Ch.

11 Decision Making and Relevant Information

Objective.1

2) Feedback regarding previous actions may affect ________.

A) future predictions
B) implementation of the decision
C) the decision model
D) All of these answers are correct.
Answer: D

5) Flash City Inc. manufactures small flash drives and is considering raising the price by 75 cents a unit
for the coming year. With a 75-cent price increase, demand is expected to fall by 7,000 units.

Current Projected
Demand 79,000 units 72,000 units
Selling price $8.50 $9.25
Incremental cost per unit $5.80 $5.80

If the price increase is implemented, operating profit is projected to ________.

A) increase by $35,100
B) decrease by $5,250
C) increase by $5,250
D) decrease by $7,000
Answer: A
Explanation: Change in operating income = [72,000 × ($9.25 - $5.80)] - [79,000 × ($8.50 - $5.80)] = Increase
of $35,100

6) Flash City Inc. manufactures small flash drives and is considering raising the price by 75 cents a unit
for the coming year. With a 75-cent price increase, demand is expected to fall by 7,000 units.

Current Projected
Demand 78,000 units 71,000 units
Selling price $9.00 $9.75
Incremental cost per unit $6.80 $6.80

Would you recommend the 75-cent price increase?

A) No, because demand decreased.
B) No, because the selling price increases.
C) Yes, because contribution margin per unit increases.
D) Yes, because operating profits increase.
Answer: D

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7) When using the five-step decision process, which one of the following steps should be done last?
A) obtain information
B) choose an alternative
C) evaluation and feedback
D) implementing the decision
Answer: C

8) When using the five-step decision process, which one of the following steps should be done first?
A) obtain information
B) choose an alternative
C) evaluation and feedback
D) implementing the decision
Answer: A

9) A decision model is an informal method for making a choice, using simpler methods like surveying.
Answer: FALSE

10) Feedback from previous decisions uses historical information and, therefore, is irrelevant for making
future predictions.
Answer: FALSE

11) Explain the five-step decision process that managers can use to make decisions.
Answer: The five step decision process is (a) Identify the problem and uncertainties, (b) Obtain
information, (c) Make predictions, (d) Make decisions by choosing among alternatives, and (e) Implement
the decision, evaluate performance to provide feedback.

Objective.2

1) Which of the following is not true with regards to relevant costs and relevant revenues?
A) They are sunk costs and historical revenues
B) They are expected costs and expected revenues
C) They occur in the future
D) The differ among alternative courses of action
Answer: A

2) Sunk costs ________.

A) are future costs for decision making
B) are avoidable costs
C) are irrelevant for decision making
D) are foregone contribution by not using a limited resource in its next-best alternative use
Answer: C

3) Sunk costs ________.

A) are relevant
B) are differential
C) have future implications
D) are ignored when evaluating alternatives
Answer: D

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4) Which of the following is an example of sunk costs?
A) wages to security staffs
B) cost of purchasing raw materials
C) cost of an alternative investment
D) wages payable to skilled laborers to make a product
Answer: A

5) Sunk costs are ________.

A) costs incurred as a result of an investment position
B) costs that is the sum of all costs in a particular business function of the value chain
C) the contributions to operating income that is forgone by not using a limited resource in its next-best
alternative use
D) costs that are unavoidable and cannot be changed no matter what action is taken
Answer: D

6) In evaluating different alternatives, it is useful to concentrate on ________.

A) variable costs
B) fixed costs
C) total costs
D) relevant costs
Answer: D

7) Which of the following costs always differ among future alternatives?

A) fixed costs
B) historical costs
C) relevant costs
D) variable costs
Answer: C

8) Management is considering two alternatives. Alternative A has projected revenue per year of $100,000
and costs of $70,000 while Alternative B has revenue of $100,000 and costs of $60,000. Both projects
require an initial investment of $250,000 of which $75,000 has already been set aside and will be used as a
down payment on the project that is chosen. There are also other qualitative factors that management
must consider before making a final choice. Which of the following statements is correct about relevant
costs and relevant revenues.
A) The sunk cost of $75,000 is relevant
B) The projected revenues are relevant to the decision
C) The initial investment of $250,000, the projected revenues, and the projected costs are all relevant
D) The only relevant item are the costs as they differ between alternatives
Answer: D

9) John's 8-year-old Chevrolet Trail Blazer requires repairs estimated at $10,000 to make it road worthy
again. His wife, Sherry, suggested that he should buy a 5-year-old used Jeep Grand Cherokee instead for
$10,000 cash. Sherry estimated the following costs for the two cars:

Trail Blazer Grand Cherokee

Acquisition cost $25,000 $10,000
Repairs $10,000 —
Annual operating costs
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 (Gas, maintenance, insurance) $2,780 $1,800

The cost NOT relevant for this decision is the ________.

A) acquisition cost of the Trail Blazer
B) acquisition cost of the Grand Cherokee
C) repairs to the Trail Blazer
D) annual operating costs of the Grand Cherokee
Answer: A

10) John's 8-year-old Chevrolet Trail Blazer requires repairs estimated at $7,000 to make it road worthy
again. His wife, Sherry, suggested that he should buy a 5-year-old used Jeep Grand Cherokee instead for
$7,000 cash. Sherry estimated the following costs for the two cars:

Trail Blazer Grand Cherokee

Acquisition cost $30,000 $7,000
Repairs $7,000 —
Annual operating costs
(Gas, maintenance, insurance) $2,580 $1,700

What should John do? What are his savings in the first year?
A) Buy the Grand Cherokee; $8,700
B) Fix the Trail Blazer; $4,380
C) Buy the Grand Cherokee; $880
D) Fix the Trail Blazer; $7,247
Answer: C
Explanation: Trail Blazer ($7,000 + $2,580) - Grand Cherokee ($7,000 + $1,700) = $880 cost savings when
choosing the Grand Cherokee option

11) A relevant revenue is revenue that is a(n) ________.

A) past revenue and differs among alternative courses of action
B) future revenue and differs among alternative courses of action
C) in-hand revenue
D) earned revenue
Answer: B

12) A relevant cost is a cost that is a(n) ________.

A) future cost
B) past cost
C) sunk cost
D) non-cash expense
Answer: A

13) Which of the following is true of relevant information?

A) All fixed costs are relevant.
B) All Future revenues and expenses are relevant.
C) Future
D) All fixed costs are not relevant.
Answer: C

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14) Quantitative factors ________.
A) include financial information, but not nonfinancial information
B) include both financial and nonfinancial information
C) are always relevant when making decisions
D) include employee morale
Answer: B

15) All of the following are examples of quantitative factors except:

A) cost of direct materials
B) budget for marketing activities
C) product development time
D) employee morale
Answer: D

16) Which of the following is true of historical costs?

A) They are useful for making future predictions.
B) They are relevant for decision making.
C) They are always accounted as opportunity costs.
D) They cannot be fixed costs.
Answer: A

17) When making decisions ________.

A) qualitative factors are not relevant as they can't be quantified
B) more weight should be given to quantitative factors
C) appropriate weight must be given to both quantitative and qualitative factors
D) quantitative factors are relevant but qualitative factors are rarely relevant
Answer: C

18) Employee morale at Dos Santos, Inc., is very high. This type of information is an example of ________.
A) qualitative factors
B) quantitative factors
C) irrelevant factors
D) financial factors
Answer: A

20) One-time-only special orders should only be accepted if ________.

A) incremental revenues exceed incremental costs
B) differential revenues exceed variable costs
C) incremental revenues exceed fixed costs
D) total revenues exceed total costs
Answer: A

21) When deciding to accept a one-time-only special order from a wholesaler, management should
________.
A) consider the sunk costs and opportunity costs
B) not consider the special order's impact on future prices of their products
C) determine whether excess capacity is available
D) verify past design costs for the product
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Answer: C

23) A product cost is composed of the following:

Direct materials $11

Direct labor $3
Manufacturing overhead $8

The product sells for $40 and a 15% commission is paid to a salesperson for every unit sold. Management
accountants also estimate that storage cost per unit averages $0.75 per unit. What is the full cost of the
product?
A) $14
B) $22
C) $28.75
D) $28.00
Answer: C
Explanation: $11 + $3 + $8 + ($40 x 15%) + $0.75 = $28.75

24) Crandle Manufacturers Inc. is approached by a potential customer to fulfill a one-time-only special
order for a product similar to one offered to domestic customers. The company has excess capacity. The
following per unit data apply for sales to regular customers:

Variable costs:
Direct materials $130
Direct labor 110
Manufacturing support 125
Marketing costs 65
Fixed costs:
Manufacturing support 175
Marketing costs 85
Total costs 690
Markup (50%) 345
Targeted selling price $1,035

What is the full cost of the product per unit?

A) $430
B) $1,035
C) $690
D) $345
Answer: C
Explanation: Full cost = $130 + $110 + $125 + $65 + $175 + $85 = $690

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25) Crandle Manufacturers Inc. is approached by a potential new customer to fulfill a one-time-only
special order for a product similar to one offered to domestic customers. The company has excess
capacity. The following per unit data apply for sales to regular customers:

Variable costs:
Direct materials $170
Direct labor 90
Manufacturing support 135
Marketing costs 85
Fixed costs:
Manufacturing support 145
Marketing costs 75
Total costs 700
Markup (40%) 280
Targeted selling price $980

What is the contribution margin per unit?

A) $220
B) $280
C) $500
D) $700
Answer: C
Explanation: Contribution margin per unit = $980 - ($170 + $90 + $135 + $85) = $500

26) Crandle Manufacturers Inc. is approached by a potential customer to fulfill a one-time-only special
order for a product similar to one offered to domestic customers. The company has excess capacity. The
following per unit data apply for sales to regular customers:

Variable costs:
Direct materials $140
Direct labor 100
Manufacturing support 105
Marketing costs 55
Fixed costs:
Manufacturing support 175
Marketing costs 65
Total costs 640
Markup (50%) 320
Targeted selling price $960

For Crandle Manufacturers Inc., what is the minimum acceptable price of this special order?
A) $400
B) $320
C) $480
D) $640
Answer: A
Explanation: Minimum acceptable price = $140 + $100 + $105 + $55 = $400

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27) Crandle Manufacturers Inc. is approached by a potential customer to fulfill a one-time-only special
order for a product similar to one offered to domestic customers. The company has excess capacity. The
following per unit data apply for sales to regular customers:

Variable costs:
Direct materials $130
Direct labor 60
Manufacturing support 105
Marketing costs 95
Fixed costs:
Manufacturing support 175
Marketing costs 65
Total costs 630
Markup (50%) 315
Targeted selling price $945

What is the change in operating profits if the one-time-only special order for 1,030 units is accepted for
$550 a unit by Crandle?
A) $164,800 increase in operating profits
B) $164,170 increase in operating profits
C) $164,170 decrease in operating profits
D) $164,800 decrease in operating profits
Answer: A
Explanation: Contribution margin per unit = $550 - ($130 + $60 + $105 + $95) = $160
Change in operating profit = 1,030 × $160 = $164,800 increase

30) Kitchens Sales Inc. is approached by Mr. Louis Cifer, a new customer, to fulfill a large one-time-only
special order for a product similar to one offered to regular customers. The following per unit data apply
for sales to regular customers:

Direct materials $556

Direct labor 362
Variable manufacturing support 60
Fixed manufacturing support 126
Total manufacturing costs 1,104
Markup (50%) 552
Targeted selling price $1,656

Kitchens Sales Inc. has excess capacity. Mr. Cifer wants the cabinets in cherry rather than oak, so direct
material costs will increase by $70 per unit. The average marketing cost of Kitchens Sales product is $173
per order. For Kitchens, what is the full cost of the one-time-only special order?
A) $1,034
B) $1,174
C) $1,104
D) $1,347
Answer: B
Explanation: Full cost = $556 + $362 + $60 + $126 + $70 = $1,174

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34) Dantley's Furniture manufactures rustic furniture. The cost accounting system estimates
manufacturing costs to be $190 per table, consisting of 80% variable costs and 20% fixed costs. The
company has surplus capacity available. It is Back Forrest's policy to add a 45% markup to full costs.
Dantley's Furniture is invited to bid on a one-time-only special order to supply 180 rustic tables. What is
the lowest price Dantley's Furniture should bid on this special order?
A) $22,230
B) $27,360
C) $34,200
D) $42,750
Answer: B
Explanation: $190 × 80% × 180 tables = $27,360
Diff: 2
Objective: 2
AACSB: Application of knowledge

35) Dantley's Furniture manufactures rustic furniture. The cost accounting system estimates
manufacturing costs to be $240 per table, consisting of 75% variable costs and 25% fixed costs. The
company has surplus capacity available. It is Back Forrest's policy to add a 45% markup to full costs. A
large hotel chain is currently expanding and has decided to decorate all new hotels using the rustic style.
Dantley's Furniture Incorporated is invited to submit a bid to the hotel chain. What is the lowest price per
unit Dantley's Furniture should bid on this long-term order?
A) $168
B) $180
C) $240
D) $348
Answer: D
Explanation: $240 + ($240 × 45%) = $348

36) Zephram Corporation has a plant capacity of 200,000 units per month. Unit costs at capacity are:

Direct materials $6.00

Direct labor 5.00
Variable overhead 4.00
Fixed overhead 2.00
Marketing—fixed 6.00
Marketing/distribution—variable 4.60

Current monthly sales are 190,000 units at $30.00 each. Q, Inc., has contacted Zephram Corporation about
purchasing 2,500 units at $24.00 each. Current sales would not be affected by the one-time-only special
order. What is Zephram's change in operating profits if the one-time-only special order is accepted?
A) $11,000 increase
B) $31,500 increase
C) $22,500 increase
D) $49,000 increase
Answer: A
Explanation: ($6.00 + $5.00 + $4.00 + $4.60) = $19.60
($24.00 - $19.60) × 2,500 = $11,000 increase

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41) The best way to avoid misidentification of relevant costs is to focus on ________.
A) expected future costs that differ among the alternatives
B) historical costs
C) unit fixed costs
D) total unit costs
Answer: A

42) Relevant costs are ________.

A) sunk costs
B) expected future costs
C) actual present costs
D) historical costs
Answer: B

43) Direct materials are $600, direct labor is $450, variable overhead costs are $650, and fixed overhead
costs are $400. The cost of one unit is ________.
A) $850
B) $1,050
C) $1,700
D) $2,100
Answer: D

45) McMurphy Corporation produces a part that is used in the manufacture of one of its products. The
costs associated with the production of 12,000 units of this part are as follows:

Direct materials $86,000

Direct labor 126,000
Variable factory overhead 58,000
Fixed factory overhead 138,000
Total costs $408,000

Of the fixed factory overhead costs, $55,000 is avoidable. Conners Company has offered to sell 12,000
units of the same part to McMurphy Corporation for $41 per unit.

Assuming there is no other use for the facilities, Schmidt should ________.
A) make the part, as this would save $16 per unit
B) buy the part, as this would save $16 per unit
C) buy the part, as this would save the company $192,000
D) make the part, as this would save $14 per unit
Answer: D
Explanation: Avoidable costs total $325,000 = $86,000 + $126,000 + $58,000 + $55,000.
$41 - ($325,000 / 12,000) = $14

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46) Striker 44 Corporation produces a part that is used in the manufacture of one of its products. The
costs associated with the production of 12,000 units of this part are as follows:

Direct materials $86,000

Direct labor 130,000
Variable factory overhead 57,000
Fixed factory overhead 135,000
Total costs $408,000

Of the fixed factory overhead costs, $58,000 is avoidable.

Assuming no other use of their facilities, the highest price that McMurphy should be willing to pay for
12,000 units of the part is ________.
A) $408,000
B) $273,000
C) $331,000
D) $351,000
Answer: C
Explanation: $86,000 + $130,000 + $57,000 + $58,000 = $331,000

47) Past costs themselves are always irrelevant when making decisions.
Answer: TRUE

48) Equal weight must be given to qualitative factors and quantitative nonfinancial factors while making
decisions.
Answer: FALSE

49) The rent paid for an already existing facility is an example of a sunk cost.
Answer: TRUE

50) A cost may be relevant for one decision, but NOT relevant for a different decision.
Answer: TRUE

51) Revenues that remain the same for two alternatives being examined are relevant revenues.
Answer: FALSE

52) Sunk costs are irrelevant to decision making.

Answer: TRUE

53) Marketing costs will be an irrelevant cost in the decision making of a one-time-only special order.
Answer: TRUE

54) A sunk cost is a relevant cost in a decision making.

Answer: FALSE

55) Quantitative factors, such as direct material costs, are outcomes that are measured in numerical terms.
Answer: TRUE

56) Qualitative factors are outcomes that can be easily measured in numerical terms, such as the costs of
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direct labor.
Answer: FALSE

57) Business function costs are the sum of all variable and fixed costs in all business functions of the value
chain.
Answer: FALSE

58) Qualitative factors, as well as relevant revenues and relevant costs need to be considered when
selecting among alternatives.
Answer: TRUE

59) Past costs are also called sunk costs because they are unavoidable and cannot be changed no matter
what action is taken.
Answer: TRUE

60) Full costs of a product include variable and fixed costs in a particular business function in the value
chain.
Answer: FALSE

61) For one-time-only special orders, fixed costs may be relevant but NOT variable costs.
Answer: FALSE

62) In the decision making of a one-time-only special order, it is assumed that accepting the special order is
not expected to affect the selling price to other customers.
Answer: TRUE

63) Bid prices and costs that are relevant for regular orders are the same costs that are relevant for one-
time-only special orders.
Answer: FALSE

64) Qualitative factors are important in the decision-making process even though they cannot be
measured numerically.
Answer: TRUE

65) In a one-time special order situation, if the price offered by the buyer is less than the absorption cost
per unit, the special order may still be profitable since absorption costs include allocated fixed
manufacturing overhead.
Answer: TRUE

66) In relevant-cost analysis, managers should not consider all variable as relevant and all fixed costs as
irrelevant.
Answer: TRUE

67) An incremental product cost is generally a fixed cost.

Answer: FALSE

68) If Option 1 costs $120 and Option 2 costs $90, then the differential cost is $30.
Answer: TRUE

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69) Variable cost per unit is the best product cost to use for one-time-only special order decisions.
Answer: TRUE

71) Swan Manufacturing is approached by a customer to fulfill a one-time-only special order for a
product similar to one offered to domestic customers. The following per unit data apply for sales to
regular customers:

Direct materials $1,825

Direct labor 900
Variable manufacturing support 1,300
Fixed manufacturing support 3,000
Total manufacturing costs $7,025.00
Markup (50%) 3,512.50
Targeted selling price $ 10,537.50

Swan Manufacturing has excess capacity.

Required:
a. What is the full cost of the product per unit if the marketing costs is $3,000?
b. What is the contribution margin per unit?
c. Which costs are relevant for making the decision regarding this one-time-only special order? Why?
d. For Swan Manufacturing, what is the minimum acceptable price of this one-time-only special order?
e. For this one-time-only special order, should Parker and Spitzer Manufacturing consider a price of
$5,400 per unit? Why or why not?
Answer:
a. Full cost of the product = $10,025
b. Contribution margin = $6,512.50= Selling price $10,537.50 - Variable costs ($1,800 + $900 + $1,300).
c. Relevant costs for decision making are those costs that differ between alternatives, which in this
situation are the incremental costs. The incremental costs total $4,025 = Variable costs ($1,800+ $900 +
$1,300).
d. The minimum acceptable price is $4,025 = Variable costs (($1,800 + $900 + $1,300), which are the
incremental costs in the short term.
e. Yes, because this price is greater than the minimum acceptable price of this special order
determined in (d).

73) Fairhaven Company needs 1,000 motors in its manufacture of boats. It can buy the motors from Asian
Motors for $1,250 each. Southwestern's plant can manufacture the motors for the following costs per unit:

Direct materials $ 600

Direct manufacturing labor 250
Variable manufacturing overhead 200
Fixed manufacturing overhead 350
Total $1,400

If Southwestern buys the motors from Jinx, 70% of the fixed manufacturing overhead applied will not be
avoided.

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Required:
a. Should the company make or buy the motors?
Answer:
a. Cost to buy the part: (1,000 × $1,250) $1,250,000
Relevant costs to make:
Variable costs:
Direct materials (1,000 × $600) $600,000
Direct manufacturing. labor (1,000 × $250) 250,000
Variable manufacturing overhead (1,000 × $200) 200,000
Total $1,050,000
Avoidable fixed costs: ($350 × 1,000 × 0.30) 105,000 1,155,000
Savings if part is manufactured $ 95,000

Objective.3

2) In a make-or-buy decision, which of the following would not be relevant?

A) the quality of the product
B) the portion of fixed costs that could be eliminated by outsourcing
C) a lease that could be discontinued upon accepting the "buy proposal"
D) property taxes on the plant that will still be necessary even if the product is outsourced
Answer: D

3) An incremental cost is
A) an additional total cost for an activity
B) a cost that has already been incurred
C) the difference in total costs between two alternatives
D) always related to fixed costs
Answer: A

7) The cost to produce Part A was $20 per unit in 2013 and in 2014 it has increased to $22 per unit. In 2014,
Supplier ABC has offered to supply Part A for $18 per unit. For the make-or-buy decision ________.
A) incremental revenues are $4 per unit B) incremental costs are $2 per unit
C) net relevant costs are $2 per unit D) differential costs are $4 per unit
Answer: D

8) When evaluating a make-or-buy decision, which of the following needs to be considered?

A) alternative uses of the production capacity
B) the original cost of the production equipment
C) pension costs to the current employees
D) material-handling costs that cannot be eliminated
Answer: A

9) For make-or-buy decisions, a supplier's ability to maintain secrecy of intellectual property is

considered a(n) ________.
A) qualitative factor B) irrelevant cost
C) differential factor D) opportunity cost
Answer: A

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13) W.T. Ginsburg Engine Company manufactures part ACT30107 used in several of its engine models.
Monthly production costs for 1,090 units are as follows:

Direct materials $46,000

Direct labor 10,500
Variable overhead costs 32,500
Fixed overhead costs 22,000
Total costs $111,000

It is estimated that 6% of the fixed overhead costs assigned to ACT30107 will no longer be incurred if the
company purchases ACT30107 from the outside supplier. W.T Ginsburg Engine Company has the option
of purchasing the part from an outside supplier at $94.75 per unit.

If the company accepts the offer from the outside supplier, the monthly avoidable costs (costs that will no
longer be incurred) total ________.
A) $90,320
B) $89,000
C) $111,000
D) $112,320
Answer: A
Explanation: Monthly avoidable costs = $46,000 + $10,500 + $32,500 + ($22,000 × 6%) = $90,320

14) W.T. Ginsburg Engine Company manufactures part ACT31107 used in several of its engine models.
Monthly production costs for 1,000 units are as follows:

Direct materials $42,000

Direct labor 10,500
Variable overhead costs 32,500
Fixed overhead costs 18,000
Total costs $103,000

It is estimated that 6% of the fixed overhead costs assigned to ACT31107 will no longer be incurred if the
company purchases ACT31107 from the outside supplier. W.T. Ginsburg Engine Company has the option
of purchasing the part from an outside supplier at $94.75 per unit.

If W.T. Ginsburg Engine Company purchases 1,000 ACT31107 parts from the outside supplier per month,
then its monthly operating income will ________. (Round any intermediary calculations and your final
answer to the nearest cent.)
A) increase by $8,670 B) increase by $21,330
C) decrease by $8,670 D) decrease by $21,330
Answer: C
Explanation: Total avoidable costs = $42,000 + $10,500 + $32,500 + ($18,000 x 6%) = $86,080
Change in monthly operating income = Avoidable costs $86,080 - ($94.75 × 1,000 units) = decrease of
$8,670

15
15) W.T. Ginsburg Engine Company manufactures part ACT31107 used in several of its engine models.
Monthly production costs for 1,010 units are as follows:

Direct materials $41,000

Direct labor 7,500
Variable overhead costs 34,500
Fixed overhead costs 18,000
Total costs $101,000

It is estimated that 7% of the fixed overhead costs assigned to ACT31107 will no longer be incurred if the
company purchases ACT31107 from the outside supplier. W.T. Ginsburg Engine Company has the option
of purchasing the part from an outside supplier at $94.75 per unit.

The maximum price that W.T. Ginsburg Engine Company should be willing to pay the outside supplier is
________.
A) $82 per ACT31107 part
B) $83.43 per ACT31107 part
C) $100 per ACT31107 part
D) $101.25 per ACT31107 part
Answer: B
Explanation: Avoidable costs = $84,260 / 1,010 units = $83.43 per part

20) If a company has excess capacity, the most it would pay for buying a product that it currently makes
would be the ________.
A) total variable cost of producing the product B) full cost of producing the product
C) total cost of producing the product D) business function cost of the product
Answer: A

21) For make-or-buy decisions, relevant costs include ________.

A) incremental costs plus sunk costs B) incremental costs plus opportunity costs
C) differential costs plus fixed costs D) incremental costs plus differential costs
Answer: B

22) A study by a consultant shows that a company that had $2,000,000 of inventory was holding excess
inventory of $320,000 that could be eliminated with a few process improvements. It also has $620,000 in
marketable securities that yield 5% per year. What is the estimated annual opportunity cost of holding
the excess inventory?
A) $16,000 B) $100,000 C) $31,000 D) $47,000
Answer: A
Explanation: $320,000 x 5% = $16,000

23) Rubium Micro Devices currently manufactures a subassembly for its main product. The costs per unit
are as follows:

Direct materials $51.00

Direct labor 43.00
Variable overhead 38.00
Fixed overhead 33.00
Total $165.00
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Crayola Technologies Inc. has contacted Rubium with an offer to sell 10,000 of the subassemblies for
$138.00 each. Rubium will eliminate $89,000 of fixed overhead if it accepts the proposal. What are the
relevant costs for Rubium?
A) $929,000 B) $1,029,000 C) $1,409,000 D) $1,739,000
Answer: C
Explanation: The relevant costs for Rubium = [($51.00 + $43.00 + $38.00) × 10,000 + $89,000] = $1,409,000

24) Rubium Micro Devices currently manufactures a subassembly for its main product. The costs per unit
are as follows:

Direct materials $54.00

Direct labor 35.00
Variable overhead 40.00
Fixed overhead 34.00
Total $163.00

Crayola Technologies Inc. has contacted Rubium with an offer to sell 6,000 of the subassemblies for
$144.00 each. Rubium will eliminate $89,000 of fixed overhead if it accepts the proposal. Should Rubium
make or buy the subassemblies? What is the difference between the two alternatives?
A) Buy; savings = $89,000 B) Buy; savings = $7,000
C) Make; savings = $1,000 D) Make; savings = $203,000
Answer: C
Explanation: Cost to buy: 6,000 × $144.00 = $864,000
Cost to make: [($54.00 + $35.00 + $40.00) × 6,000 + $89,000] = $863,000
Cost savings = $864,000 - $863,000 = $1,000; make the subassemblies

25) A recent college graduate has the choice of buying a new car for $33,500 or investing the money for
four years with an 11% expected annual rate of return. He has an investment of $41,000 in equities and
bonds which yields 8% expected annual rate of return. If the graduate decides to purchase the car, the
best estimate of the opportunity cost of that decision is ________.
A) $3,280 B) $14,740 C) $41,000 D) $18,040
Answer: B
Explanation: $33,500 × 11% × 4 years = $14,740 cost of the opportunity not chosen.

26) A supplier offers to make Part A for $30. Altec Services Corporation has relevant costs of $47 a unit to
manufacture 1,020 units of Part A. If there is excess capacity, the opportunity cost of buying Part A from
the supplier is ________.
A) $0 B) $47,940 C) $30,600 D) $78,540
Answer: A
Explanation: The opportunity cost is $0 as there is excess capacity. They will not forgo any profit they can
make on other products if they making and selling any other products.

27) Altec Services Corporation has relevant costs of $46 per unit to manufacture 1,050 units of Part A. A current
supplier offers to make Part A for $33 per unit. Alternatively, the company can rent out the capacity for $30,000. If
capacity is constrained, the opportunity cost of buying Part A from the supplier is ________.
A) $0 B) $13,650 C) $43,650 D) $30,000
Answer: D
Explanation: Alternative rent income = $30,000
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28) Opportunity costs are not recorded in financial accounting systems because historical record keeping
is limited to transactions involving alternatives that managers actually selected rather than alternatives
that they rejected.
Answer: TRUE

29) For decision making, differential costs assist in choosing between alternatives.
Answer: TRUE

30) Differential revenue is the additional total revenue from an activity.

Answer: FALSE
Explanation: Incremental revenue is the additional total revenue from an activity. Differential revenue is
the difference in total revenue between two alternatives.

31) Differential revenue is the difference in total revenue between two alternatives.
Answer: TRUE

32) Outsourcing is purchasing from outside vendors parts and other goods instead of producing your
own and contracting for services instead of providing them yourself.
Answer: TRUE

33) Planet Furniture, Inc. is currently producing well below its full capacity. The Swansea Company has
approached Plant with an offer to buy 5,000 tools at $17.50 each. Planet sells its end table for $18.50 each;
the average cost per unit is $18.30, of which $2.70 is fixed costs. If Planet accepts the order, the increase in
operating income will be $7,500.

Answer: FALSE
Explanation: If Planet accepts the order, it will increase operating income by $9,500 ($17.50 - ($18.30 -
$2.70) x 5,000

34) Outsourcing is risk free to the manufacturer because the supplier now has the responsibility of
producing the part.
Answer: FALSE

35) Decisions about whether a producer of goods or services will insource or outsource are also called
make-or-buy decisions.
Answer: TRUE

36) In a make-or-buy decision when there are alternative uses for capacity, the opportunity cost of idle
capacity is relevant.
Answer: TRUE

37) An incremental cost is the difference in total irrelevant costs between two alternatives.
Answer: FALSE

38) Under the opportunity-cost approach, the relevant cost of any alternative is the incremental of the
alternative plus the opportunity cost of the profit foregone from choosing the alternative.
Answer: TRUE

39) When capacity is constrained, relevant costs equal incremental costs plus opportunity costs.
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Answer: TRUE

40) Incremental revenue is the sum of differential revenues of two alternatives.

Answer: FALSE

41) Under the opportunity cost approach, the cost of each alternative includes the incremental costs and
the opportunity cost.
Answer: TRUE

42) When capacity is constrained, the relevant revenues and costs of any alternative equal the incremental
future revenues and costs plus the opportunity cost.
Answer: TRUE

44) Rockford Company manufactures a part for use in its production of hats. When 10,000 items are
produced, the costs per unit are:

Direct materials $0.75

Direct manufacturing labor 3.00
Variable manufacturing overhead 1.50
Fixed manufacturing overhead 1.60
Total $6.85

Angel Company has offered to sell to Rockford Company 10,000 units of the part for $6.00 per unit. The
plant facilities could be used to manufacture another item at a savings of $9,000 if Rockford accepts the
offer. In addition, $1.00 per unit of fixed manufacturing overhead on the original item would be
eliminated.

Required:
a. What is the relevant per unit cost for the original part?
b. Which alternative is best for Rockford Company? By how much?
Answer:
a. Direct materials $0.75
Direct manufacturing labor 3.00
Variable manufacturing overhead 1.50
Avoidable fixed manufacturing. overhead 1.00
Total relevant per unit costs $6.25

b. Make Buy Effect of Buying

Purchase price $60,000 $(60,000)
Savings in space (9,000) 9,000
Direct materials $7,500 7,500
Direct mfg. labor 30,000 30,000
Variable overhead 15,000 15,000
Fixed overhead saved (10,000) 10,000
Totals $52,500 $41,000 $11,500

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Objective.4
7) Springer Products manufactures three different product lines, Model X, Model Y, and Model Z.
Considerable market demand exists for all models. The following per unit data apply:

Model X Model Y Model Z

Selling price $50 $66 $80
Direct materials 10 10 10
Direct labor ($15 per hour) 15 15 30
Variable support costs ($5 per machine-hour) 5 10 10
Fixed support costs 12 12 12

Which model has the greatest contribution margin per unit?

A) Model X
B) Model Y
C) Model Z
D) Both Model X and Model Y have the highest and same contribution margin per unit
Answer: B
Explanation: Model X $50 - $10 - $15 - $5 = $20
Model Y $66 - $10 - $15 - $10 = $31 highest
Model Z $80 - $10 - $30 - $10 = $30

8) Springer Products manufactures three different product lines, Model X, Model Y, and Model Z.
Considerable market demand exists for all models. The following per unit data apply:

Model X Model Y Model Z

Selling price $54 $62 $73
Direct materials 7 7 7
Direct labor ($17 per hour) 17 17 34
Variable support costs ($7 per machine-hour) 7 14 14
Fixed support costs 13 13 13

Which model has the greatest contribution margin per machine-hour?

A) Model X
B) Model Y
C) Model Z
D) Both Model X and Model Y have the highest and same contribution margin per machine-hour
Answer: A
Explanation: Model X $54 - $7 - $17 - $7 = $23 / 1 = $23 highest
Model Y $62 - $7 - $17 - $14 = $24 / 2 = $12
Model Z $73 - $7 - $34 - $14 = $18 / 2 = $9

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12) Kinnane's Fine Furniture manufactures two models, Standard and Premium. Weekly demand is
estimated to be 100 units of the Standard Model and 77 units of the Premium Model. The following per
unit data apply:

Standard Premium
Contribution margin per unit $24 $24
Number of machine-hours required 6 6

The contribution per machine-hour is ________.

A) $24 for Standard, $24 for Premium
B) $144 for Standard, $144 for Premium
C) $18 for Standard, $18 for Premium
D) $4 for Standard, $4 for Premium
Answer: D
Explanation: Standard $24 / 6 = $4; Premium $24 / 6 = $4

13) Kinnane's Fine Furniture manufactures two models, Standard and Premium. Weekly demand is
estimated to be 106 units of the Standard Model and 74 units of the Premium Model. The following per
unit data apply:

Standard Premium
Contribution margin per unit $21 $24
Number of machine-hours required 3 6

If there are 495 machine-hours available per week, how many rockers of each model should Kinnane
produce to maximize profits?
A) 106 units of Standard and 29 units of Premium
B) 17 units of Standard and 74 units of Premium
C) 106 units of Standard and 74 units of Premium
D) 83 units of Standard and 41 units of Premium
Answer: A
Explanation: Standard (106 units × 3 mh) + Premium (29 units × 6 mh) = 495 machine-hours of the
constrained resource

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19) Product-mix decisions usually have only a short-run focus because they typically arise in the context
of capacity constraints that can be relaxed in the long run.
Answer: TRUE

20) For short-run product-mix decisions, managers should focus on minimizing total fixed costs.
Answer: FALSE

21) For short-run product-mix decisions, maximizing contribution margin will also result in maximizing
operating income.
Answer: TRUE

22) To maximize profits, managers should produce more of the product with the greatest contribution
margin per unit of the constraining resource.
Answer: TRUE

23) When there is a constraining resource, a firm should attempt to maximize sales of the product or
service with the greatest contribution margin per unit.
Answer: FALSE

Objective.5
3) The objective of the Theory of Constraints is to increase throughput margin while increasing
investment in plant and equipment.
Answer: FALSE

5) Activity based costing (ABC) systems are less useful than the theory of constraints (TOC) for long-run
pricing, cost control, and capacity management.
Answer: FALSE

7) Genent's Preserves currently makes jams and jellies and a variety of decorative jars used for packaging.
An outside supplier has offered to supply all of the needed decorative jars. For this make-or-buy decision,
a cost analysis revealed the following avoidable unit costs for the decorative jars:

Direct materials $0.56

Direct labor 0.11
Unit-related support costs 0.24
Batch-related support costs 0.30
Product-sustaining support costs 0.53
Facility-sustaining support costs 0.56
Total cost per jar $2.3

The relevant cost per jar is ________.

A) $0.67 per jar
B) $0.91 per jar
C) $1.74 per jar
D) $2.30 per jar
Answer: D
Explanation: All avoidable costs are relevant for this decision.

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8) Genent's Preserves currently makes jams and jellies and a variety of decorative jars used for packaging.
An outside supplier has offered to supply all of the needed decorative jars. For this make-or-buy decision,
a cost analysis revealed the following avoidable unit costs for the decorative jars:

Direct materials $0.52

Direct labor 0.12
Unit-related support costs 0.23
Batch-related support costs 0.30
Product-sustaining support costs 0.49
Facility-sustaining support costs 0.60
Total cost per jar $2.26

The maximum price that Genent's Preserves should be willing to pay for the decorative jars is ________.
A) $0.64 per jar B) $0.87 per jar C) $0.49 per jar D) $2.26 per jar
Answer: D

9) Throughput margin is equal to revenues minus direct materials and direct labor of the cost of goods
sold.
Answer: FALSE

Objective.6

1) Which of the following is an irrelevant cost when considering where to drop a customer?
A) cost of goods sold B) marketing support C) depreciation
D) sales order and delivery processing
Answer: C

2) When deciding to lease a new cutting machine or continue using the old machine, the irrelevant cost is
________.
A) $50,000, cost of the old machine B) $20,000, cost of the new machine
C) $10,000, selling price of the old machine
D) $3,000, annual savings in operating costs if the new machine is purchased
Answer: A

7) A segment has the following data:

Sales $650,000
Variable costs 386,000
Fixed costs 365,500

What will be the incremental effect on net income if this segment is eliminated, assuming the fixed costs
will be allocated to profitable segments?
A) $284,500 increase
B) $386,000 decrease
C) $264,000 decrease
D) $365,500 decrease
Answer: C
Explanation: Change in net income = $650,000 - $386,000 = $264,000 decrease
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8) State Road Fabricators Inc. is considering eliminating Model A02777 because of losses over the past
quarter. The past three months of information for Model A02777 are summarized below:

Sales (1,100 units) $470,000

Manufacturing costs:
Direct materials 160,000
Direct labor ($15 per hour) 80,000
Overhead 150,000
Operating loss ($80,000)

Overhead costs are 75% variable and the remaining 25% is depreciation of special equipment for model
A02777 that has no resale value.

If Model A02777 is dropped from the product line, operating income will ________.
A) increase by $80,000
B) decrease by $117,500
C) increase by $37,500
D) decrease by $80,000
Answer: B
Explanation: $470,000 - $160,000 - $80,000 - $112,500 = $117,500 This product contributes $117,500 toward
corporate profits, therefore, discontinuing this product will decrease operating income by $117,500.

12) Overhead costs allocated to the sales office and individual customers are always relevant when
deciding whether to drop a customer.
Answer: FALSE

13) Avoidable variable and fixed costs should be considered relevant when deciding whether to
discontinue a product, product line, business segment, or customer.
Answer: TRUE

14) Depreciation allocated to a product line is a relevant cost when deciding to discontinue that product.
Answer: FALSE

15) In a decision as to whether or not to drop a product, fixed costs that have been allocated to that
product are generally not relevant unless there is a savings of fixed costs as a result of dropping the
product.
Answer: TRUE

16) A company is considering adding a fourth product to use available capacity. A relevant factor to
consider is that corporate costs can now be allocated over four products rather than only three.
Answer: FALSE

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