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1. Future costs that do not differ among the alternatives are not relevant in a decision.
2. Fixed costs are irrelevant in a decision.
3. Sunk costs are considered to be avoidable costs.
4. Avoidable costs are also called relevant costs.
5. An avoidable cost is a cost that can be eliminated (in whole or in part) as a result of
choosing one alternative over another.
6. A sunk cost is a cost that has already been incurred and that cannot be avoided regardless
of what action is chosen.
7. The book value of a machine, as shown on the balance sheet, is relevant in a decision
concerning the replacement of that machine by another machine.
8. 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. Generally, a product line should be dropped when the fixed costs that can be avoided by
dropping the product line are less than the contribution margin that will be lost.
10. The cost of a resource that has no alternative use in a make or buy decision problem has
an opportunity cost of zero.
11. Vertical integration is the involvement by a company in more than one of the steps from
securing basic raw materials to the production and distribution of a finished product.
12. Depreciation expense on existing factory equipment is generally relevant to a decision of
whether to accept or reject a special offer for a company's product.
13. 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.
14. Managers should not authorize working overtime at a work station that contains a
bottleneck.
15. Joint costs are not relevant to the decision to sell a product at the split-off point or to
process the product further.
16. 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.
17. Costs which are always relevant in decision making are those costs which are:
18. A general rule in relevant cost analysis is:
19. The opportunity cost of making a component part in a factory with no excess capacity is
the:
20. Freestone Company is considering renting Machine Y to replace Machine X. It is
expected that Y will waste less direct materials than does X. If Y is rented, X will be sold on the
open market. For this decision, which of the following factors is(are) relevant?
I. Cost of direct materials used
II. Resale value of Machine X
21. Which of the following are valid reasons for eliminating a product line?
I. The product line's contribution margin is negative.
II. The product line's traceable fixed costs plus its allocated common corporate costs are less
than its contribution margin.
22. When there is a production constraint, a company should emphasize the products with:
23. In a sell or process further decision, which of the following costs are relevant?
I. A variable production cost incurred prior to the split-off point.
II. An avoidable fixed production cost incurred after the split-off point.
24. Scherer Corporation is preparing a bid for a special order that would require 720 liters of
material U48N. The company already has 560 liters of this raw material in stock that originally
cost $6.30 per liter. Material U48N 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 $5.80 per liter. New stocks
of the material can be readily purchased for $6.65 per liter. What is the relevant cost of the 720
liters of the raw material when deciding how much to bid on the special order?
25. Cung Inc. has some material that originally cost $68,400. The material has a scrap value
of $30,100 as is, but if reworked at a cost of $1,400, it could be sold for $30,800. 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?
26. Liffick 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 6,200 units of component VFG. Each unit of VFG requires 8 units of
material C79 and 6 units of material X70. Data concerning these two materials follow:
Material C79 is in use in many of the company's products and is routinely replenished. Material
X70 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 VFG?
27. Schemm Inc. regularly uses material F04E and currently has in stock 460 liters of the
material for which it paid $2,622 several weeks ago. If this were to be sold as is on the open
market as surplus material, it would fetch $5.25 per liter. New stocks of the material can be
purchased on the open market for $5.85 per liter, but it must be purchased in lots of 1,000 liters.
You have been asked to determine the relevant cost of 800 liters of the material to be used in a
job for a customer. The relevant cost of the 800 liters of material F04E is:
28. Stampka 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 4,200 units of component JJF. Each unit of JJF requires 6 units of
material O38 and 9 units of material P56. Data concerning these two materials follow:
Material O38 is in use in many of the company's products and is routinely replenished. Material
P56 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 JJF?
29. Janus Corporation has in stock 43,700 kilograms of material L that it bought five years
ago for $6.10 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 $3.23 per kilogram. An alternative
would be to use material L in one of the company's current products, E99D, which currently
requires 2 kilograms of a raw material that is available for $9.45 per kilogram. Material L can be
modified at a cost of $0.62 per kilogram so that it can be used as a substitute for this material in
the production of product E99D. However, after modification, 3 kilograms of material L is required
for every unit of product E99D that is produced. Janus Corporation has now received a request
from a company that could use material L in its production process. Assuming that Janus
Corporation could use all of its stock of material L to make product E99D or the company could
sell all of its stock of the material at the current scrap price of $3.23 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?
30. Lampshire Inc. is considering using stocks of an old raw material in a special project. The
special project would require all 160 kilograms of the raw material that are in stock and that
originally cost the company $1,136 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 $6.50 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 $75 for all 160 kilograms. What is the relevant cost of the 160
kilograms of the raw material when deciding whether to proceed with the special project?
31. 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:
32. The Kelsh Company has two divisions--North and South. The divisions have the following
revenues and expenses:
Management at Kelsh is pondering the elimination of North Division. If North Division were
eliminated, its traceable fixed expenses could be avoided. The total common corporate expenses
would be unaffected. Given these data, the elimination of North Division would result in an
overall company net operating income of:
33. Power Systems Inc. manufactures jet engines for the United States armed forces on a
cost-plus basis. The production cost of a particular jet engine is shown below:
If production of this engine was discontinued, the production capacity would be idle, and the
supervisor would be laid off. The depreciation referred to above is for special equipment that
would have no resale value and that does not wear out through use. When asked to bid on the
next contract for this engine, the minimum unit price that Power Systems should bid is:
34. The management of Heider Corporation is considering dropping product J14V. Data from
the company's accounting system appear below:
In the company's accounting system all fixed expenses of the company are fully allocated to
products. Further investigation has revealed that $211,000 of the fixed manufacturing expenses
and $172,000 of the fixed selling and administrative expenses are avoidable if product J14V is
discontinued. What would be the effect on the company's overall net operating income if product
J14V were dropped?
