Chapter 11
Relevant Costs for Decision Making
True/False
1. Fixed costs are sunk costs and are therefore irrelevant in decisions.
Level: Easy LO: 1 Ans: F
2. A complete income statement must be prepared as part of a differential cost analysis.
Level: Medium LO: 1 Ans: F
3. Future costs that do not differ between the alternatives in a decision are avoidable costs.
Level: Medium LO: 1 Ans: F
4. The book value of an old machine is always considered a sunk cost in a decision.
Level: Easy LO: 1 Ans: T
5. A product that does not cover its allocated share of general corporate administrative
expenses should be dropped.
Level: Easy LO: 2 Ans: F
6. In a decision to drop a product, the product should be charged for rent in proportion to
the space it occupies even if the space has no alternative use and the rental payment is
unavoidable.
Level: Easy LO: 2 Ans: F
7. Making rather than buying a part that goes into one of the company’s products would
increase the company’s degree of vertical integration.
Level: Easy LO: 3 Ans: T
8. In a special order situation that involves using existing idle capacity, opportunity costs
are zero.
Level: Easy LO: 4 Ans: T
9. When a company has a production constraint, the product with the highest contribution
margin per unit of the constrained resource should be given highest priority.
Level: Easy LO: 5 Ans: T
10. Payment of overtime to a worker in order to relax a production constraint could
increase the profits of a company.
Level: Medium LO: 5 Ans: T
11. In a plant operating at capacity, every machine and person in the plant would be
working at the maximum possible rate.
Level: Hard LO: 5 Ans: F
Multiple Choice
12. Hal Etoesus currently works as the fry guy at Burger Breath Drive Thru but is thinking
of quitting his job to attend college full time next semester. Which of the following would
be considered an opportunity cost in this decision?
A) the cost of the textbooks
B) the cost of the cola that Hal will consume during class
C) Hal’s lost wages at Burger Breath
D) both A and B above
Level: Easy LO: 1 Ans: C
13. Which of the following would be relevant in the decision to sell or throw out obsolete
inventory?
A) A Above
B) B Above
C) C Above
D) D Above
Level: Medium LO: 1 Ans: D
14. Buff Corp. is considering replacing an old machine with a new machine. Which of the
following items is relevant to Buff’s decision? (Ignore income tax considerations.)
A) A Above
B) B Above
C) C Above
D) D Above
Source: CPA, adapted
Level: Medium LO: 1 Ans: B
15. In a make-or-buy decision, relevant costs include:
A) unavoidable fixed costs
B) avoidable fixed costs
C) fixed factory overhead costs applied to products
D) fixed selling and administrative expenses
Source: CMA, adapted
Level: Easy LO: 3 Ans: B
16. In situations where management must decide between accepting or rejecting a
one-time-only special order where there is sufficient idle capacity to fill the order, which
one of the following is NOT relevant in making the decision?
A) absorption costing unit product costs
B) variable costs
C) incremental costs
D) differential costs
Source: CMA, adapted
Level: Easy LO: 4 Ans: A
17. When a multi-product factory operates at full capacity, decisions must be made about
what products to emphasize. In making such decisions, products should be ranked based
on:
A) selling price per unit
B) contribution margin per unit
C) contribution margin per unit of the constraining resource
D) unit sales volume
Source: CMA, adapted
Level: Easy LO: 5 Ans: C
18. Wenig Inc. has some material that originally cost $73,500. The material has a scrap
value of $45,600 as is, but if reworked at a cost of $6,600, it could be sold for $58,100.
What would be the incremental effect on the company’s overall profit of reworking and
selling the material rather than selling it as is as scrap?
A) -$22,000
B) -$67,600
C) $51,500
D) $5,900
Source: CIMA, adapted
Level: Medium LO: 1 Ans: D
19. Bosques Corporation has in stock 35,800 kilograms of material L that it bought five
years ago for $5.55 per kilogram. This raw material was purchased to use in a product line
that has been discontinued. Material L can be sold as is for scrap for $1.67 per kilogram.
An alternative would be to use material L in one of the company’s current products, Q08C,
which currently requires 2 kilograms of a raw material that is available for $9.15 per
kilogram. Material L can be modified at a cost of $0.78 per kilogram so that it can be used
as a substitute for this material in the production of product Q08C. However, after
modification, 4 kilograms of material L is required for every unit of product Q08C that is
produced. Bosques Corporation has now received a request from a company that could use
material L in its production process. Assuming that Bosques Corporation could use all of
its stock of material L to make product Q08C or the company could sell all of its stock of
the material at the current scrap price of $1.67 per kilogram, what is the minimum
acceptable selling price of material L to the company that could use material L in its own
production process?
A) $5.36
B) $3.80
C) $2.13
D) $1.67
Source: CIMA, adapted
Level: Hard LO: 1 Ans: B
20. Mankus Inc. is considering using stocks of an old raw material in a special project. The
special project would require all 120 kilograms of the raw material that are in stock and
that originally cost the company $816 in total. If the company were to buy new supplies of
this raw material on the open market, it would cost $7.25 per kilogram. However, the
company has no other use for this raw material and would sell it at the discounted price of
$6.75 per kilogram if it were not used in the special project. The sale of the raw material
would involve delivery to the purchaser at a total cost of $50.00 for all 120 kilograms.
What is the relevant cost of the 120 kilograms of the raw material when deciding whether
to proceed with the special project?
A) $810
B) $870
C) $760
D) $816
Source: CIMA, adapted
Level: Hard LO: 1 Ans: C
21. Narciso Corporation is preparing a bid for a special order that would require 880 liters
of material R19S. The company already has 280 liters of this raw material in stock that
originally cost $6.20 per liter. Material R19S is used in the company’s main product and is
replenished on a periodic basis. The resale value of the existing stock of the material is
$5.45 per liter. New stocks of the material can be readily purchased for $6.20 per liter.
What is the relevant cost of the 880 liters of the raw material when deciding how much to
bid on the special order?
A) $5,006
B) $5,456
C) $4,796
D) $5,456
Source: CIMA, adapted
Level: Hard LO: 1 Ans: B
22. Yehle Inc. regularly uses material Y51B and currently has in stock 460 liters of the
material for which it paid $2,530 several weeks ago. If this were to be sold as is on the
open market as surplus material, it would fetch $4.55 per liter. New stocks of the material
can be purchased on the open market for $5.45 per liter, but it must be purchased in lots of
1,000 liters. You have been asked to determine the relevant cost of 720 liters of the
material to be used in a job for a customer. The relevant cost of the 720 liters of material
Y51B is:
A) $3,924
B) $5,450
C) $3,510
D) $3,276
Source: CIMA, adapted
Level: Hard LO: 1 Ans: A
23. Roddey Corporation is a specialty component manufacturer with idle capacity.
Management would like to use its extra capacity to generate additional profits. A potential
customer has offered to buy 2,900 units of component GEE. Each unit of GEE requires 3
units of material R39 and 8 units of material I59. Data concerning these two materials
follow:
Material R39 is in use in many of the company’s products and is routinely replenished.
Material I59 is no longer used by the company in any of its normal products and existing
stocks would not be replenished once they are used up.
What would be the relevant cost of the materials, in total, for purposes of determining a
minimum acceptable price for the order for product GEE?
A) $224,605
B) $196,765
C) $228,204
D) $193,285
Source: CIMA, adapted
Level: Hard LO: 1 Ans: B
24. Moyer Corporation is a specialty component manufacturer with idle capacity.
Management would like to use its extra capacity to generate additional profits. A potential
customer has offered to buy 2,300 units of component TIB. Each unit of TIB requires 9
units of material F58 and 7 units of material D66. Data concerning these two materials
follow:
Material F58 is in use in many of the company’s products and is routinely replenished.
Material D66 is no longer used by the company in any of its normal products and existing
stocks would not be replenished once they are used up.
What would be the relevant cost of the materials, in total, for purposes of determining a
minimum acceptable price for the order for product TIB?
A) $189,890
B) $174,215
C) $168,533
D) $200,905
Source: CIMA, adapted
Level: Hard LO: 1 Ans: B
25. Kahn Company produces and sells 8,000 units of Product X each year. Each unit of
Product X sells for $10 and has a contribution margin of $6. It is estimated that if Product
