Chapter 8
True / False
1. The first step in making a short-run decision is to identify alternatives as possible solutions to the problem.
a. True
b. False
2. In making a short-run decision, all alternatives need to be considered.
a. True
b. False
3. In short-run decision making, the alternative with the lowest overall cost is always chosen.
a. True
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b. False
4. Irrelevant costs are costs that are the same for more than one alternative.
a. True
b. False
5. The benefit sacrificed when one alternative is chosen over another is called sunk cost.
a. True
b. False
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6. Short-run decision making only involves short-run decisions that have nothing to do with the firm’s overall strategy.
a. True
b. False
7. A sunk cost is always relevant.
a. True
b. False
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8. Future costs that differ across alternatives are relevant costs.
a. True
b. False
9. Fixed costs are never relevant.
a. True
b. False
10. Resources that are acquired in advance of usage are flexible resources.
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a. True
b. False
11. Flexible resources may have unused capacity.
a. True
b. False
12. A choice between internal and external production is a keep-or-drop decision.
a. True
b. False
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13. On a segmented income statement, fixed costs are broken down into direct fixed costs and common fixed costs.
a. True
b. False
14. Typically in a special-order decision, a customer wants to pay more than the usual price.
a. True
b. False
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15. In keep-or-drop decisions, both the segment’s contribution margin and its segment margin are useful in evaluating the
performance of the segment.
a. True
b. False
16. A segment margin is always greater than or equal to zero.
a. True
b. False
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17. At split-off, the joint costs of production for joint products are not relevant to the sell-or-process-further decision.
a. True
b. False
18. In deciding the optimal mix of products that use a constrained resource, it is important to determine the contribution
margin per unit of scarce resource.
a. True
b. False
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19. Linear programming is a special technique that can be used to determine the optimal product mix when there are
multiple constraints.
a. True
b. False
20. A situation in which management tells divisions that they must reduce costs by 10% is called target costing.
a. True
b. False
21. Bellair Company produces a product that has manufacturing cost of $30 per unit. Bellair’s policy is to charge a price
equal to cost plus 30%. The 30% is pure profit to Bellair.
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a. True
b. False
22. In determining the target price of a good, the company must first determine the target cost and the desired profit.
a. True
b. False
23. Demand is one side of the pricing equation; supply is the other side.
a. True
b. False
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24. The markup includes desired profit and any costs not included in the base cost.
a. True
b. False
25. Many companies start with cost to determine price since revenue must cover cost for the firm to make a profit.
a. True
b. False
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26. A major advantage of markup pricing is that standard markups are easy to apply.
a. True
b. False
27. Target costing is a method of determining the cost of a product or service based on the price (target price) that
customers are willing to pay.
a. True
b. False
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28. Target costing involves much more up-front work than cost-based pricing.
a. True
b. False
29. Target costing can be used most effectively in the design and development stage of the product life cycle.
a. True
b. False
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Multiple Choice
30. Pasha Company produced 50 defective units last month at a unit manufacturing cost of $30. The defective units were
discovered before leaving the plant. Pasha can sell them “as is” for $20 or can rework them at a cost of $15 and sell them
at the regular price of $50. Which of the following is not relevant to the sell-or-rework decision?
a. $15 for rework
b. $20 selling price of defective units
c. $30 manufacturing cost
d. $50 regular selling price
e. All of these are relevant.
31. Which of the following is not a step in the decision-making model?
a. define the problem
b. identify alternatives
c. consider qualitative factors
d. total relevant costs and benefits for each alternative
e. determine costs and benefits for both feasible and unfeasible alternatives
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32. Which of the following involves choosing between alternatives with an immediate or limited time frame in mind?
a. The limited options model
b. Strategic decision making
c. Restructured alternatives management
d. Short-run decision making
e. None of these.
33. Future costs that differ across alternatives are
a. opportunity costs.
b. sunk costs.
c. relevant costs.
d. variable costs.
e. product costs.
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34. Depreciation is a _____, a cost that cannot be affected by any future action.
a. step cost
b. opportunity cost
c. sunk cost
d. mixed cost
e. None of these
35. StarZinc Company produced 200 defective units last month at a unit manufacturing cost of $50. The defective units
were discovered before leaving the plant. StarZinc can sell them as is for $35 or can rework them at a cost of $25 and sell
them at the regular price of $100. The total relevant cost of reworking the defective units is:
a. $8,500.
b. $7,800.
c. $2,000.
d. $3,600.
e. $5,000.
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36. Abbott Company is considering purchasing a new machine to replace a machine purchased one year ago that is not
achieving the expected results. The following information is available:
Expected maintenance costs of new machine $12,000 per year
Purchase price of existing machine $150,000
Expected cost savings of new machine $20,000 per year
Expected maintenance costs of existing machine $8,000 per year
Resale value of existing machine $35,000
Which of these items is irrelevant?
a. Expected maintenance costs of new machine
b. Purchase cost of existing machine
c. Expected maintenance costs of existing machine
d. Expected resale value of existing machine
37. _____ are referred to as strictly variable costs.
a. Scarce resources
b. Implicit resources
c. Committed resources
d. Indirect resources
e. Flexible resources
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38. A company is considering a special order for 1,000 units to be priced at $8.90 (the normal price would be $11.50). The
order would require specialized materials costing $4.00 per unit. Direct labor and variable factory overhead would cost
$2.15 per unit. Fixed factory overhead is $1.20 per unit. However, the company has excess capacity and acceptance of the
order would not raise total fixed factory overhead. The warehouse, however, would have to add capacity costing $1,300.
Which of the following is relevant to the special order?
a. $11.50 normal selling price
b. $1.20 fixed factory overhead per unit
c. $7.35 spent on donuts and coffee
d. $8.90 selling price per unit of special order
e. None of these.
39. Which of the following is a key point considered in a special order decision?
a. Additional irrelevant costs associated with the special order
b. Avoidable sunk costs associated with the special order
c. The estimated benefits associated with the special order
d. The preparation of segmented income statements of the special order
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40. Qualitative factors that should be considered when evaluating a make-or-buy decision are
a. the quality of the outside supplier’s product.
b. whether the outside supplier can provide the needed quantities.
c. whether the outside supplier can provide the product when it is needed.
d. All of these.
41. Fuller Company makes frames. A customer wants to place a special order for 600 frames in green with the company
logo painted on the frame, to be priced at $40 each. Normally, Fuller would charge $90 per frame for this type of order.
Fuller figures that wood and glass will cost $16 per frame, variable overhead (machining, electricity) is $4 per frame,
direct labor is $12 per frame, and one setup will be required at $1,000 per setup. The set-up charge costs are 100% labor.
Currently, the workers needed to set up for and make the frames are working at Fuller. Their wages will be paid whether
or not the special order is accepted. Fuller’s policy is to avoid layoffs to the extent possible.
Which costs of the special order relate to flexible resources?
a. wood and glass
b. wood, glass, and variable overhead
c. depreciation on machinery
d. wood, glass, and direct labor
e. wood, glass, direct labor, and setup labor
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42. Fuller Company makes frames. A customer wants to place a special order for 600 frames in green with the company
logo painted on the frame, to be priced at $40 each. Normally, Fuller would charge $90 per frame for this type of order.
Fuller figures that wood and glass will cost $16 per frame, variable overhead (machining, electricity) is $4 per frame,
direct labor is $12 per frame, and one setup will be required at $1,000 per setup. The set-up charge costs are 100% labor.
Currently, the workers needed to set up for and make the frames are working at Fuller. Their wages will be paid whether
or not the special order is accepted. Fuller’s policy is to avoid layoffs to the extent possible.
Which of the following is a qualitative factor that Fuller would consider in making the decision to accept or reject the
special order?
a. cost of yarn and backing
b. cost of setup labor
c. the no-layoff policy
d. the use of machinery
e. the machining and electricity
43. Fuller Company makes frames. A customer wants to place a special order for 600 frames in green with the company
logo painted on the frame, to be priced at $40 each. Normally, Fuller would charge $90 per frame for this type of order.