Deck 8: Using Accounting Information to Make Managerial Decisions

Question 1

Because depreciation is a fixed cost that is not avoidable, it is irrelevant in making an outsourcing decision.

Answer 1

True

Question 2

The Robinson-Patman Act of 1936 prohibits companies from engaging in price discrimination - that is, offering the same item to different customers at different prices.

Answer 2

True

Question 3

An opportunity cost is the contribution margin of the next-best alternative use of the facilities.

Answer 3

True

Question 4

Offshoring means moving a company's business processes to a foreign country.

Question 5

When an outsourcing decision refers to the components of a manufactured product, it is more commonly called an insource or outsource decision.

Question 6

All variable costs are relevant and all fixed costs are irrelevant.

Question 7

Unavoidable costs are incurred under all alternatives and are always relevant.

Question 8

Sunk costs are irrelevant in deciding between two alternatives because they are incurred in the past, not the future.

Question 9

Outsourcing is a relatively new approach to doing business.

Question 10

The Fair Trade Act of 1936 prohibits companies from engaging in price discrimination - that is, offering the same item to different customers at different prices.

Question 11

The first step in making any decision is to consider all available alternatives.

Question 12

In evaluating whether or not to accept a special order, decision makers need to consider only quantitative effect as this is the impact on profit.

Question 13

A type of analysis that helps decision makers understand the impact of their choices is referred to as incremental analysis.

Question 14

Offshoring is another term for outsourcing.

Question 15

Sometimes companies will accept new business at a loss with the expectation that certain customers can influence other potential customers.

Question 16

When a company accepts an outsourcing offer, managers must take specific action to eliminate the internal costs.

Question 17

When a customer requests a special order and the supplier has capacity constraints, reducing the special order is not normally an option.

Question 18

If regular sales are given up in order to accept a special order, the lost contribution margin on the regular sales must be subtracted from the contribution margin of the special order to arrive at the total impact on operating income.

Question 19

The option of accepting a special order should always be chosen if the price exceeds the relevant costs to produce and deliver the order to the customer.

Question 20

Relevant information meets two criteria: (1) it differs between the alternatives and (2) the differences have occurred in the past.

Question 21

Managers becoming overwhelmed by the huge amount of information available to them is referred to as

A)unavoidable overload.
B)information overload.
C)phenomenon overload.
D)irrelevance overload.

Question 22

Which of the following is not a criterion of relevant information?

A)It differs between the alternatives.
B)Differences among alternatives will occur in the future.
C)The information always relates to variable costs.
D)It differs between the alternatives and differences among alternatives will occur in the future.

Question 23

According to the Theory of Constraints, all production should be subordinated to the bottleneck operation.

Question 24

Which of the following combinations results in relevant information?

A)Occurs in the future and is unavoidable
B)Occurs in the future and is avoidable
C)Occurs in the past and is unavoidable
D)Occurs in the past and is avoidable

Question 25

When a company outsources a product, it is easier to control product quality than if the product is produced internally.

Question 26

In an outsourcing decision, one important factor is the quality of the outsourced product.

Question 27

In evaluating the relevance of specific information, which of the following must the decision maker know

A)the classification of any relevant costs.
B)the behavior of all costs.
C)the context of the decision.
D)all relevant and irrelevant information.

Question 28

Which of the following is not a criterion of relevant information?

A)It differs between the alternatives.
B)Differences among alternatives will occur in the future.
C)Differences among the alternatives must have occurred in the past and must occur in the future.
D)It differs between the alternatives and differences among alternatives will occur in the future.

Question 29

The Theory of Constraints seeks to maximize throughput contribution, which equals sales revenue less direct materials cost.

Question 30

The formula for calculating the contribution margin per constrained resource is Contribution Margin Per Unit divided by Units Produced.

Question 31

Information overload can lead to

A)information fatigue syndrome.
B)data overload condition.
C)sunk costs.
D)bottlenecks.

Question 32

Variable costs associated with a segment's sales are sometimes avoidable.

Question 33

Costs such as rent and the production manager's salary are non-differential but are relevant.

Question 34

In an environment where the there is a constrained resource, the resource should be allocated first to the product with the highest contribution margin.

Question 35

In determining whether or not to eliminate a segment, differential costs are relevant to the decision.

Question 36

The segment margin is the contribution margin of a particular segment less any direct fixed costs.

Question 37

In evaluating the relevance of specific information, the decision maker must know

A)all relevant and irrelevant information.
B)the context of the decision.
C)if unavoidable costs are incurred.
D)all material information.

Question 38

One way in which companies have tried to combat information overload is through the creation of

A)information firewalls.
B)information dashboards.
C)information warning signals.
D)information ceilings.

Question 39

A characteristic of irrelevant information is that

A)the information is the same among the alternatives.
B)differences will occur in the future.
C)differences among the alternatives must have occurred in the past and must occur in the future.
D)it differs between the alternatives.

Question 40

To focus on the facts that make a difference in their decisions, managers need to know how to eliminate

A)avoidable costs.
B)non-value added activities.
C)irrelevant information.
D)relevant information.

Question 41

Once viable alternatives have been identified by a decision maker, which of the following is not a step that should be followed?

A)Develop a list of relevant revenues and costs.
B)Identify any qualitative factors that may affect the decision.
C)Reconsider nonviable alternatives.
D)Choose the alternative that produces the greatest benefit or the lowest cost.

Question 42

Ellis Dover is a scout for a Major League Baseball team based in Phoenix, Arizona.Ellis needs to travel to Los Angeles, California on June 1 to perform a variety of professional functions prior to the team travelling to Los Angeles to play.If Ellis flies, he could catch a 6
A)$414

A)m.flight on June 1.In order to perform all of his professional responsibilities, Ellis will need to spend the night and catch a flight on June 2 to return to Phoenix.If Ellis flies, he will need to rent a car for $38 per day.To cover meals and other incidental expenses, Ellis will receive $45 per day (per diem) for each day he works out of town.Flights between Phoenix and Los Angeles can be purchased for $89 one way. Phoenix is approximately 300 miles from Los Angeles, a 5-hour drive at speed limits permitted on the freeways connecting the two cities.If he drives from Phoenix to Los Angeles, Ellis would need to leave the afternoon of May 31 and would be reimbursed $.50 per mile.He would need to spend 2 nights in a hotel, the night of May 31 and the night of June 1.He would return to Phoenix by car on June 2.The hotel used by the team charges $160 per night.What is the relevant cost of flying?
B)$254
C)$459
D)$504

Question 43

Which of the following laws prohibits companies from engaging in price discrimination?

A)Sarbanes-Oxley Act of 2002
B)Robinson-Patman Act of 1936
C)The Securities Act of 1933
D)NAFTA

Question 44

Calculations which show the additional impact of one alternative over another are referred to as

A)relevant analysis.
B)avoidable analysis.
C)incremental analysis.
D)opportunity analysis.

Question 45

Once viable alternatives have been identified by a decision maker, which of the following is not a step that should be followed?

A)Develop a list of relevant revenues and costs.
B)Identify any qualitative factors that may affect the decision.
C)Choose the alternative that produces the greatest benefit or the lowest cost.
D)Reconsider nonviable alternatives.

Question 46

In making the decision about whether to accept a special order for pianos, which of the following costs should be considered?

A)Relevant costs to produce the pianos
B)Relevant costs to sell the pianos
C)Unavoidable costs to produce the pianos
D)Unavoidable costs to sell the pianos

Question 47

Sunk cost are classified as

A)irrelevant.
B)avoidable.
C)opportunity.
D)relevant.

Question 48

Incremental analysis helps decision makers to understand

A)the sunk costs involved in their decision.
B)the impact of their choices.
C)the classification of costs.
D)the materiality of a situation.

Question 49

Which of the following is not a reason a company would be willing to accept new business at a loss?

A)The company has the expectation that it will make up for it in later years.
B)The company has the expectation that certain customers can influence other potential customers.
C)The company has the expectation that its estimates will prove incorrect and that the business will result in a profit.
D)The company has the expectation that it can acquire the customer on a permanent basis by offering a special price upfront.

Question 50

Other than the financial impact, which of the following is not one of the considerations that managers should address when choosing whether or not to expand their operations?

A)Will an increase in production and sales reduce existing customer service levels?
B)Should the company risk in hiring a new sales representative?
C)Will the expected extra sales become reality?
D)Will the CEO quit next year?

Question 51

Which of the following combinations results in differential information? Occurs in the Past Avoidable

A) Yes No
B) Yes Yes
C) No No
D) No Yes

Question 52

Which of the following laws prohibits companies from offering the same item to different customers at different prices?

A)NAFTA
B)Foreign Corrupt Practices Act of 1977
C)Robinson-Patman Act of 1936
D)Sarbanes-Oxley Act of 2002

Question 53

Ellis Dover is a scout for a Major League Baseball team based in Phoenix, Arizona.Ellis needs to travel to Los Angeles, California on June 1 to perform a variety of professional functions prior to the team travelling to Los Angeles to play.If Ellis flies, he could catch a 6
A)$101

A)m.flight on June 1.In order to perform all of his professional responsibilities, Ellis will need to spend the night and catch a flight on June 2 to return to Phoenix.If Ellis flies, he will need to rent a car for $38 per day.To cover meals and other incidental expenses, Ellis will receive $45 per day (per diem) for each day he works out of town.Flights between Phoenix and Los Angeles can be purchased for $89 one way. Phoenix is approximately 300 miles from Los Angeles, a 5-hour drive at speed limits permitted on the freeways connecting the two cities.If he drives from Phoenix to Los Angeles, Ellis would need to leave the afternoon of May 31 and would be reimbursed $.50 per mile.He would need to spend 2 nights in a hotel, the night of May 31 and the night of June 1.He would return to Phoenix by car on June 2.The hotel used by the team charges $160 per night.What is the incremental cost of driving over flying?
B)$251
C)$116
D)$296

Question 54

Costs that has been incurred in the past is referred to as

A)avoidable costs.
B)sunk costs.
C)opportunity costs.
D)relevant costs.

Question 55

Which of the following would least likely be a relevant cost in a special order of expensive clocks?

A)Direct materials
B)Direct labor
C)Variable overhead
D)Fixed overhead

Question 56

Ellis Dover is a scout for a Major League Baseball team based in Phoenix, Arizona.Ellis needs to travel to Los Angeles, California on June 1 to perform a variety of professional functions prior to the team travelling to Los Angeles to play.If Ellis flies, he could catch a 6
A)$755

A)m.flight on June 1.In order to perform all of his professional responsibilities, Ellis will need to spend the night and catch a flight on June 2 to return to Phoenix.If Ellis flies, he will need to rent a car for $38 per day.To cover meals and other incidental expenses, Ellis will receive $45 per day (per diem) for each day he works out of town.Flights between Phoenix and Los Angeles can be purchased for $89 one way. Phoenix is approximately 300 miles from Los Angeles, a 5-hour drive at speed limits permitted on the freeways connecting the two cities.If he drives from Phoenix to Los Angeles, Ellis would need to leave the afternoon of May 31 and would be reimbursed $0.50 per mile.He would need to spend 2 nights in a hotel, the night of May 31 and the night of June 1.He would return to Phoenix by car on June 2.The hotel used by the team charges $160 per night.What is the relevant cost of driving?
B)$505
C)$415
D)$428

Question 57

Costs that occur only with the implementation of a particular alternative are referred to as

A)avoidable.
B)sunk.
C)opportunity.
D)relevant.

Question 58

Which of the following costs is most likely relevant in deciding whether to accept a special order?

A)Direct material, variable overhead, and fixed overhead
B)Variable overhead, fixed overhead, and direct labor
C)Direct material, direct labor, and variable overhead
D)Direct material and direct labor

Question 59

Avoidable costs are those costs that

A)are variable.
B)are fixed.
C)occur only when a particular alternative.
D)occur in the past and relate to decisions being made.

Question 60

Which of the following is a reason a company would be willing to accept new business at a loss?

A)The new business will allow the company to reduce its fixed costs.
B)The new business will always cover variable costs.
C)The new business may result in certain customers influencing other potential customers.
D)The new business will increase fixed costs.

Question 61

Delta Airlines uses Wipro, an Indian company, to handle its customer service calls.This is an example of

A)offshoring.
B)outshoring.
C)outsourcing.
D)offsourcing.

Question 62

Which of the following is not relevant in the decision to accept a special order?

A)Depreciation on factory equipment
B)Variable cost of the product
C)Sales commissions based on a percentage of the sales price
D)Direct labor associated with the product

Question 63

Harmony Forge manufactures saddles for show horses.The company has received a special order for 290 saddles for an international competition.Each of these saddles would include the specialized logo of the competition.Last year Harmony produced 710 saddles, and the company has the capacity to produce 1,000 saddles per year.Harmony's saddles normally sell for $650 each, but the special offer is for $179,800 ($620 per saddle).The controller has provided information to management that estimates the variable cost per saddle is $435; fixed manufacturing overhead is $60/saddle.Of the fixed costs assigned to this special order, $15,950 is for the specialized logos, the remainder is attributable to costs that will be incurred regardless of whether the special order is produced.What is the operating income generated by the special order?

A)$53,650
B)$37,700
C)$36,250
D)$20,300

Question 64

When a customer requests a special order and the supplier has capacity constraints, which of the following is most likely not an option for the customer?

A)Reject the special order.
B)Reduce the special order.
C)Accept the special order and cut back on normal production.
D)Accept the special order and fill it whenever capacity becomes available.

Question 65

An auto body shop is trying to decide whether or not to purchase a new piece of diagnostic equipment.Which of the following costs would not be relevant to the decision?

A)The cost of the new equipment
B)The increase in property taxes as a result of purchasing the expensive equipment
C)The book value of the old equipment
D)The cost of training a technician to operate the equipment

Question 66

Moving the delivery of services from within the organization to a provider outside the organization is referred to as

A)outcome sourcing.
B)outsourcing.
C)delivery diffusion.
D)delivery transfer.

Question 67

Moving the production of goods from within the organization to a provider outside the organization is referred to as

A)transfer pricing.
B)product diffusion.
C)segment slicing.
D)outsourcing.

Question 68

If a special order results in a positive contribution margin of $8 when the contribution margin for regular orders is $15, which of the following decisions is the most likely to be chosen?

A)Accept the order, because $8 per unit is generated as profit
B)Reject the order, because $7 per unit is lost
C)Accept the order, but only if the customer agrees to an increase in the selling price to match the $15 regular contribution margin
D)Accept the order, but only if the customer agrees to an increase of $7 in the selling price

Question 69

Your friend purchased a non-refundable ticket to a popular Broadway play for Friday night.Yesterday she was invited to spend Friday on the lake with a group of sorority sisters.Her only cost will be for personal items such as lunch.The lake is two hours away from her apartment and the play is another hour in the opposite direction.She knows that if she goes to the lake, she will not get back in time to attend the play.Which of the following is not a relevant cost in making her decision on whether to go to the play or to the lake?

A)The price of the ticket to the play
B)The price of eating out at the lake
C)The price of renting an umbrella at the lake
D)The price of driving to the play

Question 70

Lark Company manufactures dog food for distribution in Washington, Oregon, and California.A dog food distributor from Florida has approached Lark and offered to purchase 240,000 pounds of dog food for $1.40 per pound.Lark can produce 2,000,000 pounds of dog food per year, and its results for last year are as follows: If Lark accepts the offer, it will only be able to sell 1,760,000 pounds of dog food at the regular price due to its capacity constraints.What will Lark's total operating income be next year if it accepts the offer?

A)$1,358,000
B)$1,250,000
C)$1,310,000
D)$2,040,000

Question 71

Which of the following is not a qualitative issue in a special order pricing decision?

A)Will accepting the order generate a positive contribution margin?
B)If the special order generates new business, will the customer purchase again at the regular price?
C)If the special order uses a lower quality component that is used for regular orders, will it negatively affect the company's reputation?
D)Will accepting the special order require the hiring of extra workers or payment of overtime?

Question 72

Glade Industries manufactures and bottles energy drinks.Last year the company made and bottled 2,500,000 units.Glade has the capacity to manufacture and bottle 3,000,000 units per year.Glade has received a special offer from a grocery chain for 500,000 bottles with a special label to be sold as the house brand energy drink.Glade's normal selling price is $0.80 per bottle.The special offer is for $360,000 total ($0.72/bottle).Management estimates that the variable cost per bottle is $0.34; fixed manufacturing overhead is $0.22/bottle.Of the fixed costs assigned to this special order, $2,500 is for the special labels, the remainder is attributable to costs that will be incurred regardless of whether the special order is produced.What is the operating income generated by the special order?

A)$190,000
B)$187,500
C)$80,000
D)$77,500

Question 73

Many small businesses hire a local CPA firm to process their payroll.This is an example of

A)transfer pricing.
B)offshoring.
C)offsourcing.
D)outsourcing.

Question 74

Moving a company's business processes to a foreign country is referred to as

A)outsourcing.
B)offsourcing.
C)offshoring.
D)outshoring.

Question 75

Which of the following is not a qualitative issue in a special order pricing decision?

A)Will accepting the special order require the hiring of extra workers or payment of overtime?
B)Will accepting the special order result in the loss of regular customers?
C)Will accepting the order generate an increase in operating income?
D)If the special order generates new business, will the customer purchase again at the regular price?

Question 76

Which of the following operations would be the most likely to accept a special order based on seasonality?

A)H&R Block tax service
B)Federal Express
C)An attorney specializing in estate planning
D)A hospital approached by a patient negotiating on the price of kidney stone surgery

Question 77

Your professor is considering retirement.Which of the following will not be relevant in his decision?

A)The amount of retirement benefits he will receive if he retires
B)The amount of salary he will receive if he does not retire
C)The cost of commuting to and from school
D)The cost of his many books and his library of exams he uses in his classes

Question 78

A dance studio is considering a plan to add ballroom dance to its offerings.Which of the following is not a relevant consideration in this decision?

A)Will the studio have to hire an additional instructor?
B)Will another class have to be dropped if ball room dancing is offered?
C)Is there a demand for ballroom dancing?
D)What are the unavoidable costs of the proposed addition?

Question 79

Impala Industries manufactures a component used by car manufacturers.Impala can produce 1,000,000 components per year.A foreign car manufacturer has approached Impala with an offer to purchase 120,000 components at price of $6 per unit.Impala's results for last year are as follows: If Impala accepts the offer, it will only be able to sell 880,000 units at the regular price due to its capacity constraints.What will Impala's total operating income be next year if it accepts the offer?

A)$2,710,000
B)$2,410,000
C)$2,650,000
D)$4,760,000

Question 80

If a special order is being considered when the product normally sells for $10, and relevant costs are $6 to produce a unit and $2 to sell the unit, which of the following decisions is the most likely to be chosen?

A)Accept the order if the sales price is $6 or more.
B)Accept the order if the sales price is $8 or more.
C)Accept the order if the sales price is at least $10.
D)Reject the order.