Chapter 10: Relevant Information for Decision Making IM 8
publicly accessible website, in whole or in part.
ii. Some important factors that affect the appropriate sales mix of a company are product
in respect to each other as well as to competitors’ prices.
Factors that might influence price changes include fluctuations in demand, changes
with respect to price.
ii. As illustrated in text Exhibit 10.10 (p. 404), to maximize profits, management must
iii. Since a product’s sales volume typically is related to its selling price, generally, when the
the company’s scarce resources.
v. Some relevant qualitative factors involved in pricing decisions include the following:
c. Sales Compensation Changes
sales dollars.
ii. If a company has a profit maximization objective, then sales commission should be based
iii. Text Exhibit 10.12 (p. 406) illustrates the impact on profits of a compensation based on
d. Advertising Budget Changes
©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a
publicly accessible website, in whole or in part.
by targeting advertising efforts at specific products. Sales can also be influenced by
iii. See text Exhibit 10.13 (p. 407) for calculations of the expected increase in contribution
LO.6: How are special prices set, and when are they used?
4. Special order decisions
a. A special order decision is a situation that requires management to compute a reasonable
i. Special prices may be justified when orders are unusual, because the products are being
positive contribution margin.
d. Text Exhibit 10.14 (p. 408) illustrates a special order decision.
e. When setting a special order price, managers must consider qualitative as well as
i. Will setting a low bid price establish a precedent for future prices?;
management and employees?;
iii. Will the additional production activity require the use of bottleneck resources and reduce
company throughput?;
iv. How will special order sales affect normal sales?; and
v. If production of the order is scheduled during a slow period, is management willing to
employed?
f. The Robinson-Patman Act is a federal law, passed in 1936, that prohibits companies from
g. An ad hoc discount is a price concession that relates to real (or imagined) competitive
on a competitive market environment.
Chapter 10: Relevant Information for Decision Making IM 10
publicly accessible website, in whole or in part.
discontinued?
5. Product Line and Segment Decisions
a. Operating results of multiproduct environments are frequently presented in a disaggregated
b. Managers, in reviewing such statements, must distinguish relevant from non-relevant
c. See text Exhibits 10.15 (p. 409) and 10.16 (p. 410) for an example of how product lines
d. The segment margin represents the excess of revenues over direct variable expenses and
i. The segment margin figure is the appropriate one on which to base continuation or
e. Before deciding to discontinue a product line, management should carefully consider what
f. Management’s task is to allocate effectively and efficiently its finite stock of resources to
accomplish its objectives.
i. Managers must have a reliable quantitative basis on which to analyze problems, compare
ii. Because management is a social rather than a natural science, it has no fundamental
iii. Relevant costing is a process of making human approximations of the costs of alternative
Chapter 10: Relevant Information for Decision Making IM 11
publicly accessible website, in whole or in part.
Multiple Choice Questions
1. (LO.1) Which of the following is not a required characteristic of relevant information?
d. Must be verifiable by an independent reviewer or auditor
2. (LO.1) Contribution to income that is foregone by not using a limited resource for its best
alternative use is referred to as
a. marginal cost.
3. (LO.1) Total unit costs are:
a. relevant for cost-volume-profit analysis.
4. (LO.2) Sunk costs are:
a. relevant to decision making.
b. not relevant to decision making.
d. fixed costs.
5. (LO.2) In equipment-replacement decisions, which one of the following does not affect the
decision-making process?
a. Historical cost of the old equipment
6. (LO.3) Select the incorrect statement from the following.
in making an outsourcing decision.
7. (LO.3) A company’s approach to a make-buy decision
a. involves an analysis of avoidable costs.
c. should use absorption costing.
d. should use activity-based costing.
Chapter 10: Relevant Information for Decision Making IM 12
8. (LO.3) P Company currently manufactures all component parts used in the manufacture of
various small appliances. A steel handle is used in three different products. The current year
Direct material $0.60
Direct labor 0.40
includes delivery. Accepting the offer will:
a. decrease the handle unit cost by $0.15.
9. (LO.4) Select the incorrect statement concerning scarce resource decisions.
a. Unit contribution margin rather than gross margin is the appropriate measure of profitability.
the short run, management must make the most efficient use of the currently available
resources.
Per Unit Data
Product A Product B
Selling price $88.20 $80.00
Variable costs 52.80 52.80
a. 4,460
b. 12,529
c. 13,118
d. 13,853
11. (LO.6) Select the correct statement concerning special order decisions.
a. Such decisions must not violate the Robinson-Patman Act which prohibits companies from
differences.
b. Companies may give ad hoc discounts if such concessions relate to real or imagined
competitive pressures.
Chapter 10: Relevant Information for Decision Making IM 13
12. (LO.6) R Company sells a product for $10.00 that has the following unit cost:
Direct material $1.60
Direct labor 2.40
following.
a. Reject the offer since the offer price is less than the unit production cost.
b. Accept the offer since the offer price exceeds the sum of the variable costs.
13. (LO.7) Select the correct definition of segment margin from the following:
a. Revenue – Expenses
b. Revenue – Variable Costs
t
Chapter 10: Relevant Information for Decision Making IM 14
Multiple Choice Solutions
1. d
2. d (CMA Adapted)
3. c (CMA Adapted)
Unit
Differential costs: Make Buy
Purchasing $1.25
Direct material $ 0.60
Product A Product B
Units produced and sold 11,570.62 13,117.65
Unit Total Unit Total
Sales $ 88.20 $ (1,020,529) $ 80.00 $ (1,049,412)
Variable costs (52.80) (610,929) (52.80) (692,612)
11. d
12. c
13. c