Question 1

The Sand Cruiser is a takeout food store at a popular beachside resort. Teresa Texton, owner of the Sand Cruiser, was deciding how much refrigerator space to devote to four different beverages. Appropriate data on the four beverages follow:  Teresa had a maximum front shelf space of fourteen feet to devote to the four beverages. She wanted a minimum of two feet and a maximum of seven feet of front shelf for each beverage. The contribution margin per case for Limeade is:
A)$5.50.
B)$6.40.
C)$17.60.
D)$16.20.
E)$9.40.

Accepted Answer

The answer of The Sand Cruiser is a takeout food...

Question 2

A company owns equipment that is used to manufacture important parts for its production process. Because the equipment is repeatedly breaking down, the company plans to sell the equipment for $10,000 and to select one of the following alternatives: (1) acquire new equipment for $80,000 and continue to manufacture the part at the same variable cost, or (2) purchase the parts from an outside company at $4 per part. In the short run the company should quantitatively analyze the alternatives by comparing the variable cost of manufacturing the parts:
A)Plus $80,000, to the cost of buying the parts.
B)To the cost of buying the parts less $10,000.
C)Less $10,000 to the cost of buying the parts.
D)To the cost of buying the parts.
E)Plus $70,000, to the cost of buying the parts.

Accepted Answer

The answer of A company owns equipment that is used...

Question 3

In deciding whether to accept or a reject a special sales order, which of the following costs are likely relevant to the decision?
A)Depreciation expense on manufacturing equipment.
B)A portion of facilities-level costs.
C)A portion of batch-level costs.
D)Total batch-level costs.
E)An allocated share of fixed manufacturing support costs.

Accepted Answer

The answer of In deciding whether to accept or a...

Question 4

Relevant costs for a make-or-buy decision for a component part include all of the following EXCEPT:
A)Fixed salaries that will not be incurred if the part is outsourced.
B)Payroll tax (unemployment insurance cost), because of outsourcing.
C)Material-handling costs that can be eliminated if the part is outsourced.
D)Special machinery for the part that has no resale value.
E)Current direct material costs for the part.

Accepted Answer

The answer of Relevant costs for a make-or-buy decision for...

Question 5

The costs described in situations 1 and 4 above are:
A)Prime costs.
B)Sunk costs.
C)Discretionary costs.
D)Relevant costs.
E)Fully-absorbed costs.

Accepted Answer

The costs identified in situations 1 and 4 are relevant costs since they are future costs that can be affected by the decision being made. Prime costs are the direct costs of production such as labor and materials, sunk costs are costs that have already been incurred and cannot be changed, discretionary costs are costs that can be controlled or avoided, and fully-absorbed costs refer to the total cost of production including both fixed and variable costs.

Question 6

In the situation where a firm produces multiple products and the firm has a single resource constraint (e.g., machine hours), the most profitable use of available capacity (machine hours) requires that we assess:
A)Total demand for each product.
B)The selling price per unit for each product.
C)Non production-related costs (e.g., selling costs) associated with each product.
D)The contribution margin of each product per machine hour.
E)The gross profit per unit of each product.

Accepted Answer

To maximize profit with a single resource constraint, we need to prioritize production of products with the highest contribution margin per unit of the constrained resource (in this case, machine hours). Therefore, assessing the contribution margin of each product per machine hour is the most relevant factor to consider. The other factors may also be important, but they are not directly related to the optimal use of the resource constraint.

Question 7

The costs described in situations 2, 3, and 5 above are:
A)Prime costs.
B)Sunk costs.
C)Discretionary costs.
D)Relevant costs.
E)Differential costs.

Accepted Answer

The costs described in situations 2 (joint production costs), 3 (R&D costs incurred in prior months), and 5 (cost of obsolete inventory) are considered sunk costs because they have already been incurred and cannot be recovered or changed by any decision made now or in the future.

Question 8

Opportunity costs:
A)Result in a cash outlay.
B)Unless zero are always relevant for decision making.
C)Should be maximized for the best decision.
D)Are recorded in the accounting records.
E)Are the result of a completed event or transaction.

Accepted Answer

Opportunity costs are always relevant for decision making, meaning that considering them is important in determining the best course of action. The other options are incorrect. A) is false as opportunity costs do not necessarily result in a cash outlay, and B) is false as opportunity costs can be negative. C) is false as opportunity costs cannot be maximized, but rather minimized. D) is false as opportunity costs are not recorded in accounting records. E) is false as opportunity costs are forward-looking and not the result of completed events or transactions.

Question 9

The contribution per foot of front shelf space per day for Limeade is:
A)$165.00.
B)$162.00.
C)$154.00.
D)$134.40.
E)$153.90.

Accepted Answer

The answer of The contribution per foot of front shelf...

Question 10

The practice of setting prices below average variable cost and plans to raise prices later to recover the losses from the lower prices, is referred to as:
A)Marginal cost pricing.
B)Activity-based pricing.
C)Menu-based pricing.
D)Cost-plus pricing.
E)Predatory pricing.

Accepted Answer

The practice described is known as predatory pricing, which involves setting prices below average variable cost with the intention of driving competitors out of business. The goal is to gain a dominant market position and then raise prices to recoup the losses from the initial low pricing. This practice is illegal in many countries. Marginal cost pricing, activity-based pricing, menu-based pricing, and cost-plus pricing do not involve setting prices below average variable cost with the intention of driving out competitors.

Question 11

When deciding whether to discontinue a segment of a business, managers should focus on:
A)The amount of operating income per unit produced by the segment.
B)The amount of contribution margin per direct labor hour in the segment.
C)How corporate-level administrative costs would be redistributed if the segment were eliminated.
D)Equipment from the segment that could go idle if the segment were discontinued.
E)The total contribution margin generated by the segment relative to any traceable (avoidable) fixed costs associated with the segment.

Accepted Answer

When determining whether to discontinue a segment of a business, managers should focus on the total contribution margin generated by the segment relative to any traceable (avoidable) fixed costs associated with the segment. This will help determine if the segment is contributing enough to cover its costs and make a profit or if it is better to discontinue it. Factors such as the amount of operating income per unit or contribution margin per direct labor hour may be relevant, but they do not provide a complete picture of the segment's profitability. The impact on corporate-level administrative costs or equipment from the segment should also be considered, but they are not the primary focus when deciding whether to discontinue the segment.

Question 12

The opportunity cost of making a component part in a factory with excess capacity for which there is no alternative use is:
A)The variable manufacturing cost of the component.
B)The total manufacturing cost of the component.
C)The total variable cost of the component.
D)The fixed manufacturing cost of the component.
E)Zero.

Accepted Answer

The opportunity cost is the cost of the next best alternative foregone. In this case, there is no alternative use for the excess capacity, so there is no opportunity cost. Therefore, the answer is E.

Question 13

The contribution margin per case for Lemonade is:
A)$5.50.
B)$6.40.
C)$5.40.
D)$4.80.
E)$9.90.

Accepted Answer

The answer of The contribution margin per case for Lemonade...

Question 14

For short-run product-mix decisions, relevant costs (for the seller) include short-run _________ costs plus any ____________ costs.
A)direct material; direct labor.
B)variable; opportunity.
C)fixed; differential.
D)support; distribution.
E)capital; opportunity.

Accepted Answer

Short-run product-mix decisions focus on the immediate production and sales of goods. Therefore, the relevant costs for the seller would be the out-of-pocket costs (direct materials, labor, etc.) required for producing the units, along with any opportunity costs associated with producing a specific mix of products. Unavoidable fixed costs, differential costs, support costs, distribution costs, and capital costs may be relevant in long-run decisions, but they are not necessarily relevant in short-run product-mix decisions.

Question 15

Lyman Company has the opportunity to increase annual credit sales $100,000 by selling to a new, riskier group of customers. The expenses of collecting credit sales are expected to be 15 percent of credit sales. The company's manufacturing and selling expenses are 70% of sales, and its effective tax rate is 40%. If Lyman should accept this opportunity, the company's after-tax profits would increase by:
A)$9,000.
B)$10,000.
C)$10,200.
D)$14,400.
E)Some amount other than those given above.

Accepted Answer

The answer of Lyman Company has the opportunity to increase...

Question 16

The opportunity cost of making a component part in a factory with no excess capacity is the:
A)Variable manufacturing cost of the component.
B)Fixed manufacturing cost of the component.
C)Total manufacturing cost of the component.
D)Cost of the production given up in order to manufacture the component.
E)Net benefit foregone from the best alternative use of the capacity required.

Accepted Answer

The opportunity cost of making a component part in a factory with no excess capacity is the net benefit foregone from the best alternative use of the capacity required. This means that by using the factory's capacity to make the component, the company is giving up the potential benefit from producing something else that could have been made with that capacity. Therefore, the best choice is option E.

Question 17

When there is limited capacity, the minimum acceptable price for a special sales order will equal the _______________ from the product that is sacrificed plus the variable costs of the ordered product.
A)Selling price.
B)Full cost.
C)Variable cost.
D)Contribution margin.

Accepted Answer

The minimum acceptable price for a special sales order will equal the contribution margin from the product that is sacrificed plus the variable costs of the ordered product. This is because the contribution margin represents the amount that can be used to cover the fixed costs and contribute to profits, and sacrificing that contribution requires compensation through the price of the special sales order.

Question 18

When deciding to purchase a new cutting machine or continue using the existing machine, the following costs are all relevant EXCEPT the:
A)$60,000 cost of the old machine.
B)$30,000 cost of the new machine.
C)$15,000 disposal (salvage) value of the old machine.
D)$4,000 annual savings in operating costs if the new machine is purchased.
E)Maintenance costs, which are expected to be less under the new machine.

Accepted Answer

The $60,000 cost of the old machine is a sunk cost and cannot be recovered. Therefore, it is not relevant in the decision-making process. The other costs, including the cost of the new machine, disposal value of the old machine, savings in operating costs, and expected maintenance costs, are all relevant and should be considered when making the decision.

Question 19

When a firm has surplus capacity as opposed to constrained capacity (i.e., resource constraints), relevant costs for decision-making (e.g., determining short-term product mix) will be:
A)Lower.
B)The same.
C)Greater.
D)It varies-that is, it is impossible to tell without further information.

Accepted Answer

When a firm has surplus capacity, it means that it has unused resources that can be allocated to produce additional units without incurring additional costs. Therefore, the relevant costs for decision-making will be lower because there are no constraints on the resources that will limit the production of additional units.

Question 20

The contribution margin per machine hour is calculated as:
A)Full cost per unit ÷ number of machine-hours per unit.
B)Number of machine-hours per unit ÷ full-cost per unit.
C)Selling price per unit less variable manufacturing cost per unit.
D)Selling price per unit less variable manufacturing cost per unit less variable selling cost per machine-hour.
E)Selling price per unit less total variable cost per unit, divided by number of machine-hours per unit.

Accepted Answer

The contribution margin per machine hour is calculated by subtracting the total variable cost per unit from the selling price per unit, and then dividing the result by the number of machine-hours required per unit. This measures how much each machine hour contributes to covering fixed costs and generating profit.

Quiz 11: Decision Making With a Strategic Emphasis

In deciding whether to accept or a reject a special sales order, which of the following costs are likely relevant to the decision?

Relevant costs for a make-or-buy decision for a component part include all of the following EXCEPT:

The costs described in situations 1 and 4 above are:

In the situation where a firm produces multiple products and the firm has a single resource constraint (e.g., machine hours) , the most profitable use of available capacity (machine hours) requires that we assess:

The costs described in situations 2, 3, and 5 above are:

Opportunity costs:

The contribution per foot of front shelf space per day for Limeade is:

The practice of setting prices below average variable cost and plans to raise prices later to recover the losses from the lower prices, is referred to as:

When deciding whether to discontinue a segment of a business, managers should focus on:

The opportunity cost of making a component part in a factory with excess capacity for which there is no alternative use is:

The contribution margin per case for Lemonade is:

For short-run product-mix decisions, relevant costs (for the seller) include short-run _ costs plus any ____ costs.

The opportunity cost of making a component part in a factory with no excess capacity is the:

When there is limited capacity, the minimum acceptable price for a special sales order will equal the _______________ from the product that is sacrificed plus the variable costs of the ordered product.

When deciding to purchase a new cutting machine or continue using the existing machine, the following costs are all relevant EXCEPT the:

When a firm has surplus capacity as opposed to constrained capacity (i.e., resource constraints) , relevant costs for decision-making (e.g., determining short-term product mix) will be:

The contribution margin per machine hour is calculated as: