Cost Accounting, 13e (Horngren et al.) 
Chapter 11   

Decision Making and Relevant Information


58) 

A decision model involves: 
A) 

only quantitative analyses 
B) 

both quantitative and qualitative analyses 
C) 

only qualitative analyses 
D) 

a manager's instinct 
Answer:  

B 
Diff: 1 
Terms:  

decision model 
Objective:  

1 
AACSB:  

Reflective thinking


59) 

Feedback regarding previous actions may affect:  
A) 

future predictions  
B) 

implementation of the decision  
C) 

the decision model  
D) 

All of these answers are correct.  
Answer:  

D 
Diff: 2 
Terms:  

decision model 
Objective:  

1 
AACSB:  

Reflective thinking 
60) 

Place the following steps from the five-step decision process in order:
	A = Make predictions about future costs
	B = Evaluate performance to provide feedback
	C = Implement the decision
	D = Choose an alternative  
A) 

D C A B  
B) 

C D A B  
C) 

A D C B  
D) 

D C B A  
Answer:  

C 
Diff: 2 
Terms:  

decision model 
Objective:  

1 
AACSB:  

Reflective thinking

61) 

The formal process of choosing between alternatives is known as a(n):  
A) 

relevant model  
B) 

decision model  
C) 

alternative model  
D) 

prediction model  
Answer:  

B 
Diff: 1 
Terms:  

decision model 
Objective:  

1 
AACSB:  

Reflective thinking


62) 

Ruggles Circuit Company manufactures circuit boards for other firms. Management is attempting to search for ways to reduce manufacturing labor costs and has received a proposal from a consulting company to rearrange the production floor next year. Using the information below regarding current operations and the new proposal, which of the following decisions should management accept? 

	Currently	Proposed
Required machine operators	5	4.5
Materials-handling workers	1.25	1.25
Employee average pay	$8 per hour	$9 per hour
Hours worked per employee	2,100	2,000
 
A) 

Do not change the production floor.  
B) 

Rearrange the production floor.  
C) 

Either, because it makes no difference to the employees.  
D) 

It doesn't matter because the costs incurred will remain the same.  
Answer:  

B 
Explanation:  

B) 

Current operations:	5 workers ? 2,100 hours ? $8.00 = $84,000
Proposal: 4.5 workers ? 2,000 hours ? $9.00 = $81,000 

Diff: 2 
Terms:  

decision model 
Objective:  

1 
AACSB:  

Analytical skills 
Answer the following questions using the information below:

LeBlanc Lighting manufactures small flashlights and is considering raising the price by 50 cents a unit for the coming year. With a 50-cent price increase, demand is expected to fall by 3,000 units.

	Currently	Projected
	Demand	20,000 units	17,000 units
	Selling price	$4.50	$5.00
	Incremental cost per unit	$3.00	$3.00
 
63) 

If the price increase is implemented, operating profit is projected to:  
A) 

increase by $4,000  
B) 

decrease by $4,000  
C) 

increase by $6,000  
D) 

decrease by $4,500  
Answer:  

A 
Explanation:  

A) 

[17,000 ? ($5 - $3)] - [20,000 ? ($4.50 - $3.00)] = increase of $4,000  
Diff: 2 
Terms:  

decision model 
Objective:  

1 
AACSB:  

Analytical skills


64) 

Would you recommend the 50-cent price increase?  
A) 

No, because demand decreased.  
B) 

No, because the selling price increases.  
C) 

Yes, because contribution margin per unit increases.  
D) 

Yes, because operating profits increase.  
Answer:  

D 
Diff: 2 
Terms:  

decision model 
Objective:  

1 
AACSB:  

Analytical skills

65) 

When using the five-step decision process, which one of the following steps should be done last?  
A) 

Obtain information  
B) 

Choose an alternative  
C) 

Evaluation and feedback  
D) 

Implementing the decision  
Answer:  

C 
Diff: 2 
Terms:  

decision model 
Objective:  

1 
AACSB:  

Reflective thinking

66) 

When using the five-step decision process, which one of the following steps should be done first?  
A) 

Obtain information  
B) 

Choose an alternative  
C) 

Evaluation and feedback  
D) 

Implementing the decision  
Answer:  

A 
Diff: 2 
Terms:  

decision model 
Objective:  

1 
AACSB:  

Reflective thinking 
67) 

For decision making, a listing of the relevant costs:  
A) 

will help the decision maker concentrate on the pertinent data  
B) 

will only include future costs  
C) 

will only include costs that differ among alternatives  
D) 

All of these answers are correct.  
Answer:  

D 
Diff: 2 
Terms:  

relevant costs 
Objective:  

2 
AACSB:  

Reflective thinking

68) 

Sunk costs: 
A) 

are future costs 
B) 

are past costs 
C) 

have future implications 
D) 

are relevant to all decisions 
Answer:  

B 
Diff: 2 
Terms:  

sunk costs 
Objective:  

2 
AACSB:  

Reflective thinking

69) 

Sunk costs:  
A) 

are relevant  
B) 

are differential  
C) 

have future implications  
D) 

are ignored when evaluating alternatives  
Answer:  

D 
Diff: 1 
Terms:  

relevant costs, sunk costs 
Objective:  

2 
AACSB:  

Reflective thinking

70) 

A computer system installed last year is an example of a(n):  
A) 

sunk cost  
B) 

relevant cost  
C) 

differential cost  
D) 

avoidable cost  
Answer:  

A 
Diff: 1 
Terms:  

sunk costs 
Objective:  

2 
AACSB:  

Use of Information Technology

71) 

Costs that CANNOT be changed by any decision made now or in the future are:  
A) 

fixed costs  
B) 

indirect costs  
C) 

avoidable costs  
D) 

sunk costs  
Answer:  

D 
Diff: 1 
Terms:  

sunk costs 
Objective:  

2 
AACSB:  

Reflective thinking 
72) 

In evaluating different alternatives, it is useful to concentrate on:  
A) 

variable costs  
B) 

fixed costs  
C) 

total costs  
D) 

relevant costs  
Answer:  

D 
Diff: 1 
Terms:  

relevant costs 
Objective:  

2 
AACSB:  

Reflective thinking

73) 

Which of the following costs always differ among future alternatives?  
A) 

fixed costs  
B) 

historical costs  
C) 

relevant costs  
D) 

variable costs  
Answer:  

C 
Diff: 1 
Terms:  

relevant costs 
Objective:  

2 
AACSB:  

Reflective thinking

74) 

Which of the following costs are never relevant in the decision-making process?  
A) 

fixed costs  
B) 

historical costs  
C) 

relevant costs  
D) 

variable costs  
Answer:  

B 
Diff: 1 
Terms:  

relevant costs 
Objective:  

2 
AACSB:  

Reflective thinking

Answer the following questions using the information below:

Jim's 5-year-old Geo Prizm requires repairs estimated at $3,000 to make it roadworthy again. His friend, Julie, suggested that he should buy a 5-year-old used Honda Civic instead for $3,000 cash. Julie estimated the following costs for the two cars:

	Geo Prizm	Honda Civic
	Acquisition cost	$15,000	$3,000
	Repairs	$ 3,000	?
	Annual operating costs
	(Gas, maintenance, insurance)	$ 2,280	$2,100
 
75) 

The cost NOT relevant for this decision is the:  
A) 

acquisition cost of the Geo Prizm  
B) 

acquisition cost of the Honda Civic  
C) 

repairs to the Geo Prizm  
D) 

annual operating costs of the Honda Civic  
Answer:  

A 
Diff: 2 
Terms:  

relevant costs 
Objective:  

2 
AACSB:  

Analytical skills 
76) 

What should Jim do? What are his savings in the first year?  
A) 

Buy the Honda Civic; $9,780  
B) 

Fix the Geo Prizm; $5,518  
C) 

Buy the Honda Civic; $180  
D) 

Fix the Geo Prizm; $5,280  
Answer:  

C 
Explanation:  

C) 

Geo ($3,000 + $2,280) - Honda ($3,000 + $2,100) = $180 cost savings with the Honda option 

Diff: 2 
Terms:  

relevant costs 
Objective:  

2 
AACSB:  

Analytical skills


77) 

A relevant revenue is a revenue that is a(n):  
A) 

past revenue  
B) 

future revenue  
C) 

in-hand revenue  
D) 

earned revenue  
Answer:  

B 
Diff: 2 
Terms:  

relevant revenues 
Objective:  

2 
AACSB:  

Reflective thinking

78) 

A relevant cost is a cost that is a (n): 
A) 

future cost 
B) 

past cost 
C) 

sunk cost 
D) 

non-cash expense 
Answer:  

A 
Diff: 2 
Terms:  

relevant costs 
Objective:  

2 
AACSB:  

Reflective thinking

79) 

Relevant information has all of these characteristics EXCEPT: 
A) 

past costs are irrelevant 
B) 

all future revenues and expenses are relevant 
C) 

different alternatives can be compared by examining differences in total revenue and expenses 
D) 

qualitative factors should be considered 
Answer:  

B 
Diff: 2 
Terms:  

relevant revenues, relevant costs 
Objective:  

2 
AACSB:  

Reflective thinking

80) 

Quantitative factors:  
A) 

include financial information, but not nonfinancial information  
B) 

can be expressed in monetary terms  
C) 

are always relevant when making decisions  
D) 

include employee morale  
Answer:  

B 
Diff: 2 
Terms:  

quantitative factors 
Objective:  

2 
AACSB:  

Reflective thinking 
81) 

Qualitative factors:  
A) 

generally are easily measured in quantitative terms  
B) 

are generally irrelevant for decision making  
C) 

may include either financial or nonfinancial information  
D) 

include customer satisfaction  
Answer:  

D 
Diff: 2 
Terms:  

qualitative factors 
Objective:  

2 
AACSB:  

Reflective thinking

82) 

Historical costs are helpful:  
A) 

for making future predictions  
B) 

for decision making  
C) 

because they are quantitative  
D) 

None of these answers is correct.  
Answer:  

A 
Diff: 2 
Terms:  

relevant costs 
Objective:  

2 
AACSB:  

Reflective thinking

83) 

When making decisions:  
A) 

quantitative factors are the most important  
B) 

qualitative factors are the most important  
C) 

appropriate weight must be given to both quantitative and qualitative factors  
D) 

both quantitative and qualitative factors are unimportant  
Answer:  

C 
Diff: 2 
Terms:  

qualitative factors, quantitative factors 
Objective:  

2 
AACSB:  

Ethical reasoning

84) 

Employee morale at Dos Santos, Inc., is very high. This type of information is known as a:  
A) 

qualitative factor  
B) 

quantitative factor  
C) 

nonmeasurable factor  
D) 

financial factor  
Answer:  

A 
Diff: 1 
Terms:  

qualitative factors 
Objective:  

2 
AACSB:  

Reflective thinking

85) 

Roberto owns a small body shop. His major costs include labor, parts, and rent. In the decision-making process, these costs are considered to be:  
A) 

fixed  
B) 

qualitative factors  
C) 

quantitative factors  
D) 

variable  
Answer:  

C 
Diff: 1 
Terms:  

qualitative factors 
Objective:  

2 
AACSB:  

Reflective thinking 

86) 

One-time-only special orders should only be accepted if:  
A) 

incremental revenues exceed incremental costs  
B) 

differential revenues exceed variable costs  
C) 

incremental revenues exceed fixed costs  
D) 

total revenues exceed total costs  
Answer:  

A 
Diff: 3 
Terms:  

one-time-only special order, incremental revenue 
Objective:  

2 
AACSB:  

Reflective thinking

87) 

When deciding to accept a one-time-only special order from a wholesaler, management should do all of the following EXCEPT:  
A) 

analyze product costs  
B) 

consider the special order's impact on future prices of their products  
C) 

determine whether excess capacity is available  
D) 

verify past design costs for the product  
Answer:  

D 
Diff: 3 
Terms:  

one-time-only special order 
Objective:  

2 
AACSB:  

Reflective thinking

88) 

When there is excess capacity, it makes sense to accept a one-time-only special order for less than the current selling price when:  
A) 

incremental revenues exceed incremental costs  
B) 

additional fixed costs must be incurred to accommodate the order  
C) 

the company placing the order is in the same market segment as your current customers  
D) 

it never makes sense  
Answer:  

A 
Diff: 3 
Terms:  

one-time-only special order, incremental cost, incremental revenue 
Objective:  

2 
AACSB:  

Reflective thinking

89) 

Full cost of the product is: 
A) 

the sum of fixed costs in all the business functions of the value chain 
B) 

the sum of variable costs in all the business functions of the value chain 
C) 

the sum of all variable and fixed costs in all the business functions of the value chain 
D) 

the sum of all costs in the value chain minus marketing costs 
Answer:  

C 
Diff: 3 
Terms:  

full costs of the product 
Objective:  

2 
AACSB:  

Reflective thinking 

Answer the following questions using the information below:

Welch Manufacturing is approached by a European customer to fulfill a one-time-only special order for a product similar to one offered to domestic customers. Welch Manufacturing has excess capacity. The following per unit data apply for sales to regular customers:

	Variable costs:
	Direct materials	$40
	Direct labor	20
	Manufacturing support	35
	Marketing costs	15
	Fixed costs:
	Manufacturing support	45
	Marketing costs	15
	Total costs	170
	Markup (50%)	85
	Targeted selling price	$255


90) 

What is the full cost of the product per unit?  
A) 

$110  
B) 

$170  
C) 

$255  
D) 

$85  
Answer:  

B 
Explanation:  

B) 

$40 + $20 + $35 + $15 + $45 + $15 = $170 

Diff: 3 
Terms:  

full costs of the product 
Objective:  

2 
AACSB:  

Analytical skills

91) 

What is the contribution margin per unit?  
A) 

$85  
B) 

$110  
C) 

$145  
D) 

$255  
Answer:  

C 
Explanation:  

C) 

$255 - ($40 + $20 + $35 + $15) = $145 

Diff: 3 
Terms:  

one-time-only special order 
Objective:  

2 
AACSB:  

Analytical skills


92) 

For Welch Manufacturing, what is the minimum acceptable price of this special order?  
A) 

$110  
B) 

$145  
C) 

$170  
D) 

$255  
Answer:  

A 
Explanation:  

A) 

$40 + $20 + $35 + $15 = $110  
Diff: 3 
Terms:  

one-time-only special order 
Objective:  

2 
AACSB:  

Analytical skills 
93) 

What is the change in operating profits if the one-time-only special order for 1,000 units is accepted for $180 a unit by Welch?  
A) 

$70,000 increase in operating profits  
B) 

$10,000 increase in operating profits  
C) 

$10,000 decrease in operating profits  
D) 

$75,000 decrease in operating profits  
Answer:  

A 
Explanation:  

A) 

$180 - ($40 + $20 + $35 + $15) = $70; 1,000 ? $70 = $70,000 increase  
Diff: 3 
Terms:  

one-time-only special order 
Objective:  

2 
AACSB:  

Analytical skills

94) 

Ratzlaff Company has a current production level of 20,000 units per month. Unit costs at this level are: 

Direct materials	$0.25
Direct labor	0.40
Variable overhead	0.15
Fixed overhead	0.20
Marketing - fixed	0.20
Marketing/distribution - variable	0.40

Current monthly sales are 18,000 units. Jim Company has contacted Ratzlaff Company about purchasing 1,500 units at $2.00 each. Current sales would not be affected by the one-time-only special order, and variable marketing/distribution costs would not be incurred on the special order. What is Ratzlaff Company's change in operating profits if the special order is accepted?  
A) 

$400 increase in operating profits  
B) 

$400 decrease in operating profits  
C) 

$1,800 increase in operating profits  
D) 

$1,800 decrease in operating profits  
Answer:  

C 
Explanation:  

C) 

Manufacturing cost per unit = $0.25 + $0.40 + $0.15 = $0.80 1,500 ? ($2.00 - $0.80) = $1,800 increase 

Diff: 3 
Terms:  

one-time-only special order 
Objective:  

2 
AACSB:  

Analytical skills


95) 

Black Tool Company has a production capacity of 1,500 units per month, but current production is only 1,250 units. The manufacturing costs are $60 per unit and marketing costs are $16 per unit. Doug Hall offers to purchase 250 units at $76 each for the next five months. Should Black accept the one-time-only special order if only absorption-costing data are available?  
A) 

Yes, good customer relations are essential.  
B) 

No, the company will only break even.  
C) 

No, since only the employees will benefit.  
D) 

Yes, since operating profits will most likely increase.  
Answer:  

D 
Explanation:  

D) 

Since the $60 absorption cost per unit is most likely not all variable costs and since the entire $16 per unit of marketing costs may not be incurred, operating profits will most likely increase. 

Diff: 3 
Terms:  

one-time-only special order 
Objective:  

2 
AACSB:  

Analytical skills 
Answer the following questions using the information below:

Grant's Kitchens is approached by Ms. Tammy Wang, a new customer, to fulfill a large one-time-only special order for a product similar to one offered to regular customers. The following per unit data apply for sales to regular customers:

	Direct materials	$455
	Direct labor	300
	Variable manufacturing support	45
	Fixed manufacturing support	100
	Total manufacturing costs	900
	Markup (60%)	540
	Targeted selling price	$1440

Grant's Kitchens has excess capacity. Ms. Wang wants the cabinets in cherry rather than oak, so direct material costs will increase by $30 per unit.
 
96) 

For Grant's Kitchens, what is the minimum acceptable price of this one-time-only special order?  
A) 

$830  
B) 

$930  
C) 

$785  
D) 

$1,440  
Answer:  

A 
Explanation:  

A) 

$455 + $300 + $45 + $30 = $830  
Diff: 2 
Terms:  

one-time-only special order 
Objective:  

2 
AACSB:  

Analytical skills


97) 

Other than price, what other items should Grant's Kitchens consider before accepting this one-time-only special order?  
A) 

reaction of shareholders  
B) 

reaction of existing customers to the lower price offered to Ms. Wang  
C) 

demand for cherry cabinets  
D) 

price is the only consideration 
Answer:  

B 
Diff: 2 
Terms:  

one-time-only special order, qualitative factors 
Objective:  

2 
AACSB:  

Analytical skills

98) 

If Ms. Wang wanted a long-term commitment for supplying this product, this analysis:  
A) 

would definitely be different  
B) 

may be different  
C) 

would not be different  
D) 

does not contain enough information to determine if there would be a difference  
Answer:  

A 
Diff: 2 
Terms:  

one-time-only special order 
Objective:  

2 
AACSB:  

Analytical skills 
99) 

An example of a quantitative factor for the decision-making process is:  
A) 

customer satisfaction  
B) 

employee morale  
C) 

product quality  
D) 

manufacturing overhead  
Answer:  

D 
Diff: 1 
Terms:  

quantitative factors 
Objective:  

2 
AACSB:  

Reflective thinking

100) 

If there was limited capacity, all of the following amounts would change EXCEPT:  
A) 

opportunity costs  
B) 

differential costs  
C) 

variable costs  
D) 

the minimum acceptable price  
Answer:  

C 
Diff: 3 
Terms:  

constraint 
Objective:  

3 
AACSB:  

Reflective thinking


Answer the following questions using the information below:

Northwoods manufactures rustic furniture. The cost accounting system estimates manufacturing costs to be $90 per table, consisting of 80% variable costs and 20% fixed costs. The company has surplus capacity available. It is Northwoods' policy to add a 50% markup to full costs.
 
101) 

Northwoods is invited to bid on a one-time-only special order to supply 100 rustic tables. What is the lowest price Northwoods should bid on this special order?  
A) 

$6,300  
B) 

$7,200  
C) 

$9,000  
D) 

$13,500  
Answer:  

B 
Explanation:  

B) 

$90 ? 80% ? 100 tables = $7,200 

Diff: 2 
Terms:  

one-time-only special order 
Objective:  

2 
AACSB:  

Analytical skills

102) 

A large hotel chain is currently expanding and has decided to decorate all new hotels using the rustic style. Northwoods Incorporated is invited to submit a bid to the hotel chain. What is the lowest price per unit Northwoods should bid on this long-term order?  
A) 

$63  
B) 

$72  
C) 

$90  
D) 

$135  
Answer:  

D 
Explanation:  

D) 

$90 + ($90 ? 50%) = $135 

Diff: 2 
Terms:  

one-time-only special order 
Objective:  

2 
AACSB:  

Analytical skills 

103) 

Cochran Corporation has a plant capacity of 100,000 units per month. Unit costs at capacity are:

Direct materials	$4.00
Direct labor	6.00
Variable overhead	3.00
Fixed overhead	1.00
Marketing?fixed	7.00
Marketing/distribution?variable	3.60

Current monthly sales are 95,000 units at $30.00 each. Suzie, Inc., has contacted Cochran Corporation about purchasing 2,000 units at $24.00 each. Current sales would not be affected by the one-time-only special order. What is Cochran's change in operating profits if the one-time-only special order is accepted?  
A) 

$14,800 increase  
B) 

$17,200 increase  
C) 

$22,000 increase  
D) 

$33,200 increase  
Answer:  

A 
Explanation:  

A) 

($4.00 + $6.00 + $3.00 + $3.60) = $16.60
($24.00 - $16.60) ? 2,000 = $14,800 increase  
Diff: 3 
Terms:  

one-time-only special order 
Objective:  

2 
AACSB:  

Analytical skills

104) 

The sum of all the costs incurred in a particular business function (for example, marketing) is called the:  
A) 

business function cost  
B) 

full product cost  
C) 

gross product cost  
D) 

multiproduct cost  
Answer:  

A 
Diff: 1 
Terms:  

business function costs 
Objective:  

2 
AACSB:  

Reflective thinking

105) 

The sum of all costs incurred in all business functions in the value chain (product design, manufacturing, marketing, and customer service, for example) is known as the:  
A) 

business cost  
B) 

full product cost  
C) 

gross product cost  
D) 

multiproduct cost  
Answer:  

B 
Diff: 1 
Terms:  

full costs of the product 
Objective:  

2 
AACSB:  

Reflective thinking 

106) 

An example of a qualitative factor for the decision-making process is:  
A) 

customer satisfaction  
B) 

units sold  
C) 

material cost  
D) 

labor hours incurred  
Answer:  

A 
Diff: 2 
Terms:  

qualitative factors 
Objective:  

2 
AACSB:  

Ethical reasoning

107) 

Outsourcing is: 
A) 

purchasing goods and services internally 
B) 

never a viable option 
C) 

more desirable than insourcing 
D) 

purchasing goods and services from outside vendors 
Answer:  

D 
Diff: 2 
Terms:  

outsourcing 
Objective:  

2 
AACSB:  

Reflective thinking

108) 

Insourcing is: 
A) 

purchasing goods and services internally 
B) 

purchasing goods and services from outside vendors 
C) 

more expensive than outsourcing 
D) 

less expensive than outsourcing 
Answer:  

A 
Diff: 2 
Terms:  

insourcing 
Objective:  

2 
AACSB:  

Reflective thinking

109) 

Problems that should be avoided when identifying relevant costs include all of the following EXCEPT:  
A) 

assuming all variable costs are relevant  
B) 

assuming all fixed costs are irrelevant  
C) 

using unit costs that do not separate variable and fixed components  
D) 

using total costs that separate variable and fixed components  
Answer:  

D 
Diff: 2 
Terms:  

relevant costs 
Objective:  

2 
AACSB:  

Reflective thinking

110) 

The BEST way to avoid misidentification of relevant costs is to focus on:  
A) 

expected future costs that differ among the alternatives  
B) 

historical costs  
C) 

unit fixed costs  
D) 

total unit costs  
Answer:  

A 
Diff: 2 
Terms:  

relevant costs 
Objective:  

2 
AACSB:  

Reflective thinking 
111) 

Factors used to decide whether to outsource a part include:  
A) 

the supplier's cost of direct materials  
B) 

if the supplier is reliable  
C) 

the original cost of equipment currently used for production of that part  
D) 

past design costs used to develop the current composition of the part  
Answer:  

B 
Diff: 2 
Terms:  

outsourcing, make-or-buy decision 
Objective:  

2 
AACSB:  

Reflective thinking

112) 

Relevant costs of a make-or-buy decision include all of the following EXCEPT:  
A) 

fixed salaries that will not be incurred if the part is outsourced  
B) 

current direct material costs of the part  
C) 

special machinery for the part that has no resale value  
D) 

material-handling costs that can be eliminated  
Answer:  

C 
Diff: 3 
Terms:  

relevant costs, outsourcing, make-or-buy decision 
Objective:  

2 
AACSB:  

Reflective thinking

113) 

Which of following are risks of outsourcing the production of a part?  
A) 

unpredictable quality  
B) 

unreliable delivery  
C) 

unscheduled price increases  
D) 

All of these answers are correct.  
Answer:  

D 
Diff: 1 
Terms:  

outsourcing, make-or-buy decision 
Objective:  

2 
AACSB:  

Reflective thinking

114) 

Which of the following minimize the risks of outsourcing?  
A) 

the use of short-term contracts that specify price  
B) 

the responsibility for on-time delivery is now the responsibility of the supplier  
C) 

building close relationships with the supplier  
D) 

All of these answers are correct.  
Answer:  

C 
Diff: 3 
Terms:  

outsourcing, make-or-buy decision 
Objective:  

2 
AACSB:  

Reflective thinking


115) 

The cost to produce Part A was $10 per unit in 20X3 and in 20X4 it has increased to $11 per unit. In 20X4, Supplier XYZ has offered to supply Part A for $9 per unit. For the make-or-buy decision:  
A) 

incremental revenues are $2 per unit  
B) 

incremental costs are $1 per unit  
C) 

net relevant costs are $1 per unit  
D) 

differential costs are $2 per unit  
Answer:  

D 
Diff: 2 
Terms:  

outsourcing, make-or-buy decision 
Objective:  

2 
AACSB:  

Analytical skills 
116) 

When evaluating a make-or-buy decision, which of the following does NOT need to be considered?  
A) 

alternative uses of the production capacity  
B) 

the original cost of the production equipment  
C) 

the quality of the supplier's product  
D) 

the reliability of the supplier's delivery schedule  
Answer:  

B 
Diff: 2 
Terms:  

outsourcing, make-or-buy decision 
Objective:  

2 
AACSB:  

Reflective thinking

117) 

For make-or-buy decisions, a supplier's ability to deliver the item on a timely basis is considered a(n):  
A) 

qualitative factor  
B) 

relevant cost  
C) 

differential factor  
D) 

opportunity cost  
Answer:  

A 
Diff: 1 
Terms:  

outsourcing, make-or-buy decision 
Objective:  

2 
AACSB:  

Reflective thinking

118) 

The incremental costs of producing one more unit of product include all of the following EXCEPT:  
A) 

direct materials  
B) 

direct labor  
C) 

variable overhead costs  
D) 

fixed overhead costs  
Answer:  

D 
Diff: 2 
Terms:  

incremental cost 
Objective:  

2 
AACSB:  

Reflective thinking


119) 

Direct materials $40, direct labor $10, variable overhead costs $30, and fixed overhead costs $20. In the short term, the incremental cost of one unit is:  
A) 

$30  
B) 

$50  
C) 

$80  
D) 

$100  
Answer:  

C 
Diff: 2 
Terms:  

incremental cost 
Objective:  

2 
AACSB:  

Analytical skills

120) 

Unit cost data can MOST mislead decisions by:  
A) 

not computing fixed overhead costs  
B) 

computing labor and materials costs only  
C) 

computing administrative costs  
D) 

not computing unit costs at the same output level  
Answer:  

D 
Diff: 1 
Terms:  

full costs of the product 
Objective:  

2 
AACSB:  

Reflective thinking 
121) 

Schmidt Sewing Company incorporates the services of Deb's Sewing. Schmidt purchases pre-cut dresses from Deb's. This is primarily known as:  
A) 

insourcing  
B) 

outsourcing  
C) 

relevant costing  
D) 

sunk costing  
Answer:  

B 
Diff: 1 
Terms:  

outsourcing 
Objective:  

2 
AACSB:  

Reflective thinking

122) 

Pearce Sign Company manufactures signs from direct materials to the finished product. This is considered:  
A) 

insourcing  
B) 

outsourcing  
C) 

relevant costing  
D) 

sunk costing  
Answer:  

A 
Diff: 1 
Terms:  

insourcing 
Objective:  

2 
AACSB:  

Reflective thinking


123) 

Which of the following would NOT be considered in a make-or-buy decision?  
A) 

fixed costs that will no longer be incurred  
B) 

variable costs of production  
C) 

potential rental income from space occupied by the production area  
D) 

unchanged supervisory costs  
Answer:  

D 
Diff: 2 
Terms:  

make-or-buy decision 
Objective:  

2 
AACSB:  

Reflective thinking 
Answer the following questions using the information below:

Konrade's Engine Company manufactures part TE456 used in several of its engine models. Monthly production costs for 1,000 units are as follows:

	Direct materials	$ 40,000
	Direct labor	10,000
	Variable overhead costs	30,000
	Fixed overhead costs	20,000
	Total costs	$100,000

It is estimated that 10% of the fixed overhead costs assigned to TE456 will no longer be incurred if the company purchases TE456 from the outside supplier. Konrade's Engine Company has the option of purchasing the part from an outside supplier at $85 per unit.
 
124) 

If Konrade's Engine Company accepts the offer from the outside supplier, the monthly avoidable costs (costs that will no longer be incurred) total:  
A) 

$ 82,000  
B) 

$ 98,000 
C) 

$ 50,000  
D) 

$100,000  
Answer:  

A 
Explanation:  

A) 

$40,000 + $10,000 + $30,000 + ($20,000 ? 10%) = $82,000  
Diff: 2 
Terms:  

make-or-buy decision, outsourcing 
Objective:  

2 
AACSB:  

Analytical skills

125) 

If Konrade's Engine Company purchases 1,000 TE456 parts from the outside supplier per month, then its monthly operating income will:  
A) 

increase by $2,000  
B) 

increase by $80,000  
C) 

decrease by $3,000  
D) 

decrease by $85,000  
Answer:  

C 
Explanation:  

C) 

Avoidable costs $82,000 - ($85 ? 1,000 units) = decrease of $3,000 

Diff: 2 
Terms:  

make-or-buy decision, outsourcing 
Objective:  

2 
AACSB:  

Analytical skills


126) 

The maximum price that Konrade's Engine Company should be willing to pay the outside supplier is:  
A) 

$80 per TE456 part  
B) 

$82 per TE456 part  
C) 

$98 per TE456 part  
D) 

$100 per TE456 part  
Answer:  

B 
Explanation:  

B) 

Avoidable costs $82,000 / 1,000 units = $82 per part 

Diff: 2 
Terms:  

make-or-buy decision, outsourcing 
Objective:  

2 
AACSB:  

Analytical skills 
Answer the following questions using the information below:

Schmidt Corporation produces a part that is used in the manufacture of one of its products. The costs associated with the production of 10,000 units of this part are as follows:

	Direct materials	$ 45,000
	Direct labor	65,000
	Variable factory overhead	30,000
	Fixed factory overhead	70,000
	Total costs	$210,000

Of the fixed factory overhead costs, $30,000 is avoidable.
 
127) 

Phil Company has offered to sell 10,000 units of the same part to Schmidt Corporation for $18 per unit. Assuming there is no other use for the facilities, Schmidt should:  
A) 

make the part, as this would save $3 per unit  
B) 

buy the part, as this would save $3 per unit  
C) 

buy the part, as this would save the company $30,000  
D) 

make the part, as this would save $1 per unit  
Answer:  

D 
Explanation:  

D) 

Avoidable costs total $170,000 = $45,000 + $65,000 + $30,000 + $30,000.
$18 - ($170,000/10,000) = $1 

Diff: 3 
Terms:  

make-or-buy decision, outsourcing 
Objective:  

2 
AACSB:  

Analytical skills

128) 

Assuming no other use of their facilities, the highest price that Schmidt should be willing to pay for 10,000 units of the part is:  
A) 

$210,000  
B) 

$140,000  
C) 

$170,000  
D) 

$180,000  
Answer:  

C 
Explanation:  

C) 

$45,000 + $65,000 + $30,000 + $30,000 = $170,000 

Diff: 3 
Terms:  

make-or-buy decision, outsourcing 
Objective:  

2 
AACSB:  

Analytical skills

129) 

Relevant costs in a make-or-buy decision of a part include:  
A) 

setup overhead for the manufacture of the product using the outsourced part  
B) 

currently used manufacturing capacity that has alternative uses  
C) 

annual plant insurance costs that will remain the same  
D) 

corporate office costs that will be allocated differently  
Answer:  

B 
Diff: 3 
Terms:  

make-or-buy decision, outsourcing, relevant costs 
Objective:  

3 
AACSB:  

Reflective thinking 
130) 

If Horsley Corporation doesn't use one of its limited resources in the best possible way, the lost contribution to income could be called a(n):  
A) 

variable cost  
B) 

fixed cost  
C) 

opportunity cost  
D) 

sunk cost  
Answer:  

C 
Diff: 1 
Terms:  

opportunity cost 
Objective:  

3 
AACSB:  

Reflective thinking

131) 

When a firm has constrained capacity as opposed to surplus capacity, opportunity costs will be:  
A) 

lower  
B) 

the same  
C) 

greater  
D) 

variable  
Answer:  

C 
Diff: 2 
Terms:  

opportunity cost, constraint 
Objective:  

3 
AACSB:  

Reflective thinking

132) 

Opportunity costs:  
A) 

result in a cash outlay  
B) 

only are considered when selecting among alternatives  
C) 

are recorded in the accounting records  
D) 

should be maximized for the best decision  
Answer:  

B 
Diff: 2 
Terms:  

opportunity cost 
Objective:  

3 
AACSB:  

Reflective thinking


133) 

Opportunity cost(s):  
A) 

of a resource with excess capacity is zero  
B) 

should be maximized by organizations  
C) 

are recorded as an expense in the accounting records  
D) 

are most important to financial accountants  
Answer:  

A 
Diff: 2 
Terms:  

opportunity cost 
Objective:  

3 
AACSB:  

Reflective thinking

134) 

________ would be a consideration in a make-or-buy decision. 
A) 

Excess capacity 
B) 

Rental income from unused facilities 
C) 

Variable factory overhead 
D) 

All of the above are correct. 
Answer:  

D 
Diff: 2 
Terms:  

make-or-buy decision 
Objective:  

3 
AACSB:  

Reflective thinking 
135) 

If a company has excess capacity, the most it would pay for buying a product that it currently makes would be the: 
A) 

total variable cost of producing the product 
B) 

market value less the usual markup on the product 
C) 

total cost of producing the product 
D) 

market value of the product 
Answer:  

A 
Diff: 2 
Terms:  

make-or-buy decision 
Objective:  

3 
AACSB:  

Reflective thinking

136) 

For make-or-buy decisions, relevant costs include:  
A) 

direct material costs plus direct labor costs  
B) 

incremental costs plus opportunity costs  
C) 

differential costs plus fixed costs  
D) 

incremental costs plus differential costs  
Answer:  

B 
Diff: 3 
Terms:  

make-or-buy decision, outsourcing, opportunity cost, incremental cost 
Objective:  

3 
AACSB:  

Reflective thinking


137) 

The opportunity cost of holding significant inventory includes:  
A) 

the interest forgone on an alternative investment  
B) 

additional insurance costs  
C) 

additional storage costs  
D) 

All of these answers are correct.  
Answer:  

A 
Diff: 2 
Terms:  

opportunity cost 
Objective:  

3 
AACSB:  

Reflective thinking 
Answer the following questions using the information below:

Stephans Corporation currently manufactures a subassembly for its main product. The costs per unit are as follows:

	Direct materials	$ 1.00
	Direct labor	10.00
	Variable overhead	5.00
	Fixed overhead	8.00
	Total	$24.00

Bill Company has contacted Stephans with an offer to sell them 5,000 of the subassemblies for $22.00 each. Stephans will eliminate $25,000 of fixed overhead if it accepts the proposal.
 
138) 

What are the relevant costs for Stephans?  
A) 

$140,000  
B) 

$125,000  
C) 

$105,000  
D) 

$80,000  
Answer:  

C 
Explanation:  

C) 

[($1 + $10 + $5) ? 5,000 + $25,000] = $105,000 

Diff: 2 
Terms:  

make-or-buy decision, outsourcing 
Objective:  

3 
AACSB:  

Analytical skills

139) 

Should Stephans make or buy the subassemblies? What is the difference between the two alternatives?  
A) 

Buy; savings = $20,000  
B) 

Buy; savings = $50,000  
C) 

Make; savings = $60,000  
D) 

Make; savings = $5,000  
Answer:  

D 
Explanation:  

D) 

Cost to buy: 5,000 ? $22 = $110,000
Cost to make: $110,000 - [($1 + $10 + $5) ? 5,000 + $25,000] = $5,000; make the subassemblies 

Diff: 3 
Terms:  

make-or-buy decision, outsourcing 
Objective:  

3 
AACSB:  

Analytical skills


140) 

A recent college graduate has the choice of buying a new auto for $20,000 or investing the money for four years with a 6% expected annual rate of return. If the graduate decides to purchase the auto, the BEST estimate of the opportunity cost of that decision is:  
A) 

$1,200  
B) 

$4,800  
C) 

$20,000  
D) 

zero since there is no opportunity cost for this decision  
Answer:  

B 
Explanation:  

B) 

$20,000 ? 6% ? 4 years = $4,800 cost of the opportunity not chosen. 

Diff: 2 
Terms:  

opportunity cost 
Objective:  

3 
AACSB:  

Analytical skills 
141) 

A supplier offers to make Part A for $70. Jansen Company has relevant costs of $80 a unit to manufacture Part A. If there is excess capacity, the opportunity cost of buying Part A from the supplier is:  
A) 

0  
B) 

$10,000  
C) 

$70,000  
D) 

indeterminable  
Answer:  

A 
Diff: 2 
Terms:  

make-or-buy decision, outsourcing, opportunity cost 
Objective:  

3 
AACSB:  

Analytical skills

142) 

Jensen Company has relevant costs of $80 per unit to manufacture Part A. A current supplier offers to make Part A for $70 per unit. If capacity is constrained, the opportunity cost of buying Part A from the supplier is:  
A) 

0  
B) 

$10,000  
C) 

$70,000  
D) 

indeterminable  
Answer:  

D 
Explanation:  

D) 

Information regarding alternative uses for the capacity would determine the opportunity cost. 

Diff: 2 
Terms:  

make-or-buy decision, outsourcing, opportunity cost 
Objective:  

3 
AACSB:  

Analytical skills

143) 

Determining which products should be produced when the plant is operating at full capacity is referred to as:  
A) 

an outsourcing analysis  
B) 

production scheduling analysis  
C) 

a product-mix decision  
D) 

a short-run focus decision  
Answer:  

C 
Diff: 1 
Terms:  

product-mix decisions 
Objective:  

4 
AACSB:  

Reflective thinking


144) 

Product mix decisions:  
A) 

have a long-run focus  
B) 

help determine how to maximize operating profits  
C) 

focus on selling price per unit  
D) 

All of these answers are correct.  
Answer:  

B 
Diff: 2 
Terms:  

product-mix decisions 
Objective:  

4 
AACSB:  

Reflective thinking 
145) 

Constraints may include:  
A) 

the availability of direct materials in manufacturing  
B) 

linear square feet of display space for a retailer  
C) 

direct labor in the service industry  
D) 

All of these answers are correct.  
Answer:  

D 
Diff: 1 
Terms:  

constraint 
Objective:  

4 
AACSB:  

Reflective thinking

146) 

With a constraining resource, managers should choose the product with the: 
A) 

lowest contribution margin per unit of the constraining resource 
B) 

highest sales price 
C) 

highest contribution margin per unit of the constraining resource 
D) 

highest gross profit 
Answer:  

C 
Diff: 1 
Terms:  

constraint, product-mix decisions 
Objective:  

4 
AACSB:  

Reflective thinking

147) 

For determining the best mix of products, the one with the LEAST amount of influence is:  
A) 

the market price of the products  
B) 

corporate office costs allocated to each product  
C) 

the use of capacity resources  
D) 

contribution margins  
Answer:  

B 
Diff: 3 
Terms:  

constraint, product-mix decisions 
Objective:  

4 
AACSB:  

Reflective thinking

148) 

In product-mix decisions:  
A) 

always focus on maximizing total contribution margin  
B) 

focus on the product with the greatest contribution margin per machine-hour  
C) 

focus on the full costs of the product  
D) 

never focus on the short-term, but include only long-term considerations  
Answer:  

A 
Diff: 3 
Terms:  

product-mix decisions 
Objective:  

4 
AACSB:  

Reflective thinking 
Answer the following questions using the information below:

Braun's Brakes manufactures three different product lines, Model X, Model Y, and Model Z. Considerable market demand exists for all models. The following per unit data apply:

	Model X	Model Y	Model Z
	Selling price	$50	$60	$70
	Direct materials	6	6	6
	Direct labor ($12 per hour)	12	12	24
	Variable support costs ($4 per machine-hour)	4	8	8
	Fixed support costs	10	10	10
 
149) 

Which model has the greatest contribution margin per unit?  
A) 

Model X  
B) 

Model Y  
C) 

Model Z  
D) 

Models X and Y  
Answer:  

B 
Explanation:  

B) 

Model X	$50 - $6 - $12 - $4 = $28
Model Y	$60 - $6 - $12 - $8 = $34 highest
Model Z	$70 v $6 - $24 - $8 = $32 

Diff: 2 
Terms:  

product-mix decisions 
Objective:  

4 
AACSB:  

Analytical skills

150) 

Which model has the greatest contribution margin per machine-hour?  
A) 

Model X  
B) 

Model Y  
C) 

Model Z  
D) 

Models Y and Z  
Answer:  

A 
Explanation:  

A) 

Model X	$50 - $6 - $12 - $4 = $28 highest
Model Y	$60 - $6 - $12 - $8 = $34
Model Z	$70 v $6 - $24 - $8 = $32  
Diff: 2 
Terms:  

product-mix decisions, constraint 
Objective:  

4 
AACSB:  

Analytical skills


151) 

If there is excess capacity, which model is the most profitable to produce?  
A) 

Model X  
B) 

Model Y  
C) 

Model Z  
D) 

Models X and Y  
Answer:  

B 
Explanation:  

B) 

Model Y since it has the greatest contribution margin per unit
Model X	$50 - $6 - $12 - $4 = $28
Model Y	$60 - $6 - $12 - $8 = $34 highest
Model Z	$70 v $6 - $24 - $8 = $32 

Diff: 3 
Terms:  

product-mix decisions 
Objective:  

4 
AACSB:  

Analytical skills 
152) 

If there is a machine breakdown, which model is the most profitable to produce?  
A) 

Model X  
B) 

Model Y  
C) 

Model Z  
D) 

Models Y and Z  
Answer:  

A 
Explanation:  

A) 

Model X since it has the greatest contribution margin per machine-hour
Model X	$50 - $6 - $12 - $4 = $28 highest
Model Y	$60 - $6 - $12 - $8 = $34
Model Z	$70 v $6 - $24 - $8 = $32  
Diff: 3 
Terms:  

product-mix decisions, constraint 
Objective:  

4 
AACSB:  

Analytical skills

153) 

How can Lisa Braun encourage her salespeople to promote the more profitable model?  
A) 

Put all sales persons on salary.  
B) 

Provide higher sales commissions for higher priced items.  
C) 

Provide higher sales commissions for items with the greatest contribution margin per constrained resource.  
D) 

Both B and C are correct.  
Answer:  

C 
Diff: 2 
Terms:  

product-mix decisions, constraint 
Objective:  

4 
AACSB:  

Reflective thinking


Answer the following questions using the information below:

Helmer's Rockers manufactures two models, Standard and Premium. Weekly demand is estimated to be 100 units of the Standard Model and 70 units of the Premium Model. The following per unit data apply:

	Standard	Premium
	Contribution margin per unit	$18	$20
	Number of machine-hours required	3	4
 
154) 

The contribution per machine-hour is:  
A) 

$18 for Standard, $20 for Premium  
B) 

$54 for Standard, $80 for Premium  
C) 

$15 for Standard, $16 for Premium  
D) 

$6 for Standard, $5 for Premium  
Answer:  

D 
Explanation:  

D) 

Standard $18 / 3 = $6; Premium $20 / 4 = $5 

Diff: 2 
Terms:  

product-mix decisions, constraint 
Objective:  

4 
AACSB:  

Analytical skills 
155) 

If there are 496 machine-hours available per week, how many rockers of each model should Jim Helmer produce to maximize profits?  
A) 

100 units of Standard and 49 units of Premium  
B) 

72 units of Standard and 70 units of Premium  
C) 

100 units of Standard and 70 units of Premium  
D) 

85 units of Standard and 60 units of Premium  
Answer:  

A 
Explanation:  

A) 

Standard (100 units ? 3mh) + Premium (49 units ? 4 mh) = 496 machine-hours of the constrained resource  
Diff: 2 
Terms:  

product-mix decisions, constraint 
Objective:  

4 
AACSB:  

Analytical skills

156) 

If there are 600 machine-hours available per week, how many rockers of each model should Jim Helmer produce to maximize profits?  
A) 

100 units of Standard and 49 units of Premium  
B) 

72 units of Standard and 70 units of Premium  
C) 

100 units of Standard and 70 units of Premium  
D) 

85 units of Standard and 60 units of Premium  
Answer:  

C 
Explanation:  

C) 

Standard (100 units ? 3mh) + Premium (70 units ? 4 mh) = 580 machine-hours for the current demand 

Diff: 2 
Terms:  

product-mix decisions, constraint 
Objective:  

4 
AACSB:  

Analytical skills 

Answer the following questions using the information below:

Raines Company manufactures three sizes of kitchen appliances: small, medium, and large. Product information is provided below.
	Small	Medium	Large
	Unit selling price	$150	$250	$500
	Unit costs:
	Variable manufacturing	(60)	(120)	(200)
	Fixed manufacturing	(40)	(50)	(120)
	Variable selling and administrative	(30)	(30)	(30)
	Unit profit	$ 20	$ 50	$150

	Demand in units	100	120	100
	Machine-hours per unit	20	40	100

The maximum machine-hours available are 6,000 per week.
 
157) 

What is the contribution margin per machine-hour for a large chair?  
A) 

$5.00  
B) 

$3.00  
C) 

$2.70  
D) 

$1.80  
Answer:  

C 
Explanation:  

C) 

$500 - $200 - $30 = $270
$270 / 100 = $2.70 

Diff: 2 
Terms:  

product-mix decisions, constraint 
Objective:  

4 
AACSB:  

Analytical skills

158) 

Which of the three product models should be produced first if management incorporates a short-run profit maximizing strategy?  
A) 

small chairs  
B) 

medium chairs  
C) 

large chairs  
D) 

either medium or large chairs  
Answer:  

A 
Explanation:  

A) 

Small	($150 - $60 - $30) = $60 / 20 = $3.00 highest
Medium	($250 - $120 - $30) = $100 / 40 = $2.50
Large	($500 - $200 - $30) = $270 / 100 = $2.70  
Diff: 2 
Terms:  

product-mix decisions, constraint 
Objective:  

4 
AACSB:  

Analytical skills 

159) 

How many of each product should be produced per month using the short-run profit maximizing strategy?
	Small	Medium	Large 
A) 

	0	120	12	 
B) 

	100	0	40 
C) 

	100	100	0 
D) 

	100	20	40 
Answer:  

B 
Explanation:  

B) 

Small (100 ? 20) + Large (40 ? 100) = 6,000 total machine-hours 

Diff: 3 
Terms:  

product-mix decisions, constraint 
Objective:  

4 
AACSB:  

Analytical skills

160) 

Favata Corporation manufactures two products, AA and CC.  The following information was available:

	AA	CC
Selling price per unit                             $37                 $26
Variable cost per unit                              32                   22

Total fixed costs                                              $18,000

If Favata Corporation could produce and sell either 10,000 units of AA or 5,000 units of CC at full capacity, it should produce and sell: 
A) 

10,000 units of AA and none of CC 
B) 

3,000 units of CC and 6,000 units of AA 
C) 

5,000 units of CC and none of AA 
D) 

4,000 units of AA and 5,000 units of CC 
Answer:  

A 
Explanation:  

A) 

10,000 ? ($37-$32) = $50,000   
Diff: 3 
Terms:  

product-mix decisions, constraint 
Objective:  

4 
AACSB:  

Analytical skills

161) 

When deciding whether to discontinue a segment of a business, managers should focus on:  
A) 

equipment used by that segment that could become idle  
B) 

reallocation of corporate costs  
C) 

how total costs differ among alternatives  
D) 

operating income per unit of the discontinued segment  
Answer:  

C 
Diff: 3 
Terms:  

differential revenue, differential cost 
Objective:  

5 
AACSB:  

Reflective thinking 

162) 

When deciding whether to discontinue a segment of a business, relevant costs include all of the following EXCEPT:  
A) 

fixed supervision costs that can be eliminated  
B) 

variable marketing costs per unit of product sold  
C) 

cost of goods sold  
D) 

future administrative costs that will continue  
Answer:  

D 
Diff: 2 
Terms:  

relevant costs 
Objective:  

5 
AACSB:  

Reflective thinking

163) 

Molly, Inc. is considering eliminating one of its product lines.  The fixed costs currently allocated to the product line will be allocated to other product lines upon discontinuance.  What financial effects occur if the product line is discontinued? 
A) 

net income will decrease by the amount of the contribution margin of the product line being discontinued 
B) 

the company's total fixed costs will increase 
C) 

total fixed costs will decrease by the amount of the product line's fixed costs 
D) 

net income will decrease by the amount of the product line's fixed costs 
Answer:  

A 
Diff: 2 
Terms:  

relevant costs 
Objective:  

5 
AACSB:  

Reflective thinking

164) 

Discontinuing unprofitable products will increase profitability:  
A) 

if the resources no longer required by the discontinued product can be eliminated  
B) 

if capacity constraints are adjusted  
C) 

automatically  
D) 

when a large portion of the fixed costs are unavoidable  
Answer:  

A 
Diff: 2 
Terms:  

relevant revenues, relevant costs 
Objective:  

5 
AACSB:  

Reflective thinking


165) 

A segment has the following data:

Sales				$600,000
Variable costs               320,000
Fixed costs                    310,000

What will be the incremental effect on net income if this segment is eliminated, assuming the fixed costs will be allocated to profitable segments? 
A) 

$30,000 increase 
B) 

$310,000 decrease 
C) 

$280,000 decrease 
D) 

$290,000 decrease 
Answer:  

C 
Explanation:  

C) 

$600,000 ? $320,000 = $280,000 decrease

Diff: 2 
Terms:  

relevant costs 
Objective:  

5 
AACSB:  

Analytical skills 
166) 

Camera Corner is considering eliminating Model AE2 from its camera line because of losses over the past quarter. The past three months of information for Model AE2 are summarized below: 

	Sales (1,000 units)	$300,000
	Manufacturing costs:
	Direct materials	150,000
	Direct labor ($15 per hour)	60,000
	Overhead	100,000
	Operating loss	($10,000)

Overhead costs are 70% variable and the remaining 30% is depreciation of special equipment for model AE2 that has no resale value. 

If Model AE2 is dropped from the product line, operating income will:  
A) 

increase by $10,000  
B) 

decrease by $20,000  
C) 

increase by $30,000  
D) 

decrease by $10,000  
Answer:  

B 
Explanation:  

B) 

$300,000 - $150,000 - $60,000 - $70,000 = $20,000 This product contributes $20,000 toward corporate profits, therefore, discontinuing this product will decrease operating income by $20,000. 

Diff: 3 
Terms:  

relevant revenues, relevant costs 
Objective:  

5 
AACSB:  

Analytical skills


Answer the following questions using the information below:

The management accountant for Martha's Book Store has prepared the following income statement for the most current year:
	Cookbook	Travel Book	Classics	Total
	Sales	$60,000	$100,000	$40,000	$200,000
	Cost of goods sold	36,000	65,000	20,000	121,000
	Contribution margin	24,000	35,000	20,000	79,000
	Order and delivery processing	18,000	21,000	8,000	47,000
	Rent (per sq. foot used)	2,000	1,000	3,000	6,000
	Allocated corporate costs	7,000	7,000	7,000	21,000
	Corporate profit	$ (3,000)	$ 6,000	$ 2,000	$ 5,000
 
167) 

If the cookbook product line had been discontinued prior to this year, the company would have reported:  
A) 

greater corporate profits  
B) 

the same amount of corporate profits  
C) 

less corporate profits  
D) 

resulting profits cannot be determined  
Answer:  

C 
Explanation:  

C) 

$60,000 - $36,000 - $18,000 - $2,000 = $4,000
The cookbook product line contributed $4,000 toward corporate profits. Without the cookbooks, corporate profits would be $4,000 less than currently reported. 

Diff: 3 
Terms:  

relevant revenues, relevant costs 
Objective:  

5 
AACSB:  

Analytical skills 
168) 

If the travel book line had been discontinued, corporate profits for the current year would have decreased by:  
A) 

$35,000  
B) 

$14,000  
C) 

$13,000  
D) 

$6,000  
Answer:  

C 
Explanation:  

C) 

$100,000 - $65,000 - $21,000 - $1,000 = $13,000 

Diff: 3 
Terms:  

relevant revenues, relevant costs 
Objective:  

5 
AACSB:  

Analytical skills


Answer the following questions using the information below:

Denly Company has three products, A, B, and C. The following information is available:

	Product A	Product B	Product C
	Sales	$60,000	$90,000	$24,000
	Variable costs	36,000	48,000	15,000
	Contribution margin	24,000	42,000	9,000
	Fixed costs:
	Avoidable	9,000	18,000	6,000
	Unavoidable	6,000	9,000	5,400
	Operating income	$ 9,000	$15,000	$ (2,400)


169) 

Denly Company is thinking of dropping Product C because it is reporting a loss. Assuming Denly drops Product C and does not replace it, operating income will:  
A) 

increase by $2,400  
B) 

increase by $3,000  
C) 

decrease by $3,000  
D) 

decrease by $5,400  
Answer:  

C 
Explanation:  

C) 

$24,000 - $15,000 - $6,000 = $3,000. Product C contributes $3,000 toward corporate profits. Without Product C, operating income would be $3,000 less than currently reported. 

Diff: 3 
Terms:  

relevant revenues, relevant costs 
Objective:  

5 
AACSB:  

Analytical skills

170) 

Assuming Product C is discontinued and the space formerly used to produce Product C is rented for $12,000 per year, operating income will:  
A) 

increase by $6,600  
B) 

increase by $9,000  
C) 

increase by $12,000  
D) 

increase by $14,400  
Answer:  

B 
Explanation:  

B) 

$12,000 - $3,000 = $9,000 

Diff: 3 
Terms:  

relevant revenues, relevant costs, opportunity cost 
Objective:  

5 
AACSB:  

Analytical skills 

Answer the following questions using the information below:

Melodee's Preserves currently makes jams and jellies and a variety of decorative jars used for packaging. An outside supplier has offered to supply all of the needed decorative jars. For this make-or-buy decision, a cost analysis revealed the following avoidable unit costs for the decorative jars:

	Direct materials	$0.25
	Direct labor	0.03
	Unit-related support costs	0.10
	Batch-related support costs	0.12
	Product-sustaining support costs	0.22
	Facility-sustaining support costs	0.28
	Total cost per jar	$1.00


171) 

The relevant cost per jar is:  
A) 

$0.28 per jar  
B) 

$0.38 per jar  
C) 

$0.72 per jar  
D) 

$1.00 per jar  
Answer:  

D 
Explanation:  

D) 

All avoidable costs are relevant for this decision. 

Diff: 2 
Terms:  

relevant costs 
Objective:  

2, 5 
AACSB:  

Analytical skills

172) 

The maximum price that Melodee's Preserves should be willing to pay for the decorative jars is:  
A) 

$0.28 per jar  
B) 

$0.38 per jar  
C) 

$0.72 per jar  
D) 

$1.00 per jar  
Answer:  

D 
Explanation:  

D) 

Considering only quantitative factors, the company should not pay more than the avoidable costs of $1.00 per jar. There may be qualitative factors that are also important. 

Diff: 2 
Terms:  

relevant costs 
Objective:  

2, 5 
AACSB:  

Analytical skills

173) 

Costs are relevant to a particular decision if they:  
A) 

are variable costs  
B) 

are fixed costs  
C) 

differ across the alternatives being considered  
D) 

remain unchanged across the alternatives being considered  
Answer:  

C 
Diff: 2 
Terms:  

relevant costs 
Objective:  

6 
AACSB:  

Reflective thinking 

174) 

When deciding to lease a new cutting machine or continue using the old machine, the following costs are relevant EXCEPT the:  
A) 

$50,000 cost of the old machine  
B) 

$20,000 cost of the new machine  
C) 

$10,000 selling price of the old machine  
D) 

$3,000 annual savings in operating costs if the new machine is purchased 
Answer:  

A 
Diff: 2 
Terms:  

relevant costs 
Objective:  

6 
AACSB:  

Reflective thinking

175) 

For machine-replacement decisions, depreciation is a cost that is:  
A) 

not relevant 
B) 

differential  
C) 

incremental  
D) 

variable  
Answer:  

A 
Diff: 1 
Terms:  

relevant costs 
Objective:  

6 
AACSB:  

Reflective thinking

176) 

________ is relevant in a decision to replace equipment. 
A) 

Cost of old equipment 
B) 

Book value of old equipment 
C) 

Accumulated depreciation on old equipment 
D) 

Future maintenance costs of old equipment 
Answer:  

D 
Diff: 1 
Terms:  

relevant costs 
Objective:  

6 
AACSB:  

Reflective thinking

177) 

In a decision to keep or replace existing equipment, ________ is a false statement. 
A) 

the book value of the old equipment is irrelevant 
B) 

the disposal value of the old equipment is irrelevant 
C) 

the cost of the new equipment is relevant 
D) 

depreciation on the new equipment is relevant 
Answer:  

B 
Diff: 1 
Terms:  

relevant costs 
Objective:  

6 
AACSB:  

Reflective thinking


178) 

A company decided to replace an old machine with a new machine.  Which of the following is considered a relevant cost? 
A) 

the book value of the old equipment 
B) 

depreciation expense on the old equipment 
C) 

the loss on the disposal of the old equipment 
D) 

the current disposal price of the old equipment 
Answer:  

D 
Diff: 1 
Terms:  

relevant costs 
Objective:  

6 
AACSB:  

Reflective thinking 
179) 

What role does a trade-in allowance on old equipment play in a decision to retain or replace equipment? 
A) 

it is relevant since it increases the cost of the new equipment 
B) 

it is not relevant since it reduces the cost of the old equipment 
C) 

it is not relevant to the decision since it does not impact the cost of the new equipment 
D) 

it is relevant since it reduces the cost of the new equipment 
Answer:  

D 
Diff: 1 
Terms:  

relevant costs, relevant revenues 
Objective:  

6 
AACSB:  

Reflective thinking

Answer the following questions using the information below:

Flowers For Everyone is considering replacing its existing delivery van with a new one. The new van can offer considerable savings in operating costs. Information about the existing van and the new van follow:

	Existing van	New van
	Original cost	$100,000	$180,000
	Annual operating cost	$ 35,000	$ 20,000
	Accumulated depreciation	$ 60,000	?
	Current salvage value of the existing van	$ 45,000	?
	Remaining life	10 years	10 years
	Salvage value in 10 years	$ 0	$ 0
	Annual depreciation	$ 4,000	$ 18,000
 
180) 

Sunk costs include:  
A) 

the original cost of the existing van  
B) 

the original cost of the new van  
C) 

the current salvage value of the existing van  
D) 

the annual operating cost of the new van  
Answer:  

A 
Diff: 2 
Terms:  

sunk costs 
Objective:  

6 
AACSB:  

Reflective thinking


181) 

Relevant costs for this decision include:  
A) 

the original cost of the existing van  
B) 

accumulated depreciation  
C) 

the current salvage value  
D) 

the salvage value in 10 years  
Answer:  

C 
Diff: 2 
Terms:  

relevant costs 
Objective:  

6 
AACSB:  

Reflective thinking 
182) 

If Flowers For Everyone replaces the existing delivery van with the new one, over the next 10 years operating income will:  
A) 

decrease by $180,000  
B) 

increase by $150,000  
C) 

decrease by $150,000  
D) 

None of these answers is correct.  
Answer:  

B 
Explanation:  

B) 

New van ($20,000 ? 10 years) - Existing van ($35,000 ? 10 years) = $150,000 less in operating costs, which results in a $150,000 increase in operating income. 

Diff: 3 
Terms:  

relevant revenues, relevant costs 
Objective:  

6 
AACSB:  

Analytical skills

Answer the following questions using the information below:

Frederick, Inc., is considering replacing a machine. The following data are available:

	Replacement
	Old Machine	Machine
	Original cost	$45,000	$35,000
	Useful life in years	10	5
	Current age in years	5	0
	Book value	$25,000	?
	Disposal value now	$8,000	?
	Disposal value in 5 years	0	0
	Annual cash operating costs	$7,000	$4,000
 
183) 

Which of the data provided in the table is a sunk cost?  
A) 

the annual cash operating costs of the old machine  
B) 

the annual cash operating costs of the replacement machine  
C) 

the disposal value of the old machine  
D) 

the original cost of the old machine  
Answer:  

D 
Diff: 2 
Terms:  

sunk costs 
Objective:  

6 
AACSB:  

Analytical skills


184) 

For the decision to keep the old machine, the relevant costs of keeping the old machine total:  
A) 

$60,000  
B) 

$35,000  
C) 

$47,000  
D) 

$72,000  
Answer:  

B 
Explanation:  

B) 

$7,000 ? 5 = $35,000 

Diff: 3 
Terms:  

relevant costs 
Objective:  

6 
AACSB:  

Analytical skills 
185) 

The difference between keeping the old machine and replacing the old machine is:  
A) 

$37,000 in favor of keeping the old machine  
B) 

$12,000 in favor of keeping the old machine  
C) 

$37,000 in favor of replacing the old machine  
D) 

$12,000 in favor of replacing the old machine  
Answer:  

B 
Explanation:  

B) 

New [$35,000 + (5 ? $4,000)] - Old [$8,000 + (5 ? $7,000)] = $12,000 

Diff: 3 
Terms:  

relevant costs 
Objective:  

6 
AACSB:  

Analytical skills

186) 

The difference between the original cost of an asset and the accumulated depreciation is known as the:  
A) 

historical cost  
B) 

market value  
C) 

book value  
D) 

depreciable cost  
Answer:  

C 
Diff: 1 
Terms:  

relevant costs 
Objective:  

6 
AACSB:  

Reflective thinking

187) 

Managers tend to favor the alternative that makes their performance look best. Therefore, they tend to focus on:  
A) 

how to implement the chosen alternative  
B) 

the measures used in the decision model  
C) 

the measures used in the performance evaluation model  
D) 

gathering the required information  
Answer:  

C 
Diff: 2 
Terms:  

decision model 
Objective:  

7 
AACSB:  

Ethical reasoning


188) 

If management takes a multiple-year view in the decision model and judges success according to the current year's results, a problem will occur in the:  
A) 

decision model  
B) 

performance evaluation model  
C) 

production evaluation model  
D) 

quantitative model  
Answer:  

B 
Diff: 2 
Terms:  

decision model 
Objective:  

7 
AACSB:  

Reflective thinking 
189) 

Top management faces a persistent challenge to make sure that the performance evaluation model of lower level managers is:  
A) 

focused on short-term performance  
B) 

based solely on quantitative factors  
C) 

consistent with the decision model  
D) 

not consistent with the decision model  
Answer:  

D 
Diff: 2 
Terms:  

decision model 
Objective:  

7 
AACSB:  

Reflective thinking

190) 

The three steps involved in linear programming include all of the following EXCEPT:  
A) 

determining the objective  
B) 

determining the basic relationship  
C) 

computing the optimal solution  
D) 

determining the relevant and irrelevant costs  
Answer:  

D 
Diff: 2 
Terms:  

linear programming (LP) 
Objective:  

7 
AACSB:  

Reflective thinking

191) 

In linear programming, the goals of management are expressed in:  
A) 

an objective function  
B) 

constraints  
C) 

operating policies  
D) 

business functions  
Answer:  

A 
Diff: 1 
Terms:  

linear programming (LP) 
Objective:  

7 
AACSB:  

Reflective thinking


192) 

A mathematical inequality or equality that must be appeased is known as a(n):  
A) 

objective function  
B) 

constraint  
C) 

operating policy  
D) 

business function  
Answer:  

B 
Diff: 2 
Terms:  

linear programming (LP), constraint 
Objective:  

7 
AACSB:  

Reflective thinking 

193) 

Computer Products produces two keyboards, Regular and Special. Regular keyboards have a unit contribution margin of $128, and Special keyboards have a unit contribution margin of $720. The demand for Regulars exceeds Computer Product's production capacity, which is limited by available machine-hours and direct manufacturing labor-hours. The maximum demand for Special keyboards is 80 per month. Management desires a product mix that will maximize the contribution toward fixed costs and profits. 

Direct manufacturing labor is limited to 1,600 hours a month and machine-hours are limited to 1,200 a month. The Regular keyboards require 20 hours of labor and 8 machine-hours. Special keyboards require 34 labor-hours and 20 machine-hours. 

Let R represent Regular keyboards and S represent Special keyboards. The correct set of equations for the keyboard production process is:  
A) 

	Maximize:	$128R + $720S	
Constraints:
	Labor-hours:	20R + 34S ó 1,600
	Machine-hours:	8R + 20S ó 1,200
	Special:	S ó 80
	S ò 0
	Regular:	R ò 0  
B) 

	Maximize:	$128R + $720S
Constraints:
	Labor-hours:	20R + 34S ò 1,600
	Machine-hours:	8R + 20S òó 1,200
	Special:	S ò 80
	S ò 0
	Regular:	R ò 0  
C) 

	Maximize:	$720S + $128R
Constraints:
	Labor-hours:	20R + 8S ó 1,600
	Machine-hours:	34R + 20S ó 1,200
	Special:	S ó 80
	S ò 0
	Regular:	R ò 0  
D) 

	Maximize:	$128R + $720S
Constraints:
	Labor-hours:	20R + 34S ó 1,600
	Machine-hours:	8R + 20S ó 1,200
	Special:	S ò 80
	S ó 0
	Regular:	R ó 0  
Answer:  

A 
Diff: 3 
Terms:  

linear programming (LP), constraint 
Objective:  

7 
AACSB:  

Use of Information Technology 

194) 

Fluty Corporation manufactures a product that has two parts, A and B. It is currently considering two alternative proposals related to these parts. 

The first proposal is for buying Part A. This would free up some of the plant space for the manufacture of more of Part B and assembly of the final product. The product vice president believes the additional production of the final product can be sold at the current market price. No other changes in manufacturing would be needed. 

The second proposal is for buying new equipment for the production of Part B. The new equipment requires fewer workers and uses less power to operate. The old equipment has a net disposal value of zero. 

Required: 

Tell whether the following items are relevant or irrelevant for each proposal. Treat each proposal independently. 

a.	Total variable manufacturing overhead, Part A
b.	Total variable manufacturing overhead, Part B
c.	Cost of old equipment for manufacturing Part B
d.	Cost of new equipment for manufacturing Part B
e.	Total variable selling and administrative costs
f.	Sales revenue of the product
g.	Total variable costs of assembling final products
h.	Total direct manufacturing materials, Part A
i.	Total direct manufacturing materials, Part B
j.	Total direct manufacturing labor, Part A
k.	Total direct manufacturing labor, Part B  
Answer:  

	Proposal 1	Proposal 2
a.	R	I
b.	R	R
c.	I	I
d.	I	R
e.	R	I
f.	R	I
g.	R	I
h.	R	I
i.	R	I
j.	R	I
k.	R	R 
Diff: 2 
Terms:  

relevant revenues, relevant costs 
Objective:  

2 
AACSB:  

Analytical