Deck 11: Decision Making and Relevant Information

Question 1

Answer the following questions using the information below:
Schwimmer Lighting manufactures small flashlights and is considering raising the price by 50 cents a unit for the coming year. With a 50-cent price increase, demand is expected to fall by 6,000 units.

If the price increase is implemented, operating profit is projected to:

A)increase by $8,000
B)decrease by $8,000
C)increase by $12,000
D)decrease by $9,000

Answer 1

A

Question 2

A car purchased last year is an example of a(n):

A)sunk cost
B)relevant cost
C)differential cost
D)avoidable cost

Answer 2

A

Question 3

Which of the following costs always differ among future alternatives?

A)fixed costs
B)historical costs
C)relevant costs
D)variable costs

Answer 3

C

Question 4

Sunk costs:

A)are relevant
B)are differential
C)have future implications
D)are ignored when evaluating alternatives

Question 5

Answer the following questions using the information below:
Schwimmer Lighting manufactures small flashlights and is considering raising the price by 50 cents a unit for the coming year. With a 50-cent price increase, demand is expected to fall by 6,000 units.

Would you recommend the 50-cent price increase?

A)No, because demand decreased.
B)No, because the selling price increases.
C)Yes, because contribution margin per unit increases.
D)Yes, because operating profits increase.

Question 6

Feedback regarding previous actions may affect:

A)future predictions
B)implementation of the decision
C)the decision model
D)All of these answers are correct.

Question 7

Feedback from previous decisions uses historical information and, therefore, is irrelevant for making future predictions.

Question 8

Answer the following questions using the information below:
Schwimmer Lighting manufactures small flashlights and is considering raising the price by 50 cents a unit for the coming year. With a 50-cent price increase, demand is expected to fall by 6,000 units.

When using the five-step decision process, which one of the following steps should be done first?

A)Obtain information
B)Choose an alternative
C)Evaluation and feedback
D)Implementing the decision

Question 9

Sunk costs:

A)are historical costs
B)cannot be changed
C)are never relevant
D)all of the above

Question 10

Ruttles Circuit Company manufactures circuit boards for other firms. Management is attempting to search for ways to reduce manufacturing labor costs and has received a proposal from a consulting company to rearrange the production floor next year. Using the information below regarding current operations and the new proposal, which of the following decisions should management accept?

A)Do not change the production floor.
B)Rearrange the production floor.
C)Either, because it makes no difference to the employees.
D)It doesn't matter because the costs incurred will remain the same.

Question 11

A decision model is a formal method for making a choice, frequently involving both quantitative and qualitative analyses.

Question 12

Place the following steps from the five-step decision process in order:

A)A D B C
B)C D A B
C)A D C B
D)D C B A

Question 13

The textbook discusses a five-step decision process. Briefly explain each of the five steps.

Question 14

Answer the following questions using the information below:
Schwimmer Lighting manufactures small flashlights and is considering raising the price by 50 cents a unit for the coming year. With a 50-cent price increase, demand is expected to fall by 6,000 units.

When using the five-step decision process, which one of the following steps should be done last?

A)Obtain information
B)Choose an alternative
C)Evaluation and feedback
D)Implementing the decision

Question 15

In evaluating different alternatives, it is useful to concentrate on:

A)variable costs
B)fixed costs
C)total costs
D)relevant costs

Question 16

For decision making, a listing of the relevant costs:

A)will help the decision maker concentrate on the pertinent data
B)will only include future costs
C)will only include costs that differ among alternatives
D)All of these answers are correct.

Question 17

Which of the following costs are NEVER relevant in the decision-making process?

A)fixed costs
B)historical costs
C)relevant costs
D)variable costs

Question 18

Costs that CANNOT be changed by any decision made now or in the future are:

A)fixed costs
B)indirect costs
C)avoidable costs
D)sunk costs

Question 19

The formal process of choosing between alternatives is known as a(n):

A)relevant model
B)decision model
C)alternative model
D)prediction model

Question 20

A decision model involves:

A)only quantitative analyses
B)both quantitative and qualitative analyses
C)only qualitative analyses
D)a manager's instinct

Question 21

Answer the following questions using the information below:
Kolar Manufacturing is approached by a European customer to fulfill a one-time-only special order for a product similar to one offered to domestic customers. Kolar Manufacturing has excess capacity. The following per unit data apply for sales to regular customers:

For Kolar Manufacturing, what is the minimum acceptable price of this special order?

A)$220
B)$290
C)$340
D)$510

Question 22

Ratzlaff Company has a current production level of 20,000 units per month. Unit costs at this level are: Current monthly sales are 18,000 units. Jim Company has contacted Ratzlaff Company about purchasing 1,500 units at $2.00 each. Current sales would NOT be affected by the one-time-only special order, and variable marketing/distribution costs would NOT be incurred on the special order. What is Ratzlaff Company's change in operating profits if the special order is accepted?

A)$400 increase in operating profits
B)$400 decrease in operating profits
C)$1,800 increase in operating profits
D)$1,800 decrease in operating profits

Question 23

Historical costs are helpful:

A)for making future predictions
B)for decision making
C)because they are quantitative
D)None of these answers is correct.

Question 24

Quantitative factors:

A)include financial information, but not nonfinancial information
B)can be expressed in monetary terms
C)are always relevant when making decisions
D)include employee morale

Question 25

When making decisions:

A)quantitative factors are the most important
B)qualitative factors are the most important
C)appropriate weight must be given to both quantitative and qualitative factors
D)both quantitative and qualitative factors are unimportant

Question 26

Answer the following questions using the information below:
Kolar Manufacturing is approached by a European customer to fulfill a one-time-only special order for a product similar to one offered to domestic customers. Kolar Manufacturing has excess capacity. The following per unit data apply for sales to regular customers:

What is the contribution margin per unit?

A)$170
B)$220
C)$290
D)$510

Question 27

What is the change in operating profits if the one-time-only special order for 1,000 units is accepted for $360 a unit by Kolar?

A)$140,000 increase in operating profits
B)$20,000 increase in operating profits
C)$20,000 decrease in operating profits
D)$150,000 decrease in operating profits

Question 28

Qualitative factors:

A)generally are easily measured in quantitative terms
B)are generally irrelevant for decision making
C)may include either financial or nonfinancial information
D)include customer satisfaction

Question 29

Answer the following questions using the information below:
John's 8-year-old Chevrolet Trail Blazer requires repairs estimated at $6,000 to make it roadworthy again. His wife, Sherry, suggested that he should buy a 5-year-old used Jeep Grand Cherokee instead for $6,000 cash. Sherry estimated the following costs for the two cars:

The cost NOT relevant for this decision is the:

A)acquisition cost of the Trail Blazer
B)acquisition cost of the Grand Cherokee
C)repairs to the Trail Blazer
D)annual operating costs of the Grand Cherokee

Question 30

Answer the following questions using the information below:
Kolar Manufacturing is approached by a European customer to fulfill a one-time-only special order for a product similar to one offered to domestic customers. Kolar Manufacturing has excess capacity. The following per unit data apply for sales to regular customers:

What is the full cost of the product per unit?

A)$220
B)$340
C)$510
D)$170

Question 31

Employee morale at Dos Santos, Inc., is very high. This type of information is known as a:

A)qualitative factor
B)quantitative factor
C)nonmeasurable factor
D)financial factor

Question 32

Relevant information has all of these characteristics EXCEPT:

A)past costs are irrelevant
B)all future revenues and expenses are relevant
C)different alternatives can be compared by examining differences in total revenue and expenses
D)qualitative factors should be considered

Question 33

A relevant revenue is a revenue that is a(n):

A)past revenue
B)future revenue
C)in-hand revenue
D)earned revenue

Question 34

What should John do? What are his savings in the first year?

A)Buy the Grand Cherokee; $8,100
B)Fix the Trail Blazer; $3,180
C)Buy the Grand Cherokee; $180
D)Fix the Trail Blazer; $6,280

Question 35

When deciding to accept a one-time-only special order from a wholesaler, management should do all of the following EXCEPT:

A)analyze product costs
B)consider the special order's impact on future prices of their products
C)determine whether excess capacity is available
D)verify past design costs for the product

Question 36

One-time-only special orders should only be accepted if:

A)incremental revenues exceed incremental costs
B)differential revenues exceed variable costs
C)incremental revenues exceed fixed costs
D)total revenues exceed total costs

Question 37

A relevant cost is a cost that is a (n):

A)future cost
B)past cost
C)sunk cost
D)non-cash expense

Question 38

When there is excess capacity, it makes sense to accept a one-time-only special order for less than the current selling price when:

A)incremental revenues exceed incremental costs
B)additional fixed costs must be incurred to accommodate the order
C)the company placing the order is in the same market segment as your current customers
D)it never makes sense

Question 39

Roberto owns a small body shop. His major costs include labor, parts, and rent. In the decision-making process, these costs are considered to be:

A)fixed
B)qualitative factors
C)quantitative factors
D)variable

Question 40

Full cost of the product is:

A)the sum of fixed costs in all the business functions of the value chain
B)the sum of variable costs in all the business functions of the value chain
C)the sum of all variable and fixed costs in all the business functions of the value chain
D)the sum of all costs in the value chain minus marketing costs

Question 41

An example of a qualitative factor for the decision-making process is:

A)customer satisfaction
B)units sold
C)material cost
D)labor hours incurred

Question 42

Factors used to decide whether to outsource a part include:

A)the supplier's cost of direct materials
B)if the supplier is reliable
C)the original cost of equipment currently used for production of that part
D)past design costs used to develop the current composition of the part

Question 43

Answer the following questions using the information below:
Black Forrest manufactures rustic furniture. The cost accounting system estimates manufacturing costs to be $180 per table, consisting of 80% variable costs and 20% fixed costs. The company has surplus capacity available. It is Back Forrest's policy to add a 50% markup to full costs.
Black Forrest is invited to bid on a one-time-only special order to supply 100 rustic tables. What is the lowest price Black Forrest should bid on this special order?

A)$12,600
B)$14,400
C)$18,000
D)$23,000

Question 44

Answer the following questions using the information below:
Heck's Kitchens is approached by Mr. Louis Cifer, a new customer, to fulfill a large one-time-only special order for a product similar to one offered to regular customers. The following per unit data apply for sales to regular customers:
Heck's Kitchens has excess capacity. Mr. Cifer wants the cabinets in cherry rather than oak, so direct material costs will increase by $50 per unit.
If Louis Cifer wanted a long-term commitment for supplying this product, this analysis:

A)would definitely be different
B)may be different
C)would not be different
D)does not contain enough information to determine if there would be a difference

Question 45

Answer the following questions using the information below:
Heck's Kitchens is approached by Mr. Louis Cifer, a new customer, to fulfill a large one-time-only special order for a product similar to one offered to regular customers. The following per unit data apply for sales to regular customers:
Heck's Kitchens has excess capacity. Mr. Cifer wants the cabinets in cherry rather than oak, so direct material costs will increase by $50 per unit.
An example of a quantitative factor for the decision-making process is:

A)customer satisfaction
B)employee morale
C)product quality
D)manufacturing overhead

Question 46

Insourcing is:

A)purchasing goods and services internally
B)purchasing goods and services from outside vendors
C)more expensive than outsourcing
D)less expensive than outsourcing

Question 47

Problems that should be avoided when identifying relevant costs include all of the following EXCEPT:

A)assuming all variable costs are relevant
B)assuming all fixed costs are irrelevant
C)using unit costs that do not separate variable and fixed components
D)using total costs that separate variable and fixed components

Question 48

The cost to produce Part A was $20 per unit in 2013 and in 2014 it has increased to $22 per unit. In 2014, Supplier ABC has offered to supply Part A for $18 per unit. For the make-or-buy decision:

A)incremental revenues are $4 per unit
B)incremental costs are $2 per unit
C)net relevant costs are $2 per unit
D)differential costs are $4 per unit

Question 49

Answer the following questions using the information below:
Heck's Kitchens is approached by Mr. Louis Cifer, a new customer, to fulfill a large one-time-only special order for a product similar to one offered to regular customers. The following per unit data apply for sales to regular customers:
Heck's Kitchens has excess capacity. Mr. Cifer wants the cabinets in cherry rather than oak, so direct material costs will increase by $50 per unit.
Other than price, what other items should Heck's Kitchens consider before accepting this one-time-only special order?

A)reaction of shareholders
B)reaction of existing customers to the lower price offered to Mr. Louis Cifer
C)demand for cherry cabinets
D)price is the only consideration

Question 50

Outsourcing is:

A)purchasing goods and services internally
B)never a viable option
C)more desirable than insourcing
D)purchasing goods and services from outside vendors

Question 51

The sum of all the costs incurred in a particular business function (for example, marketing)is called the:

A)business function cost
B)full product cost
C)gross product cost
D)multiproduct cost

Question 52

Which of the following minimize the risks of outsourcing?

A)the use of short-term contracts that specify price
B)the responsibility for on-time delivery is now the responsibility of the supplier
C)building close relationships with the supplier
D)All of these answers are correct.

Question 53

Zephram Corporation has a plant capacity of 200,000 units per month. Unit costs at capacity are: Current monthly sales are 190,000 units at $30.00 each. Q, Inc., has contacted Zephram Corporation about purchasing 2,000 units at $24.00 each. Current sales would not be affected by the one-time-only special order. What is Zephram's change in operating profits if the one-time-only special order is accepted?

A)$14,800 increase
B)$17,200 increase
C)$22,000 increase
D)$33,200 increase

Question 54

Relevant costs of a make-or-buy decision include all of the following EXCEPT:

A)fixed salaries that will not be incurred if the part is outsourced
B)current direct material costs of the part
C)special machinery for the part that has no resale value
D)material-handling costs that can be eliminated

Question 55

The sum of all costs incurred in all business functions in the value chain (product design, manufacturing, marketing, and customer service, for example)is known as the:

A)business cost
B)full product cost
C)gross product cost
D)multiproduct cost

Question 56

Snapper Tool Company has a production capacity of 3,000 units per month, but current production is only 2,500 units. Total manufacturing costs are $60 per unit and marketing costs are $16 per unit. Doug Levy offers to purchase 500 units at $76 each for the next five months. Should Snapper accept the one-time-only special order if only absorption-costing data are available?

A)Yes, good customer relations are essential.
B)No, the company will only break even.
C)No, since only the employees will benefit.
D)Yes, since operating profits will most likely increase.

Question 57

Answer the following questions using the information below:
Heck's Kitchens is approached by Mr. Louis Cifer, a new customer, to fulfill a large one-time-only special order for a product similar to one offered to regular customers. The following per unit data apply for sales to regular customers:
Heck's Kitchens has excess capacity. Mr. Cifer wants the cabinets in cherry rather than oak, so direct material costs will increase by $50 per unit.
For Heck's Kitchens, what is the minimum acceptable price of this one-time-only special order?

A)$850
B)$950
C)$805
D)$1,460

Question 58

Answer the following questions using the information below:
Black Forrest manufactures rustic furniture. The cost accounting system estimates manufacturing costs to be $180 per table, consisting of 80% variable costs and 20% fixed costs. The company has surplus capacity available. It is Back Forrest's policy to add a 50% markup to full costs.
A large hotel chain is currently expanding and has decided to decorate all new hotels using the rustic style. Black Forrest Incorporated is invited to submit a bid to the hotel chain. What is the lowest price per unit Black Forrest should bid on this long-term order?

A)$126
B)$144
C)$180
D)$270

Question 59

Which of following are risks of outsourcing the production of a part?

A)unpredictable quality
B)unreliable delivery
C)unscheduled price increases
D)All of these answers are correct.

Question 60

The best way to avoid misidentification of relevant costs is to focus on:

A)expected future costs that differ among the alternatives
B)historical costs
C)unit fixed costs
D)total unit costs

Question 61

The amount paid to purchase equipment last year is an example of a sunk cost.

Question 62

Which of the following would NOT be considered in a make-or-buy decision?

A)fixed costs that will no longer be incurred
B)variable costs of production
C)potential rental income from space occupied by the production area
D)unchanged supervisory costs

Question 63

Unit cost data can most mislead decisions by:

A)not computing fixed overhead costs
B)computing labor and materials costs only
C)computing administrative costs
D)not computing unit costs at the same output level

Question 64

Relevant costs are expected future costs that differ among alternatives.

Question 65

A cost may be relevant for one decision, but NOT relevant for a different decision.

Question 66

For make-or-buy decisions, a supplier's ability to deliver the item on a timely basis is considered a(n):

A)qualitative factor
B)relevant cost
C)differential factor
D)opportunity cost

Question 67

For a particular decision, differential revenues and differential costs are always relevant.

Question 68

Relevant revenues are expected future revenues that do NOT differ among alternatives.

Question 69

Answer the following questions using the information below:
Donald's Engine Company manufactures part TE456 used in several of its engine models. Monthly production costs for 1,000 units are as follows:
It is estimated that 10% of the fixed overhead costs assigned to TE456 will no longer be incurred if the company purchases TE456 from the outside supplier. Donald's Engine Company has the option of purchasing the part from an outside supplier at $42.50 per unit.
If Donald's Engine Company accepts the offer from the outside supplier, the monthly avoidable costs (costs that will no longer be incurred)total:

A)$ 41,000
B)$ 49,000
C)$ 25,000
D)$50,000

Question 70

Revenues that remain the same for two alternatives being examined are relevant revenues.

Question 71

Answer the following questions using the information below:
Donald's Engine Company manufactures part TE456 used in several of its engine models. Monthly production costs for 1,000 units are as follows:
It is estimated that 10% of the fixed overhead costs assigned to TE456 will no longer be incurred if the company purchases TE456 from the outside supplier. Donald's Engine Company has the option of purchasing the part from an outside supplier at $42.50 per unit.
The maximum price that Donald's Engine Company should be willing to pay the outside supplier is:

A)$40 per TE456 part
B)$41 per TE456 part
C)$49 per TE456 part
D)$50 per TE456 part

Question 72

Answer the following questions using the information below:
Piels Corporation produces a part that is used in the manufacture of one of its products. The costs associated with the production of 10,000 units of this part are as follows:
Of the fixed factory overhead costs, $60,000 is avoidable.
Assuming no other use of their facilities, the highest price that Piels should be willing to pay for 10,000 units of the part is:

A)$420,000
B)$280,000
C)$340,000
D)$360,000

Question 73

Answer the following questions using the information below:
Donald's Engine Company manufactures part TE456 used in several of its engine models. Monthly production costs for 1,000 units are as follows:
It is estimated that 10% of the fixed overhead costs assigned to TE456 will no longer be incurred if the company purchases TE456 from the outside supplier. Donald's Engine Company has the option of purchasing the part from an outside supplier at $42.50 per unit.
If Donald's Engine Company purchases 1,000 TE456 parts from the outside supplier per month, then its monthly operating income will:

A)increase by $1,000
B)increase by $40,000
C)decrease by $1,500
D)decrease by $42,500

Question 74

For decision making, differential costs assist in choosing between alternatives.

Question 75

Direct materials are $20, direct labor is $5, variable overhead costs are $15, and fixed overhead costs are $10. In the short term, the incremental cost of one unit is:

A)$15
B)$25
C)$40
D)$50

Question 76

The incremental costs of producing one more unit of product include all of the following EXCEPT:

A)direct materials
B)direct labor
C)variable overhead costs
D)fixed overhead costs

Question 77

When evaluating a make-or-buy decision, which of the following does NOT need to be considered?

A)alternative uses of the production capacity
B)the original cost of the production equipment
C)the quality of the supplier's product
D)the reliability of the supplier's delivery schedule

Question 78

Schmidt Sewing Company incorporates the services of Deb's Sewing. Schmidt purchases pre-cut dresses from Deb's. This is primarily known as:

A)insourcing
B)outsourcing
C)relevant costing
D)sunk costing

Question 79

Smiley Face Company manufactures signs from direct materials to the finished product. This is considered:

A)insourcing
B)outsourcing
C)relevant costing
D)sunk costing

Question 80

Answer the following questions using the information below:
Piels Corporation produces a part that is used in the manufacture of one of its products. The costs associated with the production of 10,000 units of this part are as follows:
Of the fixed factory overhead costs, $60,000 is avoidable.
Conners Company has offered to sell 10,000 units of the same part to Piels Corporation for $36 per unit. Assuming there is no other use for the facilities, Schmidt should:

A)make the part, as this would save $6 per unit
B)buy the part, as this would save $6 per unit
C)buy the part, as this would save the company $60,000
D)make the part, as this would save $2 per unit