Question 1

The costs and revenues associated with two alternatives are listed below: $$\begin{array} { l r r } 
& \text { Alternative } 1 & \text { Alternative } 2 \
\text { Projected reveruse } & \$ 100,000 & \$ 125,000 \
\text { Unit-level costs } & 20,000 & 30,000 \
\text { Batch-level costs } & 20,000 & 25,000 \
\text { Product-level costs } & 15,000 & 15,000 \
\text { Facility-level costs } & 10,000 & 10,000
\end{array}$$ Which alternative should be selected based on this information?
A) Alternative 2 because it has a higher profit.
B) Alternative 2 because it has the same product- and facility-level costs.
C) Alternative 1 because it has fewer unit-level costs.
D) Alternative 1 because it has a higher profit.

Accepted Answer

The answer of The costs and revenues associated with two...

Question 2

Which of the following costs is an example of a product-level cost?
A) Machine setup costs
B) Patent filing costs
C) Materials and labor costs
D) Shipping and handling costs

Accepted Answer

Product-level costs are associated with specific products, such as patent filing costs, which are incurred to protect the intellectual property of a particular product.

Question 3

Select the incorrect statement concerning opportunity costs.
A) Opportunity costs are relevant costs.
B) Opportunity costs are cumulative.
C) Opportunity costs are future-oriented.
D) Opportunity costs are not recorded in the books.

Accepted Answer

Opportunity costs represent the benefits a business misses out on when choosing one alternative over another. They are not cumulative but rather specific to each decision made. They are indeed relevant, future-oriented, and not recorded in financial books, making all other options correct except for B.

Question 4

Lindsay purchased a raffle ticket for $5.Just before the grand prize drawing two people tried to buy her ticket.The first person offered $30,and another offered $65.What is Lindsay's opportunity cost of keeping the raffle ticket?
A) $60
B) $65
C) $90
D) $95

Accepted Answer

The opportunity cost of keeping the raffle ticket is the value of the next best alternative foregone, which in this case is the $65 offered by the second person, as it is the highest offer she received and gave up by deciding to keep the ticket.

Question 5

QRC Company is trying to decide which one of two alternatives it will accept.The costs and revenues associated with each alternative are listed below: $$\begin{array} { l c r } 
& \text { Alternative A } & \text { Alternative B } \
\text { Projected revenue } & \$ 62,500 & \$ 75,000 \
\text { Unit-level costs } & 12,500 & 18,000 \
\text { Batch-level costs } & 6,250 & 12,000 \
\text { Product-level costs } & 7,500 & 8,500 \
\text { Facility-level costs } & 5,000 & 6,250
\end{array}$$ What is the differential revenue for this decision?
A) $25,000
B) $12,500
C) $62,500
D) $75,000

Accepted Answer

The differential revenue is calculated by subtracting the revenue of the current alternative from the revenue of the alternative being considered. In this case, the revenue for Alternative B is $175,000 and the revenue for Alternative A is $162,500. Therefore, the differential revenue is $175,000 - $162,500 = $12,500. Based on this analysis, choosing Alternative B would be the best choice as it generates more revenue than Alternative A.

Question 6

All of the following are variables that could be considered in a decision to outsource a component that is currently being produced in-house.Which of the following is not likely to be relevant?
A) The impact on employee morale
B) The book value of equipment used in making the component
C) The importance of vertical integration to the company
D) The reliability of the supplier

Accepted Answer

The book value of equipment used in making the component is not likely to be relevant as it is not an indicator of the benefits or drawbacks of outsourcing. The other three variables (impact on employee morale, importance of vertical integration, and reliability of the supplier) are all important factors to consider in a decision to outsource a component.

Question 7

Select the correct statement regarding opportunity costs.
A) Opportunity costs need not be considered in decision making.
B) Opportunity costs are not recorded in a firm's financial accounting records.
C) Opportunity costs represent sunk costs.
D) All of these answers are correct.

Accepted Answer

Opportunity costs represent the benefits an individual, investor, or business misses out on when choosing one alternative over another. These costs, while crucial for making informed decisions, are not tangible expenses that are recorded in financial accounting records. They are theoretical costs of what is foregone when making a choice.

Question 8

Select the correct statement regarding quantitative and qualitative information.
A) To be relevant, qualitative data need not be quantified.
B) Relevant information cannot have both quantitative and qualitative characteristics.
C) Qualitative data should only be considered when quantitative data are inconclusive.
D) To be relevant, qualitative data need not differ among the alternatives but must be future-oriented.

Accepted Answer

Qualitative data is descriptive in nature and can contribute important insights without being quantified. This type of information can provide context, opinions, attitudes, and other non-numerical data that may be relevant for decision-making or analysis. Quantitative data, on the other hand, is numerical and can be measured or counted. Relevant information can have both quantitative and qualitative characteristics depending on the context and purpose of the analysis.

Question 9

Which of the following items is qualitative?
A) Cost of new machine
B) Depreciation of existing machine
C) Book value of the existing machine
D) Degree to which the new machine can be integrated with existing machinery

Accepted Answer

Qualitative data describes the quality, properties, or characteristics of a situation or object. Among the given options, the degree to which the new machine can be integrated with existing machinery is a qualitative item, as it describes a characteristic or feature of the machine. The other options (cost, depreciation, and book value) are all quantitative items as they describe numerical values or amounts.

Question 10

The cost that is avoided when a company eliminates a single item of a product or service is a:
A) Unit-level cost.
B) Facility-level cost.
C) Product-level cost.
D) Batch-level cost.

Accepted Answer

Unit-level costs are directly associated with the production of a single unit of product or service, so eliminating a single item would avoid these costs.

Question 11

Qualitative information is relevant when:
A) it makes a difference in the decision and it differs among the alternatives.
B) it differs among the alternatives only.
C) it makes a difference in the decision only.
D) None of these answers are correct.

Accepted Answer

Qualitative information is relevant when it can make a difference in the decision-making process and when it varies between the options being considered. This information can provide insight into the subjective experience of various options and can help decision-makers make more informed choices. Therefore, option A is the best choice as it considers both the decision-making relevance and variability among alternatives.

Question 12

Ethan paid $3 for a bottle of ThirstAid.Later,while on a hiking trip,he was offered $8 for the ThirstAid.Select the correct statement from the following:
A) The $8 offer is not relevant if Ethan refuses to sell the ThirstAid.
B) If Ethan drinks the ThirstAid, no opportunity cost is associated with his decision.
C) The $3 original purchase price is irrelevant to his decision to sell the ThirstAid.
D) All of these answers are correct.

Accepted Answer

The $3 original purchase price is a sunk cost and does not affect the decision to sell the ThirstAid for $8. The decision should be based on the current offer and the utility or value Ethan places on the ThirstAid at the moment, not on what was paid for it initially.

Question 13

Clean,Inc.cleans and waxes floors for commercial customers.The company is presently operating at less than capacity,with equipment and employees idle at times.The company recently received an order from a potential customer outside the company's normal geographic service region for a price of $4,500.The size of the proposed job is 11,000 square feet.The company's normal service costs are as follows: $$\begin{array} { l l } 
\text { Unit-level materials } & \$ 0.18 \text { per square foot } \
\text { Unit-level labor } & \$ 0.25 \text { per square foot } \
\text { Unit-level variable overhead } & \$ 0.08 \text { per square foot } \
\text { Facility-level overhead } & \text { Allocated at } \$ 0.10 \text { per square foot }
\end{array}$$ If the company accepts the special offer:
A) The company will lose $1,110 on the job.
B) The company will lose $2,210 on the job.
C) The company will lose $230 on the job.
D) The company will earn $2,520 on the job.

Accepted Answer

The answer of Clean,Inc.cleans and waxes floors for commercial customers.The...

Question 14

Benitez Company currently outsources a relay switch that is a component in one of its products.The switches cost $20 each.The company is considering making the switches internally at the following projected annual production costs: $\begin{array}{ll}
\text { Unit-level material cost } & \$3 \
\text { Unit-level labor cost } & \$2 \
\text { Unit-level overhead } & \$1 \
\text { Batch-level set-up cost (5,000 units per batch) } & \$ 25,000 \
\text { Product-level supervisory salaries } & \$ 37,500 \
\text { Allocated facility-level costs } & \$ 20,000
\end{array}$  The company expects an annual need for 5,000 switches.If the company makes the product,it will have to utilize factory space currently being leased to another company for $1,500 a month.If the company decides to make the parts,total costs will be:
A) $10,500 more than if the switches are purchased.
B) $27,000 less than if the switches are purchased.
C) $20,000 less than if the switches are purchased.
D) $30,500 more than if the switches are purchased.

Accepted Answer

If the company makes the switches internally, the annual production cost will be:
$22,000 (direct material) + $12,000 (direct labor) + $18,000 (variable factory overhead) + $24,000 (fixed factory overhead) = $76,000
The cost per switch will be $76,000/5,000 = $15.20.
If the company purchases the switches, the total cost will be $20 x 5,000 = $100,000.
Therefore, if the company makes the switches internally, the total cost will be $76,000 + $18,000 (leased space cost) = $94,000, which is $6,000 more than if the switches are purchased ($100,000 - $94,000 = $6,000).
Therefore, the best choice is A, which states that the total cost will be $10,500 more than if the switches are purchased (which is the $6,000 additional cost plus the $4,500 monthly lease cost for a year).

Question 15

Safety Products currently outsources an electrical switch that is a component in its sprinkler systems.The switches are purchased for $20 each.The company is considering making the switches internally and has conducted a study to determine the costs involved.The costs below are projected annual production costs: $\begin{array}{ll}
\text { Unit-level material cost } & \$3 \
\text { Unit-level labor cost } & \$2 \
\text { Unit-level overhead } & \$1 \
\text { Batch-level set-up cost (5,000 units per batch) } & \$ 5,000 \
\text { Product-level supervisory salaries } & \$ 37,500 \
\text { Allocated facility-level costs } & \$ 20,000
\end{array}$  Assume that the company needs 15,000 of the switches,which would be produced in three batches.Assume also that the company will still be operating within the relevant range.If Safety decides to make the parts under these conditions,the total relevant costs will be:
A) $132,500.
B) $162,500.
C) $105,000.
D) $142,500.

Accepted Answer

The answer of Safety Products currently outsources an electrical switch...

Question 16

The benefits sacrificed when one alternative is chosen over another are referred to as:
A) Avoidable costs.
B) Opportunity costs.
C) Sacrificial costs.
D) Beneficial costs.

Accepted Answer

Opportunity costs are the benefits that must be given up in order to pursue a certain course of action. Therefore, the best choice can only be made by considering the opportunity costs of each alternative and selecting the one that provides the greatest benefit relative to the costs incurred.

Question 17

The Page Turner Publishing Company is trying to decide whether to accept a special order for its latest blockbuster.In making this decision,which level of costs will most likely be relevant to the decision?
A) Batch-level costs.
B) Facility-level costs.
C) Unit-level costs.
D) None of these answers are correct.

Accepted Answer

Unit-level costs are the costs that vary with the number of units produced or sold, such as direct materials and direct labor. In the case of deciding whether to accept a special order, the relevant costs would be those that are directly affected by the production of additional units. Therefore, unit-level costs such as materials and labor would be the most relevant to the decision. Batch-level and facility-level costs are not directly affected by the decision to accept a special order and would be considered irrelevant.

Question 18

Engineering design costs are generally referred to as:
A) Batch-level costs.
B) Facility-level costs.
C) Unit-level costs.
D) Product-level costs.

Accepted Answer

Engineering design costs are associated with designing a specific product, making them product-level costs.

Question 19

Which of the following costs is an example of a batch-level cost?
A) Assembly setup costs.
B) Materials handling costs.
C) Shipping and handling costs to ship an order to a customer.
D) All of these answers are correct.

Accepted Answer

Batch-level costs are costs that are incurred every time a batch is produced, regardless of the size of the batch. Assembly setup costs, materials handling costs, and shipping and handling costs to ship an order are all examples of costs that can be incurred on a per-batch basis, making all of these answers correct.

Question 20

The Mighty Music Company produces and sells a desktop speaker for $100.The company has the capacity to produce 50,000 speakers each period.At capacity,the costs assigned to each unit are as follows: $\begin{array}{lrr}
\text { Unit level costs } & \$  45 \
\text { Product level costs } & \$  15 \
\text { Facility level costs } & \$  5
\end{array}$ The company has received a special order for 500 speakers.If this order is accepted,the company will have to spend $15,000 on additional costs.Assuming that no sales to regular customers will be lost if the order is accepted,at what selling price will the company be indifferent between accepting and rejecting the special order?
A) $95
B) $45
C) $75
D) $60

Accepted Answer

The cost per unit at capacity is $66 ($38+$19+$9). Adding the $15,000 in additional costs for the special order, the total cost of producing 500 units is $50,000 (($38 + $19 + $9) x 500 + $15,000).

To calculate the minimum selling price for the special order, we need to find out the contribution margin per unit, which is equal to the selling price minus the variable cost per unit. The variable cost per unit is $28 ($19+$9) at capacity. Thus, the contribution margin per unit is $72 ($100 - $28).

With a total cost of $50,000 and a contribution margin of $72 per unit, the company needs to sell 694 units at $75 each ($72 x 694 = $49,968) to break even on this special order. Therefore, the selling price of $75 per unit would make the company indifferent between accepting and rejecting the special order.

Quiz 6: Relevant Information for Special Decisions

Which of the following costs is an example of a product-level cost?

Select the incorrect statement concerning opportunity costs.

Lindsay purchased a raffle ticket for $5.Just before the grand prize drawing two people tried to buy her ticket.The first person offered $30,and another offered $65.What is Lindsay's opportunity cost of keeping the raffle ticket?

All of the following are variables that could be considered in a decision to outsource a component that is currently being produced in-house.Which of the following is not likely to be relevant?

Select the correct statement regarding opportunity costs.

Select the correct statement regarding quantitative and qualitative information.

Which of the following items is qualitative?

The cost that is avoided when a company eliminates a single item of a product or service is a:

Qualitative information is relevant when:

Ethan paid $3 for a bottle of ThirstAid.Later,while on a hiking trip,he was offered $8 for the ThirstAid.Select the correct statement from the following:

The benefits sacrificed when one alternative is chosen over another are referred to as:

The Page Turner Publishing Company is trying to decide whether to accept a special order for its latest blockbuster.In making this decision,which level of costs will most likely be relevant to the decision?

Engineering design costs are generally referred to as:

Which of the following costs is an example of a batch-level cost?