Week 12 - Relevant Costs & Decision Making

Question 1

It is important to be able to separate _______ costs from ______ costs

Answer 1

relevant and irrelevant

Question 2

Irrelevant Costs

Answer 2

will not change regardless of decision

Question 3

Relevant costs

Answer 3

differ between alternatives in a specific decision

Question 4

Opportunity cost

Answer 4

value of the next best option you have declined to accept an alternative

Question 5

sunk costs

Answer 5

have already been incurred and can never be recovered (ex. cost of past repairs)

Question 6

Differential analysis

Answer 6

considers different revenues and costs between alternative courses of action

Question 7

A restaurant is considering dropping its breakfast meal period. On the segmented contribution margin income statement, breakfast shows a contribution margin of $100,000 and fixed costs of $180,000. If breakfast is dropped, the company would no longer incur any of breakfast’s total fixed costs of $180,000. Based on this information, which one of the following statements is false?
Select one:
a. Keeping breakfast will increase the company’s operating income by $80,000.
b. Breakfast’s fixed costs of $180,000 are relevant to the decision.
c. From a financial perspective, the restaurant should drop breakfast.
d. The restaurant’s operating income will change if breakfast is dropped.

Answer 7

a

Question 8

When opening a new hotel, an important component of market research is:
Select one:
a. Financial statement review
b. Budget analysis
c. Variance analysis
d. Supply and demand analysis

Answer 8

d

Question 9

A commercial kitchen company is faced with a make-or-buy decision for a component used in its ice machines for restaurants. The variable costs for each unit of the component are $18 for direct materials, $10 for direct labour and $7 for variable overhead. Assume that fixed costs would remain the same under both the make and buy decisions. The company is offered a price of $35 per unit from an external supplier for the identical component. Which of the following statements is true?
Select one:
a. The company should buy the component from the external supplier, as this would save the company $7 per unit.
b. The company would be indifferent to the make-or-buy decision.
c. The company would save $7 per unit if it manufactured the component in-house.
d. The company should buy the component from the external supplier, as this would save the company $10 per unit.

Answer 9

b

If the company decides to buy, it would save precisely $35 in variable costs [$18 + $10 + $7]. Fixed costs will remain the same for either decision. The price offered by the external supplier is also $35. Since the price offered by the external supplier is equal to the potential savings in variable costs, the company should be indifferent regarding the make-or-buy decision.

Question 10

In the keep-or-drop decision, which of the following income statement formats will the company find most useful?
Select one:
a. An income statement in full costing format that complies with GAAP
b. Income statements are not useful in this case
c. A segmented income statement in the contribution margin format
d. An overall income statement in the contribution margin format

Answer 10

C

Question 11

A sunk cost is:
Select one:
a. a cost that has already been incurred and will be recovered
b. a cost that has already been incurred and can never be recovered
c. always relevant to a decision
d. sometimes relevant to a decision

Answer 11

b

Question 12

Five years ago, Robert Johnson Hotels purchased a machine for $100,000. This machine suddenly stopped working. The company is debating whether to repair the machine or replace the old machine with a new one. Based on this decision, the initial $100,000 spent on the old machine is considered a(an):
Select one:
a. differential cost
b. relevant cost
c. sunk cost
d. incremental cost

Answer 12

c

Question 13

A special order is:
Select one:
a. an order that always increases a company’s operating income if fulfilled.
b. an order that, if fulfilled, does not affect the company’s operating income.
c. an order that always decreases a company’s operating income if fulfilled.
d. a one-time purchase order received by a company that is not considered part of the company’s normal operations.

Answer 13

D

Question 14

Suppose that a restaurant has sufficient capacity to fulfill an entire special order of bagged lunches and that the variable cost of producing a normal lunch is equal to the variable manufacturing cost of producing a special-order bagged lunch. Which of the following statements is true regarding the decision to accept or reject the special order?
Select one:
a. There is an opportunity cost related to foregone contribution margin from regular sales.
b. The company should definitely accept the special order.
c. The selling price of the special order will always be irrelevant to the decision.
d. Variable cost is irrelevant to the decision.

Answer 14

d