decision making and relevant costing test

8/13/2019 Decision Making and Relevant Costing Test

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CHAPTER 11

DECISION MAKING AND RELEVANT

INFORMATION

TRUE/FALSE

1. A decision model is a formal method for making a choice, frequently involvingboth quantitative and qualitative analyses.

Answer: True Difficulty: 1 Objective: 1Terms to Learn: decision model, quantitative factors, qualitative factors

2. Feedback from previous decisions uses historical information and, therefore, isirrelevant for making future predictions.

Answer: False Difficulty: 2 Objective: 1Terms to Learn: relevant costsistorical costs may be helpful in making future predictions, but are not relevantcosts for decision making.

!. The amount paid to purchase tools last month is an e"ample of a sunk cost.

Answer: True Difficulty: 2 Objective: 2Terms to Learn: sunk costs

#. For decision making, differential costs assist in choosing bet$een alternatives.

Answer: True Difficulty: 1 Objective: 2Terms to Learn: differential cost

%. For a particular decision, differential revenues and differential costs are al$aysrelevant.

Answer: True Difficulty: 1 Objective: 2Terms to Learn: differential cost, differential revenue

&. A cost may be relevant for one decision, but not relevant for a different decision.

Answer: True Difficulty: 2 Objective: 2Terms to Learn: relevant costs

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(. )evenues that remain the same for t$o alternatives being e"amined are relevantrevenues.

Answer: False Difficulty: 1 Objective: 2Terms to Learn: relevant revenues

)evenues that remain the same bet$een t$o alternatives are irrelevant for thatdecision since they do not differ bet$een alternatives.

*. +unk costs are past costs that are unavoidable.

Answer: True Difficulty: 1 Objective: 2Terms to Learn: sunk costs

. The cost of a machine purchased last year $ill be irrelevant in a decision for ne"tyear.

Answer: True Difficulty: 2 Objective: 2Terms to Learn: sunk costs, relevant costs

1-. A sunk cost can never be relevant.

Answer: True Difficulty: 2 Objective: 2Terms to Learn: sunk costs, relevant costs

11. uantitative factors are al$ays e"pressed in numerical terms.

Answer: True Difficulty: 2 Objective: !Terms to Learn: quantitative factors

12. ualitative factors are outcomes that are measured in numerical terms, such as thecosts of direct labor.

Answer: False Difficulty: 1 Objective: !Terms to Learn: qualitative factorsQuantitativefactors are outcomes that are measured in numerical terms, such as thecosts of direct labor.

1!. /f a manufacturer chooses to continue purchasing direct materials from a supplierbecause of the ongoing relationship that has developed over the years, the decisionis based on qualitative factors.

Answer: True Difficulty: 2 Objective: !Terms to Learn: qualitative factors

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1#. )elevant revenues and relevant costs are the only information managers need toselect among alternatives.

Answer: False Difficulty: ! Objective: !Terms to Learn: relevant revenues, relevant costs, qualitative factors

ualitative factors, as $ell as relevant revenues and relevant costs need to beconsidered $hen selecting among alternatives.

1%. Full costs of a product are relevant for one'time'only special order pricingdecisions.

Answer: False Difficulty: 2 Objective: !Terms to Learn: full costs of the product, one'time'only special order, relevantcosts/ncremental costs of a product are relevant for one'time'only special order pricingdecisions.

1&. Full costs of a product include variable costs, but not fi"ed costs.

Answer: False Difficulty: 1 Objective: !Terms to Learn: full costs of the productFull costs of a product include variable and fi"ed costs for all business functions inthe value chain.

1(. For one'time'only special orders, variable costs may be relevant but not fi"ed costs.

Answer: True Difficulty: 2 Objective: !Terms to Learn: one'time'only special order, relevant costs

1*. The price quoted for a one'time'only special order may be less than the price for along'term customer.

Answer: True Difficulty: 2 Objective: !Terms to Learn: one'time'only special order

1. 0id prices and costs that are relevant for regular orders are the same costs that arerelevant for one'time'only special orders.

Answer: False Difficulty: 2 Objective: !Terms to Learn: one'time'only special order, relevant costs+ince long'term costs are relevant for regular orders and short'term costs arerelevant for one'time'only special orders, the relevant costs differ.

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2-. ualitative factors, because they are not measured numerically, are unimportant inthe decision'making process.

Answer: False Difficulty: 2 Objective: !Terms to Learn: qualitative factors

ualitative factors are important in the decision'making process even though theycannot be measured numerically.

21. /n a one'time special order situation, if the price offered by the potential buyer isless than the absorption cost per unit, then the producer should not accept thespecial offer.

Answer: False Difficulty: ! Objective: !Terms to Learn: one'time'only special order, full costs of the product/n a one'time special order situation, if the price offered by the buyer is less than theabsorption cost per unit, the special order may still be profitable since absorption

costs include allocated fi"ed manufacturing overhead.

22. An incremental product cost is generally a fi"ed cost.

Answer: False Difficulty: 1 Objective: #Terms to Learn: incremental costAn incremental product cost is generally a variablecost.

2!. /f ption 1 costs 1-- and ption 2 costs *-, then the differential cost is 1*-.

Answer: False Difficulty: 1 Objective: #Terms to Learn: differential cost/f ption 1 costs 1-- and ption 2 costs *-, then the differential cost is 2-.

2#. 3roducing another 1-,--- units mayincrease the fi"ed cost of rent.

Answer: True Difficulty: ! Objective: #Terms to Learn: incremental costTrue, if additional capacity must be added to accommodate the additionalproduction needs.

2%. Absorption cost per unit is the best product cost to use for one'time'only specialorder decisions.

Answer: False Difficulty: 2 Objective: #Terms to Learn: full costs of the product, one'time'only special order4ariable cost per unit is the best cost to use for one'time'only special orderdecisions.

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2&. +ometimes qualitative factors are the most important factors in make'or'buydecisions.

Answer: True Difficulty: 2 Objective: #Terms to Learn: qualitative factors

2(. /f a company is deciding $hether to outsource a part, the reliability of the supplieris an important factor to consider.

Answer: True Difficulty: 2 Objective: #Terms to Learn: outsourcing, make'or'buy decision

2*. utsourcing is risk free to the manufacturer because the supplier no$ has theresponsibility of producing the part.

Answer: False Difficulty: 2 Objective: #

Terms to Learn: outsourcing, make'or'buy decisionutsourcing has risks since the manufacturer is dependent on the supplier for aquality product, delivered in a timely manner, for a reasonable price.

2. 5hen a firm ma"imi6es profits it $ill simultaneously minimi6e opportunity costs.

Answer: True Difficulty: ! Objective: %Terms to Learn: opportunity cost

!-. /n a make'or'buy decision $hen there are alternative uses for capacity, theopportunity cost of idle capacity is relevant.

Answer: True Difficulty: ! Objective: %Terms to Learn: make'or'buy decision, outsourcing, opportunity cost

!1. 5hen opportunity costs e"ist, they are al$ays relevant.

Answer: True Difficulty: ! Objective: %Terms to Learn: opportunity cost, relevant costs

!2. 5hen capacity is constrained, relevant costs equal incremental costs plusopportunity costs.

Answer: True Difficulty: 2 Objective: %Terms to Learn: constraint, relevant costs, incremental cost, opportunity cost

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!!. /f the 1(,--- spent to purchase inventory could be invested and earn interest of1,---, then the opportunity cost of holding inventory is 1(,---.

Answer: False Difficulty: 2 Objective: %Terms to Learn: opportunity cost

The opportunity cost of holding inventory is 1,---.

!#. The choice is not really $hether to make or buy, but rather ho$ to best useavailable production capacity.

Answer: True Difficulty: 1 Objective: %Terms to Learn: make'or'buy decision, constraint

!%. pportunity costs never appear in a company7s accounting records since they areforegone costs and not actual costs.

Answer: True Difficulty: 2 Objective: %Terms to Learn: opportunity cost

!&. For short'run product'mi" decisions, managers should focus on minimi6ing totalfi"ed costs.

Answer: False Difficulty: 2 Objective: &Terms to Learn: decision modelFor short'run product mi" decisions, managers should focus on maximizingtotalcontribution margin.

!(. For short'run product'mi" decisions, ma"imi6ing contribution margin $ill alsoresult in ma"imi6ing operating income.

Answer: True Difficulty: 2 Objective: &Terms to Learn: decision model

!*. )egardless of the restraining resource, managers should produce more of theproduct $ith the greatest contribution margin per unit to ma"imi6e profits.

Answer: False Difficulty: 2 Objective: &Terms to Learn: decision model, constraintTo ma"imi6e profits, managers should produce more of the product $ith thegreatest contribution margin per unit of the constraining resource.

!. 5hen there are scarce resources, the firm should attempt to ma"imi6e thecontribution margin per unit of the scarce resource.

Answer: True Difficulty: 2 Objective: &Terms to Learn: constraint

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#-. 8anagement should focus on per unit costs $hen deciding $hether to discontinue aproduct or not.

Answer: False Difficulty: 2 Objective: (

Terms to Learn: full costs of the product8anagement should focus on total costs$hen deciding $hether to discontinue aproduct or not.

#1. Avoidable variable and fi"ed costs should be evaluated $hen deciding $hether todiscontinue a product, product line, business segment, or customer.

Answer: True Difficulty: 2 Objective: (Terms to Learn: differential cost

#2. 9epreciation allocated to a product line is a relevant cost $hen deciding to

discontinue that product.

Answer: False Difficulty: 2 Objective: (Terms to Learn: relevant costs9epreciation is a sunk cost and never relevant.

#!. A company is considering adding a fourth product to use available capacity. Arelevant factor to consider is that corporate costs can no$ be allocated over fourproducts rather than only three.

Answer: False Difficulty: ! Objective: (Terms to Learn: relevant costs/t appears that corporate costs $ill not change in total, and therefore they are notrelevant costs for deciding $hether to add a fourth product.

##. All variable costs are relevant and all fi"ed costs are irrelevant.

Answer: False Difficulty: 2 Objective: (Terms to Learn: relevant costsAll variable costs are not necessarily relevant and all fi"ed costs are not necessarilyirrelevant.

#%. /n a decision as to $hether or not to drop a product, fi"ed costs that have beenallocated to that product are al$ays relevant.

Answer: False Difficulty: 2 Objective: (Terms to Learn: relevant costs/n a decision as to $hether or not to drop a product, fi"ed costs that have beenallocated to that product are generally not relevant.

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#&. 5hen replacing an old machine $ith a ne$ machine, the purchase price of the ne$machine is a relevant cost.

Answer: True Difficulty: 1 Objective: *Terms to Learn: relevant costs

#(. 5hen replacing an old machine $ith a ne$ machine, the book value of the oldmachine is a relevant cost.

Answer: False Difficulty: 1 Objective: *Terms to Learn: relevant costsThe original price of the old machine is a past cost and therefore an irrelevant cost.

#*. )eplacing an old machine $ill increase operating income in the long run, but notfor this year. A manager may choose not to replace the machine if performanceevaluations are based on performance over a single year.

Answer: True Difficulty: 2 Objective: Terms to Learn: decision model

#. 8anagers tend to favor alternatives that make their o$n performance look better.

Answer: True Difficulty: 2 Objective: Terms to Learn: decision model

%-. inear programming is a tool that ma"imi6es total contribution margin of a mi" ofproducts $ith multiple constraints.

Answer: True Difficulty: 1 Objective: ATerms to Learn: linear programming ;3valuate performance to provide feedback? = /mplement the decision9 = ?hoose an alternative

a. 9 ? A 0b. ? 9 A 0c. A 9 ? 0d. 9 ? 0 A

Answer: c Difficulty: 2 Objective: 1Terms to Learn: decision model

%!. The formal process of choosing bet$een alternatives is kno$n as a;n


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T> F5/CD /CF)8AT/C A33/>+ T @>+T/C+ %% AC9 %&:e0lanc ighting manufactures small flashlights and is considering raising the price by%- cents a unit for the coming year. 5ith a %-'cent price increase, demand is e"pected tofall by !,--- units.

Currently Projected

9emand 2-,--- units 1(,--- units+elling price #.%- %.--/ncremental cost per unit !.-- !.--

%%. /f the price increase is implemented, operating profit is proEected to:a. increase by #,---b. decrease by #,---c. increase by &,---d. decrease by #,%--

Answer: a Difficulty: 2 Objective: 1Terms to Learn: decision model

1(,--- " ;% G !


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%. For decision making, a listing of the relevant costs:a. $ill help the decision maker concentrate on the pertinent datab. $ill only include future costsc. $ill only include costs that differ among alternativesd. All of these ans$ers are correct.

Answer: d Difficulty: 2 Objective: 2Terms to Learn: relevant costs

&-. +unk costs:a. are relevantb. are differentialc. have future implicationsd. are ignored $hen evaluating alternatives

Answer: d Difficulty: 1 Objective: 2

Terms to Learn: relevant costs, sunk costs

&1. A computer system installed last year is an e"ample of a;n


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. 5hich of the follo$ing costs al$ays differ among future alternativesa. fi"ed costsb. historical costsc. relevant costsd. variable costs

Answer: c Difficulty: 1 Objective: 2Terms to Learn: relevant costs

&%. 5hich of the follo$ing costs are never relevant in the decision'making processa. fi"ed costsb. historical costsc. relevant costsd. variable costs

Answer: b Difficulty: 1 Objective: 2Terms to Learn: relevant costs

T> F5/CD /CF)8AT/C A33/>+ T @>+T/C+ && AC9 &(:Jim7s %'year'old Deo 3ri6m requires repairs estimated at !,--- to make it road$orthyagain. is friend, Julie, suggested that he should buy a %'year'old used onda ?ivicinstead for !,--- cash. Julie estimated the follo$ing costs for the t$o cars:

Geo Pri! Hond" Ci#ic

Acquisition cost 1%,--- !,---)epairs !,--- K Annual operating costs

;Das, maintenance, insurance< 2,2*- 2,1--

&&. The cost CT relevant for this decision is the:a. acquisition cost of the Deo 3ri6mb. acquisition cost of the onda ?ivicc. repairs to the Deo 3ri6md. annual operating costs of the onda ?ivic

Answer: a Difficulty: 2 Objective: 2Terms to Learn: relevant costs

&(. 5hat should Jim do 5hat are his savings in the first yeara. 0uy the onda ?ivicL ,(*-

b. Fi" the Deo 3ri6mL %,%1*c. 0uy the onda ?ivicL 1*-d. Fi" the Deo 3ri6mL %,2*-

Answer: c Difficulty: 2 Objective: 2Terms to Learn: relevant costsDeo ;!,--- M 2,2*-< G onda ;!,--- M 2,1--< = 1*- cost savings $ith theonda option

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&*. A relevant revenue is a revenue that is a;n


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(!. >mployee morale at 9os +antos, /nc., is very high. This type of information iskno$n as a:a. qualitative factor b. quantitative factorc. nonmeasurable factor

d. financial factor

Answer: a Difficulty: 1 Objective: !Terms to Learn: qualitative factors

(#. )oberto o$ns a small body shop. is maEor costs include labor, parts, and rent. /nthe decision'making process, these costs are considered to be:a. fi"edb. qualitative factorsc. quantitative factorsd. variable

Answer: c Difficulty: 1 Objective: !Terms to Learn: qualitative factors

(%. ne'time'only special orders should only be accepted if:a. incremental revenues e"ceed incremental costsb. differential revenues e"ceed variable costsc. incremental revenues e"ceed fi"ed costsd. total revenues e"ceed total costs

Answer: a Difficulty: ! Objective: !Terms to Learn: one'time'only special order, incremental revenue

(&. 5hen deciding to accept a one'time'only special order from a $holesaler,management should do all of the follo$ing >N?>3T:a. analy6e product costsb. consider the special order7s impact on future prices of their productsc. determine $hether e"cess capacity is availabled. verify past design costs for the product

Answer: d Difficulty: ! Objective: !Terms to Learn: one'time'only special order

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((. 5hen there is e"cess capacity, it makes sense to accept a one'time'only specialorder for less than the current selling price $hen:a. incremental revenues e"ceed incremental costsb. additional fi"ed costs must be incurred to accommodate the orderc. the company placing the order is in the same market segment as your current

customersd. it never makes sense

Answer: a Difficulty: ! Objective: !Terms to Learn: one'time'only special order, incremental cost, incrementalrevenue

T> F5/CD /CF)8AT/C A33/>+ T @>+T/C+ (* T)@D *1:5elch 8anufacturing is approached by a >uropean customer to fulfill a one'time'onlyspecial order for a product similar to one offered to domestic customers. 5elch

8anufacturing has e"cess capacity. The follo$ing per unit data apply for sales to regularcustomers:Variable costs

9irect materials #-9irect labor 2-8anufacturing support !%8arketing costs 1%

!ixe" costs

8anufacturing support #%8arketing costs 1%

Total costs 1(-8arkup ;%-O< *%Targeted selling price 2%%

(*. 5hat is the full cost of the product per unita. 11-b. 1(-c. 2%%d. *%

Answer: b Difficulty: ! Objective: !Terms to Learn: full costs of the product#- M 2- M !% M 1% M #% M 1% = 1(-

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(. 5hat is the contribution margin per unita. *%b. 11-c. 1#%d. 2%%

Answer: c Difficulty: ! Objective: !Terms to Learn: one'time'only special order2%% G ;#- M 2- M !% M 1%< = 1#%

*-. For 5elch 8anufacturing, $hat is the minimum acceptable price of this specialordera. 11-b. 1#%c. 1(-d. 2%%

Answer: a Difficulty: ! Objective: !Terms to Learn: one'time'only special order#- M 2- M !% M 1% = 11-

*1. 5hat is the change in operating profits if the one'time'only special order for 1,---units is accepted for 1*- a unit by 5elcha. (-,--- increase in operating profitsb. 1-,--- increase in operating profitsc. 1-,--- decrease in operating profitsd. (%,--- decrease in operating profits

Answer: a Difficulty: ! Objective: !

Terms to Learn: one'time'only special order1*- G ;#- M 2- M !% M 1%< = (-L 1,--- " (- = (-,--- increase

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*2. )at6laff ?ompany has a current production level of 2-,--- units per month. @nitcosts at this level are:

9irect materials -.2%9irect labor -.#-

4ariable overhead -.1%Fi"ed overhead -.2-8arketing ' fi"ed -.2-8arketingPdistribution ' variable -.#-

?urrent monthly sales are 1*,--- units. Jim ?ompany has contacted )at6laff?ompany about purchasing 1,%-- units at 2.-- each. ?urrent sales $ould not beaffected by the one'time'only special order, and variable marketingPdistributioncosts $ould not be incurred on the special order. 5hat is )at6laff ?ompany7schange in operating profits if the special order is accepteda. #-- increase in operating profits

b. #-- decrease in operating profitsc. 1,*-- increase in operating profitsd. 1,*-- decrease in operating profits

Answer: c Difficulty: ! Objective: !Terms to Learn: one'time'only special order8anufacturing cost per unit = -.2% M -.#- M -.1% = -.*-1,%-- " ;2.-- G -.*-< = 1,*-- increase

*!. 0lack Tool ?ompany has a production capacity of 1,%-- units per month, butcurrent production is only 1,2%- units. The manufacturing costs are &- per unitand marketing costs are 1& per unit. 9oug all offers to purchase 2%- units at (&each for the ne"t five months. +hould 0lack accept the one'time'only special orderif only absorption'costing data are availablea. Ies, good customer relations are essential.b. Co, the company $ill only break even.c. Co, since only the employees $ill benefit.d. Ies, since operating profits $ill most likely increase.

Answer: d Difficulty: ! Objective: !Terms to Learn: one'time'only special order+ince the &- absorption cost per unit is most likely not all variable costs and sincethe entire 1& per unit of marketing costs may not be incurred, operating profits $illmost likely increase.

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T> F5/CD /CF)8AT/C A33/>+ T @>+T/C+ *# T)@D *&:Drant7s Qitchens is approached by 8s. Tammy 5ang, a ne$ customer, to fulfill a largeone'time'only special order for a product similar to one offered to regular customers. Thefollo$ing per unit data apply for sales to regular customers:

9irect materials #%%9irect labor !--4ariable manufacturing support #%Fi"ed manufacturing support 1-- Total manufacturing costs --8arkup ;&-O< %#-Targeted selling price 1##-

Drant7s Qitchens has e"cess capacity. 8s. 5ang $ants the cabinets in cherry rather thanoak, so direct material costs $ill increase by !- per unit.

*#. For Drant7s Qitchens, $hat is the minimum acceptable price of this one'time'only

special ordera. *!-b. !-c. (*%d. 1,##-

Answer: a Difficulty: 2 Objective: !Terms to Learn: one'time'only special order#%% M !-- M #% M !- = *!-

*%. ther than price, $hat other items should Drant7s Qitchens consider before

accepting this one'time'only special ordera. reaction of shareholdersb. reaction of e"isting customers to the lo$er price offered to 8s. 5angc. demand for cherry cabinetsd. price is the only consideration.

Answer: b Difficulty: 2 Objective: !Terms to Learn: one'time'only special order, qualitative factors

*&. /f 8s. 5ang $anted a long'term commitment for supplying this product, thisanalysis:a. $ould definitely be different

b. may be differentc. $ould not be differentd. does not contain enough information to determine if there $ould be a

difference

Answer: a Difficulty: 2 Objective: !Terms to Learn: one'time'only special order

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*(. An e"ample of a quantitative factor for the decision'making process is:a. customer satisfactionb. employee moralec. product qualityd. manufacturing overhead

Answer: d Difficulty: 1 Objective: !Terms to Learn: quantitative factors

**. /f there $as limited capacity, all of the follo$ing amounts $ould change >N?>3T:a. opportunity costsb. differential costsc. variable costsd. the minimum acceptable price

Answer: c Difficulty: ! Objective: %Terms to Learn: constraint

T> F5/CD /CF)8AT/C A33/>+ T @>+T/C+ * AC9 -:Corth$oods manufactures rustic furniture. The cost accounting system estimatesmanufacturing costs to be - per table, consisting of *-O variable costs and 2-O fi"edcosts. The company has surplus capacity available. /t is Corth$oods7 policy to add a %-Omarkup to full costs.

*. Corth$oods is invited to bid on a one'time'only special order to supply 1-- rustictables. 5hat is the lo$est price Corth$oods should bid on this special ordera. &,!--b. (,2--

c. ,---d. 1!,%--

Answer: b Difficulty: 2 Objective: !Terms to Learn: one'time'only special order- " *-O " 1-- tables = (,2--

-. A large hotel chain is currently e"panding and has decided to decorate all ne$hotels using the rustic style. Corth$oods /ncorporated is invited to submit a bid tothe hotel chain. 5hat is the lo$est price per unit Corth$oods should bid on thislong'term order

a. &!b. (2c. -d. 1!%

Answer: d Difficulty: 2 Objective: !Terms to Learn: one'time'only special order- M ;- " %-O< = 1!%

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1. ?ochran ?orporation has a plant capacity of 1--,--- units per month. @nit costs atcapacity are:9irect materials #.--9irect labor &.--

4ariable overhead !.--Fi"ed overhead 1.--8arketing K fi"ed (.--8arketingPdistribution K variable !.&-

?urrent monthly sales are %,--- units at !-.-- each. +u6ie, /nc., has contacted?ochran ?orporation about purchasing 2,--- units at 2#.-- each. ?urrent sales$ould not be affected by the one'time'only special order. 5hat is ?ochran7schange in operating profits if the one'time'only special order is accepteda. 1#,*-- increaseb. 1(,2-- increase

c. 22,--- increased. !!,2-- increase

Answer: a Difficulty: ! Objective: !Terms to Learn: one'time'only special order;#.-- M &.-- M !.-- M !.&-< = 1&.&-;2#.-- G 1&.&-< " 2,--- = 1#,*-- increase

2. The sum of all the costs incurred in a particular business function ;for e"ample,marketing< is called the:a. business function costb. full product costc. gross product costd. multiproduct cost

Answer: a Difficulty: 1 Objective: !Terms to Learn: business function costs

!. The sum of all costs incurred in all business functions in the value chain ;productdesign, manufacturing, marketing, and customer service, for e"ample< is kno$n asthe:a. business costb. full product costc. gross product costd. multiproduct cost

Answer: b Difficulty: 1 Objective: !Terms to Learn: full costs of the product

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#. An e"ample of a qualitative factor for the decision'making process is:a. customer satisfactionb. units soldc. material costd. labor hours incurred

Answer: a Difficulty: 2 Objective: !Terms to Learn: qualitative factors

%. 3roblems that should be avoided $hen identifying relevant costs include all of thefollo$ing >N?>3T:a. assuming all variable costs are relevantb. assuming all fi"ed costs are irrelevantc. using unit costs that do not separate variable and fi"ed componentsd. using total costs that separate variable and fi"ed components

Answer: d Difficulty: 2 Objective: #Terms to Learn: relevant costs

&. The 0>+T $ay to avoid misidentification of relevant costs is to focus on:a. e"pected future costs that differ among the alternativesb. historical costsc. unit fi"ed costsd. total unit costs

Answer: a Difficulty: 2 Objective: #Terms to Learn: relevant costs

(. Factors used to decide $hether to outsource a part include:a. the supplier7s cost of direct materialsb. if the supplier is reliablec. the original cost of equipment currently used for production of that partd. past design costs used to develop the current composition of the part

Answer: b Difficulty: 2 Objective: #Terms to Learn: outsourcing, make'or'buy decision

*. )elevant costs of a make'or'buy decision include all of the follo$ing >N?>3T:a. fi"ed salaries that $ill not be incurred if the part is outsourcedb. current direct material costs of the partc. special machinery for the part that has no resale valued. material'handling costs that can be eliminated

Answer: c Difficulty: ! Objective: #Terms to Learn: relevant costs, outsourcing, make'or'buy decision

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. 5hich of follo$ing are risks of outsourcing the production of a parta. unpredictable qualityb. unreliable deliveryc. unscheduled price increasesd. All of these ans$ers are correct.

Answer: d Difficulty: 1 Objective: #Terms to Learn: outsourcing, make'or'buy decision

1--. 5hich of the follo$ing minimi6e the risks of outsourcinga. the use of short'term contracts that specify priceb. the responsibility for on'time delivery is no$ the responsibility of the supplierc. building close relationships $ith the supplierd. All of these ans$ers are correct.

Answer: c Difficulty: ! Objective: #

Terms to Learn: outsourcing, make'or'buy decision

1-1. The cost to produce 3art A $as 1- per unit in 2-N! and in 2-N# it has increasedto 11 per unit. /n 2-N#, +upplier NIR has offered to supply 3art A for per unit.For the make'or'buy decision:a. incremental revenues are 2 per unitb. incremental costs are 1 per unitc. net relevant costs are 1 per unitd. differential costs are 2 per unit

Answer: d Difficulty: 2 Objective: #Terms to Learn: outsourcing, make'or'buy decision

1-2. 5hen evaluating a make'or'buy decision, $hich of the follo$ing does CT need tobe considereda. alternative uses of the production capacityb. the original cost of the production equipmentc. the quality of the supplierBs productd. the reliability of the supplierBs delivery schedule

Answer: b Difficulty: 2 Objective: #Terms to Learn: outsourcing, make'or'buy decision

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1-!. For make'or'buy decisions, a supplierBs ability to deliver the item on a timely basisis considered a;nN?>3T:a. direct materialsb. direct laborc. variable overhead costsd. fi"ed overhead costs

Answer: d Difficulty: 2 Objective: #Terms to Learn: incremental cost

1-%. 9irect materials #-, direct labor 1-, variable overhead costs !-, and fi"edoverhead costs 2-. /n the short term, the incremental cost of one unit is:a. !-b. %-c. *-d. 1--

Answer: c Difficulty: 2 Objective: #Terms to Learn: incremental cost

1-&. @nit cost data can 8+T mislead decisions by:a. not computing fi"ed overhead costsb. computing labor and materials costs onlyc. computing administrative costsd. not computing unit costs at the same output level

Answer: d Difficulty: 1 Objective: #Terms to Learn: full costs of the product

1-(. +chmidt +e$ing ?ompany incorporates the services of 9ebBs +e$ing. +chmidtpurchases pre'cut dresses from 9ebBs. This is primarily kno$n as:a. insourcingb. outsourcingc. relevant costingd. sunk costing

Answer: b Difficulty: 1 Objective: #Terms to Learn: outsourcing

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1-*. 3earce +ign ?ompany manufactures signs from direct materials to the finishedproduct. This is considered:a. insourcingb. outsourcingc. relevant costing

d. sunk costingAnswer: a Difficulty: 1 Objective: #Terms to Learn: insourcing

1-. 5hich of the follo$ing $ould CT be considered in a make'or'buy decisiona. fi"ed costs that $ill no longer be incurredb. variable costs of productionc. potential rental income from space occupied by the production aread. unchanged supervisory costs

Answer: d Difficulty: 2 Objective: #

Terms to Learn: make'or'buy decision

T> F5/CD /CF)8AT/C A33/>+ T @>+T/C+ 11- T)@D 112:Qonrade7s >ngine ?ompany manufactures part T>#%& used in several of its enginemodels. 8onthly production costs for 1,--- units are as follo$s:

9irect materials #-,---9irect labor 1-,---4ariable overhead costs !-,---Fi"ed overhead costs 2-,--- Total costs 1--,---

/t is estimated that 1-O of the fi"ed overhead costs assigned to T>#%& $ill no longer beincurred if the company purchases T>#%& from the outside supplier. Qonrade7s >ngine?ompany has the option of purchasing the part from an outside supplier at *% per unit.

11-. /f Qonrade7s >ngine ?ompany accepts the offer from the outside supplier, themonthly avoidable costs ;costs that $ill no longer be incurred< total:a. *2,---b. *,---c. %-,---d. 1--,---

Answer: a Difficulty: 2 Objective: #Terms to Learn: make'or'buy decision, outsourcing#-,--- M 1-,--- M !-,--- M ;2-,--- " 1-O< = *2,---

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111. /f Qonrade7s >ngine ?ompany purchases 1,--- T>#%& parts from the outsidesupplier per month, then its monthly operating income $ill:a. increase by 2,---b. increase by *-,---c. decrease by !,---

d. decrease by *%,---

Answer: c Difficulty: 2 Objective: #Terms to Learn: make'or'buy decision, outsourcingAvoidable costs *2,--- G ;*% " 1,--- units< = decrease of !,---

112. The maximumprice that Qonrade7s >ngine ?ompany should be $illing to pay theoutside supplier is:a. *- per T>#%& partb. *2 per T>#%& partc. * per T>#%& part

d. 1-- per T>#%& part

Answer: b Difficulty: 2 Objective: #Terms to Learn: make'or'buy decision, outsourcingAvoidable costs *2,--- P 1,--- units = *2 per part

T> F5/CD /CF)8AT/C A33/>+ T @>+T/C+ 11! AC9 11#:+chmidt ?orporation produces a part that is used in the manufacture of one of itsproducts. The costs associated $ith the production of 1-,--- units of this part are asfollo$s:

9irect materials #%,---9irect labor &%,---4ariable factory overhead !-,---Fi"ed factory overhead (-,--- Total costs 21-,---

f the fi"ed factory overhead costs, !-,--- is avoidable.

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11!. 3hil ?ompany has offered to sell 1-,--- units of the same part to +chmidt?orporation for 1* per unit. Assuming there is no other use for the facilities,+chmidt should:a. make the part, as this $ould save ! per unitb. buy the part, as this $ould save ! per unit

c. buy the part, as this $ould save the company !-,---d. make the part, as this $ould save 1 per unit

Answer: d Difficulty: ! Objective: #Terms to Learn: make'or'buy decision, outsourcingAvoidable costs total 1(-,--- = #%,--- M &%,--- M !-,--- M !-,---.1* G ;1(-,---P1-,---< = 1

11#. Assuming no other use of their facilities, the highest price that +chmidt should be$illing to pay for 1-,--- units of the part is:a. 21-,---

b. 1#-,---c. 1(-,---d. 1*-,---

Answer: c Difficulty: ! Objective: #Terms to Learn: make'or'buy decision, outsourcing#%,--- M &%,--- M !-,--- M !-,--- = 1(-,---

11%. )elevant costs in a make'or'buy decision of a part include:a. setup overhead for the manufacture of the product using the outsourced partb. currently used manufacturing capacity that has alternative usesc. annual plant insurance costs that $ill remain the samed. corporate office costs that $ill be allocated differently

Answer: b Difficulty: ! Objective: %Terms to Learn: make'or'buy decision, outsourcing, relevant costs

11&. /f orsley ?orporation doesnBt use one of its limited resources in the best possible$ay, the lost contribution to income could be called a;n


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11(. 5hen a firm has constrained capacity as opposed to surplus capacity, opportunitycosts $ill be:a. lo$er b. the samec. greater

d. variable

Answer: c Difficulty: 2 Objective: %Terms to Learn: opportunity cost, constraint

11*. pportunity costs:a. result in a cash outlayb. only are considered $hen selecting among alternativesc. are recorded in the accounting recordsd. should be ma"imi6ed for the best decision

Answer: b Difficulty: 2 Objective: %Terms to Learn: opportunity cost

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T> F5/CD /CF)8AT/C A33/>+ T @>+T/C+ 122 AC9 12!:+tephans ?orporation currently manufactures a subassembly for its main product. Thecosts per unit are as follo$s:

9irect materials 1.--9irect labor 1-.--4ariable overhead %.--Fi"ed overhead *.--

Total 2#.--

0ill ?ompany has contacted +tephans $ith an offer to sell them %,--- of thesubassemblies for 22.-- each. +tephans $ill eliminate 2%,--- of fi"ed overheadif it accepts the proposal.

122. 5hat are the relevant costs for +tephans

a. 1#-,---b. 12%,---c. 1-%,---d. *-,---

Answer: c Difficulty: 2 Objective: %Terms to Learn: make'or'buy decision, outsourcing;1 M 1- M %< " %,--- M 2%,---H = 1-%,---

12!. +hould +tephans make or buy the subassemblies 5hat is the difference bet$eenthe t$o alternativesa. 0uyL savings = 2-,---b. 0uyL savings = %-,---c. 8akeL savings = &-,---d. 8akeL savings = %,---

Answer: d Difficulty: ! Objective: %Terms to Learn: make'or'buy decision, outsourcing?ost to buy: %,--- " 22 = 11-,---?ost to make: 11-,--- G ;1 M 1- M %< " %,--- M 2%,---H = %,---L makethe subassemblies

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12*. 3roduct mi" decisions:a. have a long'run focusb. help determine ho$ to ma"imi6e operating profitsc. focus on selling price per unit

d. All of these ans$ers are correct.

Answer: b Difficulty: 2 Objective: &Terms to Learn: product'mi" decisions

12. ?onstraints may include:a. the availability of direct materials in manufacturingb. linear square feet of display space for a retailerc. direct labor in the service industryd. All of these ans$ers are correct.

Answer: d Difficulty: 1 Objective: &Terms to Learn: constraint

1!-. For determining the best mi" of products, the one $ith the >A+T amount ofinfluence is:a. the market price of the productsb. corporate office costs allocated to each productc. the use of capacity resourcesd. contribution margins

Answer: b Difficulty: ! Objective: &Terms to Learn: constraint, product'mi" decisions

1!1. /n product'mi" decisions:a. al$ays focus on ma"imi6ing total contribution marginb. focus on the product $ith the greatest contribution margin per machine'hourc. focus on the full costs of the productd. never focus on the short'term, but include only long'term considerations

Answer: a Difficulty: ! Objective: &Terms to Learn: product'mi" decisions

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T> F5/CD /CF)8AT/C A33/>+ T @>+T/C+ 1!2 T)@D 1!&:0raun7s 0rakes manufactures three different product lines, 8odel N, 8odel I, and8odel R. ?onsiderable market demand e"ists for all models. The follo$ing per unit dataapply:

Model $ Model % Model

&

+elling price %- &- (-9irect materials & & &9irect labor ;12 per hour< 12 12 2#4ariable support costs ;# per machine'hour< # * *Fi"ed support costs 1- 1- 1-

1!2. 5hich model has the greatest contribution margin per unita. 8odel Nb. 8odel Ic. 8odel R

d. 8odels N and I

Answer: b Difficulty: 2 Objective: &Terms to Learn: product'mi" decisions8odel N %- G & G 12 G # = 2*8odel I &- G & G 12 G * = !# highest8odel R (- v & G 2# G * = !2

1!!. 5hich model has the greatest contribution margin per machine'houra. 8odel Nb. 8odel I

c. 8odel Rd. 8odels I and R

Answer: a Difficulty: 2 Objective: &Terms to Learn: product'mi" decisions, constraint8odel N %- G & G 12 G # = 2* highest8odel I &- G & G 12 G * = !#8odel R (- v & G 2# G * = !2

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1!#. /f there is e"cess capacity, $hich model is the most profitable to producea. 8odel Nb. 8odel Ic. 8odel Rd. 8odels N and I

Answer: b Difficulty: ! Objective: &Terms to Learn: product'mi" decisions8odel I since it has the greatest contribution margin per unit8odel N %- G & G 12 G # = 2*8odel I &- G & G 12 G * = !# highest8odel R (- v & G 2# G * = !2

1!%. /f there is a machine breakdo$n, $hich model is the most profitable to producea. 8odel Nb. 8odel Ic. 8odel Rd. 8odels I and R

Answer: a Difficulty: ! Objective: &Terms to Learn: product'mi" decisions, constraint8odel N since it has the greatest contribution margin per machine'hour8odel N %- G & G 12 G # = 2* highest8odel I &- G & G 12 G * = !#8odel R (- v & G 2# G * = !2

1!&. o$ can isa 0raun encourage her salespeople to promote the more profitablemodel

a. 3ut all sales persons on salary.b. 3rovide higher sales commissions for higher priced items.c. 3rovide higher sales commissions for items $ith the greatest contribution

margin per constrained resource.d. 0oth b and c are correct.

Answer: c Difficulty: 2 Objective: &Terms to Learn: product'mi" decisions, constraint

T> F5/CD /CF)8AT/C A33/>+ T @>+T/C+ 1!( T)@D 1!:elmer7s )ockers manufactures t$o models, +tandard and 3remium. 5eekly demand is

estimated to be 1-- units of the +tandard 8odel and (- units of the 3remium 8odel. Thefollo$ing per unit data apply:

St"nd"rd Pre!iu!

?ontribution margin per unit 1* 2-Cumber of machine'hours required ! #

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1!(. The contribution per machine'hour is:a. 1* for +tandard, 2- for 3remiumb. %# for +tandard, *- for 3remiumc. 1% for +tandard, 1& for 3remiumd. & for +tandard, % for 3remium

Answer: d Difficulty: 2 Objective: &Terms to Learn: product'mi" decisions, constraint+tandard 1* P ! = &L 3remium 2- P # = %

1!*. /f there are #& machine'hours available per $eek, ho$ many rockers of eachmodel should Jim elmer produce to ma"imi6e profitsa. 1-- units of +tandard and # units of 3remiumb. (2 units of +tandard and (- units of 3remiumc. 1-- units of +tandard and (- units of 3remiumd. *% units of +tandard and &- units of 3remium

Answer: a Difficulty: 2 Objective: &Terms to Learn: product'mi" decisions, constraint+tandard ;1-- units " !mh< M 3remium ;# units " # mh< = #& machine'hours ofthe constrained resource

1!. /f there are &-- machine'hours available per $eek, ho$ many rockers of eachmodel should Jim elmer produce to ma"imi6e profitsa. 1-- units of +tandard and # units of 3remiumb. (2 units of +tandard and (- units of 3remiumc. 1-- units of +tandard and (- units of 3remiumd. *% units of +tandard and &- units of 3remium

Answer: c Difficulty: 2 Objective: &Terms to Learn: product'mi" decisions, constraint+tandard ;1-- units " !mh< M 3remium ;(- units " # mh< = %*- machine'hours forthe current demand

T> F5/CD /CF)8AT/C A33/>+ T @>+T/C+ 1#- T)@D 1#2:)aines ?ompany manufactures three si6es of kitchen appliances: small, medium, andlarge. 3roduct information is provided belo$.

S!"ll Mediu! L"r'e

@nit selling price 1%- 2%- %--

@nit costs:4ariable manufacturing ;&-< ;12-< ;2-- F5/CD /CF)8AT/C A33/>+ T @>+T/C+ 1%& T)@D 1%*:Flo$ers For >veryone is considering replacing its e"isting delivery van $ith a ne$ one.The ne$ van can offer considerable savings in operating costs. /nformation about thee"isting van and the ne$ van follo$:

E+istin' #"n ,e- #"n

riginal cost 1--,--- 1*-,---Annual operating cost !%,--- 2-,---Accumulated depreciation &-,--- K ?urrent salvage value of the e"isting van #%,--- K )emaining life 1- years 1- years+alvage value in 1- years - -Annual depreciation #,--- 1*,---

1%&. +unk costs include:a. the original cost of the e"isting vanb. the original cost of the ne$ vanc. the current salvage value of the e"isting vand. the annual operating cost of the ne$ van

Answer: a Difficulty: 2 Objective: *Terms to Learn: sunk costs

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1%(. )elevant costs for this decision include:a. the original cost of the e"isting vanb. accumulated depreciationc. the current salvage valued. the salvage value in 1- years

Answer: c Difficulty: 2 Objective: *Terms to Learn: relevant costs

1%*. /f Flo$ers For >veryone replaces the e"isting delivery van $ith the ne$ one, overthe ne"t 1- years operating income $ill:a. decrease by 1*-,---b. increase by 1%-,---c. decrease by 1%-,---d. Cone of these ans$ers is correct.

Answer: b Difficulty: ! Objective: *Terms to Learn: relevant revenues, relevant costsCe$ van ;2-,--- " 1- years< G >"isting van ;!%,--- " 1- years< = 1%-,--- lessin operating costs, $hich results in a 1%-,--- increase in operating income.

T> F5/CD /CF)8AT/C A33/>+ T @>+T/C+ 1% T)@D 1&1:Frederick, /nc., is considering replacing a machine. The follo$ing data are available:

Repl"ce!ent

Old M"c.ine M"c.ine

riginal cost #%,--- !%,---@seful life in years 1- %

?urrent age in years % -0ook value 2%,--- '9isposal value no$ *,--- '9isposal value in % years - -Annual cash operating costs (,--- #,---

1%. 5hich of the data provided in the table is a sunk costa. the annual cash operating costs of the old machineb. the annual cash operating costs of the replacement machinec. the disposal value of the old machined. the original cost of the old machine

Answer: d Difficulty: 2 Objective: *Terms to Learn: sunk costs

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1&-. For the decision to keep the old machine, the relevant costs of keeping the oldmachine total:a. &-,---b. !%,---c. #(,---

d. (2,---Answer: b Difficulty: ! Objective: *Terms to Learn: relevant costs(,--- " % = !%,---

1&1. The difference bet$een keeping the old machine and replacing the old machine is:a. !(,--- in favor of keeping the old machineb. 12,--- in favor of keeping the old machinec. !(,--- in favor of replacing the old machined. 12,--- in favor of replacing the old machine

Answer: b Difficulty: ! Objective: *Terms to Learn: relevant costsCe$ !%,--- M ;% " #,---


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1. /f management takes a multiple'year vie$ in the decision model and Eudges successaccording to the current yearBs results, a problem $ill occur in the:a. decision modelb. performance evaluation modelc. production evaluation model

d. quantitative model

Answer: b Difficulty: 2 Objective: Terms to Learn: decision model

1&%. Top management faces a persistent challenge to make sure that the performanceevaluation model of lo$er level managers is:a. focused on short'term performanceb. based solely on quantitative factorsc. consistent $ith the decision modeld. not consistent $ith the decision model

Answer: d Difficulty: 2 Objective: Terms to Learn: decision model

1&&. The three steps involved in linear programming include all of the follo$ing>N?>3T:a. determining the obEectiveb. determining the basic relationshipc. computing the optimal solutiond. determining the relevant and irrelevant costs

Answer: d Difficulty: 2 Objective: Terms to Learn: linear programming ;31 from its camera linebecause of losses over the past quarter. The past three months of information formodel A>1 is summari6ed belo$:

+ales ;1,--- units< 2%-,---

8anufacturing costs: 9irect materials 1#-,--- 9irect labor ;1% per hour< !-,--- +upport 1--,---perating loss ;2-,--- 1 that has no resale value.

Re0uired1

+hould ackerott ?amera eliminate 8odel A>1 from its product line 5hy or $hynot

Ans-er1

Co, ackerott ?amera should not eliminate 8odel A>1 from its product linebecause it contributes 1-,--- to$ard fi"ed costs and profits.

+ales ;1,--- units< 2%-,---8anufacturing costs: 9irect materials 1#-,--- 9irect labor !-,--- 4ariable support ;1--,--- " (-O< (-,---?ontribution margin 1-,---

Difficulty: 2 Objective: (Terms to Learn: product'mi" decisions

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1(. The management accountant for the ?hocolate +7more ?ompany has prepared thefollo$ing income statement for the most current year:

C.ocol"te Ot.er C"ndy Fud'e Tot"l

+ales #-,--- 2%,--- !%,--- 1--,---

?ost of goods sold 2&,--- 1%,--- 1,--- &-,---?ontribution margin 1#,--- 1-,--- 1&,--- #-,---9elivery and ordering costs 2,--- !,--- 2,--- (,---)ent ;per sq. foot used< !,--- !,--- 2,--- *,---Allocated corporate costs %,--- %,--- %,--- 1%,---?orporate profit #,--- ;1,---< (,--- 1-,---

Re0uired1

a. 9o you recommend discontinuing the ther ?andy product line 5hy or $hynot

b. /f the ?hocolate product line had been discontinued, corporate profits for thecurrent year $ould have decreased by $hat amount

Ans-er1

a. Co, / $ould not recommend discontinuing the ther ?andy product linebecause this product line contributes #,--- to$ards corporate costs andprofits.2%,--- G 1%,--- G !,--- G !,--- = #,---5ithout the ther ?andy product line, corporate profits $ould be #,--- lessthan currently reported.

b. /f the ?hocolate product line $ere discontinued, corporate profits $ouldimmediately decrease by ,---.

#-,--- G 2&,--- G 2,--- G !,--- = ,---

Difficulty: ! Objective: (Terms to Learn: product'mi" decisions

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1*-. 3at, a 3i66eria manager, replaced the convection oven Eust si" months ago. Today,Turbo vens 8anufacturing announced the availability of a ne$ convection oventhat cooks more quickly $ith lo$er operating e"penses. 3at is considering thepurchase of this faster, lo$er'operating cost convection oven to replace the e"istingone they recently purchased. +elected information about the t$o ovens is given

belo$:E+istin' ,e- Tur)o O#en

riginal cost &-,--- %-,---Accumulated depreciation %,--- K ?urrent salvage value #-,--- K )emaining life % years % yearsAnnual operating e"penses 1-,--- (,%--9isposal value in % years - -

Re0uired1

a. 5hat costs are sunk

b. 5hat costs are relevantc. 5hat are the net cash flo$s over the ne"t % years assuming the 3i66eria

purchases the ne$ convection ovend. 5hat other items should 3at, as manager of the 3i66eria, consider $hen

making this decision

Ans-er1

a. +unk costs include the original cost of the e"isting convection oven and theaccompanying accumulated depreciation.

b. )elevant costs include:Acquisition cost of the ne$ Turbo oven

?urrent disposal value of the e"isting convection ovenAnnual operating e"penses for the e"isting and the ne$ Turbo oven

c. Cet cash flo$s over % years $ith the ne$ Turbo oven:

&ash inflow:9ecrease in annual operating e"penses ;2,%-- " %< 12,%--+ale of the e"isting oven #-,---

&ash outflow:Acquisition of the ne$ Turbo oven ;%-,--- arnings lost ne"t year due to the hours you are not able to $ork

because of classes and home$ork.2. As a result of graduating a year earlier, higher $ages $ill be earned a

year earlier as $ell.

b. +unk costs for this decision include:1. Amounts paid for college tuition and books during the past t$o years.2. Amounts committed for college tuition and books for the remaining t$o

years.

c. A qualitative consideration $ould include having different activities andpriorities than your friends $ho are students, graduating later than students$ho started college the same time you did, and retaining information over theyear off from school.

Difficulty: 2 Objectives: 2, !Terms to Learn: relevant costs, opportunity cost, qualitative factors

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1*&. A restaurant is deciding $hether it $ants to update its image or not. /t currently hasa co6y appeal $ith an outdated dUcor that is still in good condition, menus andcarpet that need to be replaced any$ay, and loyal customers.

/dentify for the restaurant management

a. those costs that are relevant to this decision,b. those costs that are not differential,c. and qualitative considerations.

Ans-er1

For the decision of $hether to update the restaurant7s image:a. )elevant costs include a one'time cost of the renovation for the updated

image, and a change in future sales $hich includes an increase in sales due tothe updated image, decrease in sales due to loss of that co6y appeal, and lossof sales due to being closed or having a limited serving area duringrenovation.

b. ?osts that are not differential include replacing the menus and the carpet sincethey need to be replaced $hether the image is updated or not.

c. ualitative considerations include $hether the restaurant $ill lose that co6yappeal it currently has, if the restaurant needs to be closed for renovations itmay result in loss of customers, and ne$ customers may not be the type ofcustomer they $ant to attract.

Difficulty: 2 Objectives: 2, !Terms to Learn: relevant costs, qualitative factors, differential cost

1*(. Are relevant revenues and relevant costs the only information needed by managersto select among alternatives >"plain using e"amples.

Ans-er1

Co, relevant revenues and costs provide a financial analysis but do not take intoconsideration qualitative implications. /n a make'or'buy decision, e"amples ofqualitative issues include the supplier7s ability to meet e"pected quality anddelivery standards, and the likelihood that suppliers increase prices of thecomponents in the future.

Difficulty: 2 Objective: !Terms to Learn: relevant costs, relevant revenues

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1**. @nder $hat conditions might a manufacturing firm sell a product for less than itslong'term price 5hy

Ans-er1

The price for a short'term order may be less than the price offered to a long'term

customer. /f a firm has e"cess capacity that is sitting idle, it is more profitable forthe firm to accept a special order for a price belo$ the long'run price than it is to letthe capacity sit idle. /n addition, the firm may use this strategy for marketpenetration and to obtain greater market share.

Difficulty: 2 Objective: !Terms to Learn: one'time'only special order

1*. For short'term pricing decisions, $hat costs are relevant $hen there is availablesurplus capacity 5hen there is no available surplus capacity

Ans-er1For both situations the relevant costs are the future incremental costs. o$ever,$hen there is limited capacity the incremental costs $ill be greater because they$ill include the costs of adding capacity or the opportunity costs of alternativemanufacturing choices.

Difficulty: 2 Objective: %Terms to Learn: one'time'only special order, incremental cost

1-. o$ does a manager go about choosing $hich of three products to produce and sell$hen each product uses a single machine $ith a limited capacity

Ans-er1

8anagement should attempt to ma"imi6e output from the machine $hich is thelimited resource. This involves ma"imi6ing the contribution margin per unit of thescarce resource. First of all, management needs to determine the contributionmargin of each of the three products. Then, the time that it takes to produce a unitof each of the three products should be determined. Then, a contribution margin permachine hour can be calculated. The first product that should be produced is theone $ith the highest contribution margin per machine hour.

Difficulty: 2 Objective: &Terms to Learn: product'mi" decisions, incremental cost

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11. 9oggie 9inner, /nc., currently manufactures three different types of scientificallybalanced dog food. The firm is considering eliminating one of the three products.5hat factors should be taken into account in making this decision

Ans-er1

/n deciding $hether or not to eliminate a product, the firm should determine if coststhat can be eliminated $ill e"ceed the revenues that $ill be lost. The firm needs toclassify the costs into those costs $hich $ill be eliminated and therefore arerelevant, and $hich costs $ill continue even if the product is deleted. ?osts thatoften continue are those costs $hich have been allocated rather than incurreddirectly by the product. The firm must also look to see if any other products may beharmed by the elimination of the product. 8aybe the products are complements,and loss of one sale $ill result in loss of another. The firm should consider $hetheranother productBs sales might increase if the product is deleted, $hich could be anopportunity to earn more contribution from another area. ?an the firm use the spacefreed up for some other purpose that could generate additional inflo$s, $hich is an

opportunity cost The firm must also look at ho$ its reputation among itscustomers for selling a full line of products might be damaged as a result of thisdecision.

Difficulty: 2 Objective: (Terms to Learn: product'mi" decisions

12. o$ can conflicts arise bet$een the decision model and the performance evaluationmodel used to evaluate managers 3rovide an e"ample of this type of conflict.

Ans-er1

+ince managers $ill act in their self interest, they $ill make decisions that maketheir o$n performance look best. At times, this does not lead to the best decisionfor the firm. An e"ample of this situation might include evaluating a managersperformance on short'term results, $hen the firm $ould like decisions made that$ould ma"imi6e long term performance.

Difficulty: 2 Objective: Terms to Learn: decision model

decision making and relevant costing test

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