Test 3 - Short -term decision making - V1

Name___________________________________

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.

1) Which of the following costs is (are) relevant with respect to the decision to sell a product at the split-off point
or to process if further?
I. The variable costs of further processing the product.
II. The joint processing costs associated with the manufacture of the product.
III. The increase in the sales price of the product if it is further processed.
A) I and II B) I and III C) II and III D) I, II, and III

2) Mastic Company recently manufactured 100 defective products. Mastic's management can sell the defective
products as is at a reduced price or they can repair them and sell them at the regular sales price. Which of the
following is irrelevant to Mastic's decision to sell them as is or to repair them?
A) The opportunity costs associated with the time commitment to repair the defective units.
B) The difference in revenue when comparing the regular sales price to the reduced sales price.
C) The manufacturing costs incurred to produce the defective units.
D) The labor costs associated with repairing the defective units.

3) Saber Sawmill produces rough-cut lumber from a joint process which begins with logs that they purchase from
a logging company. Saber’s management is trying to determine whether the rough-cut lumber should be
planed and then sold as finished lumber. Which of the following is (are) relevant to the decision faced by Saber
’s management?
I. The amount that Saber paid to acquire the logs.
II. The selling price of the rough-cut lumber.
III. The selling price of the planed lumber.
IV. The variable cost of planing the lumber.
V. The cost of buying a new planer.
A) II, III, IV, and V B) II, III, and IV
C) I and V D) They are all relevant.

4) All of the following are relevant to the decision to replace equipment except the:
A) cost of old equipment. B) future maintenance costs of old equipment.
C) selling price of old equipment. D) cost of new equipment.

5) Fixed costs that do not differ between two alternatives are:

A) irrelevant to the decision.
B) considered opportunity costs.
C) relevant to the decision.
D) important only if they represent a material dollar amount.

6) Which of the following statements is not correct?

A) Depreciation expense is irrelevant with respect to an outsourcing decision.
B) Avoidable fixed costs are irrelevant with respect to a make or buy decision.
C) Variable production costs are relevant with respect to a special sales order decision.
D) Unavoidable fixed costs are irrelevant with respect to a decision to drop a product line.

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 7) In making a short-term decision, which of the following is most important?
A) Use a conventional absorption costing approach B) Focus on total costs
C) Discount cash flows to their present value D) Separate variable costs from fixed costs

8) The benefit foregone by not choosing an alternative course of action is referred to as a(n):
A) sunk cost. B) incremental cost. C) variable cost. D) opportunity cost.

9) Lincoln Company produces a part that is used in the manufacture of one of its products. The unit
manufacturing costs of this part, assuming a production level of 5,000 units, are as follows:

Direct materials $3
Direct labor 5
Variable manufacturing overhead 4
Fixed manufacturing overhead 2
Total cost $14

Erickson Company has offered to sell 5,000 units of the same part to Lincoln Company for $13 per unit.
Assuming the company has no other use for its facilities and that the fixed manufacturing costs are
unavoidable, what should Lincoln Company do?
A) Buy from Erickson and save $1 per unit. B) Make the part and save $3 per unit.
C) Buy from Erickson and save $3 per unit. D) Make the part and save $1 per unit.

10) Perfect Time Company manufactures and sells watches. Great Products Company has offered Perfect Time $21
per watch for 5,000 watches. Perfect Time's normal selling price is $36 per watch. The total manufacturing cost
per watch is $24 and consists of variable costs of $18 per watch and fixed overhead costs of $6 per watch. What
is the change in operating income resulting from the special sales order?
A) $105,000 B) ($15,000) C) ($60,000) D) $15,000

11) Which of the following is not important with respect to short-run decision making?
A) Focusing on analyzing incremental revenues and costs.
B) Focusing on maximizing the gross profit of each unit sold.
C) Using a contribution margin income statement format rather than an absorption costing format.
D) Focusing on relevant revenues and costs.

12) DC Electronics uses a standard part in the manufacture of several of its radios. The cost of producing 30,000
parts is $90,000, which includes fixed costs of $33,000 and variable costs of $57,000. The company can buy the
part from an outside supplier for $2.50 per unit, and avoid 30% of the fixed costs. If DC Electronics makes the
part, how much will its operating income be?
A) $5,100 less than if the company bought the part
B) $15,000 less than if the company bought the part
C) $8,100 greater than if the company bought the part
D) $6,500 greater than if the company bought the part

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13) The Bike Manufacturing Company has idle manufacturing capacity and is considering the manufacture of a
new line of bikes. Which of the following costs is irrelevant with respect to the decision to manufacture the new
line of bikes?
A) The monthly rental on the manufacturing facility used to produce bikes.
B) The cost of the new manufacturing equipment which would have to be purchased.
C) The costs associated with marketing and selling the new line of bikes.
D) The salary of the new production manager who would have to be hired.

14) Prince Company's racquet division has projected a net operating loss of $190,000 for the upcoming year; fixed
costs for the racquet division total $325,000, of which $115,000 are considered to be avoidable. As a result of the
forecasted loss, Prince is considering dropping the racquet division. If the racquet division is dropped, Prince
estimates that the clothing division's sales will decrease 5% next year. The clothing division's projected
operating income next year is $195,000 while the projected contribution margin is $525,000. Should Prince
Company drop the racquet division?
A) Yes, because operating income will increase $180,250.
B) Yes, because operating income will increase $115,000.
C) No, because operating income will decrease $46,250.
D) No, because operating income will decrease $29,750.

15) Which of the following is the format of the income statement that is most useful in decision-making?
A) Multiple-step format B) Absorption costing format
C) Single-step format D) Contribution margin format

16) DC Electronics uses a standard part in the manufacture of several of its radios. The cost of producing 30,000
parts is $90,000, which includes fixed costs of $33,000 and variable costs of $57,000. The company can buy the
part from an outside supplier for $2.50 per unit, and avoid 30% of the fixed costs. If DC Electronics buys the
part, what is the most DC Electronics can spend per unit so that operating income equals the operating income
from making the part?
A) $3.00 B) $2.67 C) $2.34 D) $2.23

17) Fixed costs that may be avoided in the future are referred to as:
A) relevant costs. B) sunk costs. C) replacement costs. D) opportunity costs.

18) Which of the following statements describes a scenario as to when management should consider dropping a
business division?
A) The division has consistently reported an operating loss.
B) The division's avoidable fixed costs are greater than its contribution margin.
C) The division's unavoidable fixed costs are greater than its operating loss.
D) The division's traceable fixed costs exceed its contribution margin.

19) Which of the following is a sunk cost?

A) Trade-in value of old vehicle B) Purchase price of vehicle to be traded in
C) Purchase price of new vehicle D) Depreciation on new vehicle

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20) Each month, Tuttle Corporation produces 400 units of a product that has unit variable costs of $16.00. Total
fixed costs for the month are $3,400. A special sales order is received for 100 units of the product at a price of
$18 per unit. In deciding to accept or reject the special sales order, it is appropriate to consider:
A) the difference between the two fixed costs per unit, or $1.70.
B) new fixed cost per unit of $6.80.
C) the difference between the offered price and the variable cost per unit, or $2.00.
D) current fixed cost per unit of $8.50.

21) In deciding whether to drop its electronics product line, a company's manager would consider which of the
following?
A) The costs it could save by dropping the product line
B) How dropping the electronics product line would affect sales of its other products like CDs
C) The revenues it would lose from dropping the product line
D) All of the above

22) Which of the following is irrelevant when making a decision?

A) The cost of further processing a product that could be sold as is.
B) The cost of an asset that the company is considering replacing.
C) The fixed overhead costs that differ among decision alternatives.
D) The expected increase in contribution margin of one product line as a result of a decision to drop a
separate unprofitable product line.

23) Lowwater Sailmakers manufactures sails for sailboats. The company has the capacity to produce 25,000 sails
per year, and is currently producing and selling 20,000 sails per year. The following information relates to
current production:

Sale price per unit $150

Variable cost per unit:
Manufacturing $55
Marketing and administrative $25
Total fixed costs:
Manufacturing $640,000
Marketing and administrative $280,000

If a special sales order is accepted for 2,500 sails at a price of $70 per unit, fixed costs increase by $10,000, and
variable marketing and administrative costs for that order decrease by $5 per unit, what is the change in
operating income?
A) Operating income decreases $82,500. B) Operating income decreases $22,500.
C) Operating income increases $22,500. D) Operating income decreases $10,000.

24) Which of the following considerations is irrelevant with respect to consideration of a special sales order?
A) The impact of the order on regular sales in the future.
B) The decline in the fixed manufacturing cost per unit as a result of producing additional units.
C) The consideration of manufacturing capacity constraints.
D) The variable manufacturing costs associated with the order.

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25) Lowwater Sailmakers manufactures sails for sailboats. The company has the capacity to produce 25,000 sails
per year, and is currently producing and selling 20,000 sails per year. The following information relates to
current production:

Sale price per unit $150

Variable cost per unit:
Manufacturing $55
Marketing and administrative $25
Total fixed costs:
Manufacturing $640,000
Marketing and administrative $280,000

If a special sales order is accepted for 5,000 sails at a price of $125 per unit, and fixed costs remain unchanged,
what is the change in operating income?
A) Operating income increases $190,000. B) Operating income decreases $125,000.
C) Operating income increases $225,000. D) Operating income decreases $5,000.

26) Russ Company is trying to determine whether to accept a 1,000 unit special sales order. Russ doesn't have the
capacity to accept the special sales order without losing 250 units of sales to regular customers. What is the least
that Russ would be willing to accept for the 1,000 units?
A) The variable and fixed costs of producing and selling the 1,000 units.
B) The incremental cost of producing and selling the 1,000 units plus the opportunity cost associated with the
loss of sales to regular customers.
C) The variable costs of producing and selling the 1,000 units.
D) The per unit sales price paid by the regular customers.

27) Pirate Company's management is considering dropping its small television product line due to continued
operating losses. Pirate has forecasted an operating loss of $25,000 for the upcoming year. Fixed expenses for the
upcoming year are forecasted at $45,000, of which $30,000 are considered to be avoidable. Should Pirate
Company drop the small television product line?
A) No, because the contribution margin that would be lost exceeds the $45,000 of fixed costs.
B) Yes, because the avoidable fixed costs exceed the contribution margin that would be lost.
C) No, because the unavoidable fixed costs are less than the forecasted operating loss.
D) Yes, because of the forecasted operating loss of $25,000.

28) DJ Corporation has a limited number of labor hours available for monthly production purposes. What should
DJ's strategy be in order to maximize its monthly operating income?
A) DJ should produce the products with the highest gross margin per unit.
B) DJ should hire additional laborers as long as the hourly labor cost is less than the sales revenue generated
as a result of working an additional hour.
C) DJ should produce the products with the highest contribution margin per labor hour.
D) DJ should produce the products with the highest contribution margin per unit.

29) Which of the following costs is irrelevant with respect to a special sales order decision?
A) Additional fixed costs that will be incurred to complete the order.
B) Variable manufacturing costs incurred to complete the order.
C) Fixed costs that are determined to be unavoidable.
D) Special packaging costs associated with the order.

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30) Shasta Company is trying to decide whether to continue to manufacture a particular component or to buy the
component from an outside supplier. Which of the following is irrelevant with respect to this decision?
A) The alternative uses of the facilities being used to currently manufacture the component.
B) The unavoidable fixed manufacturing costs associated with the manufacture of the component.
C) The outside supplier's ability to deliver the component on a timely basis.
D) The quality of the component purchased from the outside supplier.

31) DC Electronics uses a standard part in the manufacture of several of its radios. The cost of producing 30,000
parts is $90,000, which includes fixed costs of $33,000 and variable costs of $57,000. The company can buy the
part from an outside supplier for $2.50 per unit, and avoid 30% of the fixed costs. Assume that factory space
freed up by purchasing the part from an outside source can be used to manufacture another product that can be
sold for $11,600 profit. If DC Electronics makes the part, what will its operating income be?
A) It will be $19,700 greater than if the company bought the part.
B) It will be $3,400 less than if the company bought the part.
C) It will be $1,700 greater than if the company bought the part.
D) It will be $3,500 less than if the company bought the part.

32) The effect of a plant closing on employee morale is an example of which of the following?
A) A variable cost B) A qualitative factor
C) A sunk cost D) A quantitative factor

33) Gnome Company is trying to decide whether to continue to manufacture a particular component or to buy the
component from an outside supplier. Which of the following is relevant to this decision?
A) The cost of the equipment that is currently being used to manufacture the component.
B) The potentials uses of the facilities that are currently used to manufacture the component.
C) The insurance on the manufacturing facility which will continue regardless of the decision.
D) Allocated corporate fixed costs which would have to be allocated to other products if the component is no
longer manufactured.

34) In a special sales order decision, incremental fixed costs incurred because of an additional purchase of
equipment are considered to be:
A) sunk costs. B) irrelevant to the decision.
C) opportunity costs. D) relevant to the decision.

35) Which of the following describes a sunk cost?

A) An outlay expected to be incurred in the future.
B) A historical cost that is always irrelevant.
C) It is relevant to a decision because it changes depending on the alternative course of action selected.
D) A historical cost that may be relevant.

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Answer Key
Testname: UNTITLED2

1) B
2) C
3) A
4) A
5) A
6) B
7) D
8) D
9) D
10) D
11) B
12) C
13) A
14) C
15) D
16) D
17) A
18) B
19) B
20) C
21) D
22) B
23) B
24) B
25) C
26) B
27) B
28) C
29) C
30) B
31) D
32) B
33) B
34) D
35) B