Deck 13: Short-Run Decision Making: Relevant Costing

Question 1

A segment margin is always greater than or equal to zero.

Answer 1

False

Question 2

Only costs and benefits associated with feasible alternatives are relevant in decision making.

Answer 2

True

Question 3

In keep-or-drop decisions, both the segment's contribution margin and its segment margin are useful in evaluating the performance of the segment.

Answer 3

True

Question 4

Sunk costs are always irrelevant.

Question 5

At split-off, the joint costs of production for joint products are NOT relevant to the sell-or-process-further decision.

Question 6

Flexible resources may have unused capacity.

Question 7

Alora Company produces a product that has a manufacturing cost of $40 per unit. Alora's policy is to charge a price equal to cost plus $25%. The 25% is pure profit to Alora.

Question 8

Determining the optimal product mix is equally complicated whether there is only one or whether there are multiple constrained resources.

Question 9

Resources that are acquired in advance of usage are flexible resources.

Question 10

The benefit sacrificed when one alternative is chosen over another is called opportunity cost.

Question 11

Typically in a special-order decision, a customer wants to pay less than the usual price.

Question 12

In cost-based pricing, the markup includes desired profit and any costs NOT included in the base cost.

Question 13

In short-run decision making, the alternative with the lowest overall cost should always be chosen.

Question 14

The first step in making a short-run decision is to recognize and define the problem.

Question 15

Future costs that differ across alternatives are irrelevant.

Question 16

Short-run decision making only involves short-run decisions that have nothing to do with the firm's overall strategy.

Question 17

A choice between internal and external production is a make-or-buy decision.

Question 18

In deciding the optimal mix of products that use a constrained resource, it is important to determine the contribution margin per unit of scarce resource.

Question 19

All fixed costs are always relevant.

Question 20

Irrelevant costs are costs that vary across alternatives.

Question 21

Target costing is a method of determining the price of a product or service based on the cost that the business has to pay.

Question 22

MacAllister Company charges cost plus 35%. Suppose the price of an item is $90. What is the item's cost?

A) $50.00
B) $62.50
C) $66.67
D) $80.00

Question 23

Tucker Company charges cost plus 30%. What is the price of an item with cost equal to $65?

A) $12.50
B) $50.00
C) $60.00
D) $84.50

Question 24

A situation in which management tells divisions that they must reduce costs by 10% is called target costing.

Question 25

Home Hardware sets prices at cost plus 90% of cost. The cost of a cordless drill kit is $45. What is the selling price for the cordless drill kit?

A) $27.50
B) $34.00
C) $42.00
D) $85.50

Question 26

Depreciation of equipment is an example of which of the following types of costs?

A) a sunk cost
B) a variable cost
C) a relevant cost
D) an opportunity cost

Question 27

RJB Building routinely bids on construction jobs. The company first determines the budgeted product cost of the job and then applies a markup of 45%. If a bid of $20,000 is submitted for a new job, which of the following statements applies?

A) The budgeted product cost is $20,000.
B) All costs pertaining to the job total $20,000.
C) $6,207 includes selling and administrative expense and profit.
D) $6,207 includes fixed overhead, selling and administrative expense, and profit.

Question 28

What is the decision called when a manager must decide whether or not to outsource a product?

A) make-or-buy
B) special-order
C) keep-or-drop
D) sell-or-process-further

Question 29

Acron Construction charges each customer a price equal to the cost of direct materials and direct labour plus 40%. Job 126 included the following costs: Direct materials $60,000
Direct labour $46,000
What price does the company charge for Job 126?

A) $46,800
B) $65,400
C) $86,000
D) $148,400

Question 30

In target costing, the actual cost of production is not relevant.

Question 31

Many companies start with cost to determine price since revenue must cover cost for the firm to make a profit.

Question 32

When determining the target price of a good, the company must first determine the target cost and the desired profit.

Question 33

Target costing can be used most effectively in the design and development stage of the product life cycle.

Question 34

Which of the following is NOT a step in the decision-making model?

A) Identify alternatives.
B) Consider qualitative factors.
C) Total the relevant costs and benefits for each alternative.
D) Determine costs and benefits for both feasible and unfeasible alternatives.

Question 35

What kind of decision involves a choice between internal and external production?

A) a make-or-buy decision
B) a keep-or-drop decision
C) a special-order decision
D) a sell-or-process-further decision

Question 36

What kind of decision focuses on whether a one-off order should be accepted or rejected?

A) a relevant decision
B) a special-order decision
C) a make-or-buy decision
D) a sell-or-process-further decision

Question 37

Which term reflects future costs that differ across alternatives?

A) sunk costs
B) relevant costs
C) variable costs
D) opportunity costs

Question 38

Demand and supply are on opposite sides of the pricing equation.

Question 39

Which term refers to the act of choosing among alternatives with an immediate or limited end in view?

A) strategic decision making
B) short-run decision making
C) constructing a decision model
D) assessing feasible alternatives

Question 40

Target costing involves much more up-front work than cost-based pricing.

Question 41

Senior Company currently buys 30,000 units of a part used to manufacture its product at $40 per unit. Recently the supplier informed Senior Company that a 20% increase will take effect next year. Senior has some additional space and could produce the units for the following per-unit costs (based on 30,000 units): If the units are purchased from the supplier, $200,000 of fixed costs will continue to be incurred. In addition, the plant can be rented out for $20,000 per year if the parts are purchased externally.
Required: Should Senior Company buy the part externally or make it internally?

Question 42

Winston Custom Cabinetry makes cabinets to order and prices the completed jobs at product cost plus 40%. Recently, the company finished a job and billed the customer $560. Suppose direct materials for the job cost $130 and direct labour cost $180. What was the applied overhead for the job?

A) $90
B) $179
C) $250
D) $350

Question 43

Island Princess Pineapples purchases pineapples from area farmers and processes them into rings, juice, and skins. The cost of the pineapples is a joint cost, as is the initial processing in which the fruits are skinned, cored, and sliced into rings. At the split-off point, Island Princess sells the skins for fertilizer. Juice and rings are processed further (further processing costs occurs for cooking and canning). Data for the three products follows: A. Prepare a segmented income statement for Island Princess, showing results for rings, juice, fertilizer, and the total. Do not allocate joint costs individually.
B. Now suppose that Island Princess is considering the option of processing the skins further into pet food that would sell for $1,000. Additional costs would be $450. Should this be done?

Question 44

Elco Oil Products manufactures three joint products: Phase 1, Phase 2, and Phase 3. The cost of the joint process is $30,000. Information about the three products follows: Required:
A. Determine whether each product should be sold at split-off or processed further.
B. Determine the firm's income if the firm processes all three products beyond split-off.

Question 45

Classify Company has a product that its sales department believes can be sold for $40 each. The company requires that all new products yield 20% profit. What is the target cost of the new product?

A) $4.00
B) $25.50
C) $26.00
D) $32.00

Question 46

Gibb, Inc. has just designed a new product with a target cost of $54. The company requires new products to have a profit of 25%. What is the target price for the new product?

A) $13.50
B) $54.00
C) $64.00
D) $72.00

Question 47

Travers Company sets prices equal to cost plus 55%. Recently, the company charged a customer a price of $60 for an item. What was the cost of the item?

A) $25.20
B) $38.71
C) $40.32
D) $42.00

Question 48

One Kings Lane Corporation manufactures a single product with the following unit costs for 10,000 units: Recently, a company approached One Kings Lane Corporation about buying 2,000 units for $250. Currently, the models are sold to dealers for $450. One Kings Lane's capacity is sufficient to produce the extra 3,000 units. Selling expenses would be incurred as normal on the special order.
Required:
A. Calculate the profit earned by One Kings Lane on the original 10,000 units.
B. Should One Kings Lane accept the special order if its goal is to maximize short-run profits? How much will income be affected?
C. Determine the minimum price One Kings Lane would want to receive in order to increase profits by $15,000 on the special order.
D. When making a special order decision, what qualitative aspects of the decision should One Kings Lane Corporation consider?

Question 49

Jester Company was making a product for $70 and selling it for $90. A competitor began selling the same product for $78. Suppose the company wants to meet the competition's price and maintain the same amount of profit per unit. What would be the target cost?

A) $18
B) $38
C) $48
D) $58

Question 50

What determines the cost of a product or service on the basis of the price that customers are willing to pay?

A) target costing
B) product costing
C) relevant costing
D) differential costing

Question 51

"The accounting decision-making model is the only useful tool in real life because it only looks at the numbers." Critique this statement, and give an example for which it does not hold true.

Question 52

Refer to Victor's Detailing. Assume the company uses an 80% markup to set the price on each job. What price would the company quote to a new customer?

A) $24
B) $30
C) $54
D) $84

Question 53

Shredder Inc. produces paper shredders. The company is considering a new shredder design for home offices. The marketing vice president believes that a basic unit in a variety of attractive colours could be sold for $100. The company requires that all new products yield 35% profit. What is the target cost of the new shredder?

A) $21
B) $35
C) $65
D) $135

Question 54

Joseph Giovine owns a successful hole-in-the-wall bagel shop called Peach Tree Bagels. Joseph wants to expand the shop by leasing the space next door for $1,000 per month and adding tables and chairs so that customers can dine in. He figures that the tables and chairs will cost $5,000 and that the bagel machine, which cost $4,500 five years ago, will have to be scrapped in favour of a larger machine costing $7,400. He thinks sales will increase by $5,500 per month. Variable costs are 55% of sales.
Required:
A. What are the relevant costs and benefits of expanding into the new space?
B. What are the irrelevant costs and benefits of expanding into the new space?

Question 55

Refer to Victor's Detailing. Assume the company uses target costing. The company requires a 40% profit on each job. What should the company do?

A) find a way to reduce costs
B) ask customers to pay more
C) reduce the required percentage to stay in business
D) sell services at the price customers are willing to pay

Question 56

Sherpa Company manufactures tents and sleeping bags. Tents are priced at $80, have variable costs of $55, and have direct fixed costs of $120,000. Sleeping bags are priced at $60, have variable costs of $35, and have direct fixed costs of $66,000. Common fixed costs equal $200,000. Last year, the division sold 5,000 tents and 10,000 sleeping bags.
Required:
A. What was the segment margin for tents last year?
B. What was the segment margin for sleeping bags last year?
C. What was Sherpa's operating income last year?
D. If Sherpa stopped making tents, what would operating income be?

Question 57

Entertech Company is designing a tablet aimed at families travelling with young children. The company believes that the product can be sold for $150, and it requires a 25% profit on new products. What is the target cost of the tablet?

A) $28.00
B) $112.50
C) $140.00
D) $187.50

Question 58

Mason Company makes portable charges for cell phones. Currently, Mason purchases 10,000 plastic housings a year from an outside company for $1 each. One of Mason engineers suggested that the company make its plastic housings in-house. Estimated unit costs are as follows: * Fixed overhead is $2,400 per year in equipment costs specifically traceable to the plastic housing line and $1,600 per year in general overhead costs to be allocated to this line.
Required:
A. If Mason makes the housing in-house, will net income be higher or lower, and by how much?
B. What is the highest price per unit that Mason would pay an outside company for the housings?
C. Now assume that all of the fixed overhead is allocated fixed overhead and will not be affected by making the product in-house or purchasing it. If Mason makes the housing in-house, will net income be higher or lower, and by how much?

Question 59

Enzo Company manufactures a variety of athletic shoes: basketball, running, and tennis. Sales of the tennis shoes have fallen off. Enzo is considering several options: (1) drop the tennis shoe line; (2) replace the tennis shoe line with golf shoes; or (3) retool the tennis shoe line to make "Airtennies" instead of tennis shoes. Price and cost data are as follows: $\begin{array}{lrrrrr}&\text { Basketball } &\text { Running }&\text { Tennis }&\text { Golf }&\text { Airtennies }\\\text { Price } & \$ 90 & \$ 65 & \$ 40 & \$ 60 & \$ 70 \\\text { Variable cost/unit } & \$ 45 & \$ 40 & \$ 35 & \$ 43 & \$ 50 \\\text { Fixed costs } & \$ 200,000 & \$ 210,000 & \$ 50,000 & \$ 50,000 & \$ 90,000 \\\text { Number of units } & 10,000 & 15,000 & 2,500 & 25,000 & 6,000\end{array}$ If the tennis shoe line is dropped, the $50,000 fixed cost is totally avoidable.
Required:
A. Calculate the impact on operating income, using relevant amounts only, for keeping the tennis shoe line.
B. Calculate the impact on operating income, using relevant amounts only, for option 1.
C. Calculate the impact on operating income, using relevant amounts only, for option 2.
D. Calculate the impact on operating income, using relevant amounts only, for option 3.
E. Which option is best?

Question 60

Refer to Victor's Detailing. Assume the company uses target costing to set price on each job. The company requires a 40% profit on each job. What price would the company quote to a new customer?

A) $24
B) $30
C) $54
D) $57

Question 61

Auden makes three types of vitamin supplements, all of which require the use of encapsulating machines that have a capacity of 10,000 hours. Information on the three types (per case) is as follows: Required:
A. Calculate the contribution margin per case for each type.
B. Calculate the contribution margin per hour of machine time for each type.
C. Based on your analysis in requirement B, if the company can sell all that it can make of all of the products, how many of each type should be sold to maximize total contribution margin?

Question 62

Match each of the following terms with their correct description from the items listed below.* Each term may be used more than once, and it is possible that one or more of the classifications may not be used at all.a.Differential cost
b.Keep-or-drop decision
c.Constraints
d.Decision-making model
e.Split-off point
f.Joint products
g.Make-or-buy decision
h.Target costing
i.Sunk costs
j.Markup
k.Special-order decision
l.Sell-or-process-further decision
m.Relevant costs
n.Opportunity cost
o.Cost-based pricing
Determines whether or not a segment should be kept or dropped

Question 63

Match each of the following terms with their correct description from the items listed below.* Each term may be used more than once, and it is possible that one or more of the classifications may not be used at all.a.Differential cost
b.Keep-or-drop decision
c.Constraints
d.Decision-making model
e.Split-off point
f.Joint products
g.Make-or-buy decision
h.Target costing
i.Sunk costs
j.Markup
k.Special-order decision
l.Sell-or-process-further decision
m.Relevant costs
n.Opportunity cost
o.Cost-based pricing
A percentage applied to the base cost to cover other costs plus profit

Question 64

Match each of the following terms with their correct description from the items listed below.* Each term may be used more than once, and it is possible that one or more of the classifications may not be used at all.a.Differential cost
b.Keep-or-drop decision
c.Constraints
d.Decision-making model
e.Split-off point
f.Joint products
g.Make-or-buy decision
h.Target costing
i.Sunk costs
j.Markup
k.Special-order decision
l.Sell-or-process-further decision
m.Relevant costs
n.Opportunity cost
o.Cost-based pricing
Determines whether or not a segment should be kept or dropped

Question 65

Match each of the following terms with their correct description from the items listed below.* Each term may be used more than once, and it is possible that one or more of the classifications may not be used at all.a.Differential cost
b.Keep-or-drop decision
c.Constraints
d.Decision-making model
e.Split-off point
f.Joint products
g.Make-or-buy decision
h.Target costing
i.Sunk costs
j.Markup
k.Special-order decision
l.Sell-or-process-further decision
m.Relevant costs
n.Opportunity cost
o.Cost-based pricing
Determines whether or not a segment should be kept or dropped

Question 66

Match each of the following terms with their correct description from the items listed below.* Each term may be used more than once, and it is possible that one or more of the classifications may not be used at all.a.Differential cost
b.Keep-or-drop decision
c.Constraints
d.Decision-making model
e.Split-off point
f.Joint products
g.Make-or-buy decision
h.Target costing
i.Sunk costs
j.Markup
k.Special-order decision
l.Sell-or-process-further decision
m.Relevant costs
n.Opportunity cost
o.Cost-based pricing
The difference in total cost between the alternatives in a decision

Question 67

Match each of the following terms with their correct description from the items listed below.* Each term may be used more than once, and it is possible that one or more of the classifications may not be used at all.a.Differential cost
b.Keep-or-drop decision
c.Constraints
d.Decision-making model
e.Split-off point
f.Joint products
g.Make-or-buy decision
h.Target costing
i.Sunk costs
j.Markup
k.Special-order decision
l.Sell-or-process-further decision
m.Relevant costs
n.Opportunity cost
o.Cost-based pricing
Products that have common processes and costs of production up to a point

Question 68

The operations of Plastics Inc. are divided into the Blow Moulding Division and the Injection Moulding Division. Projections for the next year are as follows: Required:
A. Determine operating income for Plastics Inc. as a whole if the Injection Moulding Division is dropped.
B. Should the Injection Moulding Division be eliminated?

Question 69

Refer to Rudder Company. Upon hearing of the analysis of the cost of making the metallic ink in-house versus buying it from an outside supplier, Joseph Michaels, the production supervisor, said, "That's nuts! This ink is a real pain to make, and $1.24 per millilitre sounds like a bargain to me!" Based on Jim's feelings, Dominique Rudder (a new CPA in the accounting office) did an ABC analysis of ink production. She came up with the same direct materials, direct labour, and variable overhead, as well as the following information on activities required by metallic ink production:
Setups $ 60,000 600 setups per year
Purchasing $270,000 9,000 purchase orders per year
The metallic ink requires 300 purchase orders per year and 80 setups.
Required:
A. If Rudder purchases the ink from the outside supplier, would operating income be higher or lower, and by how much?
B. What is the highest price per millilitre that Rudder would pay an outside company for the ink?

Question 70

Polar Company produces two types of gears, Simple Gears and Deluxe Gears, with unit contribution margins of $2 and $5, respectively. Each gear must spend time on a special machine. The firm owns 10 machines that together provide 25,000 hours of machine time per year. Each Simple Gear requires 0.10 hours of machine time; each Deluxe Gear requires 0.4 hours of machine time.
Required:
A. Calculate the contribution margin per hour of machine time for Simple Gears.
Calculate the contribution margin per hour of machine time for Deluxe Gears.
B. If Polar faces only the production constraint (25,000 hours of machine time), how many units of Simple Gears should be produced? And how many units of Deluxe Gears? Calculate the total contribution margin from this product mix.
C. Now suppose that Polar cannot sell more than 200,000 units of each type of gear. How many units of Simple Gears should be produced? And how many units of Deluxe Gears? Caculate the total contribution margin from this product mix.

Question 71

Match each of the following terms with their correct description from the items listed below.* Each term may be used more than once, and it is possible that one or more of the classifications may not be used at all.a.Differential cost
b.Keep-or-drop decision
c.Constraints
d.Decision-making model
e.Split-off point
f.Joint products
g.Make-or-buy decision
h.Target costing
i.Sunk costs
j.Markup
k.Special-order decision
l.Sell-or-process-further decision
m.Relevant costs
n.Opportunity cost
o.Cost-based pricing
Limited resources and limited demand for each product

Question 72

Match each of the following terms with their correct description from the items listed below.* Each term may be used more than once, and it is possible that one or more of the classifications may not be used at all.a.Differential cost
b.Keep-or-drop decision
c.Constraints
d.Decision-making model
e.Split-off point
f.Joint products
g.Make-or-buy decision
h.Target costing
i.Sunk costs
j.Markup
k.Special-order decision
l.Sell-or-process-further decision
m.Relevant costs
n.Opportunity cost
o.Cost-based pricing
Decision involving a choice between internal and external production

Question 73

Match each of the following terms with their correct description from the items listed below.* Each term may be used more than once, and it is possible that one or more of the classifications may not be used at all.a.Differential cost
b.Keep-or-drop decision
c.Constraints
d.Decision-making model
e.Split-off point
f.Joint products
g.Make-or-buy decision
h.Target costing
i.Sunk costs
j.Markup
k.Special-order decision
l.Sell-or-process-further decision
m.Relevant costs
n.Opportunity cost
o.Cost-based pricing
Past costs that cannot be affected by future decisions

Question 74

Match each of the following terms with their correct description from the items listed below.* Each term may be used more than once, and it is possible that one or more of the classifications may not be used at all.a.Differential cost
b.Keep-or-drop decision
c.Constraints
d.Decision-making model
e.Split-off point
f.Joint products
g.Make-or-buy decision
h.Target costing
i.Sunk costs
j.Markup
k.Special-order decision
l.Sell-or-process-further decision
m.Relevant costs
n.Opportunity cost
o.Cost-based pricing
Determines whether or not a segment should be kept or dropped

Question 75

Match each of the following terms with their correct description from the items listed below.* Each term may be used more than once, and it is possible that one or more of the classifications may not be used at all.a.Differential cost
b.Keep-or-drop decision
c.Constraints
d.Decision-making model
e.Split-off point
f.Joint products
g.Make-or-buy decision
h.Target costing
i.Sunk costs
j.Markup
k.Special-order decision
l.Sell-or-process-further decision
m.Relevant costs
n.Opportunity cost
o.Cost-based pricing
Determines whether a specially priced order should be accepted or rejected

Question 76

Match each of the following terms with their correct description from the items listed below.* Each term may be used more than once, and it is possible that one or more of the classifications may not be used at all.a.Differential cost
b.Keep-or-drop decision
c.Constraints
d.Decision-making model
e.Split-off point
f.Joint products
g.Make-or-buy decision
h.Target costing
i.Sunk costs
j.Markup
k.Special-order decision
l.Sell-or-process-further decision
m.Relevant costs
n.Opportunity cost
o.Cost-based pricing
The point that products that have common processes and costs of production become distinguishable

Question 77

Refer to Rudder Company.
Required:
A. Based on the cost figures, if Rudder purchases metallic ink from the outside supplier, will operating income be higher or lower, and by how much?
B. What is the highest price per millilitre that Rudder would pay an outside supplier for the ink?

Question 78

Match each of the following terms with their correct description from the items listed below.* Each term may be used more than once, and it is possible that one or more of the classifications may not be used at all.a.Differential cost
b.Keep-or-drop decision
c.Constraints
d.Decision-making model
e.Split-off point
f.Joint products
g.Make-or-buy decision
h.Target costing
i.Sunk costs
j.Markup
k.Special-order decision
l.Sell-or-process-further decision
m.Relevant costs
n.Opportunity cost
o.Cost-based pricing
Determines whether it is more profitable to process a joint product further

Question 79

Match each of the following terms with their correct description from the items listed below.* Each term may be used more than once, and it is possible that one or more of the classifications may not be used at all.a.Differential cost
b.Keep-or-drop decision
c.Constraints
d.Decision-making model
e.Split-off point
f.Joint products
g.Make-or-buy decision
h.Target costing
i.Sunk costs
j.Markup
k.Special-order decision
l.Sell-or-process-further decision
m.Relevant costs
n.Opportunity cost
o.Cost-based pricing
A specific set of procedures that produces a decision

Question 80

Roberts Company produces two types of gears, Gear A and Gear B, with unit contribution margins of $6 and $8, respectively. Each gear must spend time on a special machine. The firm owns five machines that together provide 12,000 hours of machine time per year. Gear A requires 12 minutes of machine time; Gear B requires 24 minutes of machine time.
Required:
A. Calculate the contribution margin per hour of machine time for Gear a.Calcualte the contribution margin per hour of machine time for Gear B.
B. If Roberts faces only the production constraint (12,000 hours of machine time), how many units of Gear A should be produced? And how many units of Gear B? Calculate the total contribution margin from this product mix.
C. Now suppose that Robert cannot sell more than 45,000 units of each type of gear. How many units of Gear A should be produced? And how many units of Gear B? Calculate the total contribution margin from this product mix.