Ch 10

Question 1

The last step in the decision making process is:

Answer 1

analyze and assess the decision

Question 2

Incremental … is incremental revenues minus incremental costs.

Answer 2

income

Question 3

Incremental or differential costs are ….
costs in making decisions.

Answer 3

additional

Question 4

When making decisions, managers should consider all relevant benefits and relevant costs, which include: (Check all that apply.)

Answer 4

opportunity costs.

incremental costs.

out-of-pocket costs.

Question 5

A(n) …. cost arises from a past decision, cannot be avoided or changed, and is irrelevant to current and future decisions.

Answer 5

sunk

Question 6

List the steps of the decision making process, with the first step on top.

Answer 6

1. Define decision
2. Identify alternatives
3. Collect relevant info and evaluate alternatives
4. Select course of action
5. Analyze and assess decision made

Question 7

A student purchased a used car for $5,000 three months ago. The car now needs a major repair which will cost $2,000. If the student decides to keep the car and make the repair to the car, then the out-of-pocket costs will be:

Answer 7

$2,000

Question 8

A student is considering adding a minor to her degree. The additional courses would cost $1,500 but would allow additional income upon graduation of $10,000. The incremental income related to this decision is:

Answer 8

$8,500
10,000−1,500

Question 9

….. costs, also called differential costs, are the additional costs from selecting a certain course of action.

Answer 9

Incremental

Question 10

A student purchases a concert ticket for $50. Before entering the concert, the student is offered $75 for the ticket. If the student decides to keep the ticket and attend the concert, the opportunity cost is:

Answer 10

$75

Question 11

A student is deciding whether to take an additional class or work extra hours. Which amounts are relevant to this decision? (Check all that apply.)

Answer 11

opportunity costs

out-of-pocket costs

Question 12

A student purchased a used car for $5,000. Three months later, the student discovers the car needs major repairs which will cost $2,000. The student must decide whether to repair the car or purchase another car. Which statement is correct?

Answer 12

The relevant costs are $2,000.

Question 13

In a make or buy decision, management should consider: (Check all that apply.)

Answer 13

Employee morale

Incremental costs

Workload

product quality

Question 14

A(n) ______ cost requires a future outlay of cash and is relevant for decisions.

Answer 14

out-of-pocket

Question 15

When making sell or process decisions, management should consider: (Check all that apply.)

Answer 15

revenue from selling as is.

revenue from selling after further processing.

incremental costs of processing further.

Question 16

A company incurred $1,000 in costs to produce 500 units which normally sell for $1,500. Upon inspection, it was determined the units were defective and reworking the units would cost an additional $1.50 per unit. The defective units can be sold as is for $1.00 each. How should the company handle the defective units?

Answer 16

Rework the units which will generate incremental income of $250.

Reason: Income if sold as is: $1.00 x 500 = $500. Income if reworked: revenue $3 x 500 = $1,500 minus incremental costs to rework $1.50 x 500 = $750. Incremental income = $750 - $500 = $250.

Question 17

A(n) …
cost is the potential benefit lost by taking an action instead of an alternative action.

Answer 17

opportunity

Question 18

A company produces two products. Product A sells for $25, has variable costs of $15, and requires 2 machine hours to produce. Product B sells for $35, has variable costs of $20, and requires 5 machine hours to produce. 40,000 machine hours are available. The company can sell all it can make of either product. Which statement is true?

Answer 18

Product A should be produced because it will provide greater contribution margin per machine hour.

(25-15)/2 = 5
(35-20)/5 = 3

Question 19

A company currently makes a component used in production. The per unit costs incurred to make the component include: Direct materials: $5; Direct labor: $2; Overhead: $4; Total cost: $11. Twenty-five percent of the overhead costs are considered incremental. The company can purchase the component from another source for $10. The company should do which of the following?

Answer 19

The company should make the components because incremental costs are $2 less than the purchase price.

Reason: Total cost to make = $5+2+(4 x 25%)=$8. Cost to buy is $10. The company will save $2 if it makes the product.

Question 20

A company produces two products. Product A sells for $25, has variable costs of $15, and requires 2 machine hours to produce. Product B sells for $35, has variable costs of $20, and requires 2 machine hours to produce. 40,000 machine hours are available. The company can sell all it can make of either product. Which statement is true?

Answer 20

Product B should be produced because it will create greater profits.

Reason: CM per machine hour: Product A ($25-15)/2=$5. CM per machine hour: Product B ($35-20)/2=$7.50.

Question 21

A manufacturing company currently produces 1,000 units of a product at a cost of $5,000. The units sell for $7,000. Alternatively, the company can process the units further to produce a refined product that will sell for $10,000. The additional processing will cost $4,000. The company should:

Answer 21

sell as is because the incremental income of selling as is versus processing further will increase income by $1,000

Reason: Revenue to sell as is: $7,000. Revenue to process further: $10,000-$4,000=$6,000. The company will earn $1,000 more by selling as is.

Question 22

When making scrap or rework decisions, management should consider: (Check all that apply.)

Answer 22

incremental costs.

revenue from selling defective units as scrap.

Question 23

When production facilities are limited, the company should produce the mix that will not exceed demand and maximize the production of the product with the:

Answer 23

highest contribution margin per unit of scarce resources

Question 24

A(n) … cost is the amount that would remain if a segment is eliminated.

Answer 24

Unavoidable

Question 25

When resources are constrained and products use different inputs, the company should produce the product with the:

Answer 25

highest contribution margin per unit of constrained resource

Question 26

True or false: When considering the elimination of a segment, management should eliminate a segment if income increases from elimination.

Answer 26

True

Question 27

When products use the same inputs, the company should produce the product with:

Answer 27

the highest contribution margin per constrained resource

Question 28

When making sell or process decisions, management should consider: (Check all that apply.)

Answer 28

revenue from selling as is.

incremental costs of processing further.

revenue from selling after further processing.

Question 29

A company purchased manufacturing equipment 5 years ago for $50,000. Book value is currently $5,000 and the remaining useful life is 3 years. The equipment incurs variable manufacturing costs of $30,000. The company is considering replacing the equipment. The new equipment will cost $75,000, have a useful life of 3 years, and is more efficient and, therefore, only costs $10,000 in variable manufacturing costs to operate each year. The vendor is willing to accept the old equipment with a selling price of $20,000. The company should:

Answer 29

replace the old equipment because the total net increase in income will be $5,000

Reason: Cost to replace new machine: [$75,000 + ($10,000 x 3 years) - $20,000] = $(85,000). Cost to keep old machine: ($30,000) x 3 = $(90,000). Company should replace the old equipment because income will increase by $5,000.

Question 30

A company produces two products. Product A sells for $25, has variable costs of $15, requires 2 machine hours to produce, and the market is limited to 8,000 units. Product B sells for $35, has variable costs of $20, requires 5 machine hours to produce, and the market is limited to 6,000 units. 40,000 machine hours are available. Which statement is true?

Answer 30

The company should produce 8,000 units of Product A and 4,800 units of Product B.

Reason: Product A: CM=$25-15=10/2 hours=5 per machine hour. 8000 units x 2 machine hours=16,000 hours. 40,000 total hours available-16,000 hours for Product A leaves 24,000 hours. 24,000/5 hours for Product B = 4,800.

Question 31

The costs which are eliminated if a segment is eliminated are called …
costs.

Answer 31

avoidable

Question 32

A price-setter company will use more:

Answer 32

cost-plus pricing methods

Question 33

The decision rule for segment elimination is to eliminate a segment if income _____ from elimination.

Answer 33

increases

Question 34

Under the cost-plus pricing method, the formula to determine selling price per unit is:

Answer 34

cost per unit plus markup per unit

Question 35

Using the target costing method, if the expected selling price is $50 and the target profit is $5, the target cost is $…

Answer 35

45
50−5

Question 36

When making keep or replace decisions, management should consider the: (Check all that apply.)

Answer 36

variable manufacturing cost of the new equipment

variable manufacturing cost of the existing equipment

sale of the existing equipment

Question 37

When production facilities are limited, the company should produce the mix that will not exceed demand and maximize the production of the product with the:

Answer 37

highest contribution margin per unit of scarce resources

Question 38

Target profit is $100,000; total fixed costs are $120,000, and total variable costs are $500,000, the markup percentage is …
%. Round your answer to the nearest whole percent.

Answer 38

44%
(120,000+100,000)
÷500,000×100 = 44

Question 39

Which of the following are factors indicating that a company is a price-taker?

Answer 39

product not branded

product not unique

strong competition

Question 40

When evaluating special offer decisions, management should consider: (Check all that apply.)

Answer 40

existing sales.

available capacity.

incremental costs.

incremental revenues.

Question 41

Cost-plus pricing adds a …
to cost to get selling price.

Answer 41

markup

Question 42

List the time and materials price steps in the correct order:

Answer 42

1. Compute time charge $
2. Compute material markup %
3. Estimate DLH, DMC, and markup to gwt price

Question 43

The costing method defined as expected selling price minus target profit is called
… costing.

Answer 43

target

Question 44

The formula to compute the markup percentage using the variable cost method is:

Answer 44

(target profit plus total fixed costs) divided by total variable cost

Question 45

A company receives a special order of 10,000 units of product. The potential customer is willing to pay $0.75 per unit. Current sales are $90,000 and current costs are $75,000 for 90,000 units. If the order is accepted, costs will increase to $82,000. If the company has the capacity to accept the order without affecting current sales, the company should:

Answer 45

accept the order, because income will increase by $500

Reason: Potential sales revenue=.75 x 10,000=$7,500. Increase in costs = $82,000-75,000=$7,000. Profits will increase by $500 ($7,500-7,000).

Question 46

A common way to price services is

Answer 46

time and materials pricing

Question 47

CH 10 CV

Question 48

The decision-making process has five steps. After collecting relevant information and evaluating each alternative, the next step is to:

Answer 48

select the course of action.

Question 49

Using the drop-down list, select the correct label for each description.

Answer 49

Cost of buying land previously purchased: Not relevant

Future cost of land used to develop a plant site: relevant

Question 50

Tyler Industries currently manufactures one of its crucial parts at a cost of $4.50 per unit. This cost is based on a normal production rate of 50,000 units per year. Direct materials costs are $1.50 per unit and direct labor is $1.00 per unit, incremental overhead costs related to making this part are $50,000 per year, and allocated fixed overhead costs are $50,000 per year. Allocated fixed costs are unavoidable whether the company makes or buys the part. Tyler is considering buying the part from a supplier for a quoted price of $3.70 per unit guaranteed for a three-year period. What is the relevant cost of making the 50,000 units?

Answer 50

$175,000
Relevant Cost of Making the Part = Direct materials and direct labor costs of $125,000 (50,000 units × $1.50 + $1.00 per unit) + Incremental overhead costs of $50,000 = $175,000. Note that the allocated fixed costs of $50,000 are not relevant to this managerial decision because they will continue whether the part is made or bought.

Question 51

Carrot Company processes carrots that it can sell as is for $2,000, or it can process these carrots further and produce jarred baby food which will result in revenues of $5,000. If they process further, it will cost them an additional $1,500. Incremental income to process further is?

Answer 51

$1,500
Revenue to sell as is is $2,000. If processed further, their revenue is $5,000 − $1,500 = $3,500. The company’s incremental income to process further if $3,500 − $2,000 = $1,500.

Question 52

The management of City Front Incorporated must decide between scrapping or reworking units that do not pass inspection. The company has 11,000 defective units that cost $6.00 per unit to manufacture. The units can be sold as is for $2.50 each or they can be reworked for $3.50 each and then sold for the full price of $9.70 each. What is the incremental income from reworking and selling the units?

Answer 52

$40,700
Income to scrap = Sale of scrapped units = $27,500 (11,000 units × $2.50).

Income to rework = Sale of reworked units of $106,700 (11,000 units × $9.70) − Cost to rework units of $38,500 (11,000 units × $3.50) = $68,200

Incremental income = Income to rework − Income to scrap = $68,200 − $27,500 = $40,700

Question 53

Hamrick Industries makes and sells two products. The demand for both products is unlimited. Product A has a contribution margin of $7.70 per unit. Product B has a contribution margin of $2.64 per unit. The same machines are used to produce both products. Product A requires 0.33 machine hours and product B requires 0.20 machine hours. Which product should the company make and sell?

Answer 53

Product A because the contribution margin per MH is $23.33.

determine the contribution margin per MH. Product A = Contribution margin per unit of $7.70 ÷ 0.33 MH = $23.33 per MH. Product B = Contribution margin per unit of $2.64 ÷ 0.20 MH = $13.20 per MH. Because it has a higher contribution margin per machine hour (the constraint), the company should manufacture as many units of Product A as it can produce and sell until reaching the customer‘s demand. Thereafter, any remaining capacity should be devoted to Product B until reading the customer‘s demand.

Question 54

Cabby Jewelers has two divisions, the ring division and the necklace division. The ring division has shown a net loss of $40,000 for the past year. The necklace division has shown net income of $10,000 for that same period of time. The ring division has avoidable expenses of $30,000 and unavoidable expenses of $20,000. With revenues of $90,000, should the ring division be eliminated?

Answer 54

No, revenue exceeds avoidable costs by $60,000

decision rule is to eliminate a segment if its revenues are less than its avoidable expenses. The ring division has revenues of $90,000 and avoidable expenses of $30,000. Since its revenues exceed its avoidable expenses by $60,000 (or $90,000 − $30,000), it should not be eliminated. However, other important considerations should also be taken into account.

Question 55

A company is considering replacing an existing machine with a new machine. Based on the information below, should the company keep or replace the existing machine?

Existing Machine New Machine
Book value $ 35,000 Purchase price $ 75,000
Variable manufacturing costs per year $ 10,000 Variable manufacturing costs per year $ 8,000
Salvage value $ 0
Selling price $ 40,000
Remaining useful life 5 years Useful life 5 years

Answer 55

Keep the existing machine becaThe company should keep the existing machine because the new machine will decrease overall income by $25,000.

Keep or Replace Analysis Keep Replace Income Increase (Decrease)
Revenues
Sale of existing machine $ 40,000
Costs
Purchase of new machine (75,000)
Variable manufacturing costs $ (50,000) (40,000)
Income (loss) $ (50,000) $ (75,000) $ (25,000)use the new machine will decrease overall income by $25,000

Question 56

Place the following cost-plus product price setting process in the correct order:

Answer 56

Determine selling price per unit: step 3

Determine the dollar markup per unit: step 2

Determine total cost per unit: step 1

Question 57

Stuart Company uses the total cost method to set their selling price. Management expects to produce and sell 50,000 units of the company’s product. Variable costs include product costs of $20 per unit and selling, general and administrative costs of $10 per unit. Fixed costs include overhead of $200,000 and selling, general and administrative costs of $50,000. Total cost and total cost per unit equal:

Answer 57

$1,750,000 and $35

Production costs = Variable product costs of $1,000,000 (or $20 per unit × 50,000 units) + Fixed costs of $200,000 = $1,200,000.

Selling, general and administrative costs = Variable selling, general and administrative costs of $500,000 (or $10 per unit × 50,000 units) + Fixed selling, general and administrative costs of $50,000 = $550,000.

Total costs = Product costs of $1,200,000 + Selling, general and administrative costs of $550,000 = $1,750,000.

Total cost per unit = Total costs of $1,750,000 ÷ Total units expected to be produced and sold of 50,000 = $35.

Question 58

Cold Company makes large containers of ice cream at a variable cost of $10 per container. It usually sells the container for $15. Cold Company is operating at less than full capacity. A potential new customer is requesting containers of ice cream at a selling price of $12. Fixed overhead will not change regardless of whether this order is accepted. Should Cold Company accept the special order?

Answer 58

Yes, there will be a $2 increase in income for every new container sold

Reason:
Yes, there will be an increase in income of $2 (or selling price of $12 − variable cost of $10) for every container sold to the new customer.

Question 59

Place the following time and material price setting process in the correct order:

Answer 59

Compute the materials markup: step 2

Estimate the number of direct labor hours and total materials cost: step 3

Compute the time charge per hour of direct labor: step 1

Question 60

Marshall Grocery Delivery Service reports the following information:

Direct labor rate per hour $ 20
Non-materials related overhead per hour $ 25.80
Materials-related overhead 4% of Direct materials cost
Target profit margin 20%

The materials markup per dollar of materials cost is:

Answer 60

24%
4% DM costs + 20% target prof msrgin