Deck 16: Costs for Decision Making

Question 1

Opportunity costs are:

A) included in inventory.
B) foregone benefits.
C) sunk costs.
D)included in cost of goods sold.

Answer 1

B

Question 2

Which of the following qualitative factors favors the buy option in the make or buy decision?

A) production scheduling.
B) utilization of idle capacity.
C) ability to control quality.
D)technical expertise of supplier.

Answer 2

D

Question 3

Relevant costs in decision-making:

A) are future costs that represent differences between decision alternatives.
B) result from past decisions.
C) should not influence the decision.
D)none of the above.

Answer 3

A

Question 4

A cost classified "for decision-making purposes" would include:

A) period cost.
B) opportunity cost.
C) controllable cost.
D)inventoriable cost.

Question 5

The potential rental value of space used in the manufacturing process:

A) is a variable production cost.
B) is an unavoidable production cost.
C) is a sunk production cost.
D)is an opportunity cost if production is not outsourced.

Question 6

______________ can be measured as the income that could have been earned on an asset, based on the potential rate of return that is lost or sacrificed when one alternative use of the asset is chosen over another:

A) Target cost
B) Sunk cost
C) Opportunity cost
D)Allocated cost

Question 7

A cost is considered relevant if:

A) it is positive.
B) it is sunk.
C) it makes a difference.
D)if it can't be changed.

Question 8

_____________ is a cost management technique in which the firm determines the required cost for a product or service in order to earn a desired profit when the marketplace establishes the product's selling price.

A) Relevant costing
B) Product costing
C) Differential costing
D)Target costing

Question 9

Braizen, Inc. produces a product with a $30 per-unit variable cost and an $80 per-unit sales price. Fixed manufacturing overhead costs are $100,000. The firm has a one-time opportunity to sell an additional 1,000 units at $60 each that would not affect its current sales. Assuming the company has sufficient capacity to produce the additional units, how would the acceptance of the special order affect net income?

A) income would decrease by $30,000.
B) income would increase by $30,000.
C) income would increase by $140,000.
D)income would increase by $40,000.

Question 10

In a make or buy decision, which of the following costs would be considered relevant?

A) avoidable costs.
B) unavoidable costs.
C) sunk costs.
D)allocated costs.

Question 11

The key to analyzing a sell as is or process further decision is to determine that:

A) opportunity costs exceed sunk costs.
B) incremental revenues exceed incremental costs.
C) differential costs do not exist.
D)all allocated costs are included in the decision.

Question 12

In considering whether to accept a special order at a price less than the normal selling price of the product and where the additional sales will make use of present idle capacity, which of the following costs will not be relevant?

A) direct labor.
B) direct materials.
C) variable manufacturing overhead.
D)fixed manufacturing overhead that cannot be avoided.

Question 13

Product Z sells for $18 per unit as is, but if enhanced it can be sold for $24 per unit. The enhancement process will cost $50,000 for 10,000 units. If the 10,000 units of Product Z are sold as is without further processing, the company:

A) will incur an incremental profit of $10,000.
B) will incur an opportunity cost of $10,000.
C) will incur an incremental profit of $1 per unit.
D)will incur an incremental loss of $6 per unit.

Question 14

_____________ costs between two alternative projects are those that would result from selecting one alternative instead of the other.

A) Allocated
B) Differential
C) Sunk
D)Irrelevant

Question 15

A(n) _____________ is the minimum cost that can be incurred, which when subtracted from the selling price, allows for a desired profit to be earned.

A) relevant cost
B) opportunity cost
C) incremental cost
D)target cost

Question 16

A cost that will differ according to the alternative activity being considered is called a(n):

A) sunk cost.
B) allocated cost.
C) differential cost.
D)opportunity cost.

Question 17

If a cost is irrelevant to a decision, the cost could not be a:

A) fixed cost.
B) sunk cost.
C) differential cost.
D)variable cost.

Question 18

Greenland Sports, Inc. has been asked to submit a bid to the National Hockey League on supplying 1,000 pairs of professional quality skates. The cost per pair of skates has been determined as follows: Other non-manufacturing costs associated with each pair of skates are:
Assume the commission on the sale of skates to the National Hockey League would be reduced to $15 per pair and that available production capacity exists to produce the 1,000 pairs of skates, the lowest price the firm can bid is some price greater than:

A) $185.
B) $190.
C) $215.
D)$225.

Question 19

A sunk cost is a cost that:

A) has been incurred and cannot be eliminated.
B) is never relevant in decision-making.
C) is never a differential cost.
D)all of the above.

Question 20

Which of the following cost classifications would not be considered relevant in comparing decision alternatives?

A) opportunity cost.
B) differential cost.
C) sunk cost.
D)none of the above.

Question 21

The decision to continue or discontinue a segment of the business should focus on:

A) sales minus total variable expenses and total fixed expenses.
B) sales minus total variable expenses and avoidable fixed expenses of the segment.
C) sales minus total variable expenses and allocated fixed expenses of the business.
D)none of the above.

Question 22

The present value ratio of a proposed investment will be:

A) less than 1.0 if the net present value is positive.
B) negative if the proposed investment meets the cost of capital target.
C) less than 1.0 if the net present value is negative.
D)greater than 1.0 if the cost of capital exceeds the internal rate of return.

Question 23

Which of the following is typically not important when calculating the net present value of a project?

A) timing of cash flows from the project.
B) income tax effect of cash flows from the project.
C) method of financing the project.
D)amount of cash flows from the project.

Question 24

In order to calculate the net present value of a proposed investment, it is necessary to know:

A) the cash flows expected from the investment.
B) the net income expected from the investment.
C) the interest rate paid on funds borrowed to make the investment.
D)the cash dividends paid on the stock each year.

Question 25

A principal difference between operational budgeting and capital budgeting is the time frame of the budget. Because of this difference, capital budgeting:

A) is an activity that involves only the financial staff.
B) is done on a rolling budget period basis.
C) focuses on the present value of cash flows from investments.
D)is concerned with a long-term net income forecast.

Question 26

If the net present value of a proposed investment is positive:

A) the investment not will be made.
B) the cost of capital is higher than the internal rate of return.
C) the cost of capital is positive.
D)the cost of capital is less than the expected rate of return.

Question 27

Capital budgeting differs from operational budgeting because:

A) depreciation calculations are required.
B) it considers the time value of money.
C) operating expenses are not relevant.
D)capital budgets don't affect cash flow.

Question 28

Product X sells for $80 per unit in the marketplace and ABC Company requires a 35% minimum profit margin on all product lines. In order to compete in this market, the target cost for Product X must be equal to or lower than:

A) $28.
B) $45.
C) $52.
D)$80.

Question 29

The decision for solving production mix problems involving multiple products and scarce production resources should focus on:

A) gross profit of each product.
B) sales price of each product.
C) contribution margin per unit of scarce resource.
D)contribution margin of each product.

Question 30

Capital expenditure analysis, which leads to the capital budget, attempts to determine the impact of a proposed capital expenditure on the organization's:

A) segment margin.
B) contribution margin.
C) ROI.
D)cost of capital.

Question 31

Which of the following is not an important qualitative factor to consider in the capital budgeting decision?

A) regulations that mandate investment to meet safety, environmental, or access requirements.
B) technological developments within the industry may require new facilities to maintain customers or market share at the cost of lower ROI for a period of time.
C) commitment to a segment of the business that requires capital investments to achieve or regain competitiveness even though that segment does not have as great an ROI as others.
D)all of the above are important qualitative factors to consider.

Question 32

If the net present value of the investment is $8,510, then:

A) the rate of return is less than the cost of capital.
B) the present value of the cash flows is greater than the required investment.
C) the cost of capital is higher than the internal rate of return.
D)the present value of the cash flows is $8,510 less than the investment.

Question 33

For most firms, the cost of capital is probably in the range of:

A) the prime rate, plus or minus 2 percentage points.
B) less than 10%.
C) between 10% and 20%.
D)more than 20%.

Question 34

The principal weakness of the payback method for evaluating proposed investments is that it does not:

A) provide a way of ranking projects in order of desirability.
B) consider cash flows that continue after the investment has been recovered.
C) result in an easily understood "answer".
D)recognize the time value of money.

Question 35

Which of the following costs are not relevant in a decision to continue or discontinue a segment of the organization?

A) avoidable costs.
B) unavoidable costs.
C) opportunity costs.
D)differential costs.

Question 36

Discounting a future cash inflow at an 8% discount rate will result in a higher present value than discounting it at a:

A) 7% rate.
B) 8% rate.
C) 9% rate.
D)all of the above.

Question 37

If a project promises to generate a higher rate of return than the firm's cost of capital, accepting the project will:

A) increase ROI.
B) decrease ROI.
C) increase payback.
D)decrease payback.

Question 38

The cost of capital used in the capital budgeting analytical process is primarily a function of:

A) ROE.
B) ROI.
C) the cost of acquiring the funds that will be invested.
D)the discount rate.

Question 39

Depreciation expense is not a cash flow item but it will affect the calculation of which cash flow item?

A) initial investment.
B) income taxes.
C) salvage value.
D)working capital.

Question 40

When the present value analysis of a proposed investment results in an indication that the proposal has a rate of return greater than the cost of capital, the investment might not be made because:

A) the quantitative analysis indicates that it should not be made.
B) management's assessment of qualitative factors overrides the quantitative analysis.
C) the timing of the cash flows of the investment will not be as assumed in the present value calculation.
D)post-audits of prior investments have revealed that cash flow estimates were consistently less than actual cash flows realized.

Question 41

The capital budgeting analytical technique that calculates the rate of return on the investment based on the impact of the investment on the financial statements is known as the:

A) internal rate of return.
B) accounting rate of return.
C) payback period.
D)net present value.

Question 42

An advantage of the net present value method for evaluating investment proposals over the internal rate of return method is that:

A) only one set of present value calculations using a required discount rate is made.
B) the actual rate of return on the project is calculated.
C) projects can be ranked in order of profitability using the net present value amount.
D)estimates of future cash flows do not have to be made.

Question 43

Which of the following statements is true regarding the payback period?

A) the time value of money is considered when calculating the payback.
B) the payback analysis is more accurate than the net present value analysis.
C) the payback period is less accurate than the accounting rate of return.
D)the time value of money is not considered when calculating the payback.

Question 44

A capital budgeting decision method that considers the time value of money is the

A) accounting rate of return method.
B) return on stockholders' equity method.
C) cash payback method.
D)internal rate of return method.

Question 45

Which of the following formula elements is not used in calculating the accounting rate of return?

A) operating income.
B) a present value factor.
C) depreciation expense.
D)average investment.

Question 46

The accounting rate of return method for evaluating proposed investments:

A) is based on cash receipts and disbursements related to the investment.
B) uses accounting net income from the operating budget.
C) does not recognize the time value of money.
D)is easier to use than the net present value method.

Question 47

Boccardi Inc., has invested in new pasta manufacturing equipment at a cost of $48,000. The equipment has an estimated useful life of eight years. Estimated annual sales and operating expenses related to the pasta equipment follow: The estimated payback of the investment in the pasta equipment is:

A) 3.0 years.
B) 4.0 years.
C) 6.0 years.
D)8.0 years.

Question 48

After the results of a present value analysis has been obtained for a capital investment opportunity, overriding _______________ should also be considered before a final decision is made.

A) interest rates
B) relevant costs
C) payback calculations
D)qualitative factors

Question 49

For capital budgeting decisions, the use of present value analysis significantly improves management decision making, however:

A) other quantitative techniques may be even more insightful.
B) most decisions are significantly influenced by top management's values and experiences.
C) the accounting rate of return technique in usually more dependable.
D)a relevant cost analysis should always be used in close decisions.

Question 50

Capital budgeting techniques using present value techniques are useful in helping management:

A) decide which costs are most relevant in decision making.
B) identify investment alternatives that will contribute most to future profitability.
C) determine an accounting rate of return.
D)determine an investments payback period.

Question 51

If an asset costs $16,000, has an expected useful life of 8 years, is expected to have a $2,000 salvage value and generates net annual cash inflows of $2,000 a year, the cash payback period is

A) 8 years.
B) 7 years.
C) 6 years.
D)5 years.

Question 52

The discount rate used to determine the present value of an investment proposal being analyzed is also known as the:

A) present value ratio.
B) earnings growth rate.
C) payback rate.
D)hurdle rate.

Question 53

A simple cost/benefit analysis is not appropriate for:

A) sell or process further decisions.
B) make or buy decisions.
C) capital expenditure decisions.
D)special pricing decisions.

Question 54

In a capital budgeting decision, if a firm uses the net present value method and a 12% discount rate, what does a negative net present value indicate?

A) the proposal's rate of return exceeds 12%.
B) the proposal's rate of return is less than the minimum rate required.
C) the proposal earns a rate of return between 10% and 12%.
D)none of the above.

Question 55

Boccardi Inc., has invested in new pasta manufacturing equipment at a cost of $48,000. The equipment has an estimated useful life of eight years. Estimated annual sales and operating expenses related to the pasta equipment follow: The estimated accounting rate of return is:

A) 12.5%.
B) 18.0%.
C) 22.2%.
D)25.0%.

Question 56

Which of the following statements is true about capital investment decisions:

A) the project with the highest net present value will always be selected.
B) the project with the highest internal rate of return will always be selected.
C) the project with the highest net present value may not always be selected.
D)the project with the highest accounting rate of return will always be selected.

Question 57

Which of the following is a true statement regarding the internal rate of return in capital budgeting?

A) it provides the same basic information as the net present value method.
B) it calculates the net present value of future cash flows.
C) it calculates the proposal's rate of return.
D)it doesn't consider the time value of money.

Question 58

Which of the following is a true statement regarding the net present value method in capital budgeting?

A) it provides the same basic information as the accounting rate of return.
B) it calculates the present value of future cash flows.
C) it calculates the proposal's rate of return.
D)it doesn't consider the time value of money.

Question 59

The capital budget provides an overall blueprint to help an organization meet it's:

A) operating budget goals.
B) current period profitability.
C) relevant costing objectives.
D)long-term growth and profitability objectives.

Question 60

Sometimes when management decisions are reached, the investment project with the highest NPV or IRR is not selected. This occurs because:

A) a lower IRR is a less risky investment.
B) the highest NPV is not necessarily the highest IRR.
C) qualitative factors override quantitative analysis techniques.
D)sometimes management makes the wrong decision.

Question 61

The market price for low-end laser printers is well established at $400 per unit. ABC Technologies is considering entering this market and has enough available space in its plant to accommodate a new production line. However, several pieces of new manufacturing equipment would be required which are estimated to cost $28,000,000. ABC Technologies requires a minimum ROI of 15% on any product line investment and estimate that it can capture 100,000 units of the low-end laser printer market at the prevailing market price.(a.) Calculate the target cost per unit for ABC Technologies if it is to enter the low-end laser printer market while earning the minimum 15% ROI.

Question 62

The following data have been collected by capital budgeting analysts at Condel Brothers Oil Co. concerning the drilling and production of known reserves at an off-shore location:
Investment in rigging equipment and related personnel costs required to pump the oil
$5,300,000
Net increase in inventory and receivables associated with the drilling and production of the reserves. Assume this investment will be recovered at the end of the project 1,200,000
(a.) Calculate the net present value of the proposed investment in the drilling and production operation. Ignore income taxes, and round answers to the nearest $1.(b.) What will the internal rate of return on this investment be relative to the cost of capital? Explain your answer.

Question 63

Use the appropriate factors from Table 6 - 4 or Table 6 - 5 to answer the following questions.(a.) Yoko Co.'s common stock is expected to have a dividend of $3 per share for each of the next four years, and it is estimated that the market value per share will be $42 at the end of four years. If an investor requires a return on investment of 12%, what is the maximum price the investor would be willing to pay for a share of Yoko Co. common stock today?
(b.) Lashana bought a bond with a face amount of $1,000, a stated interest rate of 10%, and a maturity date 20 years in the future for $1,025. The bond pays interest on a semi-annual basis. Five years have gone by and the market interest rate is now 12%. What is the market value of the bond today?

Question 64

Digital Devices, Inc. has received a special order to manufacture 10,000 CD ROM drives for an Italian computer manufacturer. Digital determines that the order will not affect its current domestic sales of CD ROM drives and because of the special nature of the order no sales commission would be paid. However, to process the order for export, an additional handling cost of $10 per unit is estimated. The order indicates that the price of the drives cannot exceed $200.The company has the capacity to produce 100,000 units annually but is currently operating at 75% of available capacity. Unit selling price and costs, based on estimated actual capacity being utilized, are as follows:
(a.) Prepare a relevant cost analysis showing the effect on profit if the company accepts the special order.(b.) How would your analysis change if Digital Devices, Inc., was producing and selling 100,000 units annually?

Question 65

Use the appropriate factors from Table 6-4 or Table 6-5 to answer the following question.(a.) ABC Co.'s common stock is expected to have a dividend of $8 per share for each of the next six years, and it is estimated that the market value per share will be $78 at the end of six years. If an investor requires a return on investment of 10%, what is the maximum price the investor would be willing to pay for a share of ABC Co. common stock today?
(b.) Gregory bought a bond with a face amount of $1,000, a stated interest rate of 12%, and a maturity date 20 years in the future for $980. The bond pays interest on a semi-annual basis. Eight years have gone by and the market interest rate is now 8%. What is the market value of the bond today?

Question 66

Digger Company realizes three products from a single mining process: Products J1, A2, and V3. Each product may be sold as is in its raw form or processed further into a more refined state. The additional processing requires no expanded capacity and production costs are entirely variable. Sales values and cost information are presented below:
(a.) Determine whether Digger Company should sell each product as is or after further processing.

Question 67

The following data have been collected by capital budgeting analysts at Halda, Inc. concerning an investment in an expansion of the company's product line. Analysts estimate that an investment of $210,000 will be required to initiate the project at the beginning of 2016. Estimated cash returns from the new product line are summarized in the following table; assume that the returns will be received in lump sum at the end of each year.The new product line will also require an investment in working capital of $30,000; this investment will become available for other purposes at the end of the project. Salvage value of machinery and equipment at the end of the product line's life is expected to be $20,000. The cost of capital used in Hilda, Inc.'s capital budgeting analysis is 10%.(a.) Calculate the net present value of the proposed investment. Ignore income taxes, and round all answers to the nearest $1.(b.) Calculate the present value ratio of the investment.(c.) What will the internal rate of return on this investment be relative to the cost of capital? Explain your answer.(d.) Calculate the payback period of the investment.

Question 68

Acme Company is considering replacing outdated production equipment that will allow for production cost savings of $20,000 per month. The new equipment will have a five-year life and cost $800,000, with an estimated salvage value of $50,000. Acme's cost of capital is 10%.Calculate the payback period and the accounting rate of return for the new production equipment.

Question 69

OldSchool Corp. is reviewing its method of evaluating capital expenditure proposals using the accounting rate of return method. A recent proposal involved a $200,000 investment in a machine that had an estimated useful life of five years and an estimated salvage value of $20,000. The cash flow from the new machine was expected to increase net income before depreciation expense by $56,000 per year. OldSchool's current policy for approving a new investment is that it have a rate of return of 12% and a payback period of three years or less.(a) Calculate the accounting rate of return on this investment for the first year. Assume straight-line depreciation. Based on this analysis, would the investment be made? Explain.(b) Calculate the payback period for this investment. Based on this analysis, would the investment be made? Explain.(c) Comment on OldSchool's current policy for capital expenditure proposals

Question 70

Springfield Manufacturing Co. is considering the investment of $60,000 in a new machine. The machine will generate cash flow of $7,500 per year for each year of its 15 year life and will have a salvage value of $4,000 at the end of its life. Springfield's cost of capital is 10%.(a.) Calculate the net present value of the proposed investment. Ignore income taxes, and round all answers to the nearest $1.(b.) Calculate the present value ratio of the investment.(c.) What will the internal rate of return on this investment be relative to the cost of capital? Explain your answer.(d.) Calculate the payback period of the investment.

Question 71

The following production costs are provided for AudioPro Co., a manufacturer of high quality headphones.Manufacturing Costs:
It has been determined that the headphones could be purchased from Integrated Labs at a cost of $135 plus $8 shipping costs. Considering the offer from Integrated Labs, show whether AudioPro should make or buy the product.(a.) Assume 40% of fixed overhead allocated to making headphones relates to a production manager who would not be retained if the headphones were not produced by AudioPro.(b.) How would your analysis change if AudioPro could use capacity resources for alternative activities that would produce a contribution of $35 per unit?
(c.) What is your understanding of the term outsourcing? Briefly explain.

Question 72

Marshall, Inc., produces three products but weekly demand for the three products exceed the available amount of machine time. Following is information about each product:
(a.) Determine how many units each of Product A, Product B, and Product C that Marshall, Inc., should produce each week assuming 1,000 hours of available machine time.

Question 73

Griffin Co. is considering the investment of $136,000 in a new machine. The machine will generate cash flow of $22,500 per year for each year of its eight-year life and will have a salvage value of $8,000 at the end of its life. Griffin Co.'s cost of capital is 8 percent.(a.) Calculate the net present value of the proposed investment. Ignore income taxes, and round all answers to the nearest $1.(b.) What will the internal rate of return on this investment be relative to the cost of capital? Explain your answer.

Question 74

Delta, Inc. is considering the investment of $75,000 in a new machine. The machine will generate cash flow of $16,800 per year for each year of its seven-year life and will have a salvage value of $12,000 at the end of its life. Delta Inc.'s cost of capital is 14% percent.(a.) Calculate the net present value of the proposed investment. Ignore income taxes, and round all answers to the nearest $1.(b.) What will the internal rate of return on this investment be relative to the cost of capital? Explain your answer.

Question 75

The following data have been collected by capital budgeting analysts at Erica, Inc. concerning a new product line currently under consideration by management:
(a.) Calculate the net present value of the proposed investment in the new product line. Ignore income taxes, and round all answers to the nearest $1.(b.) What will the internal rate of return on this investment be relative to the cost of capital? Explain your answer.

Question 76

SOFT Micro Co., sells part #1973 for $240 per unit and the standard cost of producing each unit of part #1973 is determined as follows:
SOFT received a special order for 1,000 units of part #1973. The only additional cost to SOFT is a special packaging requirement that would cost $10 per unit.(a.) If SOFT were currently able to sell all of its production of part #1973, what would be the minimum sales price that SOFT should consider for this special order?
(b.) Assume that SOFT has enough idle capacity to produce 1,000 units of part #1973 and that overhead is 20% variable. If SOFT wants to increase its operating profit by $110,000, what price per unit would SOFT charge for the special order?

Question 77

The following product line information is for the Swiss Watch Company. The company is considering dropping its Children's product line due to poor operating income performance. Fixed expenses are allocated to each product line based on sales revenue.(a.) Calculate the effect on the Swiss Company's operating income if the Children's watch product line is discontinued. Comment on your analysis.(b.) Assume that Swiss Company discontinues its Children's product line. Calculate the total operating income for the Swiss Company.