Question 1

When adding or dropping a product line,variable costs are the only relevant costs.

Accepted Answer

When adding or dropping a product line, both variable costs and fixed costs are relevant. The decision should be based on the overall profitability of the product line, which takes into account both types of costs. Fixed costs cannot be avoided in the short term and must be factored into the decision-making process.

Question 2

When deciding whether to add or delete a department,managers should keep the department as long as ________ from the department exceeds ________.
A) contribution margin; variable costs
B) contribution margin; common costs
C) contribution margin; avoidable fixed costs
D) contribution margin; unavoidable fixed costs

Accepted Answer

Managers should keep the department as long as the contribution margin from the department exceeds its avoidable fixed costs. This means that the department is generating enough revenue to cover its direct (variable) costs as well as its avoidable fixed costs. Contribution margin is revenue minus variable costs, and avoidable fixed costs are costs that can be eliminated if the department is closed. Therefore, choice C is the best answer.

Question 3

Variable expenses are divided into avoidable and unavoidable costs.

Accepted Answer

The answer of Variable expenses are divided into avoidable and...

Question 4

________ are relevant in deciding whether to add or delete a department from a department store.
A) Avoidable fixed expenses
B) Common costs
C) Unavoidable fixed expenses
D) None of the above

Accepted Answer

Avoidable fixed expenses are relevant because they can be eliminated if a department is removed, impacting the decision to add or delete a department.

Question 5

Olson Company has three departments.Data for the most recent year is presented below:
 $\begin{array}{llll}&\text { Dept. } C&\text { Dept. } A&\text { Dept. } T\
\text { Sales } & \$ 4,000 & \$ 1,920 & \$ 2,240 \
\text { Variable expenses } & 3,280 & 1,420 & 520 \
\text { Unavoidable fixed expenses } & 480 & 180 & 440 \
\text { Avoidable fixed expenses } & \underline{555} & \underline{265} & \underline{360} \
\text { Operating income (loss) } & \$(315) & \$ 55 & \$ 920
\end{array}$ 
Olson Company is considering eliminating Dept.C because it is operating at a loss.
Required: 
A) Compute the change in operating income if Olson Company eliminates Dept. C and does not replace it.
B) Compute the change in operating income if Olson Company eliminates Dept. C and doubles the sales of Dept. T without increasing fixed costs.

Accepted Answer

The answer of Olson Company has three departments.Data for the...

Question 6

A company has 10,000 hours of capacity and manufactures two products.Product 1 takes 2 hours per unit.Product 2 takes 3 hours per unit.The contribution margin per unit for Product 1 is $5.The contribution margin per unit for Product 2 is $6.The demand for either product exceeds the factory capacity.Which product or products should be manufactured?
A) 3,000 units of Product 1 and 2,000 units of Product 2
B) 2,500 units of Product 1 and 3,333 units of Product 2
C) make 5,000 units of Product 1 and 0 units of Product 2
D) make 3,333 units of Product 2 and 0 units of Product 1

Accepted Answer

Product 1 has a higher contribution margin per hour ($2.50) compared to Product 2 ($2.00), so maximizing production of Product 1 will yield higher total contribution.

Question 7

A company has 100,000 hours of capacity and manufactures two products,Product X and Product Z.Neither product has enough demand to utilize the entire capacity,but the combined demand of both products exceeds the capacity of the plant.It takes one hour to make one unit of Product X and two hours to make one unit of Product Z.The following information is available:
$\begin{array}{ll}&\text { Product X }&\text { Product Z }\
\text { Units produced from capacity available }&100,000 & 50,000 \
\text { Contribution margin per unit }&\$ 20 & \$ 30
\end{array}$
What product or products should be made?
A) only make Product X
B) only make Product Z
C) make Product X to meet customer demand and then make Product Z
D) make Product Z to meet customer demand and then make Product X

Accepted Answer

To maximize profit, the company should first meet the demand for Product X and then use any remaining capacity for Product Z. This approach ensures that the company utilizes its capacity efficiently while meeting customer demand for both products.

Question 8

In deciding whether to add or delete a product,the salary of the plant manager is an ________.Assume the plant manager supervised the production of several products.
A) avoidable fixed cost
B) avoidable variable cost
C) unavoidable fixed cost
D) unavoidable variable cost

Accepted Answer

The salary of the plant manager is an unavoidable fixed cost because it is a cost that will be incurred regardless of the number of products produced or the level of production. It is a sunk cost and cannot be avoided by adding or deleting a product. Therefore, it should not be a determining factor in the decision to add or delete a product.

Question 9

Bronski Corporation manufactures two products,Simple and Complex.The following information was gathered:
$\begin{array}{lll}&\text { Simple }&\text { Complex }\
\text { Selling price per unit } & \$ 37.00 & \$ 26.00 \
\text { Variable cost per unit } & 32.00 & 22.00
\end{array}$
Total fixed costs are $18,000.Assume demand for either product exceeds the factory's capacity.It takes one hour of production time to make Simple and two hours to make Complex.The annual capacity of the plant is 10,000 hours.How many units of Simple and Complex should Bronski Corporation produce and sell to maximize profits?
A) 0 units of Simple and 5,000 units of Complex
B) 6,000 units of Simple and 3,000 units of Complex
C) 10,000 units of Simple and 0 units of Complex
D) 3,000 units of Simple and 6,000 units of Complex

Accepted Answer

The answer of Bronski Corporation manufactures two products,Simple and Complex.The...

Question 10

Unavoidable costs are never relevant in deciding whether to eliminate a product or department.

Accepted Answer

Unavoidable costs, also known as sunk costs, are not relevant in decision-making because they remain unchanged regardless of the decision to continue or eliminate a product or department.

Question 11

A company has 10,000 hours of capacity and manufactures two products.Product 1 takes 2 hours per unit.Product 2 takes 3 hours per unit.The contribution margin per unit for Product 1 is $5.The contribution margin per unit for Product 2 is $6.Neither product has enough demand to use all of the plant capacity,but the demand for both products exceeds the plant capacity.Which product or products should be manufactured?
A) 5,000 units of Product 1 and 0 units of Product 2
B) 0 units of Product 1 and 5,000 units of Product 2
C) make Product 1 first until meet customer demand, then make Product 2
D) make Product 2 first until meet customer demand, then make Product 1

Accepted Answer

If Product 1 takes 2 hours per unit, then the plant could produce 5,000 units of Product 1 (10,000 hours ÷ 2 hours per unit). Similarly, if Product 2 takes 3 hours per unit, then the plant could produce 3,333 units of Product 2 (10,000 hours ÷ 3 hours per unit).

Given that both products have demand that exceeds plant capacity, it is best to first make Product 1 until customer demand is met, before switching to Product 2. This is because Product 1 has a higher contribution margin per unit ($5 compared to $6 for Product 2), so by making and selling more units of Product 1, the company can generate greater profit. Therefore, the best choice is to make 5,000 units of Product 1 and 0 units of Product 2.

Question 12

________ is the item that restricts or constrains the production or sale of a product.
A) A limiting factor
B) A scarce resource
C) Floor space
D) All of the above

Accepted Answer

All of the choices listed can act as limiting factors that restrict or constrain the production or sale of a product. A limiting factor can be any resource or condition that limits the output or sale, including scarce resources and available floor space.

Question 13

A company can sell any mix of Product A and Product B at full capacity.The company has 100,000 hours of capacity.The demand for each product exceeds the capacity.It takes one hour to make one unit of Product A and two hours to make one unit of Product B.The following information is available:
$\begin{array}{ll}&\text { Product A }&\text { Product B }\
\text { Units produced from capacity available }&100,000 & 50,000 \
\text { Contribution margin per unit }&\$ 20 & \$ 30
\end{array}$
If capacity is the limiting factor,which product should be produced?
A) 0 units of Product A and 50,000 units of Product B
B) 20,000 units of Product A and 30,000 units of Product B
C) 30,000 units of Product A and 20,000 units of Product B
D) 100,000 units of Product A and 0 units of Product B

Accepted Answer

The answer of A company can sell any mix of...

Question 14

In deciding whether to add or delete a product,the insurance expense associated with the custom-built equipment used to produce the product is an ________ cost.Assume the equipment will be sold if the company discontinues the product.
A) avoidable fixed
B) avoidable variable
C) unavoidable fixed
D) unavoidable variable

Accepted Answer

The insurance expense associated with the custom-built equipment is an avoidable cost because it is directly tied to the production of the specific product. If the company discontinues the product, they can sell the equipment and avoid the insurance expense. However, since the equipment is custom-built, it is a fixed cost as the company cannot simply adjust the production capacity by adding or removing the equipment. Therefore, the best choice is A) avoidable fixed.

Question 15

Heating and air conditioning costs are examples of common costs to the different departments in a retail store.

Accepted Answer

Heating and air conditioning costs are considered common costs as they apply to the entire retail store rather than just one specific department.

Question 16

If demand is the limiting factor,and there are no other scarce resources,managers should emphasize the product with ________.
A) the highest selling price per unit
B) the lowest variable costs per unit
C) the highest contribution margin per unit
D) the highest contribution margin per hour

Accepted Answer

If demand is the limiting factor, it means that the company cannot produce enough to meet the demand, hence the focus should be on maximizing the contribution margin per unit to maximize profitability. The contribution margin per unit is the amount of revenue that each unit of product contributes towards covering the fixed costs and generating profit after deducting the variable costs. Therefore, managers should emphasize the product with the highest contribution margin per unit.

Question 17

When adding or dropping a product line,fixed avoidable costs may be relevant costs.

Accepted Answer

Fixed avoidable costs include expenses that can be eliminated or avoided if a particular product line is dropped or added. Therefore, when making decisions about adding or dropping a product line, fixed avoidable costs are relevant costs to consider.

Question 18

In deciding whether to add or delete a product or service,common costs are probably ________.
A) relevant and avoidable
B) relevant and unavoidable
C) irrelevant and avoidable
D) irrelevant and unavoidable

Accepted Answer

Common costs are considered irrelevant and unavoidable in the decision-making process because they are not affected by the decision to add or delete a product or service. These costs will be incurred regardless of the decision made.

Question 19

Qualitative information can influence decisions to add or drop a department.

Accepted Answer

Qualitative information, such as customer feedback or employee satisfaction, can provide insights into the performance and viability of a department. This information can be instrumental in making decisions to add or drop a department.

Question 20

Freedom Company has three departments.Data for the most recent year are presented below:
 $\begin{array}{llll}&\text { Dept. } X&\text { Dept. } Y&\text { Dept. } Z\
\text { Sales } & \$ 400 & \$ 200 & \$ 80 \
\text { Variable expenses } & 128 & 52 & 34 \
\text { Unavoidable fixed expenses } & 96 & 52 & 12 \
\text { Avoidable fixed expenses } & 116 & 104 & 54
\end{array}$ 
Required: 
A) Compute the operating income for Freedom Company.
B) Compute the contribution margin for each department.
C) Compute the operating income for each department.
D) Which department(s) should be eliminated? Why?

Accepted Answer

The answer of Freedom Company has three departments.Data for the...

Quiz 6: Relevant Information for Decision Making With a Focus on Operational Decisions

When adding or dropping a product line,variable costs are the only relevant costs.

When deciding whether to add or delete a department,managers should keep the department as long as from the department exceeds .

Variable expenses are divided into avoidable and unavoidable costs.

________ are relevant in deciding whether to add or delete a department from a department store.

In deciding whether to add or delete a product,the salary of the plant manager is an ________.Assume the plant manager supervised the production of several products.

Unavoidable costs are never relevant in deciding whether to eliminate a product or department.

________ is the item that restricts or constrains the production or sale of a product.

In deciding whether to add or delete a product,the insurance expense associated with the custom-built equipment used to produce the product is an ________ cost.Assume the equipment will be sold if the company discontinues the product.

Heating and air conditioning costs are examples of common costs to the different departments in a retail store.

If demand is the limiting factor,and there are no other scarce resources,managers should emphasize the product with ________.

When adding or dropping a product line,fixed avoidable costs may be relevant costs.

In deciding whether to add or delete a product or service,common costs are probably ________.

Qualitative information can influence decisions to add or drop a department.