Question 1

The Molly Corp. makes and sells 400,000 desks each year. The total fixed costs are $40,000,000. Its variable costs are: labor of $90 per desk; direct materials of $300 per desk; and variable overhead of $60 per desk. It normally sells its desks at $600 each. Assuming that it does not have a capacity problem, what would be the effect on its profits if it accepted a special order to make an additional 100,000 desks for $400 each?

Accepted Answer

To determine the effect of the special order on profits, we need to calculate the incremental revenues and incremental costs associated with the order.

Incremental revenues = 100,000 x $400 = $40,000,000

Incremental costs = 
Labor: 100,000 x $90 = $9,000,000
Direct materials: 100,000 x $300 = $30,000,000
Variable overhead: 100,000 x $60 = $6,000,000
Total incremental costs = $45,000,000

Therefore, the incremental profit (loss) from the special order is:

Incremental profit = Incremental revenues - Incremental costs
= $40,000,000 - $45,000,000
= -$5,000,000

Since the incremental profit is negative, accepting the special order would lead to a decrease in overall profits. Therefore, choice B is the correct answer.

Question 2

The Nightingale Corp. makes and sells 200,000 chairs each year. The total fixed costs are $10,000,000. Its variable costs are: labor of $60 per chair; direct materials of $200 per chair; and variable overhead of $40 per chair. It normally sells its chairs at $500 per chair. Assuming that it does not have a capacity problem, what would be the effect on its profits if it accepted a special order to make an additional 100,000 chairs for $310 each?

Accepted Answer

To determine the effect on profits, we need to calculate the incremental revenue and incremental costs associated with the special order.

Incremental Revenue: 
The Nightingale Corp. would make an additional 100,000 chairs for $310 each, which would result in incremental revenue of: 
100,000 x $310 = $31,000,000

Incremental Costs: 
Labor: 100,000 x $60 = $6,000,000 
Direct materials: 100,000 x $200 = $20,000,000 
Variable overhead: 100,000 x $40 = $4,000,000 
Total incremental cost = $30,000,000

Profit effect: 
Incremental revenue - Incremental cost 
$31,000,000 - $30,000,000 = $1,000,000

Therefore, profits would increase by $1,000,000 if Nightingale Corp. accepts the special order.

Question 3

Which types of costs are typically not "avoidable" costs in a decision to accept a special order to make 10,000 units of product in a factory?

Accepted Answer

Past costs for buying the land where the factory is located are sunk costs, meaning they have already been incurred and cannot be recovered. Therefore, they are not avoidable costs in the decision to accept a special order. The other options may be avoidable costs depending on the circumstances of accepting the special order.

Question 4

The Specialty T-shirt Company is now operating at capacity. It is considering taking in a special order to make 5,000 "Spring Break" T-shirts, which it can sell at $30 each. If it makes these shirts, it will have to make 5,000 fewer regular T-shirts, which sell at $10 each. The reduction in revenue due to making fewer regular t-shirts is an example of

Accepted Answer

The reduction in revenue of making fewer regular T-shirts is the opportunity cost of making the Spring Break T-shirts. Opportunity cost represents the value of the next best alternative forgone. In this case, the company is giving up the revenue it could have earned by selling regular T-shirts to make the Spring Break T-shirts. The other options (B, C, D) do not accurately describe the situation.

Question 5

The Martin Car Company is considering whether to continue to make the tires for its cars, or to buy tires from Swift Corp. Which of the following would be considered a "sunk cost" with regard to this decision?

Accepted Answer

A sunk cost is a cost that has already been incurred and cannot be recovered, regardless of the future decision made. The cost incurred two years ago to design its own tires would be a sunk cost because it has already been incurred and cannot be recovered, regardless of whether the company decides to continue making its own tires or to buy them from Swift Corp. The other options are not considered sunk costs because they are ongoing or future costs and can be avoided or changed by the company's decision.

Question 6

Allen Corp. uses the high-low method to estimate how its costs vary with levels of production. For the year, its high production was 10,000 units in a day, at a cost of $80,000, and its low production was 3,000 units, at a cost of $38,000. The equation that best describes this relation is

Accepted Answer

First, calculate the variable cost per unit using the high-low method: $ \frac{\$80,000 - \$38,000}{10,000 - 3,000} = \frac{\$42,000}{7,000} = \$6 $ per unit. Then, calculate the fixed cost by subtracting the total variable cost at either level from the total cost at that level: $ \$80,000 - (10,000 \times \$6) = \$80,000 - \$60,000 = \$20,000 $. Thus, the cost equation is $ \text{Cost} = \$20,000 + \$6 \times \text{Volume} $.

Question 7

The method of estimating cost relationships that finds the best statistical relation between cost and one or more independent variables is called

Accepted Answer

Regression analysis is the method of estimating cost relationships that finds the best statistical relation between cost and one or more independent variables. High-low estimation involves using only the highest and lowest data points to estimate the cost relationship, while examination of scatter diagrams involves visually analyzing the relationship between cost and an independent variable. Correlation analysis measures the strength of the relationship between two variables, but does not estimate cost relationships.

Question 8

A graph with the amount of some cost driver on the "x" axis and the cost of production on the "y" axis that is a straight horizontal, with $5,000 of costs at all levels of production, including zero production, would indicate which type of cost relationship?

Accepted Answer

This graph represents a fixed cost structure, where the total cost does not change with the level of production. The cost remains constant at $5,000 regardless of the amount of production, indicating fixed responsiveness.

Question 9

The IMA's term to describe a situation where one resource can be substituted for another in production, without affecting the costs of the other resources used in production of the outputs, is

Accepted Answer

Interchangeability refers to the ability to substitute one resource for another in production without affecting the costs of the other resources used. This allows for flexibility in production and cost savings.

Question 10

The IMA's term for the correlation between a particular managerial objective's output quantity and the input quantities required to produce that output is

Accepted Answer

The IMA's term for the correlation between a particular managerial objective's output quantity and the input quantities required to produce that output is called "Responsiveness". Divisibility refers to the ability to break down a cost or benefit to an identifiable level. Traceability refers to the ability to trace a cost or revenue item to the underlying transaction or event that created it. Homogeneity refers to the property of being uniform or consistent.

Question 11

The word that refers to an attribute of any two or more resources that can be substituted without affecting the costs of the other resources that are required to carry out the activities to which these resources are devoted is

Accepted Answer

Interchangeability is the attribute of resources that can be substituted without affecting the costs of the other resources required for activities. Responsiveness refers to the ability to quickly adapt to changes. Avoidability refers to the ability to avoid certain costs or activities. Divisibility refers to the ability to divide a resource into smaller units.

Question 12

The word that refers to a characteristic of an input that allows for the input (and its costs) to be eliminated as a result of a decision is

Accepted Answer

Avoidability refers to the ability to avoid or eliminate an input and its associated costs through decision-making. Therefore, it best fits the given description. Traceability refers to the ability to track or follow a process or activity, interdependence refers to the relationship between different inputs or factors, and homogeneity refers to the degree of similarity among inputs or factors. None of these terms accurately describe the given characteristic.

Question 13

"A monetary measure of consuming a resource or its output to achieve a specific managerial objective or making a resource or its output available and not using it" is a definition of which of the following terms?

Accepted Answer

The definition provided in the question is a clear definition of "Cost." It refers to the financial value of using or not using a resource or its output to achieve a specific managerial objective. Capacity refers to the maximum productive capability of a resource. Interdependence refers to the interconnectedness of various aspects of an organization's operations. Avoidability refers to the ability to prevent or eliminate a cost or expense. None of these terms match the definition provided in the question as closely as "Cost."

Question 14

The method of evaluating long-term investment decisions that involves dividing the average earnings from the investment by the amount of the investment is called the

Accepted Answer

The method described in the question is the Accounting rate of return method. The other methods listed are the Payback method, Internal rate of return method, and Net present value method, which use different calculations to evaluate long-term investment decisions. However, the question specifically describes the calculation of average earnings divided by the amount of the investment, which is the calculation used in the Accounting rate of return method.

Question 15

The method of evaluating long-term investment decisions that involves computing the present value of the future inflows, and subtracting the cost of the investment, is called the

Accepted Answer

The net present value (NPV) method is the method of evaluating long-term investment decisions that involves computing the present value of the future inflows, and subtracting the cost of the investment. This method takes into account the time value of money and provides a more accurate measure of the profitability of an investment. The higher the NPV, the more attractive the investment is.

Question 16

The method of evaluating long-term investment decisions that involves computing the interest rate at which the present value of future inflows exactly equals the cost of making the investment is called the

Accepted Answer

The description given in the question is of the Internal rate of return (IRR) method. It is a commonly used method of evaluating long-term investment decisions because it takes into account the time value of money and helps in determining the expected profitability of an investment. The other methods mentioned in the question are also used for evaluating investment decisions, but do not involve the computation of interest rate as in the case of IRR. Therefore, the correct answer is B.

Question 17

Rochester Company makes a product called Z3 as part of its manufacturing process.The variable costs of making Z3 are as follows:
Direct materials $8
Direct labor $12
Variable overhead $20
The Toronto Corp. has offered to sell 10,000 units of Z3 to Rochester at a price of $40 per unit. If Rochester agrees to this deal, Rochester will also be able to reduce its fixed costs by $50,000. Rochester should:

Accepted Answer

To determine whether Rochester should make or buy Z3, we calculate the total cost of both options. Making Z3 costs $40 per unit (direct materials $8, direct labor $12, variable overhead $20). Buying Z3 costs $40 per unit as well. However, buying allows Rochester to reduce fixed costs by $50,000, making buying the cheaper option by $50,000.

Question 18

An outlay cost is not relevant if it

Accepted Answer

Outlay costs that do not differ among alternatives are not relevant because they do not affect the decision between the alternatives. Relevant costs are costs that are affected by the decision and can vary between alternatives.

Question 19

Relevant costs are best described as

Accepted Answer

Relevant costs are future costs that differ between alternatives, meaning they are costs that will occur in the future and will vary depending on the decision made. Opportunity costs and out of pocket costs may be relevant costs in certain situations, but they are not always relevant. Future costs alone are not sufficient to determine relevancy, they must differ between alternatives.

Question 20

A manager is trying to model the costs of producing shirts. The company has two different models of machines that are used for sewing the shirts together. The manager needs to know if these two types of machines should be considered the same, or different, when computing the amount of labor needed to make the shirts. The concept involved here is best described as

Accepted Answer

The concept at play here is whether the two types of machines are interchangeable, meaning they can perform the same tasks and require the same amount of labor. If they are not interchangeable, then the manager cannot assume that the amount of labor needed for one type of machine applies to the other type. Therefore, the manager needs to determine if they are the same or different, i.e. interchangeable or not interchangeable. Variability is the amount of fluctuation in a process, capacity refers to the maximum output of a process, and interdependence refers to the relationship between separate parts of a process. While these concepts may be relevant to the cost analysis of producing shirts, they are not directly related to the question of machine interchangeability.

Quiz 5: Accounting for Inventory