Question 1

A firm currently makes a component, and requires 30 000 of them for the coming year's production. Another supplier has offered the part at a delivered price of $3 per unit. It would cost $3000 to check purchased units for quality. Product costs per unit for the past year were $2.35 variable and $1 fixed based on 30 000 units. If the component was bought, fixed overhead would be reduced by $6000, the cost of leasing specialised equipment. The space vacated by the equipment can be rented for $4000 for the year. Which of the following statements is the correct quantitative analysis of the make or buy decision?

Accepted Answer

A)  The buy option costs $12 500 more than the make option. 
B)  The buy option costs $12 500 less than the make option. 
C)  The buy option costs $10 500 more than the make option. 
D)  The firm is indifferent between the two options.

Question 2

Kragle Ltd manufacturers a number of specialised electronic components, including the advanced X1000. Kragle Ltd has the capacity to produce 10 000 units of X1000 per year. Currently it is operating at 80 per cent capacity. The selling price for X1000 is $100 per unit. The variable cost per unit is $30. Fixed cost allocated to producing X1000 is $200 000 per year. Kragle Ltd receives a special order for 3000 units of X1000. The opportunity cost associated with taking this special order is:

Accepted Answer

A)  $0. 
B)  $30 000. 
C)  $70 000. 
D)  $100 000.

Question 3

Steps in the decision-making process
The six steps in the decision-making process are to clarify the decision problem, specify the criterion, identify the alternatives, develop a decision model, collect the data and select an alternative.
i. In which step is the management accountant most heavily involved? Explain.
ii. Assume that a decision-making process has been underway for a while and that three alternatives have been developed. At the last step in the process, the managers suddenly realise there is another alternative. Describe which steps in the decision-making process will have to be revisited in order to consider this new alternative.

Accepted Answer

The answer of Steps in the decision-making process
The six steps...

Question 4

Many decisions can be classified as tactical decisions or strategic decisions. Using an example to illustrate both types of decisions, briefly describe the differences between a tactical and strategic decision.

Accepted Answer

The answer of Many decisions can be classified as tactical...

Question 5

Sunshine Products is a multiproduct firm. The revenues of a single product are $200 000 when 10 000 units are sold. Variable costs are $16 per unit. Direct fixed expenses of $25 000 consist primarily of depreciation on equipment specialised to the product. By what amount will Sunshine Products' cash flow change if the product is dropped?

Accepted Answer

A)  $200 000 decrease 
B)  $160 000 decrease 
C)  $40 000 decrease 
D)  $15 000 decrease

Question 6

When a joint production process results in two or more products being produced simultaneously, the products are termed:

Accepted Answer

A)  joint products. 
B)  split-off products. 
C)  by-products. 
D)  separable products.

Question 7

Why are joint costs never relevant in deciding whether to sell a product at split-off or process it further?

Accepted Answer

A)  Because they are sunk costs 
B)  Because they are the same under both alternatives 
C)  Because they have already been allocated to joint products 
D)  Because they are sunk costs AND because they are the same under both alternatives

Question 8

The book value of an asset such as equipment is an example of:

Accepted Answer

A)  a future cost. 
B)  a differential cost. 
C)  an opportunity cost. 
D)  a sunk cost.

Question 9

SloGrowth has idle capacity. They have received a special order for 2000 units at a price of $6 per unit. Currently production and sales are budgeted for 20 000 units without considering the special order. Budget information for the year is presented below. 
Cost of goods sold includes $20 000 of fixed manufacturing cost. Determine the effect on profit if the special order is accepted.

Accepted Answer

A)  Remains the same 
B)  Increase by $2000 
C)  Decrease by $2000 
D)  Decrease by $1000

Question 10

For which of the following should joint costs and joint cost allocations not be used?

Accepted Answer

A)  Inventory valuation 
B)  Comparing profitability of joint products 
C)  Rewarding managers of processes beyond split-off point 
D)  Both comparing profitability of joint products AND rewarding managers of processes beyond split-off point

Question 11

Opportunity cost is best defined as:

Accepted Answer

A)  the amount of money that is paid for something. 
B)  the amount of money that is paid for something, considering inflation. 
C)  the highest valued benefit given up in making a choice. 
D)  all of the benefits that are given up in making a choice.

Question 12

The joint cost allocation method that recognises the revenues at split-off but does not consider any further processing costs is the:

Accepted Answer

A)  relative sales value method. 
B)  net realisable value method. 
C)  joint cost allocation method. 
D)  constant gross margin method.

Question 13

A well-designed activity-based system helps managers because the costs are analysed in more detail and identify:

Accepted Answer

A)  volume-based costs. 
B)  non-volume-based costs. 
C)  overheads and volume-based costs. 
D)  volume-based and non-volume-based costs.

Question 14

The method under which the relative magnitude of the final products' net realisable values is used to allocate the joint cost is the:

Accepted Answer

A)  net realisable value method. 
B)  constant gross margin method. 
C)  relative sales value method. 
D)  physical units method.

Question 15

When a business has idle capacity and has two options to choose from that will maximise capacity, the potential benefit that is surrendered by choosing only one option is known as the opportunity cost.

Accepted Answer

A) True 
 B)False

Question 16

Lipex Pty Ltd produces two products (A and B) from a particular joint process. Each product may be sold at the split-off point or processed further. Additional processing requires no special facilities, and production costs of further processing are entirely variable and traceable to the products involved. Joint production costs for the year were $60 000. Sales values and costs are as follows. 
Allocate the joint production costs based on the physical units method. What are the joint costs assigned to product A?

Accepted Answer

A)  $25 714 
B)  $20 339 
C)  $34 286 
D)  $30 000

Question 17

North Central Publishing is considering outsourcing its printing process. Which of the following are relevant for this outsourcing decision?
I The rent associated with the freed-up space when the printing equipment is sold
Ii Supplier's financial stability
Iii The carrying amount of the printing equipment

Accepted Answer

A)  ii and iii 
B)  i and ii 
C)  i and iii 
D)  i, ii and iii

Question 18

A firm currently makes a component, and requires 30 000 for the coming year's production. Another supplier has offered the part at a delivered price of $3 per unit. It would cost $3000 to check purchased units for quality. Product costs per unit for the past year were $2.35 variable and $1 fixed based on 30 000 units. If the component was bought, fixed overhead would be reduced by $6000, the cost of leasing specialised equipment. The space vacated by the equipment can be rented for $4000 for the year. At what level of units of production is the firm indifferent between making and buying?

Accepted Answer

A)  30 000 units 
B)  10 769 units 
C)  4615 units 
D)  20 000 units

Question 19

Kragle Ltd manufacturers a number of specialised electronic components, including the advanced X1000. Kragle Ltd has the capacity to produce 10 000 units of X1000 per year. Currently it is operating at 80 per cent capacity. The selling price for X1000 is $100 per unit. The variable cost per unit is $30. Fixed cost allocated to producing X1000 is $200 000 per year. Kragle Ltd receives a special order for 2000 units of X1000. The opportunity cost associated with taking this special order is:

Accepted Answer

A)  $0. 
B)  $60 000. 
C)  $140 000. 
D)  $200 000.

Question 20

For a firm that currently makes a particular component, which of the following are qualitative factors that would be considered following a quantitative analysis in favour of buying?

Accepted Answer

A)  Buying increases uncertainty, in particular with respect to timely availability of the component. 
B)  Buying surrenders control over product design and quality. 
C)  Employee morale would be affected if a decision to buy meant dismissing staff. 
D)  All of the given answers

Exam 19: Information for Decisions: Relevant Costs and Benefits