Deck 8: Short-Term Business Decisions

Question 1

Fixed costs that do not differ between two alternatives are

A) relevant to the decision.
B) considered opportunity costs.
C) irrelevant to the decision.
D) important only if they represent a material dollar amount.

Answer 1

C

Question 2

Managers' decisions are based on qualitative as well as quantitative factors.

Answer 2

True

Question 3

Relevant information is future data that differs among alternatives.

Answer 3

True

Question 4

Fixed costs that may be avoided in the future are referred to as

A) replacement costs.
B) opportunity costs.
C) relevant costs.
D) sunk costs.

Question 5

The effect of a plant closing on employee morale is an example of which of the following?

A) A quantitative factor
B) A qualitative factor
C) A sunk cost
D) A variable cost

Question 6

Costs that differ between alternatives are relevant.

Question 7

Qualitative factors can differ between alternatives.

Question 8

Management accountants gather and analyze relevant information to compare alternatives.

Question 9

Expected future data that differs among alternative courses of action are referred to as

A) irrelevant information.
B) historical information.
C) predictable information.
D) relevant information.

Question 10

When making any sort of decision, managers should consider

A) only fixed costs.
B) sunk costs.
C) revenues that differ among alternatives.
D) only variable costs.

Question 11

One key to analyzing short-term business decisions is to use a contribution margin approach that separates variable costs from fixed costs.

Question 12

Which of the following best describes "contribution margin per unit"?

A) Sales price per unit minus fixed cost per unit
B) Sales price per unit minus fixed and variable costs per unit
C) Sales price per unit minus variable cost unit
D) Units sold time contribution margin ratio

Question 13

Which of the following is a sunk cost?

A) Operating costs for a new vehicle
B) Trade in value of old vehicle
C) Purchase price of new vehicle
D) Purchase price of vehicle to be traded in

Question 14

One cost that is irrelevant in decision making is a sunk cost.

Question 15

Which of the following best describes an "opportunity cost"?

A) Costs that were incurred in the past and cannot be changed
B) Benefits foregone by not choosing an alternative course of action
C) The distribution of all products to be sold
D) Expected future costs that differs among alternatives

Question 16

Smith Industries is considering replacing a machine that is presently used in its production process. The following information is available:
Which of the information provided in the table is irrelevant to the replacement decision?

A) The annual operating cost of the old machine
B) The original cost of the old machine
C) The current disposal value of the old machine
D) Both A and C

Question 17

Which of the following best describes a "relevant cost"?

A) A factor that restricts production or sales of a product
B) Cost of developing, producing, and delivering a product or service
C) Expected future costs that differs among alternatives
D) Costs that were incurred in the past and cannot be changed

Question 18

Which of the following describes a sunk cost?

A) One that is relevant to a decision because it changes depending on the alternative course of action selected
B) An outlay expected to be incurred in the future
C) A historical cost that is always irrelevant
D) A historical cost that may be relevant

Question 19

Which of the following is irrelevant when making a decision?

A) The cost of an asset that the company is considering replacing
B) Fixed overhead costs that differ among alternatives
C) The cost of further processing a product that could be sold as is
D) The expected increase in contribution margin of one product line as a result of a decision to drop a separate unprofitable product line

Question 20

Which of the following is the format of the income statement most useful in decision-making?

A) Absorption costing format
B) Traditional format
C) Single-step format
D) Contribution margin format

Question 21

Cost-plus pricing is essentially the opposite of target-costing.

Question 22

When a company is a price-setter, it emphasizes a cost-plus approach to pricing.

Question 23

Companies tend to be price-setters when there is less competition.

Question 24

Which of the following describes the products and services of companies that are price-setters?

A) They are priced by managers using a target-costing emphasis.
B) They tend to be unique.
C) They tend to have a lot of competitors.
D) They tend to be commodities.

Question 25

In setting regular sales prices it does not matter if the costs are fixed or variable.

Question 26

In 2013 Yahoo CEO, Marissa Mayer, made news when the company's policy of allowing employees to work from home was eliminated. Provide two examples each of advantages and disadvantages to the company from implementing this policy change. How will this change effect environmental sustainability?

Question 27

A cost-plus approach to pricing is more likely than a target costing approach when the product is unique in terms of features, service, or quality.

Question 28

When setting prices, a company must consider whether it is a price-taker or a price-setter for each product that it sells.

Question 29

What is the difference between relevant and irrelevant information for making decisions? Provide examples of each.

Question 30

Managers only need to consider inventoriable product costs when setting prices.

Question 31

A price-setter company emphasizes a target costing approach to pricing.

Question 32

Which of the following describes the cost-plus price?

A) Total cost plus desired profit
B) Target total cost plus desired profit
C) Revenue at market price plus desired profit
D) Variable cost plus desired profit

Question 33

Which of the following best describes "total cost of product or service"?

A) Benefits foregone by not choosing an alternative course of action
B) A factor that restricts production or sales of a product
C) All costs incurred along the value chain in connection with the product or service
D) Costs that were incurred in the past and can not be changed

Question 34

When pricing a product or service, managers must consider which of the following?

A) Only variable costs
B) Only period costs
C) Only manufacturing costs
D) All costs

Question 35

For a product, revenue at market price plus desired operating profit equals target total cost.

Question 36

Product differentiation allows companies to become more of a price-taker, and less of a price setter.

Question 37

The Gameshop manufactures specialized board games. Management is attempting to search for ways to reduce costs and is considering two alternatives for an upcoming project of special games that must be delivered to the customer in 12 months' time. Management agreed to the special project job as they have an idle plant that is scheduled for demolition 18 months from now, and either alternative will easily meet the delivery deadline. Alternative 1 requires 10 machine operators and 2.5 individuals to handle direct materials. Employee pay averages $17.50 per hour and will increase to $18.50 at the mid-point (July 1) of next year. Each employee currently works 2,500 hours but will decrease to 2,400 hours if Alternative 2 is implemented. The second proposal only requires 8.5 workers.
Which of the following items of information are relevant to this decision?

A) Hourly wage rates
B) The timing of the wage increase
C) The number of employees required in each alternative
D) The delivery deadline

Question 38

Jansen Industries is considering replacing a machine that is presently used in its production process. The following information is available:
Which of the information provided in the table is irrelevant to the replacement decision?

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

Question 39

Managers only need to consider variable costs when setting prices.

Question 40

Cost-plus price minus desired profit equals total cost.

Question 41

Holsom Cakes is an independent gourmet bakery specializing in special occasion cakes. Being a small operation Holsom is a price taker. The current market price for cakes similar to Holsom's is $40. Holsom incurs monthly fixed costs for rent, equipment depreciation and salaries of $7,500. While there are small differences between cakes management believes using the average cost for ingredients and variable overhead of $12 would be sufficiently accurate for planning purposes. Holsom's owners believe they will sell 300 cakes per month at the market price of $40.
Required:
1. Can Holsom's owners earn an 18% annual return on their invested capital of $200,000 under this cost structure and pricing?
2. What is the minimum number of cakes Holsom's would have to sell in order to earn the owners' desired rate of return on investment?

Question 42

Use the information below to answer the following question(s):
Philadelphia Swim Club is planning for the coming year. Investors would like to earn a 10% return on the company's $30 million of assets. The company primarily incurs fixed costs to maintain the swimming pool. Fixed costs are projected to be $12,500,000 for the year. About 500,000 members are expected to swim each year. Variable costs are about $10 per swimmer.

-If the Philadelphia Swim Club is a price-taker and won't be able to charge more than its competitors who charge $37.00 for a membership. What profit will the Philadelphia Swim Club earn as a percent of assets?

A) Profit of 3.33%
B) Loss of 3.33%
C) Loss of 58.17%
D) Profit of 36.67%

Question 43

Use the information below to answer the following question(s):
Green Pastures golf course is planning for the coming season. Investors would like to earn a 10% return on the company's $40 million of assets. The company primarily incurs fixed costs to groom the greens and fairways. Fixed costs are projected to be $15,000,000 for the golfing season. About 400,000 golfers are expected each year. Variable costs are about $20 per golfer.

-If the Green Pastures golf course is a price-taker and won't be able to charge more than its competitors who charge $75 per round of golf. What profit will it earn in terms of dollars?

A) $7,000,000
B) $(7,000,000)
C) $15,000,000
D) $(15,000,000)

Question 44

Which of the following pairs are characteristics of price-setters?

A) Less competition and target costing
B) Lack of product uniqueness and heavy competition
C) Cost-plus pricing and less competition
D) Less competition and lack of product uniqueness

Question 45

Use the information below to answer the following question(s):
Mountaintop golf course is planning for the coming season. Investors would like to earn a 12% return on the company's $45 million of assets. The company primarily incurs fixed costs to groom the greens and fairways. Fixed costs are projected to be $20,000,000 for the golfing season. About 400,000 golfers are expected each year. Variable costs are about $15 per golfer.

-If the Mountaintop golf course is a price-taker and won't be able to charge more than its competitors who charge $75 per round of golf. What profit will it earn in terms of dollars?

A) $16,000,000
B) $(4,000,000)
C) $4,000,000
D) $(20,000,000)

Question 46

Good Looks Fitness operates a large fitness centre in a University Town. Being the newest fitness centre in the area with the most modern and best equipment and staff Good Looks believes they can set their price at a level above their competition. The owners would like to earn a 15% return on the company's $2,000,000 in assets. The company incurs primarily fixed costs to maintain and staff the centre. Good Looks projects fixed costs to be $580,000 fixed costs for the upcoming year. Good Looks is a pay per use facility and expects to serve 55,000 customers during the year. Variable costs are estimated at $5 per customer visit.
Required:
1. What price per visit must Good Looks charge to earn the owners desired profit?
2. What is the revenue surplus or shortfall if Good Looks charges $20 per customer visit?

Question 47

Big-box retailers such as Best Buy are considered price-takers because

A) their products are unique.
B) there is less competition in the consumer electronics retail sector.
C) their products are not unique.
D) they emphasize cost-plus pricing.

Question 48

Use the information below to answer the following question(s):
Rosemont Tennis is planning for the coming year. Investors would like to earn a 12% return on the company's $25 million of assets. The company primarily incurs fixed costs to maintain the tennis courts. Fixed costs are projected to be $12,500,000 for the year. About 500,000 court time hours are expected to be played each year. Variable costs are about $5 per hour of court time.

-Using a cost-plus approach, what price should Rosemont Tennis charge for an hour of court time?

A) $33.00
B) $36.00
C) $24.00
D) $0.20

Question 49

Use the information below to answer the following question(s):
Mountaintop golf course is planning for the coming season. Investors would like to earn a 12% return on the company's $45 million of assets. The company primarily incurs fixed costs to groom the greens and fairways. Fixed costs are projected to be $20,000,000 for the golfing season. About 400,000 golfers are expected each year. Variable costs are about $15 per golfer.

-If the Mountaintop golf course is a price-taker and won't be able to charge more than its competitors who charge $75 per round of golf. What profit will it earn as a percent of assets?

A) Loss of 8.89%
B) Profit of 35.56%
C) Profit of 8.89%
D) Loss of 57.67%

Question 50

Holsom Cakes is an independent gourmet bakery specializing in special occasion cakes. Being a small operation Holsom is a price taker. The current market price for cakes similar to Holsom's is $40. Holsom incurs monthly fixed costs for rent, equipment depreciation and salaries of $7,500. While there are small differences between cakes management believes using the average cost for ingredients and variable overhead of $12 would be sufficiently accurate for planning purposes. Holsom's owners believe they will sell 300 cakes per month at the market price of $40.
Required:
Can Holsom's owners earn an 18% annual return on their invested capital of $200,000 under this cost structure and pricing?

Question 51

Burr Hill golf course is planning for the coming season. Investors would like to earn a 10% return on the company's $50 million of assets. The company primarily incurs fixed costs to groom the greens and fairways. Fixed costs are projected to be $25 million for the golfing season. About 500,000 golfers are expected each year. Variable costs are about $10 per golfer. The Burr Hill course has a favourable reputation in the area and therefore, has some control over the price of a round of golf.
Required:
1. What are Burr Hill's total costs?
2. What is Burr Hill's target revenue?
3. What will Burr Hill's revenue be at a market price of $65/round?
4. What will Burr Hill's expected profit shortfall be if it charges $65/round?

Question 52

Use the information below to answer the following question(s):
Philadelphia Swim Club is planning for the coming year. Investors would like to earn a 10% return on the company's $30 million of assets. The company primarily incurs fixed costs to maintain the swimming pool. Fixed costs are projected to be $12,500,000 for the year. About 500,000 members are expected to swim each year. Variable costs are about $10 per swimmer.

-If the Philadelphia Swim Club is a price-taker and won't be able to charge more than its competitors who charge $37.00 for a membership. What profit will it earn in terms of dollars?

A) $11,000,000
B) $(12,500,000)
C) $1,000,000
D) $(1,000,000)

Question 53

Use the information below to answer the following question(s):
Philadelphia Swim Club is planning for the coming year. Investors would like to earn a 10% return on the company's $30 million of assets. The company primarily incurs fixed costs to maintain the swimming pool. Fixed costs are projected to be $12,500,000 for the year. About 500,000 members are expected to swim each year. Variable costs are about $10 per swimmer.

-Using a cost-plus approach, what price should Philadelphia Swim Club charge for a membership?

A) $41.00
B) $37.50
C) $29.00
D) $ 0.17

Question 54

Use the information below to answer the following question(s):
Rosemont Tennis is planning for the coming year. Investors would like to earn a 12% return on the company's $25 million of assets. The company primarily incurs fixed costs to maintain the tennis courts. Fixed costs are projected to be $12,500,000 for the year. About 500,000 court time hours are expected to be played each year. Variable costs are about $5 per hour of court time.

-If Rosemont Tennis is a price-taker and won't be able to charge more than its competitors who charge $32.50 per hour of court time. What profit will it earn in terms of dollars?

A) $1,250,000
B) $(12,500,000)
C) $6,250,000
D) $(1,250,000)

Question 55

Use the information below to answer the following question(s):
Green Pastures golf course is planning for the coming season. Investors would like to earn a 10% return on the company's $40 million of assets. The company primarily incurs fixed costs to groom the greens and fairways. Fixed costs are projected to be $15,000,000 for the golfing season. About 400,000 golfers are expected each year. Variable costs are about $20 per golfer.

-Using a cost-plus approach, what price should Green Pastures charge for a round of golf?

A) $47.50
B) $61.25
C) $67.50
D) $0.17

Question 56

Use the information below to answer the following question(s):
Green Pastures golf course is planning for the coming season. Investors would like to earn a 10% return on the company's $40 million of assets. The company primarily incurs fixed costs to groom the greens and fairways. Fixed costs are projected to be $15,000,000 for the golfing season. About 400,000 golfers are expected each year. Variable costs are about $20 per golfer.

-If the Green Pastures golf course is a price-taker and won't be able to charge more than its competitors who charge $75 per round of golf. What profit will it earn as a percent of assets?

A) Loss of 17.50%
B) Profit of 17.50%
C) Profit of 57.50%
D) Loss of 57.50%

Question 57

Holsom Cakes is an independent gourmet bakery specializing in special occasion cakes. Being a small operation Holsom is a price taker. The current market price for cakes similar to Holsom's is $45. Holsom incurs monthly fixed costs for rent, equipment depreciation and salaries of $6,500. While there are small differences between cakes management believes using the average cost for ingredients and variable overhead of $15 would be sufficiently accurate for planning purposes. Holsom's owners believe they will sell 250 cakes per month at the market price of $45.
Required:
Can Holsom's owners earn an 18% annual return on their invested capital of $200,000 under this cost structure and pricing?

Question 58

Which of the following pairs are characteristics of price-takers?

A) Less competition and target pricing
B) Target costing and heavy competition
C) Cost-plus pricing and less competition
D) Cost-plus pricing and lack of product uniqueness

Question 59

Use the information below to answer the following question(s):
Mountaintop golf course is planning for the coming season. Investors would like to earn a 12% return on the company's $45 million of assets. The company primarily incurs fixed costs to groom the greens and fairways. Fixed costs are projected to be $20,000,000 for the golfing season. About 400,000 golfers are expected each year. Variable costs are about $15 per golfer.

-Using a cost-plus approach, what price should Mountaintop charge for a round of golf?

A) $51.50
B) $71.00
C) $78.50
D) $ 0.21

Question 60

Use the information below to answer the following question(s):
Rosemont Tennis is planning for the coming year. Investors would like to earn a 12% return on the company's $25 million of assets. The company primarily incurs fixed costs to maintain the tennis courts. Fixed costs are projected to be $12,500,000 for the year. About 500,000 court time hours are expected to be played each year. Variable costs are about $5 per hour of court time.

-If Rosemont Tennis is a price-taker and won't be able to charge more than its competitors who charge $32.50 per hour of court time. What profit will it earn as a percent of assets?

A) Profit of 25%
B) Loss of 5%
C) Loss of 25%
D) Profit of 5%

Question 61

When deciding whether to accept a special order, which of the following is irrelevant?

A) Available excess capacity
B) The variable costs associated with the special order
C) Fixed costs that will not be affected by the order
D) The effect of the order on regular sales

Question 62

Which of the following describes the target total cost?

A) Revenue at market price minus desired profit
B) Revenue at market price plus desired profit
C) Total cost plus desired profit
D) Total cost minus actual cost

Question 63

Green Pastures golf course is planning for the coming season. Investors would like to earn a 12% return on the company's $40 million of assets. The company primarily incurs fixed costs to groom the greens and fairways. Fixed costs are projected to be $20 million for the golfing season. About 500,000 golfers are expected each year. Variable costs are about $12 per golfer. Green Pastures golf course is a price-taker and won't be able to charge more than $60 per round because of local competition.
What will Green Pastures' expected profit shortfall be if it charges $60/round?

Question 64

Absorption costing should be used when making special order decisions.

Question 65

When using a target costing approach, the company starts with revenue at market price, and then subtracts its desired profit, to yield the target total cost.

Question 66

When making a short-term special order decision, a company should

A) focus on qualitative factors only.
B) focus on quantitative factors only.
C) use a traditional direct costing approach.
D) separate variable costs from fixed costs.

Question 67

Green Valley golf course is planning for the coming season. Investors would like to earn a 14% return on the company's $45 million of assets. The company primarily incurs fixed costs to groom the greens and fairways. Fixed costs are projected to be $18,000,000 for the golfing season. About 400,000 golfers are expected each year. Variable costs are about $8 per golfer. The Green Valley golf course is a price-taker and won't be able to charge more than its competitors who charge $65 per round of golf. What profit will it earn compared to what investors wanted? State your answer in dollars and as a percent of assets. Will investors be happy with the profit level?

Question 68

Target total cost is defined as

A) revenue at market price less desired profit.
B) cost of goods sold less desired profit.
C) revenue at market price less variable costs.
D) revenue at market price less fixed costs.

Question 69

If the expected increase in revenues from a special order is less than the expected increase in variable and fixed costs, then the special order should be accepted.

Question 70

In a special sales order decision, incremental fixed costs that will be incurred if the special order is accepted are considered to be

A) relevant to the decision.
B) irrelevant to the decision.
C) opportunity costs.
D) sunk costs.

Question 71

Variable costs are relevant to a special decision when those variable costs differ between alternatives.

Question 72

When deciding whether to accept a special order, managers need not consider whether they have available excess capacity.

Question 73

A manager should always reject a special order if

A) there is available excess capacity.
B) the special order price is less than the variable costs of the order.
C) the special order price is less than the regular sales price.
D) the special order will require variable nonmanufacturing expenses.

Question 74

In deciding whether to accept a special sales order, any fixed costs that would remain unchanged are considered irrelevant data.

Question 75

Special orders increase income if the revenue from the order exceeds the incremental variable and fixed costs incurred to fill the order.

Question 76

Use the information below to answer the following question(s):
Clear Sky Sailmakers manufactures sails for sailboats. The company has the capacity to produce 15,000 sails per year, but is currently producing and selling 10,000 sails per year. The following information relates to current production:

If Clear Sky Sailmakers accepts a special order for 5,000 sails at a price of $225 per unit, and fixed costs remain unchanged, how would operating income be affected? (NOTE: Assume regular sales are not affected by the special order.)

A) Increase by $1,125,000
B) Increase by $50,000
C) Decrease by $50,000
D) Increase by $150,000

Question 77

What the reasons a firm would adopt target costing?

Question 78

Good Looks Fitness operates a large fitness centre in a University Town. Being the newest fitness centre in the area Good Looks believes they must be a price taker until they establish a reputation for quality service. Other fitness centres in the area are charging $20 per customer visit. The owners would like to earn a 15% return on the company's $2,000,000 in assets. The company incurs primarily fixed costs to maintain and staff the centre. Good Looks projects fixed costs to be $580,000 fixed costs for the upcoming year. Good Looks is a pay per use facility and expects to serve 55,000 customers during the year. Variable costs are estimated at $5 per customer visit. The management accountant employed by Good Looks has determined that the target profitability cannot be achieved under the present cost structure at a price of $20 per customer visit. The accountant believes fixed costs can be reduced by $27,500.
Required:
If the fixed cost reduction is achieved what is the maximum variable cost per customer visit that will allow Good looks to achieve the target profitability?

Question 79

Green Valley golf course is planning for the coming season. Investors would like to earn a 14% return on the company's $45 million of assets. The company primarily incurs fixed costs to groom the greens and fairways. Fixed costs are projected to be $18,000,000 for the golfing season. About 400,000 golfers are expected each year. Variable costs are about $8 per golfer. The Green Valley golf course has a favourable reputation in the area and therefore, has some control over the price of a round of golf. Using a cost-plus approach, what price should Green Valley charge for a round of golf?

Question 80

Managers should consider the potential long-run effect of a special order.