Chapter 24 – Short Run Decision Analysis
TRUE/FALSE
1. Managers rely strictly on financial information when faced with decisions.
2. Competition, social issues, and timeliness are examples of qualitative factors.
3. Many management decisions are unique and hence incompatible with strict rules, steps, or timetables.
4. Qualitative data as well as quantitative data are useful in the decision process.
5. Facts that are the same for each alternative are not relevant for management decision making.
6. In choosing among alternatives, managers are guided by historical cost information.
7. Many of the decisions that managers make do not affect their organization’s activities in the short run.
8. Sunk costs can be recovered and are relevant in short-run decision making.
9. The cost of a previously purchased machine is an example of a sunk cost.
10. Opportunity costs are irrelevant costs.
11. The idea behind incremental analysis is to review decision data that differ between alternatives;
information that is the same for all alternatives is considered irrelevant to the decision process.
12. A cost that does not change between the alternatives is known as a differential cost.
13. The first step in the incremental analysis is to eliminate any irrelevant revenues and costs.
14. Opportunity costs arise when the choice of one course of action eliminates the possibility of another
course of action.
15. Sunk costs are not relevant for decisions based on incremental analysis.
16. Incremental analysis identifies both the benefits and the drawbacks of each alternative.
17. Outsourcing is the use of suppliers outside the organization to perform services or produce goods that
cannot be performed or produced internally.
18. Make-or-buy decisions, such as whether to make a part internally or buy it from an external supplier,
may lead to outsourcing.
19. Outsourcing production or operating activities does not help in reducing a company’s investment in
physical assets and human resources.
20. While performing an incremental analysis for outsourcing decision, information such as depreciation
and other fixed costs are not relevant.
21. Outsourcing production or operating activities will help in improving the cash flow by reducing
investment in physical assets.
22. In manufacturing companies, a common decision facing managers is whether to make or buy some or
all of the parts used in product assembly.
23. Fixed costs are irrelevant in make-or-buy decisions.
24. Special orders should only be considered if unused capacity exists.
25. A special order should be accepted only if it maximizes operating income.
26. Special order decisions are the decisions about whether to accept or reject special orders at prices
above the normal market prices.
27. Sales mix decisions should be based on the contribution margin per unit of scarce resource.
28. The objective of segment profitability decisions is to identify the segments that have a negative
segment margin so that managers can drop them or take corrective actions.
29. Only large corporations benefit from capital investment analysis.
30. Segment profitability analysis includes the preparation of a segmented income statement.
31. Avoidable costs are the direct variable costs and direct fixed costs traceable to the segments.
32. It is not possible for a company to provide the full variety of products or services which the customer
demands within a given time.
33. There is no limit on the availability of resources such as machine time, labor hours.
34. The objective of a sales mix decision is to select the alternative that maximizes the contribution margin
per constrained resource.
35. When resources like direct material, labor or time are scarce, the goal is to minimize the contribution
margin per unit of scarce resource.
36. The decision analysis, which uses incremental analysis to identify the relevant costs and revenues,
consists of two steps.
37. There are products or services that can be either sold in a basic form or be processed further.
38. A sell or process-further decision is a decision about whether to sell a joint product at the split-off
point or sell it after further processing.
39. The point where joint products or services become separable and identifiable is known as split-off
point.
40. If the incremental costs of processing further is greater than the incremental revenue, the decision to
process the product or service further is justified.
41. If the incremental costs are greater than the incremental revenue, the product should not be processed
further and should be sold at the split-off point.
42. The common costs shared by two or more products before they are split off are called joint costs.
43. Joint costs that are incurred before the split-off point should be ignored while making a decision to sell
or process a product further.
44. Joint costs are relevant costs in a sell or process-further decisions and they do change if further
processing occurs.
MULTIPLE CHOICE
1. Cost information for short-run decision making focuses on
a.
what happened.
b.
what is happening.
c.
what will happen.
d.
why it happened.
2. Qualitative factors used by decision makers include all of the following except
a.
social issues.
b.
revenue from fees.
c.
timeliness.
d.
competition.
3. Irrelevant costs are costs that are
a.
different among alternatives.
b.
avoidable costs.
c.
opportunity costs.
d.
sunk costs.
4. Estimated future costs that differ between alternative courses of action are termed __________ costs in
management decision analysis.
a.
variable overhead
b.
relevant
c.
absorption
d.
replacement
5. Which of the following could not be a relevant cost in deciding whether or not to eliminate a
producing department?
a.
The current residual value of the department’s equipment
b.
The salary of a supervisor who would be laid off
c.
The carrying value of the department’s equipment
d.
Revenue that could be generated by renting out the department’s space
6. Sunk costs are omitted from decision analysis
a.
always.
b.
never.
c.
sometimes.
d.
only if immaterial.
7. Contribution margin information is not relevant for
a.
the elimination of unprofitable segment decisions.
b.
pricing decisions for special orders.
c.
sales mix with resource constraint decisions.
d.
determining the amount that sales exceeded fixed costs.
8. The difference in total costs between two alternatives is referred to as the
a.
incremental cost.
b.
sunk cost.
c.
opportunity cost.
d.
direct cost.
9. The purpose of incremental analysis is to find the alternative
a.
with the fewest relevant costs.
b.
that brings in the most revenue.
c.
that contributes the most to profits.
d.
with the lowest fixed costs.
10. The term incremental cost refers to
a.
the difference in total costs between alternatives.
b.
a cost that does not entail any dollar outlay but that is relevant to the decision-making
process.
c.
the profit forgone by selecting one choice instead of another.
d.
a cost that constitutes expenses to be incurred even though there is no activity.
11. Which of the following typically would be considered an incremental cost?
a.
Conversion cost
b.
Direct product cost
c.
Period cost
d.
Factory overhead cost
12. In a proposal to increase the production of clock radios, the sales managers of Rinaldo Electronics
reported the total additional cost required to meet the increased production level. The increase in total
cost is known as the
a.
opportunity cost.
b.
out–of-pocket cost.
c.
controllable cost.
d.
incremental cost.
13. Which of the following statements about incremental analysis is false?
a.
It is based on both historical and future information relevant to the decision at hand.
b.
It focuses on the differences between alternatives.
c.
It reduces the time taken to select the best course of action.
d.
It makes the evaluation process easier for the decision maker.
14. Avoidable costs are important for
a.
sales mix decisions.
b.
pricing decisions for special orders.
c.
sell or process-further decisions.
d.
decisions to eliminate unprofitable segments.
15. Taylor manufactures 12,000 units of a part used in its production to manufacture guitars. The annual
production activities related to this part are as follows:
Direct materials, $24,000
Direct labor, $60,000
Variable overhead, $54,000
Fixed overhead, $84,000
Best Guitars, Inc., has offered to sell 12,000 units of the same part to Taylor for $22 per unit. If Taylor
were to accept the offer, some of the facilities presently used to manufacture the part could be rented to
a third party at an annual rental of $18,000. Moreover, $4 per unit of the fixed overhead applied to the
part would be totally eliminated.
In the decision to make or buy the part, what is the relevant fixed overhead?
a.
$30,000
b.
$54,000
c.
$84,000
d.
$48,000
16. Taylor manufactures 12,000 units of a part used in its production to manufacture guitars. The annual
production activities related to this part are as follows:
Direct materials, $24,000
Direct labor, $60,000
Variable overhead, $54,000
Fixed overhead, $84,000
Best Guitars, Inc., has offered to sell 12,000 units of the same part to Taylor for $22 per unit. If Taylor
were to accept the offer, some of the facilities presently used to manufacture the part could be rented to
a third party at an annual rental of $18,000. Moreover, $4 per unit of the fixed overhead applied to the
part would be totally eliminated.
What should Taylor’s decision be, and what is the total cost savings that would result?
a.
Make, $60,000
b.
Buy, $60,000
c.
Make, $78,000
d.
Buy, $78,000
17. The Norran Company needs 15,000 units of a certain part to use in its production cycle. If Norran buys
the part from Waterloo Company instead of making it, Norran could not use the released facilities in
another activity; thus, all of the fixed overhead applied will continue regardless of what decision is
made. Accounting records provide the following data:
Cost to Norran to make the part:
Direct materials, $3
Direct labor, $12
Variable overhead, $13
Fixed overhead applied, $8
Cost to buy the part from the Waterloo Company, $27
In deciding whether to make or buy the part, Norran’s total relevant costs to make the part are
a.
$360,000.
b.
$240,000.
c.
$420,000.
d.
$405,000.
18. The Norran Company needs 15,000 units of a certain part to use in its production cycle. If Norran buys
the part from Waterloo Company instead of making it, Norran could not use the released facilities in
another activity; thus, all of the fixed overhead applied will continue regardless of what decision is
made. Accounting records provide the following data:
Cost to Norran to make the part:
Direct materials, $3
Direct labor, $12
Variable overhead, $13
Fixed overhead applied, $8
Cost to buy the part from the Waterloo Company, $27
What should Norran’s decision be, and what is the total cost savings that would result?
a.
Buy, $90,000
b.
Buy, $15,000
c.
Make, $90,000
d.
Make, $15,000
19. During 2010, America, Inc., produced, among other products, 9,300 cameras, incurring the following
unit costs: $5 in direct materials, $3 in direct labor, $2 in variable overhead, $4 in fixed overhead,
$0.50 in variable selling and administrative expenses, and $1 in fixed selling and administrative
expenses. An outsider had offered to produce the cameras for $12 each. Assuming that the factory
space would have been idle otherwise, acceptance of the outside offer would have
a.
lost the company $9,300.
b.
saved the company $33,950.
c.
saved the company $18,950.
d.
lost the company $13,950.
20. Products Green, Red, and White have unit contribution margins of $6.50, $12, and $10, respectively,
and require 2, 4, and 3 direct labor hours per unit, respectively. If demand currently is far exceeding
supply, on which product should the company concentrate its efforts?
a.
Green
b.
Red
c.
White
d.
Either Green or Red
21. Products Uno, Dos, Tres, and Quatro have contribution margins of $2, $3, $4, and $5, respectively,
and require 1.5, 2, 2.5, and 3 machine hours per unit, respectively. Assuming that all units produced
could be sold and that total machine hours per month are limited, on which product should the
company concentrate its efforts?
a.
Dos
b.
Quatro
c.
Uno
d.
Tres
22. Which of the following techniques is most useful for a special order decision?
a.
Payback method
b.
Present value method
c.
Accounting rate-of-return method
d.
Incremental analysis
23. Candidates for outsourcing would include
a.
custodial services.
b.
payroll processing.
c.
information management.
d.
all of these.
24. The normal selling price of our product is $42 per unit. The costs of production are direct materials,
$8; direct labor, $6; variable overhead, $7; and fixed overhead, $4 (based on normal capacity). The
company has received a special order for 10,600 units at a unit sales price of $23. There is ample
unused capacity to fill the order and $1 per unit will be incurred for additional freight costs. If the
order is accepted, operating income will
a.
increase by $10,600.
b.
decrease by $31,800.
c.
increase by $21,200.
d.
decrease by $21,200.