Question 1

Which of the following is a historical cost that is always irrelevant?

Accepted Answer

A sunk cost is a cost that has already been incurred and cannot be recovered or changed, therefore it is always irrelevant for decision making.

Question 2

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 relevant information to the business decision.

Accepted Answer

The cost of operating old equipment compared to the cost of operating new equipment is relevant information in deciding whether to replace old equipment or not.

Question 3

Which of the following pieces of information would be irrelevant 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 irrelevant because the decision to upgrade should be based on factors such as energy efficiency, safety, and productivity, rather than initial cost.

Question 4

Fixed costs are relevant to a special sales order decision if those fixed costs are subject to change as a result of the special order.

Accepted Answer

Fixed costs are only relevant to a special sales order decision if they can be impacted by the decision to accept the special order. If the fixed costs will remain the same regardless of whether the special order is accepted or not, they are not relevant to the decision-making process. However, if accepting the special order will cause the fixed costs to change, then they need to be factored into the decision.

Question 5

Fixed costs that do not differ between two alternatives are:

Accepted Answer

Fixed costs that do not differ between two alternatives are considered irrelevant to the decision because they do not affect the cost comparison between the alternatives. Only the variable costs and any differential fixed costs should be considered in the decision-making process.

Question 6

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 answer of When considering whether to have a new...

Question 7

Which of the following is the most important key to short-term business decision making?

Accepted Answer

Relevant costs are those costs that will be affected by the decision being made. Using the contribution margin approach helps to determine the impact of the decision on the company's profitability in the short term.

Question 8

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

Accepted Answer

The original cost of the old machine is a sunk cost and does not affect the decision to replace it.

Question 9

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

Accepted Answer

The answer of A depreciable asset's original cost is relevant...

Question 10

A sunk cost is a cost that was incurred in the past and cannot be changed regardless of which future action is taken.

Accepted Answer

A sunk cost is a cost that has already been incurred and cannot be recovered or changed, so it cannot be avoided or changed by future decisions.

Question 11

When a business is considering whether to replace old equipment with newer equipment, the replacement cost of the old equipment, compared to the cost of the new equipment, is relevant information to the business decision.

Accepted Answer

The comparison between the replacement cost of old equipment and the cost of new equipment is relevant because it helps the business determine whether the benefits of upgrading to newer equipment outweigh the costs.

Question 12

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

Accepted Answer

This statement is false. Managers' decisions can be influenced by both quantitative and qualitative data, as both can provide valuable insights and information for the decision-making process. Qualitative factors, such as customer feedback, employee satisfaction, and brand reputation, can be just as important in certain situations as quantitative data, such as sales figures, profit margins, and market share.

Question 13

A company is planning to replace an old machine with a new one. Which of the following is a sunk cost in this decision?

Accepted Answer

Sunk costs are costs that have already been incurred and cannot be recovered or changed. The original cost of the old machine is a sunk cost because it is a cost that has already been incurred and cannot be recovered or changed. The cost of the new machine (A) is not a sunk cost because it is a future cost that can be changed or avoided depending on the decision made. The selling price of the old machine (B) and the future maintenance costs of the old machine (C) are not sunk costs because they are future costs that can be changed or avoided depending on the decision made.

Question 14

In deciding whether to accept a special sales order, management should only consider the quantitative data and disregard qualitative factors.

Accepted Answer

Management should consider both quantitative and qualitative factors when deciding whether to accept a special sales order. Quantitative factors include the cost of producing the order, potential revenue and profitability, and the impact on cash flow. Qualitative factors include factors such as the customer's long-term potential, the impact on the company's reputation, and the potential for future business opportunities.

Question 15

The contribution margin approach helps managers in short-term decision making because:

Accepted Answer

The contribution margin approach isolates costs by behavior, which helps managers make short-term decisions by focusing on the variable costs and contribution margin of each product or service. This information allows managers to identify which products or services are more profitable and which ones should be discontinued or modified. The other choices are incorrect because the contribution margin approach does not treat fixed manufacturing overhead as a product cost, report only mixed costs, or report costs and revenues at present value.

Question 16

When replacing an old asset with a new one, the original purchase price of the old asset represents:

Accepted Answer

The original purchase price of the old asset is a sunk cost because it is a cost that has already been incurred and cannot be recovered. It is not a relevant cost because it does not affect the decision to replace the old asset with a new one. It is not a differential cost because it is not a cost that changes depending on the decision being made. It is not an opportunity cost because it is not the cost of the next best alternative that must be given up.

Question 17

Smith Industries is considering replacing a machine that is presently used in its production process. The following information is available: $$\begin{array} { | l | r | r | } 
\hline & \text { Old Machine } &  { \begin{array} { c } 
\text { Replacement } \
\text { Machine }
\end{array} } \
\hline \text { Original cost } & \$ 55,000 & \$ 45,000 \
\hline \text { Remaining useful life in years } & 3 & 3 \
\hline \text { Current age in years } & 3 & 0 \
\hline \text { Book value } & \$ 33,000 & \
\hline \text { Current disposal value in cash } & \$ 9,000 & \
\hline \text { Future disposal value in cash (in 5 years) } & \$ 0 & \$ 0  \
\hline \text { Annual cash operating costs } & 8,500 & \$ 3,500\
\hline
\end{array}$$
 Which of the following amounts represent a sunk cost?

Accepted Answer

The answer of Smith Industries is considering replacing a machine...

Question 18

Which of following statements is true of short-term decision making?

Accepted Answer

In short-term decision making, fixed costs and variable costs must be analyzed separately in order to determine the breakeven point and make a decision on whether to continue or discontinue a specific product or service. All costs do not behave in the same way, as some may increase or decrease based on production levels or other factors. Unit manufacturing costs may include both fixed and variable costs, depending on the company's cost structure. Not all costs involved in a decision may be considered relevant, as some may be sunk costs or have no effect on the decision at hand.

Question 19

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 will impact the overall cost of owning and operating the new vehicle, and is therefore relevant to the business decision.

Question 20

Special sales orders increase operating income if the revenue from the order exceeds the incremental variable and fixed costs incurred to fill the order.

Accepted Answer

Special sales orders can increase operating income if the additional revenue generated from the order is higher than the extra variable and fixed costs incurred to fulfill the order.

Quiz 25: Short-Term Business Decisions