Question 1

The management accountant for Giada's Book Store has prepared the following income statement for the most current year:

If the travel book line had been discontinued, corporate profits for the current year would have decreased by ________.

Accepted Answer

$164,000 - $67,000 - $25,000 - $4,000 = $68,000

Question 2

________ is relevant in a decision to replace equipment.

Accepted Answer

The salvage value of old equipment is relevant in a decision to replace equipment because it represents the amount that can be recovered from selling the old equipment, impacting the financial analysis of the replacement decision.

Question 3

Depreciation allocated to a product line is a relevant cost when deciding to discontinue that product.

Accepted Answer

Depreciation is a sunk cost and never relevant.

Question 4

A company decided to replace an old machine with a new machine. Which of the following is considered a relevant cost?

Accepted Answer

The setup cost of the new equipment is a relevant cost as it is a cost that will be incurred as a result of the decision to replace the old machine with a new one. The book value of the old equipment, the depreciation expense on the old equipment, and the loss on disposal of the old equipment are all sunk costs and therefore not relevant for this decision.

Question 5

In a decision as to whether or not to drop a product, fixed costs that have been allocated to that product are generally not relevant unless there is a savings of fixed costs as a result of dropping the product.

Accepted Answer

Fixed costs that have been allocated to a product are already sunk costs and cannot be recovered regardless of whether or not the product is dropped. Therefore, they are not relevant in the decision-making process unless there is a potential savings of fixed costs as a result of dropping the product.

Question 6

Which of the following is true in a decision to keep or replace existing equipment?

Accepted Answer

The disposal value of the old equipment should be considered because it represents the amount that can be received if the equipment is sold or traded in. The book value is not as relevant because it only reflects the original cost of the equipment minus accumulated depreciation. Property taxes and depreciation on the new equipment are not directly relevant in this decision.

Question 7

Avoidable variable and fixed costs should be considered relevant when deciding whether to discontinue a product, product line, business segment, or customer.

Accepted Answer

Avoidable variable and fixed costs are costs that can be eliminated if a certain product, product line, business segment, or customer is discontinued. Therefore, they should be considered relevant in the decision-making process.

Question 8

Giant Company has three products, A, B, and C. The following information is available:

Giant Company is thinking of dropping Product C because it is reporting a loss. Assuming Giant drops Product C and does NOT replace it, operating income will ________.

Accepted Answer

Dropping Product C would mean Giant gives up $8,000 in contribution margin while only saving $2,000 in avoidable fixed costs. Without Product C, operating income would be $6,000 less than currently reported.

Question 9

Hartley's Meat Pies is considering replacing its existing delivery van with a new one. The new van can offer considerable savings in operating costs. Information about the existing van and the new van follow:

If Hartley's Meat Pies replaces the existing delivery van with the new one, over the next 10 years operating income will ________.

Accepted Answer

New van ($15,000 × 10 years) - Existing van ($22,500 × 10 years) = $75,000 less in operating costs, which results in a $75,000 increase in operating income.

Question 10

Hartley's Meat Pies is considering replacing its existing delivery van with a new one. The new van can offer considerable savings in operating costs. Information about the existing van and the new van follow:

Sunk costs include ________.

Accepted Answer

Sunk costs are costs that have already been incurred and cannot be recovered. In this case, the accumulated depreciation of the existing van is a sunk cost, as it represents the portion of the original cost of the van that has already been expensed and cannot be recovered. The original cost of the new van and the current salvage value of the existing van are not sunk costs, as they represent costs that have not yet been incurred or assets that can still provide value. The annual operating cost of the new van is a future cost and not relevant in determining sunk costs.

Question 11

Overhead costs allocated to the sales office and individual customers are always relevant when deciding whether to drop a customer.

Accepted Answer

Overhead costs allocated to the sales office and individual customers are always irrelevant.

Question 12

A company is considering adding a fourth product to use available capacity. A relevant factor to consider is that corporate costs can now be allocated over four products rather than only three.

Accepted Answer

It appears that corporate costs will not change in total, and therefore they are not relevant costs for deciding whether to add a fourth product.

Question 13

Book value is defined as the ________.

Accepted Answer

Book value is calculated as the original cost of an asset minus its accumulated depreciation, representing the asset's net value on the balance sheet. Therefore, the correct statement of book value is: the difference between the original cost of an asset and the accumulated depreciation.

Question 14

What role does a trade-in allowance on old equipment play in a decision to retain or replace equipment?

Accepted Answer

The trade-in allowance on old equipment plays a relevant role in the decision to retain or replace equipment since it reduces the cost of the new equipment. Therefore, the decision maker must consider the trade-in value when weighing the costs and benefits of purchasing new equipment.

Question 15

The management accountant for the Chocolate S'more Company has prepared the following income statement for the most current year:
  
a.Do you recommend discontinuing the Other Candy product line? Why or why not?
b.If the Chocolate product line had been discontinued, corporate profits for the current year would have decreased by what amount?

Accepted Answer

The answer of The management accountant for the Chocolate S'more...

Question 16

Managers are examining a possible replacement of a machine decision and generate the following numbers:
Book value of old machine $1,00,000
Current disposal value of old machine $50,000
Loss on disposal of old machine $300,000
Cost of new machine $600,000
In performing an analysis and in attempt to answer the question, "should we replace the old machine", which of the following statements would be true

Accepted Answer

The relevant items for the analysis are the cost of the new machine and the current disposal value of the old machine. The book value of the old machine is not relevant because it represents the historical cost of the machine and does not reflect its current value or potential for generating future cash flows. The loss on disposal of the old machine is also not relevant because it is a sunk cost that cannot be recovered and does not affect the future cash flows of the decision. Therefore, the best choice is C which includes the relevant items for the analysis.

Question 17

Hartley's Meat Pies is considering replacing its existing delivery van with a new one. The new van can offer considerable savings in operating costs. Information about the existing van and the new van follow:

Relevant costs for this decision include ________.

Accepted Answer

The relevant costs for this decision are the annual operating cost of the existing van and the annual operating cost of the new van. The original cost of the existing van, accumulated depreciation, and the book value of the existing van are sunk costs and not relevant to this decision. The decision should be based on the incremental difference in annual operating costs between the existing van and the new van.

Question 18

The management accountant for Giada's Book Store has prepared the following income statement for the most current year:

If the cookbook product line had been discontinued prior to this year, the company would have reported ________.

Accepted Answer

$63,000 - $37,000 - $19,000 - $3,000 = $4,000
The cookbook product line contributed $4,000 toward corporate profits. Without the cookbooks, corporate profits would be $4,000 less than currently reported.

Question 19

Biden Company sells two items, product A and product B. The company is considering dropping product B. It is expected that sales of product A will increase by 40% as a result. Dropping product B will allow the company to cancel its monthly equipment rental costing $200 per month. The other existing equipment will be used for additional production of product A. One employee earning $500 per month can be terminated if product B production is dropped. Biden's other fixed costs are allocated and will continue regardless of the decision made. A condensed, budgeted monthly income statement with both products follows:
  
Required:
Prepare an incremental analysis to determine the financial effect of dropping product B.

Accepted Answer

The answer of Biden Company sells two items, product A...

Question 20

Cassidy Products Inc.is considering eliminating Model EOS1 from its product line because of losses over the past quarter. The past three months of information for model EOS1 is summarized below:
  
Support costs are 70% variable and the remaining 30% is depreciation of special equipment for model EOS1 that has no resale value.
Should Cassidy eliminate Model EOS1 from its product line? Why or why not?

Accepted Answer

The answer of Cassidy Products Inc.is considering eliminating Model EOS1...

Quiz 11: Decision Making and Relevant Information

The management accountant for Giada's Book Store has prepared the following income statement for the most current year: If the travel book line had been discontinued, corporate profits for the current year would have decreased by ________.

________ is relevant in a decision to replace equipment.

Depreciation allocated to a product line is a relevant cost when deciding to discontinue that product.

A company decided to replace an old machine with a new machine. Which of the following is considered a relevant cost?

In a decision as to whether or not to drop a product, fixed costs that have been allocated to that product are generally not relevant unless there is a savings of fixed costs as a result of dropping the product.

Which of the following is true in a decision to keep or replace existing equipment?

Avoidable variable and fixed costs should be considered relevant when deciding whether to discontinue a product, product line, business segment, or customer.

Giant Company has three products, A, B, and C. The following information is available: Giant Company is thinking of dropping Product C because it is reporting a loss. Assuming Giant drops Product C and does NOT replace it, operating income will ________.

Hartley's Meat Pies is considering replacing its existing delivery van with a new one. The new van can offer considerable savings in operating costs. Information about the existing van and the new van follow: Sunk costs include ________.

Overhead costs allocated to the sales office and individual customers are always relevant when deciding whether to drop a customer.

A company is considering adding a fourth product to use available capacity. A relevant factor to consider is that corporate costs can now be allocated over four products rather than only three.

Book value is defined as the ________.

What role does a trade-in allowance on old equipment play in a decision to retain or replace equipment?

Hartley's Meat Pies is considering replacing its existing delivery van with a new one. The new van can offer considerable savings in operating costs. Information about the existing van and the new van follow: Relevant costs for this decision include ________.

The management accountant for Giada's Book Store has prepared the following income statement for the most current year: If the cookbook product line had been discontinued prior to this year, the company would have reported ________.