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Chapter 13
Relevant Costs for Decision-Making
True/False
1.
T
Medium
One of the dangers of allocating common fixed costs to a product
line is that such allocations can make the line appear less
profitable than it really is.
2.
T
Medium
Future costs that do not differ among the alternatives are not
relevant in a decision.
3.
F
Medium
Variable costs are always relevant costs.
4.
T
Easy
An avoidable cost is a cost that can be eliminated (in whole or
in part) as a result of choosing one alternative over another.
5.
T
Easy
A sunk cost is a cost that has already been incurred and that
cannot be avoided regardless of what action is chosen.
6.
T
Easy
The book value of old equipment is not a relevant cost in an
equipment replacement decision problem.
7.
F
Medium
Only the variable costs identified with a product are relevant in
a decision concerning whether to eliminate the product.
8.
T
Easy
If by dropping a product a firm can avoid more in fixed costs
than it loses in contribution margin, then the firm is better off
economically if the product is dropped.
9.
T
Easy
The cost of a resource that has no alternative use in a make or
buy decision problem has an opportunity cost of zero.
10.
F
Hard
Managers should pay little attention to bottleneck operations
since they have limited capacity for producing output.
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11.
F
Easy
Opportunity costs are recorded in the accounts of an
organization.
12.
T
Easy
All other things equal, it is profitable to continue processing a
joint product after the split-off point so long as the
incremental revenue from further processing exceeds the
incremental costs of further processing.
13.
F
Medium
Joint production costs are relevant costs in decisions about what
to do with a product from the split-off point onward in the
production process.
14.
F
Medium
Two or more different products that are manufactured in the same
production period are known as joint products.
15.
F
Easy
A merchandising firm which buys all of its inventory from outside
suppliers is an example of a firm that is vertically integrated.
Multiple Choice
16.
B
Easy
Costs which are always relevant in decision making are those
costs which are:
a. variable.
b. avoidable.
c. sunk.
d. fixed.
17.
D
Easy
Consider a decision facing a firm of either accepting or
rejecting a special offer for one of its products. A cost that is
not relevant is:
a. direct materials.
b. variable overhead.
c. fixed overhead that will be avoided if the special offer is
accepted.
d. common fixed overhead that will continue if the special offer
is not accepted.
18.
C
Easy
To maximize total contribution margin, a firm faced with a
production constraint should:
a. promote those products having the highest unit contribution
margins.
b. promote those products having the highest contribution margin
ratios.
c. promote those products having the highest contribution margin
per unit of constrained resource.
d. promote those products have the highest contribution margins
and contribution margin ratios.
19.
B
Hard
A plant operating at capacity would suggest that:
a. every machine and person in the plant is working at the
maximum possible rate.
b. only some specific machines or processes are operating at the
maximum rate possible.
c. fixed costs will need to change to accommodate increased
demand.
d. managers should produce those products with the highest
contribution margin in order to deal with the constrained
resource.
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20.
C
Medium
Which of the following is not an effective way of dealing with a
production constraint (i.e., bottleneck)?
a. Reduce the number of defective units produced at the
bottleneck.
b. Pay overtime to workers assigned to the bottleneck.
c. Pay overtime to workers assigned to work stations located
after the bottleneck in the production process.
d. Subcontract work that would otherwise required use of the
bottleneck.
21.
D
Medium
The opportunity cost of making a component part in a factory with
no excess capacity is the:
a. variable manufacturing cost of the component.
b. fixed manufacturing cost of the component.
c. cost of the production given up in order to manufacture the
component.
d. net benefit foregone from the best alternative use of the
capacity required.
22.
D
Easy
A joint product is:
a. any product which consists of several parts.
b. any product produced by a firm with more than one product
line.
c. any product involved in a make or buy decision.
d. one of several products produced from a common input.
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23.
D
Medium
Consider the following statements:
I. A vertically integrated firm is more dependent on its
suppliers than a firm that is not vertically integrated.
II. Many firms feel they can control quality better by making
their own parts.
III. A vertically integrated firm realizes profits from the
parts it is “making” instead of “buying” as well as
profits from its regular operations.
Which of the above statements represent advantages to a firm that
is vertically integrated?
a. Only I
b. Only III
c. Only I and II
d. Only II and III
24.
A
Easy
CPA adapted
The Lantern Corporation has 1,000 obsolete lanterns that are
carried in inventory at a manufacturing cost of $20,000. If the
lanterns are remachined for $5,000, they could be sold for
$9,000. Alternatively, the lanterns could be sold for scrap for
$1,000. Which alternative is more desirable and what are the
total relevant costs for that alternative?
a. remachine and $5,000.
b. remachine and $25,000.
c. scrap and $20,000.
d. scrap and $19,000.
25.
B
Medium
CPA adapted
Relay Corporation manufactures batons. Relay can manufacture
300,000 batons a year at a variable cost of $750,000 and a fixed
cost of $450,000. Based on Relay’s predictions for next year,
240,000 batons will be sold at the regular price of $5.00 each.
In addition, a special order was placed for 60,000 batons to be
sold at a 40% discount off the regular price. Total fixed costs
would be unaffected by this order. By what amount would the
company’s net operating income be increased or decreased as a
result of the special order?
a. $60,000 decrease.
b. $30,000 increase.
c. $36,000 increase.
d. $180,000 increase.
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26.
B
Medium
CPA adapted
The manufacturing capacity of Jordan Company’s facilities is
30,000 units a year. A summary of operating results for last year
follows:
Sales (18,000 units @ $100) …. $1,800,000
Variable costs …………….. 990,000
Contribution margin ……….. 810,000
Fixed costs ……………….. 495,000
Net operating income ……….. $ 315,000
A foreign distributor has offered to buy 15,000 units at $90 per
unit next year. Jordan expects its regular sales next year to be
18,000 units. If Jordan accepts this offer and rejects some
business from regular customers so as not to exceed capacity,
what would be the total net operating income next year? (Assume
that the total fixed costs would be the same no matter how many
units are produced and sold.)
a. $390,000.
b. $705,000.
c. $840,000.
d. $855,000.
27.
A
Easy
CPA adapted
Wagner Company sells product A for $21 per unit. Wagner’s unit
product cost based on the full capacity of 200,000 units is as
follows:
Direct materials ………………… $ 4
Direct labor ……………………. 5
Manufacturing overhead …………… 6
Unit product cost ……………… $15
A special order offering to buy 20,000 units has been received
from a foreign distributor. The only selling costs that would be
incurred on this order would be $3 per unit for shipping. Wagner
has sufficient idle capacity to manufacture the additional units.
Two-thirds of the manufacturing overhead is fixed and would not
be affected by this order. Assume that direct labor is an
avoidable cost in this decision. In negotiating a price for the
special order, the minimum acceptable selling price per unit
should be:
a. $14.
b. $15.
c. $16.
d. $18.
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28.
C
Easy
A study has been conducted to determine if one of the departments
in Parry Company should be discontinued. The contribution margin
in the department is $50,000 per year. Fixed expenses charged to
the department are $65,000 per year. It is estimated that $40,000
of these fixed expenses could be eliminated if the department is
discontinued. These data indicate that if the department is
discontinued, the company’s overall net operating income would:
a. decrease by $25,000 per year.
b. increase by $25,000 per year.
c. decrease by $10,000 per year.
d. increase by $10,000 per year.
29.
C
Easy
A study has been conducted to determine if Product A should be
dropped. Sales of the product total $200,000 per year; variable
expenses total $140,000 per year. Fixed expenses charged to the
product total $90,000 per year. The company estimates that
$40,000 of these fixed expenses will continue even if the product
is dropped. These data indicate that if Product A is dropped, the
company’s overall net operating income would:
a. decrease by $20,000 per year.
b. increase by $20,000 per year.
c. decrease by $10,000 per year.
d. increase by $30,000 per year.
30.
A
Easy
Lusk Company produces and sells 15,000 units of Product A each
month. The selling price of Product A is $20 per unit, and
variable expenses are $14 per unit. A study has been made
concerning whether Product A should be discontinued. The study
shows that $70,000 of the $100,000 in fixed expenses charged to
Product A would continue even if the product was discontinued.
These data indicate that if Product A is discontinued, the
company’s overall net operating income would:
a. decrease by $60,000 per month.
b. increase by $10,000 per month.
c. increase by $20,000 per month.
d. decrease by $20,000 per month.
31.
B
Easy
CPA adapted
Manor Company plans to discontinue a department that has a
contribution margin of $24,000 and $48,000 in fixed costs. Of the
fixed costs, $21,000 cannot be avoided. The effect of this
discontinuance on Manor’s overall net operating income would be
a(an):
a. decrease of $3,000.
b. increase of $3,000.
c. decrease of $24,000.
d. increase of $24,000.
32.
C
Easy
CPA adapted
Gata Co. plans to discontinue a department that has a $48,000
contribution margin and $96,000 of fixed costs. Of these fixed
costs, $42,000 cannot be avoided. What would be the effect of
this discontinuance on Gata’s overall net operating income?
a. Increase of $48,000
b. Decrease of $48,000
c. Increase of $6,000
d. Decrease of $6,000
33.
B
Medium
The Cook Company has two divisions–Eastern and Western. The
divisions have the following revenues and expenses:
Eastern Western
Sales ……………………. $550,000 $500,000
Variable costs ……………. 275,000 200,000
Direct fixed costs ………… 180,000 150,000
Allocated corporate costs ….. 170,000 135,000
Net income (loss) …………. (75,000) 15,000
The management of Cook is considering the elimination of the
Eastern Division. If the Eastern Division were eliminated, the
direct fixed costs associated with this division could be
avoided. However, corporate costs would still be $305,000 in
total. Given these data, the elimination of the Eastern Division
would result in an overall company net income (loss) of:
a. $15,000.
b. ($155,000).
c. ($75,000).
d. ($60,000).
34.
B
Medium
Manor Company plans to discontinue a department that has a
contribution margin of $25,000 and $50,000 in fixed costs.
Of the fixed costs, $21,000 cannot be eliminated. The effect
on the profit of Manor Company of discontinuing this
department would be:
b. an increase of $4,000.
c. a decrease of $25,000.
35.
Green Company produces 1,000 parts per year, which are used in
Fixed manufacturing cost …….. 9
The part can be purchased from an outside supplier at $20 per
unit. If the part is purchased from the outside supplier, two
thirds of the fixed manufacturing costs can be eliminated. The
annual impact on the company’s net operating income as a result
of buying the part from the outside supplier would be:
b. $1,000 decrease.
c. $5,000 increase.
