File: 7e_BGN_CH10_TB, Chapter 10, Differential Analysis: The Key to Decision Making
True/False
[QUESTION]
1. Only future costs that differ between alternatives are relevant in decision making.
[QUESTION]
2. Future costs that do not differ between the alternatives in a decision are avoidable costs.
3. The book value of a machine, as shown on the balance sheet, is not relevant in a decision concerning the
replacement of that machine by another machine. (Ignore taxes.)
4. A cost that is relevant in one decision may not be relevant in another decision.
5. Opportunity costs are not usually recorded in the accounts of a business.
6. A cost that can be avoided by choosing one alternative over another is not relevant for decision purposes.
7. The book value of old equipment is a relevant cost in a decision to replace that equipment. (Ignore taxes.)
8. An avoidable cost is a cost that can be completely eliminated irrespective of whether one chooses one
alternative or another in a decision.
9. A fixed cost cannot be a differential cost.
10. One of the advantages of allocating common fixed costs to a product is that such allocations more
accurately reflect the product’s true profitability.
11. Fixed costs may or may not be sunk costs.
12. A product whose revenues do not cover the sum of its variable costs, its traceable fixed costs, and its
allocated share of general corporate administrative expenses should usually be dropped.
13. In a decision to drop a segment, the opportunity cost of the space occupied by the segment is the cost of
renting or building similar space nearby.
14. Fixed costs may or may not be relevant in decisions about whether a product should be dropped.
15. In a decision to drop a product, the product should not be charged for factory rent if the space in which the
product is produced has no alternative use and the rental payment is unavoidable.
16. When a company is involved in only one activity in the entire value chain, it is vertically integrated.
17. A vertically integrated company is more dependent on its suppliers than a company that is not vertically
integrated.
18. A disadvantage of vertical integration is that by pooling demand for parts from a number of companies, a
supplier will face diseconomies of scale that result in lower quality and higher cost than if every company
makes its own parts.
19. In a special order situation, any fixed cost that could be avoided if the special order were not accepted
would be irrelevant.
20. Depreciation expense on existing factory equipment is usually irrelevant in a decision of whether to accept
or reject a special offer for a company’s product.
21. When a company has a production constraint, total contribution margin will be maximized by emphasizing
the products with the lowest contribution margin per unit of the constrained resource.
22. One way to increase the effective utilization of a bottleneck is to put less emphasis on preventing defects
and simply discard defective units at final inspection before sending them to customers.
23. Defective units should be detected and scrapped or reworked before the bottleneck operation rather than
after it.
24. In a factory operating at capacity, not every machine and person should be working at the maximum
possible rate.
25. Eliminating nonproductive processing time is particularly important in work stations that do not contain
bottlenecks.
26. The split-off point in a process that produces joint products is the point in the manufacturing process at
which the joint products are sent to separate customers.
27. Joint costs are relevant in the decision to sell a product at the split-off point or to process the product
further.
28. The term joint cost is used to describe the costs incurred after the split-off point in a process involving joint
products.
29. Joint products are products that are sold to customers as a set or as part of a group of products.
Multiple Choice
[QUESTION]
30. Hal currently works as the fry guy at Burger Haven but is thinking of quitting his job to attend college full
time next semester. Which of the following would be considered an opportunity cost of attending college?
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 Haven
D) the cost of commuting to the Burger Haven job
31. Opportunity costs are:
A) not used for decision making.
B) the same as variable costs.
C) the same as historical costs.
D) relevant in decision making.
32. Consider the following statements:
I. A division’s net operating income, after deducting both traceable and allocated common fixed costs, is
negative.
II. The division’s avoidable fixed costs exceed its contribution margin.
III. The division’s traceable fixed costs plus its allocated common corporate costs exceed its contribution
margin.
Which of the above statements is a valid reason for eliminating the division?
A) Only I
B) Only II
C) Only III
D) Only I and II
33. 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
34. Management is considering a one-time-only special order. There is sufficient idle capacity to fill the order
without affecting any normal sales. 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
35. When a multi-product factory operates at full capacity, decisions must be made about which 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
36. 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 require use of the bottleneck.
37. Two or more products produced from a common input are called:
A) common costs.
B) joint products.
C) joint costs.
D) sunk costs.
38. In a sell or process further decision, which of the following costs is relevant?
I. A variable production cost incurred after split-off.
II. A fixed production cost incurred prior to split-off.
A) Only I
B) Only II
C) Both I and II
D) Neither I nor II
39. 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 Units in Stock Original Cost Per Unit Current Market Price Per Unit Disposal
Value Per Unit
F58 18,940 $4.40 $4.65 $4.35
D66 15,700 $6.10 $6.50 $4.80
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) $189,290
B) $174,215
C) $168,533
D) $200,905
40. 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) $5.365 per kg
B) $3.795 per kg
C) $2.133 per kg
D) $1.675 per kg
41. Zemlya Corporation currently records $4,000 of depreciation each year on the computer that it uses for its
major data processing needs. The computer currently has one more year of useful life left and it will have a
salvage value of zero at the end of that year. Jennifer, one of the accountants at Zemlya, suggested that the
computer be sold immediately for $3,000 and that the company hire a data processing firm to handle the
corporation’s data processing needs. The computer currently requires $25,000 in annual operating costs in
addition to the depreciation. The data processing firm would charge $10,000 per year for its services. If
Zemlya decides to implement this change, what effect will this have on the corporation’s net cash flow for the
last year of the computer’s useful life?
A) increase of $15,000
B) increase of $18,000
C) decrease of $22,000
D) decrease of $25,000
42. 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
43. 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 Units in Stock Original Cost Per Unit Current Market Price Per Unit
Disposal Value Per Unit
R39 340 $4.70 $4.35 $3.95
I59 23,700 $8.20 $8.05 $6.85
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
44. 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 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
45. 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 $6.10 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
46. 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) decrease of $22,000
B) decrease of $67,600
C) increase of $51,500
D) increase of $5,900
47. Fabio Corporation is considering eliminating a department that has a contribution margin of $30,000 and
$60,000 in fixed costs. Of the fixed costs, $15,000 cannot be avoided. The effect of eliminating this
department on Fabio’s overall net operating income would be:
A) a decrease of $30,000.
B) an increase of $30,000.
C) a decrease of $15,000.
D) an increase of $15,000.
48. Lusk Corporation produces and sells 20,000 units of Product X each month. The selling price of Product X
is $30 per unit, and variable expenses are $21 per unit. A study has been made concerning whether Product
X should be discontinued. The study shows that $50,000 of the $250,000 in fixed expenses charged to
Product X would not be avoidable even if the product was discontinued. If Product X is discontinued, the
company’s overall net operating income would:
A) decrease by $70,000 per month.
B) increase by $70,000 per month.
C) increase by $20,000 per month.
D) decrease by $20,000 per month.
49. The following information relates to next year’s projected operating results of the Consumer Division of
Xampa Corporation:
Contribution margin $1,800,000
Fixed expenses 2,100,000
Net operating loss $(300,000)
If the Consumer Division is eliminated, $1,600,000 of the above fixed expenses could be avoided. What will
be the effect on Xampa’s profit next year if Consumer Division is eliminated?
A) $300,000 increase
B) $300,000 increase
C) $200,000 decrease
D) $200,000 increase
50. Vanikord Corporation currently has two divisions which had the following operating results for last year:
Cork Rubber
Division Division
Sales $500,000 $400,000
Variable costs 210,000 300,000
Contribution margin 290,000 100,000
Traceable fixed costs 130,000 70,000
Segment margin 160,000 30,000
Allocated common corporate fixed costs 90,000 50,000
Net operating income (loss) $ 70,000 $(20,000)
Because the Rubber Division sustained a loss, the president of Vanikoro is considering the elimination of this
division. All of the division’s traceable fixed costs could be avoided if the division was dropped. None of the
allocated common corporate fixed costs could be avoided. If the Rubber Division was dropped at the
beginning of last year, how much higher or lower would Vanikoro’s total net operating income have been for
the year?
A) $20,000 higher
B) $50,000 higher
C) $50,000 lower
D) $30,000 lower
51. A study has been conducted to determine if Product A should be dropped. Sales of the product total
$400,000 per year; variable expenses total $270,000 per year. Fixed expenses charged to the product total
$160,000 per year. The company estimates that $70,000 of these fixed expenses are not avoidable even if
the product is dropped. If Product A is dropped, the company’s overall net operating income would:
A) decrease by $40,000 per year
B) increase by $40,000 per year
C) decrease by $30,000 per year
D) increase by $30,000 per year
52. Weston Corporation is considering eliminating a department that has a contribution margin of $70,000 and
$140,000 in fixed costs. Of the fixed costs, $100,000 cannot be avoided. The effect of eliminating this
department on Weston’s overall net operating income would be:
A) an increase of $70,000.
B) a decrease of $70,000.
C) an increase of $30,000.
D) a decrease of $30,000.
53. The Milham Corporation has two divisions—East and West. The divisions have the following revenues
and expenses:
East West
Sales $720,000 $350,000
Variable costs 370,000 240,000
Traceable fixed costs 130,000 80,000
Allocated common corporate costs 120,000 50,000
Net operating income (loss) $100,000 $(20,000)
Management at Milham is considering the elimination of the West Division. If the West Division were
eliminated, its traceable fixed costs could be avoided. Total common corporate costs would be unaffected by
this decision. Given these data, the elimination of the West Division would result in an overall company net
operating income of:
A) $100,000
B) $80,000
C) $120,000
D) $50,000
54. A study has been conducted to determine if one of the departments in Barry Corporation should be
discontinued. The contribution margin in the department is $60,000 per year. Fixed expenses charged to the
department are $75,000 per year. It is estimated that $34,000 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 $26,000 per year
B) increase by $26,000 per year
C) decrease by $15,000 per year
D) increase by $15,000 per year
55. Claris Corporation (a multi-product company) produces and sells 7,000 units of Product X each year.
Each unit of Product X sells for $12 and has a contribution margin of $4. If Product X is discontinued, $19,000
of the $32,000 in fixed costs charged to Product X could be eliminated. If Product X is discontinued, the
company’s overall operating income would:
A) decrease by $4,000 per year.
B) increase by $4,000 per year.
C) decrease by $9,000 per year.
D) increase by $9,000 per year.
56. Product Q77H has been considered a drag on profits at Zenke Corporation for some time and
management is considering discontinuing the product altogether. Data from the company’s accounting system
appear below:
Sales $380,000
Variable expenses $171,000
Fixed manufacturing expenses $133,000
Fixed selling and administrative expenses $80,000
In the company’s accounting system all fixed expenses of the company are fully allocated to products. Further
investigation has revealed that $71,000 of the fixed manufacturing expenses and $43,000 of the fixed selling
and administrative expenses are avoidable if product Q77H is discontinued. What would be the effect on the
company’s overall net operating income if product Q77H were dropped?
A) Overall net operating income would decrease by $95,000.
B) Overall net operating income would increase by $95,000.
C) Overall net operating income would increase by $4,000.
D) Overall net operating income would decrease by $4,000.
57. The management of Fannin Corporation is considering dropping product H58S. Data from the company’s
accounting system appear below:
Sales $490,000
Variable expenses $221,000
Fixed manufacturing expenses $152,000
Fixed selling and administrative expenses $98,000
In the company’s accounting system all fixed expenses of the company are fully allocated to products. Further
investigation has revealed that $90,000 of the fixed manufacturing expenses and $42,000 of the fixed selling
and administrative expenses are avoidable if product H58S is discontinued. What would be the effect on the
company’s overall net operating income if product H58S were dropped?
A) Overall net operating income would decrease by $137,000.
B) Overall net operating income would increase by $137,000.
C) Overall net operating income would decrease by $151,000.
D) Overall net operating income would increase by $151,000.