Deck 6: Relevant Information and Decision Making: Operational Decisions

Question 1

Opportunity costs and outlay costs are widely used synonyms.

Answer 1

False

Question 2

There is no longer an opportunity cost after a homeowner pays off the mortgage.

Answer 2

False

Question 3

Outsourcing is a make-or-buy decision for services.

Answer 3

True

Question 4

Opportunity costs apply to resources that will be owned.

Question 5

Variable expenses are divided into avoidable and unavoidable costs.

Question 6

Opportunity costs need to be considered when deciding on the use of limited resources.

Question 7

In deciding whether to add or drop new products, services, or departments, managers should emphasize the option that makes the greatest contribution possible to pay unavoidable costs.

Question 8

In a make-or-buy decision, if facilities are and will remain idle when the decision is made to not make a part internally, then the opportunity cost is zero.

Question 9

Nonfinancial information can influence decisions to add or delete products.

Question 10

To make outsourcing services a good option, the services must be reliable, available when needed, and flexible to adapt to changing conditions.

Question 11

Opportunity cost depends on alternatives available.

Question 12

Relevant costs are only variable.

Question 13

Unavoidable costs are never relevant in deciding whether to eliminate a product or department.

Question 14

The profit maximizing volume is the quantities at which marginal cost equals price.

Question 15

Unavoidable costs do not include common costs.

Question 16

Relevant costs may include fixed avoidable costs.

Question 17

The big obstacle to outsourcing has been the cost.

Question 18

Qualitative factors do not affect a make-or-buy decision.

Question 19

The key reasons that companies outsource are to improve the company's focus and reduce operating costs.

Question 20

Heating and air conditioning are examples of common costs of all departments in a retail store.

Question 21

In retail sales, the limiting resource is often floor space.

Question 22

Gain or loss on disposal of equipment is relevant in deciding whether to keep or replace equipment.

Question 23

Sunk cost is another term for historical cost or past cost.

Question 24

Inventory turnover is the average number of times a consumer buys a particular product per year.

Question 25

Scarce resources include labor hours.

Question 26

A scarce resource limits the production or sale of a product or service.

Question 27

Future costs are relevant if they are the same under all feasible alternatives.

Question 28

Equipment's book value is the original cost plus depreciation.

Question 29

Examples of joint products include chemicals, lumber, and flour.

Question 30

Only unit costs computed using the same denominator level of production should be compared.

Question 31

The disposal value of old equipment is relevant.

Question 32

Operating at capacity indicates that the company does not want to produce more products.

Question 33

The split-off point is the juncture in manufacturing where the joint products
become individually identifiable.

Question 34

The relevant information for a sell or process further decision includes the costs incurred before the split-off point.

Question 35

Depreciation on new equipment is relevant in deciding whether to keep or replace equipment.

Question 36

In practice, sunk costs often influence important decisions, especially when a decision maker does not want to admit that a previous decision was a bad decision.

Question 37

Past costs may affect future payments for income taxes.

Question 38

If the limiting factor is demand i.e., unit of sales), the more profitable product is the one with the higher contribution per unit.

Question 39

It is profitable to extend processing or to incur additional distribution costs on a joint product if the additional revenue exceeds joint cost.

Question 40

The allocation of joint costs should affect the decision to sell or process further.

Question 41

Opportunity cost is specifically mentioned in _____.

A)a differential cost analysis
B)an opportunity cost analysis
C)a differential and opportunity cost analysis
D)neither differential cost analysis nor opportunity cost analysis

Question 42

Mary is considering leaving her current position to open an ice cream shop.Mary's current salary is $77,000.Annual ice cream shop revenue and costs are estimated at $260,000 and $210,000, respectively._____ is the opportunity cost of remaining employed.

A)$77,000
B)$210,000
C)$287,000
D)$50,000

Question 43

Opportunity cost _____.

A)is the contribution of the best alternative that is excluded from consideration
B)applies to resources owned by the company
C)is the cost of resources owned by the company
D)all of these answers are correct

Question 44

Birdflu Company manufactures a part for its production cycle.The costs per unit for 38,000 units of this part are as follows: $\begin{array} {ll}\text {Direct materials}&\$3\\\text {Directlabor}&5\\\text {Variable factory overhead}&4\\\text {Fixed factory overhead}&6\\\text {Total costs}&\$16\\\end{array}$ The fixed factory overhead costs are unavoidable.Assuming no other use of their facilities, the highest price that Birdflu Company should be willing to pay for the part is _____.

A)$12
B)$16
C)$8
D)$11

Question 45

Jack Bowers has paid off the mortgage on his house and continues to live in the house.The interest income forgone by not selling the house and investing the proceeds is an example of an) _____.

A)sunk cost
B)detrimental cost
C)opportunity cost
D)outlay cost

Question 46

Sue is considering leaving her current position to open a coffee shop.Sue's current salary is $83,000.Annual coffee shop revenue and costs are estimated at $260,000 and $210,000, respectively._____ is the opportunity cost of opening the coffee shop.

A)$83,000
B)$210,000
C)$343,000
D)$40,000

Question 47

Lakers Company manufactures a part for its production cycle.The costs per unit for 5,000 units of this part are as follows: $\begin{array} {ll}\text {Direct materials}&\$3\\\text {Directlabor}&5\\\text {Variable factory overhead}&4\\\text {Fixed factory overhead}&2\\\text {Total costs}&\$14\\\end{array}$ The fixed factory overhead costs are unavoidable.Assume that Lakers Company has been offered 5,000 units of the part from another producer for $14 each.The facilities currently used could be used to make 5,000 units of a product that would contribute $5 a unit to fixed expenses.No additional fixed costs would be incurred.Lakers Company should _____.

A)make the new product and buy the part to earn an extra $3 per unit contribution to profit
B)make the new product and buy the part to earn an extra $1 per unit contribution to profit
C)continue to make the part to earn an extra $1 per unit contribution to profit
D)continue to make the part to earn an extra $3 per unit contribution to profit

Question 48

Generally, companies use aggregate measures to determine performance evaluations.

Question 49

Clinton Company manufactures a part for its production cycle.The costs per unit for 10,000 units of this part are as follows: $\begin{array}{lr}\text { Direct materials } & \$ 20 \\\text { Directlabor } & 15 \\\text { Variable factory overhead } & 16 \\\text { Fixed factory overhead } & 10 \\\text { Total costs } & \$ 61\end{array}$ The fixed factory overhead costs are unavoidable.Wilson Company has offered to sell 10,000 units of the same part to Clinton Company for $55 a unit.Assuming no other use for the facilities, Clinton Company should _____.

A)make the part to save $4 per unit
B)buy from Wilson to save $6 per unit
C)make the part to save $6 per unit
D)buy from Wilson to save $4 per unit

Question 50

Nestle Company paid $130,000 for a machine used to mill oats.The annual contribution margin from oat sales is $60,000.The machine could be sold for $80,000.The opportunity cost of producing wheat flour is _____.

A)$130,000
B)$80,000
C)$60,000
D)$20,000

Question 51

Birch Company manufactures a part for its production cycle.The costs per unit for 5,000 units of this part are as follows: $\begin{array} {ll}\text {Direct materials}&\$3\\\text {Directlabor}&5\\\text {Variable factory overhead}&4\\\text {Fixed factory overhead}&6\\\text {Total costs}&\$16\\\end{array}$ The fixed factory overhead costs are unavoidable.Spalding Corporation has offered to sell 5,000 units of the same part to Birch Company for $15 a unit.Assuming no other use for the facilities, Birch Company should _____.

A)buy from Scalding Corporation to save $1 per unit
B)make the part to save $1 per unit
C)buy from Scalding Corporation to save $3 per unit
D)make the part to save $3 per unit

Question 52

Fird Company manufactures a part for its production cycle.The costs per unit for 10,000 units of this part are as follows: $\begin{array}{lr}\text { Direct materials } & \$ 20 \\\text { Directlabor } & 15 \\\text { Variable factory overhead } & 16 \\\text { Fixed factory overhead } & 15 \\\text { Total costs } & \$ 66\end{array}$ The fixed factory overhead costs are unavoidable.Assuming no other use of their facilities, the highest price that Fird Company should be willing to pay for the part is _____.

A)$41
B)$35
C)$45
D)$51

Question 53

Conflicts in the decision-making process can arise when superiors evaluate a manager's performance using a model consistent with the decision model.

Question 54

Goldwater Company manufactures a part for its production cycle.The costs per unit for 10,000 units of this part are as follows: $\begin{array}{lr}\text { Direct materials } & \$ 20 \\\text { Directlabor } & 15 \\\text { Variable factory overhead } & 16 \\\text { Fixed factory overhead } & 10 \\\text { Total costs } & \$ 61 \\\hline\end{array}$ The fixed factory overhead costs are unavoidable.Assume that Goldwater Company can buy 10,000 units of the part from another producer for $56 each.The current facilities could be used to make 10,000 units of a product that has a contribution margin of $20 per unit.No additional fixed costs would be incurred.Goldwater Company should _____.

A)make the new product and buy the part to earn an extra $5 per unit contribution to profit
B)continue to make the part to earn an extra $5 per unit contribution to profit
C)continue to make the part to earn an extra $15 per unit contribution to profit
D)make the new product and buy the part to earn an extra $15 per unit contribution to profit

Question 55

Crispy Company manufactures a part for its production cycle.The costs per unit for 5,000 units of this part are as follows: $\begin{array} {ll}\text {Direct materials}&\$3\\\text {Directlabor}&5\\\text {Variable factory overhead}&4\\\text {Fixed factory overhead}&2\\\text {Total costs}&\$14\\\end{array}$ The fixed factory overhead costs are unavoidable.Assume that Crispy Company has been offered 5,000 units of the part from another producer for $15 each.The facilities currently used to make the part could be rented out to another manufacturer for $20,000 a year.Crispy Company should _____.

A)make the part to save $1 per unit
B)buy the part to save $3 per unit
C)buy the part to save $1 per unit
D)make the part to save $3 per unit

Question 56

Beth is considering leaving her current position to open a coffee shop.Beth's current salary is $56,000.Annual coffee shop revenue and costs are estimated at $250,000 and $200,000, respectively._____ is the outlay cost associated with the decision to open the coffee shop.

A)$56,000
B)$200,000
C)$450,000
D)$40,000

Question 57

The salary forgone by a person who quits a job to start a business is an example of a n) _____.

A)sunk cost
B)opportunity cost
C)depreciable cost
D)outlay cost

Question 58

Copter Company currently produces a key part at a total cost of $210,000.Variable costs are $170,000.Of the fixed cost, $10,000 relate specifically to this part.The remaining fixed costs are unavoidable. Another manufacturer has offered to supply the part for $190,000.The facilities currently used to manufacture the part could be used to manufacture a new product with an expected contribution margin of $30,000.Alternately, the facilities could be rented out at $60,000.Given all of these alternatives, _____ is Copter's lowest net cost for the part.

A)$170,000
B)$180,000
C)$190,000
D)$130,000

Question 59

Johnson Company manufactures a part for its production cycle.The costs per unit for 10,000 units of this part are as follows: $\begin{array}{lr}\text { Direct materials } & \$ 20 \\\text { Directlabor } & 15 \\\text { Variable factory overhead } & 16 \\\text { Fixed factory overhead } & 10 \\\text { Total costs } & \$ 61\end{array}$ The fixed factory overhead costs are unavoidable.Assume that Johnson Company can buy 10,000 units of the part from another producer for $60 each.The facilities currently used to make the part could be rented out to another manufacturer for $100,000 a year.Johnson Company should _____.

A)buy the part to save $2.50 per unit
B)buy the part to save $1 per unit
C)make the part to save $2.50 per unit
D)make the part to save $1 per unit

Question 60

Christina is considering leaving her current position to open a music store.Christina's current salary is $45,000.Annual music store revenue and costs are estimated at $250,000 and $210,000, respectively.If Christina decides to open the music store, the change in her annual income would be _____.

A)$85,000
B)$5,000)
C)$250,000
D)$40,000

Question 61

Alta Loma Industries has three product lines, A, B, and C.The following information is available: $\begin{array}{lrrr}&A&B&C\\\text { Sales } & \$ 100,000 & \$ 90,000 & \$ 36,000 \\\text { Variable costs } & \underline{76,000} & 48,000 & \underline{27,000} \\\text { Contribution margin } & \$ 24,000 & \$ 42,000 & \$ 9,000 \\\text { Fixed costs: } & & &\\\text { Avoidable } & 9,000 & 18,000 & 3,000 \\\text { Unavoidable } & \underline{6,000} & \underline{9,000} & \underline{8,400} \\\text { Operating income } & \underline{\$ 9,000} & \$ 15,000 & \$ 2,400\end{array}$ Assume that product line C is discontinued and replaced with product line B.This will double the production and sales of product line B without increasing fixed costs.Operating income will increase _____.

A)$15,000
B)$42,000
C)$24,000
D)$36,000

Question 62

Garcia Company produces a part that is used in the manufacture of one of its products.The costs associated with the production of 5,000 units of this part are as follows: $\begin{array}{lr}\text { Direct materials } & \$ 108,000 \\\text { Direct labor } & 156,000 \\\text { Variable factory overhead } & 72,000 \\\text { Fixed factory overhead } & 168,000 \\\text { Total costs } & \$ 504,000\end{array}$ Of the fixed factory overhead costs, $72,000 is avoidable.Assume that Garcia Company can buy 5,000 units of the part from another producer for $105.60 each.The facilities currently used to make the part could be rented out to another manufacturer for $72,000 a year.Garcia Company should _____.

A)make the part to save $19.20 per unit
B)make the part to save the company $48,000
C)buy the part to save $14.40 per unit
D)buy the part to save the company $72,000

Question 63

Future costs are relevant in decision making when they _____.

A)exceed future revenues
B)are not based on estimates
C)differ between alternatives
D)are the same between alternatives

Question 64

Lancaster Company currently produces 10,000 units of a key part at a total cost of $210,000.Variable costs are $170,000.Of the fixed cost, $10,000 relate specifically to this part.The remaining fixed costs are unavoidable. Another manufacturer has offered to supply the part for $190 per unit.The facilities currently used to manufacture the part could be used to manufacture a new product with an expected contribution margin of $25,000.Alternately, the facilities could be rented out at $55,000._____ is the opportunity cost to Lancaster Company for making the part.

A)$20,000)
B)$55,000
C)$25,000
D)$10,000)

Question 65

_____ costs will not continue if an ongoing operation is changed or deleted.

A)Avoidable
B)Common
C)Sunk
D)Differential

Question 66

Daly Company produces a part that is used in the manufacture of one of its products.The costs associated with the production of 5,000 units of this part are as follows: $\begin{array}{lr}\text { Direct materials } & \$ 108,000 \\\text { Direct labor } & 156,000 \\\text { Variable factory overhead } & 72,000 \\\text { Fixed factory overhead } & 168,000 \\\text { Total costs } & \$ 504,000\end{array}$ Of the fixed factory overhead costs, $72,000 is avoidable.Assuming no other use of their facilities, the highest price that Daly Company should be willing to pay for 5,000 units of the part is _____.

A)$504,000
B)$336,000
C)$408,000
D)$288,000

Question 67

Hitch Company currently produces 10,000 units of a key part at a total cost of $512,000.Variable costs are $300,000.Of the fixed cost, $140,000 relate specifically to this part.The remaining fixed costs are unavoidable. Another manufacturer has offered to supply the part for $48 per unit.The facilities currently used to manufacture the part could be used to manufacture a new product with an expected contribution margin of $55,000.Alternately, the facilities could be rented out at $68,000._____ is the opportunity cost to Hitch Company to make the part:

A)$68,000
B)$55,000
C)$440,000
D)None of these answers is correct

Question 68

_____ costs are costs that continue even if an operation is halted.

A)Common
B)Sunk
C)Unavoidable
D)Variable

Question 69

Deuce Company currently produces 10,000 units of a key part at a total cost of $512,000.Variable costs are $300,000.Of the fixed cost, $140,000 relate specifically to this part.The remaining fixed costs are unavoidable. Another manufacturer has offered to supply the part for $48 per unit.The facilities currently used to manufacture the part could be used to manufacture a new product with an expected contribution margin of $30,000.Alternately, the facilities could be rented out at $60,000.Given all of these alternatives, _____ is Deuce Company's lowest net cost per unit for the part.

A)$30
B)$48
C)$42
D)$44

Question 70

Vineyard Industries has three product lines, A, B, and C.The following information is available: $\begin{array}{lrrr}&A&B&C\\\text { Sales } & \$ 60,000 & \$ 90,000 & \$ 24,000 \\\text { Variable costs } & \underline{36,000} & \underline{48,000} & \underline{20,000} \\\text { Contribution margin } & \$ 24,000 & \$ 42,000 & \$ 4,000 \\\text { Fixed costs: } & & &\\\text { Avoidable } & 9,000 & 18,000 & 3,000 \\\text { Unavoidable } & \underline{6,000} & 9,000 & 2,400 \\\text { Operating income } & \$ 9,000 & \$ 15,000 & \$ 1,400)\end{array}$ Assuming Vineyard Industries can increase the selling price of product C to $30,000, all other information remaining constant, operating income will _____.

A)increase $3,600
B)decrease $3,600
C)decrease $6,000
D)increase $6,000

Question 71

If a company has excess capacity, the most it would pay for buying a product that it currently makes would be the _____.

A)total cost of producing the product
B)market value of the product
C)market value less the usual markup on the product
D)total variable cost of producing the product

Question 72

The most recent income statement for the Strongsville Branch of the July Company is presented below. $\begin{array}{lr}\text { Sales } & \$ 57,000 \\\text { Variable costs } & 31,500 \\\text { Contribution margin } & \$ 25,500 \\\text { Fixed costs: } & \\\text { Avoidable } & 13,500 \\\text { Unavoidable } & 20,000\\\text { Operating income }&\$8,000\end{array}$ The July Company is thinking of eliminating the Strongsville Branch because it is showing a loss.If the Strongsville Branch is eliminated, July's operating income will _____.

A)increase $8,000
B)decrease $12,000
C)decrease $31,500
D)not change

Question 73

_____ would be a consideration in a make-or-buy decision.

A)Excess capacity
B)Variable factory overhead
C)Rental income from unused facilities
D)All of these answers are correct

Question 74

_____ are a qualitative factor of a make-or-buy decision.

A)Variable manufacturing costs
B)Avoidable costs
C)Long-term relationship with suppliers
D)Opportunity costs

Question 75

San Bernardino Industries has three product lines, A, B, and C.The following information is available: $\begin{array}{lrrr}&A&B&C\\\text { Sales } & \$ 100,000 & \$ 90,000 & \$ 88,000 \\\text { Variable costs } & \underline{76,000} & \$ 8,000 & {79,000} \\\text { Contribution margin } & \$ 24,000 & \$ 42,000 & \$ 9,000\\\text { Fixed costs: } & & & \\\text { Avoidable } & 9,000 & 18,000 &3,000\\\text { Unavoidable } & \underline{6,000} & 9,000&9,400 \\\text { Operating income } & \$ 9,000 & \$ 15,000&\$3,400)\end{array}$ Assuming product line C is discontinued and the space formerly used to produce product C is rented for $15,000 per year, operating income will increase _____.

A)$6,600
B)$9,000
C)$15,000
D)$14,400

Question 76

Riverside Industries has three product lines, A, B, and C.The following information is available: $\begin{array}{l}&A&B&C\\\text { Sales } & \$ 100,000 & \$ 90,000 & \$ 44,000 \\\text { Variable costs } & \underline{76,000} & \underline{48,000} & \underline{35,000} \\\text { Contribution margin } & \$ 24,000 & \$ 42,000 & \$ 9,000\\\text { Fixed costs: }\\\text { Avoidable } & 9,000 & 18,000 & 3,000 \\\text { Unavoidable } & \underline{6,000} & 9,000 & \underline{7,700} \\\text { Operating income } & \$ 9,000 & \$ 15,000 & \$ 1,700)\end{array}$ Riverside Industries is thinking of dropping product line C because it is reporting a loss.Assuming Riverside drops line C and does not replace it, the operating income will _____.

A)increase by $2,400
B)increase by $600
C)decrease by $6,000
D)decrease by $9,000

Question 77

Match Company produces a part that is used in the manufacture of one of its products.The costs associated with the production of 5,000 units of this part are as follows: $\begin{array}{lr}\text { Direct materials } & \$ 108,000 \\\text { Directlabor } & 156,000 \\\text { Variable factory overhead } & 72,000 \\\text { Fixed factory overhead } & 168,000 \\\text { Total costs } & \$ 504,000\end{array}$ Of the fixed factory overhead costs, $72,000 are avoidable.Match Company has offered to sell 5,000 units of the same part to Match for $86.40 per unit.Assuming there is no other use for the facilities, Match Company should _____.

A)make the part to save $14.40 per unit
B)buy the part to save $14.40 per unit
C)buy the part to save the company $72,000
D)make the part to save $4.80 per unit

Question 78

Mickleson Company produces a part that is used in the manufacture of one of its products.The costs associated with the production of 5,000 units of this part are as follows: $\begin{array}{lr}\text { Direct materials } & \$ 108,000 \\\text { Direct labor } & 156,000 \\\text { Variable factory overhead } & 72,000 \\\text { Fixed factory overhead } & 168,000 \\\text { Total costs } & \$ 504,000\end{array}$ Of the fixed factory overhead costs, $72,000 is avoidable.Assume that Mickleson Company can buy 5,000 units of the part from another producer for $100.80 each.The current facilities could be used to make 5,000 units of a product that has a contribution margin of $24 per unit.Fixed factory overhead costs to produce this new product would be the same as for the currently produced part.Mickleson Company should _____.

A)continue to make the part and earn an extra $48,000 in profit
B)buy the part, produce the new product, and earn an extra $4.80 per unit contribution to profit
C)continue to make the part and earn an extra $4.80 per unit contribution to profit
D)buy the part, produce the new product, and earn an extra $24 per unit contribution to profit

Question 79

The most recent income statement for the Parma Branch of the Dinero Company is presented below. $$\begin{array} { l r } \text { Sales } & \$ 57,000 \\\text { Variable costs } & \underline { 31,500 } \\\text { Contribution margin } & \$ 25,500 \\\text { Fixed costs: } & \\\text { Avoidable } & 13,500 \\\quad \text { Unavoidable } & \underline { 18,000 } \\\text { Operating income } & \underline { \$ 6,000 } )\end{array}$$ If the Parma Branch is eliminated and the space is rented for $24,000, operating income will be _____.

A)increased by $24,000
B)decreased by $30,000
C)increased by $12,000
D)decreased by $12,000

Question 80

A key factor in a make-or-buy decision is _____.

A)whether or not there are idle facilities
B)the amount of the sunk costs
C)gain or loss on the disposal of equipment
D)the total joint costs