Question 1

Managers' decisions are based primarily on quantitative data because the qualitative factors are NOT usually relevant to the decision making process.

Accepted Answer

This statement is false. Qualitative factors, such as customer satisfaction and employee morale, can play an important role in managerial decision making alongside quantitative data.

Question 2

Which of the following pieces of information would NOT be relevant in deciding to upgrade a company's heating and air conditioning system?

Accepted Answer

The purchase price of the old equipment is not the only factor that should be considered when deciding to upgrade a heating and air conditioning system. Other factors, such as energy efficiency and safety, are also important. Productivity may also be a consideration, but it is not the best choice because it may not be directly related to the heating and air conditioning system.

Question 3

In considering the trade-in of a vehicle, which of the following is a sunk cost?

Accepted Answer

The sunk cost in considering the trade-in of a vehicle is the original purchase price of the old vehicle. This cost cannot be recovered or changed and is therefore a sunk cost. Depreciation on the new vehicle, trade-in value of the old vehicle, and purchase price of the new vehicle are not sunk costs as they may vary depending on the decision made to trade-in the vehicle.

Question 4

Fixed costs that do NOT differ between two alternatives are:

Accepted Answer

Fixed costs that do not differ between two alternatives are irrelevant to the decision as they will not affect the choice between the two alternatives. Only variable costs and differential costs will impact the decision-making process.

Question 5

The effect of a plant closing on employee morale is an example of which of the following?

Accepted Answer

The effect of a plant closing on employee morale is a subjective and intangible factor, making it a qualitative factor rather than a quantitative factor (which would involve quantitative measurements or data). It is also not related to sunk costs or variable costs.

Question 6

If a business is considering buying a new vehicle, the cost of insurance on the new vehicle is information that is relevant to the business decision.

Accepted Answer

The cost of insurance will add an additional expense to the cost of owning and operating the new vehicle, which will impact the overall financial decision for the business.

Question 7

Which of the following is irrelevant when making a decision?

Accepted Answer

The original cost of an asset, also known as a sunk cost, is irrelevant when making a decision because it cannot be recovered or changed by any future action.

Question 8

Smith Industries is considering replacing a machine that is presently used in its production process. The following information is available:  Which of the information provided in the table is irrelevant to the replacement decision?

Accepted Answer

The original cost of the old machine is a sunk cost and is irrelevant to the replacement decision. The decision should be based on the current and future costs and benefits, rather than the costs incurred in the past. Therefore, option B is irrelevant, while A, C, and D are all relevant factors to be considered in the decision making process.

Question 9

Which of the following is the format of the income statement that is MOST useful in decision-making?

Accepted Answer

The contribution margin format separates costs into fixed and variable categories and calculates the contribution margin, which is the amount of revenue left over after variable costs have been deducted. This format provides valuable information about the profitability of individual products or services and helps in making decisions regarding pricing, product mix, and cost control.

Question 10

A depreciable asset's original cost is relevant when considering whether to replace the depreciable asset.

Accepted Answer

The answer of A depreciable asset's original cost is relevant...

Question 11

The benefit foregone by NOT choosing an alternative course of action is referred to as a(n):

Accepted Answer

The benefit foregone by NOT choosing an alternative course of action is referred to as opportunity cost. This is a fundamental concept in economics and is used to analyze and compare different choices. The opportunity cost of a decision is the value of the highest-valued alternative forgone.

Question 12

Which of the following describes a sunk cost?

Accepted Answer

A sunk cost is a cost that has already been incurred and cannot be recovered. Therefore, it is always a historical cost and is irrelevant to future decisions.

Question 13

When a business is considering whether to replace old equipment with newer equipment, the cost of operating the old equipment-compared to the cost of operating the new equipment-is information relevant to the business decision.

Accepted Answer

The cost of operating old equipment versus new equipment is relevant information for a business to consider when deciding whether to replace old equipment with newer equipment.

Question 14

All of the following are relevant to the decision to replace equipment EXCEPT the:

Accepted Answer

The original cost of old equipment is a sunk cost, meaning it has already been incurred and cannot be recovered or changed by any future action. Therefore, it is not relevant to the decision of whether to replace equipment. Decisions should be based on future costs and benefits, not past expenditures.

Question 15

Which of the following is NOT important with respect to short-run decision making?

Accepted Answer

While focusing on relevant revenues and costs, using a contribution margin income statement format, and analyzing incremental revenues and costs are all important in short-run decision making, maximizing the gross profit of each unit sold may not be the most important factor. In some cases, it may be more important to focus on total profit or contribution margin rather than just gross profit per unit sold.

Question 16

When considering whether to have a new roof installed on a building, the money spent previously on roof repairs to the old roof is information that is relevant to the business decision.

Accepted Answer

The answer of When considering whether to have a new...

Question 17

A sunk cost is a cost that was previously incurred and is irrelevant to the decision making process.

Accepted Answer

A sunk cost is a cost that has already been incurred and cannot be recovered, and therefore should not be factored into future decision making.

Question 18

When a business is considering whether to replace old equipment with newer equipment, the original cost of the old equipment-compared to the cost of the new equipment-is information relevant to the business decision.

Accepted Answer

The original cost of the old equipment is a sunk cost and is not relevant to the decision-making process. What matters are the future costs and benefits associated with the new equipment compared to the continuing use of the old equipment.

Question 19

In making a short-term decision, which of the following is MOST important?

Accepted Answer

Separating variable costs from fixed costs is crucial in short-term decision-making because it helps in identifying costs that will change with the level of activity (variable costs) and those that will not (fixed costs). This distinction is important for decisions such as pricing, outsourcing, and determining product mix, as it directly impacts the contribution margin and profitability in the short term.

Question 20

Smith Industries is considering replacing a machine that is presently used in its production process. The following information is available:  For a machine replacement decision which of the information provided in the table is a sunk cost?

Accepted Answer

A sunk cost is a cost that has already been incurred and cannot be recovered. The original cost of the old machine is a sunk cost because it has already been paid for and cannot be recovered. The decision to replace the machine should be based on future costs and benefits, not on past costs. The current disposal value of the old machine, current annual operating cost of the old machine, and price of the new machine are all relevant costs that should be considered in the decision-making process.

Quiz 20: Short-Term Business Decisions