Deck 8: Tactical Decision-Making and Relevant Costing

Question 1

Future costs that differ across alternatives are relevant costs.

Answer 1

True

Question 2

Fixed costs are never relevant.

Answer 2

False

Question 3

Irrelevant costs are costs that are the same for more than one alternative.

Answer 3

True

Question 4

Flexible resources may have unused capacity.

Question 5

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

Question 6

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

Question 7

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

Question 8

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

Question 9

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

Question 10

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

Question 11

The first step in making a short-run decision is to identify alternatives as possible solutions to the problem.

Question 12

A choice between internal and external production is a keep-or-drop decision.

Question 13

Linear programming is a special technique that can be used to determine the optimal product mix when there are multiple constraints.

Question 14

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

Question 15

A sunk cost is always relevant.

Question 16

In making a short-run decision, all alternatives need to be considered.

Question 17

On a segmented income statement, fixed costs are broken down into direct fixed costs and common fixed costs.

Question 18

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

Question 19

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

Question 20

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

Question 21

Target costing is a method of determining the cost of a product or service based on the price (target price) that customers are willing to pay.

Question 22

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

Question 23

Future costs that differ across alternatives are

A) opportunity costs.
B) sunk costs.
C) relevant costs.
D) variable costs.
E) product costs.

Question 24

Demand is one side of the pricing equation; supply is the other side.

Question 25

A company is considering a special order for 1,000 units to be priced at $8.90 (the normal price would be $11.50).The order would require specialized materials costing $4.00 per unit.Direct labor and variable factory overhead would cost $2.15 per unit.Fixed factory overhead is $1.20 per unit.However, the company has excess capacity and acceptance of the order would not raise total fixed factory overhead.The warehouse, however, would have to add capacity costing $1,300.Which of the following is relevant to the special order?

A) $11.50 normal selling price
B) $1.20 fixed factory overhead per unit
C) $7.35 spent on donuts and coffee
D) $8.90 selling price per unit of special order
E) None of these.

Question 26

A major advantage of markup pricing is that standard markups are easy to apply.

Question 27

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

Question 28

Which of the following involves choosing between alternatives with an immediate or limited time frame in mind?

A) The limited options model
B) Strategic decision making
C) Restructured alternatives management
D) Short-run decision making
E) None of these.

Question 29

Bellair Company produces a product that has manufacturing cost of $30 per unit.Bellair's policy is to charge a price equal to cost plus 30%.The 30% is pure profit to Bellair.

Question 30

_____ are referred to as strictly variable costs.

A) Scarce resources
B) Implicit resources
C) Committed resources
D) Indirect resources
E) Flexible resources

Question 31

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

Question 32

Abbott Company is considering purchasing a new machine to replace a machine purchased one year ago that is not achieving the expected results.The following information is available:

Which of these items is irrelevant?

A) Expected maintenance costs of new machine
B) Purchase cost of existing machine
C) Expected maintenance costs of existing machine
D) Expected resale value of existing machine

Question 33

The markup includes desired profit and any costs not included in the base cost.

Question 34

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

Question 35

StarZinc Company produced 200 defective units last month at a unit manufacturing cost of $50.The defective units were discovered before leaving the plant.StarZinc can sell them as is for $35 or can rework them at a cost of $25 and sell them at the regular price of $100.The total relevant cost of reworking the defective units is:

A) $8,500.
B) $7,800.
C) $2,000.
D) $3,600.
E) $5,000.

Question 36

Qualitative factors that should be considered when evaluating a make-or-buy decision are

A) the quality of the outside supplier's product.
B) whether the outside supplier can provide the needed quantities.
C) whether the outside supplier can provide the product when it is needed.
D) All of these.

Question 37

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

A) define the problem
B) identify alternatives
C) consider qualitative factors
D) total relevant costs and benefits for each alternative
E) determine costs and benefits for both feasible and unfeasible alternatives

Question 38

Which of the following is a key point considered in a special order decision?

A) Additional irrelevant costs associated with the special order
B) Avoidable sunk costs associated with the special order
C) The estimated benefits associated with the special order
D) The preparation of segmented income statements of the special order

Question 39

Depreciation is a _____, a cost that cannot be affected by any future action.

A) step cost
B) opportunity cost
C) sunk cost
D) mixed cost
E) None of these

Question 40

Pasha Company produced 50 defective units last month at a unit manufacturing cost of $30.The defective units were discovered before leaving the plant.Pasha can sell them "as is" for $20 or can rework them at a cost of $15 and sell them at the regular price of $50.Which of the following is not relevant to the sell-or-rework decision?

A) $15 for rework
B) $20 selling price of defective units
C) $30 manufacturing cost
D) $50 regular selling price
E) All of these are relevant.

Question 41

A decision that focuses on whether a specially priced order should be accepted or rejected is what kind of decision?

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

Question 42

Fuller Company makes frames.A customer wants to place a special order for 600 frames in green with the company logo painted on the frame, to be priced at $40 each.Normally, Fuller would charge $90 per frame for this type of order.Fuller figures that wood and glass will cost $16 per frame, variable overhead (machining, electricity) is $4 per frame, direct labor is $12 per frame, and one setup will be required at $1,000 per setup.The set-up charge costs are 100% labor.Currently, the workers needed to set up for and make the frames are working at Fuller.Their wages will be paid whether or not the special order is accepted.Fuller's policy is to avoid layoffs to the extent possible.

- Which of the following is a qualitative factor that Fuller would consider in making the decision to accept or reject the special order?

A) cost of yarn and backing
B) cost of setup labor
C) the no-layoff policy
D) the use of machinery
E) the machining and electricity

Question 43

Fuller Company makes frames.A customer wants to place a special order for 600 frames in green with the company logo painted on the frame, to be priced at $40 each.Normally, Fuller would charge $90 per frame for this type of order.Fuller figures that wood and glass will cost $16 per frame, variable overhead (machining, electricity) is $4 per frame, direct labor is $12 per frame, and one setup will be required at $1,000 per setup.The set-up charge costs are 100% labor.Currently, the workers needed to set up for and make the frames are working at Fuller.Their wages will be paid whether or not the special order is accepted.Fuller's policy is to avoid layoffs to the extent possible.

-
Which of the following is irrelevant to the special order decision?

A) cost of wood and glass
B) direct labor cost
C) machining and electricity cost
D) $40 price
E) All of these are relevant.

Question 44

Fuller Company makes frames.A customer wants to place a special order for 600 frames in green with the company logo painted on the frame, to be priced at $40 each.Normally, Fuller would charge $90 per frame for this type of order.Fuller figures that wood and glass will cost $16 per frame, variable overhead (machining, electricity) is $4 per frame, direct labor is $12 per frame, and one setup will be required at $1,000 per setup.The set-up charge costs are 100% labor.Currently, the workers needed to set up for and make the frames are working at Fuller.Their wages will be paid whether or not the special order is accepted.Fuller's policy is to avoid layoffs to the extent possible.

-Which costs of the special order relate to flexible resources?

A) wood and glass
B) wood, glass, and variable overhead
C) depreciation on machinery
D) wood, glass, and direct labor
E) wood, glass, direct labor, and setup labor

Question 45

Craydye Corporation manufactures a part for its production cycle.The costs per unit for 8,000 units of this part are as follows: ?
?
Zinkyl Company has offered to sell Craydye Corporation 8,000 units of the part for $120 per unit.If Craydye Corporation accepts Zinkyl Company's offer, total fixed overhead will be reduced by $40,000.What alternative is more desirable and by what amount is it more desirable?
Alternative Amount

A) Make; $220,000
B) Make; $72,000
C) Buy; $188,000
D) Buy; $170,000

Question 46

The following information relates to a product produced by Marigold Company:

Fixed selling costs are $650,000 per year, and variable selling costs are $10 per unit sold.Although production capacity is 400,000 units per year, the company expects to produce only 250,000 units next year.The product normally sells for $100 each.A customer has offered to buy 40,000 units for $80 each.
The incremental cost per unit associated with the special order is:

A) $76.
B) $60.
C) $90.
D) $84.

Question 47

Colortrigon Company makes a variety of paper products.One product is 30 lb copier paper, packaged 3,000 sheets to a box.One box normally sells for $20.A large bank offered to purchase 6,000 boxes at $15 per box.Costs per box are as follows:
No variable marketing costs would be incurred on the order.The company is operating significantly below the maximum productive capacity.No fixed costs are avoidable.
Should Colotrigon accept the order?

A) Yes, income will increase by $30,000.
B) Yes, income will increase by $19,000.
C) No, income will decrease by $43,000.
D) No, income will decrease by $86,000.
E) It doesn't matter; there will be no impact on income.

Question 48

Foster Industries manufactures 20,000 components per year.The manufacturing cost of the components was determined as follows:

If the component is not produced by Foster, inspection of products and provision of power costs will only be 10% of the current production costs; moving materials costs and setting up equipment costs will only be 50% of the production costs; and supervision costs will amount to only 40% of the production amount.An outside supplier has offered to sell the component for $25.50.
What is the effect on income if Foster Industries purchases the component from the outside supplier?

A) $25,000 increase
B) $45,000 increase
C) $90,000 decrease
D) $90,000 increase

Question 49

Miller Company produces speakers for home stereo units.The speakers are sold to retail stores for $30.Manufacturing and other costs are as follows:

The variable distribution costs are for transportation to the retail stores.The current production and sales volume is 20,000 per year.Capacity is 25,000 units per year.
A Tennessee manufacturing firm has offered a one-year contract to supply speakers at a cost of $17.00 per unit.If Miller Company accepts the offer, it will be able to rent unused space to an outside firm for $18,000 per year.All other information remains the same as the original data.What is the effect on profits if Miller Company buys from the Tennessee firm?

A) decrease of $8,000
B) increase of $9,000
C) increase of $8,000
D) decrease of $6,000

Question 50

Manganese Company makes frames.A customer wants to place a special order for 750 frames in green with the company logo painted on the frame, to be priced at $60 each.Normally, Manganese would charge $100 per frame for this type of order.Manganese figures that wood and glass will cost $20 per frame, variable overhead (machining, electricity) is $5 per frame, direct labor is $10 per frame, and one setup will be required at $1,500 per setup.The set-up charge costs are 100% labor.Currently, the workers needed to set up for and make the frames are working at Manganese.Their wages will be paid whether or not the special order is accepted.Manganese's policy is to avoid layoffs to the extent possible. If Manganese accepts the special order, by how much will operating income increase or decrease?

A) $16,660 increase
B) $40,000 decrease
C) $26,250 increase
D) $30,000 increase
E) There will be no effect on operating income.

Question 51

The operations of Smits Corporation are divided into the Child Division and the Jackson Division.Projections for the next year are as follows:
Operating income for Smits Corporation as a whole if the Jackson Division were dropped would be

A) $22,500.
B) $40,000.
C) $50,000.
D) $60,000.

Question 52

Vest Industries manufactures 40,000 components per year.The manufacturing cost of the components was determined as follows:

An outside supplier has offered to sell the component for $12.75.Fixed cost will remain the same if the component is purchased from an outside supplier.
Vest Industries can rent its unused manufacturing facilities for $45,000 if it purchases the component from the outside supplier.
What is the effect on income if Vest purchases the component from the outside supplier?

A) $225,000 decrease
B) $195,000 increase
C) $165,000 decrease
D) $135,000 increase

Question 53

Which of the following decisions determines whether a product line or segment should be continued or eliminated?

A) Re-engineering
B) Make-or-buy
C) Restructuring
D) Special-order
E) Keep-or-drop

Question 54

AlphaBrona Industries manufactures 50,000 components per year.The manufacturing cost of the components was determined as follows:
An outside supplier has offered to sell the component for $10.Fixed costs will remain the same if the component is purchased from an outside supplier.
What is the effect on income if AlphaBrona Industries purchases the component from the outside supplier?

A) $290,000 decrease
B) $290,000 increase
C) $45,000 decrease
D) $45,000 increase

Question 55

Which of the following costs is not relevant to a decision to sell a product at split-off or process the product further and then sell the product?

A) joint costs allocated to the product
B) the selling price of the product at split-off
C) the additional processing costs after split-off
D) the selling price of the product after further processing

Question 56

Which of the following decisions involve a choice between internal and external production?

A) Repurchase order
B) Keep-or-drop
C) Sell-or-process-further
D) Special-order
E) Make-or-buy

Question 57

The operations of Knickers Corporation are divided into the Pacers Division and the Bulls Division.Projections for the next year are as follows:



Operating income for Knickers Corporation as a whole if the Bulls Division were dropped would be

A) $99,750.
B) $84,000.
C) $68,250.
D) $36,750.

Question 58

Pericloud Company produces a product that has a regular selling price of $500 per unit.At a typical monthly production volume of 4,000 units, the product's average unit cost of goods sold amounts to $300.Included in this average is $150,000 of fixed manufacturing costs.All selling and administrative costs are fixed and amount to $40,000 per month.
Pericloud Company has just received a special order for 2,000 units at $280 per unit.The buyer will pay for transportation, and the regular selling price will not be affected if Pericloud accepts the order.

Assuming Pericloud Company has excess capacity, the effect on profits of accepting the order would be a:

A) $72,000 increase.
B) $72,000 decrease.
C) $35,000 increase.
D) $35,000 decrease.

Question 59

The following information pertains to Chrysnta Company's three products:

Assume that product C is discontinued and an extra space is rented for $800 per month.All other information remains the same as the original data.Annual profits will:

A) increase by $9,000.
B) decrease by $2,000.
C) increase by $9,600.
D) decrease by $600.

Question 60

Merry Toy Company makes toy airplanes.One plane is an excellent replica of a 737; it sells for $8.Joyous Airlines wants to purchase 15,000 planes at $4 each to give to children flying unaccompanied.Costs per plane are as follows:

No variable marketing costs would be incurred.The company is operating significantly below the maximum productive capacity.No fixed costs are avoidable.However, Joyous Airlines wants its own logo and colors on the planes.The cost of the decals is $0.05 per plane and a special machine costing $2,000 would be required to affix the decals.After the order is complete, the machine would be scrapped.Should the special order be accepted

A) Yes, income will increase by $600.
B) No, income will decrease by $200.
C) No, income will decrease by $2,500.
D) Yes, income will increase by $250.
E) It doesn't matter; there will be no change in income.

Question 61

Reggie Corporation manufactures a single product with the following unit costs for 1,000 units: Recently, a company approached Reggie Corporation about buying 100 units for $5,100 each.Currently, the models are sold to dealers for $7,800.Reggie Corporation's capacity is sufficient to produce the extra 100 units.No additional selling expenses would be incurred on the special order.
How much will income change if the special order is accepted?

A) increase by $398,400
B) decrease by $180,000
C) increase by $111,600
D) no change

Question 62

Walton Company manufactures a product with the following costs per unit at the expected production level of 84,000 units: The company has the capacity to produce 90,000 units.The product regularly sells for $120.A wholesaler has offered to pay $110 per unit for 7,500 units.If the special order is accepted, the effect on operating income would be a

A) $75,000 decrease.
B) $429,000 increase.
C) $495,000 increase.
D) $249,000 increase.

Question 63

Information about three joint products follows:


The cost of the joint process is $60,000.Which of the joint products should be sold at split-off?

A) A.
B) B.
C) C.
D) Both A and B.

Question 64

ColorPro uses part 87A in the production of color printers.Unit manufacturing costs for part 87A are:
ColorPro uses 100,000 units of 87A per year.Filbert Company has offered to sell ColorPro 100,000 units of 87A per year for $12.Fixed overhead is unavoidable.

-

Now suppose that ColorPro discovers that other costs will increase by $7,000 per year if the component is purchased rather than made internally.Should ColorPro make or buy the part?

A) Make the part because it will save $100,000 over buying it.
B) Buy the part because it will save $100,000 over making it.
C) Make the part because it will save $107,000 over buying it.
D) Buy the part because it will save $107,000 over making it.
E) Make the part because it will save $10,000 over buying it.

Question 65

Stars Manufacturing Company produces Products A1, B2, C3, and D4 through a joint process.The joint costs amount to $200,000.

If Product B2 is processed further, profits will

A) increase by $30,000.
B) decrease by $3,000.
C) increase by $32,000.
D) increase by $2,000.

Question 66

Bergamit Company manufactures veterinary products.One joint process involves refining a chemical (dactylyte) into two chemicals dac and tyl.One batch of 10,000 gallons of dactylyte can be converted to 4,000 gallons of dac and 6,000 gallons of tyl at a total joint processing cost of $15,000.At the split-off point, dac can be sold for $5 per gallon and tyl can be sold for $7 per gallon.Bergamit has just learned of a new process to convert dac into prodac.The new process costs $5,000 and yields 2,500 gallons of prodac for every 3,000 gallons of dac.Prodac sells for $6 per gallon.
What is Bergamit's profit from refining one batch of dactylyte if both dac and tyl are sold at the split-off point?

A) $47,000
B) $25,000
C) $17,000
D) $36,000
E) $52,000

Question 67

Glascro Manufacturing Company had the following unit costs:
A one-time customer has offered to buy 3,000 units at a special price of $60 per unit.Assuming that sufficient unused production capacity exists to produce the order and no regular customers will be affected by the order, how much additional profit or loss will be generated by accepting the special order?

A) $45,000 profit
B) $22,000 profit
C) $36,000 loss
D) $57,000 loss

Question 68

Rexeleg Company manufactures a product with the following costs per unit at the expected production of 40,000 units:
The company has the capacity to produce 50,000 units.The product regularly sells for $50.A wholesaler has offered to pay $43 per unit for 3,000 units.

If the firm chooses to accept the special order and reject some regular sales, the effect on operating income would be a:

A) $30,000 increase.
B) $21,000 decrease.
C) $64,000 increase.
D) $45,000 decrease.

Question 69

The following information relates to a product produced by Creamer Company:

Fixed selling costs are $500,000 per year, and variable selling costs are $12 per unit sold.Although production capacity is 600,000 units per year, the company expects to produce only 400,000 units next year.The product normally sells for $120 each.A customer has offered to buy 60,000 units for $90 each.
If the firm produces the special order, the effect on income would be a

A) $360,000 increase.
B) $360,000 decrease.
C) $540,000 increase.
D) $540,000 decrease.

Question 70

ColorPro uses part 87A in the production of color printers.Unit manufacturing costs for part 87A are:
ColorPro uses 100,000 units of 87A per year.Filbert Company has offered to sell ColorPro 100,000 units of 87A per year for $12.Fixed overhead is unavoidable.

-
Which of the following is a qualitative factor that might affect ColorPro's decision?

A) Filbert has an outstanding reputation for quality.
B) Ordering from Filbert would give ColorPro a chance to see how well Filbert could meet JIT standards for ColorPro's other products.
C) Filbert is known for the reliability of its products.
D) Making the part in-house would help ColorPro avoid layoffs of direct and indirect labor.
E) All of these.

Question 71

Lavandyr Company has two divisions with the following segment margins for the current year: Northern, $300,000 and Southern, $500,000.Common expenses of the company are $75,000.What is Lavandyr Company's income?

A) $360,000
B) $725,000
C) $215,000
D) $420,000

Question 72

Information about three joint products follows:

The cost of the joint process is $140,000.Which of the joint products should be processed further?

A) X.
B) Y.
C) Z.
D) Both X and Y.

Question 73

Amaryliz Products had the following unit costs:

A one-time customer has offered to buy 4,000 units at a special price of $60 per unit.Because of capacity constraints, 1,000 units will need to be produced during overtime.Overtime premium is $15 per unit.How much additional profit or loss will be generated by accepting the special order?

A) $60,000 profit
B) $52,000 loss
C) $27,000 loss
D) $37,000 profit

Question 74

Manning Company uses a joint process to produce products W, X, Y, and Z.Each product may be sold at its split-off point or processed further.Additional processing costs of specific products are entirely variable.Joint processing costs for a single batch of joint products are $120,000.Other relevant data are as follows:

Which products should Manning process further?

A) All.
B) All except Z.
C) Y and X.
D) None.

Question 75

Cherry Company makes telephones.Currently, Cherry makes all the components of the telephones in-house.An outside company has offered to supply one component, part number X76, for $15 each.Cherry uses 15,000 of these components per year.Costs of X76 are as follows:
Assume that all of the fixed overhead is allocated and cannot be avoided.Should Cherry purchase the part from the outside supplier?

A) Yes, income will increase by $200,500.
B) No, income will decrease by $145,500.
C) Yes, income will increase by $278,500.
D) No, income will decrease by $120,000.
E) Yes, income will increase by $140,200.

Question 76

Kerrigan Lumber Yard receives 12,000 large trees each year that they process into rough logs.Currently, Kerrigan sells the rough logs for $75 each.Kerrigan is considering processing the logs further into refined lumber.Each log can be processed into 200 feet of refined lumber at an additional cost of $0.40 per foot.The refined lumber can be sold for $0.95 per foot.
Should Kerrigan process the rough logs into refined lumber?

A) Yes, income will increase by $35 per log.
B) Yes, income will increase by $110 per log.
C) Yes, income will increase by $75 per log.
D) No, income will decrease by $35 per log.
E) No, income will decrease by $110 per log.

Question 77

Begonia uses part 87A in the production of color printers.Unit manufacturing costs for part 87A are:
Begonia uses 130,000 units of 87A per year.Benzyl Company has offered to sell Begonia 130,000 units of 87A per year for $18.Fixed overhead is unavoidable.

Should Begonia make or buy the part?

A) It should make the part because it will save $390,000 over buying it.
B) It should buy the part because it will save $390,000 over making it.
C) It should make the part because it will save $1,250,000 over buying it.
D) It should buy the part because it will save 1,250,000 over making it.
E) It should buy the part because it will save $340,000 over making it.

Question 78

Autry Company manufactures veterinary products.One joint process involves refining a chemical (dactylyte) into two chemicals ? dac and tyl.One batch of 5,000 gallons of dactylyte can be converted to 2,000 gallons of dac and 3,000 gallons of tyl at a total joint processing cost of $12,000.At the split-off point, dac can be sold for $3 per gallon and tyl can be sold for $4 per gallon.Autry has just learned of a new process to convert dac into prodac.The new process costs $4,000 and yields 1,700 gallons of prodac for every 2,000 gallons of dac.Prodac sells for $5 per gallon.
Should Autry process dac further?

A) No, income will be $1,500 lower.
B) No, income will be $5,000 lower.
C) Yes, income will be $1,500 higher.
D) Yes, income will be $5,000 higher.
E) It doesn't matter; income will be the same.

Question 79

Which of the following is used to calculate the segment margin?

A) Segment margin = Segment's sales revenue - Direct fixed costs - Variable costs
B) Segment margin = Segment's sales revenue + Direct fixed costs + Contribution margin
C) Segment margin = Segment's sales revenue - Target cost + Contribution margin
D) Segment margin = Segment's Desired profit - Target cost + Contribution margin
E) Segment margin = Segment's marginal sales + Step cost + Contribution margin

Question 80

Ring Company makes telephones.Currently, Ring makes all components of the telephones in-house.An outside company has offered to supply one component, part number X76, for $12 each.Ring uses 22,000 of these components per year.Costs of X76 are as follows:? ?
?
Suppose that 30% of the fixed overhead is avoidable if part X76 is not made by Ring.Should Ring purchase the part from the outside supplier?

A) No, income will decrease by $71,500.
B) No, income will decrease by $15,000.
C) Yes, income will increase by $74,500.
D) No, income will decrease by $10,500.
E) Yes, income will increase by $10,500.