Deck 22: Relevant Information and Decisions

Question 1

The total-cost approach to considering alternatives includes analyzing:

A) Only the differential costs of the alternatives
B) Only the common costs of the alternatives
C) Both the common and the differential costs of the alternatives
D) Neither the common nor the differential costs of the alternatives

Answer 1

C

Question 2

For which decision would a store manager's salary be a differential cost?

A) Adding a department
B) Closing the store
C) Increasing sales 10%
D) Leasing a larger store

Answer 2

B

Question 3

Evening theater tickets are probably more expensive than matinee tickets because:

A) Variable costs of a matinee are lower than those of an evening performance
B) Theaters are trying to use up excess capacity and so are considering only incremental costs in determining the price of a matinee
C) Less electricity is probably used in the daytime
D) None of these reasons are correct

Answer 3

B

Question 4

The total-cost approach to pricing products is usually relevant to:

A) Only the pricing of normal orders for products
B) Only the pricing of special orders
C) The pricing of both special orders and normal orders for products
D) Neither the pricing of special orders nor the pricing of normal orders for products

Question 5

A special order is an:

A) Order that is priced at normal price in order to utilize excess capacity
B) Order that is priced above the normal price in order to make a large profit
C) Order that is priced below the normal price in order to utilize excess capacity
D) Order that is part of normal business

Question 6

Costs that can be eliminated in whole or in part by choosing one alternative over another are:

A) Sunk costs
B) Variable costs
C) Differential costs
D) Opportunity costs

Question 7

Which of the following is true when making product and process decisions?

A) Opportunity costs should never be included in making a decision.
B) All costs should be taken into account when making a decision.
C) Only the differential costs should be used to make a decision.
D) None of these are true.

Question 8

Which of the following costs is LEAST likely to be a differential cost?

A) Overtime wages
B) Depreciation
C) Manager's salary
D) Costs for additional equipment

Question 9

Future costs that change as a result of a decision are:

A) Sunk costs
B) Variable costs
C) Differential costs
D) Opportunity costs

Question 10

The maximum available contributions to profit that have been passed up by using resources for another purpose are:

A) Sunk costs
B) Variable costs
C) Differential costs
D) Opportunity costs

Question 11

Costs that are significant in the decision-making process but are NOT recorded in the accounting records are:

A) Opportunity costs
B) Differential costs
C) Sunk costs
D) Overhead costs

Question 12

For which decision(s) would shipping costs be a differential cost?

A) Increasing the product's sales
B) Deciding how many units to produce with limited resources
C) Both increasing the product's sales and deciding how many units to produce with limited resources
D) Neither increasing the product's sales nor deciding how many units to produce with limited resources

Question 13

Costs that have already been incurred and CANNOT be avoided are:

A) Sunk costs
B) Variable costs
C) Differential costs
D) Opportunity costs

Question 14

Differential costs are relevant when making which of the following types of decisions?

A) The pricing of special orders
B) When to drop or add a product
C) Determining whether or not to further process different products
D) All of these are correct

Question 15

Which of the following costs are always relevant for decision making?

A) Sunk costs and differential costs
B) Opportunity costs and sunk costs
C) Differential costs and fixed costs
D) Opportunity costs and differential costs

Question 16

A cost that is measured by the benefits forgone from an alternative use of resources is called a(n):

A) Sunk cost
B) Opportunity cost
C) Differential cost
D) Standard cost

Question 17

For a cost to be a differential cost, it must be:

A) A future cost
B) A sunk cost
C) Recorded in the accounting records
D) A future cost that changes

Question 18

In a decision regarding whether or not to buy a new truck, the book value of the old truck usually is considered to be:

A) A relevant cost
B) A differential cost
C) A sunk cost
D) None of these are correct

Question 19

Costs that are never relevant to a decision because they are always the same are:

A) Sunk costs
B) Variable costs
C) Differential costs
D) Opportunity costs

Question 20

Which of the following statements is true when making product and process decisions?

A) Both quantitative and qualitative factors should be considered
B) Only quantitative factors should be considered
C) Only qualitative factors should be considered
D) Neither quantitative nor qualitative factors should be considered

Question 21

When there is idle capacity, which costs are most likely to be IRRELEVANT?

A) Incremental costs
B) Fixed costs
C) Variable costs
D) Opportunity costs

Question 22

Assuming a firm has excess capacity, which of the following is NOT a reason that the firm would decide to reduce the normal price of a product or service in order to obtain a special order?

A) The demand for the firm's products has dropped sharply in the last three months
B) The firm is being offered a contract from a foreign distributor based in a country where normal selling prices are lower
C) Market demand is strong and the firm is able to produce more products and still sell them at normal price
D) The firm is able to sell its excess product to be retailed under a generic brand name, the product will sell at lower than normal price

Question 23

West Star Company manufactures computers. The following cost information for the manufacture of one computer has been compiled: West Star received an offer for a special order for 1,000 computers. In addition to normal costs, West Star would also incur a $10 shipping charge per computer. In negotiating a price, what is the minimum selling price West Star should accept? (Assume that other variables do not change and West Star has enough capacity to fulfill the order.)

A) $285
B) $275
C) $235
D) $250

Question 24

Packer Corporation makes vases, the costs of which are: The manufacturing overhead can be divided into 60% variable manufacturing overhead and 40% fixed manufacturing overhead. A major department store has offered to buy 1,000 of the vases from Packer for $250 each. Given this information, if Packer has sufficient idle capacity and no adverse qualitative factors, should Packer accept the special order?

A) No, Packer would lose $10,000 in profits
B) Yes, Packer would earn $18,000 in profits
C) Yes, Packer would earn $42,000 in profits
D) No, Packer would lose $8,000 in profits

Question 25

If a decision regarding special orders is based only on costs, management should:

A) Accept any order where the payoff covers the variable costs
B) Accept any order where the payoff covers the variable costs and the direct fixed costs
C) Accept any order that will help utilize excess capacity, regardless of the payoff
D) All of these statements are true

Question 26

In making a decision about whether or not to fill a special order, fixed costs that are incurred regardless of whether the order is accepted should:

A) Be considered because they help to reduce net income
B) Be considered because they cannot be avoided
C) Not be considered because they will be incurred whether or not the order is accepted
D) None of these are correct

Question 27

Napa Company manufactures computers. The following cost information for the manufacture of one computer has been compiled: If Napa receives a special order for 500 computers at a price of $550, what will be the effect on the company's profit if the order is accepted? (Assume that other variables do not change.)

A) Increase of $15,000
B) Increase of $35,000
C) Increase of $75,000
D) Decrease of $5,000

Question 28

The relevant costs of buying a component from a supplier are:

A) Direct labor costs
B) Opportunity costs
C) Variable manufacturing costs
D) Prices charged by the supplier

Question 29

Exhibit 22-1 Lumens Corporation makes ornamental lamps. The costs per lamp are the following:
The manufacturing overhead can be divided into 40% variable manufacturing overhead and 60% fixed manufacturing overhead.
Refer to Exhibit 22-1. To earn a reasonable return and cover administrative and selling expenses, Lumens normally sells its lamps for $200 each. Given this information, Lumens's variable cost of making each lamp is:

A) $90
B) $100
C) $120
D) $130

Question 30

In a make-or-buy decision, management would consider:

A) Cost advantages
B) Negative qualitative factors
C) Alternative uses for idle facilities
D) All of these should be considered

Question 31

When managers are deciding what price to charge for a special order, they should consider:

A) Both additional costs and qualitative factors
B) Only additional costs
C) Only qualitative factors
D) Neither qualitative factors nor additional costs

Question 32

When pricing special orders in a situation where there is unused capacity, management should charge a price that is greater than the:

A) Additional costs of manufacturing the product
B) Total costs of manufacturing the product
C) Fixed costs of manufacturing the product
D) The answer cannot be determined

Question 33

When pricing special orders, management can often approximate additional costs by the:

A) Sunk costs of making the product
B) Total costs of making the product
C) Fixed costs of making the product
D) Variable costs of making the product

Question 34

The opportunity cost of producing a component within a firm is:

A) The return that could be earned from the best alternative use of the resources
B) The return that could be earned from the worst alternative use of the resources
C) The actual cost of making the component
D) None of these are correct

Question 35

Which of the following statements about opportunity costs is true?

A) They are not recorded in the accounts and thus are not useful in the decision-making process
B) They are not recorded in the accounts but are useful in the decision-making process
C) They are recorded in the accounts but are not useful in the decision-making process
D) They are recorded in the accounts and are useful in the decision-making process

Question 36

Exhibit 22-1 Lumens Corporation makes ornamental lamps. The costs per lamp are the following:
The manufacturing overhead can be divided into 40% variable manufacturing overhead and 60% fixed manufacturing overhead.
Refer to Exhibit 22-1. A major department store has offered to buy 1,000 of the lamps from Lumens for $120 each. Given this information, if Lumens has sufficient idle capacity, by how much would Lumens increase its profits by selling the lamps to the store?

A) $20,000
B) $10,000
C) $0
D) Lumens would lose profits for accepting this order

Question 37

A firm can increase profits if:

A) The selling price exceeds the total variable costs
B) The selling price exceeds the total variable and differential fixed costs
C) The price floor exceeds the selling price
D) Special sales have no adverse effect on normal sales

Question 38

Make-or-buy decisions should be based on:

A) Total costs
B) Only variable costs
C) Variable costs and indirect fixed costs
D) Variable costs and direct fixed costs

Question 39

Which of the following qualitative factors should be considered in a make-or-buy decision?

A) The effect on the regular supply source
B) The company's ability to make a high-quality component
C) Employment considerations
D) All of these are correct

Question 40

Which type of data might cause a manager to erroneously reject an order?

A) Total cost
B) Effect on sales
C) Future costs that would change
D) Differential costs

Question 41

A cost important to the decision-making process but NOT recorded in conventional accounting records is called a(n):

A) Sunk cost
B) Standard cost
C) Direct cost
D) Opportunity cost

Question 42

Exhibit 22-4 Lauria Electronics has excess capacity that could be used to make 2,000 antennas for the cell phones that the company produces. The following cost figures are available:
Lauria can buy the antennas from an outside supplier for $10.50.
Refer to Exhibit 22-4. Given the data above, if Lauria has idle facilities with no alternative use, it should:

A) Buy the antennas from the outside supplier
B) Make the antennas
C) Lauria would be equally well off either buying or making the antennas
D) The answer cannot be determined

Question 43

Exhibit 22-2 JD Smith Company is operating at less than full capacity. The production manager is considering using this excess capacity to make a part that he usually buys. The full costs of manufacturing the part are as follows:
Up to now, the company has been buying 3,000 units of the part for a total of $115,000.
Refer to Exhibit 22-2. In deciding whether or not to make the part, JD Smith Company should use a differential unit cost figure of:

A) $33
B) $38
C) $40
D) $46

Question 44

Which of the following criteria should be used when making a decision about whether or not to drop a market segment?

A) Total contribution margin of the segment
B) Contribution margin available to cover indirect fixed costs
C) Net income of the segment
D) Segment margin available to cover indirect fixed costs

Question 45

Newell Company presently has three product lines: paper, stamps, and printer ink. The company is considering discontinuing the stamp line. The stamp line has the following current data: Given this information, if Newell discontinues the stamp line, net income would:

A) Increase by $3,000
B) Decrease by $6,000
C) Decrease by $9,000
D) Decrease by $12,000

Question 46

Northwest Company presently has two products: compasses and maps. The company is considering discontinuing the compass line. The following financial information is available for these two products: Given this information, if Northwest discontinues the compass line, net income would:

A) Increase by $15,000
B) Decrease by $40,000
C) Decrease by $25,000
D) Decrease by $30,000

Question 47

Newell Company presently has three product lines: paper, stamps, and printer ink. The company is considering adding a new line of pens. Market research shows the following expected revenues and costs if the pen line were added: If pens are added as a product line, it is expected that the other lines will have a decrease in contribution margin of $7,000. Given this information, if Newell adds the pen line, net income would increase by:

A) $16,000
B) $14,000
C) $7,000
D) $0

Question 48

Which of the following should be considered in a decision to enter a market?

A) Effects on profits
B) Effects on quality
C) Effects on delivery time
D) All of these are correct

Question 49

Overland Company is planning on discontinuing one of its markets in Japan. The Japanese market has a contribution margin of $33,000. Fixed costs for the Japanese market are $55,000, 70% of which are unavoidable. What will be the effect on Overland's net income if the Japanese market is eliminated?

A) Increase by $33,000
B) Decrease by $33,000
C) Increase by $16,500
D) Decrease by $16,500

Question 50

Costs that are NOT the responsibility of any specific segment, product, or department are:

A) Common costs
B) Differential costs
C) Sunk costs
D) Fixed costs

Question 51

A company should generally add a product line if:

A) Its segment margin is negative and its contribution to overall company profits is negative
B) Its segment margin is negative and its contribution to overall company profits is positive
C) Its segment margin is positive
D) None of these are correct

Question 52

Exhibit 22-4 Lauria Electronics has excess capacity that could be used to make 2,000 antennas for the cell phones that the company produces. The following cost figures are available:
Lauria can buy the antennas from an outside supplier for $10.50.
Refer to Exhibit 22-4. Given the data above, Lauria would:

A) Save $1,400 by making the antennas
B) Save $3,600 by making the antennas
C) Lose $1,000 by making the antennas
D) Lose $3,600 by making the antennas

Question 53

When considering whether or not to drop a market segment of a business, past costs that CANNOT be recovered regardless of whether the segment is dropped are:

A) Opportunity costs
B) Variable costs
C) Sunk costs
D) Relevant costs

Question 54

Exhibit 22-2 JD Smith Company is operating at less than full capacity. The production manager is considering using this excess capacity to make a part that he usually buys. The full costs of manufacturing the part are as follows:
Up to now, the company has been buying 3,000 units of the part for a total of $115,000.
Refer to Exhibit 22-2. If JD Smith decided to make this product, its profit would:

A) Decrease $5,000
B) Decrease $23,000
C) Increase $5,000
D) Increase $23,000

Question 55

Exhibit 22-2 JD Smith Company is operating at less than full capacity. The production manager is considering using this excess capacity to make a part that he usually buys. The full costs of manufacturing the part are as follows:
Up to now, the company has been buying 3,000 units of the part for a total of $115,000.
Refer to Exhibit 22-2. If JD Smith uses a differential-cost analysis in deciding whether to make the part or buy the part, the total differential cost of making the part would be:

A) $99,000
B) $114,000
C) $120,000
D) $138,000

Question 56

Exhibit 22-3 Shasta Company is operating at less than full capacity. The production manager is considering using this excess capacity to make a part that he usually buys. The full costs of manufacturing the part are as follows:
Up to now, the company has been buying 2,000 units of the part for a total of $124,000.
Refer to Exhibit 22-3. In deciding whether or not to make the part, Shasta Company should use a differential unit cost figure of:

A) $46
B) $58
C) $64
D) $76

Question 57

Decisions to drop a product line must take into consideration:

A) All differential costs
B) Qualitative factors
C) Joint costs
D) All of these are correct

Question 58

Exhibit 22-3 Shasta Company is operating at less than full capacity. The production manager is considering using this excess capacity to make a part that he usually buys. The full costs of manufacturing the part are as follows:
Up to now, the company has been buying 2,000 units of the part for a total of $124,000.
Refer to Exhibit 22-3. If Shasta Company uses a differential-cost analysis in deciding whether to make the part, the total differential cost of making the part would be:

A) $88,000
B) $116,000
C) $128,000
D) $152,000

Question 59

When a segment of a business consistently shows net losses, it should:

A) Definitely be dropped
B) Be dropped only if its contribution to overall company profits is negative
C) Be dropped only if contribution margin exceeds fixed costs
D) Never be dropped

Question 60

Exhibit 22-3 Shasta Company is operating at less than full capacity. The production manager is considering using this excess capacity to make a part that he usually buys. The full costs of manufacturing the part are as follows:
Up to now, the company has been buying 2,000 units of the part for a total of $124,000.
Refer to Exhibit 22-3. If Shasta Company decided to make this product, its profit would:

A) Decrease $28,000
B) Decrease $4,000
C) Increase $4,000
D) Increase $10,000

Question 61

Merced Corporation is considering adding a new product line. Market research indicates that sales revenue for the new line would be $80,000 for 35,000 units. Variable costs would be $1.70 per unit; direct fixed costs, $0.40 per unit; and indirect fixed costs, $0.50 per unit. If Merced added the new line, its income would:

A) Increase by $20,500
B) Increase by $6,500
C) Decrease by $5,000
D) Decrease by $11,000

Question 62

The resource that limits operating capacity by its availability is the:

A) Outsourcing factor
B) Common cost factor
C) Special resource factor
D) Critical resource factor

Question 63

When making normal pricing decisions, management should consider:

A) Differential costs and markup amount
B) Variable costs and direct fixed costs only
C) Total costs and markup amount
D) Variable costs only

Question 64

Exhibit 22-5 Imperial Company manufactures two types of fruit drinks, Tropical and Hawaiian. The company can sell as many bottles of each product as it can produce, but production is limited by the availability of direct labor hours. The revenues, costs, and labor hours for the two products are as follows:
Refer to Exhibit 22-5. What is the contribution margin per 100 bottles of Hawaiian?

A) $480
B) $600
C) $720
D) $1,200

Question 65

The price charged for a product should normally be high enough to cover:

A) Total costs and still provide a reasonable return to owners
B) Fixed costs and still provide a reasonable return to owners
C) Variable costs and still provide a reasonable return to owners
D) Differential costs and still provide a reasonable return to owners

Question 66

To maximize net income in a situation involving scarce resources, a company should:

A) Manufacture products that generate overall contribution margin
B) Manufacture products that generate the greatest overall contribution margin per unit of scarce resource
C) Manufacture products that sell for the highest price
D) Manufacture products that have the lowest variable costs

Question 67

In relation to the critical resource factor, a company will maximize net income by selling products that:

A) Have the lowest variable costs
B) Have the highest selling price
C) Contribute the most toward fixed costs
D) Have the lowest differential costs

Question 68

Hopson Company is located in a large city that has good access to both raw materials and a dependable labor supply. Real estate in the city is extremely expensive, and Hopson's warehouse is always full because the company operates at 100% capacity. Hopson's critical resource probably is:

A) Labor hours
B) Availability of raw materials
C) Floor space
D) Machine hours

Question 69

Tarver Corporation makes stools and tables. The company can sell as many stools and tables as it can produce, but its machine-hour capacity is limited. Revenue and cost data for each unit are given as follows: It takes two machine hours to make a table and one machine hour per stool. Given this information, Tarver should:

A) Produce tables rather than stools
B) Produce stools rather than tables
C) Be equally well off either producing all tables or all stools
D) The answer cannot be determined from the information given

Question 70

Under what circumstance will it be profitable to continue processing after the split-off point?

A) When incremental revenues exceed incremental processing costs after the split-off point
B) There are no additional sunk costs
C) Opportunity costs outweigh the differential costs
D) None of these are correct

Question 71

CharCore mixes together wood chips and pine oil. After joint manufacturing costs of $2,000 have been incurred, the mixture separates into two products, granulated charcoal and methyl alcohol. At the split-off point, granulated charcoal can be sold for $5,000 and the alcohol can be sold for $9,000. The charcoal can be further processed at a cost of $6,000 to make air filters which could be sold for $15,000. The alcohol can be further processed at a cost of $7,000 to make a cleaning solvent which could be sold for $14,000. What is the net increase (decrease) in operating income from air filters?

A) $(2,000)
B) $2,000
C) $3,000
D) $4,000

Question 72

Exhibit 22-5 Imperial Company manufactures two types of fruit drinks, Tropical and Hawaiian. The company can sell as many bottles of each product as it can produce, but production is limited by the availability of direct labor hours. The revenues, costs, and labor hours for the two products are as follows:
Refer to Exhibit 22-5. How much larger or smaller would Imperial's earnings be if the company produced Hawaiian instead of Tropical with the 1,000 available direct labor hours?

A) $12,000 larger
B) $12,000 smaller
C) $18,000 larger
D) $18,000 smaller

Question 73

When managers are deciding how much of each product to sell to maximize net income, they should:

A) Focus on the product that contributes the most toward covering indirect fixed costs in relation to the critical resource factor
B) Focus on the product that has the highest contribution margin, regardless of its relation to the critical resource factor
C) Focus on the product that has the highest selling price
D) Focus on the product that has the lowest variable costs

Question 74

CharCore mixes together wood chips and pine oil. After joint manufacturing costs of $2,000 have been incurred, the mixture separates into two products, granulated charcoal and methyl alcohol. At the split-off point, granulated charcoal can be sold for $5,000 and the alcohol can be sold for $9,000. The charcoal can be further processed at a cost of $6,000 to make air filters which could be sold for $15,000. The alcohol can be further processed at a cost of $7,000 to make a cleaning solvent which could be sold for $14,000. What is the net increase (decrease) in operating income from cleaning solvents?

A) $(2,000)
B) $2,000
C) $3,000
D) $4,000

Question 75

When using the functional cost approach to set selling prices, the markup must cover:

A) Variable costs plus a reasonable return on investment
B) Fixed costs plus a reasonable return on investment
C) Period costs plus a reasonable return on investment
D) None of these are correct

Question 76

Granger Company makes portable DVD players. In its inventory, Granger found 200 DVD players that had become obsolete. Each DVD player has a cost of $100. Granger can upgrade these DVD players for $15 each after which they can be sold at a cost of $40 each. Granger has also received an offer to sell the DVD players, as is, for a total of $4,000. Compared to just selling the 200 DVD players for a total of $4,000 as they are, what is the net increase (decrease) in operating income if Granger upgrades the DVD players and then sells them?

A) $1,000 decrease
B) $1,000 increase
C) $5,000 decrease
D) $5,000 increase

Question 77

Exhibit 22-5 Imperial Company manufactures two types of fruit drinks, Tropical and Hawaiian. The company can sell as many bottles of each product as it can produce, but production is limited by the availability of direct labor hours. The revenues, costs, and labor hours for the two products are as follows:
Refer to Exhibit 22-5. With 1,000 direct labor hours available for production, if Imperial Company uses the entire amount to produce Tropical, the contribution margin in total dollars would be:

A) $24,000
B) $30,000
C) $48,000
D) $60,000

Question 78

Joint product costs are:

A) Costs incurred before the split-off point
B) Irrelevant to decisions concerning further processing
C) Incurred whether further processing is done or not
D) All of these are correct

Question 79

Granger Company makes portable DVD players. In its inventory, Granger found 200 DVD players that had become obsolete. Each DVD player has a cost of $100. Granger can upgrade these DVD players for $15 each after which they can be sold at a cost of $40 each. Granger has also received an offer to sell the DVD players, as is, for a total of $4,000. What is the total amount of sunk cost?

A) $3,000
B) $4,500
C) $8,000
D) $20,000

Question 80

CharCore mixes together wood chips and pine oil. After joint manufacturing costs of $2,000 have been incurred, the mixture separates into two products, granulated charcoal and methyl alcohol. At the split-off point, granulated charcoal can be sold for $5,000 and the alcohol can be sold for $9,000. The charcoal can be further processed at a cost of $6,000 to make air filters which could be sold for $15,000. The alcohol can be further processed at a cost of $7,000 to make a cleaning solvent which could be sold for $14,000. Which product should be processed further?

A) Granulated charcoal only
B) Methyl alcohol only
C) Both granulated charcoal and methyl alcohol
D) Neither granulated charcoal nor methyl alcohol