Question 1

The concept of incremental cost is the same as the concept of differential cost.

Accepted Answer

Incremental cost and differential cost are used interchangeably to refer to the additional cost incurred by a company when it produces one extra unit or makes one more decision.

Question 2

Another name for relevant cost is unavoidable cost.

Accepted Answer

Relevant costs are costs that are directly affected by a specific business decision and can be avoided if the decision is not made. Unavoidable costs, on the other hand, are costs that cannot be avoided regardless of the decision made. Therefore, relevant cost and unavoidable cost are not interchangeable terms.

Question 3

Relevant benefits refer to the additional or incremental revenue generated by selecting a particular course or action over another.

Accepted Answer

Relevant benefits are the additional revenue or value that can be gained by choosing one course of action over another.

Question 4

If a company has the capacity to produce either 10,000 units of Product A or 10,000 units of Product B;assuming fixed costs are the same,production restrictions are the same for both products,and the markets for both products are unlimited;the company should commit 100% of its capacity to the product that has the higher contribution margin.

Accepted Answer

This is because the product with the higher contribution margin will generate more profit per unit, resulting in higher overall profit for the company.

Question 5

Neither the payback period nor the accounting rate of return methods of evaluating investments considers the time value of money.

Accepted Answer

Both payback period and accounting rate of return only focus on cash inflows and outflows without adjusting for the time value of money. They do not take into account the fact that money today is worth more than the same amount of money in the future due to inflation and the opportunity cost of not using that money for other investments.

Question 6

Significant sunk costs are relevant to decisions about the future.

Accepted Answer

The answer of Significant sunk costs are relevant to decisions...

Question 7

An out-of-pocket cost requires a future outlay of cash and is relevant for current and future decision making.

Accepted Answer

An out-of-pocket cost requires a current or future expenditure of cash, and therefore it is relevant for current and future decision making.

Question 8

Incremental costs should be considered in a make or buy decision.

Accepted Answer

Incremental costs are the additional costs that are incurred if a company decides to produce or buy a product. These costs should be considered in a make or buy decision to determine which option is more cost-effective. Therefore, the statement is true.

Question 9

Capital budgeting decisions are risky because the outcome is uncertain,large amounts of money are usually involved,the investment involves a long-term commitment,and the decision could be difficult or impossible to reverse.

Accepted Answer

The statement is true because capital budgeting decisions involve making long-term investment decisions that require significant financial resources, and the outcomes of these decisions may not be known with certainty. In addition, reversing a capital budgeting decision can be difficult or impossible, further emphasizing the risk involved in making these decisions.

Question 10

If the internal rate of return (IRR)of an investment is lower than the hurdle rate,the project should be accepted.

Accepted Answer

If the internal rate of return (IRR) of an investment is lower than the hurdle rate, it means that the project is not generating enough return to meet the minimum threshold set by the company or investor. In this case, it would be wise to reject the project as it is not worth the investment. Therefore, the correct statement is that if the IRR is lower than the hurdle rate, the project should be rejected, not accepted.

Question 11

Part of the decision to accept additional business should be based on a comparison of the incremental (differential)costs of the added production with the additional revenues to be received.

Accepted Answer

Considering the incremental costs and additional revenues is an important factor in making a decision about accepting additional business.

Question 12

An advantage of the break-even time (BET)method over the payback period method is that it recognizes the time value of money.

Accepted Answer

The break-even time (BET) method takes into account the time value of money by calculating the time required for the project's cash inflows to equal the cash outflows, whereas the payback period method does not. Therefore, the statement is true.

Question 13

Additional business in the form of a special order of goods or services should be accepted when the incremental revenue equals the incremental costs.

Accepted Answer

The answer of Additional business in the form of a...

Question 14

In a make or buy decision,management should focus on costs that are the same under the two alternatives.

Accepted Answer

In a make or buy decision, management should focus on costs that are different under the two alternatives. This includes direct costs such as materials and labor, as well as indirect costs such as opportunity costs and administrative expenses. Focusing only on costs that are the same under both alternatives may result in a biased decision.

Question 15

The decision to accept an additional volume of business should be based on a comparison of the revenue from the additional business with the sunk costs of producing that revenue.

Accepted Answer

The answer of The decision to accept an additional volume...

Question 16

An opportunity cost is the potential benefit lost by taking a specific action when two or more alternative choices are available.

Accepted Answer

This is the definition of opportunity cost.

Question 17

Capital budgeting is the process of analyzing alternative long-term investments and deciding which assets to acquire or sell.

Accepted Answer

Capital budgeting involves analyzing long-term investments and making decisions on acquiring or selling assets.

Question 18

A sunk cost will change with a future course of action.

Accepted Answer

A sunk cost is a cost that has already been incurred and cannot be recovered, regardless of any future course of action. Therefore, it does not change with a future course of action.

Question 19

When computing payback period,the year in which a capital investment is made is year 1.

Accepted Answer

The answer of When computing payback period,the year in which...

Question 20

In ranking choices with the break-even time (BET)method,the investment with the longest BET gets the highest rank.

Accepted Answer

The answer of In ranking choices with the break-even time...

Quiz 25: Capital Budgeting and Managerial Decisions