Question 1

Variable costs that are proxies for long-term costs should be used to measure profitability.

Accepted Answer

A) True 
 B)False  False

Question 2

Lindsay purchased a raffle ticket for $5. Just before the grand prize drawing two people tried to buy her ticket. The first person offered $30, and another offered $65. What is Lindsay's opportunity cost of keeping the raffle ticket?

Accepted Answer

A) $60 
B) $65 
C) $90 
D) $95 
A) $60 
B) $65 
C) $90 
D) $95 B

Question 3

Easton Company makes and sells scooters. Easton incurred the following costs in its most recent fiscal year: Easton can currently purchase the scooters it makes from another company. If the company purchases the scooters, Easton would still continue to use its own logo, sales staff, and advertising programs. Which of the following costs would be classified as a facility-level cost?
$$\begin{array} { | l | l | } 
\hline { \text { Cost Items Appearing } } & \text { on the Income Statement } \
\hline \text { Materials cost (\$10 per unit) } & \text { Depreciation on manufacturing equipment } \
\hline \text { Company president's salary } & \text { Salaries of administrative personnel } \
\hline \text { Labor cost (\$4 per unit) } & \text { Research and development costs } \
\hline \text { Advertising costs ( } 150,000 \text { per vear) } & \text { Real estate taxes on factory } \
\hline \text { Shipping and handling (\$0.15 per unit) } & \text { Inspection costs } \
\hline
\end{array}$$

Accepted Answer

A) Inspection costs 
B) Shipping and handling 
C) Materials cost 
D) Company president's salary 
A) Inspection costs 
B) Shipping and handling 
C) Materials cost 
D) Company president's salary D

Question 4

Select the incorrect statement concerning opportunity costs.

Accepted Answer

A) Opportunity costs are relevant costs. 
B) Opportunity costs are cumulative. 
C) Opportunity costs are future-oriented. 
D) Opportunity costs are not recorded in the books. 
A) Opportunity costs are relevant costs. 
B) Opportunity costs are cumulative. 
C) Opportunity costs are future-oriented. 
D) Opportunity costs are not recorded in the books.

Question 5

Sunk costs:

Accepted Answer

A) are not considered when evaluating new proposals. 
B) differ among the alternatives. 
C) impact the future. 
D) are relevant. 
A) are not considered when evaluating new proposals. 
B) differ among the alternatives. 
C) impact the future. 
D) are relevant.

Question 6

Safety Products currently outsources an electrical switch that is a component in its sprinkler systems. The switches are purchased for $20 each. The company is considering making the switches internally and has conducted a study to determine the costs involved. The costs below are projected annual production costs: Assume that the company needs 15,000 of the switches, which would be produced in three batches. Assume also that the company will still be operating within the relevant range. If Safety decides to make the parts under these conditions, the total relevant costs will be:
$$\begin{array} { | l | l | } 
\hline \text { Unit-level material cost } & \$  3 \
\hline \text { Unit-level labor cost } & \$  2 \
\hline \text { Unit-level overhead } & \$  1 \
\hline \text { Batch-level  cost ( } 5,000 \text { units per batch) } & \$5,000 \
\hline \text { Product-level supervisory salaries } & \$ 37,500 \
\hline \text { Allocated facility-level costs } & \$ 20,000 \
\hline
\end{array}$$

Accepted Answer

A) $132,500. 
B) $162,500. 
C) $105,000. 
D) $142,500. 
A) $132,500. 
B) $162,500. 
C) $105,000. 
D) $142,500.

Question 7

Which of the following statements is incorrect?

Accepted Answer

A) When faced with multiple demands on a constrained resources, managers should choose the product that provides the highest unit contribution margin. 
B) Constraints are limitations on a company's ability to satisfy demands for its products. 
C) Constraints are also referred to as bottlenecks. 
D) Managers seek to minimize the impact of bottlenecks on the operations of a business. 
A) When faced with multiple demands on a constrained resources, managers should choose the product that provides the highest unit contribution margin. 
B) Constraints are limitations on a company's ability to satisfy demands for its products. 
C) Constraints are also referred to as bottlenecks. 
D) Managers seek to minimize the impact of bottlenecks on the operations of a business.

Question 8

A manager refuses to replace an existing asset even though an extensive analysis indicates that replacement is desirable. One possible explanation for the manager's action is that:

Accepted Answer

A) A financial loss may be reported in the current period if the asset is replaced. 
B) The manager is concerned that his or her superior may think that the original asset purchase was a mistake on the part of the manager. 
C) The manager expects to be promoted or transferred in the near future and is concerned primarily about short-term performance. 
D) All of the above. 
A) A financial loss may be reported in the current period if the asset is replaced. 
B) The manager is concerned that his or her superior may think that the original asset purchase was a mistake on the part of the manager. 
C) The manager expects to be promoted or transferred in the near future and is concerned primarily about short-term performance. 
D) All of the above.

Question 9

Variable costs are always relevant in decision making.

Accepted Answer

A) True 
 B)False

Question 10

The management practice that increases profitability through the management of bottlenecks is known as:

Accepted Answer

A) the theory of constraints. 
B) the theory of restraints. 
C) the materiality principle. 
D) total quality management. 
A) the theory of constraints. 
B) the theory of restraints. 
C) the materiality principle. 
D) total quality management.

Question 11

What characteristics must qualitative information have to be relevant to a particular decision?

Accepted Answer

Answers will vary
Qualitative

Question 12

Osprey Company is trying to decide between the following two alternatives: Which of the following conclusions can be drawn from this example?
$$\begin{array} { | l | r | r | } 
\hline & \text { Alternative A } & \text { Alternative B } \
\hline \text { Projected revenue } & \$ 50,000 & \$ 60,000 \
\hline \text { Direct material } & 6,000 & 12,000 \
\hline \text { Assembly labor } & 9,000 & 9,000 \
\hline \text { Production supervisor's salary } & 10,000 & 10,000 \
\hline\text { Facility-related costs } & 10,000 & 15,000 \
\hline \text { Profit } & \$ 15,000 & \$ 14,000 \
\hline & & \
\hline
\end{array}$$

Accepted Answer

A) Variable costs are always relevant for decision making. 
B) Fixed costs are sunk and thus are never relevant for decision making. 
C) Relevant costs may include variable costs and fixed costs. 
D) None of the above. 
A) Variable costs are always relevant for decision making. 
B) Fixed costs are sunk and thus are never relevant for decision making. 
C) Relevant costs may include variable costs and fixed costs. 
D) None of the above.

Question 13

The Enhanced Products Division of Forrest Industries makes ceramic pots that are used to hold large decorative plants. During the current year, the division produced 10,000 pots and incurred the following costs:
 $\begin{array}{|l|r|}
\hline\text { Unit-level materials costs }(10,000 @ \$ 15) & \$ 150,000 \
\hline \text { Unit-level labor costs }(10,000 @ \$ 20) & 200,000\\hline \text { Unit-level overhead costs }(10,000 @ \$ 16) & 160,000 \
\hline \text { Depreciation expenses on equipment* } & 30,000 \
\hline \text { Other manufacturing overhead** } & 36,000 \\hline
\end{array}$ *The equipment was purchased for $150,000 and has a current book value of $120,000, remaining useful life of four years, and a zero salvage value. If the company does not use the equipment, it can be leased for $8,000 per year.**Includes supervisors' salaries and rent for manufacturing plant.Required:
The division is considering replacing the equipment used to manufacture its ceramic pots. Replacement equipment can be purchased at a price of $200,000. The new equipment, which is expected to last 4 years and have a salvage value of $20,000, will reduce unit-level labor costs by 25 percent. Assuming the division desires to maintain its production and sales at 10,000 ceramic pots per year, prepare a schedule that shows the relevant cost of operating the existing equipment versus the cost of operating the new equipment. Should the existing equipment be replaced? Why or why not?

Accepted Answer

The relevant costs of using the old equi

Question 14

Only variable costs are relevant for decision making.

Accepted Answer

A) True 
 B)False

Question 15

Select the correct statement regarding relevant costs and revenues.

Accepted Answer

A) Sunk costs are relevant for decision-making purposes. 
B) Relevant costs are frequently called unavoidable costs. 
C) Direct labor is an example of a unit-level cost. 
D) Only variable costs are relevant for decision making. 
A) Sunk costs are relevant for decision-making purposes. 
B) Relevant costs are frequently called unavoidable costs. 
C) Direct labor is an example of a unit-level cost. 
D) Only variable costs are relevant for decision making.

Question 16

The decision to accept a lower-than-normal selling price may depend on the availability of excess capacity.

Accepted Answer

A) True 
 B)False

Question 17

Outdoor Living Company has just received a special order for 500 hammocks. Outdoor Living has sufficient idle capacity to accept the order. Accepting the order will increase Outdoor Living's variable manufacturing costs. Which type of cost is considered a sunk cost to Outdoor Living's decision of whether to accept or reject the special order?

Accepted Answer

A) Raw materials to make the 500 hammocks 
B) Labor cost to make the 500 hammocks 
C) Depreciation on equipment that would be used to make the hammocks 
D) Materials handling cost 
A) Raw materials to make the 500 hammocks 
B) Labor cost to make the 500 hammocks 
C) Depreciation on equipment that would be used to make the hammocks 
D) Materials handling cost

Question 18

Discuss why qualitative characteristics must be considered when making decisions such as special orders, outsourcing, elimination and replacement decisions and scarce resource allocation decisions. Give examples.

Accepted Answer

Answers will vary
As with quantitative d

Question 19

Discuss the conflict that often occurs between short-run and long-run performance in asset replacement decisions.

Accepted Answer

Answers will vary
Often when existing as

Question 20

Equipment should be evaluated for possible replacement only as it nears the end of its useful life.

Accepted Answer

A) True 
 B)False

Variable costs that are proxies for long-term costs should be used to measure profitability.

Lindsay purchased a raffle ticket for $5. Just before the grand prize drawing two people tried to buy her ticket. The first person offered $30, and another offered $65. What is Lindsay's opportunity cost of keeping the raffle ticket?

Select the incorrect statement concerning opportunity costs.

Sunk costs:

Which of the following statements is incorrect?

A manager refuses to replace an existing asset even though an extensive analysis indicates that replacement is desirable. One possible explanation for the manager's action is that:

Variable costs are always relevant in decision making.

The management practice that increases profitability through the management of bottlenecks is known as:

What characteristics must qualitative information have to be relevant to a particular decision?

Only variable costs are relevant for decision making.

Select the correct statement regarding relevant costs and revenues.

The decision to accept a lower-than-normal selling price may depend on the availability of excess capacity.

Discuss why qualitative characteristics must be considered when making decisions such as special orders, outsourcing, elimination and replacement decisions and scarce resource allocation decisions. Give examples.

Discuss the conflict that often occurs between short-run and long-run performance in asset replacement decisions.

Equipment should be evaluated for possible replacement only as it nears the end of its useful life.

Management Accounting and Corporate Governance

Cost Behavior, Operating Leverage, and Profitability Analysis

Analysis of Cost, Volume, and Pricing to Increase Profitability

Cost Accumulation, Tracing, and Allocation

Cost Management in an Automated Business Environment: Abc, Abm, and Tqm

Planning for Profit and Cost Control

Performance Evaluation

Responsibility Accounting

Planning for Capital Investments

Product Costing in Service and Manufacturing Entities

Job-Order, Process, and Hybrid Costing Systems

Financial Statement Analysis

Statement of Cash Flows

Filters

Exam 6: Relevant Information for Special Decisions

Variable costs that are proxies for long-term costs should be used to measure profitability.

Lindsay purchased a raffle ticket for $5. Just before the grand prize drawing two people tried to buy her ticket. The first person offered $30, and another offered $65. What is Lindsay's opportunity cost of keeping the raffle ticket?

Select the incorrect statement concerning opportunity costs.

Sunk costs:

Which of the following statements is incorrect?

A manager refuses to replace an existing asset even though an extensive analysis indicates that replacement is desirable. One possible explanation for the manager's action is that:

Variable costs are always relevant in decision making.

The management practice that increases profitability through the management of bottlenecks is known as:

What characteristics must qualitative information have to be relevant to a particular decision?

Only variable costs are relevant for decision making.

Select the correct statement regarding relevant costs and revenues.

The decision to accept a lower-than-normal selling price may depend on the availability of excess capacity.

Discuss why qualitative characteristics must be considered when making decisions such as special orders, outsourcing, elimination and replacement decisions and scarce resource allocation decisions. Give examples.

Discuss the conflict that often occurs between short-run and long-run performance in asset replacement decisions.

Equipment should be evaluated for possible replacement only as it nears the end of its useful life.

Management Accounting and Corporate Governance

Cost Behavior, Operating Leverage, and Profitability Analysis

Analysis of Cost, Volume, and Pricing to Increase Profitability

Cost Accumulation, Tracing, and Allocation

Cost Management in an Automated Business Environment: Abc, Abm, and Tqm

Planning for Profit and Cost Control

Performance Evaluation

Responsibility Accounting

Planning for Capital Investments

Product Costing in Service and Manufacturing Entities

Job-Order, Process, and Hybrid Costing Systems

Financial Statement Analysis

Statement of Cash Flows

Filters