True or False

1. Incremental costs are relevant to the decision to further process a product beyond its
current state. True
2. The opportunity cost of making a component part in a factory with excess capacity for which
there is no alternative use is equal to the contribution margin lost. False, zero
3. The opportunity cost of making a component part in a factory with no excess capacity is the
net benefit foregone from the best alternative use of the capacity required. True
4. Costs relevant to a make-or-buy decision include variable manufacturing costs as well as
unavoidable fixed costs. False
5. The term incremental cost refers to the difference in total costs that results from selecting
one choice instead of another. True
6. Relevant or differential cost analysis considers all variable and fixed costs as they change
with each decision alternative. True
7. The relevance of a particular cost to a decision is determined by the potential effect on the
decision, accuracy and verifiability of the cost, riskiness of the decision and the size of the
cost. False, only the potential effect on the decision.
8. A decision-making concept, described as "the contribution to income that is foregone by not
using a limited resource for its best alternative use," is called marginal cost. False,
opportunity cost.
9. The term that best refers to past costs that have been incurred and are not relevant to any
future decisions is full absorption costs. False, sunk costs.
10. Relevant costs refer to anticipated future costs that will differ among various alternatives.
True.
11. Incremental fixed costs would be relevant in short-term decision making. True.
12. Total unit costs are relevant for cost-volume-profit analysis. False, irrelevant in marginal
analysis.
13. A company's approach to a make-or-buy decision involves an analysis of avoidable costs.
True.
14. The sum of the average fixed costs and the average variable costs for a given output is
known as average total cost. True.
15. The change in total product resulting from the use of one unit more of the variable factor is
known as marginal product. True.
16. In a joint manufacturing process, joint costs incurred prior to a decision as to whether to
process the products after the split-off point should be viewed as relevant costs. False, sunk
costs.
17. Marginal revenue, by definition, is the change in total revenue associated with producing
and selling one more unit. True.
18. Profits that are lost by moving an input from one use to another are referred to as
cannibalization income. False, opportunity costs.
19. Sunk costs are In and of themselves are not relevant to decision making. True.
20. In a decision analysis situation, depreciation is not likely to contain a variable cost
component. True
21. The disposal price of the old equipment is relevant to a manufacturing equipment
replacement decision. True.
22. The replacement costs, out-of-pocket costs and differential costs are relevant to a decision
to accept or reject an order. True.
23. When making a decision to increase the robotic automation equipment in an existing facility,
a firm takes into consideration the initial cost of the current facility. True.
24. Incremental (differential) costs are additional costs that result when production, or some
other factor is increased. True.
25. Some fixed cost may vary among the alternatives and would be relevant, but not all fixed
cost are relevant. True.
26. Absorption costing includes all variable and fixed manufacturing cost, of which not all are
 relevant to the decision whether to make-or-buy decision. True.
27. Discretionary costs are costs that can be deferred to future periods without creating a significant
impact on the current period's results. True.
28. An imputed cost is an opportunity cost. It is a benefit that is given up as a result of using the
company's resources elsewhere. It is a cost that is not stated and must be calculated in some
way. A common example of an imputed cost is the interest cost of equity capital. True.
29. The cash inflow that the company would be able to gain from disposing of the old piece of
equipment is most relevant because this cash inflow will only occur if the decision is made to
dispose of the old piece of equipment. True.
30. General office costs will generally not differ among the options, therefore they are not relevant.
True.

Multiple Choice
1. D
2. A
3. C
4. B
5. A
6. B
7. A
8. C
9. A
10. A
11. C
12. A
13. C
14. C
15. B
16. B
17. C
18. B
19. D
20. C
21. C
22. A
23. D
24. D
25. B
26. B
27. A
28. D
29. C
30. A
31. B
32. A
33. A
34. C
35. C
36. A
37. C
38. B
39. A
 40. B
Straight Problems:
1.
1.1. Accept, Yes, profit of P1/unit or P10,000 >> (P7 – P6 x 10, 000 units)
1.2. Reject, P10,000 decrease >> -5,000 x (P10-P6) = - P20,000 less P10,000 (item 1.1)
1.3. Reject, P5,000 decrease
2.
2.1. Reject , P17,250, >> 10,000 x (7.5-6.25) – 7,000 x (10.50-6.25)
2.2. P7.95 >> Indifference point: 10,000x = 4,000 (4.25)
3.
3.1. Buy>> Make, P16.70 (P9 + P3 + P2.5 + P2.2) and Buy P16
3.2. P16.70
3.3. .70 x 40,000 = P28,000 Increase
3.4.
3.4.1. Make >> Make P14.50 vs Buy P16
3.4.2.P14.50
3.4.3. 60,000 decrease (14.5-16 x 40,000)
4.
4.1. Make; Loss of P8,000 to Purchase
Porcelain Gold Total
DM 80 165
DL 27 27
VOH 8 8
VC 115 200
x Units 3,000 800
Make Total VC 345,000 160,000 505,000

130 200
x Units 3,000 800
Total VC 390,000 160,000 550,000
FC
Dep (5,000)
Rent (32,000)
Purchase 513,000

Should Make, will lose P8,000 if the decision is to purchase

4.2. Quality, reliability of suppliers, timeliness, availability of inventory
4.3. No effect – the amount will still be avoided.
4.4. Should still make; loss of P23,000 if to purchase
 Porcelain Gold Total
DM 80 165
DL 27 27
VOH 8 8
VC 115 200
x Units 4,000 600
Make Total VC 460,000 120,000 580,000

130 200
x Units 4,000 600
Total VC 520,000 120,000 640,000
FC
Dep (5,000)
Rent (32,000)
Purchase 603,000

Should still Make, will lose P23,000 if the decision is to purchase

5.
5.1. P512 >> P240 + P80 + P120 + P72
5.2. P872 >> VC P512 + OC P360

6.
6.1. Continue to operate, net advantage of P40, 000. Demand (8,000x2=16,000) is greater than SDP so the decision
is to continue.
Shut-Down Cost Shut Down Savings Total
FMOH 105,000 45,000 150,000
FSC 27,000 3,000 30,000
Total 132,000 48,000 180,000
X months 2 2 2
Total 264,000 96,000 360,000
Start-up Costs 8,000 (8,000) -
Total 272,000 88,000 360,000
CM per Unit 8
Shut-down point 11,000
6.2. 11,000 for 2 months (see above computation).

7. Increase in profit of P70,000

If to Eliminate
Net Income - 200,000
Allocated Cost 340,000
Segment Income - Dept.B 140,000

Loss Income - 140,000

Increase in Sales 210,000
Net Increase 70,000
8.
8.1. 3, 4, 6
8.2. 6
8.3. 1
8.4. 3, 4, 5, 6

9. X = 950, Y = 700

10.
10.1. No, the conclusion is incorrect because the order generates a net contribution of P66,000 for the firm.
Note: The fixed administrative cost is irrelevant to the decision.
Selling price P115
Less: Direct materials (P45 - P4) P41
Direct labor 30
Variable manufacturing overhead (2 hours x P9*) 18 89
Unit contribution margin P 26

Total contribution margin (3,000 units x P26) P78,000

Less: Additional set-up costs P8,700
Special device 3,300 12,000
Net contribution to profit P66,000

*Fixed manufacturing overhead: P624,000 ÷ 24,000 labor hours = P26 per hour
Variable manufacturing overhead: P35 - P26 = P9

10.2. Yes, the order should be rejected. An environment of no excess capacity implies a very strong
marketplace. Success would be giving up sales at P180 per faucet, to be replaced with sales of P115 per unit
and the need to incur additional set-up costs and the cost of a special device. Company profitability would
suffer.
10.3. Yes, outsourcing is an option. Success could have another manufacturer produce the faucets for Yale
or perhaps even for another customer. Price, product quality, and supplier reliability would be important
considerations in this decision.