Question 1

Price discrimination involves temporarily setting a price below cost to broaden demand for a product and injure competition.

Accepted Answer

Price discrimination involves charging different prices to different customers for the same product or service, not necessarily setting prices below cost to affect competition.

Question 2

A business has complete freedom when setting prices for products and services.

Accepted Answer

In many countries, laws and regulations exist to prevent unfair pricing practices such as price fixing, price gouging, and predatory pricing, limiting a business's freedom to set prices.

Question 3

In making special order pricing decisions, generally only unit costs and batch-costs need to be considered assuming excess capacity exists.

Accepted Answer

When there is excess capacity, only the variable costs (unit and batch costs) are relevant for special order pricing decisions, as fixed costs are already covered by existing operations.

Question 4

When using a decision tree, the outcomes of each decision are shown with their costs and benefits.

Accepted Answer

Decision trees visually map out the different decisions, outcomes, costs, and benefits associated with each path, allowing for a structured analysis of potential choices and their implications.

Question 5

Because it lacks complete objectivity, subjective information is not useful in good decision making.

Accepted Answer

Subjective information can provide valuable insights, perspectives, and context that are crucial for informed decision-making, especially in situations where human experiences and judgments are important.

Question 6

Which of the following costs are relevant in the decision to drop a business unit?
A) Unavoidable Costs
B) Avoidable Costs
C) Both of the above
D) None of the above

Accepted Answer

Avoidable costs are relevant in the decision to drop a business unit because these are the costs that would not be incurred if the unit is dropped. Unavoidable costs, on the other hand, will still be incurred regardless of the decision and therefore are not relevant to this specific decision-making process.

Question 7

When deciding on special order pricing, it is important to consider
A) Alternative capacity uses
B) The reaction of other customers
C) The potential for future sales
D) All of the above

Accepted Answer

When deciding on special order pricing, it's crucial to consider all factors that could impact the business. This includes alternative uses of capacity (to ensure the special order is the best use of resources), the reaction of other customers (to avoid alienating your existing customer base), and the potential for future sales (to assess whether the special order could lead to more business). All these considerations help in making a well-rounded decision.

Question 8

To be useful for decision making, information must be
A) Accurate
B) Timely
C) Relevant
D) All of the above

Accepted Answer

Information must be accurate, timely, and relevant to be useful for decision making. Accuracy ensures that decisions are based on correct data, timeliness ensures that the information is available when needed, and relevance ensures that the information pertains to the decision at hand.

Question 9

The first step in the decision making process is to
A) Determine the consequences of outcomes
B) Determine the decision rule
C) Define the goals and objectives
D) All of the above

Accepted Answer

The first step in the decision-making process is to define the goals and objectives, as it sets the foundation for what the decision aims to achieve.

Question 10

In differential analysis, changes in the cost of direct materials among alternatives is an example of
A) Price discrimination
B) Relevant data
C) Batch-level costs
D) None of the above

Accepted Answer

Relevant data in differential analysis refers to the costs and revenues that differ among alternatives. Changes in the cost of direct materials among alternatives directly impact the decision-making process, making them relevant.

Question 11

You purchase baseball tickets last month when the team was doing poorly. You paid $100 a non-refundable ticket. Your best friend offered you $130 for the ticket now that the team is doing well. The opportunity cost of going to the game is
A) $30
B) $70
C) $130
D) None of the above

Accepted Answer

The opportunity cost of going to the game is the value of the next best alternative foregone, which in this case is selling the ticket to your friend for $130.

Question 12

TwoWheels (TW) manufactures hi-tech bicycles that sell for $600 each. They sell 1,000 bicycles per year. Fixed higher-level costs amount to $100,000. Break-even for TW is 300 bicycles. TW's margin safety is
A) $50,000
B) $180,000
C) $360,000
D) $420,000

Accepted Answer

The answer of TwoWheels (TW) manufactures hi-tech bicycles that sell...

Question 13

Bommarito Company plans to introduce an automatic vacuum cleaner that senses dirt, turns its motor on, vacuums the dirt and shuts the motor off. Because they will have no competition, they believe they can set prices very high. In setting the price they should consider
A) The Robinson-Patman Act
B) Life Cycle Costs
C) Sunk Costs
D) All of the above

Accepted Answer

The answer of Bommarito Company plans to introduce an automatic...

Question 14

Relevant costs exclude
A) Fixed costs
B) Costs that change from year to year
C) Costs that do not change based upon the alternative choices
D) All of the above

Accepted Answer

Relevant costs are those that will be affected by a decision. Costs that do not change based on alternative choices are not relevant because they do not impact the decision-making process.

Question 15

When making decisions based upon relevant costs, it is important to ignore
A) Qualitative objective costs
B) Fixed costs allocated based upon a cost driver that does not change
C) Quantitative subjective costs
D) All of the above

Accepted Answer

Fixed costs allocated based upon a cost driver that does not change are considered sunk costs and should not influence decision-making since they do not change with the decision at hand.

Question 16

Box Industries (BI) produces computers. They believe the market will not longer support their current price. A new price of $900 per computer is suggested by the marketing department. BI requires
A 25% return on sales. BI can produce and expects to sell 11,000 units. Their current costs are as follows:
 To achieve their target profit, BI must
A) Reduce their fixed higher level manufacturing costs to $2,500,000
B) Reduce variable costs of goods sold by $25 per unit
C) Reduce fixed selling & administrative costs to $1,250,000
D) All of the above will allow them to reach their target profit

Accepted Answer

The answer of Box Industries (BI) produces computers. They believe...

Question 17

Karl Kady, the controller of a nation wide manufacturing company is considering closing a plant in Texas. The plant manufactures containers for their products. All of the following would be relevant except
A) Costs paid for material on hand
B) Opportunity cost of alternative uses for the plant
C) Costs to buy externally
D) All of the above are relevant

Accepted Answer

Costs paid for material on hand are considered sunk costs and are not relevant to the decision about closing a plant. Relevant costs are those that will change as a result of the decision, such as opportunity costs of alternative uses for the plant and costs to buy externally.

Question 18

Rosenblatt Enterprises used decision tree analysis and cost-benefit analysis in their decision to keep open their current plant. The quantitative costs of keeping the plant open were $5,000,000, while the quantitative benefits of keeping the plant open were only $3,000,000. Rosenblatt decides to keep the plant open. The decision to keep the plant open is appropriate if:
A) Additional qualitative benefits exceed $2,000,000
B) The relevant costs less the benefits of closing the plant were greater than $2,000,000
C) It would never be appropriate
D) Both A & B

Accepted Answer

The decision to keep the plant open can be justified if there are additional qualitative benefits that exceed the $2,000,000 shortfall in the quantitative analysis, or if the costs of closing the plant (when considering relevant costs minus benefits of closing) are greater than $2,000,000. Both scenarios provide a rationale for keeping the plant open despite the initial quantitative analysis.

Question 19

Consider the following case:
Management is considering purchasing a Model B300 machine to use in addition to the company's present Model B100 machine. This will increase the company's production and sales. The increase in volume will be large enough to require increases in fixed selling expenses and in general administrative overhead, but not in the fixed manufacturing overhead.
Which of the following items would be considered relevant to the case?
A) Variable manufacturing overhead
B) Depreciation - Model B100 machine
C) Both of the above
D) None of the above

Accepted Answer

Variable manufacturing overhead is relevant because it will change with the increase in production volume due to the addition of the Model B300 machine. Depreciation on the Model B100 machine is not relevant to the decision, as it is a sunk cost and will not be affected by the purchase of the new machine.

Question 20

Edison Company has 5,000 obsolete desk lamps that are carried in inventory at a manufacturing cost of $45000. If the lamps are reworked for $20,000, they could be sold for $37,000. Alternatively, the lamps could be sold for $9,000 for scrap. In a decision model analyzing these alternatives, the sunk cost would be:
A) $9,000
B) $8,000
C) $43,000
D) $45,000

Accepted Answer

The sunk cost is the original manufacturing cost of $45,000, which is a past cost that cannot be recovered, regardless of the future action taken.

Quiz 13: Cost Management and Decision Making

Price discrimination involves temporarily setting a price below cost to broaden demand for a product and injure competition.

A business has complete freedom when setting prices for products and services.

In making special order pricing decisions, generally only unit costs and batch-costs need to be considered assuming excess capacity exists.

When using a decision tree, the outcomes of each decision are shown with their costs and benefits.

Because it lacks complete objectivity, subjective information is not useful in good decision making.

Which of the following costs are relevant in the decision to drop a business unit?

When deciding on special order pricing, it is important to consider

To be useful for decision making, information must be

The first step in the decision making process is to

In differential analysis, changes in the cost of direct materials among alternatives is an example of

You purchase baseball tickets last month when the team was doing poorly. You paid $100 a non-refundable ticket. Your best friend offered you $130 for the ticket now that the team is doing well. The opportunity cost of going to the game is

TwoWheels (TW) manufactures hi-tech bicycles that sell for $600 each. They sell 1,000 bicycles per year. Fixed higher-level costs amount to $100,000. Break-even for TW is 300 bicycles. TW's margin safety is

Bommarito Company plans to introduce an automatic vacuum cleaner that senses dirt, turns its motor on, vacuums the dirt and shuts the motor off. Because they will have no competition, they believe they can set prices very high. In setting the price they should consider

Relevant costs exclude

When making decisions based upon relevant costs, it is important to ignore

Karl Kady, the controller of a nation wide manufacturing company is considering closing a plant in Texas. The plant manufactures containers for their products. All of the following would be relevant except