Deck 8: Short-Term Business Decisions

Question 1

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

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

Answer 1

D

Question 2

Smith Industries 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

Answer 2

B

Question 3

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

Answer 3

True

Question 4

Which of the following best describes "contribution margin per unit"?

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

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 new vehicle
D)Purchase price of vehicle to be traded in

Question 6

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

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

Question 7

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

Question 8

Which of the following is irrelevant when making a decision?

A)The cost of an asset that the company is considering replacing
B)Fixed overhead costs that differ among alternatives
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 drop a separate unprofitable product line

Question 9

Relevant information is future data that differs among alternatives.

Question 10

Which of the following best describes an "opportunity cost"?

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

Question 11

Which of the following describes a sunk cost?

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

Question 12

When making any sort of decision,managers should consider

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

Question 13

Costs that differ between alternatives are relevant.

Question 14

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

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

Question 15

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

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

Question 16

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

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

Question 17

Management accountants gather and analyze relevant information to compare alternatives.

Question 18

Managers' decisions are based on qualitative as well as quantitative factors.

Question 19

Fixed costs that do not differ between two alternatives are

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

Question 20

Managers only need to consider variable costs when setting prices.

Question 21

Which of the following pairs are characteristics of price-takers?

A)Less competition and target pricing
B)Target costing and heavy competition
C)Cost-plus pricing and less competition
D)Cost-plus pricing and lack of product uniqueness

Question 22

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

Question 23

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

Question 24

Cost-plus price minus desired profit equals total cost.

Question 25

In 2013 Yahoo CEO,Marissa Mayer,made news when the company's policy of allowing employees to work from home was eliminated.Provide two examples each of advantages and disadvantages to the company from implementing this policy change.How will this change effect environmental sustainability?

Question 26

Product differentiation allows companies to become more of a price-taker,and less of a price setter.

Question 27

Which of the following best describes "total cost of product or service"?

A)Benefits foregone by not choosing an alternative course of action
B)A factor that restricts production or sales of a product
C)All costs incurred along the value chain in connection with the product or service
D)Costs that were incurred in the past and can not be changed

Question 28

When making a pricing decision,it is necessary to separate costs into fixed and variable.

Question 29

Cost-plus pricing is essentially the opposite of target-costing.

Question 30

Companies often try to gain more control over pricing by attempting to differentiate their products.

Question 31

When pricing a product or service,managers must consider which of the following?

A)Only variable costs
B)Only period costs
C)Only manufacturing costs
D)All costs

Question 32

Which of the following describes the cost-plus price?

A)Total cost plus desired profit
B)Target total cost plus desired profit
C)Revenue at market price plus desired profit
D)Variable cost plus desired profit

Question 33

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.

Question 34

Managers only need to consider inventoriable product costs when setting prices.

Question 35

Which of the following describes the products and services of companies that are price-setters?

A)They are priced by managers using a target-costing emphasis.
B)They tend to be unique.
C)They tend to have a lot of competitors.
D)They tend to be commodities.

Question 36

A price-setter company emphasizes a target costing approach to pricing.

Question 37

When a company is a price-setter,it emphasizes a cost-plus approach to pricing.

Question 38

Which of the following describes the target total cost?

A)Revenue at market price minus desired profit
B)Revenue at market price plus desired profit
C)Total cost plus desired profit
D)Total cost minus actual cost

Question 39

When setting prices,a company must consider whether it is a price-taker or a price-setter for each product that it sells.

Question 40

Holsom Cakes is an independent gourmet bakery specializing in special occasion cakes.Being a small operation Holsom is a price taker.The current market price for cakes similar to Holsom's is $40.Holsom incurs monthly fixed costs for rent,equipment depreciation and salaries of $7,500.While there are small differences between cakes management believes using the average cost for ingredients and variable overhead of $12 would be sufficiently accurate for planning purposes.Holsom's owners believe they will sell 300 cakes per month at the market price of $40.
Required:
1.Can Holsom's owners earn an 18% annual return on their invested capital of $200,000 under this cost structure and pricing?
2.What is the minimum number of cakes Holsom's would have to sell in order to earn the owners' desired rate of return on investment?

Question 41

Target total cost is defined as

A)revenue at market price less desired profit.
B)cost of goods sold less desired profit.
C)revenue at market price less variable costs.
D)revenue at market price less fixed costs.

Question 42

Big-box retailers such as Best Buy are considered price-takers because

A)their products are unique.
B)there is less competition in the consumer electronics retail sector.
C)their products are not unique.
D)they emphasize cost-plus pricing.

Question 43

When deciding whether to accept a special order,managers need not consider whether they have available excess capacity.

Question 44

Using a cost-plus approach,what price should Green Pastures charge for a round of golf?

A)$47.50
B)$61.25
C)$67.50
D)$0.17

Question 45

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

Question 46

If Rosemont Tennis is a price-taker and won't be able to charge more than its competitors who charge $32.50 per hour of court time.What profit will it earn in terms of dollars?

A)$1,250,000
B)$(12,500,000)
C)$6,250,000
D)$(1,250,000)

Question 47

Holsom Cakes is an independent gourmet bakery specializing in special occasion cakes.Being a small operation Holsom is a price taker.The current market price for cakes similar to Holsom's is $45.Holsom incurs monthly fixed costs for rent,equipment depreciation and salaries of $6,500.While there are small differences between cakes management believes using the average cost for ingredients and variable overhead of $15 would be sufficiently accurate for planning purposes.Holsom's owners believe they will sell 250 cakes per month at the market price of $45.
Required:
Can Holsom's owners earn an 18% annual return on their invested capital of $200,000 under this cost structure and pricing?

Question 48

If the Green Pastures 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 in terms of dollars?

A)$7,000,000
B)$(7,000,000)
C)$15,000,000
D)$(15,000,000)

Question 49

Using a cost-plus approach,what price should Rosemont Tennis charge for an hour of court time?

A)$33.00
B)$36.00
C)$24.00
D)$0.20

Question 50

Special orders increase income if the revenue from the order exceeds the incremental variable and fixed costs incurred to fill the order.

Question 51

Managers should consider the potential long-run effect of a special order.

Question 52

Holsom Cakes is an independent gourmet bakery specializing in special occasion cakes.Being a small operation Holsom is a price taker.The current market price for cakes similar to Holsom's is $40.Holsom incurs monthly fixed costs for rent,equipment depreciation and salaries of $7,500.While there are small differences between cakes management believes using the average cost for ingredients and variable overhead of $12 would be sufficiently accurate for planning purposes.Holsom's owners believe they will sell 300 cakes per month at the market price of $40.
Required:
Can Holsom's owners earn an 18% annual return on their invested capital of $200,000 under this cost structure and pricing?

Question 53

Which of the following pairs are characteristics of price-setters?

A)Less competition and target costing
B)Lack of product uniqueness and heavy competition
C)Cost-plus pricing and less competition
D)Less competition and lack of product uniqueness

Question 54

Burr Hill golf course is planning for the coming season.Investors would like to earn a 10% 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 million for the golfing season.About 500,000 golfers are expected each year.Variable costs are about $10 per golfer.The Burr Hill course has a favourable reputation in the area and therefore,has some control over the price of a round of golf.
Required:
1.What are Burr Hill's total costs?
2.What is Burr Hill's target revenue?
3.What will Burr Hill's revenue be at a market price of $65/round?
4.What will Burr Hill's expected profit shortfall be if it charges $65/round?

Question 55

If Rosemont Tennis is a price-taker and won't be able to charge more than its competitors who charge $32.50 per hour of court time.What profit will it earn as a percent of assets?

A)Profit of 25%
B)Loss of 5%
C)Loss of 25%
D)Profit of 5%

Question 56

If the Green Pastures 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 as a percent of assets?

A)Loss of 17.50%
B)Profit of 17.50%
C)Profit of 57.50%
D)Loss of 57.50%

Question 57

Good Looks Fitness operates a large fitness centre in a University Town.Being the
newest fitness centre in the area Good Looks believes they must be a price taker until they establish a reputation for quality service.Other fitness centres in the area are charging $20 per customer visit.The owners would like to earn a 15% return on the company's $2,000,000 in assets.The company incurs primarily fixed costs to maintain and staff the centre.Good Looks projects fixed costs to be $580,000 fixed costs for the upcoming year.Good Looks is a pay per use facility and expects to serve 55,000 customers during the year.Variable costs are estimated at $5 per customer visit.The management accountant employed by Good Looks has determined that the target profitability cannot be achieved under the present cost structure at a price of $20 per customer visit.The accountant believes fixed costs can be reduced by $27,500.
Required:
If the fixed cost reduction is achieved what is the maximum variable cost per customer visit that will allow Good looks to achieve the target profitability?

Question 58

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

Question 59

Good Looks Fitness operates a large fitness centre in a University Town.Being the newest fitness centre in the area with the most modern and best equipment and staff Good Looks believes they can set their price at a level above their competition.The owners would like to earn a 15% return on the company's $2,000,000 in assets.The company incurs primarily fixed costs to maintain and staff the centre.Good Looks projects fixed costs to be $580,000 fixed costs for the upcoming year.Good Looks is a pay per use facility and expects to serve 55,000 customers during the year.Variable costs are estimated at $5 per customer visit.
Required:
1.What price per visit must Good Looks charge to earn the owners desired profit?
2.What is the revenue surplus or shortfall if Good Looks charges $20 per customer visit?

Question 60

When making a short-term special order decision,a company should

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

Question 61

Aquamarine Manufacturing is analyzing the opportunity to accept a special sales order for 3,000 bench seats at a price of $175 per unit.Fixed costs would remain unchanged.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 $129,000
B)Increase by $525,000
C)Decrease by $129,000
D)Decrease by $525,000

Question 62

Aquamarine Manufacturing is analyzing the opportunity to accept a special sales order for 2,500 bench seats at a price of $155 per unit.Fixed costs would increase by $10,000.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 $57,500
B)Increase by $57,500
C)Decrease by $47,500
D)Increase by $47,500

Question 63

When deciding whether to accept a special order,which of the following is irrelevant

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

Question 64

Glow Sticks Corporation manufactures and sells glow-in-the-dark necklaces for $10 each.The company has the capacity to produce 25,000 necklaces in a year,but is currently producing and selling 20,000 necklaces per year.The company currently is incurring the following costs at its current production level of 20,000 necklaces:

An amusement park is interested in purchasing the excess capacity of 5,000 necklaces if it can receive a special price.This special order would not affect Glow Sticks Corporation's regular sales or its cost structure.Glow Sticks Corporation's profits would increase from this special order if the special order price per necklace is greater than

A)$5.40.
B)$6.75.
C)$7.50.
D)$3.00.

Question 65

Assuming there is excess capacity at Woodson Corporation,what would be the effect on operating income of accepting a special order for 800 units at a sale price of $52 per product? The 800 units would not require any variable selling and administrative expenses.(NOTE: Assume regular sales are not affected by the special order. )

A)Decrease by $4,400
B)Decrease by $1,200
C)Increase by $4,400
D)Increase by $78,800

Question 66

Swisser Vase Company manufactures and sells vases.Great Products Company has offered Swisser Vase $16 per vase for 5,000 vases.Swisser Vase's normal selling price is $28 per vase.The total manufacturing cost per vase is $18 and consists of variable costs of $14 per vase and fixed overhead costs of $4 per vase.(NOTE: Assume excess capacity and no effect on regular sales. )
Should Swisser Vase accept or reject the special sales order?

A)Accept,because operating income would increase $150,000.
B)Reject,because operating income would decrease $70,000.
C)Reject,because operating income would decrease $10,000.
D)Accept,because operating income would increase $10,000.

Question 67

Assuming there is excess capacity at Woodson Corporation,what would be the effect on operating income of accepting a special order for 1,000 units at a sale price of $55 per product? (NOTE: Assume regular sales are not affected by the special order. )

A)Decrease by $1,500
B)Increase by $55,000
C)Increase by $1,500
D)Increase by $108,500

Question 68

Aquamarine Manufacturing is analyzing the opportunity to accept a special sales order for 2,000 bench seats at a price of $150 per unit.Fixed costs would remain unchanged.The variable marketing and administrative costs of $30 per unit would NOT be incurred on this special order.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 $96,000
B)Decrease by $36,000
C)Increase by $96,000
D)Increase by $36,000

Question 69

Forge Company produces cast-iron skillets.A local campground recently made a special order offer;the campground would like to purchase 1,000 skillets branded with their logo.Forge Company is currently producing and selling 20,000 skillets;the company has the excess capacity to handle this special order.The campground has offered to pay $30 for each skillet.An accountant at Forge Company provides an estimate of the unit product cost as follows:

This special order would require an investment of $5,000 for the molds required for the custom logo brand.These molds would have no other purpose and would have no salvage value.The special order skillets would also have an additional variable cost of $2.00 per unit associated with the custom logos.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)$19,500.
B)$15,500.
C)$10,500.
D)$12,500.

Question 70

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

Question 71

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

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

Question 72

What would be the effect on Venus Corporation's operating income of accepting a special order for 3,000 units at a sale price of $65 per product? The company has excess capacity and regular sales will not be affected by this special order.

A)Increase by $327,000
B)Increase by $63,000
C)Decrease by $327,000
D)Decrease by $63,000

Question 73

If Clear Sky Sailmakers accepts a special order for 3,000 sails at a price of $215 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 $50,000
B)Increase by $150,000
C)Increase by $0
D)Decrease by $50,000

Question 74

A manager should always reject a special order if

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

Question 75

If Clear Sky Sailmakers accepts a special order for 2,000 sails at a price of $220 per unit,and fixed costs increase by $7,000,how would operating income be affected? (NOTE: Assume regular sales are not affected by the special order. )

A)Decrease by $3,000
B)Increase by $103,000
C)Increase by $3,000
D)Increase by $10,000

Question 76

If Clear Sky Sailmakers accepts a special order for 2,500 sails at a price of $205 per unit,fixed costs increase by $14,000,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 $23,500
B)Decrease by $23,500
C)Increase by $37,500
D)Increase by $86,000

Question 77

Aquamarine Manufacturing is analyzing the opportunity to accept a special sales order for 3,000 bench seats at a price of $140 per unit.Variable marketing and administrative costs would be $15 per unit lower than on regular sales.Fixed costs would increase by $10,000.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 $69,000
B)Decrease by $59,000
C)Increase by $69,000
D)Increase by $59,000

Question 78

Assuming there is excess capacity at Woodson Corporation,what would be the effect on operating income of accepting a special order for 1,200 units at a sale price of $60 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 $72,000
B)Decrease by $2,800
C)Increase by $7,800
D)Increase by $2,800

Question 79

If Clear Sky Sailmakers accepts a special order for 5,000 sails at a price of $225 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 $1,125,000
B)Increase by $50,000
C)Decrease by $50,000
D)Increase by $150,000

Question 80

Roadrunner Manufacturing produces Item Q with variable manufacturing costs of $16/unit.The selling price of Item Q is $20/unit.The fixed manufacturing overhead cost is $75,000.A normal production run includes 150,000 units.Roadrunner Manufacturing has discovered an additional process to change Item Q into Item QR.Additional costs are estimated at $3/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 Roadrunner Manufacturing's operating income improve if the change is made?