Deck 6: Relevant Information for Decision Making With a Focus

Question 1

Sue is considering leaving her current position to open a coffee shop.Sue's current annual salary is $83,000.Annual coffee shop revenue and costs are estimated at $260,000 and $210,000,respectively.What is Sue's opportunity cost of opening the coffee shop in the first year?

A)$40,000
B)$83,000
C)$210,000
D)$343,000

Answer 1

B

Question 2

A key factor in a make-or-buy decision is ________.

A)whether there are idle facilities
B)the amount of sunk costs
C)the total joint costs
D)the total separable costs

Answer 2

A

Question 3

Jack Bowers has paid off the mortgage on his house and continues to live in the house.The interest income foregone by not selling the house and investing the proceeds is an example of a(n)________.

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

Answer 3

C

Question 4

The key to determining the financial difference between two alternative courses of action is to identify the ________.

A)opportunity cost of one alternative
B)joint cost of both alternatives
C)differential costs and revenues
D)joint cost of one alternative

Question 5

Beth is considering leaving her current position to open a coffee shop.Beth's current annual salary is $56,000.Beth is going to invest $200,000 of her own money to start the business.Estimated annual revenue from the new business is $250,000.What is the outlay cost associated with the decision to open the coffee shop?

A)$50,000
B)$56,000
C)$200,000
D)$250,000

Question 6

When determining the opportunity cost of a project,it depends on the alternatives available.

Question 7

Opportunity costs and outlay costs are widely used synonyms.

Question 8

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

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

Question 9

The salary foregone by a person who quits a job to start a business is an example of a(n)________.

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

Question 10

Opportunity costs apply to resources that a company has committed to purchase.

Question 11

Mary is considering leaving her current position to open an ice cream shop.Mary's current annual salary is $77,000.Annual ice cream shop revenue and costs are estimated at $260,000 and $210,000,respectively.What is Mary's annual opportunity cost of remaining employed in her current position?

A)$50,000
B)$77,000
C)$210,000
D)$260,000

Question 12

The term opportunity cost applies to a resource that a company ________.

A)is thinking about purchasing
B)already owns
C)has committed to purchase
D)already owns or has committed to purchase

Question 13

An opportunity cost is ________.

A)the additional costs generated by a proposed alternative
B)the difference in total cost between two alternatives
C)a cash disbursement in the future
D)the maximum available benefit foregone by using a resource for a particular purpose instead of the best alternative use

Question 14

Nestle 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 $80,000.The opportunity cost of producing the oats is ________.

A)$20,000
B)$60,000
C)$80,000
D)$130,000

Question 15

Company XYZ is a small company with limited expertise with information technology.Company XYZ has a contract with Company ZZ.Company ZZ handles all of Company XYZ's information technology needs.For Company XYZ,this is an example of ________.

A)joint costs
B)joint decision making
C)outsourcing
D)technology transfer

Question 16

What is a qualitative factor in a make-or-buy decision?

A)variable manufacturing costs
B)avoidable costs
C)long-term relationship with supplier
D)opportunity costs

Question 17

Opportunity cost ________.

A)is the contribution margin of the best alternative that is included in the analysis
B)is the contribution margin of the worst alternative that is included in the analysis
C)is the cost of resources owned by the company
D)applies to resources owned by a company

Question 18

Which is NOT an example of outsourcing?

A)A company located in the United States has a different company in India handle customer complaints and inquiries.
B)A company with headquarters in the United States has a different company in Mexico manufacture some products because the labor is cheaper.
C)A company with headquarters in the United States has a different company in the United States handle the payroll function.
D)Company XX with headquarters in the United States makes the parts for a complex product at Company XX's plant in Canada.

Question 19

What would be a consideration in a make-or-buy decision?

A)excess capacity
B)variable factory overhead costs
C)rental income from idle facilities when not making a part
D)all of the above

Question 20

Future costs are relevant in decision making when they ________.

A)exceed future revenues
B)are not based on estimates
C)differ between alternative courses of action
D)are the same between alternative courses of action

Question 21

If a company has excess capacity,the most it should be willing to pay for a part for a product that it currently makes would be the ________.

A)total costs of producing the part
B)total variable costs of producing the part
C)total fixed costs that can be avoided by buying the part
D)total variable costs of producing the part plus total fixed costs that can be avoided by buying the part

Question 22

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

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

Question 23

Copter Company currently produces a key part at a total cost of $210,000.Annual variable costs are $170,000.Of the annual fixed costs,$10,000 relate specifically to this part.The remaining fixed costs are unavoidable. Another manufacturer has offered to supply the part annually 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 per year.Alternatively,the facilities could be rented out at $60,000 per year.Given all of these alternatives,what is Copter Company's lowest net relevant cost for the part?

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

Question 24

Hitch Company currently produces 10,000 units of a key part at a total cost of $512,000 annually.Annual variable costs are $300,000.Of the annual fixed costs,$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 annually.Alternatively,the facilities could be rented out at $68,000 annually.If Hitch Company makes the part,what is the annual opportunity cost of the facilities?

A)$13,000
B)$28,000
C)$55,000
D)$68,000

Question 25

Johnson Company manufactures a part for its production cycle.The annual costs per unit for 10,000 units of the part are as follows: The fixed factory overhead costs are unavoidable.Spalding Company has offered to sell 10,000 units of the same part to Johnson Company for $60 per unit.The facilities currently used to make the part could be rented out to another manufacturer for $100,000 per year.Johnson Company should ________.

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

Question 26

Fixed overhead costs that will continue regardless of a make-or-buy decision are ________ to the make-or-buy decision.

A)relevant
B)irrelevant
C)avoidable
D)incremental

Question 27

When making a make-or-buy decision for a part,what items are relevant to the decision?

A)variable costs of making the part
B)fixed costs that the company can avoid by not making the part
C)rental income from idle plant when not making the part
D)all of the above

Question 28

Outsourcing is the purchase of products or services by a company from an outside supplier.

Question 29

Qualitative factors do not affect a make-or-buy decision.

Question 30

Garcia Company produces a part that is used in the manufacture of one of its products.The annual 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.Another company has offered to sell 5,000 units of the same part to Garcia for $105.60 per unit.The facilities currently used to make the part can be rented out to another manufacturer for $72,000 per year.What should Garcia Company do?

A)Make the part to save $48,000.
B)Make the part to save $96,000.
C)Buy the part to save $24,000.
D)Buy the part to save $72,000.

Question 31

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

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

Question 32

Dally 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.Assuming there is no other use for the facilities.What is the highest price Dally Company should be willing to pay for 5,000 units of the part?

A)$288,000
B)$336,000
C)$408,000
D)$504,000

Question 33

Deuce Company currently produces 10,000 units of a key part at a total cost of $512,000 annually.Variable costs are $300,000 annually.Of the annual fixed costs,$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 per year.Alternatively,the facilities could be rented out at $60,000 per year.Given all of these alternatives,what is Deuce Company's lowest net relevant cost per unit for the part?

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

Question 34

Match 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.Today Company has offered to sell 5,000 units of the same part to Match for $86.40 per unit.Assuming there is no other use for the facilities,Match Company should ________.

A)make the part to save $24,000
B)make the part to save $72,000
C)buy the part to save $24,000
D)buy the part to save $72,000

Question 35

Goldwater Company manufactures a part for its production cycle.The annual costs per unit for 10,000 units of the part are as follows: The fixed factory overhead costs are unavoidable.Olson Company has offered to sell 10,000 units of the same part to Goldwater Company for $60 per unit.The facilities currently used to make the part could be used to make 10,000 units per year of a new product that has a contribution margin of $20 per unit.No additional fixed costs would be incurred with the new product.Goldwater Company should ________.

A)make the part to save $10,000
B)make the part to save $90,000
C)make the new product and buy the part to save $90,000
D)make the new product and buy the part to save $110,000

Question 36

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

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

Question 37

Crispy Company manufactures a part for its production cycle.The annual costs per unit for 5,000 units of the part are as follows: The fixed factory overhead costs are unavoidable.Another company has offered to sell 5,000 units of the same part to Crispy Company for $15 per unit.The facilities currently used to make the part could be rented out to another manufacturer for $20,000 a year.Crispy 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 $1 per unit
D)buy the part to save $3 per unit

Question 38

Bird Company manufactures a part for its production cycle.The costs per unit for 38,000 units of the part are as follows: The fixed factory overhead costs are unavoidable.Assume no other use for the facilities.What is the highest price Bird Company should pay for the part from an outside supplier?

A)$8
B)$11
C)$12
D)$16

Question 39

Fast Company has just decided to outsource the production of a part for a product.Assume Fast Company leaves the area of the manufacturing plant idle where it was producing the outsourced part.It has no alternative uses of the plant.What is the opportunity cost of the idle area of the manufacturing plant to Fast Company?

A)zero
B)definitely a negative number
C)the disposal value of the entire manufacturing plant
D)none of the above

Question 40

Lakers Company manufactures a part for its production cycle.The annual costs per unit for 5,000 units of the part are as follows: The fixed factory overhead costs are unavoidable.Spalding Company has offered to sell 5,000 units of the same part to Lakers Company for $14 per unit.The facilities currently used for the part could be used to make 5,000 units annually of a new product that would contribute $5 a unit to fixed expenses.No additional fixed costs would be incurred with the new product.Lakers Company should ________.

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

Question 41

Sanama Industries has three product lines: A,B and C.The following annual information is available: Sanama Industries is thinking about dropping Product C because it is reporting a loss.Assume Sanama Industries drops Product C and the space formerly used to produce Product C is rented out for $15,000 per year.What will happen to operating income?

A)increase $6,600
B)increase $9,000
C)increase $14,400
D)increase $15,000

Question 42

Riverside Industries has three product lines: A,B and C.The following information is available: Riverside Industries is thinking about dropping Product C because it is reporting a loss.Assume Riverside Industries drops Product C and does not replace it.What will happen to operating income?

A)increase $600
B)increase $2,400
C)decrease $6,000
D)decrease $9,000

Question 43

The most recent income statement for the Strongsville Branch of First Union Bank is presented below: First Union Bank is thinking about eliminating the Strongsville Branch.If the branch is eliminated,First Union Bank's operating income will ________.

A)increase $8,000
B)increase $25,500
C)decrease $12,000
D)decrease $31,500

Question 44

In deciding whether to add or delete a product,the salary of the plant manager is an ________.Assume the plant manager supervised the production of several products.

A)avoidable fixed cost
B)avoidable variable cost
C)unavoidable fixed cost
D)unavoidable variable cost

Question 45

When deciding whether to add or delete a department,managers should keep the department as long as ________ from the department exceeds ________.

A)contribution margin; variable costs
B)contribution margin; common costs
C)contribution margin; avoidable fixed costs
D)contribution margin; unavoidable fixed costs

Question 46

Aloa Company has three product lines: A,B and C.The following annual information is available: Assume Aloa Company drops Product C.Aloa Company then doubles the production and sales of Product B without increasing fixed costs.What will happen to operating income?

A)increase $15,000
B)increase $24,000
C)increase $36,000
D)increase $42,000

Question 47

Jeff Company produces a part that is used in the manufacture of one of its products.The annual costs associated with the production of 11,000 units of this part are as follows:
A supplier is willing to sell 11,000 units of the part to Jeff Company for $12.50 per unit.When examining the indirect production costsfixed,Jeff Company determines $10,000 is avoidable.
Required:

A)If there are no alternative uses for the facilities,should Jeff Company take advantage of the supplier's offer?
B)If Jeff Company decides to buy the part from the supplier,Jeff Company can rent out the idle facilities for $50,000 per year.Should Jeff Company take advantage of the supplier's offer?

Question 48

In a make-or-buy decision,if plant facilities will remain idle when the decision is made to outsource a part,then the opportunity cost of the plant facilities is zero.Assume there are no alternative uses of the plant facilities available.

Question 49

________ are relevant in deciding whether to add or delete a department.

A)Avoidable costs
B)Common costs
C)Unavoidable costs
D)All of the above

Question 50

Each year,Mother Company purchases 8,000 units of a part that it needs for production of its product.The supplier notified Mother Company that a price increase will take effect shortly,which will bring the price of the part to $25 per part.Mother Company is considering the use of idle facilities to produce the part.The annual production costs to produce the needed 8,000 parts are as follows:
The idle facilities could also be rented out at an annual rent of $99,000.All the fixed indirect production costs are avoidable.
Required:
Determine if Mother Company should buy the part or produce it internally.

Question 51

In deciding whether to add or delete a product,the insurance expense associated with the custom-built equipment used to produce the product is an ________ cost.Assume the equipment will be sold if the company discontinues the product.

A)avoidable fixed
B)avoidable variable
C)unavoidable fixed
D)unavoidable variable

Question 52

The most recent income statement for the Weakville Branch of Second Union Bank is presented below: Second Union Bank is thinking about eliminating the Weakville Branch.If the branch is eliminated,Second Union Bank's operating income will ________.

A)increase $6,000
B)increase $25,500
C)decrease $12,000
D)decrease $31,500

Question 53

The key reasons that companies outsource are to improve the company's focus and reduce operating costs.

Question 54

The big obstacle to outsourcing for most firms has been the cost.

Question 55

Vineyard Company has three product lines: A,B and C.The following annual information is available: Assume Vineyard Company can increase the selling price of Product C to $30,000.Assume all other information remains the same.What will happen to operating income?

A)increase $3,600
B)increase $6,000
C)decrease $3,600
D)decrease $6,000

Question 56

In deciding whether to add or delete a product or service,common costs are probably ________.

A)relevant and avoidable
B)relevant and unavoidable
C)irrelevant and avoidable
D)irrelevant and unavoidable

Question 57

________ costs are costs that continue even if an operation is halted.

A)Differential
B)Sunk
C)Unavoidable
D)Avoidable

Question 58

To make outsourcing services a good option,the services must be reliable,available when needed,and flexible to adapt to changing conditions.

Question 59

Brian Company manufactures a part for its production cycle.The annual costs per unit for 20,000 units of this part are as follows:
Brian Company has been approached by a supplier who will sell 20,000 units of the same part for $940,000.All the fixed indirect production costs are unavoidable if Brian Company ceases production of the part.
Required:

A)Assuming there is no alternative use for the facilities,should Brian Company buy or make the part?
B)Assume the facilities can be rented out for $100,000 per year.Should Brian Company buy the part? If so,how much money will be saved?

Question 60

________ costs will not continue if an ongoing operation is changed or deleted.

A)Avoidable
B)Common
C)Differential
D)Incremental

Question 61

Super Corporation manufactures two products,Super1 and Super2.The following annual information was gathered: Total annual fixed costs are $25,000.Assume Super Corporation manufactures and sells three units of Super1 for every two units of Super2.The company produced and sold 1,500 units of Super1.What is the operating income (loss)for this year?

A)$(13,500)
B)$(25,000)
C)$22,500
D)$34,500

Question 62

Yeman Corporation manufactures two products,Pots and Blenders.The following annual information was gathered: Total annual fixed costs are $15,000.Total production capacity is 10,000 units per year.The maximum number of each product that can be sold in a year is 7,000 units.It takes the same amount of time to make each product.How many units of Pots should Yeman Corporation produce and sell to maximize profits in one year?

A)3,000 units of Pots
B)5,000 units of Pots
C)7,000 units of Pots
D)8,000 units of Pots

Question 63

Unavoidable costs are never relevant in deciding whether to eliminate a product or department.

Question 64

Meyer Corporation manufactures two products,Pots and Roasters.The following information was gathered: Total fixed costs are $15,000.Assume Meyer Corporation can produce and sell any mix of Pots or Roasters at full capacity.Total production capacity is 10,000 units.It takes the same amount of time to produce each product.How many units of Pots and Roasters should Meyer Corporation produce and sell to maximize profits?

A)Pots only
B)Roasters only
C)2,500 units of Pots and 7,500 units of Roasters
D)5,000 units of Pots and 5,000 units of Roasters

Question 65

When adding or dropping a product line,variable costs are the only relevant costs.

Question 66

________ is the number of times the average inventory is sold per year.

A)Inventory storage
B)Inventory flipit
C)Inventory turnover
D)Inventory shortage

Question 67

If the limiting factor is demand and there are no scarce resources,managers should emphasize the product with ________.

A)the highest selling price per unit
B)the lowest variable costs per unit
C)the highest contribution margin per unit
D)the lowest fixed costs per unit

Question 68

Heating and air conditioning costs are examples of common costs to the different departments in a retail store.

Question 69

Unavoidable costs do not include common costs.

Question 70

________ is the item that restricts or constrains the production or sale of a product.

A)A limiting factor
B)A scarce resource
C)Floor space
D)All of the above

Question 71

Watson Corporation manufactures two products,Simple and Complex.The following annual information was gathered: Total annual fixed costs are $18,000.Assume Watson Corporation can produce and sell any mix of Simple or Complex at full capacity.It takes one hour to make one unit of Complex.However,Simple takes 50% longer to manufacture when compared to Complex.Only 120,000 hours of plant capacity are available.How many units of Simple and Complex should Watson Corporation produce and sell in a year to maximize profits?

A)an equal number of Simple and Complex
B)80,000 units of Simple and 0 units of Complex
C)0 units of Simple and 120,000 units of Complex
D)either Simple or Complex; it does not matter

Question 72

LeBron Corporation manufactures two products,Simple and Complex.The following information was gathered: Total fixed costs are $18,000.Assume LeBron Corporation can produce and sell either 10,000 units of Simple or 5,000 units of Complex at full capacity.How many units of Simple and Complex should LeBron Corporation produce and sell to maximize profits?

A)0 units of Simple and 5,000 units of Complex
B)6,000 units of Simple and 3,000 units of Complex
C)10,000 units of Simple and 0 units of Complex
D)3,000 units of Simple and 6,000 units of Complex

Question 73

When managers are making a decision regarding adding or dropping a product,ethical considerations may also be influential.

Question 74

When adding or dropping a product line,fixed avoidable costs may be relevant costs.

Question 75

Freedom Company has three departments.Data for the most recent year are presented below:
Required:

A)Compute the operating income for Freedom Company.
B)Compute the contribution margin for each department.
C)Compute the operating income for each department.
D)Which department(s)should be eliminated? Why?

Question 76

Qualitative information can influence decisions to add or drop a department.

Question 77

Variable expenses are divided into avoidable and unavoidable costs.

Question 78

When a company has scarce resources,managers should emphasize the product that has ________.

A)highest contribution margin per unit
B)highest selling price per unit
C)highest contribution margin per unit of the scarce resource
D)highest operating profit per unit

Question 79

Olson Company has three departments.Data for the most recent year is presented below:
Olson Company is considering eliminating Dept.C because it is operating at a loss.
Required:

A)Compute the change in operating income if Olson Company eliminates Dept.C and does not replace it.
B)Compute the change in operating income if Olson Company eliminates Dept.C and doubles the sales of Dept.T without increasing fixed costs.

Question 80

Superglue Corporation manufactures two products,Product1 and Product2.The following annual information was gathered: Total annual fixed costs are $25,000.Assume Superglue Corporation could produce and sell any mix of products at full capacity.It takes twice as long to manufacture Product1 when compared to Product2.The company has 120,000 hours of plant capacity available.How many units of Product1 and Product2 should be manufactured in a year to maximize profits?

A)an equal number of Product1 and Product2
B)only Product1
C)only Product2
D)more units of Product1 than Product2