CHAPTER 11: DECISION MAKING AND RELEVANT INFORMATION TRUE/FALSE 1.

A decision model is a formal method for making a choice, frequently involving both quantitative and qualitative analyses. Answer: 2. True Difficulty: 1 Objective: 1

Feedback from previous decisions uses historical information and, therefore, is irrelevant for making future predictions. Answer: False Difficulty: 2 Objective: 1 istorical costs may be helpful in making future predictions, but are not relevant costs for decision making.

!.

The amount paid to purchase tools last month is an e"ample of a sunk cost. Answer: True Difficulty: 2 Objective: 2

#.

For decision making, differential costs assist in choosing bet$een alternatives. Answer: True Difficulty: 1 Objective: 2

%.

For a particular decision, differential revenues and differential costs are al$ays relevant. Answer: True Difficulty: 1 Objective: 2

&.

A cost may be relevant for one decision, but not relevant for a different decision. Answer: True Difficulty: 2 Objective: 2

'.

(evenues that remain the same for t$o alternatives being e"amined are relevant revenues. Answer: False Difficulty: 1 Objective: 2 (evenues that remain the same bet$een t$o alternatives are irrelevant for that decision since they do not differ bet$een alternatives.

).

*unk costs are past costs that are unavoidable. Answer: True Difficulty: 1 Objective: 2

+.

,uantitative factors are al$ays e"pressed in numerical terms. Answer: True Difficulty: 2 Objective: !

-hapter 11

.age 1

1/.

,ualitative factors are outcomes that are measured in numerical terms, such as the costs of direct labor. Answer: False Difficulty: 1 Objective: ! Quantitative factors are outcomes that are measured in numerical terms, such as the costs of direct labor.

11.

0f a manufacturer chooses to continue purchasing direct materials from a supplier because of the ongoing relationship that has developed over the years, the decision is based on qualitative factors. Answer: True Difficulty: 2 Objective: !

12.

(elevant revenues and relevant costs are the only information managers need to select among alternatives. Answer: False Difficulty: ! Objective: ! ,ualitative factors, as $ell as relevant revenues and relevant costs need to be considered $hen selecting among alternatives.

1!.

Full costs of a product are relevant for one1time1only special order pricing decisions. Answer: False Difficulty: 2 Objective: ! 0ncremental costs of a product are relevant for one1time1only special order pricing decisions.

1#.

Full costs of a product include variable costs, but not fi"ed costs. Answer: False Difficulty: 1 Objective: ! Full costs of a product include variable and fi"ed costs for all business functions in the value chain.

1%.

For one1time1only special orders, variable costs may be relevant but not fi"ed costs. Answer: True Difficulty: 2 Objective: !

1&.

The price quoted for a one1time1only special order may be less than the price for a long1term customer. Answer: True Difficulty: 2 Objective: !

1'.

2id prices and costs that are relevant for regular orders are the same costs that are relevant for one1time1only special orders. Answer: False Difficulty: 2 Objective: ! *ince long1term costs are relevant for regular orders and short1term costs are relevant for one1time1only special orders, the relevant costs differ.

-hapter 11

.age 2

1).

An incremental product cost is generally a fi"ed cost. Answer: False Difficulty: 1 An incremental product cost is generally a variable cost. Objective: #

1+.

0f 3ption 1 costs 41// and 3ption 2 costs 4)/, then the differential cost is 41)/. Answer: False Difficulty: 1 Objective: # 0f 3ption 1 costs 41// and 3ption 2 costs 4)/, then the differential cost is 42/.

2/.

.roducing another 1/,/// units may increase the fi"ed cost of rent. Answer: True Difficulty: ! Objective: # True, if additional capacity must be added to accommodate the additional production needs.

21.

Absorption cost per unit is the best product cost to use for one1time1only special order decisions. Answer: False Difficulty: 2 Objective: # 5ariable cost per unit is the best cost to use for one1time1only special order decisions.

22.

*ometimes qualitative factors are the most important factors in make1or1buy decisions. Answer: True Difficulty: 2 Objective: #

2!.

0f a company is deciding $hether to outsource a part, the reliability of the supplier is an important factor to consider. Answer: True Difficulty: 2 Objective: #

2#.

3utsourcing is risk free to the manufacturer because the supplier no$ has the responsibility of producing the part. Answer: False Difficulty: 2 Objective: # 3utsourcing has risks since the manufacturer is dependent on the supplier for a quality product, delivered in a timely manner, for a reasonable price.

2%.

6hen a firm ma"imi7es profits it $ill simultaneously minimi7e opportunity costs. Answer: True Difficulty: ! Objective: %

2&.

0n a make1or1buy decision $hen there are alternative uses for capacity, the opportunity cost of idle capacity is relevant. Answer: True Difficulty: ! Objective: %

-hapter 11

.age !

2'.

6hen opportunity costs e"ist, they are al$ays relevant. Answer: True Difficulty: ! Objective: %

2).

6hen capacity is constrained, relevant costs equal incremental costs plus opportunity costs. Answer: True Difficulty: 2 Objective: %

2+.

0f the 41',/// spent to purchase inventory could be invested and earn interest of 41,///, then the opportunity cost of holding inventory is 41',///. Answer: False Difficulty: 2 The opportunity cost of holding inventory is 41,///. Objective: %

!/.

The choice is not really $hether to make or buy, but rather ho$ to best utili7e available production capacity. Answer: True Difficulty: 1 Objective: %

!1.

For short1run product1mi" decisions, managers should focus on minimi7ing total fi"ed costs. Answer: False Difficulty: 2 Objective: & For short1run product mi" decisions, managers should focus on maximizing total contribution margin.

!2.

For short1run product1mi" decisions, ma"imi7ing contribution margin $ill also result in ma"imi7ing operating income. Answer: True Difficulty: 2 Objective: &

!!.

(egardless of the restraining resource, to ma"imi7e profits managers should produce more of the product $ith the greatest contribution margin per unit. Answer: False Difficulty: 2 Objective: & To ma"imi7e profits, managers should produce more of the product $ith the greatest contribution margin per unit of the constraining resource.

!#.

8anagement should focus on per unit costs $hen deciding $hether to discontinue a product or not. Answer: False Difficulty: 2 Objective: ' 8anagement should focus on total costs $hen deciding $hether to discontinue a product or not.

-hapter 11

.age #

!%.

Avoidable variable and fi"ed costs should be evaluated $hen deciding $hether to discontinue a product, product line, business segment, or customer. Answer: True Difficulty: 2 Objective: '

!&.

9epreciation allocated to a product line is a relevant cost $hen deciding to discontinue that product. Answer: False Difficulty: 2 9epreciation is a sunk cost and never relevant. Objective: '

!'.

A company is considering adding a fourth product to use available capacity. A relevant factor to consider is that corporate costs can no$ be allocated over four products rather than only three. Answer: False Difficulty: ! Objective: ' 0t appears that corporate costs $ill not change in total, and therefore are not relevant costs for deciding $hether to add a fourth product.

!).

6hen replacing an old machine $ith a ne$ machine, the purchase price of the ne$ machine is a relevant cost. Answer: True Difficulty: 1 Objective: )

!+.

6hen replacing an old machine $ith a ne$ machine, the book value of the old machine is a relevant cost. Answer: False Difficulty: 1 Objective: ) The original price of the old machine is a past cost and therefore an irrelevant cost.

#/.

(eplacing an old machine $ill increase operating income in the long run, but not for this year. A manager may choose not to replace the machine if performance evaluations are based on performance over a single year. Answer: True Difficulty: 2 Objective: +

#1.

:inear programming is a tool that ma"imi7es total contribution margin of a mi" of products $ith multiple constraints. Answer: True Difficulty: 1 Objective: A

-hapter 11

.age %

MULTIPLE CHOICE #2. Feedback regarding previous actions may affect a. future predictions. b. implementation of the decision. c. the decision model. d. all of the above. Answer: #!. d Difficulty: 2 Objective: 1

.lace the follo$ing steps from the five1step decision process in order: A ; 8ake predictions about future costs 2 ; <valuate performance to provide feedback - ; 0mplement the decision 9 ; -hoose an alternative a. 9-A2 b. -9A2 c. A9-2 d. 9-2A Answer: c Difficulty: 2 Objective: 1

##.

The formal process of choosing bet$een alternatives is kno$n as a. a relevant model. b. a decision model. c. an alternative model. d. a prediction model. Answer: b Difficulty: 1 Objective: 1

#%.

(uggles -ircuit -ompany manufactures circuit boards for other firms. 8anagement is attempting to search for $ays to reduce manufacturing labor costs and has received a proposal from a consulting company to rearrange the production floor ne"t year. =sing the information belo$ regarding current operations and the ne$ proposal, $hich of the follo$ing decisions should management accept> (equired machine operators 8aterials1handling $orkers <mployee average pay ours $orked per employee a. b. c. d. Currently % 1.2% 4) per hour 2,1// Propose #.% 1.2% 4+ per hour 2,///

9o not change the production floor. (earrange the production floor. <ither, because it makes no difference to the employees. 0t doesn?t matter because the costs incurred $ill remain the same. 1

Answer: b Difficulty: 2 Objective: -urrent operations: % $orkers " 2,1// hours " 4).// ; 4)#,/// .roposal: #.% $orkers " 2,/// hours " 4+.// ; 4)1,///
-hapter 11 .age &

T < F3::360@A 0@F3(8AT03@ A..:0<* T3 ,=<*T03@* #& A@9 #'. :e2lanc :ighting manufactures small flashlights and is considering raising the price by %/ cents a unit for the coming year. 6ith a %/1cent price increase, demand is e"pected to fall by !,/// units. Currently Pro!e"te 9emand 2/,/// units 1',/// units *elling price 4#.%/ 4%.// 0ncremental cost per unit 4!.// 4!.// #&. 0f the price increase is implemented, operating profit is proBected to a. increase by 4#,///. b. decrease by 4#,///. c. increase by 4&,///. d. decrease by 4#,%//. Answer: a Difficulty: 2 Objective: C1',/// " D4% 1 4!EF G C2/,/// " D4#.%/ 1 4!.//EF ; increase of 4#,/// #'. 6ould you recommend the %/1cent price increase> a. @o, because demand decreased. b. @o, because the selling price increases. c Hes, because contribution margin per unit increases. d. Hes, because operating profits increase. Answer: #). d Difficulty: 2 Objective: 1 1

For decision making, a listing of the relevant costs a. $ill help the decision maker concentrate on the pertinent data. b. $ill only include future costs. c. $ill only include costs that differ among alternatives. d. should include all of the above. Answer: d Difficulty: 2 Objective: 2

#+.

*unk costs a. are relevant. b. are differential. c. have future implications. d. are ignored $hen evaluating alternatives. Answer: d Difficulty: 1 Objective: 2

%/.

A computer system installed last year is an e"ample of a. a sunk cost. b. a relevant cost. c. a differential cost. d. an avoidable cost. Answer: a Difficulty:
-hapter 11

1
.age '

Objective:

2

%1.

-osts that -A@@3T be changed by any decision made no$ or in the future are a. fi"ed costs. b. indirect costs. c. avoidable costs. d. sunk costs. Answer: d Difficulty: 1 Objective: 2

%2.

0n evaluating different alternatives, it is useful to concentrate on a. variable costs. b. fi"ed costs. c. total costs. d. relevant costs. Answer: d Difficulty: 1 Objective: 2

%!.

6hich of the follo$ing costs al$ays differ among future alternatives> a. Fi"ed costs b. istorical costs c. (elevant costs d. 5ariable costs Answer: c Difficulty: 1 Objective: 2

%#.

6hich of the follo$ing costs are never relevant in the decision1making process> a. Fi"ed costs b. istorical costs c. (elevant costs d. 5ariable costs Answer: b Difficulty: 1 Objective: 2

T < F3::360@A 0@F3(8AT03@ A..:0<* T3 ,=<*T03@* %% A@9 %&. IimJs %1year1old Aeo .ri7m requires repairs estimated at 4!,/// to make it road$orthy again. is friend, Iulie, suggested that he should buy a %1year1old used onda -ivic instead for 4!,/// cash. Iulie estimated the follo$ing costs for the t$o cars: Acquisition cost (epairs Annual operating costs DAas, maintenance, insuranceE %%. Geo Pr#$% 41%,/// 4 !,/// 4 2,2)/ Hon & C#'#" 4!,/// 111 42,1//

The cost @3T relevant for this decision isDareE a. the acquisition cost of the Aeo .ri7m. b. the acquisition cost of the onda -ivic. c. the repairs to the Aeo .ri7m. d. the annual operating costs of the onda -ivic. Answer: a Difficulty:
-hapter 11

2
.age )

Objective:

2

%&.

6hat should Iim do> 6hat are his savings in the first year> a. 2uy the onda -ivicK 4+,')/ b. Fi" the Aeo .ri7mK 4%,%1) c. 2uy the onda -ivicK 41)/ d. Fi" the Aeo .ri7mK 4%,2)/ Answer: c Difficulty: 2 Objective: 2 Aeo D4!,/// L 42,2)/E 1 onda D4!,/// L 42,1//E ; 41)/ cost savings $ith the onda option

%'.

,uantitative factors a. include financial information, but not nonfinancial information. b. can be e"pressed in monetary terms. c. are al$ays relevant $hen making decisions. d. include employee morale. Answer: b Difficulty: 2 Objective: !

%).

,ualitative factors a. generally are easily measured in quantitative terms. b. are generally irrelevant for decision making. c. may include either financial or nonfinancial information. d. include customer satisfaction. Answer: d Difficulty: 2 Objective: !

%+.

istorical costs are helpful a. for making future predictions. b. for decision making. c. because they are quantitative. d. $ith none of the above. Answer: a Difficulty: 2 Objective: !

&/.

6hen making decisions a. quantitative factors are the most important. b. qualitative factors are the most important. c. appropriate $eight must be given to both quantitative and qualitative factors. d. both quantitative and qualitative factors are unimportant. Answer: c Difficulty: 2 Objective: !

-hapter 11

.age +

&1.

<mployee morale at 9os *antos, 0nc., is very high. This type of information is kno$n as a. a qualitative factor. b. a quantitative factor. c. a nonmeasurable factor. d. a financial factor. Answer: a Difficulty: 1 Objective: !

&2.

(oberto o$ns a small body shop. is maBor costs include labor, parts, and rent. 0n the decision1making process, these costs are considered to be a. fi"ed. b. qualitative factors. c. quantitative factors. d. variable. Answer: c Difficulty: 1 Objective: !

&!.

3ne1time1only special orders should only be accepted if a. incremental revenues e"ceed incremental costs. b. differential revenues e"ceed variable costs. c. incremental revenues e"ceed fi"ed costs. d. total revenues e"ceed total costs. Answer: a Difficulty: ! Objective: !

&#.

6hen deciding to accept a one1time1only special order from a $holesaler, management should do all <M-<.T a. analy7e product costs. b. consider the special orderJs impact on future prices of their products. c. determine $hether e"cess capacity is available. d. verify past design costs for the product. Answer: d Difficulty: ! Objective: !

&%.

6hen there is e"cess capacity, it makes sense to accept a one1time1only special order for less than the current selling price $hen a. incremental revenues e"ceed incremental costs. b. additional fi"ed costs must be incurred to accommodate the order. c. the company placing the order is in the same market segment as your current customers. d. it never makes sense. Answer: a Difficulty: ! Objective: !

-hapter 11

.age 1/

T < F3::360@A 0@F3(8AT03@ A..:0<* T3 ,=<*T03@* && T (3=A &+.
6elch 8anufacturing is approached by a <uropean customer to fulfill a one1time1only special order for a product similar to one offered to domestic customers. 6elch 8anufacturing has e"cess capacity. The follo$ing per unit data apply for sales to regular customers: Variable costs: 9irect materials 4#/ 9irect labor 2/ 8anufacturing support !% 8arketing costs 1% Fixe costs: 8anufacturing support #% 8arketing costs 1% Total costs 1'/ 8arkup D%/NE )% Targeted selling price 42%%

&&.

6hat is the full cost of the product per unit> a. 411/ b. 41'/ c. 42%% d. 4)% Answer: b Difficulty: ! Objective: !
4#/ L 42/ L 4!% L 41% L 4#% L 41% ; 41'/

&'.

6hat is the contribution margin per unit> a. 4)% b. 411/ c. 41#% d. 42%% Answer: c Difficulty: ! Objective: !
42%% G D4#/ L 42/ L 4!% L 41%E ; 41#%

&).

For 6elch 8anufacturing, $hat is the minimum acceptable price of this special order> a. 411/ b. 41#% c. 41'/ d. 42%% Answer: a Difficulty: ! Objective: !
4#/ L 42/ L 4!% L 41% ; 411/

&+.

6hat is the change in operating profits if the 1,/// unit one1time1only special order is accepted for 41)/ a unit by 6elch> a. 4'/,/// increase in operating profits b. 41/,/// increase in operating profits c. 41/,/// decrease in operating profits d. 4'%,/// decrease in operating profits Answer: a Difficulty: ! Objective: !
41)/ G D4#/ L 42/ L 4!% L 41%E ; 4'/K 1,/// " 4'/ ; 4'/,/// increase
-hapter 11 .age 11

'/.

(at7laff -ompany has a current production level of 2/,/// units per month. =nit costs at this level are: 9irect materials 9irect labor 5ariable overhead Fi"ed overhead 8arketing 1 fi"ed 8arketingOdistribution 1 variable 4/.2% /.#/ /.1% /.2/ /.2/ /.#/

-urrent monthly sales are 1),/// units. Iim -ompany has contacted (at7laff -ompany about purchasing 1,%// units at 42.// each. -urrent sales $ould not be affected by the one1time1only special order, and variable marketingOdistribution costs $ould not be incurred on the special order. 6hat is (at7laff -ompanyJs change in operating profits if the special order is accepted> a. 4#// increase in operating profits b. 4#// decrease in operating profits c. 41,)// increase in operating profits d. 41,)// decrease in operating profits Answer: c Difficulty: ! 8anufacturing cost per unit ; 4/.2% L 4/.#/ L 4/.1% ; 4/.)/ 1,%// " D42.// 1 4/.)/E ; 41,)// increase '1. Objective: !

2lack Tool -ompany has a production capacity is 1,%// units per month, but current production is only 1,2%/ units. The manufacturing costs are 4&/ per unit and marketing costs are 41& per unit. 9oug all offers to purchase 2%/ units at 4'& each for the ne"t five months. *hould 2lack accept the one1time1only special order if only absorption1 costing data are available> a. Hes, good customer relations are essential. b. @o, the company $ill only break even. c. @o, since only the employees $ill benefit. d. Hes, since operating profits $ill most likely increase. Answer: d Difficulty: ! Objective: ! *ince the 4&/ absorption cost per unit is most likely not all variable costs and since the entire 41& per unit of marketing costs may not be incurred, operating profits $ill most likely increase.

-hapter 11

.age 12

T < F3::360@A 0@F3(8AT03@ A..:0<* T3 ,=<*T03@* '2 T (3=A '%. ArantJs Pitchens is approached by 8s. Tammy 6ang, a ne$ customer, to fulfill a large one1 time1only special order for a product similar to one offered to regular customers. The follo$ing per unit data apply for sales to regular customers: 9irect materials 9irect labor 5ariable manufacturing support Fi"ed manufacturing support Total manufacturing costs 8arkup D&/NE Targeted selling price 4#%% !// #% 1// +// %#/ 41##/

ArantJs Pitchens has e"cess capacity. 8s. 6ang $ants the cabinets in cherry rather than oak, so direct material costs $ill increase by 4!/ per unit. '2. For ArantJs Pitchens, $hat is the minimum acceptable price of this one1time1only special order> a. 4)!/ b. 4+!/ c. 4')% d. 41##/ Answer: a Difficulty: 4#%% L 4!// L 4#% L 4!/ ; 4)!/ '!. 2 Objective: !

3ther than price, $hat other items should ArantJs Pitchens consider before accepting this one1time1only special order> a. (eaction of shareholders b. (eaction of e"isting customers to the lo$er price offered to 8s. 6ang c. 9emand for cherry cabinets d. .rice is the only consideration. Answer: b Difficulty: 2 Objective: !

'#.

0f 8s. 6ang $anted a long1term commitment for supplying this product, this analysis a. $ould definitely be different. b. may be different. c. $ould not be different. d. does not contain enough information to determine if there $ould be a difference. Answer: a Difficulty: 2 Objective: !

'%.

0f there $as limited capacity, all of the follo$ing amounts $ould change <M-<.T a. opportunity costs. b. differential costs. c. variable costs. d. the minimum acceptable price. Answer: c Difficulty:
-hapter 11

!

Objective:

%

.age 1!

T < F3::360@A 0@F3(8AT03@ A..:0<* T3 ,=<*T03@* '& A@9 ''. @orth$oods manufactures rustic furniture. The cost accounting system estimates manufacturing costs to be 4+/ per table, consisting of )/N variable costs and 2/N fi"ed costs. The company has surplus capacity available. 0t is @orth$oodsJ policy to add a %/N markup to full costs. '&. @orth$oods is invited to bid on a one1time1only special order to supply 1// rustic tables. 6hat is the lo$est price @orth$oods should bid on this special order> a. 4&,!// b. 4',2// c. 4+,/// d. 41!,%// Answer: b Difficulty: 4+/ " )/N " 1// tables ; 4',2// ''. 2 Objective: !

A large hotel chain is currently e"panding and has decided to decorate all ne$ hotels using the rustic style. @orth$oods 0ncorporated is invited to submit a bid to the hotel chain. 6hat is the lo$est price per unit @orth$oods should bid on this long1term order> a. 4&! b. 4'2 c. 4+/ d. 41!% Answer: d 4+/ L D4+/ " %/NE ; 41!% Difficulty: 2 Objective: !

').

-ochran -orporation has a plant capacity of 1//,/// units per month. =nit costs at capacity are: 9irect materials 4#.// 9irect labor &.// 5ariable overhead !.// Fi"ed overhead 1.// 8arketing 1 fi"ed '.// 8arketingOdistribution 1 variable !.&/ -urrent monthly sales are +%,/// units at 4!/.// each. *u7ie, 0nc., has contacted -ochran -orporation about purchasing 2,/// units at 42#.// each. -urrent sales $ould not be affected by the one1time1only special order. 6hat is -ochranJs change in operating profits if the one1time1only special order is accepted> a. 41#,)// increase b. 41',2// increase c. 422,/// increase d. 4!!,2// increase Answer: a Difficulty: ! D4#.// L &.// L !.// L !.&/E ; 41&.&/ D42#.// G 1&.&/E " 2,/// ; 41#,)// increase Objective: !

-hapter 11

.age 1#

'+.

The sum of all the costs incurred in a particular business function Dfor e"ample, marketingE is called the a. business function cost. b. full product cost. c. gross product cost. d. multiproduct cost. Answer: a Difficulty: 1 Objective: !

)/.

The sum of all costs incurred in all business functions in the value chain Dproduct design, manufacturing, marketing, and customer service, for e"ampleE is kno$n as the a. business cost. b. full product cost. c. gross product cost. d. multiproduct cost. Answer: b Difficulty: 1 Objective: !

)1.

.roblems that should be avoided $hen identifying relevant costs include all <M-<.T a. assuming all variable costs are relevant. b. assuming all fi"ed costs are irrelevant. c. using unit costs that do not separate variable and fi"ed components. d. using total costs that separate variable and fi"ed components. Answer: d Difficulty: 2 Objective: #

)2.

The 2<*T $ay to avoid misidentification of relevant costs is to focus on a. e"pected future costs that differ among the alternatives. b. historical costs. c. unit fi"ed costs. d. total unit costs. Answer: a Difficulty: 2 Objective: #

)!.

Factors used to decide $hether to outsource a part include a. the supplierJs cost of direct materials. b. if the supplier is reliable. c. the original cost of equipment currently used for production of that part. d. past design costs used to develop the current composition of the part. Answer: b Difficulty: 2 Objective: #

)#.

(elevant costs of a make1or1buy decision include all <M-<.T a. fi"ed salaries that $ill not be incurred if the part is outsourced. b. current direct material costs of the part. c. special machinery for the part that has no resale value. d. material1handling costs that can be eliminated. Answer: c Difficulty:
-hapter 11

!

Objective:

#

.age 1%

)%.

6hich of follo$ing are risks of outsourcing the production of a part> a. =npredictable quality b. =nreliable delivery c. =nscheduled price increases d. All of the above are risks of outsourcing. Answer: d Difficulty: 1 Objective: #

)&.

6hich of the follo$ing minimi7e the risks of outsourcing> a. The use of short1term contracts that specify price b. The responsibility for on1time delivery is no$ the responsibility of the supplier c. 2uilding close relationships $ith the supplier d. All of the above minimi7e the risks of outsourcing. Answer: c Difficulty: ! Objective: #

)'.

The cost to produce .art A $as 41/ per unit in 2/"! and in 2/"# has increased to 411 per unit. 0n 2/"#, *upplier MHQ has offered to supply .art A for 4+ per unit. For the make1or1buy decision, a. incremental revenues are 42 per unit. b. incremental costs are 41 per unit. c. net relevant costs are 41 per unit. d. differential costs are 42 per unit. Answer: d Difficulty: 2 Objective: #

)).

6hen evaluating a make1or1buy decision, $hich of the follo$ing does @3T need to be considered> a. Alternative uses of the production capacity b. The original cost of the production equipment c. The quality of the supplier?s product d. The reliability of the supplier?s delivery schedule Answer: b Difficulty: 2 Objective: #

)+.

For make1or1buy decisions, a supplier?s ability to deliver the item on a timely basis is considered a. a qualitative factor. b. a relevant cost. c. a differential factor. d. an opportunity cost. Answer: a Difficulty: 1 Objective: #

-hapter 11

.age 1&

+/.

The incremental costs of producing one more unit of product include all of the follo$ing <M-<.T a. direct materials. b. direct labor. c. variable overhead costs. d. fi"ed overhead costs. Answer: d Difficulty: 2 Objective: #

+1.

9irect materials 4#/, direct labor 41/, variable overhead costs 4!/, and fi"ed overhead costs 42/. 0n the short term, the incremental cost of one unit is a. 4!/. b. 4%/. c. 4)/. d. 41//. Answer: c Difficulty: 2 Objective: #

+2.

=nit cost data can 83*T mislead decisions by a. not computing fi"ed overhead costs. b. computing labor and materials costs only. c. computing administrative costs. d. not computing unit costs at the same output level. Answer: d Difficulty: 1 Objective: #

+!.

*chmidt *e$ing -ompany incorporates the services of 9eb?s *e$ing. *chmidt purchases pre1cut dresses from 9eb?s. This is primarily kno$n as a. insourcing. b. outsourcing. c. relevant costing. d. sunk costing. Answer: b Difficulty: 1 Objective: #

+#.

.earce *ign -ompany manufactures signs from direct materials to the finished product. This is considered a. insourcing. b. outsourcing. c. relevant costing. d. sunk costing. Answer: a Difficulty: 1 Objective: #

+%.

6hich of the follo$ing $ould @3T be considered in a make1or1buy decision> a. Fi"ed costs that $ill no longer be incurred b. 5ariable costs of production c. .otential rental income from space occupied by the production area d. =nchanged supervisory costs Answer: d Difficulty: 2 Objective: #

-hapter 11

.age 1'

T < F3::360@A 0@F3(8AT03@ A..:0<* T3 ,=<*T03@* +& T (3=A +). PonradeJs <ngine -ompany manufactures part T<#%& used in several of its engine models. 8onthly production costs for 1,/// units are as follo$s: 9irect materials 9irect labor 5ariable overhead costs Fi"ed overhead costs Total costs 4 #/,/// 1/,/// !/,/// 2/,/// 41//,///

0t is estimated that 1/N of the fi"ed overhead costs assigned to T<#%& $ill no longer be incurred if the company purchases T<#%& from the outside supplier. PonradeJs <ngine -ompany has the option of purchasing the part from an outside supplier at 4)% per unit. +&. 0f PonradeJs <ngine -ompany accepts the offer from the outside supplier, the monthly avoidable costs Dcosts $ill no longer be incurredE total a. 4 )2,///. b. 4 +),///. c. 4 %/,///. d. 41//,///. Answer: a Difficulty: 2 4#/,/// L 41/,/// L 4!/,/// L D42/,/// " 1/NE ; 4)2,/// +'. Objective: #

0f PonradeJs <ngine -ompany purchases 1,/// T<#%& parts from the outside supplier per month, then its monthly operating income $ill a. increase by 42,///. b. increase by 4)/,///. c. decrease by 4!,///. d. decrease by 4)%,///. Answer: c Difficulty: 2 Objective: Avoidable costs 4)2,/// G D4)% " 1,/// unitsE ; decrease of 4!,/// #

+).

The maximum price that PonradeJs <ngine -ompany should be $illing to pay the outside supplier is a. 4)/ per T<#%& part. b. 4)2 per T<#%& part. c. 4+) per T<#%& part. d. 41// per T<#%& part. Answer: b Difficulty: 2 Avoidable costs 4)2,/// O 1,/// units ; 4)2 per part Objective: #

-hapter 11

.age 1)

T < F3::360@A 0@F3(8AT03@ A..:0<* T3 ,=<*T03@* ++ A@9 1//. *chmidt -orporation produces a part that is used in the manufacture of one of its products. The costs associated $ith the production of 1/,/// units of this part are as follo$s: 9irect materials 9irect labor 5ariable factory overhead Fi"ed factory overhead Total costs 4 #%,/// &%,/// !/,/// '/,/// 421/,///

3f the fi"ed factory overhead costs, 4!/,/// is avoidable. ++. .hil -ompany has offered to sell 1/,/// units of the same part to *chmidt -orporation for 41) per unit. Assuming there is no other use for the facilities, *chmidt should a. make the part as this $ould save 4! per unit. b. buy the part as this $ould save 4! per unit. c. buy the part as this $ould save the company 4!/,///. d. make the part as this $ould save 41 per unit. Answer: d Difficulty: ! Objective: # Avoidable costs total 41'/,/// ; 4#%,/// L 4&%,/// L 4!/,/// L 4!/,///. 41) 1 41'/,///O1/,/// ; 41 1//. Assuming no other use of their facilities, the highest price that *chmidt should be $illing to pay for 1/,/// units of the part is a. 421/,///. b. 41#/,///. c. 41'/,///. d. 41)/,///. Answer: c Difficulty: ! 4#%,/// L 4&%,/// L 4!/,/// L 4!/,/// ; 41'/,/// Objective: #

1/1. (elevant costs in a make1or1buy decision of a part include a. setup overhead for the manufacture of the product using the outsourced part. b. currently used manufacturing capacity that has alternative uses. c. annual plant insurance costs that $ill remain the same. d. corporate office costs that $ill be allocated differently. Answer: b Difficulty: ! Objective: %

1/2. 0f orsley -orporation doesn?t use one of its limited resources in the best possible $ay, the lost contribution to income could be called a. a variable cost. b. a fi"ed cost. c. an opportunity cost. d. a sunk cost. Answer: c Difficulty:
-hapter 11

1

Objective:

%

.age 1+

1/!. 6hen a firm has constrained capacity as opposed to surplus capacity, opportunity costs $ill be a. lo$er. b. the same. c. greater. d. it varies. Answer: c Difficulty: 2 Objective: %

1/#. 3pportunity costs a. result in a cash outlay. b. only are considered $hen selecting among alternatives. c. are recorded in the accounting records. d. should be ma"imi7ed for the best decision. Answer: b Difficulty: 2 Objective: %

1/%. 3pportunity costDsE a. of a resource $ith e"cess capacity is 7ero. b. should be ma"imi7ed by organi7ations. c. are recorded as an e"pense in the accounting records. d. are most important to financial accountants. Answer: a Difficulty: 2 Objective: %

1/&. For make1or1buy decisions, relevant costs include a. direct material costs plus direct labor costs. b. incremental costs plus opportunity costs. c. differential costs plus fi"ed costs. d. incremental costs plus differential costs. Answer: b Difficulty: ! Objective: %

1/'. The opportunity cost of holding significant inventory includes a. the interest forgone on an alternative investment. b. additional insurance costs. c. additional storage costs. d. all of the above. Answer: a Difficulty: 2 Objective: %

-hapter 11

.age 2/

T < F3::360@A 0@F3(8AT03@ A..:0<* T3 ,=<*T03@* 1/) A@9 1/+. *tephans -orporation currently manufactures a subassembly for its main product. The costs per unit are as follo$s: 9irect materials 9irect labor 5ariable overhead Fi"ed overhead Total 4 1.// 1/.// %.// ).// 42#.//

2ill -ompany has contacted *tephans $ith an offer to sell them %,/// of the subassemblies for 422.// each. *tephans $ill eliminate 42%,/// of fi"ed overhead if it accepts the proposal. 1/). 6hat are the relevant costs for *tephans> a. 41#/,/// b. 412%,/// c. 41/%,/// d. 4)/,/// Answer: c Difficulty: 2 D41 L 1/ L %E " %,/// L 42%,/// ; 41/%,/// Objective: %

1/+. *hould *tephans make or buy the subassemblies> 6hat is the difference bet$een the t$o alternatives> a. 2uyK savings ; 42/,/// b. 2uyK savings ; 4%/,/// c. 8akeK savings ; 4&/,/// d. 8akeK savings ; 4%,/// Answer: d -ost to buy: -ost to make: Difficulty: ! %,/// " 422 ; 411/,/// 411/,/// 1 1/%,/// ; 4%,/// RR make Objective: %

11/. A recent college graduate has the choice of buying a ne$ auto for 42/,/// or investing the money for four years $ith a &N e"pected rate of return. 0f the graduate decides to purchase the auto, the 2<*T estimate of the opportunity cost of that decision is a. 41,2//. b. 4#,)//. c. 42/,///. d. 7ero since there is no opportunity cost for this decision. Answer: b Difficulty: 2 Objective: 42/,/// " &N " # years ; 4#,)// cost of the opportunity not chosen. %

-hapter 11

.age 21

111. A supplier offers to make .art A for 4'/. Iansen -ompany has relevant costs of 4)/ a unit to manufacture .art A. 0f there is e"cess capacity, the opportunity cost of buying .art A from the supplier a. is 7ero. b. is 41/,///. c. is 4'/,///. d. cannot be determined using the above information. Answer: a Difficulty: 2 Objective: %

112. Iensen -ompany has relevant costs of 4)/ per unit to manufacture .art A. A current supplier offers to make .art A for 4'/ per unit. 0f capacity is constrained, the opportunity cost of buying .art A from the supplier a. is 7ero. b. is 41/,///. c. is 4'/,///. d. cannot be determined using the above information. Answer: d Difficulty: 2 Objective: % 0nformation regarding alternative uses for the capacity $ould determine the opportunity cost. 11!. 9etermining $hich products should be produced $hen the plant is operating at full capacity is referred to as a. an outsourcing analysis. b. production scheduling analysis. c. a product1mi" decision. d. a short1run focus decision. Answer: c Difficulty: 1 Objective: &

11#. .roduct mi" decisions a. have a long1run focus. b. help determine ho$ to ma"imi7e operating profits. c. focus on selling price per unit. d. are all of the above. Answer: b Difficulty: 2 Objective: &

11%. -onstraints may include a. the availability of direct materials in manufacturing. b. linear square feet of display space for a retailer. c. direct labor in the service industry. d. all of the above. Answer: d Difficulty: 1 Objective: &

-hapter 11

.age 22

11&. For determining the best mi" of products, the one $ith the :<A*T amount of influence is a. the market price of the products. b. corporate office costs allocated to each product. c. the use of capacity resources. d. contribution margins. Answer: b Difficulty: ! Objective: &

11'. 0n product1mi" decisions, a. al$ays focus on ma"imi7ing total contribution margin. b. focus on the product $ith the greatest contribution margin per machine1hour. c. focus on the full costs of the product. d. never focus on the short1term, but include only long1term considerations. Answer: a Difficulty: ! Objective: &

-hapter 11

.age 2!

T < F3::360@A 0@F3(8AT03@ A..:0<* T3 ,=<*T03@* 11) T (3=A 122. 2raunJs 2rakes manufactures three different product lines, 8odel M, 8odel H, and 8odel Q. -onsiderable market demand e"ists for all models. The follo$ing per unit data apply: *elling price 9irect materials 9irect labor D412 per hourE 5ariable support costs D4# per machine1hourE Fi"ed support costs Mo el ( 4%/ & 12 # 1/ Mo el ) 4&/ & 12 ) 1/ Mo el * 4'/ & 2# ) 1/

11). 6hich model has the greatest contribution margin per unit> a. 8odel M b. 8odel H c. 8odel Q d. 2oth 8odels M and H Answer: 8odel M 8odel H 8odel Q b Difficulty: 2 4%/ 1 4& 1 412 1 4# ; 42) 4&/ 1 4& 1 412 1 4) ; 4!# RRhighest 4'/ 1 4& 1 42# 1 4) ; 4!2 Objective: &

11+. 6hich model, has the greatest contribution margin per machine1hour> a. 8odel M b. 8odel H c. 8odel Q d. 2oth 8odels H and Q Answer: 8odel M 8odel H 8odel Q a Difficulty: 2 4%/ 1 4& 1 412 1 4# ; 42) O 1 ; 42) RRhighest 4&/ 1 4& 1 412 1 4) ; 4!# O 2 ; 41' 4'/ 1 4& 1 42# 1 4) ; 4!2 O 2 ; 41& Objective: &

12/. 0f there is e"cess capacity, $hich model is the most profitable to produce> a. 8odel M b. 8odel H c. 8odel Q d. 2oth 8odels M and H Answer: b Difficulty: ! Objective: 8odel H since it has the greatest contribution margin per unit &

121. 0f there is a machine breakdo$n, $hich model is the most profitable to produce> a. 8odel M b. 8odel H c. 8odel Q d. 2oth 8odels H and Q Answer: a Difficulty: ! Objective: 8odel M since it has the greatest contribution margin per machine1hour
-hapter 11 .age 2#

&

122.

o$ can :isa 2raun encourage her salespeople to promote the more profitable model> a. .ut all sales persons on salary b. .rovide higher sales commissions for higher priced items c. .rovide higher sales commissions for items $ith the greatest contribution margin per constrained resource d. 2oth DbE and DcE Answer: c Difficulty: 2 Objective: &

T < F3::360@A 0@F3(8AT03@ A..:0<* T3 ,=<*T03@* 12! T (3=A 12%. elmerJs (ockers manufactures t$o models, *tandard and .remium. 6eekly demand is estimated to be 1// units of the *tandard 8odel and '/ units of the .remium 8odel. The follo$ing per unit data apply: -ontribution margin per unit @umber of machine1hours required 12!. The contribution per machine1hour is a. 41) for *tandard, 42/ for .remium. b. 4%# for *tandard, 4)/ for .remium. c. 41% for *tandard, 41& for .remium. d. 4& for *tandard, 4% for .remium. Answer: d Difficulty: 2 *tandard 41) O ! ; 4&K .remium 42/ O # ; % Objective: & St&n &r 41) ! Pre%#u% 42/ #

12#. 0f there are #+& machine1hours available per $eek, ho$ many rockers of each model should Iim elmer produce to ma"imi7e profits> a. 1// units of *tandard and #+ units of .remium b. '2 units of *tandard and '/ units of .remium c. 1// units of *tandard and '/ units of .remium d. )% units of *tandard and &/ units of .remium Answer: a Difficulty: 2 Objective: & *tandard D1// units " !mhE L .remium D#+ units " # mhE ; #+& machine1hours of the constrained resource 12%. 0f there are &// machine1hours available per $eek, ho$ many rockers of each model should Iim elmer produce to ma"imi7e profits> a. 1// units of *tandard and #+ units of .remium b. '2 units of *tandard and '/ units of .remium c. 1// units of *tandard and '/ units of .remium d. )% units of *tandard and &/ units of .remium Answer: c Difficulty: 2 Objective: & *tandard D1// units " !mhE L .remium D'/ units " # mhE ; %)/ machine1hours for the current demand

-hapter 11

.age 2%

T < F3::360@A 0@F3(8AT03@ A..:0<* T3 ,=<*T03@* 12& T (3=A 12). (aines -ompany manufactures three si7es of kitchen appliances: small, medium, and large. .roduct information is provided belo$. S%&ll Me #u% L&r+e =nit selling price 41%/ 42%/ 4%// =nit costs: 5ariable manufacturing D&/E D12/E D2//E Fi"ed manufacturing D#/E D%/E D12/E 5ariable selling and administrative D!/E D!/E D!/E =nit profit 4 2/ 4 %/ 41%/ 9emand in units 8achine1hours per unit 1// 2/ 12/ #/ 1// 1//

The ma"imum machine1hours available are &,/// per $eek. 12&. 6hat is the contribution margin per machine1hour for a large chair> a. 4%.// b. 4!.// c. 42.'/ d. 41.)/ Answer: c 4%// 1 42// 1 4!/ ; 42'/ 42'/ O 1// ; 42.'/ Difficulty: 2 Objective: &

12'. 6hich of the three product models should be produced first if management incorporates a short1run profit ma"imi7ing strategy> a. *mall chairs b. 8edium chairs c. :arge chairs d. <ither medium or large chairs Answer: *mall 8edium :arge 12). a Difficulty: 2 D41%/ 1 4&/ 1 4!/E ; 4&/ O 2/ ; 4!.// RRhighest D42%/ 1 412/ 1 4!/E ; 41// O #/ ; 42.%/ D4%// 1 42// 1 4!/E ; 42'/ O 1// ; 42.'/ Objective: &

o$ many of each product should be produced per month using the short1run profit ma"imi7ing strategy> a. b. c. d. S%&ll / 1// 1// 1// Me #u% 12/ / 1// 2/ L&r+e 12 #/ / #/ &

Answer: b Difficulty: ! Objective: *mall D1// " 2/E L :arge D#/ " 1//E ; &,/// total machine1hours

-hapter 11

.age 2&

12+. 6hen deciding $hether to discontinue a segment of a business, managers should focus on a. equipment used by that segment that could become idle. b. reallocation of corporate costs. c. ho$ total costs differ among alternatives. d. operating income per unit of the discontinued segment. Answer: c Difficulty: ! Objective: '

1!/. 6hen deciding $hether to discontinue a segment of a business, relevant costs include all <M-<.T a. fi"ed supervision costs that can be eliminated. b. variable marketing costs per unit of product sold. c. cost of goods sold. d. future administrative costs that $ill continue. Answer: d Difficulty: 2 Objective: '

1!1. 9iscontinuing unprofitable products $ill increase profitability a. if the resources no longer required by the discontinued product can be eliminated. b. if capacity constraints are adBusted. c. automatically. d. $hen a large portion of the fi"ed costs are unavoidable. Answer: a Difficulty: 2 Objective: '

1!2. -amera -orner is considering eliminating 8odel A<2 from its camera line because of losses over the past quarter. The past three months of information for 8odel A<2 are summari7ed belo$. *ales D1,/// unitsE 8anufacturing costs: 9irect materials 9irect labor D41% per hourE 3verhead 3perating loss 4!//,/// 1%/,/// &/,/// 1//,/// D41/,///E

3verhead costs are '/N variable and the remaining !/N is depreciation of special equipment for model A<2 that has no resale value. 0f 8odel A<2 is dropped from the product line, operating income $ill a. increase by 41/,///. b. decrease by 42/,///. c. increase by 4!/,///. d. decrease by 41/,///. Answer: b Difficulty: ! Objective: ' !//,/// 1 41%/,/// 1 4&/,/// 1 4'/,/// ; 42/,/// This product contributes 42/,/// to$ard corporate profits, therefore, discontinuing this product $ill decrease operating income by 42/,///.
-hapter 11 .age 2'

T < F3::360@A 0@F3(8AT03@ A..:0<* T3 ,=<*T03@* 1!! A@9 1!#. The management accountant for 8arthaJs 2ook *tore has prepared the follo$ing income statement for the most current year. Coo,-oo, Tr&'el .oo, Cl&ss#"s Tot&l *ales 4&/,/// 41//,/// 4#/,/// 42//,/// -ost of goods sold !&,/// &%,/// 2/,/// 121,/// -ontribution margin 2#,/// !%,/// 2/,/// '+,/// 3rder and delivery processing 1),/// 21,/// ),/// #',/// (ent Dper sq. foot usedE 2,/// 1,/// !,/// &,/// Allocated corporate costs ',/// ',/// ',/// 21,/// -orporate profit 4 D!,///E 4 &,/// 4 2,/// 4 %,/// 1!!. 0f the cookbook product line had been discontinued prior to this year, the company $ould have reported a. greater corporate profits. b. the same amount of corporate profits. c. less corporate profits. d. resulting profits cannot be determined. Answer: c Difficulty: ! Objective: ' 4&/,/// 1 4!&,/// 1 41),/// 1 42,/// ; 4#,/// The cookbook product line contributed 4#,/// to$ard corporate profits. 6ithout the cookbooks, corporate profits $ould be 4#,/// less than currently reported. 1!#. 0f the travel book line had been discontinued, corporate profits for the current year $ould have decreased by a. 4!%,///. b. 41#,///. c. 41!,///. d. 4&,///. Answer: c Difficulty: ! 41//,/// 1 4&%,/// 1 421,/// 1 41,/// ; 41!,/// Objective: '

-hapter 11

.age 2)

T < F3::360@A 0@F3(8AT03@ A..:0<* T3 ,=<*T03@* 1!% A@9 1!&. 9enly -ompany has three products, A, 2, and -. The follo$ing information is available: *ales 5ariable costs -ontribution margin Fi"ed costs: Avoidable =navoidable 3perating income Pro u"t A 4&/,/// !&,/// 2#,/// +,/// &,/// 4 +,/// Pro u"t . 4+/,/// #),/// #2,/// 1),/// +,/// 41%,/// Pro u"t C 42#,/// 1%,/// +,/// &,/// %,#// 4 D2,#//E

1!%. 9enly -ompany is thinking of dropping .roduct - because it is reporting a loss. Assuming 9enly drops .roduct - and does not replace it, operating income $ill a. increase by 42,#//. b. increase by 4!,///. c. decrease by 4!,///. d. decrease by 4%,#//. Answer: c Difficulty: ! Objective: ' 42#,/// 1 41%,/// 1 4&,/// ; 4!,///. .roduct - contributes 4!,/// to$ard corporate profits. 6ithout .roduct -, operating income $ould be 4!,/// less than currently reported. 1!&. Assuming .roduct - is discontinued and the space formerly used to produce .roduct is rented for 412,/// per year, operating income $ill a. increase by 4&,&//. b. increase by 4+,///. c. increase by 412,///. d. increase by 41#,#//. Answer: b 4D!,///E L 412,/// ; 4+,/// Difficulty: ! Objective: '

-hapter 11

.age 2+

T < F3::360@A 0@F3(8AT03@ A..:0<* T3 ,=<*T03@* 1!' A@9 1!). 8elodeeJs .reserves currently makes Bams and Bellies and a variety of decorative Bars used for packaging. An outside supplier has offered to supply all of the needed decorative Bars. For this make1or1buy decision, a cost analysis revealed the follo$ing avoidable unit costs for the decorative Bars: 9irect materials 9irect labor =nit1related support costs 2atch1related support costs .roduct1sustaining support costs Facility1sustaining support costs Total cost per Bar 1!'. The relevant cost per Bar is a. 4/.2) per Bar. b. 4/.!) per Bar. c. 4/.'2 per Bar. d. 41.// per Bar. Answer: d Difficulty: 2 All avoidable costs are relevant for this decision. Objectives: #, ' 4/.2% /./! /.1/ /.12 /.22 /.2) 41.//

1!). The ma"imum price that 8elodeeJs .reserves should be $illing to pay for the decorative Bars is a. 4/.2) per Bar. b. 4/.!) per Bar. c. 4/.'2 per Bar. d. 41.// per Bar. Answer: d Difficulty: 2 Objectives: #, ' -onsidering only quantitative factors, the company should not pay more than the avoidable costs of 41.// per Bar. There may be qualitative factors that are also important. 1!+. -osts are relevant to a particular decision if they a. are variable costs. b. are fi"ed costs. c. differ across the alternatives being considered. d. remain unchanged across the alternatives being considered. Answer: c Difficulty: 2 Objective: )

-hapter 11

.age !/

1#/. 6hen deciding to lease a ne$ cutting machine or continue using the old machine, the follo$ing costs are relevant <M-<.T the a. 4%/,/// cost of the old machine. b. 42/,/// cost of the ne$ machine. c. 41/,/// selling price of the old machine. d. 4!,/// annual savings in operating costs if the ne$ machine is purchased. Answer: a Difficulty: 2 Objective: )

1#1. For machine1replacement decisions, depreciation is a cost that is a. not relevant. b. differential. c. incremental. d. variable. Answer: a Difficulty: 1 Objective: )

T < F3::360@A 0@F3(8AT03@ A..:0<* T3 ,=<*T03@* 1#2 T (3=A 1##. Flo$ers For <veryone is considering replacing its e"isting delivery van $ith a ne$ one. The ne$ van can offer considerable savings in operating costs. 0nformation about the e"isting van and the ne$ van follo$: E/#st#n+ '&n Ne0 '&n 3riginal cost 41//,/// 41)/,/// Annual operating cost 4 !%,/// 4 2/,/// Accumulated depreciation 4 &/,/// 111 -urrent salvage value of the e"isting van 4 #%,/// 111 (emaining life 1/ years 1/ years *alvage value in 1/ years 4 / 4 / Annual depreciation 4 #,/// 4 1),/// 1#2. *unk costs include a. the original cost of the e"isting van. b. the original cost of the ne$ van. c. the current salvage value of the e"isting van. d. the annual operating cost of the ne$ van. Answer: a Difficulty: 2 Objective: )

1#!. (elevant costs for this decision include a. the original cost of the e"isting van. b. accumulated depreciation. c. the current salvage value. d. the salvage value in 1/ years. Answer: c Difficulty: 2 Objective: )

-hapter 11

.age !1

1##. 0f Flo$ers For <veryone replaces the e"isting delivery van $ith the ne$ one, over the ne"t 1/ years operating income $ill a. decrease by 41)/,///. b. increase by 41%/,///. c. decrease by 41%/,///. d. none of the above. Answer: b Difficulty: ! Objective: ) @e$ van D42/,/// " 1/ yearsE 1 <"isting van D4!%,/// " 1/ yearsE ; 41%/,/// less in operating costs, $hich results in a 41%/,/// increase in operating income. T < F3::360@A 0@F3(8AT03@ A..:0<* T3 ,=<*T03@* 1#% T (3=A 1#'. Frederick, 0nc., is considering replacing a machine. The follo$ing data are available: Ol M&"1#ne 4#%,/// 1/ % 42%,/// 4),/// / 4',/// Repl&"e%ent M&"1#ne 4!%,/// % / 1 1 / 4#,///

3riginal cost =seful life in years -urrent age in years 2ook value 9isposal value no$ 9isposal value in % years Annual cash operating costs

1#%. 6hich of the data provided in the table is a sunk cost> a. The annual cash operating costs of the old machine b. The annual cash operating costs of the replacement machine c. The disposal value of the old machine d. The original cost of the old machine Answer: d Difficulty: 2 Objective: )

1#&. For the decision to keep the old machine, the relevant costs of keeping the old machine total a. 4&/,///. b. 4!%,///. c. 4#',///. d. 4'2,///. Answer: b 4',/// " % ; 4!%,/// Difficulty: ! Objective: )

1#'. The difference bet$een keeping the old machine and replacing the old machine is a. 4!',/// in favor of keeping the old machine. b. 412,/// in favor of keeping the old machine. c. 4!',/// in favor of replacing the old machine. d. 412,/// in favor of replacing the old machine. Answer: b Difficulty: ! Objective: @e$ C4!%,/// L D% " 4#,///EF G 3ld C4),/// L D% " 4',///EF ; 412,///
-hapter 11 .age !2

)

1#). 8anagers tend to favor the alternative that makes their performance look best. Therefore, they tend to focus on a. ho$ to implement the chosen alternative. b. the measures used in the decision model. c. the measures used in the performance evaluation model. d. gathering the required information. Answer: c Difficulty: 2 Objective: +

1#+. 0f management takes a multiple1year vie$ in the decision model and Budges success according to the current year?s results, a problem $ill occur in the a. decision model. b. performance evaluation model. c. production evaluation model. d. quantitative model. Answer: b Difficulty: 2 Objective: +

1%/. The three steps involved in linear programming include all of the follo$ing <M-<.T a. determining the obBective. b. determining the basic relationship. c. computing the optimal solution. d. determining the relevant and irrelevant costs. Answer: d Difficulty: 2 Objective: A

1%1. 0n linear programming, the goals of management are e"pressed in a. an obBective function. b. constraints. c. operating policies. d. business functions. Answer: a Difficulty: 1 Objective: A

1%2. A mathematical inequality or equality that must be appeased is kno$n as a. an obBective function. b. a constraint. c. an operating policy. d. a business function. Answer: b Difficulty: 2 Objective: A

-hapter 11

.age !!