CHAPTER 6

RELEVANT INFORMATION AND DECISION MAKING: PRODUCTION DECISIONS TRUE / FALSE:
1. Opportunity costs need to be considered when deciding on the use of limited resources. T Opportunity cost depends on alternatives available at a point in time. T Opportunity costs and outlay costs are widely used synonyms. F Opportunity costs apply to resources that will be owned. F Outsourcing is a make-or-buy decision for services. T Qualitative factors do not affect a make-or-buy decision. F In a make-or-buy decision, if facilities are and will remain idle when the decision is made to not make a part internally, then the opportunity cost is zero. T The key reasons that companies outsource are to improve the company’s focus and reduce operating costs. T Past costs can be good predictors of future costs. T The cost of inventory is relevant when deciding whether to dispose of the inventory in cases of obsolescence. F The disposal value of old equipment is relevant. T Sunk cost is another term for historical cost or past cost. T When making a decision to replace some old equipment with new, the depreciation taken on both the old or new equipment is irrelevant information.
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2. 3. 4. 6. 7. 8.

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18. 19.

20. 21. 22.

000. c. 34. T MULTIPLE CHOICE: 35.000 $90. The interest income forgone by not selling the house and investing the proceeds is an example of a(n): a. opportunity cost Wholesome Company paid $130. F Equipment’s book value is the original cost plus depreciation. T The contribution margin is computed using variable manufacturing costs and variable selling and administrative costs.000 39. The annual contribution margin from oat sales is $60. Joe Smith has paid off the mortgage on his house and continues to live in the house. b. d.000. $130. b.000 for a machine used to mill oats. sunk cost opportunity cost depreciable cost outlay cost b.000 $60. $90. 25. b. The opportunity cost of producing wheat flour is: a. Future costs are relevant if they are the same under all feasible alternatives.F 24.000 b. opportunity cost 2 . The salary forgone by a person who quits a job to start a business is an example of a (n): a. The machine could be sold for $90. d. F Past costs may affect future payments for income taxes. c. c. 26. d.000 $30. 38. sunk cost detrimental cost opportunity cost outlay cost c.

000 . Sharon’s current salary is $83.$210.000 and $210. Annual ice cream shop revenue and costs are estimated at $250.000 b.000 $287.000) 3 .000 b. c. b. $85. d. b. $210. ________ is the opportunity cost of remaining employed. d. c. d. Janice’s current salary is $56. ____________ is the opportunity cost of opening the coffee shop.000 $40.000.000. a.000.000 $460. Janice is considering leaving her current position to open a coffee shop.000 and $210.000 43.000 = ($5.000 .000 $40. Annual music store revenue and costs are estimated at $250. Lynnette’s current salary is $77. c.000 $40.000 41. c.$45.000 $333.000 $210. the change in her annual income would be: a. respectively.000 $40.000 ($5.000.000 d.000 a. $77. Beyonce’s current salary is $45.000) ($250.000 and $210.000) $250. d.000 $210. Annual coffee shop revenue and costs are estimated at $250. $83. ($5.000. a.000 42. Sharon is considering leaving her current position to open a coffee shop. If Beyonce decides to open the music store.000. respectively. b.000 and $210. $40. respectively.000. Annual coffee shop revenue and costs are estimated at $250. $83.000 = $40. Lynnette is considering leaving her current position to open an ice cream shop. $56.40.000) . a. ___________ is the outlay cost associated with the decision to open the coffee shop.000 $210. respectively. b.$210.000 $250.000. Beyonce is considering leaving her current position to open a music store.

b. Scalding Corporation has offered to sell 5.000 units of this part are as follows: Direct materials Direct labor Variable factory overhead Fixed factory overhead Total costs $3 5 4 2 $14 The fixed factory overhead costs are unavoidable. Mad Cow Company manufactures a part for its production cycle. Assuming no other use of their facilities. b. the highest price that Mad Cow Company should be willing to pay for the part is: a. buy from Scalding Corporation to save $1 per unit make the part to save $1 per unit buy from Scalding Corporation to save $3 per unit make the part to save $3 per unit d.LEARNING OBJECTIVE 2 44. The costs per unit for 38.($3 + $5 + $4) = $3 Savings 45. Finch Company should: a.000 units of this part are as follows: Direct materials Direct labor Variable factory overhead Fixed factory overhead Total costs $3 5 4 3 $15 The fixed factory overhead costs are unavoidable. Finch Company manufactures a part for its production cycle. c. The costs per unit for 5. d. c. $12 $15 $8 $11 a.000 units of the same part to Finch Company for $15 a unit. $12 $3 + $5 + $4 = $12 4 . d. Assuming no other use for the facilities. make the part to save $3 per unit $15 .

The costs per unit for 5. The costs per unit for 5.$55.000 units of a product that would contribute $5 a unit to fixed expenses. Assume that Bull Company has been offered 5. buy the part to save $1 per unit Buy: (5. make the part to save $1 per unit buy the part to save $3 per unit buy the part to save $1 per unit make the part to save $3 per unit c.000 units of this part are as follows: Direct materials Direct labor Variable factory overhead Fixed factory overhead Total costs $3 5 4 2 $14 The fixed factory overhead costs are unavoidable. make the new product and buy the part to earn an extra $1 per unit contribution to profit c.000 x $15) .000 . make the new product and buy the part to earn an extra $3 per unit contribution to profit ($14 . continue to make the part to earn an extra $3 per unit contribution to profit a.000 units of this part are as follows: Direct materials Direct labor Variable factory overhead Fixed factory overhead Total costs $3 5 4 2 $14 The fixed factory overhead costs are unavoidable.000 Make: (5.000 x $12) = $60.46. Tender Company should: a. d. Bull Company should: a.$20. make the new product and buy the part to earn an extra $3 per unit contribution to profit b. Assume that Tender Company has been offered 5.000 units of the part from another producer for $14 each. c.000 a year.000 units of the part from another producer for $15 each.000) / 5.000 units = $1 per unit 47. The facilities currently used to make the part could be rented out to another manufacturer for $20. and ($60. b.000 = $55.$12 = $(3) 5 . continue to make the part to earn an extra $1 per unit contribution to profit d. The facilities currently used could be used to make 5. No additional fixed costs would be incurred. Bull Company manufactures a part for its production cycle. Tender Company manufactures a part for its production cycle.000.$5) .

Hoover Company should: a.48.000.000 = $1 6 . make the part to save $4 per unit b. Assume that Kennedy Company can buy 10.000 units of the part from another producer for $60 each. The costs per unit for 10.50 per unit make the part to save $1 per unit b. buy the part to save $2. and ($510. make the part to save $6 per unit d.000 units of this part are as follows: Direct materials Direct labor Variable factory overhead Fixed factory overhead Total costs $20 15 16 10 $61 The fixed factory overhead costs are unavoidable. Kennedy Company manufactures a part for its production cycle.000 .000 a year.000 x $51) = $510. buy from Madison to save $4 per unit a. Madison Company has offered to sell 10.000) / 10.$500.$100. b.000 = $500.000 units of the same part to Hoover Company for $55 a unit.000 x $60) .000.($20 + $15 + $16) = $4 Savings 50. d. Hoover Company manufactures a part for its production cycle. buy from Madison to save $6 per unit c. buy the part to save $1 per unit Buy: (10. The facilities currently used to make the part could be rented out to another manufacturer for $100.50 per unit buy the part to save $1 per unit make the part to save $2. Kennedy Company should: a. make the part to save $4 per unit $55 . The costs per unit for 10. Make: (10.000 units of this part are as follows: Direct materials Direct labor Variable factory overhead Fixed factory overhead Total costs $20 15 16 10 $61 The fixed factory overhead costs are unavoidable. c. Assuming no other use for the facilities.

000 72.($408. make the part to save $4. Hoopster Company should: a. The costs associated with the production of 5.000 + $72.40 per unit.000 = $408.000 $180.40 . The facilities currently used to manufacture the part could be used to manufacture a new product with an expected contribution margin of $30. Knight Company has offered to sell 5.000 .000.80 per unit d. Super Cooper Company currently produces a key part at a total cost of $210. Hoopster Company produces a part that is used in the manufacture of one of its products.000 Of the fixed factory overhead costs.000 make the part to save $4.000 vs. $210.$170.000 are avoidable.40 per unit buy the part to save $14. $10. d. $130.40 per unit buy the part to save the company $72. b.000 $190.$10.000 + $156.52.000 $190.000 + $72. c.80 7 .000 relate specifically to this part.000 156.000 = $130. $170. $72.000 56. b.000 $86.000 d.000.000 $504. the facilities could be rented out at $60. Variable costs are $170. Of the fixed cost. Alternately. a.000 units of the same part to Hoopster for $86.000 . d.000. Assuming there is no other use for the facilities.000) = $180.000 units of this part are as follows: Direct materials Direct labor Variable factory overhead Fixed factory overhead Total costs $108.000) = $4. Another manufacturer has offered to supply the part for $190.$60. ________________ is Super Cooper’s lowest net cost for the part. Given all of these alternatives.000 / 5.000.000.000 $130.000 .000 . make the part to save $14.80 per unit $108.($210. The remaining fixed costs are unavoidable. c.000 168.

000 $432.000 is avoidable. $432.$72.000 units of the part is: a. the highest price that Crenshaw Company should be willing to pay for 5.000 units of the part from another producer for $100. continue to make the part and earn an extra $4.57.000 72.000 156. The costs associated with the production of 5. $72. c. $72. continue to make the part and earn an extra $48. Fixed factory overhead costs to produce this new product would be exactly the same as for the currently produced part.000 = $100.000 in profit b.000 + ($168.000 Of the fixed factory overhead costs.80 . The costs associated with the production of 5.000 units of a product that has a contribution margin of $24 per unit.000 $336. Miller Company should: a. buy the part and produce the new product and earn an extra $24 per unit contribution to profit Buy: $100.000 + $72.000 $504. Assume that Miller Company can buy 5.000 72.000 + $156. Crenshaw Company produces a part that is used in the manufacture of one of its products.80 per unit contribution to profit d.000 Of the fixed factory overhead costs. d.000 168.000 $288.00 = $76.000) = $432. buy the part and produce the new product and earn an extra $4.80 each.000 units of this part are as follows: Direct materials Direct labor Variable factory overhead Fixed factory overhead Total costs $108.000 59. The current facilities could be used to make 5.000 $504.000 . $504.80 per unit contribution to profit c.80 8 .000 168.000 c.000 $108.000 is avoidable.$24. Miller Company produces a part that is used in the manufacture of one of its products. buy the part and produce the new product and earn an extra $24 per unit contribution to profit d.000 156.000 units of this part are as follows: Direct materials Direct labor Variable factory overhead Fixed factory overhead Total costs $108. Assuming no other use of their facilities.000 / 5. b.80 Make: $504.

d. d. b. a. _________________ would be a consideration in a make-or-buy decision. they differ between alternatives d. Inventory cost 83.60. b. Excess capacity Variable factory overhead Rental income from unused facilities All of these answers are correct. Variable manufacturing costs b. _____________________ is not likely to be relevant in a decision concerning the disposal of obsolete inventory. A key factor in a make-or-buy decision is: a. whether or not there are idle facilities the amount of the sunk costs gain or loss on the disposal of equipment the total joint costs a. 82. Future costs are relevant in decision making when: a. Long term relationship with suppliers d. Inventory cost Expected future revenues Scrap value of inventory Expected future costs a. a. they differ between alternatives 63. they are the same between alternatives c. Opportunity costs c. _____________________are a qualitative factor of a make-or-buy decision. c. Avoidable costs c. whether or not there are idle facilities 61. Long term relationship with suppliers 62. d. c. they exceed future revenues b. they are not based on estimates c.All of these answers are correct. c. ____________________ is relevant in a decision to replace equipment. a. 9 . b. d.

88. a. c.000 0 $17. the periodic cost of equipment spread over the future periods in which the equipment is expected to be used b.000 9 3 $33. Future maintenance costs of old equipment 84.000 Replacement Machine $88. a. d. The annual cash operating costs of the old machine The annual cash operating costs of the replacement machine The disposal value of the old machine The original cost of the old machine d. d. the periodic cost of equipment spread over the future periods in which the equipment is expected to be used 85. disposal value disposal value less accumulated depreciation cost less accumulated depreciation disposal value less original cost c. c. b. Book value is defined as: a. b. c.000 ___________________________________ is a sunk cost. The following data are available: Old Machine Original cost Useful life in years Current age in years Book value Disposal value now Disposal value in 5 years Annual cash operating costs $99. the difference between the original cost and current market value d. Depreciation is: a. Derwood Company is considering replacing a machine that is presently used in the production of its product. Cost of old equipment Book value of old equipment Depreciation accrued on old equipment Future maintenance costs of old equipment d. cost less accumulated depreciation 87.000 $28.a. the decline in equipment value due to obsolescence c. b. The original cost of the old machine Tabitha Company is considering replacing a machine that is presently used in the 10 . d.000 6 0 0 $14. All of these answers are correct.

000 in favor of replacing the old machine b.000 5 0 0 $4.$4.$35. d. $60.000 in favor of keeping the old machine [($7.000 The difference in cost between keeping the old machine and replacing the old machine.000 17 12 $39.000 + $8.000 x (10 years – 5 years) = $50.000 89. b.000) 11 .000 $30.000 b.000 10 5 $25.000 in favor of keeping the old machine $12. c.000 0 $10.000 .production of its product.000 $8. d. The following data are available: Old Machine Original cost Useful life in years Current age in years Book value Disposal value now Disposal value in 5 years Annual cash operating costs $60. $50.000 Replacement Machine $35.000 The total relevant costs to consider if the old machine is kept are: a.000 $10.000 0 $7. $22. ignoring income taxes. Major Nelson Company is considering replacing a machine that is presently used in the production of its product. The following data are available: Old Machine Original cost Useful life in years Current age in years Book value Disposal value now Disposal value in 5 years Annual cash operating costs $57. $12.000 in favor of keeping the old machine $37.000 $50.000 5 0 0 $4. c.000 in favor of replacing the old machine $22.000 Replacement Machine $35.000 $52. b.000) x 5] . is: a.000 = $($12.000 $8.

d.000 5 0 0 $34. The following data are available: Old Machine Original cost Useful life in years Current age in years Book value Disposal value now Disposal value in 5 years Annual cash operating costs ____________________________ is irrelevant. b.000 $132.000 c. a. The original cost of the replacement machine The disposal value of the old machine The book value of the old machine The annual operating cost of the old machine $295.000 5 0 0 $24.000 Replacement Machine $222. c. Jeannie Company is considering replacing a machine that is presently used in the production of its product. The book value of the old machine 91.000 $52.000 0 $45. Tony Company is considering replacing a machine that is presently used in the production of its product. The disposal value of the old machine The original cost of the old machine The annual cash operating costs of the old machine The annual cash operating costs of the replacement machine $333. c. b. The original cost of the old machine 12 .000 b. d. a.000 6 1 $198. The following data are available: Old Machine Original cost Useful life in years Current age in years Book value Disposal value now Disposal value in 5 years Annual cash operating costs __________________________ is a sunk cost.90.000 11 6 $130.000 Replacement Machine $188.000 0 $39.

c.000 0 $20. The gain or loss on the disposal of equipment is determined by: a. a. subtracting the book value from the cash received for the old equipment 94. d.000 .$14.$160.000) 93.000 = $(98. ____________ is a false statement. d.000 + $32. $98. the disposal value of the old equipment is irrelevant 13 .000 in favor of the new machine $40. $98. adding the book value of the old equipment to the cost of the new equipment adding the disposal value and the book value of the old equipment subtracting the book value from the cash received for the old equipment subtracting the book value of the old equipment from the cost of the new equipment c. d. the difference in cost between the old and new machine is: a.000 Replacement Machine $160. c.92. Cocoa Beach Company is considering replacing a machine that is presently used in the production of its product.000 in favor of the old machine $98.000 $32. b.000 in favor of the new machine a. c.000 5 0 0 $14. b.000 Ignoring income taxes. b.000 in favor of the old machine [($20.000 10 5 $100. In a decision to keep or replace existing equipment.000) x 5] . the disposal value of the old equipment is irrelevant the book value of the old equipment is irrelevant the cost of the new equipment is relevant depreciation on the new equipment is relevant a. The following data are available: Old Machine Original cost Useful life in years Current age in years Book value Disposal value now Disposal value in 5 years Annual cash operating costs $200.000 in favor of the new machine $12.

c. Past costs that are unavoidable and unchangeable are known as: a. the unit cost will: a.000) .000) = $2 99. decrease by $2 per unit ($200. increase by $35. If production increases from 20. c.000 / 25. b. sunk costs 14 .000) – ($200. increase by $1 ($200.000 decrease by $8 per unit decrease by $2 per unit not change c. $19 $7 + ($240.000 units. b. the cost per unit will: a.000 units to 25. ___________ is the cost per unit if 20. d. a. d. Melissa Company produces and sells a product that has variable costs of $7 per unit and fixed costs of $240.000 / 50.000 / 40. b. Geren Company produces and sells a product that has variable costs of $9 per unit and fixed costs of $200.000) = $19 98.000 per year.000 / 20. fixed overhead costs operating costs product production costs sunk costs d.($200. If production decreases from 50.000 units. a. increase by $1 decrease by $1 increase to $13 decrease to $14 a.000 per year.000 / 20. d. c.000) = $1 96.000 per year. b. c.000 units per year are produced and sold.000 to 40.95. $7 $19 $5 $12 b. Joshua Company produces and sells a product that has variable costs of $7 per unit and fixed costs of $200.

000 -__ $90.000 $81.000 0 $15.000 45. Ignore income taxes.000 $60.000 The $9. Answer: Keep Cash operating costs Disposal value of old equipment New equipment. The Cyclone Corporation is contemplating the replacement of some old equipment.000 Replace $66.000 6 0 0 $11. Comment on the best alternative for Cyclone Corporation.138. acquisition cost Total relevant costs $90.000 Difference $24.000 (45. 15 .000) $9. The pertinent information is as follows: Old Replacement Equipment Equipment Original cost Useful life in years Current age in years Book value Disposal value now Disposal value in 6 years Annual cash operating costs Required: Prepare a cost comparison of all relevant items for the next six years together.000 (60.000 13 7 $57.000) 60.000 cumulative effect over the six years favors replacing the old equipment.000 $93.000 $45.

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