Deck 13: Relevant Information for Special Decisions

Question 1

Great Outdoors Company operates a store in downtown Denver that has five departments including a fishing department. If the fishing department is closed, the store manager's position will not be affected, but if the entire store is closed, the manager will be terminated. Which of the following lessons should be learned from this example?

A) Opportunity costs are always present.
B) Sunk costs cannot be avoided.
C) Relevance of costs is context sensitive.
D) Information does not have to be precisely accurate in order to be relevant.

Answer 1

C
Explanation: The concept of relevance is independent from the concept of cost behavior. In a given circumstance, relevant costs could be either fixed or variable.

Question 2

Relevant costs are often referred to as:

A) Unavoidable costs
B) Differential costs
C) Sunk costs
D) All of the above

Answer 2

B
Explanation: Relevant information (1) differs among the alternatives and (2) is future-oriented. Relevant costs are frequently called avoidable costs.

Question 3

All of the following statements describe qualities of relevance except:

A) Relevant information requires a high degree of precision.
B) Relevant information differs between the alternatives.
C) Relevant information is future-oriented.
D) Relevant information includes qualitative as well as quantitative data.

Answer 3

A
Explanation: The most useful information is both relevant and precise. Totally inaccurate information is useless. Likewise, irrelevant information is useless regardless of its accuracy.

Question 4

Osprey Company is trying to decide between the following two alternatives: Which of the following conclusions can be drawn from this example?

A) Variable costs are always relevant for decision making.
B) Fixed costs are sunk and thus are never relevant for decision making.
C) Relevant costs may include variable costs and fixed costs.
D) None of the above.

Question 5

Bates Company plans to add a new item to its line of consumer product offerings. Two possible products are under consideration. Each unit of Product A costs $6 to produce and has a contribution margin of $3, while each unit of Product B costs $12 and has a contribution margin of $4. What is the differential revenue for this decision?

A) $7
B) $1
C) $6
D) $9

Question 6

Rachel is deciding whether to remain in the home she has lived in for the past ten years, which is located very near her work, or to move into a newer home that is located in the suburbs further from her job. The old house was purchased for $160,000 and has a market value of $220,000. The new home can be purchased for $285,000. Which of the following is not relevant to Rachel's decision?

A) Driving distance to work
B) Cost of the old house
C) Market value of the old house
D) Cost of the new house

Question 7

Which of the following is not a possible alternate term for costs that can be eliminated by taking a specified course of action?

A) Avoidable costs
B) Opportunity costs
C) Relevant costs
D) Differential costs

Question 8

Select the incorrect statement regarding relevant costs and revenues.

A) To be relevant, a cost or revenue must be future-oriented and must differ between the alternatives.
B) Sunk costs are never relevant for decision-making purposes.
C) Differential revenues are expected future revenues that differ from past revenues.
D) Avoidable costs are also known as differential costs.

Question 9

Select the incorrect statement regarding sunk costs.

A) Sunk costs cannot be avoided.
B) Sunk costs are relevant if they differ between the alternatives.
C) Sunk costs are costs that have been incurred in past transactions.
D) Sunk costs include historical costs such as equipment acquisition costs.

Question 10

Expected future revenues that differ among the alternatives under consideration are often referred to as:

A) Alternative revenues.
B) Preferential revenues.
C) Relative revenues.
D) Differential revenues.

Question 11

Jason is trying to decide which one of two job offers he will accept. Several items are presented below: Which of the above items would be considered relevant costs?

A) (1), (3), (5)
B) (2), (4)
C) (5)
D) None of the above.

Question 12

Stephenson Company is trying to decide which one of two contracts it will accept. The costs and revenues associated with each are listed below: The equipment was purchased last year and has no resale value. Which of these amounts is relevant for the selection of one contract over another?

A) Contract revenue and labor costs
B) Materials, consulting advice and allocated overhead
C) Cost of consulting advice and allocated overhead
D) Contract revenue, labor costs and depreciation on equipment

Question 13

Alex brought his lunch today but now a co-worker has asked him to go to the deli across the street. Select the correct statement from the following.

A) The cost of the lunch Alex had brought is relevant to Alex's decision to have lunch with his friend.
B) The cost of the lunch that Alex had brought has nothing to do with his current decision.
C) The cost to buy lunch at the deli is not relevant because it has not yet been incurred.
D) The cost of the lunch Alex already has represents the opportunity cost of dining with his friend.

Question 14

Which of the following statements is true?

A) Fixed costs are sometimes relevant for decision making.
B) Opportunity costs are never relevant to decision making.
C) Information must be exactly accurate to be relevant to decision making.
D) A cost that is relevant in one decision context is relevant in other decision contexts.

Question 15

For purposes of decision making, avoidable costs are costs that:

A) were incurred in the past.
B) will not be incurred in the future, regardless of the alternative chosen.
C) differ between alternatives.
D) None of the above.

Question 16

Select the correct statement regarding relevant costs and revenues.

A) Relevant costs are also known as unavoidable costs.
B) Relevant costs are only those that are based on past experience.
C) Relevant revenues must differ between the alternatives.
D) All of the above.

Question 17

Select the correct statement regarding relevant costs and revenues.

A) Sunk costs are relevant for decision-making purposes.
B) Relevant costs are frequently called unavoidable costs.
C) Direct labor is an example of a unit-level cost.
D) Only variable costs are relevant for decision making.

Question 18

Scholastic Tours is trying to decide which one of two tours it will introduce. The costs and revenues associated with each alternative are listed below: What are the incremental (differential) costs of the Western Tour?

A) $4,000
B) $6,000
C) $8,000
D) None of these.

Question 19

Ann is trying to decide which one of two job offers she will accept. Several items are presented below: Select the items that are irrelevant to Ann's decision.

A) (1), (2), (3), (4), (5)
B) (2), (3), (4)
C) (1), (3), (5)
D) (2), (4)

Question 20

Select the correct statement regarding relevant revenues.

A) Relevant revenues must not differ between the alternatives being considered.
B) Past or future revenues may be relevant.
C) Relevant revenues must make a difference in the decision under consideration.
D) Revenues are not considered relevant in the same way as relevant costs.

Question 21

Benitez Company currently outsources a relay switch that is a component in one of its products. The switches cost $20 each. The company is considering making the switches internally at the following projected annual production costs: The company expects an annual need for 5,000 switches. If the company makes the product, it will have to utilize factory space currently being leased to another company for $1,500 a month. If the company decides to make the parts, total costs will be:

A) $10,500 more than if the switches are purchased.
B) $27,000 less than if the switches are purchased.
C) $20,000 less than if the switches are purchased.
D) $30,500 more than if the switches are purchased.

Question 22

Engineering design costs are generally referred to as:

A) Batch-level costs.
B) Facility-level costs.
C) Unit-level costs.
D) Product-level costs.

Question 23

Qualitative information is relevant when:

A) it makes a difference in the decision and it differs between the alternatives.
B) it differs between the alternatives only.
C) it makes a difference in the decision only.
D) None of the above.

Question 24

Select the correct statement regarding quantitative and qualitative information.

A) To be relevant, qualitative data need not be quantified.
B) Relevant information cannot have both quantitative and qualitative characteristics.
C) Qualitative data should only be considered when quantitative data are inconclusive.
D) To be relevant, qualitative data need not differ between the alternatives but must be future-oriented.

Question 25

QRC Company is trying to decide which one of two alternatives it will accept. The costs and revenues associated with each alternative are listed below: What is the differential revenue for this decision?

A) $25,000
B) $12,500
C) $62,500
D) $75,000

Question 26

Lindsay purchased a raffle ticket for $5. Just before the grand prize drawing two people tried to buy her ticket. The first person offered $30, and another offered $65. What is Lindsay's opportunity cost of keeping the raffle ticket?

A) $60
B) $65
C) $90
D) $95

Question 27

The Mighty Music Company produces and sells a desktop speaker for $100. The company has the capacity to produce 50,000 speakers each period. At capacity, the costs assigned to each unit are as follows: The company has received a special order for 500 speakers. If this order is accepted, the company will have to spend $15,000 on additional costs. Assuming that no sales to regular customers will be lost if the order is accepted, at what selling price will the company be indifferent between accepting and rejecting the special order?

A) $95
B) $45
C) $75
D) $60

Question 28

Select the incorrect statement concerning opportunity costs.

A) Opportunity costs are relevant costs.
B) Opportunity costs are cumulative.
C) Opportunity costs are future-oriented.
D) Opportunity costs are not recorded in the books.

Question 29

Ethan paid $3 for a bottle of ThirstAid. Later while on a hiking trip, she was offered $8 for the ThirstAid. Select the correct statement from the following:

A) The $8 offer is not relevant if Ethan refuses to sell the ThirstAid.
B) If Ethan drinks the ThirstAid, no opportunity cost is associated with his decision.
C) The $3 original purchase price is irrelevant to his decision to sell the ThirstAid.
D) All of the above.

Question 30

Which of the following items is qualitative?

A) Cost of new machine
B) Depreciation of existing machine
C) Book value of the existing machine
D) Degree to which the new machine can be integrated with existing machinery

Question 31

The cost that is avoided when a company eliminates a single item of a product or service is a:

A) Unit-level cost.
B) Facility-level cost.
C) Product-level cost.
D) Batch-level cost.

Question 32

The costs and revenues associated with two alternatives are listed below: Which alternative should be selected based on this information?

A) Alternative 2 because it has a higher profit.
B) Alternative 2 because it has the same product- & facility-level costs.
C) Alternative 1 because it has fewer unit-level costs.
D) Alternative 1 because it has a higher profit.

Question 33

The Page Turner Publishing Company is trying to decide whether or not to accept a special order for its latest blockbuster. In making this decision, which level of costs will most likely be relevant to the decision?

A) Batch-level costs
B) Facility-level costs
C) Unit-level costs
D) None of the above.

Question 34

Select the correct statement regarding opportunity costs.

A) Opportunity costs need not be considered in decision making.
B) Opportunity costs are not recorded in a firm's financial accounting records.
C) Opportunity costs represent sunk costs.
D) All of the above.

Question 35

Which of the following costs is an example of a product-level cost?

A) Machine setup costs
B) Patent filing costs
C) Materials and labor costs
D) Shipping and handling costs

Question 36

All of the following are variables that could be considered in a decision to outsource a component that is currently being produced in house. Which of the following is not likely to be relevant?

A) The impact on employee morale
B) The book value of equipment used in making the component
C) The importance of vertical integration to the company
D) The reliability of the supplier

Question 37

Which of the following costs is an example of a batch-level cost?

A) Assembly setup costs
B) Materials handling costs
C) Shipping and handling costs to ship an order to a customer
D) All of the above.

Question 38

Safety Products currently outsources an electrical switch that is a component in its sprinkler systems. The switches are purchased for $20 each. The company is considering making the switches internally and has conducted a study to determine the costs involved. The costs below are projected annual production costs: Assume that the company needs 15,000 of the switches, which would be produced in three batches. Assume also that the company will still be operating within the relevant range. If Safety decides to make the parts under these conditions, the total relevant costs will be:

A) $132,500.
B) $162,500.
C) $105,000.
D) $142,500.

Question 39

Clean, Inc. cleans and waxes floors for commercial customers. The company is presently operating at less than capacity with equipment and employees idle at times. The company recently received an order from a potential customer outside the company's normal geographic service region for a price of $4,500. The size of the proposed job is 11,000 square feet. The company's normal service costs are as follows: If the company accepts the special offer:

A) The company will lose $1,110 on the job.
B) The company will lose $2,210 on the job.
C) The company will lose $230 on the job.
D) The company will earn $2,520 on the job.

Question 40

The benefits sacrificed when one alternative is chosen over another are referred to as:

A) Avoidable costs.
B) Opportunity costs.
C) Sacrificial costs.
D) Beneficial costs.

Question 41

Which of the following is a true statement regarding product-level costs?

A) Product-level costs are only relevant to a decision when adding a product to a company's product line.
B) Product-level costs are generally relevant to outsourcing decisions.
C) Product-level costs are generally relevant to special order decisions.
D) Product-level costs are incurred to support the entire company.

Question 42

Mountain Gear has been using the same machines to make its name brand clothing for the last five years. A cost efficiency consultant has suggested that production costs may be reduced by purchasing more technologically advanced machinery. The old machines cost the company $100,000. The old machines presently have a book value of $60,000 and a market value of $6,000. They are expected to have a five-year remaining life and zero salvage value. The new machines would cost the company $50,000 and have operating expenses of $9,000 a year. The new machines are expected to have a five-year useful life and no salvage value. The operating expenses associated with the old machines are $15,000 a year. The new machines are expected to increase quality, justifying a price increase, and thereby increasing sales revenue by $5,000 a year. Select the true statement.

A) The company will be $11,000 better off over the 5-year period if it replaces the old equipment.
B) The company will be $20,000 better off over the 5-year period if it keeps the old equipment.
C) The company will be $12,000 better off over the 5-year period if it replaces the old equipment.
D) The company will be $6,000 better off over the 5-year period if it replaces the old equipment.

Question 43

Easton Company makes and sells scooters. Easton incurred the following costs in its most recent fiscal year: Easton can currently purchase the scooters it makes from Weston Company. If the company purchases the scooters, Easton would still continue to use its own logo, sales staff, and advertising programs. If Easton outsources the scooters to Weston, which of the following costs would be relevant to the outsourcing decision?

A) Materials cost
B) Shipping and handling
C) Inspection costs
D) All of the above.

Question 44

Outdoor Living Company has just received a special order for 500 hammocks. Outdoor Living has sufficient idle capacity to accept the order. Accepting the order will increase Outdoor Living's variable manufacturing costs. Variable selling and administrative costs would be unaffected. What is the minimum price that Outdoor Living should accept for the special order?

A) A price equivalent to the hammock's variable manufacturing cost per unit
B) A price equivalent to the hammock's unit contribution margin
C) The same price that Outdoor Living charges its existing customers
D) None of the above.

Question 45

All of the following are examples of product-level costs except:

A) product inspection costs.
B) product advertising costs.
C) engineering design costs.
D) patent costs.

Question 46

Gibbs Corporation makes indoor gas fireplaces. A standard fireplace includes unit-level materials, labor, and overhead costs. In addition, the company incurs product-level engineering and advertising costs. The sales staff is paid a 5% commission on each fireplace sold. A sales representative has been in contact with a building developer who wants to buy 20 fireplaces only if he can buy them at amount lower than Gibbs' selling price. Which of the following costs would be relevant to this special order decision?

A) The sales commissions
B) The product-level engineering and advertising costs
C) The unit-level materials, labor, and overhead
D) All of the above.

Question 47

Outdoor Living Company has just received a special order for 500 hammocks. Outdoor Living has sufficient idle capacity to accept the order. Accepting the order will increase Outdoor Living's total variable manufacturing costs. Which type of cost is considered relevant to Outdoor Living's decision of whether to accept or reject the special order?

A) Raw materials to make the 500 hammocks
B) Company president's salary
C) Salary of the production manager
D) Depreciation on equipment that would be used to make the hammocks

Question 48

Easton Company makes and sells scooters. Easton incurred the following costs in its most recent fiscal year: Easton can currently purchase the scooters it makes from another company. If the company purchases the scooters, Easton would still continue to use its own logo, sales staff, and advertising programs. Which of the following costs would be classified as a facility-level cost?

A) Inspection costs
B) Shipping and handling
C) Materials cost
D) Company president's salary

Question 49

Asset replacement decisions involve:

A) choices between continuing using existing materials or replacing them with less expensive materials.
B) choices between closing down or continuing to operate a segment of a business.
C) choices between continuing operating existing equipment or replacing it with new equipment.
D) None of the above.

Question 50

Jack currently works for a law firm full time and earns $60,000 a year. He is thinking of quitting his job to pursue a medical degree. Medical school will cost him $100,000 per year. If Jack quits his job and goes to medical school, the salary he currently earns would be considered what type of cost?

A) Irrelevant cost
B) Sunk cost
C) Opportunity cost
D) Fixed cost

Question 51

Special order decisions involve:

A) an offer to sell goods at a price that is higher than normal.
B) buying goods from other companies rather than making them internally.
C) an offer from a customer to buy goods at a lower-than-normal selling price.
D) None of the above.

Question 52

Sunk costs:

A) are not considered when evaluating new proposals.
B) differ among the alternatives.
C) impact the future.
D) are relevant.

Question 53

Which of the following statements is true?

A) Outsourcing decreases the extent of a company's vertical integration.
B) Reputation of the supplier is a critical issue in an outsourcing decision.
C) An outsourcing decision involves a purchase offer from a customer at a lower-than-normal selling price.
D) Outsourcing decreases the extent of a company's vertical integration and the reputation of the supplier is a critical issue in an outsourcing decision.

Question 54

The Mansfield Company manufactures and sells two lines of fishing rods. During the most recent accounting period, the Pro line and the Novice line sold 15,000 and 2,000 units, respectively. The company's most recent financial statements are shown below: Based on this information, the company should:

A) Eliminate the Novice line because it is operating at a loss.
B) Keep the Novice line because it contributes $40,000 to total profitability.
C) Keep the Novice line because it contributes $55,000 to total profitability.
D) It is impossible to determine with the given information.

Question 55

Outdoor Living Company has just received a special order for 500 hammocks. Outdoor Living has sufficient idle capacity to accept the order. Accepting the order will increase Outdoor Living's variable manufacturing costs. Which type of cost is considered a sunk cost to Outdoor Living's decision of whether to accept or reject the special order?

A) Raw materials to make the 500 hammocks
B) Labor cost to make the 500 hammocks
C) Depreciation on equipment that would be used to make the hammocks
D) Materials handling cost

Question 56

Easton Company makes and sells scooters. Easton incurred the following costs in its most recent fiscal year: Easton can currently purchase the scooters it makes from another company. If the company purchases the scooters, Easton would still continue to use its own logo, sales staff, and advertising programs. Which of the following costs would be classified as a unit-level cost?

A) Company president's salary
B) Depreciation on manufacturing equipment
C) Materials cost
D) Real estate taxes on factory

Question 57

ServicePro provides two kinds of services. During the most recent accounting period, the two service lines produced the following operating results: If the company stops providing Service 2:

A) The company's income will decrease by $1,500 per year.
B) The company's income will increase by $1,500 per year.
C) The company's income will decrease by $3,500 per year.
D) The company's income will increase by $3,500 per year.

Question 58

Hancock Company manufactures and sells two lines of furniture, case goods and upholstery. During the most recent accounting period, the Case Goods and Upholstery Divisions sold 15,000 and 2,000 units, respectively. The company's most recent financial statements are shown below: (Do not round intermediate calculations.) If unit sales for both divisions increased 10%, the company would report which of the following?

A) A $52,000 increase in net income for the Upholstery Division
B) A 10% increase in total net income of the company
C) A decline in profit for the Upholstery Division.
D) A net income for the Upholstery Division of $9,000

Question 59

When evaluating alternatives, what type of costs should be considered?

A) Relevant costs
B) Sunk costs
C) Prevention costs
D) Fixed costs

Question 60

Which of the following statements is incorrect?

A) An outsourcing decision typically affects only product-level costs.
B) Accepting a special order will involve incurring unit-level costs.
C) Eliminating a business segment often allows a company to avoid some facility-level costs.
D) Facility-level costs generally are not relevant in special order decisions.

Question 61

Which costs are relevant for equipment replacement decisions?

A) Unit-level costs
B) Batch-level costs
C) Product-level costs
D) All of the above.

Question 62

A company that provides services (not goods) to its customers may incur costs that are appropriately classified as product-level costs.

Question 63

Qualitative information is only relevant for decision making if it can be quantified.

Question 64

Only variable costs are relevant for decision making.

Question 65

Grady Corporation is evaluating two decision alternatives. Alternative One has costs of $2,000 and revenues of $3,000 while Alternative Two has costs of $3,200 and revenues of $4,000. The amount of differential revenue is $1,000.

Question 66

An alternative under consideration involves incurring $50 in costs to generate $60 in revenue. The differential revenue for this alternative is $10.

Question 67

Sunk costs are sometimes relevant for decision-making purposes.

Question 68

Differential revenues are expected future revenues that vary between the alternatives under consideration.

Question 69

Variable costs are always relevant in decision making.

Question 70

Mary must decide between two alternatives for the weekend: babysitting or yard work. If she babysits, she will receive $40 and will incur $15 in transportation costs. If she does yard work, she will receive $40 and will incur $3 in lawn mower gas and oil costs and $5 in transportation costs. The payment she would receive for the jobs is relevant in deciding which alternative to select.

Question 71

For decision-making purposes, qualitative factors are relevant if they differ among the alternatives and relate to the future.

Question 72

Natalie purchased a concert ticket recently for $50. She is trying to decide whether to drive, take a taxi, or ride the public transit bus. The cost of driving to the concert is a sunk cost because Natalie purchased her car several years ago.

Question 73

Relevant costs are frequently called unavoidable costs.

Question 74

Breezy Company is disposing of equipment that was originally purchased for $600,000 and has $240,000 of accumulated depreciation to date. The same equipment would cost $800,000 to replace. What is the total amount of sunk cost in this decision?

A) $240,000
B) $360,000
C) $840,000
D) $800,000

Question 75

Pilot Motors Corporation is an automobile manufacturer. The company produces its own motors, tires, and other automobile parts. Pilot has the opportunity to purchase tires from another manufacturer instead of producing the tires in its own facility. This type of decision is typically known as a(n):

A) outsourcing decision.
B) special order decision.
C) segment elimination decision.
D) asset replacement decision.

Question 76

Although opportunity costs are not recorded in the financial records, they nevertheless are useful for decision making.

Question 77

Fixed costs are relevant for decision making if they vary between the alternatives and are future-oriented.

Question 78

Max bought a ticket to the championship baseball game for $75. Someone approaches him outside the stadium and offers him $175 for his ticket. If Max decides to go to the game, instead of selling his ticket, how much does it cost Max to go to the game?

A) $75
B) $100
C) $175
D) None of the above.

Question 79

To be relevant in decision making, cost or revenue information must be future-oriented and must not differ between the alternatives.

Question 80

Monica paid $12 for a music CD for which she later was offered $15. After that someone offered her $18 for the CD. If Monica keeps the CD, the amount of her opportunity cost is $33.