased sales price.

Question 32

A company should ________ when making a short-term special decision.

A)focus on qualitative factors only
B)focus on quantitative factors only
C)separate variable costs from fixed costs
D)use a traditional direct costing approach

Question 33

If the expected increase in revenues from a special order is greater than the expected increase in variable and fixed costs, then the special order should be accepted.

Question 34

Managers should consider the potential effect of a special order on long-run profits and operations.

Question 35

Variable costs are irrelevant to a special decision when those variable costs differ between alternatives.

Question 36

Managers should consider ________ when making any sort of decision.

A)only fixed costs
B)sunk costs
C)only variable costs
D)revenues that differ among alternatives

Question 37

In a special sales order decision, the special price must exceed the variable cost of filling the order. In other words, the special order must have ________.

A)sunk costs
B)a positive contribution margin
C)opportunity costs
D)a negative contribution margin

Question 38

Special orders increase income if the revenue from the order does not exceed the incremental variable and fixed costs incurred to fill the order.

Question 39

Sky High Seats manufactures seats for airplanes. The company has the capacity to produce 100,000 seats per year, but is currently producing and selling 75,000 seats per year. The following information relates to current production: If a special sales order is accepted for 7,000 seats at a price of $350 per unit, and fixed costs remain unchanged, how would operating income be affected? (NOTE: Assume regular sales are not affected by the special order.)

A)Increase by $560,000
B)Decrease by $560,000
C)Increase by $2,450,000
D)Increase by $8,000,000

Question 40

The format of the income statement most useful in decision-making is which of the following?

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

Question 41

Blue Technologies manufactures and sells DVD players. Great Products Company has offered Blue Technologies $22 per DVD player for 10,000 DVD players. Blue Technologies' normal selling price is $30 per DVD player. The total manufacturing cost per DVD player is $12 and consists of variable costs of $14 per DVD player and fixed overhead costs of $4 per DVD player. (NOTE: Assume excess capacity and no effect on regular sales.) How much are the expected increase (decrease)in revenues and expenses from the special sales order?

A)Expected increase in revenues $220,000; expected increase in expenses $140,000
B)Expected increase in revenues $220,000; expected increase in expenses $40,000
C)Expected increase in revenues $300,000; expected increase in expenses $140,000
D)Expected increase in revenues $220,000; expected increase in expenses $120,000

Question 42

Pluto Incorporated provided the following information regarding its single product: The regular selling price for the product is $80. The annual quantity of units produced and sold is 40,000 units (the costs above relate to the 40,000 units production level). The company has excess capacity and regular sales will not be affected by this special order. There was no beginning inventory.
What would be the effect on operating income of accepting a special order for 3,500 units at a sale price of $55 per product?

A)Increase by $115,500
B)Increase by $269,500
C)Decrease by $115,500
D)Decrease by $269,500

Question 43

The following information relates to current production of outdoor chaise lounges at Backyard Posh: The regular selling price per chaise lounge is $300.00. The company is analyzing the opportunity to accept a special sales order for 1,200 chaise lounges at a price of $225.00 per unit. Fixed costs would remain unchanged. The company has the capacity to produce 15,000 chaise lounges per year, but is currently producing and selling 10,000 chaise lounges per year. Regular sales will not be affected by the special order. If the company were to accept this special order, how would operating income be affected?

A)Increase by $270,000
B)Increase by $111,600
C)Decrease by $111,600
D)Decrease by $270,000

Question 44

ABC Toys manufactures and sells wooden toys for $15 each. The company has the capacity to produce 25,000 toys in a year, but is currently producing and selling 20,000 toys per year. The company currently is incurring the following costs at its current production level of 20,000 toys: A retailer is interested in purchasing the excess capacity of 5,000 toys if it can receive a special price. This special order would not affect ABC Toys' regular sales or its cost structure. ABC Toys' profits would increase from this special order if the special order price per toy is greater than

A)$8.00.
B)$5.80.
C)$7.25.
D)$14.25.

Question 45

The following information relates to current production of outdoor chaise lounges Backyard Posh: The regular selling price per chaise lounge is $300.00. The company is analyzing the opportunity to accept a special sales order for 200 chaise lounges at a price of $200.00 per unit. Fixed costs would increase by $20,000. The company has the capacity to produce 15,000 chaise lounges per year, but is currently producing and selling 10,000 chaise lounges per year. Regular sales will not be affected by the special order. If the company were to accept this special order, how would operating income be affected?

A)Decrease by $6,400
B)Increase by $13,600
C)Decrease by $13,600
D)Increase by $6,400

Question 46

Comfort Cloud manufactures seats for airplanes. The company has the capacity to produce 100,000 seats per year, but is currently producing and selling 75,000 seats per year. The following information relates to current production: If a special sales order is accepted for 2,500 seats at a price of $310 per unit, fixed costs increase by $6,500, and variable marketing and administrative costs for that order are $25 per unit, how would operating income be affected? (NOTE: Assume regular sales are not affected by the special order.)

A)Increase by $218,500
B)Decrease by $156,000
C)Increase by $162,500
D)Increase by $156,000

Question 47

Comfort Cloud manufactures seats for airplanes. The company has the capacity to prroduce 100,000 seats per year, but is currently producing and selling 75,000 seats per year. The following information relates to current production: If a special sales order is accepted for 5,500 seats at a price of $325 per unit, fixed costs remain unchanged, and no variable marketing and administrative costs will be incurred for this order, how would operating income be affected? (NOTE: Assume regular sales are not affected by the special order.)

A)Increase by $2,997,500
B)Increase by $302,500
C)Increase by $577,500
D)Decrease by $577,500

Question 48

Sky High Seats manufactures seats for airplanes. The company has the capacity to produce 100,000 seats per year, but is currently producing and selling 75,000 seats per year. The following information relates to current production: If a special sales order is accepted for 3,000 seats at a price of $300 per unit, and fixed costs increase by $10,000, how would operating income be affected? (NOTE: Assume regular sales are not affected by the special order.)

A)Decrease by $80,000
B)Increase by $230,000
C)Increase by $90,000
D)Increase by $80,000

Question 49

Comfort Cloud manufactures seats for airplanes. The company has the capacity to produce 100,000 seats per year, but is currently producing and selling 75,000 seats per year. The following information relates to current production: If a special sales order is accepted for 6,500 seats at a price of $325 per unit, and fixed costs remain unchanged, how would operating income be affected? (NOTE: Assume regular sales are not affected by the special order.)

A)Decrease by $357,500
B)Increase by $357,500
C)Increase by $2,112,500
D)Increase by $5,500,000

Question 50

Pluto Incorporated provided the following information regarding its single product: The regular selling price for the product is $80. The annual quantity of units produced and sold is 40,000 units (the costs above relate to the 40,000 units production level). The company has excess capacity and regular sales will not be affected by this special order. There was no beginning inventory.
What would be the effect on operating income of accepting a special order for 1,500 units at a sale price of $50 per product assuming additional fixed manufacturing overhead costs of $10,000 are incurred?

A)Decrease by $42,000
B)Decrease by $32,000
C)Increase by $32,000
D)Increase by $42,000

Question 51

Samson Incorporated provided the following information regarding its only product: Assuming there is excess capacity, what would be the effect on operating income of accepting a special order for 1,200 units at a sale price of $47 per product? The 1,200 units would not require any variable selling and administrative expenses. (NOTE: Assume regular sales are not affected by the special order.)

A)Increase by $84,300
B)Decrease by $28,500
C)Increase by $24,300
D)Increase by $28,500

Question 52

Blue Technologies manufactures and sells DVD players. Great Products Company has offered Blue Technologies $22 per DVD player for 10,000 DVD players. Blue Technologies' normal selling price is $30 per DVD player. The total manufacturing cost per DVD player is $12 and consists of variable costs of $14 per DVD player and fixed overhead costs of $4 per DVD player. (NOTE: Assume excess capacity and no effect on regular sales.) Should Blue Technologies accept or reject the special sales order?

A)Accept, because operating income would increase $360,000.
B)Reject, because operating income would decrease $80,000.
C)Accept, because operating income would increase $80,000.
D)Reject, because operating income would decrease $160,000.

Question 53

Sky High Seats manufactures seats for airplanes. The company has the capacity to produce 100,000 seats per year, but is currently producing and selling 75,000 seats per year. The following information relates to current production: If a special sales order is accepted for 4,000 seats at a price of $325 per unit, fixed costs remain unchanged, and no variable marketing and administrative costs will be incurred for this order, how would operating income be affected? (NOTE: Assume regular sales are not affected by the special order.)

A)Increase by $2,180,000
B)Increase by $420,000
C)Increase by $220,000
D)Decrease by $420,000

Question 54

Apex Company produces artificial Christmas trees. A local shopping mall recently made a special order offer; the shopping mall would like to purchase 200 extra large white trees. Apex Company is currently producing and selling 20,000 trees; the company has the excess capacity to handle this special order. The shopping mall has offered to pay $120 for each tree. An accountant at Apex Company provides an estimate of the unit product cost as follows: This special order would require an investment of $10,000 for the molds required for the extra large trees. These molds would have no other purpose and would have no salvage value. The special order trees would also have an additional variable cost of $5.00 per unit associated with having a white tree. This special order would not have any effect on the company's other sales. If the special order is accepted, the company's operating income would increase (decrease)by

A)$2,300 decrease.
B)$13,100 decrease.
C)$2,100 increase.
D)$13,100 increase.

Question 55

The following information relates to current production of outdoor chaise lounges at Backyard Posh: The regular selling price per chaise lounge is $300.00. The company is analyzing the opportunity to accept a special sales order for 800 chaise lounge at a price of $250.00 per unit. Fixed costs would remain unchanged. The company has the capacity to produce 15,000 chaise lounges per year, but is currently producing and selling 10,000 chaise lounges per year. Regular sales will not be affected by the special order. If the company were to accept this special order, how would operating income be affected?

A)Decrease by $94,400
B)Decrease by $118,400
C)Increase by $94,400
D)Increase by $118,400

Question 56

Sky High Seats manufactures seats for airplanes. The company has the capacity to produce 100,000 seats per year, but is currently producing and selling 75,000 seats per year. The following information relates to current production: If a special sales order is accepted for 2,500 seats at a price of $320 per unit, fixed costs increase by $5,000, and variable marketing and administrative costs for that order are $25 per unit, how would operating income be affected? (NOTE: Assume regular sales are not affected by the special order.)

A)Increase by $187,500
B)Decrease by $182,500
C)Increase by $182,500
D)Increase by $245,000

Question 57

The following information relates to current production of outdoor chaise lounges at Backyard Posh: The regular selling price per chaise lounge is $300.00. The company is analyzing the opportunity to accept a special sales order for 500 chaise lounges at a price of $200.00 per unit. Variable marketing and administrative costs would be $10 per unit lower than on regular sales. Fixed costs would increase by $15,000. The company has the capacity to produce 15,000 chaise lounges per year, but is currently producing and selling 10,000 chaise lounges per year. Regular sales will not be affected by the special order. If the company were to accept this special order, how would operating income be affected?

A)Decrease by $39,000
B)Decrease by $24,000
C)Increase by $39,000
D)Increase by $24,000

Question 58

Samson Incorporated provided the following information regarding its only product: Assuming there is excess capacity, what would be the effect on operating income of accepting a special order for 5,000 units at a sale price of $40 per product? (NOTE: Assume regular sales are not affected by the special order.)

A)Decrease by $66,250
B)Increase by $66,250
C)Increase by $200,000
D)Increase by $333,750

Question 59

Comfort Cloud manufactures seats for airplanes. The company has the capacity to produce 100,000 seats per year, but is currently producing and selling 75,000 seats per year. The following information relates to current production: If a special sales order is accepted for 3,200 seats at a price of $350 per unit, and fixed costs increase by $12,000, how would operating income be affected? (NOTE: Assume regular sales are not affected by the special order.)

A)Decrease by $244,000
B)Increase by $404,000
C)Increase by $256,000
D)Increase by $244,000

Question 60

Samson Incorporated provided the following information regarding its only product: Assuming there is excess capacity, what would be the effect on operating income of accepting a special order for 3,000 units at a sale price of $45 per product assuming additional fixed manufacturing overhead costs of $5,000 is incurred? (NOTE: Assume regular sales are not affected by the special order.)

A)Increase by $135,000
B)Decrease by $49,750
C)Increase by $49,750
D)Increase by $54,750

Question 61

Jeff's Widget Corporation produces and sells a part used in the production of bicycles. The unit costs associated with this part are as follows:
Direct materials $.14
Direct labor .30
Variable manufacturing overhead .20
Fixed manufacturing overhead .05
Total cost $.69
Saturn Company has approached Jeff's Widget Corporation with an offer to purchase 20,000 units of this part at a price of $.80. Accepting this special sales order will put idle manufacturing capacity to use and will not affect regular sales. Total fixed costs will not change.
Determine whether or not the special order should be accepted. Justify your conclusion.

Question 62

When making a pricing decision, it is not necessary to separate costs into fixed and variable.

Question 63

Elite Office Furniture received a special order for 1,200 units of its executive chair at a selling price of $90 per chair. Elite Office Furniture has enough capacity to accept the order. No additional selling costs will be incurred. Unit costs to make and sell this product are as follows: Direct Materials $45; Direct Labor $19; Variable Manufacturing Overhead $6; Fixed Manufacturing Overhead $12; and Variable Selling Costs $5.
List the relevant costs (and amount)to Elite Office Furniture for this special order.

Question 64

When a company is a price-setter, it emphasizes a target costing approach to pricing.

Question 65

Heinz Manufacturing produces Item Q with variable manufacturing costs of $12/unit. The selling price of Item Q is $15/unit. The fixed manufacturing overhead cost is $72,000. A normal production run includes 100,000 units. Heinz Manufacturing has discovered an additional process to change Item Q into Item QR. Additional costs are estimated at $7/unit. Item QR would sell for $24/unit. Additional fixed manufacturing overhead costs of $4,500 would be incurred if Item QR is produced. There would be no change in the number of units produced.
By what percent would Heinz Manufacturing's operating income improve if the change is made?

Question 66

Pluto Incorporated provided the following information regarding its single product: The regular selling price for the product is $80. The annual quantity of units produced and sold is 40,000 units (the costs above relate to the 40,000 units production level). The company has excess capacity and regular sales will not be affected by this special order. There was no beginning inventory.
What would be the effect on operating income of accepting a special order for 1,000 units at a sale price of $40 per product? The special order units would not require any variable selling and administrative expenses.

A)Decrease by $18,000
B)Decrease by $19,500
C)Increase by $18,000
D)Increase by $19,500

Question 67

Heinz Manufacturing produces Item Q with variable manufacturing costs of $12/unit. The selling price of Item Q is $15/unit. The fixed manufacturing overhead cost is $72,000. A normal production run includes 100,000 units. Heinz Manufacturing has discovered an additional process to change Item Q into Item QR. Additional costs are estimated at $7/unit. Item QR would sell for $24/unit. Additional fixed manufacturing overhead costs of $4,500 would be incurred if Item QR is produced. There would be no change in the number of units produced.
What would be the operating income for Item QR?

Question 68

Cost-plus price minus desired profit equals total cost.

Question 69

For a product, revenue at market price plus desired operating profit equals target total cost.

Question 70

Indicate whether each item below is a characteristic of a price-taker or a price-setter. Use PT for price-taker and PS for price-setter.
a)Cost-plus pricing
b)Product lacks uniqueness
c)Less competition
d)Target pricing
e)Heavy competition

Question 71

Mountaintop golf course is planning for the coming season. Investors would like to earn a 12% return on the company's $50 million of assets. The company primarily incurs fixed costs to groom the greens and fairways. Fixed costs are projected to be $25,000,000 for the golfing season. About 400,000 golfers are expected each year. Variable costs are about $8 per golfer. The Mountaintop golf course is a price-taker and won't be able to charge more than its competitors who charge $75 per round of golf. What profit will it earn? State your answer in dollars and as a percent of assets. Will investors be happy with the profit level?

Question 72

A price-setter company emphasizes a cost-plus approach to pricing.

Question 73

Extreme Sports received a special order for 1,000 units of its extreme motorbike at a selling price of $250 per motorbike. Extreme Sports has enough extra capacity to accept the order. No additional selling costs will be incurred.
Unit costs to make and sell this product are as follows: Direct materials, $100; direct labor, $50; variable manufacturing overhead, $14; fixed manufacturing overhead, $10, and variable selling costs, $2.

A)List the relevant costs.
B)What will be the change in operating income if Extreme Sports accepts the special order?
C)Should Extreme Sports accept the special order?

Question 74

Elite Office Furniture received a special order for 1,200 units of its executive chairs at a selling price of $90 per chair. Elite Office Furniture has enough capacity to accept the order. No additional selling costs will be incurred. Unit costs to make and sell this product are as follows: Direct Materials $45; Direct Labor $19; Variable Manufacturing Overhead $6; Fixed Manufacturing Overhead $12; and Variable Selling Costs $5.
What will be Elite Office Furniture's change in operating income if they accept the special order? Should Elite Office Furniture accept the order? Explain why or why not.

Question 75

Mountaintop golf course is planning for the coming season. Investors would like to earn a 12% return on the company's $50 million of assets. The company primarily incurs fixed costs to groom the greens and fairways. Fixed costs are projected to be $25,000,000 for the golfing season. About 400,000 golfers are expected each year. Variable costs are about $8 per golfer. The Mountaintop golf course has a favorable reputation in the area and therefore, has some control over the price of a round of golf. Using a cost-plus approach, what price should Mountaintop charge for a round of golf?

Question 76

Companies operating in highly competitive industries are generally price-setters.

Question 77

Heinz Manufacturing produces Item Q with variable manufacturing costs of $12/unit. The selling price of Item Q is $15/unit. The fixed manufacturing overhead cost is $72,000. A normal production run includes 100,000 units. Heinz Manufacturing has discovered an additional process to change Item Q into Item QR. Additional costs are estimated at $7/unit. Item QR would sell for $24/unit. Additional fixed manufacturing overhead costs of $4,500 would be incurred if Item QR is produced. There would be no change in the number of units produced.
What would be the operating income for Item Q?

Question 78

Revved Up Toys manufactures a computer chip used in the production of remote control cars. When 6,000 cars are produced, the costs per part are:
Sam's Associates has offered to sell Revved Up Toys 6,000 parts for $5.75 each. If Sarah accepts the offer, $1.00 of the fixed manufacturing overhead costs can be eliminated.
a. What is the relevant per unit cost to manufacture the part?
b. Which alternative is best for Revved Up Toys and by how much?

Question 79

When setting prices, a company need not consider whether it is a price-taker or a price-setter for each product that it sells.

Question 80

When using a target costing approach, the company starts with revenue at market price, and then subtracts its desired profit, to yield the target total cost.