Chapter 12 Relevant Costs for Decision Making Answer Key

True / False Questions

1. The book value of old equipment is not a relevant cost in a decision. TRUE

2. One of the dangers of allocating common fixed costs to a product line is that such allocations can make the line appear less profitable than it really is. TRUE

3. A differential cost is a variable cost. FALSE

4. All future costs are relevant in decision making. FALSE

5. Variable costs are always relevant costs. FALSE

6. A sunk cost is a cost that has already been incurred but that can be avoided at least in part depending on the action a manager takes. FALSE

7. A cost that will be incurred regardless of which course of action a manager takes is relevant to the manager's decision. FALSE

8. Opportunity costs are recorded in the accounts of an organization. FALSE

9. In a decision to drop a segment, the opportunity cost of the space occupied by the segment would be the profit that could be derived from the best alternative use of the space. TRUE

10. Only the variable costs identified with a product are relevant in a decision concerning whether to eliminate the product. FALSE

11. Managers should pay little attention to bottleneck operations because they have limited capacity for producing output. FALSE

12. Defective units should be detected and scrapped or reworked after the bottleneck operation rather than before it. FALSE

13. All other things equal, it is profitable to continue processing a joint product after the split-off point so long as the incremental revenue from further processing exceeds the incremental costs of further processing. TRUE

14. Two or more different products that are manufactured in the same production period are known as joint products. FALSE

15. A merchandising company that buys all of its inventory from outside suppliers is an example of a company that is vertically integrated. FALSE

Multiple Choice Questions

16. For which of the following decisions are opportunity costs relevant?

A. Option A B. Option B C. Option C D. Option D

17. Which of the following costs are always irrelevant in decision making? A. avoidable costs B. sunk costs C. opportunity costs D. fixed costs

18. For which of the following decisions are sunk costs relevant? A. the decision to keep an old machine or buy a new one. B. the decision to sell a product at the split-off point or after further processing. C. the decision to accept or reject a special order offer. D. all of the above. E. none of the above.

19. The opportunity cost of making a component part in a factory with excess capacity for which there is no alternative use is: A. the variable manufacturing cost of the component. B. the total manufacturing cost of the component. C. the fixed manufacturing cost of the component. D. zero.

20. Allocated common fixed costs: A. can make a product line appear to be unprofitable. B. are always incremental costs. C. are always relevant in decisions involving dropping a product line. D. responses A, B, and C are all correct.

21. In deciding whether to manufacture a part or buy it from an outside supplier, which of the following costs are irrelevant?

A. Option A B. Option B C. Option C D. Option D

22. Consider a decision facing a company of either accepting or rejecting a special offer for one of its products. A cost that is not relevant is: A. direct materials. B. variable overhead. C. fixed overhead that will be avoided if the special offer is accepted. D. common fixed overhead that will continue if the special offer is not accepted. 23. Which product would be selected in a decision that involves the utilization of a constrained resource? A. the product with the lowest total cost per unit. B. the product with the lowest variable cost per unit. C. the product that uses the least amount of constrained resource per unit. D. the product with the highest contribution margin per unit. E. the product with the highest contribution margin per unit of the constrained resource.

24. In a plant operating at capacity: A. every machine and person in the plant is working at the maximum possible rate. B. only some specific machines or processes are operating at the maximum rate possible. C. profits are maximized. D. managers should produce those products with the highest contribution margin in order to deal with the constrained resource.

25. United Industries manufactures a number of products at its highly automated factory. The products are very popular, with demand far exceeding the factory's capacity. To maximize profit, management should rank products based on their: A. gross margin B. contribution margin C. selling price D. contribution margin per unit of the constrained resource

26. Sheela Dairy Corporation buys unprocessed cows' milk from local farmers. At the dairy, this unprocessed milk is broken down into cream and low-fat milk. The cream can be sold at this point or can be further processed into butter. Which of the following would be relevant in the decision to further process the cream into butter? A. the amount paid to the farmers to purchase the unprocessed milk. B. the cost of breaking down the unprocessed milk into cream and low-fat milk. C. the portion of corporate fixed expenses that are currently being allocated to cream. D. none of the above.

27. Consider the following statements: I. A vertically integrated company is more dependent on its suppliers than a company that is not vertically integrated. II. Many companies feel they can control quality better by making their own parts. III. A vertically integrated company realizes profits from the parts it is "making" instead of "buying" as well as profits from its regular operations. Which of the above statements represent advantages to a company that is vertically integrated? A. Only I B. Only III C. Only I and II D. Only II and III

28. JB Lumber Corporation is downsizing operations and has to decide which of its large saws should be sold. JB currently has four saws but only needs to keep three. All four saws have a remaining useful life of 3 years and will all have a salvage value of zero at the end of those 3 years. Also, all four saws have equal annual operating costs and output efficiency. Information related to the four saws is provided below:

In order to maximize profits for the next three years, which machine would be most beneficial for JB to sell? A. 1 B. 2 C. 3 D. 4