Deck 9: Relevant Costs for Decision Making

Question 1

Special order decisions are long-term decisions that may need to include the time value of money.

Answer 1

False

Question 2

If idle capacity exists, a special order must cover its full cost to be profitable.

Answer 2

False

Question 3

In multi-product firms, managers need to consider the effect on demand for other products when they make a keep or drop decision about one product.

Answer 3

True

Question 4

The general rule is to discontinue a segment of the business when its total contribution margin does not cover avoidable fixed costs.

Question 5

The general rule for make or buy decisions is to choose the option with the lowest total cost.

Question 6

Make or buy decisions are sometimes known as outsourcing decisions.

Question 7

Non-routine operating decisions rarely require analysis of qualitative factors.

Question 8

The effect of production practices on the environment is an example of a qualitative factor to be considered in a non-routine operating decision.

Question 9

The general rule is to discontinue a product line when its total profit margin is greater than its avoidable fixed cost.

Question 10

The process for making a non-routine operating decision starts with identifying the decision type.

Question 11

The general rule is to discontinue a service when its total fixed costs are less than its avoidable fixed costs.

Question 12

If a service organisation is at capacity, it would only accept a special order for service if it was priced at or above the price that regular customers pay for the service.

Question 13

A key aspect of special order decisions is being at least as well off after the decision as before it.

Question 14

Emphasising products with higher contribution margins assumes that fixed costs are unaffected by product mix.

Question 15

Managers should always emphasise products with the highest total contribution margin.

Question 16

Opportunity costs are often relevant in make or buy decisions.

Question 17

Non-routine operating decisions involve primarily decisions about long-term strategic plans.

Question 18

Average costs are appropriate to use when deciding whether to keep a product or product line.

Question 19

Because non-routine operating decisions are so unique, managers cannot use a standard decision process for addressing them.

Question 20

An order from a new customer always constitutes a special order.

Question 21

Since non-routine operating decisions do not typically involve large dollar amounts, managers do not need to consider uncertainties when evaluating them.

Question 22

A factor in special order decisions is the effect that the decision will have on regular customers.

Question 23

Strategic plans require managers to emphasise products that generate the highest short-term profit.

Question 24

Managers may outsource a service because they do not consider it a core competency.

Question 25

The process for making non-routine operating decisions

A) Is exactly the same as the process for making routine operating decisions
B) Involves qualitative techniques only
C) Begins with identifying the type of decision
D) Ignores qualitative factors

Question 26

As long as managers can identify all the relevant quantitative information for making non-routine operating decisions, they will make the best decision.

Question 27

Product quality is seldom a factor in make or buy decisions.

Question 28

Managers may choose to keep an unprofitable product if dropping it would adversely affect the sales of profitable products.

Question 29

Because many management decisions are unique, managers address them using a/an

A) Meeting
B) Process
C) Information system
D) Team

Question 30

When resources are constrained, managers should emphasise products and services that maximise the contribution margin per unit of constrained resource.

Question 31

The number of lawnmowers available could be a constraint for a lawn care service.

Question 32

Non-routine operating decisions differ from routine operating decisions in that non-routine decisions

A) Ignore cash flows
B) Consider cash flows
C) Do not happen on a regular basis
D) Involve small dollar amounts

Question 33

Rapid growth may require a company to outsource certain products or services.

Question 34

In non-routine situations, managers must identify the type of decision to be made. Which of the following is not an example of a non-routine operating decision?

A) Make or buy
B) Special order pricing
C) Budgeting
D) Managing limited resources

Question 35

Relationships with resource suppliers are not a consideration in constrained resource decisions.

Question 36

The process for addressing a non-routine operating decision begins with

A) Applying relevant quantitative techniques
B) Applying relevant qualitative techniques
C) Questioning managers' judgment
D) Identifying the type of decision involved

Question 37

The accessibility and timeliness of information can affect decision quality in non-routine situations.

Question 38

Uncertainties about future revenues affect all non-routine operating decisions.

Question 39

In applying a relevant quantitative analysis technique to a non-routine operating decision, managers must

A) Identify input variables
B) Identify a dependent variable
C) Not use estimates
D) Interpret results in the most favorable way possible

Question 40

One way to deal with constrained resources is to spend money to alleviate them.

Question 41

Sebastian is a manager at DLL Restaurant. He is considering accepting a special order from a neighborhood homeless shelter for 150 Christmas meals. Which of the following is a relevant qualitative factor he should consider?

A) The number of homeless who will be served
B) His production capacity
C) The potential publicity for his restaurant
D) All of the above

Question 42

Assume the following cost data: A special order for 100 units is received. The buyer wants his name stamped on each unit. This will increase labor costs by $0.25 per unit and cost $300 for the stamping machine. What price must be charged to earn $300 on the special order?

A) $1,925
B) $1,775
C) $2,225
D) $2,075

Question 43

PRO Shops has a capacity of 45,000 units, and is currently producing and selling 40,000 at $25 a unit. The present cost structure, on a per unit basis, is: An order for 7,000 units has been received from a Japanese company at a price of $20 per unit. If the order is accepted, profit will

A) Decrease by $2,000
B) Increase by $14,000
C) Increase by $7,000
D) Increase by $4,000

Question 44

Sunk costs should be considered in

A) Both routine and non-routine operating decisions
B) Neither routine or non-routine operating decisions
C) Routine decisions only
D) Non-routine operating decisions only

Question 45

Which of these is an opportunity cost associated with dropping a business segment?

A) The revenue given up
B) The avoidable fixed costs
C) The benefits from using excess capacity for something else
D) The increase in employee morale

Question 46

Wagner Ltd can manufacture 490,000 tennis rackets a year at a variable cost of $15 per racket and fixed costs of $500,000. Wagner budgeted that it can sell 400,000 at $25 each. An additional order of 100,000 was received, but at a discount of 35% from the regular price. If Wagner accepts the special order, profit before taxes will

A) Decrease by $100,000
B) Increase by $125,000
C) Increase by $25,000
D) Some other amount

Question 47

To make a decision about a special order, managers need to know whether

A) The order replaces regular business
B) The customer will buy the same product in the future
C) The customer is a not-for-profit organisation
D) The order has a long-term strategic effect

Question 48

In making a special order decision, which of the following is a relevant fixed cost?

A) Incremental fixed costs associated with current business
B) Contribution margin of any current business replaced
C) Depreciation on existing production equipment
D) Incremental fixed costs associated with the order

Question 49

Wolff Ltd. sells product P at a price of $38 a unit. The per-unit cost data are: direct materials $8, direct labor $10, and overhead $12 (25% fixed and 75% variable). Wolff has sufficient capacity to accept a special order for 40,000 units just received. Selling costs associated with this order would be $3 per unit. At a selling price of $33 per unit, the operating profit will

A) Increase by $60,000
B) Increase by $80,000
C) Increase by $120,000
D) Increase by $160,000

Question 50

Wagner Ltd can manufacture 490,000 tennis rackets a year at a variable cost of $15 per racket and fixed costs of $500,000. Wagner budgeted that it can sell 400,000 at $25 each. An additional order of 100,000 was received, but at a discount of 35% from the regular price. The relevant cost to Wagner of the special order is

A) $1,500,000
B) $1,450,000
C) $1,625,000
D) Some other amount

Question 51

Redmond Ltd is closing one of its divisions. Operating data on this division follows: Overhead consists of $30,000 in salary and $10,000 for rent and insurance. The salary is for the chief engineer, who will continue to work for Redmond even if the division is closed.
Assuming all overhead costs continue to be incurred even if the division closes, what will be the effect on overall company profits of closing the division?

A) $10,000 decrease
B) $40,000 decrease
C) $40,000 increase
D) $30,000 decrease

Question 52

The general rule for special orders is

A) Profit should be greater after the special order than before it
B) Only take special orders when excess capacity exists
C) The organisation should be as well off after taking the order as it was before taking it
D) Ignore all fixed costs associated with the special order

Question 53

Wolff Ltd. sells product P at a price of $38 a unit. The per-unit cost data are: direct materials $8, direct labor $10, and overhead $12 (25% fixed and 75% variable). Wolff has sufficient capacity to accept a special order for 40,000 units just received. Selling costs associated with this order would be $3 per unit. The minimum selling price per unit should be

A) $24
B) $30
C) $32
D) $36

Question 54

Redmond Ltd is closing one of its divisions. Operating data on this division follows: Overhead consists of $30,000 in salary and $10,000 for rent and insurance. The salary is for the chief engineer, who will continue to work for Redmond even if the division is closed.
Rent and insurance that will cease if the division is closed is an

A) Unavoidable and irrelevant cost
B) Unavoidable and relevant cost
C) Avoidable and irrelevant cost
D) Avoidable and relevant cost

Question 55

A product emphasis decision may involve

A) Sunk costs and opportunity costs
B) Multiple resource constraints and sunk costs
C) Multiple products and qualitative factors
D) Sunk costs and qualitative factors

Question 56

A company will only incur an opportunity cost for a special order when

A) Current capacity is constrained
B) The price of the order is less than its variable cost
C) The cost of the order is greater than the average cost for current business
D) Qualitative factors can be ignored

Question 57

Qualitative factors can be difficult to identify because

A) They are not usually relevant in non-routine operating decisions
B) They are usually unimportant
C) No set formula assures managers they have considered the important issues
D) They are typically the same as sunk costs

Question 58

Managers should accept a special order if its price is greater than the sum of

A) all variable costs and all fixed costs
B) all variable costs and all opportunity costs
C) all fixed costs and all opportunity costs
D) variable costs, relevant fixed costs and opportunity costs

Question 59

The managers of Adamson Apple Ltd. are considering dropping one of their product lines. The product line typically has the following revenue and costs: If the product line is discontinued, $4,000 of the fixed costs would be avoided. Also, the freed-up capacity would generate $4,000 of additional contribution margin from the expansion of other product lines. If Adamson discontinues the product line, the effect on overall profit will be

A) $12,000 decrease
B) $8,000 decrease
C) $9,000 increase
D) $3,000 increase

Question 60

Which of the following is the best definition of a qualitative factor?

A) Factors related to product or service quality
B) Factors that cannot be identified in a decision-making process
C) Factors that are not valued in monetary terms
D) Factors that are superior to quantitative factors in decision making

Question 61

Managers should discontinue a business if its contribution margin is less than the sum of

A) Relevant fixed costs and opportunity costs
B) Relevant fixed costs and sunk costs
C) Relevant opportunity costs and sunk costs
D) Relevant opportunity costs and profits

Question 62

Amsat has equipment that is in high demand, but has a limited amount of time available. The equipment can be used to produce a number of different products. The following data are available: Which product should be emphasised first?

A) L
B) M
C) N
D) O

Question 63

In deciding whether to manufacture a part or buy it from an outside supplier, which of the following is an irrelevant cost?

A) Direct labor
B) Variable overhead
C) Fixed overhead that will be avoided if the part is purchased from an outside supplier
D) Fixed overhead that will continue even if the part is purchased from an outside supplier

Question 64

If financial statement data are used to evaluate a decision to discontinue a business

A) Average costs are often mistakenly included as relevant information
B) Average costs are often correctly included as relevant information
C) Qualitative factors are irrelevant
D) Financial statement data is useless in this decision-making context

Question 65

A company manufactures chips used in the production of computers. The chips can be purchased for $50 each from an outside vendor. It costs the manufacturer $60 a chip to produce them, of which 25% is fixed overhead cost. What are the relevant costs for this decision? Based on these costs, which option should the company choose?

A) i
B) ii
C) iii
D) iv

Question 66

Managers should generally consider opportunity costs in both "keep or drop" and "make or buy" decisions. Which of the following is an opportunity cost they should consider in both situations?

A) Avoidable fixed costs
B) Benefits from alternate uses of released capacity
C) Depreciation on new machinery
D) Market share

Question 67

Financial institutions often consider outsourcing their information technology functions internationally. Which of the following are qualitative factors that should managers consider in the decision?
B) II and III only
C) I, II, and III
D) I and II only

Question 68

In an outsourcing decision, fixed costs are

A) Never relevant
B) Relevant if they are greater than associated opportunity costs
C) Relevant if the company is operating outside the relevant range
D) Relevant if they can be avoided through outsourcing

Question 69

Yvonne and Ken own and operate Deluxe Housecleaning Service. Which of the following is a qualitative factor associated with dropping carpet cleaning from their current line of services?

A) The timeliness with which they can provide other cleaning services
B) The quality of their current carpet cleaning equipment
C) The potential effect on demand for their other services
D) The lost revenue from current customers

Question 70

In the decision to drop a product line, fixed costs are often classified as

A) Avoidable or sunk
B) Sunk or opportunity
C) Product or period
D) Incremental or avoidable

Question 71

In making a decision to drop a product line, variable costs are

A) Always relevant
B) Never relevant
C) Usually relevant
D) Usually sunk

Question 72

N.G., Ltd. currently buys 9,000 subcomponents from an outside supplier at $10 each. The company has excess capacity, which it sublets to another company for $20,000 per year. If the company were to use the idle capacity to produce the subcomponent internally, it would incur variable production costs of $6 per unit, and it would hire a new supervisor for $15,000 per year. Other fixed overhead costs would not change, but the average overhead cost per subcomponent unit would be $2. What is the advantage or disadvantage (in dollars) if N.G. makes the subcomponent instead of continuing to buy outside and subletting the excess capacity?

A) $6,000 disadvantage
B) $21,000 disadvantage
C) $1,000 advantage
D) $21,000 advantage

Question 73

In an outsourcing decision, the general rule managers should follow is to

A) Choose the option with the lowest relevant cost
B) Maximise the use of constrained resources
C) Outsource if the price is greater than the sum of variable costs and fixed costs
D) Do not outsource if the cost is less than the sum of relevant fixed costs and opportunity costs

Question 74

Which of the following is an opportunity cost that should be considered in an outsourcing decision?

A) Avoidable fixed costs
B) Benefits from alternate uses of released capacity
C) Unavoidable fixed costs
D) taxation implications of the decision

Question 75

In general, a company should outsource if the cost to buy is

A) Less than the sum of variable costs and fixed costs
B) Less than the relevant variable costs.
C) Greater than or equal to (variable costs + relevant fixed costs - opportunity costs)
D) Less than or equal to (variable costs + relevant fixed costs - opportunity costs)

Question 76

Which of the following statements about outsourcing is true? Outsourcing is used for manufactured goods, but not for services

A) I only
B) I and III only
C) II and III only
D) I, II, and III

Question 77

For manufacturers, outsourcing decisions are often known as

A) Make or buy
B) Routine
C) Constrained resource decisions
D) Special order decisions

Question 78

PQK Ltd produces and sells bookends. Its managers are considering whether to outsource the task of cutting the wood for the bookends to DLN Ltd. Which of the following is most likely to be a qualitative factor that managers will consider in making the decision?

A) Cost of delivery
B) Timeliness of delivery
C) Whether DLN will outsource the delivery process
D) Depreciation on DLN's fleet of delivery trucks

Question 79

Managers should discontinue a business if which of the following is less than the sum of relevant fixed costs and opportunity costs?

A) Profit
B) Variable cost
C) Total cost
D) Contribution margin

Question 80

Amsat has equipment that is in high demand, but has a limited amount of time available. The equipment can be used to produce a number of different products. The following data are available: Which product should be emphasised last?

A) L
B) M
C) N
D) O