Deck 11: Decision Making and Relevant Information

Question 1

A decision model is an informal method for making a choice,using simpler methods like surveying.

Answer 1

False
Explanation:A decision model is a formal method of making a choice that often involves both quantitative and qualitative analyses.

Question 2

Which of the following is an example of sunk costs?

A)wages to security staffs
B)cost of purchasing raw materials
C)cost of an alternative investment
D)wages payable to skilled laborers to make a product

Answer 2

A

Question 3

John's 8-year-old Chevrolet Trail Blazer requires repairs estimated at $10,000 to make it road worthy again.His wife,Sherry,suggested that he should buy a 5-year-old used Jeep Grand Cherokee instead for $10,000 cash.Sherry estimated the following costs for the two cars:

The cost NOT relevant for this decision is the ________.

A)acquisition cost of the Trail Blazer
B)acquisition cost of the Grand Cherokee
C)repairs to the Trail Blazer
D)annual operating costs of the Grand Cherokee

Answer 3

A

Question 4

Feedback from previous decisions uses historical information and,therefore,is irrelevant for making future predictions.

Question 5

Sunk costs ________.

A)are future costs for decision making
B)are avoidable costs
C)are irrelevant for decision making
D)are foregone contribution by not using a limited resource in its next-best alternative use

Question 6

Place the following steps from the five-step decision process in order:

A)A,E,D,B,C
B)E,A,D,B,C
C)E,A,D,C,B
D)D,C,B,A,E

Question 7

Management is considering two alternatives.Alternative A has projected revenue per year of $100,000 and costs of $70,000 while Alternative B has revenue of $100,000 and costs of $60,000.Both projects require an initial investment of $250,000 of which $75,000 has already been set aside and will be used as a down payment on the project that is chosen.There are also other qualitative factors that management must consider before making a final choice.Which of the following statements is correct about relevant costs and relevant revenues.

A)The sunk cost of $75,000 is relevant
B)The projected revenues are relevant to the decision
C)The initial investment of $250,000,the projected revenues,and the projected costs are all relevant
D)The only relevant item are the costs as they differ between alternatives

Question 8

Which of the following is not true with regards to relevant costs and relevant revenues?

A)They are sunk costs and historical revenues
B)They are expected costs and expected revenues
C)They occur in the future
D)The differ among alternative courses of action

Question 9

Flash City Inc.manufactures small flash drives and is considering raising the price by 75 cents a unit for the coming year.With a 75-cent price increase,demand is expected to fall by 7,000 units.

If the price increase is implemented,operating profit is projected to ________.

A)increase by $35,100
B)decrease by $5,250
C)increase by $5,250
D)decrease by $7,000

Question 10

Which of the following costs always differ among future alternatives?

A)fixed costs
B)historical costs
C)relevant costs
D)variable costs

Question 11

In evaluating different alternatives,it is useful to concentrate on ________.

A)variable costs
B)fixed costs
C)total costs
D)relevant costs

Question 12

Flash City Inc.manufactures small flash drives and is considering raising the price by 75 cents a unit for the coming year.With a 75-cent price increase,demand is expected to fall by 7,000 units.

Would you recommend the 75-cent price increase?

A)No,because demand decreased.
B)No,because the selling price increases.
C)Yes,because contribution margin per unit increases.
D)Yes,because operating profits increase.

Question 13

When using the five-step decision process,which one of the following steps should be done first?

A)obtain information
B)choose an alternative
C)evaluation and feedback
D)implementing the decision

Question 14

Explain the five-step decision process that managers can use to make decisions.

Question 15

The formal process of choosing between alternatives is known as a(n)________.

A)relevant model
B)decision model
C)alternative model
D)prediction model

Question 16

Sunk costs ________.

A)are relevant
B)are differential
C)have future implications
D)are ignored when evaluating alternatives

Question 17

Feedback regarding previous actions may affect ________.

A)future predictions
B)implementation of the decision
C)the decision model
D)All of these answers are correct.

Question 18

A decision model involves a(n)________.

A)informal method of making a choice at the lower level management using sensitivity analysis
B)formal method of making a choice that often involves both quantitative and qualitative analyses
C)informal method of making a choice which is discussed in detailed in the financial reports
D)formal method of making a choice at the lower level management using advanced management techniques such as balance scorecard

Question 19

Sunk costs are ________.

A)costs incurred as a result of an investment position
B)costs that is the sum of all costs in a particular business function of the value chain
C)the contributions to operating income that is forgone by not using a limited resource in its next-best alternative use
D)costs that are unavoidable and cannot be changed no matter what action is taken

Question 20

When using the five-step decision process,which one of the following steps should be done last?

A)obtain information
B)choose an alternative
C)evaluation and feedback
D)implementing the decision

Question 21

Each of the following are true of relevant information except:

A)Past costs are helpful when making predictions but not relevant when making decisions
B)Different alternatives can be compared by examining differences in expected future revenues and expected total future costs
C)significant past investment amounts are relevant to decision making
D)Not all future revenues and expenses are relevant

Question 22

When deciding to accept a one-time-only special order from a wholesaler,management should ________.

A)consider the sunk costs and opportunity costs
B)not consider the special order's impact on future prices of their products
C)determine whether excess capacity is available
D)verify past design costs for the product

Question 23

All of the following are examples of quantitative factors except:

A)cost of direct materials
B)budget for marketing activities
C)product development time
D)employee morale

Question 24

Crandle Manufacturers Inc.is approached by a potential customer to fulfill a one-time-only special order for a product similar to one offered to domestic customers.The company has excess capacity.The following per unit data apply for sales to regular customers:

What is the full cost of the product per unit?

A)$430
B)$1,035
C)$690
D)$345

Question 25

Crandle Manufacturers Inc.is approached by a potential customer to fulfill a one-time-only special order for a product similar to one offered to domestic customers.The company has excess capacity.The following per unit data apply for sales to regular customers:

For Crandle Manufacturers Inc. ,what is the minimum acceptable price of this special order?

A)$400
B)$320
C)$480
D)$640

Question 26

When making decisions ________.

A)qualitative factors are not relevant as they can't be quantified
B)more weight should be given to quantitative factors
C)appropriate weight must be given to both quantitative and qualitative factors
D)quantitative factors are relevant but qualitative factors are rarely relevant

Question 27

Quantitative factors ________.

A)include financial information,but not nonfinancial information
B)include both financial and nonfinancial information
C)are always relevant when making decisions
D)include employee morale

Question 28

When there is an excess capacity,it makes sense to accept a one-time-only special order for less than the current selling price if ________.

A)incremental revenues exceed incremental costs
B)additional fixed costs is incurred to accommodate the order
C)the company placing the order is in the same market segment as your current customers
D)incremental revenue equals incremental operating income

Question 29

Which of the following is true of relevant information?

A)All fixed costs are relevant.
B)All Future revenues and expenses are relevant.
C)Future
D)All fixed costs are not relevant.

Question 30

A relevant revenue is revenue that is a(n)________.

A)past revenue and differs among alternative courses of action
B)future revenue and differs among alternative courses of action
C)in-hand revenue
D)earned revenue

Question 31

Employee morale at Dos Santos,Inc. ,is very high.This type of information is an example of ________.

A)qualitative factors
B)quantitative factors
C)irrelevant factors
D)financial factors

Question 32

Snapper Tool Company has plenty of excess capacity to accept a special order.Shown below is an "what-if" analysis of the special order.Which of the following is the correct decision and reason?

A)Yes,since the goal is to fill capacity as much as possible to keep fixed overhead variances as low as possible.
B)No,the company will only break even.
C)No,since only the employees will benefit from this in that they will earn more overtime.
D)Yes,since operating profits will most likely increase.

Question 33

Crandle Manufacturers Inc.is approached by a potential new customer to fulfill a one-time-only special order for a product similar to one offered to domestic customers.The company has excess capacity.The following per unit data apply for sales to regular customers:

What is the contribution margin per unit?

A)$220
B)$280
C)$500
D)$700

Question 34

Excellent Manufacturers Inc.has a current production level of 20,000 units per month.Unit costs at this level are:

Current monthly sales are 18,000 units.Jax Company has contacted Excellent about purchasing 1,550 units at $2.00 each.Current sales would NOT be affected by the one-time-only special order,and variable marketing/distribution costs would NOT be incurred on the special order.What is Ratzlaff Company's change in operating profits if the special order is accepted?

A)$4,929.00 increase in operating profits
B)$4,929.00 decrease in operating profits
C)$1,829.00 increase in operating profits
D)$1,829.00 decrease in operating profits

Question 35

A relevant cost is a cost that is a(n)________.

A)future cost
B)past cost
C)sunk cost
D)non-cash expense

Question 36

Which of the following is true of historical costs?

A)They are useful for making future predictions.
B)They are relevant for decision making.
C)They are always accounted as opportunity costs.
D)They cannot be fixed costs.

Question 37

Crandle Manufacturers Inc.is approached by a potential customer to fulfill a one-time-only special order for a product similar to one offered to domestic customers.The company has excess capacity.The following per unit data apply for sales to regular customers:

What is the change in operating profits if the one-time-only special order for 1,030 units is accepted for $550 a unit by Crandle?

A)$164,800 increase in operating profits
B)$164,170 increase in operating profits
C)$164,170 decrease in operating profits
D)$164,800 decrease in operating profits

Question 38

A product cost is composed of the following:

The product sells for $40 and a 15% commission is paid to a salesperson for every unit sold.Management accountants also estimate that storage cost per unit averages $0.75 per unit.What is the full cost of the product?

A)$14
B)$22
C)$28.75
D)$28.00

Question 39

One-time-only special orders should only be accepted if ________.

A)incremental revenues exceed incremental costs
B)differential revenues exceed variable costs
C)incremental revenues exceed fixed costs
D)total revenues exceed total costs

Question 40

John's 8-year-old Chevrolet Trail Blazer requires repairs estimated at $7,000 to make it road worthy again.His wife,Sherry,suggested that he should buy a 5-year-old used Jeep Grand Cherokee instead for $7,000 cash.Sherry estimated the following costs for the two cars:

What should John do? What are his savings in the first year?

A)Buy the Grand Cherokee;$8,700
B)Fix the Trail Blazer;$4,380
C)Buy the Grand Cherokee;$880
D)Fix the Trail Blazer;$7,247

Question 41

Dantley's Furniture manufactures rustic furniture.The cost accounting system estimates manufacturing costs to be $190 per table,consisting of 80% variable costs and 20% fixed costs.The company has surplus capacity available.It is Back Forrest's policy to add a 45% markup to full costs.Dantley's Furniture is invited to bid on a one-time-only special order to supply 180 rustic tables.What is the lowest price Dantley's Furniture should bid on this special order?

A)$22,230
B)$27,360
C)$34,200
D)$42,750

Question 42

Dantley's Furniture manufactures rustic furniture.The cost accounting system estimates manufacturing costs to be $240 per table,consisting of 75% variable costs and 25% fixed costs.The company has surplus capacity available.It is Back Forrest's policy to add a 45% markup to full costs.A large hotel chain is currently expanding and has decided to decorate all new hotels using the rustic style.Dantley's Furniture Incorporated is invited to submit a bid to the hotel chain.What is the lowest price per unit Dantley's Furniture should bid on this long-term order?

A)$168
B)$180
C)$240
D)$348

Question 43

Which of the following costs is irrelevant in the decision making of a special order when there is idle production capacity - enough excess capacity to accept the order?

A)fixed manufacturing costs
B)units sold
C)material cost
D)labor hours incurred

Question 44

The rent paid for an already existing facility is an example of a sunk cost.

Question 45

The best way to avoid misidentification of relevant costs is to focus on ________.

A)expected future costs that differ among the alternatives
B)historical costs
C)unit fixed costs
D)total unit costs

Question 46

Past costs themselves are always irrelevant when making decisions.

Question 47

Direct materials are $600,direct labor is $450,variable overhead costs are $650,and fixed overhead costs are $400.The cost of one unit is ________.

A)$850
B)$1,050
C)$1,700
D)$2,100

Question 48

Which of the following is an appropriate step when identifying relevant costs to make a business
Decision?

A)assuming all variable costs are relevant
B)assuming all fixed costs are irrelevant
C)separating total costs into business function costs and full costs
D)separating total costs into variable and fixed components

Question 49

Striker 44 Corporation produces a part that is used in the manufacture of one of its products.The costs associated with the production of 12,000 units of this part are as follows:

Of the fixed factory overhead costs,$58,000 is avoidable.
Assuming no other use of their facilities,the highest price that McMurphy should be willing to pay for 12,000 units of the part is ________.

A)$408,000
B)$273,000
C)$331,000
D)$351,000

Question 50

Which of the following is not true about one-time-only special orders?

A)special orders would be accepted if they result in an increase in the contribution margin regardless of capacity and long-term implications
B)along with other criteria,there must be excess capacity to accept an order
C)along with other criteria,there must not be significant long-term negative implications of accepting a special order
D)the impact on operating income of the acceptance of a special-order must be analyzed by management before making a final decision

Question 51

Zephram Corporation has a plant capacity of 200,000 units per month.Unit costs at capacity are:

Current monthly sales are 190,000 units at $30.00 each.Q,Inc. ,has contacted Zephram Corporation about purchasing 2,500 units at $24.00 each.Current sales would not be affected by the one-time-only special order.What is Zephram's change in operating profits if the one-time-only special order is accepted?

A)$11,000 increase
B)$31,500 increase
C)$22,500 increase
D)$49,000 increase

Question 52

Kitchens Sales Inc.is approached by Mr.Louis Cifer,a new customer,to fulfill a large one-time-only special order for a product similar to one offered to regular customers.The following per unit data apply for sales to regular customers:

Kitchens Sales inc.has excess capacity.Mr.Cifer wants the cabinets in cherry rather than oak,so direct material costs will increase by $66 per unit.The average marketing cost of Kitchens Sales product is $173 per order.Other than price,what other items should Kitchens Sales consider before accepting this one-time-only special order?

A)reaction of shareholders
B)reaction of existing customers to the lower price offered to Mr.Louis Cifer
C)demand for cherry cabinets
D)price is the only consideration

Question 53

McMurphy Corporation produces a part that is used in the manufacture of one of its products.The costs associated with the production of 12,000 units of this part are as follows:

Of the fixed factory overhead costs,$55,000 is avoidable.Conners Company has offered to sell 12,000 units of the same part to McMurphy Corporation for $41 per unit.
Assuming there is no other use for the facilities,Schmidt should ________.

A)make the part,as this would save $16 per unit
B)buy the part,as this would save $16 per unit
C)buy the part,as this would save the company $192,000
D)make the part,as this would save $14 per unit

Question 54

Kitchens Sales Inc.is approached by Mr.Louis Cifer,a new customer,to fulfill a large one-time-only special order for a product similar to one offered to regular customers.The following per unit data apply for sales to regular customers:

Kitchens Sales Inc.has excess capacity.Mr.Cifer wants the cabinets in cherry rather than oak,so direct material costs will increase by $70 per unit.The average marketing cost of Kitchens Sales product is $173 per order.For Kitchens,what is the full cost of the one-time-only special order?

A)$1,034
B)$1,174
C)$1,104
D)$1,347

Question 55

Unit cost data can most mislead decisions by ________.

A)not computing fixed overhead costs
B)computing labor and materials costs only
C)computing administrative costs
D)not computing unit costs at the same output level

Question 56

An example of a qualitative factor for the decision-making process is ________

A)customer satisfaction as determined by written responses given by customers to survey questions
B)employee wages paid this week
C)number of clicks on a web site during a month
D)manufacturing overhead allocated to WIP

Question 57

Which of the following are potential problems managers face in relevant-cost analysis?

A)Including only relevant costs and relevant revenues in an analysis
B)incorrect assumptions such as all variable costs are relevant and all fixed costs are not
C)considering past historical costs when making predictions about future costs
D)examining differences in expected total future revenues and expected total future costs among alternatives

Question 58

Relevant costs are ________.

A)sunk costs
B)expected future costs
C)actual present costs
D)historical costs

Question 59

Equal weight must be given to qualitative factors and quantitative nonfinancial factors while making decisions.

Question 60

Kitchens Sales Inc.is approached by Mr.Louis Cifer,a new customer,to fulfill a large one-time-only special order for a product similar to one offered to regular customers.The following per unit data apply for sales to regular customers:

Kitchens Sales inc.has excess capacity.Mr.Cifer wants the cabinets in cherry rather than oak,so direct material costs will increase by $65 per unit.The average marketing cost of Kitchens Sales product is $175 per order.Which of the following costs is NOT considered to calculate the minimum acceptable price of a one-time-only special order?

A)marketing costs
B)direct material costs
C)indirect material costs
D)special design costs

Question 61

Variable cost per unit is the best product cost to use for one-time-only special order decisions.

Question 62

Business function costs are the sum of all variable and fixed costs in all business functions of the value chain.

Question 63

A cost may be relevant for one decision,but NOT relevant for a different decision.

Question 64

Sunk costs are irrelevant to decision making.

Question 65

For one-time-only special orders,fixed costs may be relevant but NOT variable costs.

Question 66

Qualitative factors are outcomes that can be easily measured in numerical terms,such as the costs of direct labor.

Question 67

In the decision making of a one-time-only special order,it is assumed that accepting the special order is
not expected to affect the selling price to other customers.

Question 68

Revenues that remain the same for two alternatives being examined are relevant revenues.

Question 69

In a one-time special order situation,if the price offered by the buyer is less than the absorption cost per unit,the special order may still be profitable since absorption costs include allocated fixed manufacturing overhead.

Question 70

If Option 1 costs $120 and Option 2 costs $90,then the differential cost is $30.

Question 71

In relevant-cost analysis,managers should not consider all variable as relevant and all fixed costs as irrelevant.

Question 72

Marketing costs will be an irrelevant cost in the decision making of a one-time-only special order.

Question 73

A sunk cost is a relevant cost in a decision making.

Question 74

An incremental product cost is generally a fixed cost.

Question 75

Bid prices and costs that are relevant for regular orders are the same costs that are relevant for one-time-only special orders.

Question 76

Qualitative factors,as well as relevant revenues and relevant costs need to be considered when selecting among alternatives.

Question 77

Qualitative factors are important in the decision-making process even though they cannot be measured numerically.

Question 78

Full costs of a product include variable and fixed costs in a particular business function in the value
chain.

Question 79

Past costs are also called sunk costs because they are unavoidable and cannot be changed no matter what action is taken.

Question 80

Quantitative factors,such as direct material costs,are outcomes that are measured in numerical terms.