Deck 6: Relevant Information and Decision-Making: Product Decisions

Question 1

Opportunity cost is specifically mentioned in:

A) a differential and opportunity cost analysis
B) a differential cost analysis
C) an opportunity cost analysis
D) neither differential cost analysis nor opportunity cost analysis

Answer 1

D

Question 2

Goldwater Company manufactures a part for its production cycle. The costs per unit for 10,000 units of this part are as follows: The fixed factory overhead costs are unavoidable. Assume that Goldwater Company can buy 10,000 units of the part from another producer for $56 each. The current facilities could be used to make 10,000 units of a product that has a contribution margin of $20 per unit. No additional fixed costs would be incurred. Goldwater Company should:

A) continue to make the part to earn an extra $5 per unit contribution to profit
B) make the new product and buy the part to earn an extra $15 per unit contribution to profit
C) make the new product and buy the part to earn an extra $5 per unit contribution to profit
D) continue to make the part to earn an extra $15 per unit contribution to profit

Answer 2

B

Question 3

Adios Company provided the following information regarding its one and only product -skateboards. The difference in manufacturing cost per unit, if the absorption approach is used in place of the contribution approach, is:

A) cost per unit decreases by $0.75
B) cost per unit increases by $2
C) cost per unit decreases by $2
D) cost per unit increases by $0.75

Answer 3

B

Question 4

Samantha Company is considering replacing a machine that is presently used in the production of its product. The following data are available: is irrelevant.

A) The disposal value of the old machine
B) The annual operating cost of the old machine
C) The disposal value in five years
D) The original cost of the replacement machine

Question 5

is relevant in a decision to replace equipment.

A) Book value of old equipment
B) Future maintenance costs of old equipment
C) Depreciation accrued on old equipment
D) Cost of old equipment

Question 6

Tender Company manufactures a part for its production cycle. The costs per unit for 5,000 units of this part are as follows: The fixed factory overhead costs are unavoidable. Assume that Tender Company has been offered 5,000 units of the part from another producer for $15 each. The facilities currently used to make the part could be rented out to another manufacturer for $20,000 a year. Tender Company should:

A) make the part to save $1 per unit
B) make the part to save $3 per unit
C) buy the part to save $3 per unit
D) buy the part to save $1 per unit

Question 7

Belize Corporation has a joint process which produces three products: X, Y, and Z. Each product may be sold at split- off or processed further and then sold. Joint processing costs for a year amount to $100,000. Other relevant data are as follows: In processing Product Z further:

A) profits will decrease by $5,600
B) profits will increase by $20,000
C) incremental profits will exceed incremental costs
D) the additional revenue produced will exceed the additional costs

Question 8

Janice is considering leaving her current position to open a coffee shop. Janice's current salary is $56,000. Annual coffee shop revenue and costs are estimated at $250,000 and $210,000, respectively.
Is the outlay cost associated with the decision to open the coffee shop.

A) $460,000
B) $40,000
C) $210,000
D) $56,000

Question 9

Feliz Company provided the following information regarding its one and only product -skateboards. is the contribution margin if the contribution approach is used.

A) $450,000
B) $390,000
C) $350,000
D) $470,000

Question 10

Floyd Company produces a part that is used in the manufacture of one of its products. The costs associated with the production of 5,000 units of this part are as follows: Of the fixed factory overhead costs, $72,000 is avoidable. Assume that Floyd Company can buy 5,000 units of the part from another producer for $105.60 each. The facilities currently used to make the part could be rented out to another manufacturer for $72,000 a year. Floyd Company should:

A) buy the part to save the company $72,000
B) make the part to save the company $24,000
C) buy the part to save $14.40 per unit
D) make the part to save $19.20 per unit

Question 11

Donald Company provided the following information regarding its one and only product -skateboards. The manufacturing cost per unit, if the contribution approach is used, is:

A) $13.50
B) $15.50
C) $13.00
D) $14.75

Question 12

Opportunity cost:

A) is the cost of resources owned by the company
B) is the contribution of the best alternative that is excluded from consideration
C) applies to resources owned by the company
D) All of these answers are correct.

Question 13

The salary forgone by a person who quits a job to start a business is an example of a (n):

A) outlay cost
B) depreciable cost
C) opportunity cost
D) sunk cost

Question 14

Derwood Company is considering replacing a machine that is presently used in the production of its product. The following data are available: is a sunk cost.

A) The disposal value of the old machine
B) The original cost of the old machine
C) The annual cash operating costs of the replacement machine
D) The annual cash operating costs of the old machine

Question 15

Bull Company manufactures a part for its production cycle. The costs per unit for 5,000 units of this part are as follows: The fixed factory overhead costs are unavoidable. Assume that Bull Company has been offered 5,000 units of the part from another producer for $14 each. The facilities currently used could be used to make 5,000 units of a product that would contribute $5 a unit to fixed expenses. No additional fixed costs would be incurred. Bull Company should:

A) continue to make the part to earn an extra $3 per unit contribution to profit
B) make the new product and buy the part to earn an extra $1 per unit contribution to profit
C) make the new product and buy the part to earn an extra $3 per unit contribution to profit
D) continue to make the part to earn an extra $1 per unit contribution to profit

Question 16

Jeannie Company is considering replacing a machine that is presently used in the production of its product. The following data are available: is a sunk cost.

A) The annual cash operating costs of the old machine
B) The original cost of the old machine
C) The disposal value of the old machine
D) The annual cash operating costs of the replacement machine

Question 17

Bueno Company provided the following information regarding its one and only product-ice skates. is the manufacturing cost per unit if the absorption approach is used.

A) $28
B) $40
C) $36
D) $30

Question 18

Brady Company provided the following information regarding its one and only product -skateboards. is the difference in total product cost between the absorption approach and the contribution approach.

A) $150,000
B) $100,000
C) $120,000
D) None of these answers is correct.

Question 19

is the juncture in manufacturing where the joint products become individually identifiable.

A) The significant juncture
B) The joint processing juncture
C) The split- off point
D) The common point

Question 20

Orange Manufacturing Company produces three products using a joint process which accumulates $25,000 in joint costs. The products, A, B, and C, can be sold at split- off or processed further and then sold. The production level for each product is 10,000 units. The following unit information is also available: To maximize profits, Orange Manufacturing Company should process further.

A) product A only
B) product B only
C) product C only
D) products A, B, and C

Question 21

Hola Company provided the following information regarding its one and only product-ice skates. is the total manufacturing cost if the absorption approach is used.

A) $400,000
B) $300,000
C) $360,000
D) $280,000

Question 22

Tony Company is considering replacing a machine that is presently used in the production of its product. The following data are available: is irrelevant.

A) The disposal value of the old machine
B) The book value of the old machine
C) The annual operating cost of the old machine
D) The original cost of the replacement machine

Question 23

Mad Cow Company manufactures a part for its production cycle. The costs per unit for 38,000 units of this part are as follows: The fixed factory overhead costs are unavoidable. Assuming no other use of their facilities, the highest price that Mad Cow Company should be willing to pay for the part is:

A) $11
B) $12
C) $15
D) $8

Question 24

Hawaii Corporation has a joint process which produces three products: X, Y, and Z. Each product may be sold at split- off or processed further and then sold. Joint processing costs for a year amount to $100,000. Other relevant data are as follows: Product Y:

A) can be processed further or sold at split- off; there is no difference in profit.
B) should be processed further to increase profits by $76,000
C) should be processed further to increase profits by $26,000
D) should be sold at split- off since processing further would only reduce profits by $26,000

Question 25

Reagan Company manufactures a part for its production cycle. The costs per unit for 10,000 units of this part are as follows: The fixed factory overhead costs are unavoidable. Assuming no other use of their facilities, the highest price that Reagan Company should be willing to pay for the part is:

A) $35
B) $45
C) $51
D) $41

Question 26

is not likely to be relevant in a decision concerning the disposal of obsolete inventory.

A) Expected future revenues
B) Scrap value of inventory
C) Inventory cost
D) Expected future costs

Question 27

Geren Company produces and sells a product that has variable costs of $9 per unit and fixed costs of $200,000 per year. If production decreases from 50,000 to 40,000 units, the cost per unit will:

A) increase by $1
B) increase to $13
C) decrease to $14
D) decrease by $1

Question 28

Zachary Company produces and sells a product that has variable costs of $7 per unit and fixed costs of $200,000 per year. _ is the cost per unit if 40,000 units per year are produced and sold.

A) $10
B) $12
C) $17
D) $7

Question 29

Hoover Company manufactures a part for its production cycle. The costs per unit for 10,000 units of this part are as follows: The fixed factory overhead costs are unavoidable. Madison Company has offered to sell 10,000 units of the same part to Hoover Company for $55 a unit. Assuming no other use for the facilities, Hoover Company should:

A) make the part to save $4 per unit
B) buy from Madison to save $6 per unit
C) buy from Madison to save $4 per unit
D) make the part to save $6 per unit

Question 30

are costs of manufacturing two or more products that are not separately identifiable as individual products until their split- off point.

A) Sunk costs
B) Separable costs
C) Joint costs
D) Incremental costs

Question 31

Grape Company produces three products using a joint process which accumulates $25,000 in joint costs. The products, A, B, and C, can be sold at split- off or processed further and then sold. The production level for each product is 10,000 units. The following unit information is also available: Product C should be processed beyond the split- off point because:

A) incremental revenues will exceed incremental costs
B) sales value at completion exceeds sales value at split- off
C) incremental costs exceed incremental revenue
D) None of these answers is correct.

Question 32

Major Nelson Company is considering replacing a machine that is presently used in the production of its product. The following data are available: The difference in cost between keeping the old machine and replacing the old machine, ignoring income taxes, is:

A) $22,000 in favor of replacing the old machine
B) $12,000 in favor of keeping the old machine
C) $22,000 in favor of keeping the old machine
D) $37,000 in favor of replacing the old machine

Question 33

If a company has excess capacity, the most it would pay for buying a product that it currently makes would be the:

A) total cost of producing the product
B) market value less the usual markup on the product
C) market value of the product
D) total variable cost of producing the product

Question 34

Dumpster Company produces three products using a joint process which accumulates $25,000 in joint costs. The products, A, B, and C, can be sold at split- off or processed further and then sold. The production level for each product is 1,000 units. The following unit information is also available: If Dumpster Company makes the decisions that maximize profit, Dumpster Company's net income will be:

A) $30,000
B) $32,000
C) $15,000
D) $47,000

Question 35

A key factor in a make- or- buy decision is:

A) whether or not there are idle facilities
B) gain or loss on the disposal of equipment
C) the total joint costs
D) the amount of the sunk costs

Question 36

Hoopster Company produces a part that is used in the manufacture of one of its products. The costs associated with the production of 5,000 units of this part are as follows: Of the fixed factory overhead costs, $72,000 are avoidable. Knight Company has offered to sell 5,000 units of the same part to Hoopster for $86.40 per unit. Assuming there is no other use for the facilities, Hoopster Company should:

A) make the part to save $4.80 per unit
B) make the part to save $14.40 per unit
C) buy the part to save $14.40 per unit
D) buy the part to save the company $72,000

Question 37

Tangerine Manufacturing Company produces three products using a joint process which accumulates $25,000 in joint costs. The products, A, B, and C, can be sold at split- off or processed further and then sold. The production level for each product is 10,000 units. The following unit information is also available: If product A is processed beyond the split- off point, profit will:

A) increase by $90,000
B) stay the same
C) increase by $210,000
D) increase by $120,000

Question 38

Kennedy Company manufactures a part for its production cycle. The costs per unit for 10,000 units of this part are as follows: The fixed factory overhead costs are unavoidable. Assume that Kennedy Company can buy 10,000 units of the part from another producer for $60 each. The facilities currently used to make the part could be rented out to another manufacturer for $100,000 a year. Kennedy Company should:

A) make the part to save $2.50 per unit
B) buy the part to save $2.50 per unit
C) make the part to save $1 per unit
D) buy the part to save $1 per unit

Question 39

Hogan Corporation has a joint process which produces three products: P, G, and A. Each product may be sold at split- off or processed further and then sold. Joint processing costs for a year amount to $25,000. Other relevant data are as follows: Once product P is produced, processing it further will cause profits to:

A) decrease by $5,000
B) decrease by $8,000
C) increase by $3,000
D) increase by $8,000

Question 40

Finch Company manufactures a part for its production cycle. The costs per unit for 5,000 units of this part are as follows: The fixed factory overhead costs are unavoidable. Scalding Corporation has offered to sell 5,000 units of the same part to Finch Company for $15 a unit. Assuming no other use for the facilities, Finch Company should:

A) buy from Scalding Corporation to save $3 per unit
B) make the part to save $1 per unit
C) make the part to save $3 per unit
D) buy from Scalding Corporation to save $1 per unit

Question 41

Burt Company currently produces 10,000 units of a key part at a total cost of $210,000. Variable costs are $170,000. Of the fixed cost, $10,000 relate specifically to this part. The remaining fixed costs are unavoidable. Another manufacturer has offered to supply the part for $190 per unit. The facilities currently used to manufacture the part could be used to manufacture a new product with an expected contribution margin of $25,000. Alternately, the facilities could be rented out at $55,000. is the opportunity cost to Burt Company for making the part.

A) ($20,000)
B) $25,000
C) $55,000
D) ($10,000)

Question 42

Manufacturing costs incurred after the split- off are known as:

A) product costs
B) separable costs
C) split- off costs
D) joint costs

Question 43

Don Juan Company provided the following information regarding its one and only product-ice skates. is the total manufacturing cost if the contribution approach is used.

A) $480,000
B) $420,000
C) $600,000
D) $300,000

Question 44

Els Corporation has a joint process that produces two products: A and B. Each product may be sold at the split- off point or processed further and then sold. Joint processing costs for a year amount to $25,000.
Product A can be sold at the split- off point for $32,000. Alternately, product A can be processed further and sold for $40,000. Additional processing costs are $5,000.
In deciding whether to sell product A at the split- off point or to process further, the is not relevant.

A) sales value at split- off of $32,000
B) joint processing cost of $25,000
C) sales value at completion of $40,000
D) All of these answers are relevant.

Question 45

Super Cooper Company currently produces a key part at a total cost of $210,000. Variable costs are $170,000. Of the fixed cost, $10,000 relate specifically to this part. The remaining fixed costs are unavoidable.
Another manufacturer has offered to supply the part for $190,000. The facilities currently used to manufacture the part could be used to manufacture a new product with an expected contribution margin of $30,000. Alternately, the facilities could be rented out at $60,000. Given all of these alternatives, is Super Cooper's lowest net cost for the part.

A) $170,000
B) $180,000
C) $130,000
D) $190,000

Question 46

Por Favor Company provided the following information regarding its one and only product -skateboards. is the manufacturing cost per unit if the contribution approach is used.

A) $40
B) $28
C) $30
D) $36

Question 47

Future costs are relevant in decision making when:

A) they exceed future revenues
B) they are the same between alternatives
C) they are not based on estimates
D) they differ between alternatives

Question 48

Cancun Corporation has a joint process which produces three products: X, Y, and Z. Each product may be sold at split- off or processed further and then sold. Joint processing costs for a year amount to $100,000. Other relevant data are as follows: Once product X is produced, processing it further will cause profits to:

A) decrease by $16,000
B) increase by $16,000
C) decrease by $32,000
D) increase by $32,000

Question 49

Crenshaw Company produces a part that is used in the manufacture of one of its products. The costs associated with the production of 5,000 units of this part are as follows: Of the fixed factory overhead costs, $72,000 is avoidable. Assuming no other use of their facilities, the highest price that Crenshaw Company should be willing to pay for 5,000 units of the part is:

A) $432,000
B) $288,000
C) $504,000
D) $336,000

Question 50

would be a consideration in a make- or- buy decision.

A) Variable factory overhead
B) Rental income from unused facilities
C) Excess capacity
D) All of these answers are correct.

Question 51

Cocoa Beach Company is considering replacing a machine that is presently used in the production of its product. The following data are available: Ignoring income taxes, the difference in cost between the old and new machine is:

A) $98,000 in favor of the old machine
B) $40,000 in favor of the new machine
C) $12,000 in favor of the new machine
D) $98,000 in favor of the new machine

Question 52

Andrew Company provided the following information regarding its one and only product -skateboards. The manufacturing cost per unit by using the absorption approach is:

A) $14.75
B) $13.50
C) $15.50
D) $13.00

Question 53

Tabitha Company is considering replacing a machine that is presently used in the production of its product. The following data are available: The total relevant costs to consider if the old machine is kept are:

A) $50,000
B) $30,000
C) $52,000
D) $60,000

Question 54

Past costs that are unavoidable and unchangeable are known as:

A) fixed overhead costs
B) sunk costs
C) product production costs
D) operating costs

Question 55

Beyonce is considering leaving her current position to open a music store. Beyonce's current salary is $45,000. Annual music store revenue and costs are estimated at $250,000 and $210,000, respectively. If Beyonce decides to open the music store, the change in her annual income would be:

A) $40,000
B) $85,000
C) ($5,000)
D) $250,000

Question 56

The absorption approach to the computation of manufacturing cost differs from the contribution approach because the absorption approach:

A) includes variable selling and administrative costs
B) includes all selling and administrative costs
C) includes all fixed costs
D) includes fixed overhead

Question 57

Three Point Company currently produces 10,000 units of a key part at a total cost of $512,000. Variable costs are $300,000. Of the fixed cost, $140,000 relate specifically to this part. The remaining fixed costs are unavoidable. Another manufacturer has offered to supply the part for $48 per unit. The facilities currently used to manufacture the part could be used to manufacture a new product with an expected contribution margin of $55,000. Alternately, the facilities could be rented out at $63,000. is the opportunity cost to Three Point Company to make the part:

A) $480,000
B) $63,000
C) $55,000
D) None of these answers is correct.

Question 58

Bermuda Triangle Corporation has a joint process which produces three products: X, Y, and Z. Each product may be sold at split- off or processed further and then sold. Joint processing costs for a year amount to $100,000. Other relevant data are as follows: To maximize profits, Bermuda Triangle Corporation should process further.

A) product Z only
B) product Y only
C) product X only
D) products X, Y, and Z

Question 59

are a qualitative factor of a make- or- buy decision.

A) Avoidable costs
B) Long- term relationship with suppliers
C) Variable manufacturing costs
D) Opportunity costs

Question 60

Miller Company produces a part that is used in the manufacture of one of its products. The costs associated with the production of 5,000 units of this part are as follows: Of the fixed factory overhead costs, $72,000 is avoidable. Assume that Miller Company can buy 5,000 units of the part from another producer for $100.80 each. The current facilities could be used to make 5,000 units of a product that has a contribution margin of $24 per unit. Fixed factory overhead costs to produce this new product would be exactly the same as for the currently produced part. Miller Company should:

A) continue to make the part and earn an extra $4.80 per unit contribution to profit
B) buy the part and produce the new product and earn an extra $4.80 per unit contribution to profit
C) continue to make the part and earn an extra $48,000 in profit
D) buy the part and produce the new product and earn an extra $24 per unit contribution to profit

Question 61

The choice of the absorption or contribution approach affects the manufacturing cost per unit because the:

A) manufacturing cost per unit is independent of the approach
B) manufacturing cost per unit is the same regardless of the approach
C) manufacturing cost per unit is higher if the absorption approach is used
D) manufacturing cost per unit is higher if the contribution approach is used

Question 62

Sharon is considering leaving her current position to open a coffee shop. Sharon's current salary is $83,000. Annual coffee shop revenue and costs are estimated at $250,000 and $210,000, respectively.
Is the opportunity cost of opening the coffee shop.

A) $333,000
B) $40,000
C) $210,000
D) $83,000

Question 63

Lemon Manufacturing Company produces three products using a joint process that accumulates $25,000 in joint costs. The products, A, B, and C, can be sold at split- off or processed further and then sold. The production level for each product is 10,000 units. The following unit information is also available: Product B:

A) can be processed further or sold at split- off; it makes no difference.
B) should be processed further to increase profits by $3 per unit
C) should be processed further to increase profits by $70,000
D) should be sold at split- off to maximize profits

Question 64

Melissa Company produces and sells a product that has variable costs of $7 per unit and fixed costs of $240,000 per year. is the cost per unit if 20,000 units per year are produced and sold.

A) $5
B) $7
C) $12
D) $19

Question 65

Which of the following is correct?

A) The contribution income statement provides a gross margin.
B) The absorption income statement provides a contribution margin.
C) Both statements are correct.
D) Neither statement is correct.

Question 66

Joshua Company produces and sells a product that has variable costs of $7 per unit and fixed costs of $200,000 per year. If production increases from 20,000 units to 25,000 units, the unit cost will:

A) decrease by $2 per unit
B) decrease by $8 per unit
C) increase by $35,000
D) not change

Question 67

In a decision to keep or replace existing equipment, is a false statement.

A) the book value of the old equipment is irrelevant
B) the disposal value of the old equipment is irrelevant
C) depreciation on the new equipment is relevant
D) the cost of the new equipment is relevant

Question 68

Wholesome Company paid $130,000 for a machine used to mill oats. The annual contribution margin from oat sales is $60,000. The machine could be sold for $90,000. The opportunity cost of producing wheat flour is:

A) $90,000
B) $130,000
C) $30,000
D) $60,000

Question 69

Book value is defined as:

A) cost less accumulated depreciation
B) disposal value
C) disposal value less original cost
D) disposal value less accumulated depreciation

Question 70

Deuce Company currently produces 10,000 units of a key part at a total cost of $512,000. Variable costs are $300,000. Of the fixed cost, $140,000 relate specifically to this part. The remaining fixed costs are unavoidable. Another manufacturer has offered to supply the part for $48 per unit. The facilities currently used to manufacture the part could be used to manufacture a new product with an expected contribution margin of $30,000. Alternately, the facilities could be rented out at $60,000. Given all of these alternatives, is Deuce Company's lowest net cost per unit for the part.

A) $42
B) $48
C) $44
D) $30

Question 71

The choice of the absorption or contribution approach affects a firm's contribution margin because:

A) contribution margin is higher if the contribution approach is used
B) contribution margin is independent of the approach
C) contribution margin is lower if the contribution approach is used
D) None of these answers is correct.

Question 72

Joint products should be processed beyond the split- off point if:

A) additional net revenue exceeds the sales value at split- off
B) there is a market for the joint products
C) incremental expenses exceed incremental revenues
D) sale of the product is guaranteed

Question 73

Joe Smith has paid off the mortgage on his house and continues to live in the house. The interest income forgone by not selling the house and investing the proceeds is an example of a(n):

A) sunk cost
B) outlay cost
C) opportunity cost
D) detrimental cost

Question 74

is an example of a joint product.

A) Lumber
B) Flour
C) Chemicals
D) All of these answers are correct.

Question 75

Depreciation is:

A) the decline in equipment value due to obsolescence
B) the periodic cost of equipment spread over the future periods in which the equipment is expected to be used
C) the difference between the original cost and current market value
D) All of these answers are correct.

Question 76

Partridge Company provided the following information regarding its one and only product-ice skates. The difference in manufacturing cost per unit between the absorption approach and contribution approach is:

A) $10 higher if absorption cost is used
B) $36 higher if contribution is used
C) $10 higher if contribution cost is used
D) $36 higher if absorption is used

Question 77

Woods Corporation has a joint process that produces three products: P, G, and A. Each product may be sold at split- off or processed further and then sold. Joint processing costs for a year amount to $25,000. Other relevant data are as follows: Product G:

A) should be processed further to increase profits by $6,500
B) can be processed further or sold at split- off; there is no difference in profit.
C) should be sold at split- off since processing further would only reduce profits by $6,500
D) should be processed further to increase profits by $19,000

Question 78

Lynnette is considering leaving her current position to open an ice cream shop. Lynnette's current salary is $77,000. Annual ice cream shop revenue and costs are estimated at $250,000 and $210,000, respectively. is the opportunity cost of remaining employed.

A) $287,000
B) $210,000
C) $40,000
D) $77,000

Question 79

The gain or loss on the disposal of equipment is determined by:

A) subtracting the book value of the old equipment from the cost of the new equipment
B) adding the disposal value and the book value of the old equipment
C) subtracting the book value from the cash received for the old equipment
D) adding the book value of the old equipment to the cost of the new equipment

Question 80

Agua Company provided the following information regarding its one and only product -skateboards. is the gross margin if the absorption approach is used.

A) $450,000
B) $390,000
C) $470,000
D) $350,000