Question 1

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:The contribution margin per case for Lemonade is:
A) $5.50.
B) $6.40.
C) $5.40.
D) $4.80.
E) $9.90.

Accepted Answer

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

Question 2

When deciding to purchase a new cutting machine or continue using an existing machine, the following costs are all relevant except the:
A) Original cost of the old machine.
B) Cost (purchase price) of the new machine.
C) Disposal (salvage) value of the old (existing) machine.
D) Annual savings in operating costs if the new machine is purchased.
E) Maintenance costs, if expected to be less under the new machine.

Accepted Answer

The original cost of the old machine is not relevant because it is a sunk cost and cannot be changed by the decision to purchase a new machine or not. The other costs listed are relevant and should be considered when making the decision.

Question 3

When deciding whether to discontinue a segment of a business, managers should focus on:
A) The amount of operating income per unit produced by the segment.
B) The amount of contribution margin per direct labor hour in the segment.
C) How corporate-level administrative costs would be redistributed if the segment were eliminated.
D) The cost of equipment from the segment that could go idle if the segment were discontinued.
E) The total contribution margin generated by the segment relative to any traceable (avoidable) fixed costs associated with the segment.

Accepted Answer

Managers should focus on the total contribution margin generated by the segment relative to any traceable (avoidable) fixed costs associated with the segment. This helps determine if the segment is contributing enough to cover its costs and if its elimination would result in a positive impact on the company's overall profitability.

Question 4

Opportunity costs:
A) Result in a cash outlay.
B) Unless they are zero are always relevant for decision making.
C) Can sometimes be deductible for U.S. federal income tax purposes.
D) Are recorded in the accounting records.
E) Are the result of a completed event or transaction.

Accepted Answer

Opportunity costs are always relevant for decision making as they represent the foregone benefit of the next best alternative when making a choice. A, C, D, and E are incorrect statements.

Question 5

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:The contribution per foot of shelf space per day for Limeade is:
A) $165.00.
B) $162.00.
C) $154.00.
D) $134.40.
E) $153.90.

Accepted Answer

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

Question 6

In the situation where a firm produces multiple products and has a single resource constraint (e.g., machine hours), the most profitable use of available capacity (machine hours) requires that we assess:
A) The contribution margin per unit of each product.
B) The selling price per unit for each product.
C) Non-production-related costs (e.g., selling costs) associated with each product.
D) The contribution margin of each product per machine hour.
E) The gross profit per unit of each product per machine hour.

Accepted Answer

To determine the most profitable use of available capacity (machine hours) when producing multiple products, we need to determine the contribution margin of each product per machine hour. This calculation will allow us to see which product generates the highest profit for each hour of machine time used.

Question 7

In deciding whether to accept or reject a "special sales order," which of the following costs are likely relevant to the decision?
A) Depreciation expense on existing manufacturing equipment.
B) A portion of facility-level costs.
C) A portion of batch-level costs.
D) Total batch-level costs.
E) An allocated share of fixed manufacturing support (i.e., fixed factory overhead) costs.

Accepted Answer

Batch-level costs are relevant because they are directly associated with the production of the special order and can change with the decision to accept or reject the order.

Question 8

When there is limited capacity, the minimum acceptable price for a "special sales order" should equal the ________ from the product that is sacrificed plus the incremental costs of the product being produced.
A) Selling price 
B) Full cost 
C) Variable cost 
D) Contribution margin 
E) Gross profit

Accepted Answer

The minimum acceptable price for a "special sales order" should at least cover the opportunity cost of producing the product being sacrificed, which is the contribution margin. In addition, the incremental costs of the product being produced should also be considered. Therefore, the best choice is D) Contribution margin.

Question 9

The opportunity cost of making a component part in a factory with excess capacity for which there is no alternative use is:
A) The variable manufacturing cost of the component.
B) The total manufacturing cost of the component.
C) The total variable cost of the component.
D) The fixed manufacturing cost of the component.
E) Zero.

Accepted Answer

The opportunity cost is the value of the next best alternative foregone. In this case, since there is no alternative use for the excess capacity in the factory, there is no foregone alternative and therefore the opportunity cost is zero.

Question 10

When a firm has surplus capacity (that is, no resource constraints), relevant costs for decision-making (for example, determining short-term product mix) will, relative to the situation where the firm faces one or more resource constraints, be:
A) Lower.
B) The same.
C) Greater.
D) It varies—that is, it is impossible to tell without further information.

Accepted Answer

When a firm has surplus capacity, there are no resource constraints to limit production or affect the cost of producing additional units. This means that the additional units would not require incremental investments in resources, labor, or equipment, resulting in lower relevant costs. Therefore, relevant costs for decision-making would be lower in such a situation.

Question 11

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 projected at 70% of sales, and its effective income tax rate is 40%. If Lyman accepts this sales opportunity, its after-tax profits would increase by an estimated:
A) $9,000.
B) $10,000.
C) $10,200.
D) $14,400.
E) Some amount other than these choices.

Accepted Answer

The increase in after-tax profits is calculated as follows: Increase in sales = $100,000Less: Collection expenses (15% of $100,000) = $15,000Less: Manufacturing and selling expenses (70% of $100,000) = $70,000Profit before tax = $15,000Less: Income tax (40% of $15,000) = $6,000After-tax profit = $15,000 - $6,000 = $9,000.

Question 12

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 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 analyze the two decision alternatives by comparing the variable cost of manufacturing the parts:
A) Plus $80,000, to the cost of buying the parts.
B) To the cost of buying the parts less $10,000.
C) Less $10,000, to the cost of buying the parts.
D) To the cost of buying the parts.
E) Plus $70,000, to the cost of buying the parts

Accepted Answer

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

Question 13

Management accountants are frequently asked to analyze various decision situations including the following:

(1) Alternative uses of plant space, to be considered in a make/buy decision. 
(2) Joint production costs incurred, to be considered in a sell-at-split-off-point-versus-process-further decision. 
(3) Research and development (R&D) costs incurred in prior months, to be considered in a new-product-introduction decision. 
(4) The cost of a special device that is necessary if a special sales order is accepted. 
(5) The cost of obsolete inventory to be considered in a keep-versus-disposal decision.

The costs described in situations 1 and 4 above are:
A) Prime costs.
B) Sunk costs.
C) Discretionary costs.
D) Relevant costs.
E) Fully-absorbed costs.

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 14

The contribution margin per machine hour for a given product is calculated as:
A) Full cost per unit/number of machine-hours per unit for the product in question.
B) Number of machine-hours per unit for the product in question/full-cost per unit of the product.
C) Selling price per unit less variable manufacturing cost per unit for the product in question.
D) Selling price per unit for the product less the product's variable manufacturing cost per unit less the variable selling cost per unit for the product.
E) Selling price per unit less total variable cost per unit, divided by number of machine-hours per unit.

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 15

The practice of setting prices below average variable cost and with accompanying plans to raise prices later to recover the losses from the lower prices is referred to as:
A) Marginal cost pricing.
B) Activity-based pricing.
C) Menu-based pricing.
D) Cost-plus pricing.
E) Predatory pricing.

Accepted Answer

The given scenario describes predatory pricing, which involves setting prices below the cost of production to drive competitors out of the market and gain a monopoly. The predator (the company offering lower prices) intends to increase prices once it eliminates rivals and gains power in the market. This practice is illegal in many countries, including the USA, EU, and India, as it violates antitrust laws that promote fair competition.

Question 16

Management accountants are frequently asked to analyze various decision situations including the following:

(1) Alternative uses of plant space, to be considered in a make/buy decision. 
(2) Joint production costs incurred, to be considered in a sell-at-split-off-versus-process-further decision. 
(3) Research and development (R&D) costs incurred in prior months, to be considered in a product-introduction decision. 
(4) The cost of a special device that is necessary if a special sales order is accepted. 
(5) The cost of obsolete inventory to be considered in a keep-versus-disposal decision.

The costs described in situations 2, 3, and 5 above are:
A) Prime costs.
B) Sunk costs.
C) Discretionary costs.
D) Relevant costs.
E) Differential costs.

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 17

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:
A)$5.50.
B)$6.40.
C)$17.60.
D)$16.20.
E)$9.40.

Accepted Answer

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

Question 18

For short-run product-mix decisions, relevant costs (for the seller) include short-run ________ costs plus any ________ costs.
A) direct material; unavoidable fixed
B) out-of-pocket; opportunity
C) fixed; differential
D) support; distribution
E) capital; opportunity

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 19

The opportunity cost of making a component part in a factory with no excess capacity is the:
A) Variable manufacturing cost of the component.
B) Fixed manufacturing cost of the component.
C) Total manufacturing cost of the component.
D) Cost of the production given up to manufacture the component.
E) Net benefit foregone from the best alternative use of the capacity required.

Accepted Answer

The opportunity cost is the value of the best alternative forgone, in this case, the net benefit foregone from the best alternative use of the capacity required to make the component. This takes into account not only the manufacturing cost but also the potential benefits that could have been obtained from using the capacity for other purposes. Therefore, the correct answer is E.

Question 20

Relevant costs for a make-or-buy decision for a component part include all the following except:
A) Fixed salaries that will not be incurred if the part is outsourced.
B) Payroll tax (unemployment insurance cost), because of outsourcing.
C) Material-handling costs that can be eliminated if the part is outsourced.
D) Fixed overhead currently being allocated to the part.
E) Current direct material costs for the part.

Accepted Answer

Fixed overhead currently being allocated to the part is not a relevant cost because it will remain unchanged regardless of whether the part is made in-house or outsourced. Relevant costs are those that will change as a result of the decision.

Quiz 11: Decision Making With a Strategic Emphasis

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:The contribution margin per case for Lemonade is:

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

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

Opportunity costs:

In the situation where a firm produces multiple products and has a single resource constraint (e.g., machine hours) , the most profitable use of available capacity (machine hours) requires that we assess:

In deciding whether to accept or reject a "special sales order," which of the following costs are likely relevant to the decision?

When there is limited capacity, the minimum acceptable price for a "special sales order" should equal the ________ from the product that is sacrificed plus the incremental costs of the product being produced.

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

When a firm has surplus capacity (that is, no resource constraints) , relevant costs for decision-making (for example, determining short-term product mix) will, relative to the situation where the firm faces one or more resource constraints, be:

The contribution margin per machine hour for a given product is calculated as:

The practice of setting prices below average variable cost and with accompanying plans to raise prices later to recover the losses from the lower prices is referred to as:

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

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

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