Deck 25: Short-Run Decision Analysis and Capital Budgeting

Question 1

Information that is the same for all alternatives is considered relevant to the decision process.

Answer 1

False

Question 2

In choosing among alternatives,managers are guided by historical cost information.

Answer 2

False

Question 3

The first step in the incremental analysis is to eliminate all relevant revenues and costs.

Answer 3

False

Question 4

Outsourcing is the use of suppliers outside the organization to perform services or produce goods that could be performed or produced internally.

Question 5

All short-run decisions made by managers will affect an organization in both short run and long run.

Question 6

The cost of a previously purchased machine is an example of a sunk cost.

Question 7

Qualitative factors are also considered in the evaluation of capital investment proposals.

Question 8

A cost that changes between the alternatives is known as a differential cost.

Question 9

The minimum rate of return is also known as the hurdle rate.

Question 10

The idea behind incremental analysis is to review decision data that differ between alternatives.

Question 11

Opportunity costs are ignored for decision making.

Question 12

Costs that vary among alternatives are irrelevant for decision making.

Question 13

Sunk costs arise when the choice of one course of action eliminates the possibility of another course of action.

Question 14

Incremental analysis is a technique used not only by businesses but also by individuals in day-to-day activities.

Question 15

Sunk costs are irrelevant for decision making.

Question 16

Only quantitative data are used in the capital investment decision-making process.

Question 17

Total costs and savings are examples of qualitative factors.

Question 18

Capital budgeting involves the evaluation of alternative proposals for large capital investments,including considerations for financing the projects.

Question 19

Capital investment analysis is a decision process for the purchase of capital facilities,such as buildings and equipment.

Question 20

Managers rely strictly on financial information when faced with decisions.

Question 21

A segment margin is a segment's sales revenue minus its direct variable costs and direct fixed costs traceable to the segment.

Question 22

In a company,there is no limit on the availability of resources such as machine time,labor hours.

Question 23

Avoidable costs are the direct variable costs and direct fixed costs traceable to the segments.

Question 24

The objective of segment profitability decisions is to identify the segments that have a negative segment margin so that managers can drop them or take corrective actions.

Question 25

Segment profitability analysis includes the preparation of a segmented income statement.

Question 26

The common costs shared by two or more products before they are split off are called joint costs.

Question 27

Outsourcing production help in reducing a company's investment in physical assets and human resources.

Question 28

Special order decisions are the decisions about whether to accept or reject special orders at prices below the normal market prices.

Question 29

A special order should be accepted only if it maximizes operating income.

Question 30

The fixed costs that are traceable to the segments are called common costs.

Question 31

Contribution margin per unit of constrained resources is calculated by dividing contribution margin per unit by quantity of the constrained resources required per unit.

Question 32

When resources like direct material,labor,or time are scarce,the goal is to maximize the contribution margin per unit of scarce resource.

Question 33

Fixed costs are often irrelevant in make-or-buy decisions.

Question 34

The objective of a sales mix decision is to select the alternative that maximizes the contribution margin per constrained resource.

Question 35

The sales mix analysis that uses incremental analysis to identify the relevant costs and revenues,consists of two steps.

Question 36

Make-or-buy decisions,such as whether to make a part internally or buy it from an external supplier,may lead to outsourcing.

Question 37

While performing an incremental analysis for outsourcing decision,information such as depreciation is not relevant.

Question 38

Special orders should be considered only when entire capacity of an organization is used.

Question 39

Outsourcing production or operating activities will help in improving the cash flow by reducing investment in physical assets.

Question 40

Outsourcing can reduce operating costs of a company.

Question 41

If the incremental costs of processing further are greater than the incremental revenue,the decision of selling the product at the split-off point is justified.

Question 42

Joint costs are also referred to as common cost.

Question 43

The net present value method and other methods of capital investment analysis should only be used for taking short-term decisions.

Question 44

A sell or process-further decision is a decision about whether to sell a joint product at the split-off point or sell it after further processing.

Question 45

Conduct a preliminary screening of a new capital investment is the last step in the six step process of capital investment analysis.

Question 46

The minimum rate of return or a minimum cash flow payback period are two standards established in capital investment analysis.

Question 47

The most commonly used methods in the evaluation of capital investment proposals are net present value method,payback period method,and the accounting rate-of-return method.

Question 48

Managers must be careful while making capital budgeting decisions so that the selected alternative will contribute the most to future profits.

Question 49

The proposals that will either meet company strategic goals or produce the minimum rate of return will not be reviewed in the process.

Question 50

Automating the existing production process comes under the purview of capital investment analysis.

Question 51

There are products or services that can be either sold in a basic form or be processed further.

Question 52

Net present value method and accounting rate of return method are the two important decision variables used in the evaluation of proposals.

Question 53

Cost of capital information is necessary to establish the minimum rate of return on investments.

Question 54

If the incremental revenues are greater than the incremental costs,the product should be processed further.

Question 55

The six steps of capital investment analysis are used exclusively for short-term planning purposes.

Question 56

Capital investment analysis can be applied in case of expensive and long-term projects.

Question 57

Capital investment analysis ensures that the resources are used wisely.

Question 58

The point where joint products or services become separable and identifiable is known as identifiable point.

Question 59

To analyze a capital investment using the accounting rate-of-return method,one can use an estimated amount for the annual net income.

Question 60

An organization with several branches and a highly developed system for capital investment analysis,would require that all proposals should go through preliminary screening.

Question 61

The discount rate used in net present value calculations is the company's minimum rate of return.

Question 62

When deciding whether to keep or replace a fixed asset,the asset's carrying value could be relevant to the decision.

Question 63

Any proposal that fails to produce the hurdle rate will be accepted.

Question 64

The most beneficial projects are the ones with the highest net present value.

Question 65

The acceptable proposals are ranked in order of net present value,payback period,or rate of return in capital investment decisions.

Question 66

Employees from every part of an organization participate in capital investment analysis.

Question 67

The carrying value of the old asset in a machine replacement decision is relevant.

Question 68

The proposals with the highest rank are funded first in the capital investment decisions.

Question 69

The cost of debt,the cost of preferred stock,the cost of common stock,and the cost of retained earnings are the components of cost of capital.

Question 70

An advantage of the net present value method is that it considers the time value of money.

Question 71

Capital investment analysis is beneficial only for large corporations.

Question 72

Capital investment analysis is also known as capital budgeting.

Question 73

Competition,availability and training of employees,and anticipated future technological improvements are some of the examples of qualitative factors.

Question 74

The proposals that will produce poor returns will have a negative impact on an organization's profitability.

Question 75

Projected cash flows remain constant in each year of an asset's life.

Question 76

Capital investment decisions are decisions about when and how much to spend on capital facilities and other long-term projects.

Question 77

Net present value analysis is based on a project's cash flows.

Question 78

The minimum rate of return on a capital investment is set by the management of a company.

Question 79

Depending on the mixture of sources of capital,a company's cost of capital will vary.

Question 80

Availability of funds is one of the criteria for deciding on the capital investment proposals.