Financial and Managerial Accounting, 8e (Wild)
Chapter 23 Relevant Costing for Managerial Decisions
1) An opportunity cost is the potential benefit lost by taking a specific action when two or more
alternative choices are available.
2) Incremental costs are the additional costs incurred if a company pursues a certain course of
action.
3) Opportunity costs are the additional or incremental revenues generated by selecting a certain
course of action.
4) A sunk cost will change with a future course of action.
5) A sunk cost arises from a past decision and cannot be avoided or changed.
6) Sunk costs are irrelevant to future decisions.
7) An out-of-pocket cost requires a future outlay of cash and is relevant for current and future
decision making.
8) Another name for relevant cost is unavoidable cost.
9) Incremental revenues refer to the additional revenue generated by selecting a particular course
or action over another.
10) Significant sunk costs are relevant to decisions about the future.
11) The concept of incremental cost is the same as the concept of differential cost.
12) Additional business in the form of a special order of goods or services should be accepted
when the incremental revenue equals the incremental costs.
13) In a make or buy decision, management should focus on costs that are the same under the
two alternatives.
14) Part of the decision to accept additional business should be based on a comparison of the
incremental (differential) costs of the added production with the additional revenues to be
received.
15) Incremental costs should be considered in a make or buy decision.
16) If a company has the capacity to produce either 10,000 units of Product A or 10,000 units of
Product B; assuming fixed costs are the same, production restrictions are the same for both
products, and the markets for both products are unlimited; the company should commit 100% of
its capacity to the product that has the higher contribution margin per unit of operating capacity.
17) The decision to accept an additional volume of business should be based on a comparison of
the revenue from the additional business with the sunk costs of producing that revenue.
18) Sunk costs are irrelevant to future decisions as they cannot be changed or avoided.
19) Wages from a job a student gives up to attend summer school would be a sunk cost.
20) The cost of equipment purchased by a company last year would be an avoidable cost.
21) A special order of goods or services should be accepted when the incremental revenue
exceeds the normal revenue.
22) Assuming a company has excess operating capacity, a special order should be accepted if its
incremental revenues exceed the incremental costs, and the special order does not negatively
impact existing business.
23) The decision to accept additional business should be based on a comparison of the
incremental costs of the added production with the additional revenues to be received.
24) If the cost to buy a part is less than the direct material, direct labor, and incremental overhead
cost of making the part, the company should buy the part.
25) A company’s best sales mix is determined using contribution margin per unit of scarce
resource.
26) The total cost method determines a selling price equal to a product’s total costs plus a desired
profit on the product.
27) Markup percentage equals total costs divided by desired profit.
28) Incremental costs are also called out-of-pocket costs.
29) Additional costs incurred if a company pursues a certain course of action are sunk costs.
30) If accepting additional business would cause existing sales to decline, the offer should
always be declined.
31) Contribution margin lost from a decline in sales is an opportunity cost.
32) Additional power for operating machines, extra supplies, and added cleanup costs are
examples of incremental overhead costs.
33) Employee morale, timeliness of delivery, and the reactions of customers are examples of
nonfinancial factors that should be considered when making a managerial decision.
34) Costs already incurred in manufacturing the units of a product that do not meet quality
standards are relevant costs in a scrap or rework decision.
35) Sales mix refers to the combination of products sold by a company.
36) To maximize profit when a constrained resource exists, management should produce the
sales mix that has the highest contribution margin per unit of scarce resource.
37) The decision to sell or process a product further is analyzed by identifying the incremental
costs and benefits of further processing.
38) An opportunity cost:
A) Is an unavoidable cost because it remains the same regardless of the alternative chosen.
B) Requires a current outlay of cash.
C) Results from past managerial decisions.
D) Is the potential benefit lost by choosing a specific alternative course of action among two or
more.
E) Is irrelevant in decision making because it occurred in the past.
39) The potential benefits lost by taking a specific action when two or more alternative choices
are available is known as a(n):
A) Alternative cost.
B) Sunk cost.
C) Out-of-pocket cost.
D) Differential cost.
E) Opportunity cost.
40) A cost that requires a future outlay of cash, and is relevant for current and future decision
making, is a(n):
A) Out-of-pocket cost.
B) Sunk cost.
C) Opportunity cost.
D) Operating cost.
E) Uncontrollable cost.
41) A cost that cannot be avoided or changed because it arises from a past decision, and is
irrelevant to future decisions, is called a(n):
A) Uncontrollable cost.
B) Incremental cost.
C) Opportunity cost.
D) Out-of-pocket cost.
E) Sunk cost.
42) A company paid $200,000 ten years ago for a specialized machine that has no salvage value
and is being depreciated at the rate of $10,000 per year. The company is considering using the
machine in a new project that will have incremental revenues of $28,000 per year and annual
cash expenses of $20,000. In analyzing the new project, the $200,000 original cost of the
machine is an example of a(n):
A) Incremental cost.
B) Opportunity cost.
C) Variable cost.
D) Sunk cost.
E) Out-of-pocket cost.
43) An additional cost incurred only if a company pursues a particular course of action is a(n):
A) Period cost.
B) Pocket cost.
C) Discount cost.
D) Incremental cost.
E) Sunk cost.
44) A company is considering a new project that will cost $19,000. This project would result in
additional annual revenues of $6,000 for the next 5 years. The $19,000 cost is an example of
a(n):
A) Sunk cost.
B) Fixed cost.
C) Incremental cost.
D) Uncontrollable cost.
E) Opportunity cost.
45) Gordon Corporation produced 10,000 digital watches in the current year. Variable costs are
$8 per watch. Overhead assigned is $2.25 per watch. A supplier offers the watches for $9.50
each. Gordon’s production manager reports the incremental overhead is $1.25 per watch. Gordon
should:
A) Continue making the watches as an additional $1.50 per watch would be incurred if bought
from the supplier.
B) Continue making the watches as an additional $0.25 per watch would be incurred if bought
from the supplier.
C) Buy the watches as they would save $0.75 per watch.
D) Buy the watches as they would save $1.50 per watch.
E) Buy the watches as they would save $1.75 per watch.
46) Chang Industries has 2,000 tables that cost $115 each to produce. Each table can be sold as is
for $221 or finished with a stain or paint. The cost to add a finish to each table is $75. Finished
tables can be sold for $310. Chang should:
A) Finish the table for incremental cost of $190 per table.
B) Sell the unfinished tables for profit of $195 per table.
C) Finish the table for profit of $89 per table.
D) Sell unfinished tables for $106 incremental revenue per table.
E) Finish the table for profit of $14 per table.
47) Chang Industries has 2,000 defective units of product that already cost $14 each to produce.
A salvage company will purchase the defective units as is for $5 each. Chang’s production
manager reports that the defects can be corrected for $6 per unit, enabling them to be sold at their
regular market price of $21. The $14 per unit is a:
A) Incremental cost.
B) Sunk cost.
C) Out-of-pocket cost.
D) Opportunity cost.
E) Period cost.
48) Product A requires 5 machine hours per unit to be produced, Product B requires only 3
machine hours per unit, and the company’s productive capacity is limited to 240,000 machine
hours. Product A sells for $16 per unit and has variable costs of $6 per unit. Product B sells for
$12 per unit and has variable costs of $5 per unit. Assuming the company can sell as many units
of either product it produces, the company should:
A) Produce only Product A.
B) Produce only Product B.
C) Produce equal amounts of A and B.
D) Produce A and B in the ratio of 62.5% A to 37.5% B.
E) Produce A and B in the ratio of 40% A and 60% B.
49) Epsilon Co. can produce a unit of product for the following costs:
Direct material $ 8
Direct labor 24
Overhead 40
Total product costs per unit $ 72
An outside supplier offers to provide Epsilon with all the units it needs at $60 per unit. If Epsilon
buys from the supplier, the company will still incur 40% of its overhead. Epsilon should choose
to:
A) Buy since the relevant cost to make it is $72.
B) Make since the relevant cost to make it is $56.
C) Buy since the relevant cost to make it is $48.
D) Make since the relevant cost to make it is $48.
E) Buy since the relevant cost to make it is $56.
50) Factor Co. can produce a unit of product for the following costs:
Direct material $ 8
Direct labor 24
Overhead 40
Total product cost per unit $ 72
An outside supplier offers to provide Factor with all the units it needs at $46 per unit. If Factor
buys from the supplier, the company will still incur 60% of its overhead. Factor should choose
to:
A) Buy since the relevant cost to make it is $56.
B) Make since the relevant cost to make it is $48.
C) Buy since the relevant cost to make it is $48.
D) Make since the relevant cost to make it is $32.
E) Buy since the relevant cost to make it is $32.
51) Listmann Corp. processes four different products that can either be sold as is or processed
further.
Listed below are sales and additional cost data:
Product Sales Value with no further Processing Additional Processing Costs
Sales Value after further processing
Premier $ 1,350 $ 900 $ 2,700
Deluxe 450 225 630
Super 900 450 1,800
Basic 90 45 180
Which product(s) should not be processed further?
A) Premier.
B) Deluxe.
C) Super.
D) Basic.
E) Premier and Basic.
52) Maxim manufactures a hamster food product called Green Health. Maxim currently has
10,000 bags of Green Health on hand. The variable production costs per bag are $1.80 and total
fixed costs are $10,000. The hamster food can be sold as it is for $9.00 per bag or be processed
further into Premium Green and Green Deluxe at an additional cost. The additional processing
will yield 10,000 bags of Premium Green and 3,000 bags of Green Deluxe, which can be sold for
$8 and $6 per bag, respectively. Assuming Maxim further processes Green Health further into
Premium Green and Green Deluxe, revenue from the two products would be:
A) $98,000.
B) $96,000.
C) $8,000.
D) $6,000.
E) $2,000.
53) Maxim manufactures a hamster food product called Green Health. Maxim currently has
10,000 bags of Green Health on hand. The variable production costs per bag are $1.80 and total
fixed costs are $10,000. The hamster food can be sold as it is for $9.00 per bag or be processed
further into Premium Green and Green Deluxe at an additional cost. The additional processing
will yield 10,000 bags of Premium Green and 3,000 bags of Green Deluxe, which can be sold for
$8 and $6 per bag, respectively. The incremental revenue of processing Green Health further into
Premium Green and Green Deluxe would be:
A) $98,000.
B) $96,000.
C) $8,000.
D) $6,000.
E) $2,000.