________ is relevant in a decision to replace equipment.

D) Salvage value
A "what-if" technique that examines how a result will change if the original predicted data are NOT
achieved or if an underlying assumption changes is called ________.A) sensitivity analysis
A capital budgeting tool that management can use to summarize the difference in the future net cash
inflows from an intangible asset at two different points in time is referred to as: B) the net present value
method
A company decided to replace an old machine with a new machine. Which of the following is considered
a relevant cost?D) the setup cost of the new equipment
A cost function is a ________.C) mathematical description of how a cost changes with changes in the
level of an activity relating to that cost
A decision model involves a(n) ________.B) formal method of making a choice that often involves both
quantitative and qualitative analyses
A finance manager has to select one of the four different suppliers of raw materials. The total cost
functions under the four options are given below. Assume the quality of the raw material to be the same,
which of the following is preferred by the finance manager?C) y = 200 + 4.50X
A learning curve is a function ________.A) that measures the decline in labor-hours per unit due to
workers becoming better at a job
A major concern that arises with multiple regression is multicollinearity, which exists when ________.A)
the dependent variable is not normally distributed
A mathematical inequality or equality that must be appeased is known as a(n) ________. B) constraint
A plot of data that results in bunched points with little slope generally indicates ________.B) a weak
relationship
A plot of data that results in one extreme observation most likely indicates that ________.B) an unusual
event such as a plant shutdown occurred during that month
A recent college graduate has the choice of buying a new car for $33,500 or investing the money for four
years with an 8% expected annual rate of return. He has an investment of $40,000 in equities and bonds
which yields 6% expected annual rate of return. If the graduate decides to purchase the car, the best
estimate of the opportunity cost of that decision is ________.B) $10,720Explanation: B) $33,500 × 8% ×
4 years = $10,720 cost of the opportunity not chosen.
A relevant cost is a cost that is a(n) ________.A) future cost
A relevant revenue is revenue that is a(n) ________.B) future revenue
A steeply sloped regression line indicates ________.A) a strong relationship between the cost driver and
costs
A step variable-cost function ________.B) is often approximated with a continuous variable-cost function
A supplier offers to make Part A for $35. Altec Services Corporation has relevant costs of $40 a unit to
manufacture 1,000 units of Part A. If there is excess capacity, the opportunity cost of buying Part A from
the supplier is ________.A) $0
A) always focus on maximizing total contribution margin
A) increase profitability if the resources no longer required by the discontinued product can be eliminated
AARR indicates the average rate at which ________.A) a dollar of investment generates after-tax
operating income
Accrual accounting rate of return is calculated by dividing ________.B) an increase in expected average
annual after-tax operating income by the net initial investment
All individual cost items included in the dependent variable should have ________.C) an economically
plausible relationship with the cost driver
Altec Services Corporation has relevant costs of $40 per unit to manufacture 1,000 units of Part A. A
current supplier offers to make Part A for $35 per unit. Alternatively, the company can rent out the
capacity for $25,000. If capacity is constrained, the opportunity cost of buying Part A from the supplier is
________.D) $25,000 Explanation: D) Alternative rent income = $25,000
Ambinu Flower Company provides flowers and other nursery products for decorative purposes in
medium to large sized restaurants and businesses. The company has been investigating the purchase of a
new specially equipped van for deliveries. The van has a value of $113,750 with a seven-year life. The
expected additional cash inflows are $32,500 per year. What is the payback period for this investment? B)
3.5 years B) PB = $113,750/$32,500 = 3.5 years.
An annuity is ________. B) a series of equal cash flows at equal time intervals
An example of a sunk cost in a capital budgeting decision for new equipment is .B) the original price of
an old equipment
An experience curve ________.B) measures the decline in cost per unit as production decreases for
various value-chain functions such as marketing as production increases
An inaccurate cost function with a constant that is estimated too high may most likely result in
________.A) evaluating a weak manager as providing strong performance
An inaccurate cost function with a slope coefficient that is estimated too low may most likely result in
________.B) initiating cost cutting measures when they are unnecessary
As a result of learning curve, ________. B) unit costs decrease as productivity increases and the unit-cost
function behaves nonlinearly
Assume your goal in life is to retire with $2,500,000. How much would you need to save at the end of
each year if interest rates average 7% and you have a 20-year work life? B) $60,983 B) Savings ×
(40.995) = $2,500,000
Assume your goal in life is to retire with 3 million dollars. How much would you need to save at the end
of each year if investment rates average 8% and you have a 14-year work life? B) $ 123,891 Savings ×
(24.2149) = $3,000,000
Assume your goal in life is to retire with two million dollars. How much would you need to save at the
end of each year if interest rates average 6% and you have a 25-year work life? C) $36,453 Savings ×
(54.865) = $2,000,000
Based on the theory of constraints, investments equal ________.B) the sum of material costs in direct
materials, work-in-process, and finished goods inventories; R&D costs; and capital costs of equipment
and buildings
Bennet Company employs 20 individuals. Eighteen employees are paid $18 per hour and the rest are
salaried employees paid $3,000 a month. Which of the following is the total cost function of personnel?
A) y = a + bX
Book value is defined as the ________.C) difference between the original cost of an asset and the
accumulated depreciation
Business function costs are ________.B) the sum of all variable and fixed costs in a particular business
function of the value chain
Capacity constraints include ________.B) increased need of display space for a retailer
Capital budgeting is a process of ________. D) making long-run planning decisions for investments in
projects
Comparison of the actual results for a project to the costs and benefits expected at the time the project
was selected is referred to as ________. C) a post-investment audit
Concose Park Department is considering a new capital investment. The following information is available
on the investment. The cost of the machine will be $330,000. The annual cost savings if the new machine
is acquired will be $85,000. The machine will have a 5-year life, at which time the terminal disposal
value is expected to be $32,000. Concose Park Department is assuming no tax consequences. If Concose
Park Department has a required rate of return of 11%, which of the following is closest to the present
value of the project? C) $3,136 C) ($85,000 × 3.696) + ($32,000 × .593) - $330,000 = $3,136
Crimson Services, Inc., employs 8 individuals. They are all paid $16.50 per hour. How would total costs
of personnel be classified?A) variable cost
Cross-sectional data analysis includes ________.C) observing different entities during the same time
period
Data collection problems arise when ________.C) fixed and variable costs are not separately identified
and both are allocated to products on a per unit basis
decision? D) separating total costs into variable and fixed components
Depreciation is usually NOT considered an operating cash flow in capital budgeting because ________.
B) deducting depreciation from operating cash flows would be counting the lump-sum amount twice
Determining which products should be produced when the plant is operating at full capacity is referred to
as a(n) ________.C) product-mix decision
Diamond Manufacturing Company provides glassware machines for major department store retailers. The
company has been investigating a new piece of machinery for its production department. The old
equipment has a remaining life of four years and the new equipment has a value of $87,776 with a four-
year life. The expected additional cash inflows are $32,000 per year. What is the internal rate of return?
C) 17% C) $87,776 = $32,000F F = 2.743 Chart criteria for 4 years is 2.743 = 17%
Direct materials are $600, direct labor is $150, variable overhead costs are $450, and fixed overhead costs
are $300. The cost of one unit is ________.D) $1500
Discontinuing unprofitable products will ________.
Discounted cash flow methods for capital budgeting focus on ________.A) cash inflows and required rate
of return
Employee morale at Dos Santos, Inc., is very high. This type of information is an example of
________.A) qualitative factors
Factors used to decide whether to outsource a part include ________.B) if the supplier is reliable
Feedback regarding previous actions may affect ________.D) All of these answers are correct.
For decision making, a listing of the relevant costs ________. A) will help the decision maker concentrate
on the pertinent data
For February, the cost components of a picture frame include $0.30 for the glass, $0.75 for the wooden
frame, and $0.80 for assembly. The assembly desk and tools cost $500. Two hundred fifty frames are
expected to be produced in the coming year. What cost function best represents these costs? B) y = 500 +
1.85X
For make-or-buy decisions, a supplier's ability to maintain secrecy of intellectual property is considered
a(n) ________.A) qualitative factor
For make-or-buy decisions, relevant costs include ________.B) incremental costs plus opportunity costs
Forge Company wants to purchase a new cutting machine for its sewing plant. The investment is
expected to generate annual cash inflows of $120,000. The required rate of return is 10% and the current
machine is expected to last for four years. What is the maximum dollar amount the company would be
willing to spend for the machine, assuming its life is also four years? Income taxes are not considered. D)
$380,280 D) X = $120,000 × PV Ann 4 (10%) = $120,000 × 3.169
Full costs of a product are the sum of ________.C) all variable and fixed costs in all the business
functions of the value chain
Goodness-of-fit measures how well the predicted values in a cost estimating equation ________.C) match
the actual cost observations
How can Lisa Dynondo encourage her salespeople to promote the more profitable model? C) Provide
higher sales commissions for items with the greatest contribution margin per constrained resource.
Hypore Darby Park Department is considering a new capital investment. The following information is
available on the investment. The cost of the machine will be $251,130. The annual cost savings if the new
machine is acquired will be $110,000. The machine will have a 3-year life, at which time the terminal
disposal value is expected to be zero. Hypore Park Department is assuming no tax consequences. What is
the internal rate of return for Hypore Park Department? B) 15% B) PV Factor is $251,130 / $110,000 =
2.283. This corresponds to a 15% IRR using the annuity table for a 3-year Which of the following is an
advantage of internal rate of return method?B) The percentage returns computed under the IRR method
are easy to understand and compare.
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
If machine maintenance is scheduled at a time when production is at a low level, then ________.B) an
understanding of operations is needed to determine an appropriate cost driver
If management takes a multiple-year view in the decision model and judges success according to the
current year's results, a problem will occur in the ________.B) performance evaluation model
If Talium Services Inc. does not use one of its limited resources in the best possible way, the lost
contribution to income could be called a(n) ________.C) opportunity cost
If the net present value for a project is positive, ________. A) the project should be accepted
If the total cost function is y = 5,000 + 7X, calculate the variable cost for 4,000 units.B) $28,000
Explanation: B) Explanation: Variable cost for 4,000 units = $7 × 4,000 units = $28,000
In capital budgeting, a project is accepted only if the internal rate of return equals or ________.A)
exceeds the required rate of return
In evaluating different alternatives, it is useful to concentrate on ________.D) relevant costs
In linear programming, the goals of management are expressed in ________.A) an objective function
In multiple regression, when two or more independent variables are highly correlated with one another,
the situation is known as ________.C) multicollinearity
In product-mix decisions, managers should ________.
In situations where the required rate of return is not constant for each year of the project, it is
advantageous to use ________. C) the net present value method
In the estimation of a cost function using quantitative analysis, the independent variable ________. C) is
the factor used to predict the dependent variable
In using the net present value method, only projects with a zero or positive net present value are
acceptable because ________.A) the return from these projects equals or exceeds the cost of capital
Investment A requires a net investment of $1,400,000. The required rate of return is 10% for the five-year
annuity. What are the annual cash inflows if the net present value equals 0? (rounded) B) $369,296 B)
3.791 × annual cash inflows - $1,400,000 = $0 = $369,296
Locil Corporation recently purchased a new machine for $415,275 with a nine-year life. The old
equipment has a remaining life of nine years and no disposal value at the time of replacement. Net cash
flows will be $75,000 per year. What is the internal rate of return? A) 11% A) $415,275 = $75,000F F =
5.537 Chart criteria for 9 years is 5.537 = 11%
Malive Park Department is considering a new capital investment. The following information is available
on the investment. The cost of the machine will be $119,000. The annual cost savings if the new machine
is acquired will be $35,000. The machine will have a 5-year life, at which time the terminal disposal
value is expected to be zero. Malive Park is assuming no tax consequences. Malive Park has a 12%
required rate of return. What is the payback period for the investment? B) 3.4 years
Managers tend to favor the alternative that makes their performance look best. Therefore, they tend to
focus on ________.C) the measures used in the performance evaluation model
Midize Flower Company provides flowers and other nursery products for decorative purposes in medium
to large sized restaurants and businesses. The company has been investigating the purchase of a new
specially equipped van for deliveries. The van has a value of $66,645 with a seven-year life. The expected
additional cash inflows are $15,000 per year. What is the internal rate of return? B) 13% B) $66,645 =
$15,000F F = 4.443 Chart criteria for 7 years is 4.443 = 13%
Net initial investment includes ________.C) cash outflow to purchase new equipment, cash outflow for
working capital, and after-tax cash inflow from disposal of the old equipment
Net present value is calculated using the ________.B) discount rate
One-time-only special orders should only be accepted if ________.A) incremental revenues exceed
incremental costs
Opportunity costs is defined as ________.B) the contribution to operating income that is forgone by not
using a limited resource in its next-best alternative use
Pearl Manufacturing Company provides glassware machines for major department store retailers. The
company has been investigating a new piece of machinery for its production department. The old
equipment has a remaining life of five years and the new equipment has a value of $239,400 with a five-
year life. The expected additional cash inflows are $63,000 per year. What is the payback period for this
investment? C) 3.8 years C) PB = $239,400/$63,000 = 3.8 years.
Post-investment audits ________. B) provide management with feedback about the performance of a
project
Product mix decisions ________.B) help determine how to maximize operating profits
Qualitative factors ________.D) include customer satisfaction
Quantitative analysis methods estimate cost functions ________.C) using a formal mathematical method
to fit cost functions to past data observations
Quantitative factors ________. B) can be expressed in monetary terms
Regression analysis ________.B) measures the average amount of change in the dependent variable
associated with a unit change in one or more independent variables
Relevant costs are ________.B) expected future costs
Relevant costs in a make-or-buy decision of a part include ________. B) currently used manufacturing
capacity that has alternative uses
Roberto owns a small body shop. His major costs include labor, parts, and rent. In the decision-making
process, these costs are considered to be ________.C) quantitative factors
Schmidt Sewing Company incorporates the services of Deb's Sewing. Schmidt purchases pre-cut dresses
from Deb's. This is primarily known as ________.B) outsourcing
Smiley Face Company manufactures signs from direct materials to the finished product. This is
considered ________.A) insourcing
Snapper Tool Company has a production capacity of 3,000 units per month, but current production is only
2,500 units. Total manufacturing costs are $60 per unit and marketing costs are $16 per unit. Doug Levy
offers to purchase 500 units at $76 each for the next five months. Should Snapper accept the one-time-
only special order if only absorption-costing data are available? D) Yes, since operating profits will most
likely increase. Explanation: D) Since the $60 absorption cost per unit is most likely not all variable
costs and since the entire $16 per unit of marketing costs may not be incurred, operating profits will most
likely increase.
Soda Manufacturing Company provides vending machines for soft-drink manufacturers. The company
has been investigating a new piece of machinery for its production department. The old equipment has a
remaining life of four years and the new equipment has a value of $91,110 with a four-year life. The
expected additional cash inflows are $30,000 per year. What is the internal rate of return? A) 12% A)
$91,110 = $30,000F F = 3.037 Chart criteria for 4 years is 3.037 = 12%
Sunk costs ________.C) are irrelevant for decision making
Sunk costs ________.D) are ignored when evaluating alternatives
Sunk costs are ________.D) costs that are unavoidable and cannot be changed no matter what action is
taken
The AARR method is similar to the IRR method as ________.C) both calculate the result in terms of
percentage
The account analysis method estimates cost functions ________.A) by classifying cost accounts as
variable, fixed, or mixed based on qualitative analysis
The accounting system that corresponds to the project dimension in capital budgeting is the ________. D)
life-cycle costing
The Ambitz Corporation has an annual cash inflow from operations from its investment in a capital asset
of $35,000 each year for four years. The corporation's income tax rate is 40%. Calculate the total after-tax
cash inflow from operations for four years. C) $ 84,000 C) $35,000 × 4 = $140,000; $140,000 × (1 - 0.4)
= $ 84,000 net cash flow
The best way to avoid misidentification of relevant costs is to focus on ________. A) expected future
costs that differ among the alternatives
The capital budgeting method that calculates the discount rate at which the present value of expected cash
inflows from a project equals the present value of expected cash outflows is the ________. D) internal
rate of return method
The capital budgeting method which calculates the expected monetary gain or loss from a project by
discounting all expected future cash inflows and outflows to the present point in time using the required
rate of return is the ________. D) net present value method
The coefficient of determination is important in explaining variances in estimating equations. For a
certain estimating equation, the unexplained variation was given as 22,506. The total variation was given
as 51,150. What is the coefficient of determination for the equation? C) 0.56
The Comil Corporation recently purchased a new machine for its factory operations at a cost of $390,875.
The investment is expected to generate $125,000 in annual cash flows for a period of five years. The
required rate of return is 12%. The old machine has a remaining life of five years. The new machine is
expected to have zero value at the end of the five-year period. The disposal value of the old machine at
the time of replacement is zero. What is the internal rate of return? D) 18% D) $390,875 = $125,000F F =
3.127 Chart criteria for five years is 3.127 = 18%
The conference method estimates cost functions ________.B) based on analysis and opinions gathered
from various departments
The cost components of a heater include $30 for the compressor, $10 for the sheet molded compound
frame, and $75 per unit for assembly. The factory machines and tools cost is $60,000. The company
expects to produce 1,000 heaters in the coming year. What cost function best represents these costs? A) y
= 60,000 + 115X
The cost function y = 10,000 + 3X ________.A) represents a mixed cost
The cost function y = 150 + 10X ________.B) has an intercept of 150
The cost function y = 2,000 + 6X ________.C) is a straight line
The cost to be predicted is referred to as the ________.B) dependent variable
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 ________.D)
differential costs are $4 per unit
The focus in capital budgeting should be on ________.C) expected future cash flows that differ between
alternatives
The formal process of choosing between alternatives is known as a(n) ________.B) decision model
The Fortive Corporation disposes a capital asset with an original cost of $180,000 and accumulated
depreciation of $111,000 for $56,000. Alpha betas tax rate is 40%. Calculate the after-tax cash inflow
from the disposal of the capital asset.C) $61,200 C) ($180,000 - $111,000) = $69,000; $69,000 - $56,000
= $13,000 loss; $13,000 × 0.4 = $5,200 tax savings from loss plus $56,000 proceeds = $61,200
The Golden Shades Corporation disposes a capital asset with an original cost of $280,000 and
accumulated depreciation of $160,000 for a salvage price of $50,000. Silver Shades's tax rate is 40%.
Calculate the after-tax cash inflow from the disposal of the capital asset. D) $78,000 D) ($280,000 -
$160,000) = $120,000; $120,000 - $50,000 = $70,000 loss; $70,000 × 0.4 = $28,000 tax savings from
loss plus $50,000 proceeds = $78,000
The high-low method ________.C) calculates the slope coefficient using only two observed values within
the relevant range and their respective costs
The ideal database for estimating cost functions contains ________. A) numerous cost driver
observations
The internal rate of return method assumes that project cash flows can be reinvested at the project's
________.A) internal rate of return
The internal rate-of-return (IRR) method calculates ________.D) the discount rate at which sum of an
investment's present value of all expected cash inflows equals the present value of its expected cash
outflows.
The learning-curve models presented in the text examine ________.B) how efficiency increases as more
units are produced
The method that measures the time it will take to recoup, in the form of future cash inflows, the total
dollars invested in a project is called ________.B) the payback method
The minimum annual acceptable rate of return on an investment is the ________.B) hurdle rate
The net initial investment for a piece of construction equipment is $3,000,000. Annual cash inflows are
expected to increase by $500,000 per year. The equipment has an 8-year useful life. What is the payback
period? C) 6 years
The net present value method assumes that project cash flows can be reinvested at the company's
________.B) required rate of return
The net present value method focuses on ________. A) cash flows and discount rate
The net present value method of capital budgeting is preferred over the internal rate-of-return method
because ________.B) the net present values of individual projects can be added to determine the effects
of accepting a combination of projects
The nominal approach to incorporating inflation into the net present value method predicts ________.D)
cash inflows and outflows in nominal monetary units and uses a nominal rate as the required rate of
return
The NPV method is the preferred method over IRR for selecting projects because ________.A) its use
leads to shareholder value maximization
The opportunity cost of holding significant inventory includes ________.A) the interest forgone on an
alternative investment
The payback method of capital budgeting approach to an investment decision _.B) highlights liquidity of
the investment
The reason to have a post-investment audit is ________.B) they help alert senior management to
problems in the implementation of projects
The relevant terminal disposal price of a machine equals the ________. A) difference between the
salvage value of the old machine and the ultimate salvage value of the new machine
The slope of the line of regression is the ________.A) rate at which the dependent variable varies
The smaller the residual terms, the ________. A) better is the fit between the actual cost observations and
estimated costs
The sum of all the costs incurred in a particular function, such as marketing, is called the ________. A)
business function cost
The theory of constraints (TOC) defines throughput margin as ________.C) revenues minus the direct
material costs of the goods sold
The Venoid Corporation has an annual cash inflow from operations from its investment in a capital asset
of $16,000 each year for six years. The corporation's income tax rate is 30%. Calculate the total after-tax
cash inflow from operations for six years. B) $67,200 B) $16,000 × 6 = $96,000; $96,000 × (1 - 0.30) =
$67,200 net cash flow
Time-series data analysis includes ________.A) using a variety of time periods to measure the dependent
variable
To complete the first setup on a new machine took an employee 100 minutes. Using an 80% incremental
unit-time learning model indicates that the second setup on the new machine is expected to take
________. A) 80 minutes Explanation: A) The time taken for the second set up on machine = 100 × 0.80
= 80 minutes
To complete the first setup on a new machine took an employee 300 minutes. Using an 85% cumulative
average-time learning curve indicates that the second setup on the new machine is expected to take
________. B) 210 minutes Explanation: B) The time taken for the second set up on machine = 300 ×
0.85 = 255; (300 + X) / 2 = 255; X = 210 minutes
Top management faces a persistent challenge to make sure that the performance evaluation model of
lower level managers is ________.C) consistent with the decision model
Unit cost data can most mislead decisions by ________.D) not computing unit costs at the same output
level
Variable cost per labor-hour is $8.50. Fixed cost is $10,500. Calculate the total cost for 350 labor hours.
Machine hours during the period are 50.B) $13,475 Explanation: B) Total cost = $10,500 + ($8.50 ×
350) = $13,475
What role does a trade-in allowance on old equipment play in a decision to retain or replace
equipment?.D) It is relevant since it reduces the cost of the new equipment.
When deciding to accept a one-time-only special order from a wholesaler, management should
________.C) determine whether excess capacity is available
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
When deciding whether to discontinue a segment of a business, relevant costs include ________.D)
future administrative costs that can be eliminated
When evaluating a make-or-buy decision, which of the following needs to be considered? A) alternative
uses of the production capacity
When making decisions ________.C) appropriate weight must be given to both quantitative and
qualitative factors
When there is an excess capacity, it makes sense to accept a one-time-only special order for less than the
current selling price if ________.A) incremental revenues exceed incremental costs
When using the five-step decision process, which one of the following steps should be done last? C)
evaluation and feedback
When using the five-step decision process, which one of the following steps should be done first? A)
obtain information
When using the high-low method, the numerator of the equation that determines the slope is the
________. D) difference between the costs associated with highest and lowest observations of the cost
driver
When using the high-low method, the two observations used are the high and low observations of the
________.A) cost driver
Which capital budgeting technique measures all expected future cash inflows and outflows as if they
occurred at a single point in time? C) payback method
Which cost estimation method analyzes accounts in the subsidiary ledger as variable, fixed, or mixed
using qualitative methods? A) the account analysis method
Which cost estimation method may use time-and-motion studies to analyze the relationship between
inputs and outputs in physical terms? C) the industrial engineering method
Which cost estimation method uses a formal mathematical method to develop cost functions based on
past data? D) the quantitative analysis method
Which of following is a firm's risk of outsourcing the production of a part? B) leakage of intellectual
property
Which of the following capital budgeting methods uses discounted cash flows?B) net present value
method
Which of the following costs always differ among future alternatives? C) relevant costs
Which of the following costs is irrelevant in the decision making of a special order when there is idle
production capacity? A) fixed manufacturing costs
Which of the following costs is relevant in a decision-making process?D) variable costs
Which of the following functions represents the least total cost assuming the number of units is equal in
each case?B) y = 90 + 6X
Which of the following involves the process of making decisions for significant financial investments in
projects to develop new products, expand production capacity, or remodel current production facilities?
A) capital budgeting
Which of the following is a component of net-initial-investment cash flows?B) cash outflow to purchase
a new equipment
Which of the following is a learning-curve model? A) the cumulative average-time learning model and
the incremental unit-time learning model
Which of the following is a limitation of AARR method?D) It does not consider time value of money.
Which of the following is a nonlinear cost function?D) learning curve function
Which of the following is a problem related to cost analysis?A) fixed costs are allocated as if they are
variable costs
Which of the following is a relevant cost to be included in a make-or-buy decision?A) fixed salaries that
will not be incurred if the part is outsourced
Which of the following is a stage of the capital budgeting process that indicates potential capital
investments that agree with an organization's strategy?A) identify projects stage
Which of the following is a stage of the capital budgeting process during which a plant manager is
queried for assembly time?B) obtain information stage
Which of the following is a stage of the capital budgeting process that forecasts all potential cash flows
attributable to the alternative projects? D) make predictions stage
Which of the following is a stage of the capital budgeting process that determines which investment
Which of the following is a stage of the capital budgeting process in which a firm obtains funding for the
project?D) implement the decision, evaluate performance, and learn stage
Which of the following is a stage of the capital-budgeting process that tracks realized cash flows and
compares those against estimated numbers?A) implement the decision, evaluate performance, and learn
stage
Which of the following is a step followed by an analyst to overcome problems related to data collection
for estimating cost function?C) to eliminate unusual observations if extreme values of observations occur
Which of the following is a step to overcome problems related to data collection for estimating cost
function?A) The analyst should remove the inflationary effects.
Which of the following is also called required rate of return? A) hurdle rate
Which of the following is an appropriate step when identifying relevant costs to make a business
Which of the following is an assumption of linear programming?D) All costs are either variable or fixed
for a single cost driver.
Which of the following is an equation of a fixed cost function? D) y = a
Which of the following is an example of insourcing?A) a pharmaceutical company's research team
developing a new patent using current resources
Which of the following is an example of nonlinear cost function?C) learning curves
Which of the following is an example of outsourcing? D) a petrochemical company assigning a vendor to
make software for its supply chain management
Which of the following is an example of sunk costs? A) wages to security staffs
Which of the following is an irrelevant cost?C) depreciation
Which of the following is the first stage to the capital budgeting process? D) identify potential capital
investments that agree with the organization's strategy
Which of the following is the mathematical expression to calculate the coefficient of determination?A)
Coefficient of determination = 1 - (Unexplained variation / Total variation)
Which of the following is the numerator in the mathematical expression for accrual accounting rate-of-
return (AARR)? B) increase in expected average annual after-tax operating income
Which of the following is true if a slope coefficient in a cost function is decreased from the last year?B)
variable cost per unit has decreased
Which of the following is true if the constant in the cost function is low compared to the last year? D)
total fixed cost have decreased
Which of the following is true in a decision to keep or replace existing equipment?B) The disposal value
of the old equipment is relevant.
Which of the following is true of an opportunity cost?A) It is the income foregone by not using a resource
in an alternative way.
Which of the following is true of depreciation cost?A) Depreciation cost on equipment is irrelevant in
decision making because depreciation on equipment that has already been purchased is a past cost.
Which of the following is true of historical costs?A) They are useful for making future predictions.
Which of the following is true of relevant information?C) Past costs are not relevant.
Which of the following methods is used to determine the most profitable production schedule and the
most profitable product mix?D) linear programming
Which of the following methods of capital budgeting divides the average annual accrual accounting
income of a project by a measure of the investment in it? D) accrual accounting rate of return
Which of the following minimizes the risks of outsourcing? C) building close partnerships with the
supplier
Which of the following projects is rejected on the basis of net present value method?B) Project B with an
NPV of $(7,000)
Which of the following represents cross-sectional data?C) personnel costs of a month at 10 different
organizations
Which of the following statements is true of a linear cost function?A) It presents variable cost as a slope
coefficient.
Which of the following statements is true of a post-investment audit?D) It provides managers with
feedback about the performance of a project so they can compare the actual results to the costs and
benefits expected at the time the project was selected.
Which of the following statements is true of accrual accounting rate of return (AARR) method and
internal rate of return (IRR) method?B) The AARR method calculates the return using operating-income
numbers after considering accruals and taxes, whereas the IRR method calculates the return using after-
tax cash flows and the time value of money.
Which of the following statements is true of activity-based costing?A) There is a clear cause-and-effect
relationship between costs and the cost driver in the long run.
Which of the following statements is true of choosing cost drivers under activity-based costing? C) Cost
drivers are independent variables.
Which of the following statements shows a difference between simple regression and multiple
regression?C) Simple regression uses only one dependent and one independent variable, whereas multiple
regression uses one dependent and more than one independent variable.
Which of the following would be a consideration in a make-or-buy decision?A) excess capacity
Which of the following would be considered in a make-or-buy decision? C) potential rental income from
space occupied by the production area
With a constraining resource, managers should choose the product with the ________.C) highest
contribution margin per unit of the constraining resource
With a step fixed-cost function ________.D) the cost remains the same over wide ranges of the activity in
each relevant range
yields the greatest benefit and the least cost to an organization?A) make decisions by choosing among
alternatives stage
Zephyr Energies, Inc. is considering eliminating one of its product lines. The fixed costs currently
allocated to the product line will be allocated to other product lines upon discontinuance. What financial
effects occur if the product line is discontinued?A) net income will decrease by the amount of the
contribution margin of the product line being discontinued

At the Auric Company, the cost of the personnel department has always been charged to production
departments based upon number of employees. Recently, opinions gathered from the department
managers indicate that the number of new hires might be a better predictor of personnel costs.
Total personnel department costs are $287,500.
Department A B C
Number of employees 70 280 225
Number of new hires 25 13 12
If the number of employees is considered the cost driver, what amount of personnel costs will be
allocated to Department A?
A) $35,000 Explanation: A) Personnel costs of Department A = [70 / (70 + 280 + 225)] × $287,500 =
$35,000
If the number of new hires is considered the cost driver, what amount of personnel costs will be allocated
to Department A?C) $143,750 Explanation: C) Personnel costs of Department A = [25 / (25 + 13 + 12)] ×
$287,500 = $143,750
Which cost estimation method is being used by Auric Company? B) the conference method

At the Verill Company, the cost of the library and information center has always been charged to the
various departments based upon number of employees. Recently, opinions gathered from the department
managers indicate that the number of engineers within a department might be a better predictor of library
and information center costs.
Total library and information center costs are $200,000.
Department A B C
Number of employees 135 530 135
Number of engineers 0 80 20
Which cost estimation method is being used by Verill Company? C) the conference method
If the number of employees is considered the cost driver, what amount of library and information center
costs will be allocated to Department A? B) $33,750 Explanation: B) Library and information costs of
Department A = [135/ (135 + 530 + 135)] × $200,000 = $33,750
If the number of engineers is considered the cost driver, what amount of library and information center
costs will be allocated to Department A? C) $0 Explanation: C) Library and information costs of
Department A = [0 / (0 + 80 + 20)] × $200,000 = $0

Isondo's TV and Appliance Store is a small company that has hired you to perform some management
advisory services. The following information pertains to 2015 operations.
Sales (1,200 televisions) $ 1,200,000
Cost of goods sold 540,000
Store manager's salary per year108,000
Operating costs per year 216,000
Advertising and promotion per year24,000
Commissions (3% of sales) 36,000
What was the variable cost per unit sold for 2015? B) $480 Explanation: B) Variable cost per unit =
($540,000 + $36,000) / 1,200 = $480 per unit
What were total fixed costs for 2015? C) $348,000 Explanation: C) Fixed costs = $108,000 + $216,000 +
$24,000 = $348,000
What are the estimated total costs if the company expects to sell 3,500 units next year? A) $2,028,000
Explanation: A) Total cost = fixed costs ($108,000 + $216,000 + $24,000) + variable costs (3,500 units ×
$480
variable costs per unit) = $1,680,000 = $2,028,000 total estimated costs.
Which cost estimation method is being used by Isondo's TV and Appliance Store? C) the account analysis
method

Genend's Good Value Appliance Store is a small company that has hired you to perform some
management advisory services. The following information pertains to 2015 operations.
Sales (6,000 microwave ovens)$ 1,740,000
Cost of goods sold 960,000
Store manager's salary per year100,000
Operating costs per year 250,000
Advertising and promotion per year30,000
Commissions (3% of sales) 52,200
Which cost estimation method is being used by Genend's Good Value Appliance Store? A) the account
analysis method
What was the variable cost per unit sold for 2015? C) $168.70 Explanation: C) Variable cost per unit =
($960,000 + $52,200) / 6,000 = $168.70 per unit
What were the total fixed costs for 2015? B) $380,000
What are the estimated total costs if Genend's store expects to sell 8,000 units next year? B) $1,729,600
Explanation: B) Total cost = fixed cost ($100,000 + $250,000 + 30,000) + variable costs (8,000 units ×
$168.70 variable costs per unit) = $1,349,600 = $1,729,600.

Flify Manufacturing Inc., incurred total indirect manufacturing labor costs of $500,000. The company is
labor intensive. Total labor hours during the period were 5,000. Using qualitative analysis, the manager
and the management accountant determine that over the period the indirect manufacturing labor costs are
mixed costs with only one cost driver–labor-hours. They separated the total indirect manufacturing labor
costs into costs that are fixed ($110,000 based on 8,000 hours of labor) and costs that are variable
($390,000) based on the number of labor-hours used. The company has estimated 7,000 labor hours
during the next period.
Which of the following represents the correct linear cost function?C) y = $110,000 + $78 X Explanation:
C) Fixed costs are given at $110,000 based on 8,000 hours of labor; variable costs are $390,000 during
the period divided by 5,000 labor hours during the period = $78.00 variable cost per labor hour.
What will be the variable cost per hour?A) $78 Explanation: A) Variable cost per hour =
($390,000/5,000) = $78
What will be the total variable cost for the estimated 7,000 hours?B) $546,000 Explanation: B) Total
variable cost = ($390,000/5,000) × 7,000 = $546,000
What will be the total cost for the estimated 7,000 hours?D) $656,000 Explanation: D) Total cost =
$110,000 + [($390,000/5,000) × 7,000] = $656,000

How many separate cost pools should be formed given the following information?
Cost Cost driver
Postage costs # of brochures mailed
Printing and paper costs # of brochures mailed
Quality control costs # of inspections
Customer service costs # of customers served
C) 3 cost pools

Place the following steps in order for estimating a cost function using quantitative analysis.
A = Plot the data
B = Collect data on the dependent variable and the cost driver.
C = Choose the dependent variable
D = Identify the independent variable, or cost driver
E = Estimate the cost function
B) C D B A E

Put the following steps in order for using the high-low method of estimating a cost function:

A = Identify the cost function

B = Calculate the constant
 C = Calculate the slope coefficient
D = Identify the highest and lowest observed values
C) A D C B

Uninder Company uses the high-low method to estimate the cost function. The information for 2015 is
provided below:
Machine-hoursLabor Costs
Highest observation of cost driver 550 $22,000
Lowest observation of cost driver 250 $ 13,000
What is the slope coefficient?C) $30.00 Explanation: C) Slope = ($22,000 − $13,000) / (550 − 250) =
$30
What is the constant for the estimated cost equation? A) $5,500 Explanation: A) Using highest
observation: Constant = $22,000 − ($30.00 × 550 hours) = $5,500 OR: Using lowest observation:
Constant = $13,000 − ($30.00 × 250 hours) = $5,500
What is the estimated cost function for the above data?B) y = 5,500 + 30X
What is the estimated total cost when 400 machine-hours are used? D) $17,500 Explanation: D) The total
cost, y = $5,500 + ($30 × 400) = $17,500

Syosis Company uses the high-low method to estimate its cost function. The information for 2015 is
provided below:
Machine-hours Costs
Highest observation of cost driver2,500 $300,000
Lowest observation of cost driver1,500 $ 220,000
What is the slope coefficient? C) $80.00 Explanation: C) Slope = ($300,000 − $220,000) / (2,500 −
1,500) = $80
What is the constant for the estimated cost equation? C) $100,000 Explanation: C) EITHER: High
observation: Constant = $300,000 − ($80.00 × 2,500 hours) = $100,000 OR: Low observation: Constant =
$220,000 − ($80.00 × 1,500 hours) = $100,000
What is the estimated cost function for the above data?C) y = 100,000 +80X
What is the estimated total cost when 1,300 machine-hours are used? B) $204,000 Explanation: B) The
total cost, y = $100,000 + ($80 × 1,300) = $204,000

For Divaxo Company, labor-hours are 30,000 and wages $130,000 at the high point of the relevant range,
and labor-hours are 18,000 and wages $85,000 at the low point of the relevant range.
What is the slope coefficient?B) $3.75 Explanation: B) Slope = ($130,000 − $85,000) / (30,000 −
18,000) = $3.75 per labor-hour
What is the constant? A) $17,500 Explanation: A) High observation: Constant = $130,000 − ($3.75 ×
30,000) = $17,500 OR: Low observation: Constant = $85,000 − ($3.75 × 18,000) = $17,500
What is the estimated total labor costs at Divaxo Company when 11,000 labor-hours are used? B)
$58,750 Explanation: B) Total labor costs, y = $17,500 + ($3.75 × 11,000) = $58,750

The Frontive Company has assembled the following data pertaining to certain costs that cannot be easily
identified as either fixed or variable. Frontive Company has heard about a method of measuring cost
functions called the high-low method and has decided to use it in this situation.
Cost Hours
$24,700 5,000
 26,000 5,500
34,000 7,500
45,370 10,300
38,000 9,500
What is the cost function? D) y = $5,200 + $3.90X Explanation: D) b = ($45,370 − $24,700) / (10,300 −
5,000) = $3.90 for the highest and lowest values of the cost driver Using highest observation: $45,370 = a
+ ($3.90 × 10,300)
a = $5,200 Cost function is Y = $5,200 + $3.90X
What is the estimated total cost at an operating level of 9,000 hours?
B) $40,300
Explanation: B) b = ($45,370 − $24,700) / (10,300 − 5,000) = $3.90 for the highest and lowest values of
the cost driver
$45,370 = a + ($3.90 × 10,300)
a = $5,200
Cost function is Y = $5,200 + $3.90X
Y = $5,200 + ($3.90 × 9,000)
Y = $40,300

Presented below are the production data for the first six months of the year for the mixed costs incurred
by Vertise Company.

Month Cost Units

January $4,890 4,100
February 4,426 3,520
March 6,730 5,200
April 9,724 8,250
May 5,900 4,900
June 7,336 6,600
Vertise Company uses the high-low method to analyze mixed costs.
How would the cost function be stated? A) y = $484 + $1.12X
Explanation: A) b = ($9,724 − $4,426) / (8,250 − 3,520) = $1.12
$9,724 = a + $1.12 × 8,250
a = $484
Cost function is Y=$484 + $1.12X
What is the estimated total cost at an operating level of 6,500 units? B) $7,764.00
Explanation: B) b = ($9,724 − $4,426) / (8,250 − 3,520) = $1.12
$9,724 = a + $1.12 × 8,250
a = $484
Cost function is: Y = $484 + $1.12X
Y = $484 + $1.12 × 6,500 = $7,764

The Bovise Company has assembled the following data pertaining to certain costs that cannot be easily
identified as either fixed or variable. Bovise Company has heard about a method of measuring cost
functions called the high-low method and has decided to use it in this situation.
Month Cost Hours
January $40,000 3,600
 February 38,500 3,000
March 36,280 3,300
April 38,000 3,500
May 69,850 5,850
June 45,000 4,250
How is the cost function stated? D) y = $5,500 + $11X
Explanation: D) b = ($69,850 − $38,500) / (5,850 − 3,000) = $11
$69,850 = a + ($11 × 5,850)
a = $5,500
What is the estimated total cost at an operating level of 3,100 hours? B) $39,600
Explanation: B) b = ($69,850 − $38,500) / (5,850 − 3,000) = $11
$69,850 = a + ($11 × 5,850)
a = $5,500
y = $5,500 + ($11 × 3,100) = $39,600

The Perize Corporation used regression analysis to predict the annual cost of indirect materials. The
results were as follows:
Indirect Materials Cost Explained by Units Produced
Constant $15,685
Standard error of Y estimate $3,500
r2 0.7832
Number of observations 20
X coefficient(s) 10.25
Standard error of coefficient(s) 2.1876
A) Y = $15,685 + $10.25X

Corise's Cola was to manufacture 500 cases of cola next week. The accountant provided the following
analysis of total manufacturing costs.
Variable CoefficientStandard Errort-Value
Constant 115 82.73 1.39
Independent variable 230 105.50 2.18
r2 = 0.82
What is the estimated cost of producing the 500 cases of cola? A) $115,115 Explanation: A) y = $115 +
($230 × 500) = $115,115

Midose's Stables used two different independent variables (trainer hours and number of horses) in two
different equations to evaluate the cost of training horses. The most recent results of the two regressions
are as follows:
Trainer's hours:
Variable Coefficient Standard Error t-Value
Constant $1,004.65 $217.93 4.61
Independent Variable $22.99 $3.23 7.11
r2 = 0.56
Number of horses:
Variable Coefficient Standard Error t-Value
Constant $5,240.95 $1,180.40 4.44
Independent Variable $951.48 $271.85 3.50
r2 = 0.63
What is the estimated total cost for the coming year if 15,000 trainer hours are incurred and the stable has
350 horses to be trained, based upon the best cost driver? B) $338,258.95 Explanation: B) y = $5,240.95
+ ($951.48 × 350) = $338,258.95 based on highest r2, which uses # of horses as the cost driver

Place the following steps from the five-step decision process in order:
A = Obtain information including historical costs
B = Evaluate performance to provide feedback
C = Make decisions choosing among alternatives
D = Make predictions about the future
E = Identify the problem and uncertainties
C) E, A, D, C, B

Lander Metals Inc. manufactures automobile spare parts for car manufacturers. Management is
attempting to search for ways to reduce manufacturing labor costs and has received a proposal from a
consulting company to rearrange the production floor next year. Using the information below regarding
current operations and the new proposal, which of the following decisions should management accept?
Current Proposed
Required machine operators 16 12
Materials-handling workers 3.00 3.00
Employee average pay $15 per hour$18 per hour
Hours worked per employee 3,400 3,150
B) Rearrange the production floor.
Explanation: B) Current operations: 16 workers × 3,400 hours × $15.00 = $816,000
Proposal: 12 workers × 3,150 hours × $18.00 = $680,400

Contrafic Lighting manufactures small flashlights 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 75,000 units 68,000 units
Selling price $8.50 $9.25
Incremental cost per unit $4.80 $4.80
If the price increase is implemented, operating profit is projected to ________.A) increase by $25,100
Explanation: A) Change in operating income = [68,000 × ($9.25 - $4.80)] - [75,000 × ($8.50 - $4.80)] =
Increase of $25,100
Would you recommend the 75-cent price increase? D) Yes, because operating profits increase.

John's 8-year-old Chevrolet Trail Blazer requires repairs estimated at $6,000 to make it roadworthy again.
His wife, Sherry, suggested that he should buy a 5-year-old used Jeep Grand Cherokee instead for $6,000
cash. Sherry estimated the following costs for the two cars:
Trail Blazer Grand Cherokee
Acquisition cost $25,000 $6,000
Repairs $ 6,000 —
 Annual operating costs
(Gas, maintenance, insurance)$ 2,280 $2,100
The cost NOT relevant for this decision is the ________.A) acquisition cost of the Trail Blazer
What should John do? What are his savings in the first year? C) Buy the Grand Cherokee; $180
Explanation: C) Trail Blazer ($6,000 + $2,280) - Grand Cherokee ($6,000 + $2,100) = $180 cost savings
when choosing the Grand Cherokee option

Coroid Manufacturers Inc. is approached by a European 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 $120
Direct labor 60
Manufacturing support 105
Marketing costs 45
Fixed costs:
Manufacturing support 135
Marketing costs 45
Total costs 510
Markup (50%) 255
Targeted selling price $765
What is the full cost of the product per unit? C) $510 Explanation: C) Full cost = $120 + $60 + $105 +
$45 + $135 + $45 = $510
What is the contribution margin per unit? C) $435 Explanation: C) Contribution margin per unit = $765 -
($120 + $60 + $105 + $45) = $435
For Coroid Manufacturers Inc., what is the minimum acceptable price of this special order? A) $330
Explanation: A) Minimum acceptable price = $120 + $60 + $105 + $45 = $330
What is the change in operating profits if the one-time-only special order for 1,000 units is accepted for
$540 a unit by Coroid? A) $210,000 increase in operating profits Explanation: A) Contribution margin
per unit = $540 - ($120 + $60 + $105 + $45) = $210 Change in operating profit = 1,000 × $210 =
$210,000 increase

Ratzlaff Company has a current production level of 20,000 units per month. Unit costs at this level are:
Direct materials $0.25
Direct labor 0.40
Variable overhead 0.15
Fixed overhead 0.20
Marketing - fixed 0.20
Marketing/distribution - variable 0.40
Current monthly sales are 18,000 units. Jim Company has contacted Ratzlaff Company about purchasing
1,500 units at $2.00 each. Current sales would NOT be affected by the one-time-only special order, and
variable marketing/distribution costs would NOT be incurred on the special order. What is Ratzlaff
Company's change in operating profits if the special order is accepted? C) $1,800 increase in operating
profits Explanation: C) Manufacturing cost per unit = $0.25 + $0.40 + $0.15 = $0.80 1,500 × ($2.00 -
$0.80) = $1,800 increase
Contrafic's Kitchens 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 $546
Direct labor 360
Variable manufacturing support 54
Fixed manufacturing support 120
Total manufacturing costs 1,080
Markup (60%) 648
Targeted selling price $1,728
Contrafic's Kitchens has excess capacity. Mr. Cifer wants the cabinets in cherry rather than oak, so direct
material costs will increase by $60 per unit. The average marketing cost of Contrafic's Kitchens is $180
per order.
For Contrafic's Kitchens, what is the full cost of the one-time-only special order?B) $1,140 Explanation:
B) Full cost = $546 + $360 + $54 + $120 + $60 = $1,140
Other than price, what other items should Contrafic's Kitchens consider before accepting this one-time-
only special order?B) reaction of existing customers to the lower price offered to Mr. Louis Cifer
Which of the following costs is NOT considered to calculate the minimum acceptable price of a one-
time-only special order?A) marketing costs
An example of a qualitative factor for the decision-making process is ________A) customer satisfaction

Black Forrest manufactures rustic furniture. The cost accounting system estimates manufacturing costs to
be $180 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 50% markup to full costs.
Black Forrest is invited to bid on a one-time-only special order to supply 100 rustic tables. What is the
lowest price Black Forrest should bid on this special order? B) $14,400 Explanation: B) $180 × 80% ×
100 tables = $14,400
A large hotel chain is currently expanding and has decided to decorate all new hotels using the rustic
style. Black Forrest Incorporated is invited to submit a bid to the hotel chain. What is the lowest price per
unit Black Forrest should bid on this long-term order? D) $270 Explanation: D) $180 + ($180 × 50%) =
$270

Zephram Corporation has a plant capacity of 200,000 units per month. Unit costs at capacity are:
Direct materials $4.00
Direct labor 6.00
Variable overhead 3.00
Fixed overhead 1.00
Marketing—fixed 7.00
Marketing/distribution—variable 3.60
Current monthly sales are 190,000 units at $30.00 each. Q, Inc., has contacted Zephram Corporation
about purchasing 2,000 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) $14,800 increase Explanation: A) ($4.00 + $6.00 + $3.00 + $3.60) = $16.60 ($24.00 -
$16.60) × 2,000 = $14,800 increase

Piels Corporation produces a part that is used in the manufacture of one of its products. The costs
associated with the production of 10,000 units of this part are as follows:
 Direct materials $ 90,000
Direct labor 130,000
Variable factory overhead60,000
Fixed factory overhead 140,000
Total costs $420,000
Of the fixed factory overhead costs, $60,000 is avoidable.
Conners Company has offered to sell 10,000 units of the same part to Piels Corporation for $36 per unit.
Assuming there is no other use for the facilities, Schmidt should ________.D) make the part, as this
would save $2 per unit Explanation: D) Avoidable costs total $340,000 = $90,000 + $130,000 + $60,000
+ $60,000. $36 - ($340,000/10,000) = $2
Assuming no other use of their facilities, the highest price that Piels should be willing to pay for 10,000
units of the part is ________.C) $340,000 Explanation: C) $90,000 + $130,000 + $60,000 + $60,000 =
$340,000

Genent's Engine Company manufactures part TE456 used in several of its engine models. Monthly
production costs for 1,000 units are as follows:
Direct materials $46,000
Direct labor 11,500
Variable overhead costs 34,500
Fixed overhead costs 23,000
Total costs $115,000
It is estimated that 8% of the fixed overhead costs assigned to TE456 will no longer be incurred if the
company purchases TE456 from the outside supplier. Genent's Engine Company has the option of
purchasing the part from an outside supplier at $97.75 per unit.
If Genent's Engine Company accepts the offer from the outside supplier, the monthly avoidable costs
(costs that will no longer be incurred) total ________. A) $93,840 Explanation: A) Monthly avoidable
costs = $46,000 + $11,500 + $34,500 + ($23,000 × 8%) = $93,840
If Genent's Engine Company purchases 1,000 TE456 parts from the outside supplier per month, then its
monthly operating income will ________.C) decrease by $3,910 Explanation: C) Change in monthly
operating income = Avoidable costs $93,840 - ($97.75 × 1,000 units) = decrease of $3,910
The maximum price that Genent's Engine Company should be willing to pay the outside supplier is
________.B) $93.84 per TE456 part Explanation: B) Avoidable costs = $93,840 / 1,000 units = $93.84
per part

Rubium Micro Devices currently manufactures a subassembly for its main product. The costs per unit are
as follows:
Direct materials $ 45.00
Direct labor 35.00
Variable overhead 33.00
Fixed overhead 30.00
Total $143.00
Crayola Technologies Inc. has contacted Rubium with an offer to sell 5,000 of the subassemblies for
$135.00 each. Rubium will eliminate $85,000 of fixed overhead if it accepts the proposal.
What are the relevant costs for Rubium? C) $650,000 Explanation: C) The relevant costs for Rubium =
[($45 + $35 + $33) × 5,000 + $85,000] = $650,000
Should Rubium make or buy the subassemblies? What is the difference between the two alternatives?C)
Make; savings = $25,000 Explanation: C) Cost to buy: 5,000 × $135 = $675,000
Cost to make: [($45 + $35 + $33) × 5,000 + $85,000] = $650,000
Cost savings = $675,000 - $650,000 = $25,000; make the subassemblies

Dynondo's Brakes 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 $60 $70
Direct materials 6 6 6
Direct labor ($12 per hour) 12 12 24
Variable support costs ($4 per machine-hour) 4 8 8
Fixed support costs 10 10 10
Which model has the greatest contribution margin per unit?
B) Model Y
Explanation: B)
Model X $50 - $6 - $12 - $4 = $28
Model Y $60 - $6 - $12 - $8 = $34 highest
Model Z $70 - $6 - $24 - $8 = $32
Which model has the greatest contribution margin per machine-hour?
A) Model X
Explanation: A)
Model X $50 - $6 - $12 - $4 = $28/1 = $28 highest
Model Y $60 - $6 - $12 - $8 = $34/2= $17
Model Z $70 - $6 - $24 - $8 = $32/2= $16
If there is excess capacity, which model is the most profitable to produce?
B) Model Y
Explanation: B)
Model Y, since it has the greatest contribution margin per unit
Model X $50 - $6 - $12 - $4 = $28
Model Y $60 - $6 - $12 - $8 = $34 highest
Model Z $70 - $6 - $24 - $8 = $32
If there is a machine breakdown, which model is the most profitable to produce?
A) Model X
Explanation: A)
Model X since it has the greatest contribution margin per machine-hour
Model X $50 - $6 - $12 - $4 = $28/1 = $28 highest
Model Y $60 - $6 - $12 - $8 = $34/2= $17
Model Z $70 v $6 - $24 - $8 = $32 /2= $16

Helmer's Rockers manufactures two models, Standard and Premium. Weekly demand is estimated to be
100 units of the Standard Model and 70 units of the Premium Model. The following per unit data apply:
Standard Premium
Contribution margin per unit $18 $20
Number of machine-hours required 3 4
The contribution per machine-hour is ________.D) $6 for Standard, $5 for Premium Explanation: D)
Standard $18 / 3 = $6; Premium $20 / 4 = $5
If there are 496 machine-hours available per week, how many rockers of each model should Jim Helmer
produce to maximize profits? A) 100 units of Standard and 49 units of Premium Explanation: A)
Standard (100 units × 3mh) + Premium (49 units × 4 mh) = 496 machine-hours of the constrained
resource
If there are 600 machine-hours available per week, how many rockers of each model should Jim Helmer
produce to maximize profits? C) 100 units of Standard and 70 units of Premium Explanation: C)
Standard (100 units × 3mh) + Premium (70 units × 4 mh) = 580 machine-hours for the current demand

Aurum Appliances manufactures three sizes of kitchen appliances: small, medium, and large. Product
information is provided below.
Small Medium Large
Unit selling price $400 $600 $1,200
Unit costs:
Variable manufacturing (220) (280) (500)
Fixed manufacturing (80) (130) (240)
Fixed selling and administrative(60) (75) (120)
Unit profit $ 40 $ 115 $340

Demand in units 100 120 100

Machine-hours per unit 20 40 100
The maximum machine-hours available are 6,000 per week.
15) What is the contribution margin per machine-hour for a medium appliance? C) $6.13 Explanation: C)
Contribution margin = $600 - $280 - $75 = $245 Contribution margin per machine hour = $245 / 40 =
$6.125
Which of the three product models should be produced first if management incorporates a short-run profit
maximizing strategy? B) medium appliance

How many of each product should be produced per month using the short-run profit maximizing
strategy?
Small Medium Large
B) 60 120 0
Explanation: B) Medium (120 × 40) + Small (60 × 20) = 6,000 total machine-hours
Favata Corporation manufactures two products, AA and CC. The following information was available:
AA CC
Selling price per unit $37 $26
Variable cost per unit 32 22
Total fixed costs $18,000
If Favata Corporation could produce and sell either 10,000 units of AA or 5,000 units of CC at full
capacity, it should produce and sell ________.A) 10,000 units of AA and none of CC Explanation: A)
10,000 × ($37 - $32) = $50,000

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 $0.50
Direct labor 0.06
 Unit-related support costs 0.20
Batch-related support costs 0.24
Product-sustaining support costs 0.44
Facility-sustaining support costs 0.56
Total cost per jar $2.00
The relevant cost per jar is ________.D) $2.00 per jar Explanation: D) All avoidable costs are relevant
for this decision.
The maximum price that Genent's Preserves should be willing to pay for the decorative jars is ________.
D) $2.00 per jar Explanation: D) Considering only quantitative factors, the company should not pay
more than the avoidable costs of $2.00 per jar. There may be qualitative factors that are also important.
A segment has the following data:
Sales $630,000
Variable costs 336,000
Fixed costs 325,500
What will be the incremental effect on net income if this segment is eliminated, assuming the fixed costs
will be allocated to profitable segments?C) $294,000 decrease Explanation: C) Change in net income =
$630,000 - $336,000 = $294,000 decrease
Camera Corner is considering eliminating Model AE2 from its camera line because of losses over the past
quarter. The past three months of information for Model AE2 are summarized below:
Sales (1,000 units) $300,000
Manufacturing costs:
Direct materials 150,000
Direct labor ($15 per hour)60,000
Overhead 100,000
Operating loss ($10,000)
Overhead costs are 70% variable and the remaining 30% is depreciation of special equipment for model
AE2 that has no resale value.
If Model AE2 is dropped from the product line, operating income will ________.B) decrease by $20,000
Explanation: B) $300,000 - $150,000 - $60,000 - $70,000 = $20,000 This product contributes $20,000
toward corporate profits, therefore, discontinuing this product will decrease operating income by $20,000.

The management accountant for Giada's Book Store has prepared the following income statement for the
most current year:
CookbookTravel BookClassics Total
Sales $60,000 $100,000 $40,000 $200,000
Cost of goods sold 36,000 65,000 20,000 121,000
Contribution margin 24,000 35,000 20,000 79,000
Order and delivery processing18,00021,000 8,000 47,000
Rent (per sq. foot used) 2,000 1,000 3,000 6,000
Allocated corporate costs7,000 7,000 7,000 21,000
Corporate profit $ (3,000) $ 6,000 $ 2,000 $ 5,000
If the cookbook product line had been discontinued prior to this year, the company would have reported
________. C) less corporate profits Explanation: C) $60,000 - $36,000 - $18,000 - $2,000 = $4,000
The cookbook product line contributed $4,000 toward corporate profits. Without the cookbooks,
corporate profits would be $4,000 less than currently reported.
If the travel book line had been discontinued, corporate profits for the current year would have decreased
by ________. C) $13,000 Explanation: C) $100,000 - $65,000 - $21,000 - $1,000 = $13,000

Rambo Company has three products, A, B, and C. The following information is available:
Product A Product B Product C
Sales $60,000 $90,000 $24,000
Variable costs 36,000 48,000 15,000
Contribution margin 24,000 42,000 9,000
Fixed costs:
Avoidable 6,000 15,000 4,000
Unavoidable 7,000 9,000 5,400
Operating income $ 11,000 $18,000 $ (400)
Rambo Company is thinking of dropping Product C because it is reporting a loss. Assuming Rambo drops
Product C and does NOT replace it, operating income will ________.
C) decrease by $5,000
Explanation: C) Dropping Product C would mean Rambo gives up $9,000 in contribution margin while
only saving $4,000 in avoidable fixed costs. Without Product C, operating income would be $5,000 less
than currently reported.

Pizza For Everyone is considering replacing its existing delivery van with a new one. The new van can
offer considerable savings in operating costs. Information about the existing van and the new van follow:
Existing van New van
Original cost $50,000 $90,000
Annual operating cost $ 17,500 $ 10,000
Accumulated depreciation $ 30,000 —
Current salvage value of the existing van$ 22,500 —
Remaining life 10 years 10 years
Salvage value in 10 years $0 $0
Annual depreciation $ 2,000 $ 9,000
Sunk costs include ________.A) the accumulated depreciation of the existing van
Relevant costs for this decision include ________.C) the annual operating cost
If Pizza For Everyone replaces the existing delivery van with the new one, over the next 10 years
operating income will ________.B) increase by $75,000 Explanation: B) New van ($10,000 × 10 years)
- Existing van ($17,500 × 10 years) = $75,000 less in operating costs, which results in a $75,000 increase
in operating income.

Indium Services, Inc., is considering replacing a machine. The following data are available:
Replacement
Old Machine Machine
Original cost $630,000 $490,000
Useful life in years 10 5
Current age in years 5 0
Book value $350,000 —
Disposal value now $112,000 —
Disposal value in 5 years 0 0
Annual cash operating costs$98,000 $56,000
Which of the data provided in the table is a sunk cost? D) the original cost of the old machine
For the decision to keep the old machine, the relevant costs of keeping the old machine is ________.B)
$490,000 Explanation: B) Relevant cost = $98,000 × 5 = $490,000
The difference between keeping the old machine and replacing the old machine is ________.B) $168,000
in favor of keeping the old machine Explanation: B) New [$490,000 + (5 × $56,000) - $112,000] - Old
[(5 × $98,000)] = $168,000

Computer Products produces two keyboards, Regular and Special. Regular keyboards have a unit
contribution margin of $128, and Special keyboards have a unit contribution margin of $720. The demand
for Regulars exceeds Computer Product's production capacity, which is limited by available machine-
hours and direct manufacturing labor-hours. The maximum demand for Special keyboards is 80 per
month. Management desires a product mix that will maximize the contribution toward fixed costs and
profits.
Direct manufacturing labor is limited to 1,600 hours a month and machine-hours are limited to 1,200 a
month. The Regular keyboards require 20 hours of labor and 8 machine-hours. Special keyboards require
34 labor-hours and 20 machine-hours.
Let R represent Regular keyboards and S represent Special keyboards. The correct set of equations for the
keyboard production process is ________.
A) Maximize: $128R + $720S
Constraints:
Labor-hours: 20R + 34S ≤ 1,600
Machine-hours: 8R + 20S ≤ 1,200
Special: S ≤ 80
S≥0
Regular: R≥0
Difend Cleaners has been considering the purchase of an industrial dry-cleaning machine. The existing
machine is operable for three more years and will have a zero disposal price. If the machine is disposed
now, it may be sold for $100,000. The new machine will cost $350,000 and an additional cash investment
in working capital of $100,000 will be required. The new machine will reduce the average amount of time
required to wash clothing and will decrease labor costs. The investment is expected to net $110,000 in
additional cash inflows during the first year of acquisition and $250,000 each additional year of use. The
new machine has a three-year life, and zero disposal value. These cash flows will generally occur
throughout the year and are recognized at the end of each year. Income taxes are not considered in this
problem. The working capital investment will not be recovered at the end of the asset's life.
8) What is the net present value of the investment, assuming the required rate of return is 10%? Would the
company want to purchase the new machine? A) $144,240 ; yes
Yr. 0 ($100,000 - $350,000 - $100,000) × 1.000 = $(350,000)
Yr. 1 $110,000 × 0.909 = 99,990
Yr. 2 $250,000 × 0.826 = 206,500
Yr. 3 $250,000 × 0.751 = 187,750
Net present value at 10% $ 144,240
9) What is the net present value of the investment, assuming the required rate of return is 20%? Would the
company want to purchase the new machine? C) $59,880; yes
Yr. 0 ($100,000 - $350,000 - $100,000) × 1.000 = $(350,000)
Yr. 1 $110,000 × 0.833 = 91,630
Yr. 2 $250,000 × 0.694 = 173,500
Yr. 3 $250,000 × 0.579 = 144,750
Net present value at 20% $ 59,880

Diemia Hospital has been considering the purchase of a new x-ray machine. The existing machine is
operable for five more years and will have a zero disposal price. If the machine is disposed now, it may
be sold for $80,000. The new machine will cost $600,000 and an additional cash investment in working
capital of $25,000 will be required. The new machine will reduce the average amount of time required to
take the x-rays and will allow an additional amount of business to be done at the hospital. The investment
is expected to net $50,000 in additional cash inflows during the year of acquisition and $200,000 each
additional year of use. The new machine has a five-year life, and zero disposal value. These cash flows
will generally occur throughout the year and are recognized at the end of each year. Income taxes are not
considered in this problem. The working capital investment will not be recovered at the end of the asset's
life.
10) What is the net present value of the investment, assuming the required rate of return is 11%? Would
the hospital want to purchase the new machine? C) $59,050; yes
Yr. 0 ($80,000 - $600,000 - $25,000) × 1.000 = $(545,000)
Yr. 1 $ 50,000 × 0.901 = 45,050
Yr. 2 $200,000 × 0.812 = 162,400
Yr. 3 $200,000 × 0.731 = 146,200
Yr. 4 $200,000 × 0.659 = 131,800
Yr. 5 $200,000 × 0.593 = 118,600
Net present value at 11% $ 59,050

11) What is the net present value of the investment, assuming the required rate of return is 18%? Would
the hospital want to purchase the new machine? B) $(46,650); no
Yr. 0 ($80,000 - $600,000 - $25,000) × 1.000 = $(545,000)
Yr. 1 $ 50,000 × 0.847 = 42,350
Yr. 2 $200,000 × 0.718 = 143,600
Yr. 3 $200,000 × 0.609 = 121,800
Yr. 4 $200,000 × 0.516 = 103,200
Yr. 5 $200,000 × 0.437 = 87,400
Net present value at 18% $( 46,650)

The Zeron Corporation wants to purchase a new machine for its factory operations at a cost of $380,000.
The investment is expected to generate $125,000 in annual cash flows for a period of four years. The
required rate of return is 12%. The old machine can be sold for $20,000. The machine is expected to have
zero value at the end of the four-year period. What is the net present value of the investment? Would the
company want to purchase the new machine? Income taxes are not considered. A) $19,750; yes
Year 0 = ($20,000 - $380,000) =$(360,000)
Year 1 = $125,000 × 0.893 =111,625
Year 2 = $125,000 × 0.797 =99,625
Year 3 = $125,000 × 0.712 =89,000
Year 4 = $125,000 × 0.636 =79,500
Net present value at 12% $19,750

Forise Water Company drills small commercial water wells. The company is in the process of analyzing
the purchase of a new drill. Information on the proposal is provided below.
 Initial investment:
Asset $600,000
Working capital $ 128,000
Operations (per year for four years):
Cash receipts $450,000
Cash expenditures $ 190,000
Disinvestment:
Salvage value of drill (existing)$ 50,000
Discount rate 18%
What is the net present value of the investment? Assume there is no recovery of working capital. B)
$21,400
-$128,000 - $600,000 + $50,000 =$(678,000)
Yr 1 = $260,000 × 0.847 =220,220
Yr 2 = $260,000 × 0.718 =186,680
Yr 3 = $260,000 × 0.609 =158,340
Yr 4 = $260,000 × 0.516 =134,160
Net present value at 18% $ 21,400