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Chapter 12 Differential Analysis: The Key to Decision Making Answer Key
True / False Questions
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.
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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.
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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.
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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.
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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.
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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.
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Multiple Choice Questions
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:
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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.
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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.
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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?
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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?
