Question 1

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

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 the cost of the production given up in order to manufacture the component is considered, along with any potential profits or benefits that could have been gained from using the capacity for an alternative purpose. Therefore, option E is the best choice as it takes into account both the cost of production and the potential benefits foregone.

Question 2

The contribution margin per machine hour is calculated as:

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.

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?

Accepted Answer

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

Question 4

The contribution margin per case for Lemonade is:

Accepted Answer

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

Question 5

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

Accepted Answer

The cost of the old machine is not a relevant cost in the decision-making process because it is a sunk cost, meaning it has already been incurred and cannot be recovered. The relevant costs are the cost of the new machine, the disposal value of the old machine, the annual savings in operating costs if the new machine is purchased, and the expected maintenance costs.

Question 6

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

Accepted Answer

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

Question 7

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:

Accepted Answer

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

Question 8

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:

Accepted Answer

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

Question 9

The costs described in situations 1 and 4 above are:

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 10

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.

Accepted Answer

When there is limited capacity, the company must sacrifice the sale of one product to fulfill a special sales order. In such cases, the minimum acceptable price for the special sales order should equal the contribution margin from the product that is sacrificed plus the variable costs of the ordered product. This approach ensures that the company generates a positive contribution margin from the sale of the ordered product, which will help cover the fixed costs associated with the limited capacity. Therefore, choice D, contribution margin, is the best answer.

Question 11

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:

Accepted Answer

To determine the most profitable use of available capacity, we need to assess the contribution margin of each product per machine hour. This will tell us which product generates the highest profit per unit of the constrained resource, and which product should be prioritized for production. The total demand, selling price, non production-related costs, and gross profit per unit are important factors to consider, but they do not directly relate to the optimal allocation of the constrained resource.

Question 12

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

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 13

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

Accepted Answer

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

Question 14

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

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

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

Accepted Answer

The opportunity cost of making a component part in a factory with excess capacity for which there is no alternative use is zero. This is because there is no other option for the factory to generate revenue from the excess capacity, therefore there is no opportunity cost involved in producing the component.

Question 16

Opportunity costs:

Accepted Answer

Opportunity costs are always relevant for decision making. They represent the value of the next best alternative that is foregone in taking a particular decision. Even if no cash outlay is involved, opportunity costs must be considered. This is because every decision involves a trade-off between alternatives, and the value of the foregone alternative is the opportunity cost.

Question 17

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:

Accepted Answer

When a firm has surplus capacity, it means that it has available resources that are not being fully utilized. Therefore, relevant costs for decision-making will be lower because there are no resource constraints to consider. This allows the firm to produce additional units without incurring additional costs, so the relevant costs will be lower compared to when the firm is operating at full capacity.

Question 18

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

Accepted Answer

When deciding 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 approach considers the profitability of the segment and whether discontinuing it will result in cost savings that outweigh the loss of contribution margin. Focusing on operating income per unit, contribution margin per direct labor hour, corporate-level administrative costs, or idle equipment may provide useful information, but they do not necessarily give a complete picture of the profitability and overall impact of discontinuing the segment.

Question 19

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:

Accepted Answer

The practice described is known as predatory pricing, where a company sets prices below their competitors' costs in an attempt to drive them out of business, then raise prices later to recoup the losses. This is generally seen as anti-competitive behavior and is illegal in many countries.

Question 20

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:

Accepted Answer

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

Quiz 11: Decision Making With a Strategic Emphasis