Deck 4: Fundamentals of Cost Analysis for Decision Making

Question 1

The alternative courses of action in a make-or-buy decision are (a)manufacture needed items internally or (b)purchase needed items externally.

Answer 1

True

Question 2

The differential analysis approach to pricing for special orders could lead to under-pricing in the long-run because fixed costs are not included in the analysis.

Answer 2

True

Question 3

When deciding whether or not to accept a special order,a decision-maker should focus on differential costs instead of full costs.

Answer 3

True

Question 4

Dumping occurs when a company exports its product to consumers in another country at an export price that is below the domestic price.

Question 5

A decision must involve at least two alternative courses of action.

Question 6

Price discrimination is the practice of selling identical goods or services to different customers at different prices.

Question 7

With constrained resources,the important measure of profitability is the contribution margin per unit of scarce resource.

Question 8

The full cost fallacy occurs when a decision-maker fails to include fixed manufacturing overhead in the product's cost.

Question 9

Financial statements prepared in accordance with generally accepted accounting principles (GAAP)provide differential cost information.

Question 10

Short-run decisions often have long-run implications.

Question 11

If there is only one alternative course of action and the status quo is unacceptable,then there really is no decision to make.

Question 12

Differential analysis cannot be used for long-run decisions because it cannot incorporate the timing of revenues and costs (i.e.,the time-value of money).

Question 13

Fixed costs are always classified as sunk costs in differential cost analysis.

Question 14

Peak load pricing is the practice of setting prices lowest when the quantity demanded for the product approaches the physical capacity to produce it.

Question 15

The reason opportunity costs are not included in the accounting system is because they involve estimates.

Question 16

In the short-run,plant capacity is fixed and product choices have to be made that optimize the use of available capacity.

Question 17

Only variable costs can be differential costs.

Question 18

The theory of constraints focuses on determining the optimal product mix when one or more resources restrict the attainment of a goal or objective.

Question 19

Differential analysis involves the comparison of one or more alternative courses of action with the status quo.

Question 20

Target costs equal the difference between the target selling price and the desired profit margin.

Question 21

The CJP Company produces 10,000 units of item S10 annually at a total cost of $190,000. The XYZ Company has offered to supply 10,000 units of S10 per year for $18 per unit.If CJP accepts the offer,$4 per unit of the fixed overhead would be saved.In addition,some of CJP's facilities could be rented to a third party for $15,000 per year.At what price would CJP be indifferent to XYZ's offer?

A)$17.00
B)$17.50
C)$18.50
D)$19.50

Question 22

Which of the following costs are not considered in a differential analysis for a make-or-buy decision?

A)Indirect materials and indirect labor if the item is manufactured internally
B)Direct materials and direct labor if the item is purchased
C)Variable overhead if the item is manufactured internally
D)Fixed overhead that can be avoided if the item is purchased
E)Fixed overhead that will continue if the item is purchased

Question 23

Which of the following costs are irrelevant for a special order that will allow an organization to utilize some of its present idle capacity?

A)Direct materials
B)Indirect materials
C)Variable overhead
D)Unavoidable fixed overhead
E)Differential sales commission

Question 24

Which of the following statements regarding special orders is (are)true? (A)The primary decision for special orders is determining whether the differential revenue is greater than the differential costs associated with the order.
(B)The differential analysis approach to pricing for special orders could lead to underpricing in the long-run because fixed costs are not included in the analysis.

A)Only A.
B)Only B.
C)Neither A nor B is false.
D)Both A and B are true.

Question 25

The period of time over which capacity will be unchanged is

A)long run
B)sunk cost
C)short run
D)product life cycle

Question 26

Which of the following statements about the theory of constraints is (are)true? (A)The theory of constraints focuses on determining the optimal product mix when one or more resources restrict the attainment of a goal or objective.
(B)The theory of constraints focuses on maximizing the rate of throughput contribution while minimizing investment and other operating costs.

A)Only A.
B)Only B.
C)Neither A nor B is true.
D)Both A and B are true.

Question 27

In a decision analysis situation,which one of the following costs is not likely to contain a variable cost component? (CMA adapted)

A)Labor
B)Overhead
C)Straight-line Depreciation
D)Selling
E)Material

Question 28

The AZ Company manufactures kitchen utensils.The company is currently producing well below its full capacity.The BV Company has approached AZ with an offer to buy 20,000 utensils at $0.75 each.AZ sells its utensils wholesale for $0.85 each; the average cost per unit is $0.83,of which $0.12 is fixed costs.If AZ were to accept BV's offer,what would be the increase in AZ's operating profits?

A)$400
B)$800
C)$1,600
D)$2,000
E)AZ's operating profits will not increase as a result of accepting the special order.

Question 29

Differential costs are (CMA adapted)

A)the difference in total costs that result from selecting one choice instead of another.
B)the profit foregone by selecting one choice instead of another.
C)a cost that continues to be incurred in the absence of activity.
D)a cost common to all choices in questions and not clearly allocable to any of them.

Question 30

The theory of constraints focuses on maximizing throughput contribution margin while minimizing all of the following except

A)selling expenses per unit sold.
B)production bottlenecks.
C)investment in buildings.
D)investment in inventories.

Question 31

The relevance of a particular cost to a decision is determined by the: (CMA adapted)

A)riskiness of the decision.
B)number of decision variables.
C)amount of the cost.
D)potential effect on the decision.
E)accuracy of the cost.

Question 32

For the past five years,the RS Company has produced and sold electronic magnets to chemistry labs throughout the United States.Recently,a strong competitor has entered the market and RS is considering whether it should continue to produce and sell the electronic magnets.The following information has been gathered to assist management in their decision: A)The machinery used to produce the magnet was purchased five-years ago for $500,000.
B)Four of the employees who produce magnets would be reassigned to the magnifying glass division.
C)The space now used to produce the magnets would be used to eliminate the need to rent warehouse space.
D)Sales volume (units)is estimated to drop by 50% once the competitor becomes fully operational.
Which of the items listed above is (are)relevant to the decision to continue the production and sale of the electronic magnets?

A)A and C.
B)B and C.
C)C and D.
D)A,B,and D.
E)B,C,and D.

Question 33

The Regal Baking Company is considering the expansion of its business into door-to-door delivery service.This would require an additional $12,500 in labor costs per month.Company-owned vehicles now used to make morning deliveries to restaurants could be used in the afternoons to make the home deliveries.However,it is estimated that an additional $5,000 would be required per month for gas,oil,and maintenance.It is further estimated that the home delivery use of the trucks would be allocated 45% of the existing $6,500 fixed vehicle costs.What is the differential delivery cost per month for expanding into the home delivery market?

A)$12,500
B)$17,500
C)$19,750
D)$20,425

Question 34

The Blade Division of Axe Company produces hardened steel blades.One-third of Blade's 30,000 unit output is sold to the Forestry Products Division of Axe; the remainder is sold to outside customers.Blades' estimated operating profit for the year is: The Forestry Division has an opportunity to purchase 10,000 blades of the same quality from an outside supplier on a continuing basis.The purchase price would be $1.25.If the Blade Division is now operating at full capacity and can sell all its units to outside customers at the present selling price,what is the differential cost to Axe of requiring that the blades be made internally and sold to the Forestry Division?

A)$2,500
B)$5,000
C)$7,500
D)$10,000

Question 35

The following information relates to the Tram Company for the upcoming year. The cost of goods sold includes $1,200,000 of fixed manufacturing overhead; the operating expenses include $100,000 of fixed marketing expenses.A special order offering to buy 50,000 units for $7.50 per unit has been made to Tram.Fortunately,there will be no additional operating expenses associated with the order and Tram has sufficient capacity to handle the order.How much will operate profits be increased if Tram accepts the special order?

A)$25,000
B)$62,500
C)$100,000
D)$125,000
E)Operating profits will not increase as a result of accepting the special order.

Question 36

The MNK Company has gathered the following information for a unit of its most popular product: The above cost information is based on 4,000 units.A foreign distributor has offered to buy 1,000 units at a price of $16 per unit.This special order would not disturb regular sales.Variable shipping and other selling expenses would be an additional $1 per unit for the special order.If the special order is accepted,MNK's operating profits will increase by:

A)$1,000.
B)$1,600.
C)$2,000.
D)$4,000.
E)$5,000.

Question 37

The time from initial research and development to the time that support to the customer ends is the

A)product life cycle
B)short run
C)target time
D)predatory price

Question 38

The CJP Company produces 10,000 units of item S10 annually at a total cost of $190,000. The XYZ Company has offered to supply 10,000 units of S10 per year for $18 per unit.If CJP accepts the offer,$4 per unit of the fixed overhead would be saved.In addition,some of CJP's facilities could be rented to a third party for $15,000 per year.What are the relevant costs for the "make" alternative?

A)$160,000
B)$165,000
C)$175,000
D)$185,000

Question 39

The Blade Division of Axe Company produces hardened steel blades.One-third of Blade's output is sold to the Forestry Products Division of Axe; the remainder is sold to outside customers.Blades' estimated operating profit for the year is: The Forestry Division has an opportunity to purchase 10,000 blades of the same quality from an outside supplier on a continuing basis.The Blade Division cannot sell any additional products to outside customers.Should the Axe Company allow its Forestry Division to purchase the blades from the outside supplier at $1.25 per unit?

A)No; making the blades will save Axe $1,500.
B)Yes; buying the blades will save Axe $1,500.
C)No; making the blades will save Axe $2,500.
D)Yes; buying the blades will save Axe $2,500.

Question 40

Which of the following statements regarding differential costs is (are)false? (A)The full cost fallacy occurs when a decision-maker fails to include fixed manufacturing overhead in the product's cost.
(B)When deciding whether or not to accept a special order,a decision-maker should focus on differential costs instead of full costs.

A)Only A.
B)Only B.
C)Neither A nor B is false.
D)Both A and B are true.

Question 41

NorWest Shoe Company has two retail stores,one in Albertville and the other in Bloomer.The Albertville store had sales of $100,000,a contribution margin of 35 percent,and a segment margin of $14,000.The company's two stores have total sales of $250,000,contribution margin of 32 percent,and a total segment margin of $31,000.The contribution margin for the Bloomer store must have been

A)$65,000
B)$170,000
C)$105,000
D)$45,000

Question 42

Chetek Industries manufactures 15,000 components per year.The manufacturing cost of the components was determined to be as follows: Assume Chetek Industries could avoid $40,000 of fixed manufacturing overhead if it purchases the component from an outside supplier.An outside supplier has offered to sell the component for $34.If Chetek purchases the component from the supplier instead of manufacturing it,the effect on income would be a

A)$60,000 increase
B)$10,000 increase
C)$100,000 decrease
D)$140,000 increase

Question 43

Bryon Industries manufactures 20,000 components per year.The manufacturing cost of the components was determined as follows: An outside supplier has offered to sell the component for $17.If Bryon purchases the component from the outside supplier,the manufacturing facilities would be unused and could be rented out for $10,000.If Bryon purchases the component from the supplier instead of manufacturing it,the effect on income would be:

A)a $70,000 increase
B)a $50,000 decrease
C)a $10,000 decrease
D)a $30,000 increase

Question 44

The practice of setting prices highest when the quantity demanded for the product approaches capacity:

A)predatory pricing
B)target pricing
C)peak-load pricing
D)price fixing

Question 45

A target cost is computed as

A)cost to manufacture plus a desired markup
B)cost to manufacture plus designated selling expenses
C)market willingness to pay - cost to manufacture
D)market willingness to pay - desired profit

Question 46

Miller Industries has two divisions: the West Division and the East Division.Information relating to the divisions for the year just ended is as follows: Common fixed expenses have been allocated equally to each of the two divisions.Miller's segment margin for the West Division is

A)$150,000
B)$102,000
C)$30,000
D)$110,000

Question 47

The operations of Blink Corporation are divided into the Will Division and the Aloy Division.Projections for the next year are as follows: Operating income for Blink Corporation as a whole if the Carter Division were dropped would be

A)$133,000
B)$112,000
C)$91,000
D)$49,000

Question 48

The Winwood Company manufactures two products: Q and T.The costs and revenues are as follows: Total demand for Product Q is 14,000 units and for Product T is 9,000 units.Machine time is a scarce resource.During the year,54,000 machine hours are available.Product Q requires 5 machine hours per unit,while Product T requires 3 machine hours per unit.
How many units of Products Q and T should Winwood produce?

A)a
B)b
C)c
D)d

Question 49

If there is excess capacity,the minimum acceptable price for a special order must cover

A)only variable costs associated with the special order.
B)variable and fixed manufacturing costs associated with the special order.
C)variable and incremental fixed costs associated with the special order.
D)variable costs and incremental fixed costs associated with the special order,plus the contribution margin usually earned on regular units.

Question 50

Albany Industries produces two products.Information about the products is as follows: The company's fixed costs totaled $70,000,of which $15,000 can be directly traced to Product 1 and $40,000 can be directly traced to Product 2.The effect on the firm's profits if Product 2 is dropped would be a

A)$10,000 increase
B)$35,000 increase
C)$35,000 decrease
D)$10,000 decrease

Question 51

The following information relates to a product produced by Ashland Company: Fixed selling costs are $1,000,000 per year.Variable selling costs of $4 per unit sold are added to cover the transportation cost.Although production capacity is 500,000 units per year,Ashland expects to produce only 400,000 units next year.The product normally sells for $40 each.A customer has offered to buy 60,000 units for $30 each.The customer will pay the transportation charge on the units purchased.If Ashland accepts the special order,the effect on income would be a

A)$60,000 increase
B)$180,000 increase
C)$420,000 increase
D)$600,000 decrease

Question 52

The price based on customers' perceived value for the product and the price that competitors charge:

A)predatory price
B)target price
C)target cost
D)dumping price

Question 53

Which of the following costs would continue to be incurred even if a segment is eliminated?

A)Direct fixed expenses
B)Variable cost of goods sold
C)Common fixed costs
D)Variable selling and administrative expenses

Question 54

Roswell Inc has 5,400 machine hours available each month.The following information on the company's three products is available: If market demand exceeds the available capacity,in what sequence should orders be filled to maximize the company's profits?

A)Product 1 first,product 2 second,and product 3 third
B)Product 2 first,product 3 second,and product 1 third
C)Product 3 first,product 2 second,and product 1 third
D)Product 3 first,product 1 second,and product 2 third

Question 55

Lerner Inc has 6,600 machine hours available each month.The following information on the company's three products is available: If market demand exceeds the available capacity,in what sequence should orders be filled to maximize the company's profits?

A)Product X first,product Z second,and product Y third
B)Product Y first,product Z second,and product X third
C)Product Y first,product X second,and product Z third
D)Product Z first,product X second,and product Y third

Question 56

The operations of Superior Corporation are divided into the Northrup Division and the Hawley Division.Projections for the next year are as follows: Operating income for Superior Corporation,as a whole,if the Hawley Division were dropped would be

A)$45,000
B)$80,000
C)$100,000
D)$120,000

Question 57

The practice of setting price below cost with the intent to drive competitors out of business:

A)predatory pricing
B)target pricing
C)target costing
D)peak-load pricing

Question 58

Exporting a product to another country at a price below domestic cost:

A)dumping
B)target pricing
C)peak-load pricing
D)price fixing

Question 59

Agreement among business competitors to set prices at a particular level:

A)predatory pricing
B)target pricing
C)peak-load pricing
D)price fixing

Question 60

Chetek Industries manufactures 15,000 components per year.The manufacturing cost of the components was determined to be as follows: Assume that the fixed manufacturing overhead reflects the cost of Chetek's manufacturing facility.This facility cannot be used for any other purpose.An outside supplier has offered to sell the component to Chetek for $34.If Chetek Industries purchases the component from the outside supplier,the effect on income would be a

A)$30,000 decrease
B)$30,000 increase
C)$90,000 decrease
D)$90,000 increase

Question 61

The operations of Gadwell Corporation are divided into the Blink Division and the Blur Division.Projections for the next year are as follows: Operating income for Gadwell Corporation as a whole if the Blur Division were dropped would be

A)$66,500
B)$56,000
C)$45,500
D)$24,500

Question 62

The Buchanan Company has gathered the following information for a unit of its most popular product: The above cost information is based on 10,000 units.A distributor has offered to buy 2,000 units at a price of $32 per unit.This special order would not disturb regular sales.Special packaging and other selling expenses would be an additional $0.50 per unit for the special order.If the special order is accepted,Buchanan's operating profits will increase by:

A)$4,000.
B)$6,400.
C)$8,000.
D)$19,000.
E)$20,000.

Question 63

The following information relates to the Jax Company for the upcoming year. The cost of goods sold includes $2,400,000 of fixed manufacturing overhead; the operating expenses include $200,000 of fixed marketing expenses.A special order offering to buy 50,000 units for $15.00 per unit has been made to Jax.Fortunately,there will be no additional operating expenses associated with the order and Jax has sufficient capacity to handle the order.How much will operating profits increase if Jax accepts the special order?

A)$50,000
B)$125,000
C)$200,000
D)$250,000
E)Operating profits will not increase as a result of accepting the special order.

Question 64

The Clapton Company manufactures two products: Alpha and Beta.The costs and revenues are as follows: Total demand for Alpha is 10,000 units and for Beta is 6,000 units.Machine hours is a scarce resource.During the year,50,000 machine hours are available.Alpha requires 4 machine hours per unit,while Beta requires 2.5 machine hours per unit.
How many units of Alpha and Beta should Clapton produce?

A)a
B)b
C)c
D)d

Question 65

The Speedy Delivery Service is considering the expansion of its business into afternoon retail delivery service.This would require an additional $25,000 in labor costs per month.Company-owned vehicles now used to make morning deliveries to local manufacturers could be used in the afternoons to make retail deliveries.However,it is estimated that an additional $10,000 would be required per month for gas,oil,and maintenance.It is further estimated that the retail delivery use of the trucks would be allocated 45% of the existing $13,000 fixed vehicle costs.What is the differential delivery cost per month for expanding into the retail delivery market?

A)$25,000
B)$35,000
C)$39,500
D)$40,850

Question 66

The Buchanan Company has gathered the following information for a unit of its most popular product: The above cost information is based on 10,000 units.A distributor has offered to buy 2,000 units at a price of $32 per unit.The distributor claims this special order would not disturb regular sales at $42.Special packaging and other selling expenses would be an additional $0.50 per unit for the special order.How many units of regular sales could be lost before this contract is not profitable?

A)0 units.
B)950 units.
C)1,000 units.
D)2,000 units.
E)10,000 units.

Question 67

The Lemaire Company manufactures wiring tools.The company is currently producing well below its full capacity.The Boisvert Company has approached Lemaire with an offer to buy 10,000 tools at $1.75 each.Lemaire sells its tools wholesale for $1.85 each; the average cost per unit is $1.83,of which $0.27 is fixed costs.If Lemaire were to accept Boisvert's offer,what would be the increase in Lemaire's operating profits?

A)$800
B)$1,000
C)$1,900
D)$2,900
E)Lemaire's operating profits will not increase as a result of accepting the special order.

Question 68

Winton Inc has 12,000 machine hours available each month.The following information on the company's four products is available: If market demand exceeds the available capacity,in what sequence should orders be filled to maximize the company's profits?

A)Product W first,product X second,product Z third,and product Y last.
B)Product Z first,product W second,product X third,and product Y last.
C)Product X first,product W second,product Y third,and product Z last.
D)Product X first,product Z second,product Y third,and product W last.

Question 69

The Axle Division of Becker Company produces axles for off-road sport vehicles.One-third of Axle's 30,000 unit output is sold to an internal division of Becker; the remainder is sold to outside customers.Axles' estimated operating profit for the year is: The internal division has an opportunity to purchase 10,000 axles of the same quality from an outside supplier on a continuing basis.The purchase price would be $13.00.If the Axle Division is now operating at full capacity and can sell all its units to outside customers at the present selling price,what is the differential cost to Becker of requiring that the axles be made internally and sold to the internal division?

A)$25,000
B)$50,000
C)$70,000
D)$100,000

Question 70

Zurek Inc has 5,400 machine hours available each month.The following information on the company's three products is available: The market demand is limited to 2,000 units of each of the three products.How many units of each should Zurek produce and sell?

A)a
B)b
C)c
D)d

Question 71

The following information relates to the Jax Company for the upcoming year. The cost of goods sold includes $2,400,000 of fixed manufacturing overhead; the operating expenses include $200,000 of fixed marketing expenses.A special order offering to buy 50,000 units for $15.00 per unit has been made to Jax.Fortunately,there will be no additional operating expenses associated with the order; however,Jax is operating at full capacity.How much will operating profits increase if Jax accepts the special order?

A)$50,000
B)$125,000
C)$200,000
D)$250,000
E)Operating profits will not increase as a result of accepting the special order.

Question 72

The Axle Division of Becker Company produces axles for off-road sport vehicles.One-third of Axle's output is sold to an internal division of Becker; the remainder is sold to outside customers.Axle's estimated operating profit for the year is: The internal division has an opportunity to purchase 10,000 axles of the same quality from an outside supplier on a continuing basis.The Axle Division cannot sell any additional products to outside customers.Should the Becker Company allow its internal division to purchase the axles from the outside supplier at $13.00 per unit?

A)No; making the axles will save Becker $15,000.
B)Yes; buying the axles will save Becker $15,000.
C)No; making the axles will save Becker $30,000.
D)Yes; buying the axles will save Becker $30,000.

Question 73

Zurek Inc has 5,400 machine hours available each month.The following information on the company's three products is available: The market demand is limited to 2,000 units of each of the three products.What is the maximum possible contribution margin that Zurek could make in any month?

A)$81,000
B)$46,500
C)$43,000
D)$51,000

Question 74

The Bremmer Company produces 5,000 units of item ZQ98 annually at a total cost of $200,000. The Daisy Company has offered to supply all 5,000 units of ZQ98 per year for $35 per unit.If Bremmer accepts the offer,$8 per unit of the fixed overhead would be saved.In addition,some of Bremmer's leased facilities could be vacated,reducing lease payments by $30,000 per year.At what price would Bremmer be indifferent to Daisy's offer?

A)$40
B)$38
C)$35
D)$24

Question 75

The Clapton Company manufactures two products: Alpha and Beta.The costs and revenues are as follows: Total demand for Alpha is 10,000 units and for Beta is 6,000 units.Machine time is a scarce resource.During the year,50,000 machine hours are available.Alpha requires 4 machine hours per unit,while Beta requires 2.5 machine hours per unit.
What is the maximum contribution margin Clapton can achieve during a year?

A)$444,250
B)$1,014,000
C)$488,000
D)$855,500

Question 76

The Bremmer Company produces 5,000 units of item ZQ98 annually at a total cost of $200,000. The Daisy Company has offered to supply all 5,000 units of ZQ98 per year for $35 per unit.If Bremmer accepts the offer,$8 per unit of the fixed overhead would be saved.In addition,some of Bremmer's leased facilities could be vacated,reducing lease payments by $30,000 per year.What are the relevant costs for the "make" alternative?

A)$120,000
B)$175,000
C)$190,000
D)$200,000

Question 77

The following information relates to a product produced by Ashland Company: Fixed selling costs are $1,000,000 per year.Although production capacity is 500,000 units per year,Ashland expects to produce only 400,000 units next year.The product normally sells for $80 each.A customer has offered to buy 60,000 units for $60 each.The customer will pay the transportation charge on the units purchased.If Ashland accepts the special order,the effect on income would be a

A)$120,000 increase
B)$360,000 increase
C)$840,000 increase
D)$1,200,000 decrease

Question 78

The operations of Gadwell Corporation are divided into the Blink Division and the Blur Division.Projections for the next year are as follows: If the Blur Division were dropped,Blink Division's sales would increase by 30%.If this happened,the operating income for Gadwell Corporation as a whole would be

A)$72,800
B)$56,000
C)$79,100
D)$59,150

Question 79

The Axle Division of Becker Company produces axles for off-road sport vehicles.One-third of Axle's output is sold to an internal division of Becker; the remainder is sold to outside customers.Axle's estimated operating profit for the year is: The internal division has an opportunity to purchase 10,000 axles of the same quality from an outside supplier on a continuing basis.The Axle Division cannot sell any additional products to outside customers.What is the minimum selling price that Axle should accept from the internal division?

A)$10.00
B)$13.00
C)$15.00
D)$50.00

Question 80

The Axle Division of Becker Company produces axles for off-road sport vehicles.One-third of Axle's 30,000 unit output is sold to an internal division of Becker; the remainder is sold to outside customers.Axles' estimated operating profit for the year is: The internal division has an opportunity to purchase 10,000 axles of the same quality from an outside supplier on a continuing basis.The purchase price would be $13.00.If the Axle Division is now operating at full capacity and can sell all its units to outside customers at the present selling price,what is the minimum selling price that Axle should accept from the internal division?

A)$10.00
B)$13.00
C)$15.00
D)$20.00