Chapter 22—Relevant Information and Decisions Key
1. Future costs that change as a result of a decision are:
2. Costs that have already been incurred and CANNOT be avoided are:
3. Costs that are never relevant to a decision because they are always the same are:
4. Costs that can be eliminated in whole or in part by choosing one alternative over another are:
5. Which of the following costs are always relevant for decision making?
6. The maximum available contributions to profit that have been passed up by using resources for another
purpose are:
7. Which of the following costs is LEAST likely to be a differential cost?
8. In a decision regarding whether or not to buy a new truck, the book value of the old truck usually is
considered to be:
9. The total-cost approach to considering alternatives includes analyzing:
10. Which of the following statements is true when making product and process decisions?
12. For a cost to be a differential cost, it must be:
13. The total-cost approach to pricing products is usually relevant to:
14. Differential costs are relevant when making which of the following types of decisions?
15. Costs that are significant in the decision-making process but are NOT recorded in the accounting records
are:
16. A cost that is measured by the benefits forgone from an alternative use of resources is called a(n):
17. Evening theater tickets are probably more expensive than matinee tickets because:
18. For which decision would a store manager’s salary be a differential cost?
19. For which decision(s) would shipping costs be a differential cost?
20. A special order is an:
21. Which type of data might cause a manager to erroneously reject an order?
22. In making a decision about whether or not to fill a special order, fixed costs that are incurred regardless of
whether the order is accepted should:
23. When pricing special orders in a situation where there is unused capacity, management should charge a
price that is greater than the:
24. If a decision regarding special orders is based only on costs, management should:
25. When managers are deciding what price to charge for a special order, they should consider:
26. When pricing special orders, management can often approximate additional costs by the:
27. Assuming a firm has excess capacity, which of the following is NOT a reason that the firm would decide to
reduce the normal price of a product or service in order to obtain a special order?
28. A firm can increase profits if:
29. Napa Company manufactures computers. The following cost information for the manufacture of one
computer has been compiled:
Direct materials
$ 96
Direct labor
180
Variable manufacturing overhead
124
Variable selling and administrative expenses
80
Fixed manufacturing overhead
80
If Napa receives a special order for 500 computers at a price of $550, what will be the effect on the company’s profit if the order is accepted?
(Assume that other variables do not change.)
30. West Star Company manufactures computers. The following cost information for the manufacture of one
computer has been compiled:
Direct materials
$55
Direct labor
95
Variable manufacturing overhead
60
Variable selling and administrative expenses
30
Fixed manufacturing overhead
40
West Star received an offer for a special order for 1,000 computers. In addition to normal costs, West Star would also incur a $10 shipping charge per
computer. In negotiating a price, what is the minimum selling price West Star should accept? (Assume that other variables do not change and West
Star has enough capacity to fulfill the order.)
31. Exhibit 22-1
Lumens Corporation makes ornamental lamps. The costs per lamp are the following:
Direct materials
$ 35
Direct labor
45
Manufacturing overhead
50
Total
$130
The manufacturing overhead can be divided into 40% variable manufacturing overhead and 60% fixed manufacturing overhead.
Refer to Exhibit 22-1. To earn a reasonable return and cover administrative and selling expenses, Lumens normally sells its lamps for $200 each.
Given this information, Lumens’s variable cost of making each lamp is:
32. Exhibit 22-1
Lumens Corporation makes ornamental lamps. The costs per lamp are the following:
Direct materials
$ 35
Direct labor
45
Manufacturing overhead
50
Total
$130
The manufacturing overhead can be divided into 40% variable manufacturing overhead and 60% fixed manufacturing overhead.
Refer to Exhibit 22-1. A major department store has offered to buy 1,000 of the lamps from Lumens for $120 each. Given this information, if
Lumens has sufficient idle capacity, by how much would Lumens increase its profits by selling the lamps to the store?
33. Packer Corporation makes vases, the costs of which are:
Direct materials
$ 70
Direct labor
90
Manufacturing overhead
120
Total
$280
The manufacturing overhead can be divided into 60% variable manufacturing overhead and 40% fixed manufacturing overhead. A major department
store has offered to buy 1,000 of the vases from Packer for $250 each. Given this information, if Packer has sufficient idle capacity and no adverse
qualitative factors, should Packer accept the special order?
34. The relevant costs of buying a component from a supplier are:
35. In a make-or-buy decision, management would consider:
36. When there is idle capacity, which costs are most likely to be IRRELEVANT?
37. The opportunity cost of producing a component within a firm is:
38. Make-or-buy decisions should be based on:
39. Which of the following qualitative factors should be considered in a make-or-buy decision?
40. Which of the following statements about opportunity costs is true?
41. A cost important to the decision-making process but NOT recorded in conventional accounting records is
called a(n):
42. Exhibit 22-2
JD Smith Company is operating at less than full capacity. The production manager is considering using this
excess capacity to make a part that he usually buys. The full costs of manufacturing the part are as follows:
Total Cost of
Unit Cost
3,000 Units
Direct materials
$15
$ 45,000
Direct labor
18
54,000
Variable manufacturing overhead
5
15,000
Direct fixed manufacturing overhead
2
6,000
Indirect fixed manufacturing overhead
6
18,000
Totals
$46
$138,000
Up to now, the company has been buying 3,000 units of the part for a total of $115,000.
Refer to Exhibit 22-2. In deciding whether or not to make the part, JD Smith Company should use a differential unit cost figure of:
43. Exhibit 22-2
JD Smith Company is operating at less than full capacity. The production manager is considering using this
excess capacity to make a part that he usually buys. The full costs of manufacturing the part are as follows:
Total Cost of
Unit Cost
3,000 Units
Direct materials
$15
$ 45,000
Direct labor
18
54,000
Variable manufacturing overhead
5
15,000
Direct fixed manufacturing overhead
2
6,000
Indirect fixed manufacturing overhead
6
18,000
Totals
$46
$138,000
Up to now, the company has been buying 3,000 units of the part for a total of $115,000.
Refer to Exhibit 22-2. If JD Smith uses a differential-cost analysis in deciding whether to make the part or buy the part, the total differential cost of
making the part would be:
44. Exhibit 22-2
JD Smith Company is operating at less than full capacity. The production manager is considering using this
excess capacity to make a part that he usually buys. The full costs of manufacturing the part are as follows:
Total Cost of
Unit Cost
3,000 Units
Direct materials
$15
$ 45,000
Direct labor
18
54,000
Variable manufacturing overhead
5
15,000
Direct fixed manufacturing overhead
2
6,000
Indirect fixed manufacturing overhead
6
18,000
Totals
$46
$138,000
Up to now, the company has been buying 3,000 units of the part for a total of $115,000.
Refer to Exhibit 22-2. If JD Smith decided to make this product, its profit would:
45. Exhibit 22-3
Shasta Company is operating at less than full capacity. The production manager is considering using this excess
capacity to make a part that he usually buys. The full costs of manufacturing the part are as follows:
Total Cost of
Unit Cost
2,000 Units
Direct materials
$16
$ 32,000
Direct labor
30
60,000
Variable manufacturing overhead
12
24,000
Direct fixed manufacturing overhead
6
12,000
Indirect fixed manufacturing overhead
12
24,000
Totals
$76
$152,000
Up to now, the company has been buying 2,000 units of the part for a total of $124,000.
Refer to Exhibit 22-3. In deciding whether or not to make the part, Shasta Company should use a differential unit cost figure of:
46. Exhibit 22-3
Shasta Company is operating at less than full capacity. The production manager is considering using this excess
capacity to make a part that he usually buys. The full costs of manufacturing the part are as follows:
Total Cost of
Unit Cost
2,000 Units
Direct materials
$16
$ 32,000
Direct labor
30
60,000
Variable manufacturing overhead
12
24,000
Direct fixed manufacturing overhead
6
12,000
Indirect fixed manufacturing overhead
12
24,000
Totals
$76
$152,000
Up to now, the company has been buying 2,000 units of the part for a total of $124,000.
Refer to Exhibit 22-3. If Shasta Company uses a differential-cost analysis in deciding whether to make the part, the total differential cost of making
the part would be:
47. Exhibit 22-3
Shasta Company is operating at less than full capacity. The production manager is considering using this excess
capacity to make a part that he usually buys. The full costs of manufacturing the part are as follows:
Total Cost of
Unit Cost
2,000 Units
Direct materials
$16
$ 32,000
Direct labor
30
60,000
Variable manufacturing overhead
12
24,000
Direct fixed manufacturing overhead
6
12,000
Indirect fixed manufacturing overhead
12
24,000
Totals
$76
$152,000
Up to now, the company has been buying 2,000 units of the part for a total of $124,000.
Refer to Exhibit 22-3. If Shasta Company decided to make this product, its profit would:
48. Exhibit 22-4
Lauria Electronics has excess capacity that could be used to make 2,000 antennas for the cell phones that the
company produces. The following cost figures are available:
Per Unit
Total
$2.00
$4,000
3.00
6,000
2.50
5,000
1.20
2,400
2.40
4,800
Lauria can buy the antennas from an outside supplier for $10.50.
Refer to Exhibit 22-4. Given the data above, Lauria would:
49. Exhibit 22-4
Lauria Electronics has excess capacity that could be used to make 2,000 antennas for the cell phones that the
company produces. The following cost figures are available:
Per Unit
Total
$2.00
$4,000
3.00
6,000
2.50
5,000
1.20
2,400
2.40
4,800
Lauria can buy the antennas from an outside supplier for $10.50.
Refer to Exhibit 22-4. Given the data above, if Lauria has idle facilities with no alternative use, it should:
50. Decisions to drop a product line must take into consideration:
51. Which of the following should be considered in a decision to enter a market?
52. When a segment of a business consistently shows net losses, it should:
53. When considering whether or not to drop a market segment of a business, past costs that CANNOT be
recovered regardless of whether the segment is dropped are:
54. Which of the following criteria should be used when making a decision about whether or not to drop a
market segment?
55. Costs that are NOT the responsibility of any specific segment, product, or department are:
56. A company should generally add a product line if:
57. Newell Company presently has three product lines: paper, stamps, and printer ink. The company is
considering discontinuing the stamp line. The stamp line has the following current data:
Sales revenue
$ 48,000
Variable costs
(30,000)
Direct fixed costs
(12,000)
Indirect fixed costs (allocated from company headquarters)
(9,000)
Net loss
$ (3,000)
Given this information, if Newell discontinues the stamp line, net income would:
58. Newell Company presently has three product lines: paper, stamps, and printer ink. The company is
considering adding a new line of pens. Market research shows the following expected revenues and costs if the
pen line were added:
Sales revenue (expected annual sale of 16,250 units)
$ 65,000
Variable costs
(30,000)
Direct fixed costs
(12,000)
Indirect fixed costs (allocated from company headquarters)
(9,000)
Net income
$ 14,000
If pens are added as a product line, it is expected that the other lines will have a decrease in contribution margin of $7,000. Given this information, if
Newell adds the pen line, net income would increase by:
59. Northwest Company presently has two products: compasses and maps. The company is considering
discontinuing the compass line. The following financial information is available for these two products:
Compass
Map
$275,000
$228,000
(190,000)
(133,000)
(60,000)
(40,000)
(40,000)
(30,000)
$ (15,000)
$ 25,000
Given this information, if Northwest discontinues the compass line, net income would:
60. Overland Company is planning on discontinuing one of its markets in Japan. The Japanese market has a
contribution margin of $33,000. Fixed costs for the Japanese market are $55,000, 70% of which are
unavoidable. What will be the effect on Overland’s net income if the Japanese market is eliminated?
61. Merced Corporation is considering adding a new product line. Market research indicates that sales revenue
for the new line would be $80,000 for 35,000 units. Variable costs would be $1.70 per unit; direct fixed costs,
$0.40 per unit; and indirect fixed costs, $0.50 per unit. If Merced added the new line, its income would:
62. Joint product costs are:
63. Under what circumstance will it be profitable to continue processing after the split-off point?
64. Granger Company makes portable DVD players. In its inventory, Granger found 200 DVD players that had
become obsolete. Each DVD player has a cost of $100. Granger can upgrade these DVD players for $15 each
after which they can be sold at a cost of $40 each. Granger has also received an offer to sell the DVD players, as
is, for a total of $4,000. What is the total amount of sunk cost?