Deck 9: Short Run Decision Analysis

Question 1

Incremental analysis identifies both the benefits and the drawbacks of each alternative.

Answer 1

True

Question 2

Many of the decisions that managers make do not affect their organization's activities in the short run.

Answer 2

False

Question 3

A cost that does not change between the alternatives is known as a differential cost.

Answer 3

False

Question 4

Facts that are the same for each alternative are not relevant for management decision making.

Question 5

Competition, social issues, and timeliness are examples of qualitative factors.

Question 6

The idea behind incremental analysis is to review decision data that differ between alternatives; information that is the same for all alternatives is considered irrelevant to the decision process.

Question 7

The first step in the incremental analysis is to eliminate any irrelevant revenues and costs.

Question 8

Qualitative data as well as quantitative data are useful in the decision process.

Question 9

While performing an incremental analysis for outsourcing decision, information such as depreciation and other fixed costs are not relevant.

Question 10

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

Question 11

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

Question 12

Outsourcing is the use of suppliers outside the organization to perform services or produce goods that cannot be performed or produced internally.

Question 13

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

Question 14

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

Question 15

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

Question 16

Sunk costs are not relevant for decisions based on incremental analysis.

Question 17

Sunk costs can be recovered and are relevant in short-run decision making.

Question 18

Outsourcing production or operating activities does not help in reducing a company's investment in physical assets and human resources.

Question 19

Opportunity costs are irrelevant costs.

Question 20

Managers rely strictly on financial information when faced with decisions.

Question 21

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 22

Only large corporations benefit from capital investment analysis.

Question 23

Sales mix decisions should be based on the contribution margin per unit of scarce resource.

Question 24

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

Question 25

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 26

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

Question 27

In manufacturing companies, a common decision facing managers is whether to make or buy some or all of the parts used in product assembly.

Question 28

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

Question 29

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

Question 30

Special orders should only be considered if unused capacity exists.

Question 31

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

Question 32

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

Question 33

It is not possible for a company to provide the full variety of products or services which the customer demands within a given time.

Question 34

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

Question 35

There is no limit on the availability of resources such as machine time, labor hours.

Question 36

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

Question 37

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

Question 38

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

Question 39

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

Question 40

If the incremental costs of processing further is greater than the incremental revenue, the decision to process the product or service further is justified.

Question 41

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

Question 42

The purpose of incremental analysis is to find the alternative

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

Question 43

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) out-of-pocket cost.
C) controllable cost.
D) incremental cost.

Question 44

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 45

Which of the following statements about incremental analysis is false?

A) It is based on both historical and future 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 46

If the incremental costs are greater than the incremental revenue, the product should not be processed further and should be sold at the split-off point.

Question 47

Joint costs are relevant costs in a sell or process-further decisions and they do change if further processing occurs.

Question 48

Irrelevant costs are costs that are

A) different among alternatives.
B) avoidable costs.
C) opportunity costs.
D) sunk costs.

Question 49

Qualitative factors used by decision makers include all of the following except

A) social issues.
B) revenue from fees.
C) timeliness.
D) competition.

Question 50

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

A) Conversion cost
B) Direct product cost
C) Period cost
D) Factory overhead cost

Question 51

Cost information for short-run decision making focuses on

A) what happened.
B) what is happening.
C) what will happen.
D) why it happened.

Question 52

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

A) variable overhead
B) relevant
C) absorption
D) replacement

Question 53

Joint costs that are incurred before the split-off point should be ignored while making a decision to sell or process a product further.

Question 54

Taylor 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:
Direct materials, $24,000
Direct labor, $60,000
Variable overhead, $54,000
Fixed overhead, $84,000

Best Guitars, Inc., has offered to sell 12,000 units of the same part to Taylor for $22 per unit. If Taylor 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 Taylor'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 55

Sunk costs are omitted from decision analysis

A) always.
B) never.
C) sometimes.
D) only if immaterial.

Question 56

Which of the following could not be a relevant 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 57

Taylor 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:
Direct materials, $24,000
Direct labor, $60,000
Variable overhead, $54,000
Fixed overhead, $84,000

Best Guitars, Inc., has offered to sell 12,000 units of the same part to Taylor for $22 per unit. If Taylor 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?

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

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) determining the amount that sales exceeded fixed costs.

Question 59

The difference in total costs between two alternatives is referred to as the

A) incremental cost.
B) sunk cost.
C) opportunity cost.
D) direct cost.

Question 60

Avoidable costs are important for

A) sales mix decisions.
B) pricing decisions for special orders.
C) sell or process-further decisions.
D) decisions to eliminate unprofitable segments.

Question 61

The point at which products are separated in a joint production process is the

A) split-off point.
B) joint product point.
C) separation point.
D) breakeven point.

Question 62

The Norran Company needs 15,000 units of a certain part to use in its production cycle. If Norran buys the part from Waterloo Company instead of making it, Norran 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 Norran to make the part:
Direct materials, $3
Direct labor, $12
Variable overhead, $13
Fixed overhead applied, $8
Cost to buy the part from the Waterloo Company, $27


-What should Norran's decision be, and what is the total cost savings that would result?

A) Buy, $90,000
B) Buy, $15,000
C) Make, $90,000
D) Make, $15,000

Question 63

All of the following are relevant in a sell or process-further decision except

A) sales value at the split-off point.
B) sales value after further processing.
C) additional processing costs.
D) joint costs.

Question 64

The costs incurred beyond the split-off point are called

A) split-off point costs.
B) incremental costs.
C) joint product costs.
D) by-product costs.

Question 65

Products Uno, Dos, Tres, and Quatro have contribution margins of $2, $3, $4, and $5, respectively, and require 1.5, 2, 2.5, and 3 machine hours per unit, respectively. Assuming that all units produced could be sold and that total machine hours per month are limited, on which product should the company concentrate its efforts?

A) Dos
B) Quatro
C) Uno
D) Tres

Question 66

The normal selling price of our product is $42 per unit. The costs of production are direct materials, $8; direct labor, $6; variable overhead, $7; and fixed overhead, $4 (based on normal capacity). The company has received a special order for 10,600 units at a unit sales price of $23. There is ample unused capacity to fill the order and $1 per unit will be incurred for additional freight costs. If the order is accepted, operating income will

A) increase by $10,600.
B) decrease by $31,800.
C) increase by $21,200.
D) decrease by $21,200.

Question 67

What two criteria must be met for information to be considered relevant to decision making?

Question 68

Relevant costs in a sell or process-further decision include

A) costs of additional processing.
B) both additional revenues and additional costs.
C) revenues after additional processing.
D) joint product costs.

Question 69

Why is the book value of equipment irrelevant when considering the replacement of equipment?

Question 70

Anderson 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:
$\begin{array}{|l|l|}\hline \text { Direct materials } & \$ 8 \\\hline \text { Direct labor } & 32 \\\hline \text { Variable overhead } & 12 \\\hline \text { Fixed overhead(based on normal capacity) } & 34 \\\hline\end{array}$
If Anderson 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 71

California Chemical Co. produces several chemical compounds. Each compound can be sold at the split-off point or processed further. The following results apply to May: $\begin{array}{|l|l|l|l|}\hline \text { Compound } & \text { Sales Value at Split-off Point } & \text { Costs of Additional Processing } & \begin{array}{l}\text { Sales Value After Additional } \\\text { Processing }\end{array} \\\hline \text { Chem I } & \$ 59,600 & \$ 7,300 & \$ 74,400 \\\hline \text { Chem II } & 70,700 & 17,500 & 82,600 \\\hline \text { Chem III } & 46,700 & 6,200 & 55,500 \\\hline & & &\end{array}$
After determining which products should be sold at the split-off point and which should be processed further, the total revenue provided by these three products would be

A) $172,500.
B) $199,000.
C) $200,600.
D) $212,500.

Question 72

Discuss the qualitative factors that should be considered in short-run decision making.

Question 73

Which of the following techniques is most useful for a special order decision?

A) Payback method
B) Present value method
C) Accounting rate-of-return method
D) Incremental analysis

Question 74

The Norran Company needs 15,000 units of a certain part to use in its production cycle. If Norran buys the part from Waterloo Company instead of making it, Norran 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 Norran to make the part:
Direct materials, $3
Direct labor, $12
Variable overhead, $13
Fixed overhead applied, $8
Cost to buy the part from the Waterloo Company, $27

-In deciding whether to make or buy the part, Norran's total relevant costs to make the part are

A) $360,000.
B) $240,000.
C) $420,000.
D) $405,000.

Question 75

Candidates for outsourcing would include

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

Question 76

Products Green, Red, and White have unit contribution margins of $6.50, $12, and $10, respectively, and require 2, 4, and 3 direct labor hours per unit, respectively. If demand currently is far exceeding supply, on which product should the company concentrate its efforts?

A) Green
B) Red
C) White
D) Either Green or Red

Question 77

"Variable costs are relevant and fixed costs are irrelevant." Explain why you agree or disagree with this statement.

Question 78

Anderson 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:
$\begin{array}{|l|l|}\hline \text { Direct materials } & \$ 8 \\\hline \text { Direct labor } & 32 \\\hline \text { Variable overhead } & 12 \\\hline \text { Fixed overhead(based on normal capacity) } & 34 \\\hline\end{array}$
If Anderson accepts the order, $8 of fixed overhead per unit will be eliminated.
What is the relevant cost to produce one unit?

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

Question 79

During 2010, America, Inc., produced, among other products, 9,300 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 $9,300.
B) saved the company $33,950.
C) saved the company $18,950.
D) lost the company $13,950.

Question 80

An old machine that originally cost $9,500 thus far has accumulated depreciation of $1,900. The remaining useful life is four years, with no salvage value at the end of its useful life. A new machine is now available that costs $8,500, with a useful life of five years and no residual value. The old machine could be sold now for $5,900. The annual cash operating costs for the old machine are $5,000, but for the new machine they would be only $2,500. Gross revenue from the products would be $12,000 annually for either machine. The company should

A) keep the old machine to avoid a $5,900 loss on its disposal.
B) keep the old machine to avoid a $1,700 loss on its disposal.
C) replace the old machine.
D) keep the old machine to avoid an $8,500 decrease in cash.