Question 1

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 2

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

Accepted Answer

False

Question 3

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 money previously spent on roof repairs is a sunk cost and should not influence the decision to install a new roof, which should be based on future benefits and costs.

Question 4

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 compared to the purchase price of the new equipment is not the most relevant information when deciding to upgrade a heating and air conditioning system. Factors such as energy efficiency and safety are more important considerations. Productivity could also be relevant, but it is not as critical as energy efficiency and safety.

Question 5

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 6

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

Accepted Answer

Maximizing the gross profit of each unit sold is a long-term objective rather than a short-term one. In short-run decision making, the focus is on maximizing overall profit or minimizing losses in the current period. A and D are important factors to consider in short-run decision making, while B may or may not be necessary depending on the situation.

Question 7

Fixed costs that do NOT differ between two alternatives are:

Accepted Answer

Fixed costs that do not differ between two alternatives do not affect the decision-making process since they will exist regardless of the option chosen. They are considered irrelevant costs and should not be factored into the decision.

Question 8

Smith Industries is considering replacing a machine that is presently used in its production process. The following information is available:
$$\begin{array} { | l | r | r | } 
\hline& \text { Old Machine } &{ \begin{array} { c } 
\text { Replacement } \
\text { Machine }
\end{array} } \ 
\hline \text { Original cost } & \$ 45,000 & \$ 35,000 \
\hline \text { Remaining useful life in years } & 5 & 5 \
\hline \text { Current age in years } & 5 &0 \
\hline \text { Book value } & \$ 25,000 &  \
\hline \text { Current disposal value in cash } & \$ 8,000 &  \
\hline \text { Future disposal value in cash (in 5 years) } & \$0 & \$0\
\hline \text { Annual cash operating costs } & \$7,000&\$4,000 \
\hline
\end{array}$$

-
For a machine replacement decision which of the information provided in the table is a sunk cost?

Accepted Answer

The original cost of the old machine is a sunk cost because it is a historical cost that cannot be recovered regardless of the decision to replace the machine. The current disposal value and current annual operating cost of the old machine are relevant costs that should be considered in the decision-making process. The price of the new machine is also a relevant cost as it represents the cost of the potential investment.

Question 9

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 10

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

Accepted Answer

While quantitative data is important to the decision making process, qualitative factors such as cultural differences, personal values, and societal trends can also play a significant role in decision making. Therefore, managers should consider both quantitative and qualitative data when making decisions.

Question 11

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

Accepted Answer

A sunk cost is a cost that has already been incurred and cannot be recovered. The original purchase price of the old vehicle is a sunk cost because it has already been paid and cannot be recovered. Depreciation on the new vehicle, trade-in value of old vehicle, and purchase price of new vehicle are not sunk costs as they are all current or prospective expenses that can be influenced by current decisions.

Question 12

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 qualitative factor, as it relates to the subjective experiences and emotions of employees rather than measurable data.

Question 13

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 or changed. It is therefore always irrelevant to future decisions because it cannot be changed, regardless of the course of action taken.

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

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 helps individuals and businesses make optimal decisions by considering the opportunity cost of different choices.

Question 16

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, so it should not be considered when making decisions about future investments or actions.

Question 17

Smith Industries is considering replacing a machine that is presently used in its production process. The following information is available:
$$\begin{array} { | l | r | r | } 
\hline& \text { Old Machine } &{ \begin{array} { c } 
\text { Replacement } \
\text { Machine }
\end{array} } \ 
\hline \text { Original cost } & \$ 45,000 & \$ 35,000 \
\hline \text { Remaining useful life in years } & 5 & 5 \
\hline \text { Current age in years } & 5 &0 \
\hline \text { Book value } & \$ 25,000 &  \
\hline \text { Current disposal value in cash } & \$ 8,000 &  \
\hline \text { Future disposal value in cash (in 5 years) } & \$0 & \$0\
\hline \text { Annual cash operating costs } & \$7,000&\$4,000 \
\hline
\end{array}$$
-
Which of the information provided in the table is irrelevant to the replacement decision?

Accepted Answer

The original cost of the old machine is sunk cost and has no bearing on the replacement decision. The relevant factors are the price of the new machine, the current disposal value of the old machine, and the annual operating costs.

Question 18

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 the old equipment versus newer equipment is relevant information for the business to consider when making a decision about whether to replace the old equipment or not.

Question 19

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

Accepted Answer

The contribution margin format is the most useful in decision-making as it focuses on the behavior of costs, separating variable costs from fixed costs. It helps in determining the impact of changes in sales volume or selling price on the profitability of the company. This format is especially helpful in making decisions related to pricing, product mix, and cost control.

Question 20

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 on the new vehicle is a factor that can affect the overall cost and budget of the business, and therefore is relevant to the decision of purchasing the new vehicle.

Quiz 20: Short-Term Business Decisions