Deck 23: Short-Run Decision Analysis

Question 1

While performing an incremental analysis for outsourcing decision,information such as depreciation is not relevant.

Answer 1

True

Question 2

Opportunity costs are ignored for decision making.

Answer 2

False

Question 3

Total costs and savings are examples of qualitative factors.

Answer 3

False

Question 4

Outsourcing production help in reducing a company's investment in physical assets and human resources.

Question 5

A cost that changes between the alternatives is known as a differential cost.

Question 6

Costs that vary among alternatives are irrelevant for decision making.

Question 7

Outsourcing can reduce operating costs of a company.

Question 8

The idea behind incremental analysis is to review decision data that differ between alternatives.

Question 9

Fixed costs are often irrelevant in make-or-buy decisions.

Question 10

Make-or-buy decisions,such as whether to make a part internally or buy it from an external supplier,may lead to outsourcing.

Question 11

Information that is the same for all alternatives is considered relevant to the decision process.

Question 12

Outsourcing production or operating activities will help in improving the cash flow by reducing investment in physical assets.

Question 13

Sunk costs arise when the choice of one course of action eliminates the possibility of another course of action.

Question 14

Only quantitative data are used in the decision-making process.

Question 15

Outsourcing is the use of suppliers outside the organization to perform services or produce goods that could be performed or produced internally.

Question 16

The first step in the incremental analysis is to eliminate all relevant revenues and costs.

Question 17

Sunk costs are irrelevant for decision making.

Question 18

The cost of a previously purchased machine is an example of a sunk cost.

Question 19

In choosing among alternatives,managers are guided by historical cost information.

Question 20

Special orders should be considered only when entire capacity of an organization is used.

Question 21

The objective of a sales mix decision is to select the alternative that maximizes the contribution margin per constrained resource.

Question 22

Contribution margin per unit is calculated as selling price per unit less fixed costs per unit.

Question 23

Examples of relevant fixed costs for a special order decision are the purchase of additional machinery,an increase in supervisory help,and an increase in insurance premiums required by a specific order.

Question 24

Sales commission expenses are included in special order decision analysis even if the customer approached the company directly.

Question 25

The fixed costs that are traceable to the segments are called common costs.

Question 26

In a decision to eliminate a segment,remaining segments must have sufficient contribution margin to cover their own direct costs and the common costs.

Question 27

There are products or services that can be either sold in a basic form or be processed further.

Question 28

A special order should be accepted only if it maximizes operating income.

Question 29

Contribution margin per unit of constrained resources is calculated by dividing contribution margin per unit by quantity of the constrained resources required per unit.

Question 30

A segment margin is a segment's sales revenue minus its direct variable costs and direct fixed costs traceable to the segment.

Question 31

Special order decisions are about whether to accept or reject special orders at prices below the normal market prices.

Question 32

The objective of segment profitability decisions is to identify the segments that have a negative segment margin so that managers can drop them or take corrective actions.

Question 33

When resources like direct materials,labor,or time are scarce,the goal is to maximize the contribution margin per unit of scarce resource.

Question 34

In a company,there is no limit on the availability of resources such as machine time and labor hours.

Question 35

Joint costs are also referred to as common cost.

Question 36

Avoidable costs are the direct variable costs and direct fixed costs traceable to the segments.

Question 37

The sales mix analysis,which uses incremental analysis to identify the relevant costs and revenues,consists of two steps.

Question 38

Segment profitability analysis includes the preparation of a segmented income statement.

Question 39

A sell-or-process-further decision is a decision about whether to sell a joint product at the split-off point or sell it after further processing.

Question 40

The fixed costs of existing facilities are usually included in the analysis for special order decisions.

Question 41

Estimated future costs that differ between alternative courses of action are termed as __________ costs in management decision analysis.

A)sunk
B)relevant
C)absorption
D)replacement

Question 42

All of the following are qualitative factors that may be used by decision makers except

A)social issues.
B)tax implications.
C)timeliness.
D)competition.

Question 43

If the incremental revenues are greater than the incremental costs,the product should be processed further.

Question 44

If the incremental costs of processing further are greater than the incremental revenue,the decision of selling the product at the split-off point is justified.

Question 45

Which of the following costs are the benefits that are forfeited or lost when one alternative is chosen over another?

A)Incremental cost
B)Sunk cost
C)Opportunity cost
D)Direct cost

Question 46

Which of the following is an irrelevant cost in deciding whether or not to eliminate a producing department?

A)The current residual value of the department's equipment
B)The salary of a supervisor who would be laid off
C)The carrying value of the department's equipment
D)Revenue that could be generated by renting out the department's space

Question 47

The point where joint products or services become separable and identifiable is known as identifiable point.

Question 48

Preparing a thorough analysis of each possible solution and selecting a course of action falls under the performing stage of the management process.

Question 49

Many management decisions are unique and hence incompatible with strict rules,steps,or timetables.

Question 50

Identifying and prescribing corrective actions for short-run decisions falls under the performing stage of the management process.

Question 51

The purpose of incremental analysis is to find the alternative

A)with a few relevant costs.
B)that brings in the highest revenue.
C)that contributes the most to profits.
D)with the lowest fixed costs.

Question 52

Managers should use only financial and quantitative information in the decision-making process.

Question 53

Which of the following is true of cost-benefit analysis?

A)It supports only short-run decision making.
B)It considers quantitative costs and benefits,not qualitative.
C)It conveys that the benefits from a project should exceed its costs.
D)It supports only long-run decision making.

Question 54

When are sunk costs omitted from decision analysis?

A)Always
B)Never
C)Only if necessary
D)Only if they are immaterial

Question 55

The term incremental cost refers to

A)the difference in total costs between alternatives.
B)a cost that does not entail any dollar outlay but that is relevant to the decision-making process.
C)the profit forgone by selecting one choice instead of another.
D)a cost that constitutes expenses to be incurred even though there is no activity.

Question 56

Managers should use both financial and nonfinancial quantitative and qualitative information as inputs in the decision-making process.

Question 57

The common costs shared by two or more products before they are split off are called joint costs.

Question 58

Contribution margin information is not relevant for

A)the elimination of unprofitable segment decisions.
B)pricing decisions for special orders.
C)sales mix with resource constraint decisions.
D)estimating the sales revenue for next period.

Question 59

Conducting post completion audits to determine if short-run outcomes were achieved falls under the evaluation stage of the management process.

Question 60

Irrelevant costs

A)do not differ among alternatives.
B)can be avoided by a business.
C)are the same as opportunity costs.
D)are costs that will be incurred in the future.

Question 61

Which of the following statements about incremental analysis is false?

A)It is based on historical information relevant to the decision at hand.
B)It focuses on the differences between alternatives.
C)It reduces the time taken to select the best course of action.
D)It makes the evaluation process easier for the decision maker.

Question 62

The normal selling price of Carla Company's product is $3.00 per unit.The costs of production are: direct materials,$0.20;direct labor,$0.10;variable overhead,$0.40;and fixed overhead,$0.60 (based on normal capacity).The company has received a special order for 8,000 units at a unit sales price of $1.00.There is ample unused capacity to fill the order.If the order is accepted,operating income will

A)increase by $2,400.
B)decrease by $2,400.
C)increase by $3,600.
D)increase by $8,000.

Question 63

During 2014,America Inc.produced,among other products,9,500 cameras,incurring the following unit costs: $5 in direct materials,$3 in direct labor,$2 in variable overhead,$4 in fixed overhead,$0.50 in variable selling and administrative expenses,and $1 in fixed selling and administrative expenses.An outsider had offered to produce the cameras for $12 each.Assuming that the factory space would have been idle otherwise,acceptance of the outside offer would have

A)lost the company $9,500.
B)saved the company $34,250.
C)saved the company $19,250.
D)lost the company $14,250.

Question 64

When faced with a make-or-buy decision,managers need the following information about buying except

A)purchase price of item
B)rent or cash flow to be generated from vacated factory space
C)salvage value of unused machinery
D)depreciation previously charged to machinery to be discarded

Question 65

The normal selling price of Daniel Company's product is $35 per unit.The costs of production are: direct materials,$6;direct labor,$5;variable overhead,$5;and fixed overhead,$6 (based on normal capacity).The company has received a special order for 12,800 units at a unit sales price of $19.There is ample unused capacity to fill the order and $2 per unit will be incurred for additional packaging.If the order is accepted,operating income will

A)increase by $12,800.
B)decrease by $38,400.
C)increase by $38,400.
D)decrease by $12,800.

Question 66

Which of the following typically would be considered an incremental cost?

A)Fixed cost
B)Direct product cost
C)Sunk cost
D)Administrative overhead cost

Question 67

Make-or-buy decisions may lead to

A)outsourcing
B)joint products
C)a more diversified sales mix
D)none of these choices

Question 68

With a special order decision,relevant qualitative factors include all except

A)the impact of the special order on regular customers.
B)the potential of the special order to lead into new sales areas.
C)the customer's ability to maintain an ongoing relationship.
D)the special order's impact on operating income.

Question 69

Candidates for outsourcing would include

A)custodial services.
B)payroll processing.
C)information management.
D)all of these choices.

Question 70

McGraw Inc.manufactures 12,000 units of a part used in its production to manufacture guitars.The annual production activities related to this part are as follows: Hill Inc.has offered to sell 12,000 units of the same part to McGraw for $22 per unit.If McGraw were to accept the offer,some of the facilities presently used to manufacture the part could be rented to a third party at an annual rental of $18,000.Moreover,$4 per unit of the fixed overhead applied to the part would be totally eliminated.
In the decision to make or buy the part,what is the relevant fixed overhead for McGraw Inc.?

A)$30,000
B)$54,000
C)$84,000
D)$48,000

Question 71

Kyle Inc.manufactures automobiles.In recent past,the company started buying brake shoes from an external vendor.Which of the following decisions was made by the company in this example?

A)Special order decision
B)Segment profitability decision
C)Make-or-buy decision
D)Sales mix decision

Question 72

McGraw Inc.manufactures 12,000 units of a part used in its production to manufacture guitars.The annual production activities related to this part are as follows: Hill Inc.has offered to sell 12,000 units of the same part to McGraw for $22 per unit.If McGraw were to accept the offer,some of the facilities presently used to manufacture the part could be rented to a third party at an annual rental of $18,000.Moreover,$4 per unit of the fixed overhead applied to the part would be totally eliminated.
What should McGraw's decision be,and what is the total cost savings that would result?

A)Make,$60,000
B)Buy,$60,000
C)Make,$78,000
D)Buy,$78,000

Question 73

When faced with a make-or-buy decision,managers need which item of information about making?

A)Variable costs of making the item
B)Need for additional machinery
C)Incremental fixed costs
D)All of these choices

Question 74

Cooper Co.makes and uses 5,000 components each year in its manufacturing operations.An outside supplier has offered to supply the components to Anderson at $66 per unit.Anderson's production costs are as follows: If Cooper accepts the order,$8 of fixed overhead per unit will be eliminated.
What is the relevant cost to produce one unit?

A)$52
B)$60
C)$78
D)$86

Question 75

In a proposal to increase the production of clock radios,the sales managers of Rinaldo Electronics reported the total additional cost required to meet the increased production level.The increase in total cost is known as the

A)opportunity cost.
B)sunk cost.
C)uncontrollable cost.
D)differential cost.

Question 76

Cooper Co.makes and uses 5,000 components each year in its manufacturing operations.An outside supplier has offered to supply the components to Anderson at $66 per unit.Anderson's production costs are as follows: If Cooper accepts the order,$8 of fixed overhead per unit will be eliminated.
If the offer is accepted,operating income will

A)increase by $100,000.
B)decrease by $70,000.
C)decrease by $30,000.
D)increase by $60,000.

Question 77

With a special order decision,the fixed costs of existing facilities

A)do not change and are therefore irrelevant.
B)change in proportion of the order to net sales.
C)do not change and are relevant.
D)change drastically.

Question 78

Sales commissions would be excluded from special order decision analysis because

A)the customer approached the company directly.
B)they are fixed costs and therefore irrelevant.
C)they are administrative expenses.
D)they are relevant variable costs.

Question 79

Alex International needs 20,000 units of a certain part to use in its production cycle.If Alex buys the part from Nicole Company instead of making it,Alex could not use the released facilities in another activity;thus,all of the fixed overhead applied will continue regardless of what decision is made.Accounting records provide the following data: Cost to Alex to make the part:
What should Alex's decision be,and what is the total cost savings that would result?

A)Buy,$180,000
B)Buy,$20,000
C)Make,$180,000
D)Make,$20,000

Question 80

Before a company accepts a special order,it must

A)be sure that excess capacity exists to complete the order.
B)be sure that the order will not take away from normal sales.
C)take into account relative qualitative factors.
D)consider all these choices.