Deck 8: Relevant Costs for Short-Term Decisions

Question 1

Managers' decisions are based solely on quantitative factors.

Answer 1

False

Question 2

Irrelevant costs are costs that do not affect short-term decisions.

Answer 2

True

Question 3

Fixed costs that do not differ between two alternatives are

A)irrelevant to the decision.
B)considered opportunity costs.
C)relevant to the decision.
D)important only if they represent a material dollar amount.

Answer 3

A

Question 4

Which of the following is irrelevant when making a decision?

A)Fixed overhead costs that differ among alternatives
B)The cost of an asset that the company is considering replacing
C)The cost of further processing a product that could be sold as is
D)The expected increase in contribution margin of one product line as a result of a decision to discontinue a separate unprofitable product line

Question 5

Which of the following is relevant when deciding whether to drive or fly home for semester break?

A)Cost of plane ticket.
B)Wear and tear on your vehicle.
C)Cost of the gasoline.
D)All of these costs are relevant.

Question 6

One key to analyzing short-term business decisions is to focus on relevant revenues, costs and profits.

Question 7

Which of the following is relevant when deciding to replace old equipment with new?

A)Depreciation accumulated on the old equipment.
B)The cost of the old equipment that the company is replacing.
C)Trade-in value of the old equipment.
D)Variable cost of utilities that will not change between the old and new equipment.

Question 8

Expected future data that differs among alternative courses of action are referred to as

A)relevant information.
B)historical information.
C)predictable information.
D)irrelevant information.

Question 9

A "relevant cost" is best described by which of the following?

A)A factor that restricts production or sales of a product
B)Cost of developing, producing, and delivering a product or service
C)Costs that were incurred in the past and cannot be changed
D)Expected future costs that differ among alternatives

Question 10

An "opportunity cost" is best described by which of the following?

A)Benefits foregone by choosing a particular alternative course of action
B)Costs that were incurred in the past and cannot be changed
C)The distribution of all products to be sold
D)Expected future costs that differ among alternatives

Question 11

One key to analyzing short-term business decisions is to use a contribution margin approach that separates variable costs from fixed costs.

Question 12

Relevant information is future data that do not differ among alternatives.

Question 13

Costs that differ between alternatives are irrelevant.

Question 14

Which of the following best describes a "sunk cost"?

A)Costs that were incurred in the past and cannot be changed
B)Benefits foregone by choosing a particular alternative course of action
C)A factor that restricts the production or sale of a product
D)Expected future data that differ among alternatives

Question 15

One cost that is irrelevant in decision making is a sunk cost.

Question 16

"Contribution margin per unit" is best described by which of the following?

A)Sales price per unit minus fixed cost per unit
B)Sales price per unit minus variable cost unit
C)Sales price per unit minus fixed and variable costs per unit
D)Units sold time contribution margin ratio

Question 17

Management accountants gather and analyze relevant information to compare alternatives.

Question 18

Relevant information is expected future data that will not differ among alternatives.

Question 19

Which of the following is irrelevant when deciding whether to drive or fly home for semester break?

A)Cost of plane ticket.
B)Wear and tear on your vehicle.
C)Cost of the gasoline.
D)Cost of car insurance.

Question 20

Which of the following is a sunk cost?

A)Operating costs for a new vehicle
B)Trade in value of old vehicle
C)Purchase price of vehicle to be traded in
D)Purchase price of new vehicle

Question 21

A price-setter company emphasizes a cost-plus approach to pricing.

Question 22

The effect of a plant closing on employee morale is an example of which of the following?

A)A qualitative factor
B)A quantitative factor
C)A sunk cost
D)A variable cost

Question 23

Managers should consider ________ when making any sort of decision.

A)only fixed costs
B)sunk costs
C)only variable costs
D)revenues that differ among alternatives

Question 24

The format of the income statement most useful in decision-making is which of the following?

A)Absorption costing format
B)Traditional format
C)Contribution margin format
D)Single-step format

Question 25

Which of the following is most important in making a short-term special decision?

A)Focus on total costs
B)Separate variable from fixed costs
C)Use a conventional absorption costing approach
D)Calculating the fixed cost per unit

Question 26

Cost-plus price minus desired profit equals total cost.

Question 27

For a product, revenue at market price plus desired operating profit equals target total cost.

Question 28

Companies operating in highly competitive industries are generally price-setters.

Question 29

When a company is a price-setter, it emphasizes a target costing approach to pricing.

Question 30

Fixed costs that may be avoided in the future are referred to as

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

Question 31

A sunk cost can be described as which of the following?

A)A historical cost
B)Always irrelevant
C)Cannot be changed regardless of future actions taken
D)All of the above

Question 32

When making a pricing decision, it is not necessary to separate costs into fixed and variable.

Question 33

When setting prices, a company need not consider whether it is a price-taker or a price-setter for each product that it sells.

Question 34

A sunk cost is described as which of the following?

A)One that is relevant to a decision because it changes depending on the alternative course of action selected
B)A historical cost that is always irrelevant
C)An outlay expected to be incurred in the future
D)A historical cost that may be relevant

Question 35

Companies often try to gain more control over pricing by attempting to differentiate their products.

Question 36

What is the difference between relevant and irrelevant information for making decisions. Provide examples of each.

Question 37

When using a target costing approach, the company starts with revenue at market price, and then subtracts its desired profit, to yield the target total cost.

Question 38

All of the following are relevant to the decision to replace equipment except the

A)cost of old equipment.
B)selling price of old equipment.
C)future maintenance costs of old equipment.
D)cost of new equipment.

Question 39

Ida Enterprises is considering replacing a machine that is presently used in its production process. The following information is available: Which of the information provided in the table is irrelevant to the replacement decision?

A)The annual operating cost of the old machine
B)The original cost of the old machine
C)The current disposal value of the old machine
D)Both A and C

Question 40

Label each item below as relevant or irrelevant in making a decision.
a)Cost of roof repair made on rental property last year
b)The cost of insurance on a new vehicle when deciding to buy a new vehicle
c)Cost of new equipment under evaluation to replace used equipment
d)Original cost of old equipment that is being evaluated for replacement
e)Cost of previous year's insurance policy on old equipment being evaluated for replacement
f)Accumulated depreciation on old equipment being evaluated for replacement

Question 41

Which of the following describes the products and services of companies that are price-setters?

A)They tend to be unique.
B)They are priced by managers using a target-costing emphasis.
C)They tend to have a lot of competitors.
D)They tend to be commodities.

Question 42

When setting prices, managers need to consider all costs.

Question 43

Managers must consider which of the following when pricing a product or service?

A)All costs
B)Only period costs
C)Only manufacturing costs
D)Only variable costs

Question 44

In pricing a product, managers should consider which of the following?

A)Only fixed costs
B)Only variable costs
C)Only period costs
D)None of the above

Question 45

"Total cost of product or service" is best described as which of the following?

A)Benefits foregone by choosing a particular alternative course of action
B)A factor that restricts production or sales of a product
C)Costs that were incurred in the past and cannot be changed
D)All costs incurred along the value chain in connection with the product or service

Question 46

Target total cost is described by which of the following?

A)Total cost plus desired profit
B)Revenue at market price plus desired profit
C)Revenue at market price minus desired profit
D)Total cost minus actual cost

Question 47

Big-box retailers such as Lowe's are considered price-takers because

A)their products are not unique.
B)there is less competition in the home improvement retail sector.
C)their products are unique.
D)they emphasize cost-plus pricing.

Question 48

The cost-plus price is described by which of the following?

A)Target total cost plus desired profit
B)Total cost plus desired profit
C)Revenue at market price plus desired profit
D)Variable cost plus desired profit

Question 49

Which of the following pairs are characteristics of price-takers?

A)Less competition and target pricing
B)Cost-plus pricing and less competition
C)Target costing and heavy competition
D)Cost-plus pricing and lack of product uniqueness

Question 50

Product differentiation allows companies to become more of a price-setter, and less of a price-taker.

Question 51

Target total cost is defined as

A)cost of goods sold less desired profit.
B)revenue at market price less desired profit.
C)revenue at market price less variable costs.
D)revenue at market price less fixed costs.

Question 52

Managers need to consider variable costs, fixed costs, inventoriable product costs and period costs when setting prices.

Question 53

Companies that are considered price-setters usually employ the _________________ approach to pricing products.

A)cost-plus pricing
B)percentage pricing
C)target costing
D)cost plus one

Question 54

Methods for a company to meet target total cost and the profit goals if the current cost of the product is higher than the target cost include which of the following?

A)Accept a lower profit
B)Cut fixed costs, cut variable costs
C)Cut fixed costs
D)Any of the above

Question 55

Companies that are considered price-takers usually employ the _________________ approach to pricing products.

A)cost-plus pricing
B)percentage pricing
C)target costing
D)cost plus one

Question 56

Stockholders' expectations of company profits are affected by which of the following?

A)Industry risk
B)Historical company earnings
C)General economic conditions
D)All of the above

Question 57

Which of the following best describes "target costing"?

A)An approach to pricing that begins with revenue at market price and subtracts desired profit to arrive at target total cost
B)A factor that restricts production or sales of a product
C)All costs incurred along the value chain in connection with the product or service
D)An approach to pricing that begins with the product's total cost and adds desired profit

Question 58

Cost-plus pricing is essentially the opposite of target-costing.

Question 59

All of the following factors affect the amount a customer is willing to pay for a product, except

A)the selling company's costs.
B)the competition's price.
C)the product's uniqueness.
D)general economic conditions.

Question 60

Which of the following pairs are characteristics of price-setters?

A)Less competition and target costing
B)Cost-plus pricing and less competition
C)Lack of product uniqueness and heavy competition
D)Less competition and lack of product uniqueness

Question 61

When deciding whether to accept a special order, managers need to consider whether they have available excess capacity.

Question 62

Mountaintop golf course is planning for the coming season. Investors would like to earn a 12% return on the company's $50 million of assets. The company primarily incurs fixed costs to groom the greens and fairways. Fixed costs are projected to be $25,000,000 for the golfing season. About 400,000 golfers are expected each year. Variable costs are about $8 per golfer. The Mountaintop golf course has a favorable reputation in the area and therefore, has some control over the price of a round of golf. Using a cost-plus approach, what price should Mountaintop charge for a round of golf?

Question 63

Mountaintop golf course is planning for the coming season. Investors would like to earn a 12% return on the company's $50,000,000 of assets. The company primarily incurs fixed costs to groom the greens and fairways. Fixed costs are projected to be $24,000,000 for the golfing season. About 440,000 golfers are expected each year. Variable costs are about $20 per golfer. Mountaintop golf course is a price-taker and won't be able to charge more than its competitors who charge $102 per round of golf. What profit will it earn as a percent of assets?

A)Loss of 24.16%
B)Profit of 152.44%
C)Profit of 24.16%
D)Loss of 111.41%

Question 64

Philadelphia Swim Club is planning for the coming year. Investors would like to earn a 10% return on the company's $35,000,000 of assets. The company primarily incurs fixed costs to maintain the swimming pools. Fixed costs are projected to be $13,000,000 for the year. About 510,000 members are expected to swim each year. Variable costs are about $11 per swimmer. Philadelphia Swim Club is a price-taker and won't be able to charge more than its competitors who charge $41 for a membership. What profit will it earn as a percent of assets?

A)Profit of 6.57%
B)Loss of 6.57%
C)Loss of 53.17%
D)Profit of 37.14%

Question 65

Stoneycreek golf course is planning for the coming season. Investors would like to earn a 12% return on the company's $40 million of assets. The company primarily incurs fixed costs to groom the greens and fairways. Fixed costs are projected to be $20 million for the golfing season. About 500,000 golfers are expected each year. Variable costs are about $12 per golfer. Stoneycreek golf course is a price-taker and won't be able to charge more than $60 per round because of local competition.
What will Stoneycreek's expected profit shortfall be if it charges $60/round?

Question 66

Variable costs are irrelevant to a special decision when those variable costs differ between alternatives.

Question 67

If the expected increase in revenues from a special order is greater than the expected increase in variable and fixed costs, then the special order should be accepted.

Question 68

Stoneycreek golf course is planning for the coming season. Investors would like to earn a 12% return on the company's $40 million of assets. The company primarily incurs fixed costs to groom the greens and fairways. Fixed costs are projected to be $20 million for the golfing season. About 500,000 golfers are expected each year. Variable costs are about $12 per golfer. Stoneycreek golf course is a price-taker and won't be able to charge more than $60 per round because of local competition.
What will Stoneycreek's revenue be at a market price of $60/round?

Question 69

Mountaintop golf course is planning for the coming season. Investors would like to earn a 12% return on the company's $47,000,000 of assets. The company primarily incurs fixed costs to groom the greens and fairways. Fixed costs are projected to be $22,000,000 for the golfing season. About 420,000 golfers are expected each year. Variable costs are about $17 per golfer. The Mountaintop golf course is a price-taker and won't be able to charge more than its competitors who charge $79 per round of golf. What profit will it earn in terms of dollars?

A)$18,320,000
B)$(4,040,000)
C)$4,040,000
D)$(22,000,000)

Question 70

Stoneycreek golf course is planning for the coming season. Investors would like to earn a 12% return on the company's $40 million of assets. The company primarily incurs fixed costs to groom the greens and fairways. Fixed costs are projected to be $20 million for the golfing season. About 500,000 golfers are expected each year. Variable costs are about $12 per golfer. The Stoneycreek course has a favorable reputation in the area and therefore, has some control over the price of a round of golf.
Based on these numbers, what are Stoneycreek's total costs?

Question 71

A special order occurs when a customer requests a one-time order at an increased sales price.

Question 72

Managers should consider the potential effect of a special order on long-run profits and operations.

Question 73

Philadelphia Swim Club is planning for the coming year. Investors would like to earn a 10% return on the company's $36,000,000 of assets. The company primarily incurs fixed costs to maintain the swimming pools. Fixed costs are projected to be $12,500,000 for the year. About 520,000 members are expected to swim each year. Variable costs are about $12 per swimmer. Philadelphia Swim Club is a price-taker and won't be able to charge more than its competitors who charge $40 for a membership. What profit will it earn in terms of dollars?

A)$6,779,960
B)$12,500,000
C)$2,060,000
D)$(2,060,000)

Question 74

Stoneycreek golf course is planning for the coming season. Investors would like to earn a 12% return on the company's $40 million of assets. The company primarily incurs fixed costs to groom the greens and fairways. Fixed costs are projected to be $20 million for the golfing season. About 500,000 golfers are expected each year. Variable costs are about $12 per golfer. The Stoneycreek course has a favorable reputation in the area and therefore, has some control over the price of a round of golf.
Based on these numbers, what is Stoneycreek's target revenue?

Question 75

Indicate whether each item below is a characteristic of a price-taker or a price-setter. Use PT for price-taker and PS for price-setter.
a)Cost-plus pricing
b)Product lacks uniqueness
c)Less competition
d)Target pricing
e)Heavy competition

Question 76

Mountaintop golf course is planning for the coming season. Investors would like to earn a 12% return on the company's $47,000,000 of assets. The company primarily incurs fixed costs to groom the greens and fairways. Fixed costs are projected to be $20,000,000 for the golfing season. About 440,000 golfers are expected each year. Variable costs are about $17 per golfer. Mountaintop golf course has a favorable reputation in the area and therefore, has some control over the price of a round of golf. Using a cost-plus approach, what price should Mountaintop charge for a round of golf?

A)$62.45
B)$119.64
C)$75.27
D)$17

Question 77

Mountaintop golf course is planning for the coming season. Investors would like to earn a 12% return on the company's $50 million of assets. The company primarily incurs fixed costs to groom the greens and fairways. Fixed costs are projected to be $25,000,000 for the golfing season. About 400,000 golfers are expected each year. Variable costs are about $8 per golfer. The Mountaintop golf course is a price-taker and won't be able to charge more than its competitors who charge $75 per round of golf. What profit will it earn? State your answer in dollars and as a percent of assets. Will investors be happy with the profit level?

Question 78

In deciding whether to accept a special sales order, any fixed costs that would remain unchanged are considered relevant data.

Question 79

Philadelphia Swim Club is planning for the coming year. Investors would like to earn a 10% return on the company's $37,000,000 of assets. The company primarily incurs fixed costs to maintain the swimming pool. Fixed costs are projected to be $12,600,000 for the year. About 540,000 members are expected to swim each year. Variable costs are about $13 per swimmer. The Philadelphia Swim Club has a favorable reputation in the area and therefore, has some control over the membership price. Using a cost-plus approach, what price should Philadelphia Swim Club charge for a membership?

A)$43.19
B)$36.33
C)$29.48
D)$6.85

Question 80

Special orders increase income if the revenue from the order does not exceed the incremental variable and fixed costs incurred to fill the order.