Horngren's Cost Accounting: A Managerial Emphasis, 17e, Global Edition by Datar/Rajan

Chapter 12 Decision Making and Relevant Information

Objective 12.1

1) A decision model involves a(n):

A) informal method of making a choice at the lower level management using sensitivity analysis
B) formal method of making a choice that often involves both quantitative and qualitative analyses
C) informal method of making a choice which is discussed in detailed in the financial reports
D) formal method of making a choice at the lower level management using advanced management
techniques such as balance scorecard
Answer: B
Diff: 1
Objective: 1
AACSB: Analytical thinking

2) Feedback regarding previous actions may affect:

A) future predictions
B) implementation of the decision
C) the decision model
D) All of these answers are correct.
Answer: D
Diff: 2
Objective: 1
AACSB: Analytical thinking

3) Place the following steps from the five-step decision process in order:

A= Obtain information including historical costs

B= Evaluate performance to provide feedback
C= Make decisions choosing among alternatives
D= Make predictions about the future
E= Identify the problem and uncertainties

A) A, E, D, B, C
B) E, A, D, B, C
C) E, A, D, C, B
D) D, C, B, A, E
Answer: C
Diff: 2
Objective: 1
AACSB: Analytical thinking

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4) The formal process of choosing between alternatives is known as a(n):
A) relevant model
B) decision model
C) alternative model
D) prediction model
Answer: B
Diff: 1
Objective: 1
AACSB: Analytical thinking

5) Flash City Inc. manufactures small flash drives and is considering raising the price by 75 cents a unit
for the coming year. With a 75-cent price increase, demand is expected to fall by 7,000 units.

Current Projected
Demand 79,000 units 72,000 units
Selling price $8.75 $9.50
Incremental cost per unit $5.80 $5.80

If the price increase is implemented, operating profit is projected to:

A) increase by $33,350
B) decrease by $5250
C) increase by $5250
D) decrease by $7000
Answer: A
Explanation: A) Change in operating income = [72,000 × ($9.50 - $5.80)] - [79,000 × ($8.75 - $5.80)] =
Increase of $33,350
Diff: 2
Objective: 1
AACSB: Application of knowledge

6) Flash City Inc. manufactures small flash drives and is considering raising the price by 75 cents a unit
for the coming year. With a 75-cent price increase, demand is expected to fall by 7,000 units.

Current Projected
Demand 76,000 units 69,000 units
Selling price $8.75 $9.50
Incremental cost per unit $4.80 $4.80

Would you recommend the 75-cent price increase?

A) No, because demand decreased.
B) No, because the selling price increases.
C) Yes, because contribution margin per unit increases.
D) Yes, because operating profits increase.
Answer: D
Diff: 2
Objective: 1
AACSB: Application of knowledge

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7) When using the five-step decision process, which one of the following steps should be done last?
A) obtain information
B) choose an alternative
C) evaluation and feedback
D) implementing the decision
Answer: C
Diff: 2
Objective: 1
AACSB: Analytical thinking

8) When using the five-step decision process, which one of the following steps should be done first?
A) obtain information
B) choose an alternative
C) evaluation and feedback
D) implementing the decision
Answer: A
Diff: 2
Objective: 1
AACSB: Analytical thinking

9) A decision model is an informal method for making a choice, using simpler methods like surveying.
Answer: FALSE
Explanation: A decision model is a formal method of making a choice that often involves both
quantitative and qualitative analyses.
Diff: 1
Objective: 1
AACSB: Analytical thinking

10) A decision model is a formal method of making a choice, and can include quantitative as well as
qualitative analysis.
Answer: TRUE
Diff: 1
Objective: 1
AACSB: Analytical thinking

11) Feedback from previous decisions uses historical information and, therefore, is irrelevant for making
future predictions.
Answer: FALSE
Explanation: Historical costs may be helpful in making future predictions, but are not relevant costs for
decision making.
Diff: 1
Objective: 1
AACSB: Analytical thinking

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12) Explain the five-step decision process that managers can use to make decisions.
Answer: The five step decision process is (a) Identify the problem and uncertainties, (b) Obtain
information, (c) Make predictions, (d) Make decisions by choosing among alternatives, and (e) Implement
the decision, evaluate performance to provide feedback.

Identifying the problem and uncertainties involves finding risks, uncertainties, or other failures
associated with a business which will affect the internal and external prospects of the firm.

Obtaining information involves collecting all data pertinent to the decision situation, both quantitative
and qualitative, and determining which information is relevant to the decision, and determining which
alternatives are being considered.

Making predictions involves using the information obtained above and attempting to predict what the
future costs and benefits will be for each of the various alternatives.

Choosing an alternative involves comparing the predicted benefits of each alternative with each of the
predicted costs (as well as other non-quantitative factors), and selecting an alternative that maximizes the
difference between the expected benefits and the expected costs.

Implementing the decision involves actually doing the alternative selected above and making all the
necessary changes in operations to support the decision. Evaluating the performance of the decision
involves learning from the results of the decision and seeing which predictions were accurate and
determining how to avoid any difficulties encountered in either the decision-process or the
implementation.
Diff: 2
Objective: 1
AACSB: Analytical thinking

Objective 12.2

1) Which of the following is NOT true with regards to relevant costs and relevant revenues?
A) They are sunk costs and historical revenues.
B) They are expected costs and expected revenues.
C) They occur in the future.
D) The differ among alternative courses of action.
Answer: A
Diff: 2
Objective: 2
AACSB: Analytical thinking

2) Which of the following statements is true with regards to relevant information?

A) When judging alternatives, differences between expected future results are relevant to a decision.
B) Past (historical) costs relevant when making decisions.
C) All expected future revenues and expected future costs are relevant when making decisions.
D) A heavier weight should be given to quantitative nonfinancial factors than to qualitative factors.
Answer: A
Diff: 2
Objective: 2
AACSB: Analytical thinking

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3) Sunk costs:
A) are future costs for decision making
B) are avoidable costs
C) are irrelevant for decision making
D) are foregone contribution by not using a limited resource in its next-best alternative use
Answer: C
Diff: 2
Objective: 2
AACSB: Analytical thinking

4) Sunk costs:
A) are relevant
B) are differential
C) have future implications
D) are ignored when evaluating alternatives
Answer: D
Diff: 1
Objective: 2
AACSB: Analytical thinking

5) Which of the following is an example of sunk costs?

A) book value of equipment
B) cost of purchasing raw materials
C) cost of an alternative investment
D) wages payable to skilled laborers to make a product
Answer: A
Diff: 1
Objective: 2
AACSB: Application of knowledge

6) In evaluating different alternatives, it is useful to concentrate on:

A) variable costs
B) fixed costs
C) total costs
D) relevant costs
Answer: D
Diff: 1
Objective: 2
AACSB: Analytical thinking

7) Which of the following costs always differ among future alternatives?

A) fixed costs
B) historical costs
C) relevant costs
D) variable costs
Answer: C
Diff: 1
Objective: 2
AACSB: Analytical thinking

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8) Management is considering two alternatives. Alternative A has projected revenue per year of $100,000
and costs of $70,000 while Alternative B has revenue of $100,000 and costs of $60,000. Both projects
require an initial investment of $250,000 of which $75,000 has already been set aside and will be used as a
down payment on the project that is chosen. There are also other qualitative factors that management
must consider before making a final choice. Which of the following statements is correct about relevant
costs and relevant revenues?
A) The sunk cost of $75,000 is relevant.
B) The projected revenues are relevant to the decision.
C) The initial investment of $250,000, the projected revenues, and the projected costs are all relevant.
D) The only relevant item are the costs as they differ between alternatives.
Answer: D
Diff: 1
Objective: 2
AACSB: Analytical thinking

9) John's 8-year-old Chevrolet Trail Blazer requires repairs estimated at $9000 to make it road worthy
again. His wife, Sherry, suggested that he should buy a 5-year-old used Jeep Grand Cherokee instead for
$9000 cash. Sherry estimated the following costs for the two cars:

Trail Blazer Grand Cherokee

Acquisition cost $28,000 $9000
Repairs $9000 —
Annual operating costs
(Gas, maintenance,
insurance) $2480 $1600

The cost NOT relevant for this decision is the:

A) acquisition cost of the Trail Blazer
B) acquisition cost of the Grand Cherokee
C) repairs to the Trail Blazer
D) annual operating costs of the Grand Cherokee
Answer: A
Diff: 2
Objective: 2
AACSB: Analytical thinking

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10) John's 8-year-old Chevrolet Trail Blazer requires repairs estimated at $11,000 to make it road worthy
again. His wife, Sherry, suggested that he should buy a 5-year-old used Jeep Grand Cherokee instead for
$11,000 cash. Sherry estimated the following costs for the two cars:

Trail Blazer Grand Cherokee

Acquisition cost $30,000 $11,000
Repairs $11,000 —
Annual operating costs
(Gas, maintenance,
insurance) $2480 $2000

What should John do? What are his savings in the first year?
A) Buy the Grand Cherokee; $13,000
B) Fix the Trail Blazer; $5980
C) Buy the Grand Cherokee; $480
D) Fix the Trail Blazer; $9813
Answer: C
Explanation: C) Trail Blazer ($11,000 + $2480) - Grand Cherokee ($11,000 + $2000) = $480 cost savings
when choosing the Grand Cherokee option
Diff: 2
Objective: 2
AACSB: Application of knowledge

11) A relevant revenue is revenue that is a(n):

A) past revenue that differs among alternative courses of action
B) future revenue that differs among alternative courses of action
C) in-hand revenue
D) earned revenue
Answer: B
Diff: 2
Objective: 2
AACSB: Analytical thinking

12) A relevant cost is a cost that is a(n):

A) future cost
B) past cost
C) sunk cost
D) non-cash expense
Answer: A
Diff: 2
Objective: 2
AACSB: Analytical thinking

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13) Which of the following is true of relevant information?
A) all fixed costs are relevant
B) all Future revenues and expenses are relevant
C) future
D) all fixed costs are not relevant
Answer: C
Diff: 2
Objective: 2
AACSB: Analytical thinking

14) Quantitative factors:

A) include financial information, but not nonfinancial information
B) include both financial and nonfinancial information
C) are always relevant when making decisions
D) include employee morale
Answer: B
Diff: 2
Objective: 2
AACSB: Analytical thinking

15) All of the following are examples of quantitative factors EXCEPT:

A) cost of direct materials
B) budget for marketing activities
C) product development time
D) employee morale
Answer: D
Diff: 2
Objective: 2
AACSB: Analytical thinking

16) Which of the following is true of historical costs?

A) They are useful for making future predictions.
B) They are relevant for decision making.
C) They are always accounted as opportunity costs.
D) They cannot be fixed costs.
Answer: A
Diff: 2
Objective: 2
AACSB: Analytical thinking

17) When making decisions:

A) qualitative factors are not relevant as they can't be quantified
B) more weight should be given to quantitative factors
C) appropriate weight must be given to both quantitative and qualitative factors
D) quantitative factors are relevant but qualitative factors are rarely relevant
Answer: C
Diff: 2
Objective: 2
AACSB: Analytical thinking

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18) Employee morale at Dos Santos, Inc., is very high. This type of information is an example of:
A) qualitative factors
B) quantitative factors
C) irrelevant factors
D) financial factors
Answer: A
Diff: 1
Objective: 2
AACSB: Analytical thinking

19) Each of the following are true of relevant information EXCEPT:

A) past costs are helpful when making predictions but not relevant when making decisions
B) different alternatives can be compared by examining differences in expected future revenues and
expected total future costs
C) significant past investment amounts are relevant to decision making
D) not all future revenues and expenses are relevant
Answer: C
Diff: 1
Objective: 2
AACSB: Analytical thinking

20) One-time-only special orders should only be accepted if:

A) incremental revenues exceed incremental costs
B) differential revenues exceed variable costs
C) incremental revenues exceed fixed costs
D) total revenues exceed total costs
Answer: A
Diff: 3
Objective: 2
AACSB: Analytical thinking

21) When deciding to accept a one-time-only special order from a wholesaler, management should:
A) consider the sunk costs and opportunity costs
B) not consider the special order's impact on future prices of their products
C) determine whether excess capacity is available
D) verify past design costs for the product
Answer: C
Diff: 3
Objective: 2
AACSB: Analytical thinking

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22) When there is an excess capacity, it makes sense to accept a one-time-only special order for less than
the current selling price if:
A) incremental revenues exceed incremental costs
B) additional fixed costs is incurred to accommodate the order
C) the company placing the order is in the same market segment as your current customers
D) incremental revenue equals incremental operating income
Answer: A
Diff: 3
Objective: 2
AACSB: Analytical thinking

23) Which of the following is true of special order pricing?

A) It represents a short-run pricing decision.
B) The special pricing should not be set below the regular price.
C) It represents a long-term pricing decision.
D) The special price should assure that incremental revenue covers fixed costs.
Answer: A
Diff: 3
Objective: 2
AACSB: Analytical thinking

24) A product cost is composed of the following:

Direct materials $10

Direct labor $1
Manufacturing overhead $8

The product sells for $65 and a 10% commission is paid to a salesperson for every unit sold.
Management accountants also estimate that storage cost per unit averages $0.25 per unit. What is the
full cost of the product?
A) $11
B) $19
C) $25.75
D) $25.50
Answer: C
Explanation: C) $10 + $1 + $8 + ($65 × 10%) + $0.25 = $25.75
Diff: 2
Objective: 2
AACSB: Analytical thinking

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25) Red Rose Manufacturers Inc. is approached by a potential customer to fulfill a one-time-only special
order for a product similar to one offered to domestic customers. The company has excess capacity. The
following per unit data apply for sales to regular customers:

Variable costs:
Direct materials $120
Direct labor 100
Manufacturing
support 115
Marketing costs 85
Fixed costs:
Manufacturing
support 155
Marketing costs 55
Total costs 630
Markup (40%) 252
Targeted selling price $882

What is the full cost of the product per unit?

A) $420
B) $882
C) $630
D) $252
Answer: C
Explanation: C) Full cost = $120 + $100 + $115 + $85 + $155 + $55 = $630
Diff: 3
Objective: 2
AACSB: Application of knowledge

11
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26) Red Rose Manufacturers Inc. is approached by a potential new customer to fulfill a one-time-only
special order for a product similar to one offered to domestic customers. The company has excess
capacity. The following per unit data apply for sales to regular customers:

Variable costs:
Direct materials $160
Direct labor 90
Manufacturing
support 115
Marketing costs 65
Fixed costs:
Manufacturing
support 135
Marketing costs 55
Total costs 620
Markup (40%) 248
Targeted selling price $868

What is the contribution margin per unit?

A) $190
B) $248
C) $438
D) $620
Answer: C
Explanation: C) Contribution margin per unit = $868 - ($160 + $90 + $115 + $65) = $438
Diff: 3
Objective: 2
AACSB: Application of knowledge

12
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27) Red Rose Manufacturers Inc. is approached by a potential customer to fulfill a one-time-only special
order for a product similar to one offered to domestic customers. The company has excess capacity. The
following per unit data apply for sales to regular customers:

Variable costs:
Direct materials $120
Direct labor 90
Manufacturing
support 155
Marketing costs 75
Fixed costs:
Manufacturing
support 175
Marketing costs 65
Total costs 680
Markup (45%) 306
Targeted selling price $986

For Red Rose Manufacturers Inc., what is the minimum acceptable price of this special order?
A) $440
B) $306
C) $450
D) $680
Answer: A
Explanation: A) Minimum acceptable price = $120 + $90 + $155 + $75 = $440
Diff: 3
Objective: 2
AACSB: Analytical thinking

13
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28) Red Rose Manufacturers Inc. is approached by a potential customer to fulfill a one-time-only special
order for a product similar to one offered to domestic customers. The company has excess capacity. The
following per unit data apply for sales to regular customers:

Variable costs:
Direct materials $170
Direct labor 70
Manufacturing
support 125
Marketing costs 75
Fixed costs:
Manufacturing
support 175
Marketing costs 55
Total costs 670
Markup (40%) 268
Targeted selling price $938

What is the change in operating profits if the one-time-only special order for 1000 units is accepted for
$580 a unit by Red Rose?
A) $140,000 increase in operating profits
B) $139,330 increase in operating profits
C) $139,330 decrease in operating profits
D) $140,000 decrease in operating profits
Answer: A
Explanation: A) Contribution margin per unit = $580 - ($170 + $70 + $125 + $75) = $140
Change in operating profit = 1000 × $140 = $140,000 increase
Diff: 3
Objective: 2
AACSB: Analytical thinking

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29) Excellent Manufacturers Inc. has a current production level of 20,000 units per month. Unit costs at
this level are:

Direct materials $0.29

Direct labor 0.45
Variable overhead 0.16
Fixed overhead 0.22
Marketing - fixed 0.21
Marketing/distribution - variable 0.44

Current monthly sales are 18,000 units. Jax Company has contacted Excellent about purchasing 1600 units
at $2.30 each. Current sales would NOT be affected by the one-time-only special order, and variable
marketing/distribution costs would NOT be incurred on the special order. What is Ratzlaff Company's
change in operating profits if the special order is accepted?
A) $5584.00 increase in operating profits
B) $5584.00 decrease in operating profits
C) $2240.00 increase in operating profits
D) $2240.00 decrease in operating profits
Answer: C
Explanation: C) Manufacturing cost per unit = $0.29 + $0.45 + $0.16 = $0.9
Increase in operating profits = 1600 × ($2.30 - $0.9) = $2240.00 increase
Diff: 3
Objective: 2
AACSB: Application of knowledge

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30) Snapper Tool Company has plenty of excess capacity to accept a special order. Shown below is the
special order "what-if" analysis. Which of the following is the correct decision and reason?

With Special
Status Quo Order
Sales $128,000 $133,000
variable costs:
Manufacturing 51,200 54,400
Selling and
administrative 25,600 26,600
Contribution
margin $51,200 $52,000
Fixed cost 19,200 19,200
Operating
profit $32,000 $32,800

A) Yes, since the goal is to fill capacity as much as possible to keep fixed overhead variances as low as
possible.
B) No, the company will only break even.
C) No, since only the employees will benefit from this in that they will earn more overtime.
D) Yes, since operating profits will most likely increase.
Answer: D
Diff: 3
Objective: 2
AACSB: Application of knowledge

16
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31) Kitchens Sales Inc. is approached by Mr. Louis Cifer, a new customer, to fulfill a large one-time-only
special order for a product similar to one offered to regular customers. The following per unit data apply
for sales to regular customers:

Direct materials $552

Direct labor 370

Variable manufacturing support 60

Fixed manufacturing support 130
Total manufacturing costs 1112
Markup (50%) 556
Targeted selling price $1668

Kitchens Sales Inc. has excess capacity. Mr. Cifer wants the cabinets in cherry rather than oak, so direct
material costs will increase by $68 per unit. The average marketing cost of Kitchens Sales' product is $172
per order. For Kitchens, what is the full cost of the one-time-only special order?
A) $1044
B) $1180
C) $1112
D) $1352
Answer: B
Explanation: B) Full cost = $552 + $370 + $60 + $130 + $68 = $1180
Diff: 2
Objective: 2
AACSB: Application of knowledge

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32) Kitchens Sales Inc. is approached by Mr. Louis Cifer, a new customer, to fulfill a large one-time-only
special order for a product similar to one offered to regular customers. The following per unit data apply
for sales to regular customers:

Direct materials $546

Direct labor 360

Variable manufacturing support 56

Fixed manufacturing support 128
Total manufacturing costs 1090
Markup (50%) 545
Targeted selling price $1635

Kitchens Sales Inc. has excess capacity. Mr. Cifer wants the cabinets in cherry rather than oak, so direct
material costs will increase by $63 per unit. The average marketing cost of Kitchens Sales' product is $171
per order. Other than price, what other items should Kitchens Sales consider before accepting this
one-time-only special order?
A) reaction of shareholders
B) reaction of existing customers to the lower price offered to Mr. Louis Cifer
C) demand for cherry cabinets
D) price is the only consideration
Answer: B
Diff: 2
Objective: 2
AACSB: Analytical thinking

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33) Kitchens Sales Inc. is approached by Mr. Louis Cifer, a new customer, to fulfill a large one-time-only
special order for a product similar to one offered to regular customers. The following per unit data apply
for sales to regular customers:

Direct materials $548

Direct labor 360

Variable manufacturing support 60

Fixed manufacturing support 128
Total manufacturing costs 1096
Markup (50%) 548
Targeted selling price $1644

Kitchens Sales Inc. has excess capacity. Mr. Cifer wants the cabinets in cherry rather than oak, so direct
material costs will increase by $63 per unit. The average marketing cost of Kitchens Sales' product is $179
per order. Which of the following costs is NOT considered to calculate the minimum acceptable price of a
one-time-only special order?
A) marketing costs
B) direct material costs
C) indirect material costs
D) special design costs
Answer: A
Diff: 2
Objective: 2
AACSB: Analytical thinking

34) An example of a qualitative factor for the decision-making process is:

A) customer satisfaction as determined by written responses given by customers to survey questions
B) employee wages paid this week
C) number of clicks on a web site during a month
D) manufacturing overhead allocated to WIP
Answer: A
Diff: 1
Objective: 2
AACSB: Analytical thinking

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35) Dantley's Furniture manufactures rustic furniture. The cost accounting system estimates
manufacturing costs to be $180 per table, consisting of 80% variable costs and 20% fixed costs. The
company has surplus capacity available. It is Back Forrest's policy to add a 55% markup to full costs.
Dantley's Furniture is invited to bid on a one-time-only special order to supply 120 rustic tables. What is
the lowest price Dantley's Furniture should bid on this special order?
A) $16,200
B) $17,280
C) $21,600
D) $29,160
Answer: B
Explanation: B) $180 × 80% × 120 tables = $17,280
Diff: 2
Objective: 2
AACSB: Application of knowledge

36) Dantley's Furniture manufactures rustic furniture. The cost accounting system estimates
manufacturing costs to be $220 per table, consisting of 80% variable costs and 20% fixed costs. The
company has surplus capacity available. It is Back Forrest's policy to add a 50% markup to full costs. A
large hotel chain is currently expanding and has decided to decorate all new hotels using the rustic style.
Dantley's Furniture Incorporated is invited to submit a bid to the hotel chain. What is the lowest price per
unit Dantley's Furniture should bid on this long-term order? (Round answer to the nearest dollar.)
A) $154
B) $176
C) $220
D) $330
Answer: D
Explanation: D) $220 + ($220 × 50%) = $330
Diff: 2
Objective: 2
AACSB: Application of knowledge

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37) Zephram Corporation has a plant capacity of 200,000 units per month. Unit costs at capacity are:

Direct materials $6.00

Direct labor 5.00
Variable overhead 2.00
Fixed overhead 1.00
Marketing—fixed 8.00
Marketing/distribution—variable 4.60

Current monthly sales are 190,000 units at $30.00 each. Q, Inc., has contacted Zephram Corporation about
purchasing 2300 units at $26.00 each. Current sales would not be affected by the one-time-only special
order. What is Zephram's change in operating profits if the one-time-only special order is accepted?
A) $19,320 increase
B) $26,680 increase
C) $29,900 increase
D) $40,480 increase
Answer: A
Explanation: A) ($6.00 + $5.00 + $2.00 + $4.60) = $17.60
($26.00 - $17.60) × 2300 = $19,320 increase
Diff: 3
Objective: 2
AACSB: Application of knowledge

38) Which of the following is NOT true about one-time-only special orders?
A) special orders would be accepted if they result in an increase in the contribution margin regardless of
capacity and long-term implications
B) along with other criteria, there must be excess capacity to accept an order
C) along with other criteria, there must not be significant long-term negative implications of accepting a
special order
D) the impact on operating income of the acceptance of a special-order must be analyzed by management
before making a final decision
Answer: A
Diff: 1
Objective: 2
AACSB: Analytical thinking

39) Which of the following are potential problems managers face in relevant-cost analysis?
A) including only relevant costs and relevant revenues in an analysis
B) incorrect assumptions such as all variable costs are relevant and all fixed costs are not
C) considering past historical costs when making predictions about future costs
D) examining differences in expected total future revenues and expected total future costs among
alternatives
Answer: B
Diff: 1
Objective: 2
AACSB: Analytical thinking

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40) Which of the following costs is irrelevant in the decision making of a special order when there is idle
production capacity - enough excess capacity to accept the order?
A) fixed manufacturing costs
B) units sold
C) material cost
D) labor hours incurred
Answer: A
Diff: 2
Objective: 2
AACSB: Analytical thinking

41) Which of the following is an appropriate step when identifying relevant costs to make a business
decision?
A) assuming all variable costs are relevant
B) assuming all fixed costs are irrelevant
C) separating total costs into business function costs and full costs
D) separating total costs into variable and fixed components
Answer: D
Diff: 2
Objective: 2
AACSB: Analytical thinking

42) The best way to avoid misidentification of relevant costs is to focus on:
A) expected future costs that differ among the alternatives
B) historical costs
C) unit fixed costs
D) total unit costs
Answer: A
Diff: 2
Objective: 2
AACSB: Analytical thinking

43) Relevant costs are:

A) sunk costs
B) expected future costs
C) actual present costs
D) historical costs
Answer: B
Diff: 2
Objective: 2
AACSB: Analytical thinking

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44) Direct materials are $600, direct labor is $150, variable overhead costs are $450, and fixed overhead
costs are $300. The cost of one unit is:
A) $450
B) $750
C) $1200
D) $1500
Answer: D
Explanation: D) Incremental cost of one unit = $600 + $150 + $450 + $300 = $1500
Diff: 2
Objective: 2
AACSB: Application of knowledge

45) Unit cost data can most mislead decisions by:

A) not computing fixed overhead costs
B) computing labor and materials costs only
C) computing administrative costs
D) not computing unit costs at the same output level
Answer: D
Diff: 1
Objective: 2
AACSB: Analytical thinking

46) McMurphy Corporation produces a part that is used in the manufacture of one of its products. The
costs associated with the production of 13,000 units of this part are as follows:

Direct materials $85,000

Direct labor 125,000

Variable factory overhead 60,000

Fixed factory overhead 135,000
Total costs $405,000

Of the fixed factory overhead costs, $59,000 is avoidable. Conners Company has offered to sell 13,000
units of the same part to McMurphy Corporation for $36 per unit.

Assuming there is no other use for the facilities, Schmidt should:

A) make the part, as this would save $14 per unit
B) buy the part, as this would save $14 per unit
C) buy the part, as this would save the company $182,000
D) make the part, as this would save $11 per unit
Answer: D
Explanation: D) Avoidable costs total $329,000 = $85,000 + $125,000 + $60,000 + $59,000.
$36 - ($329,000 / 13,000) = $11
Diff: 3
Objective: 2
AACSB: Analytical thinking

23
Copyright © 2021 Pearson Education, Ltd.
47) Striker 44 Corporation produces a part that is used in the manufacture of one of its products. The
costs associated with the production of 12,000 units of this part are as follows:

Direct materials $89,000

Direct labor 125,000

Variable factory overhead 59,000

Fixed factory overhead 139,000
Total costs $412,000

Of the fixed factory overhead costs, $58,000 is avoidable.

Assuming no other use of their facilities, the highest price that McMurphy should be willing to pay for
12,000 units of the part is:
A) $412,000
B) $273,000
C) $331,000
D) $353,000
Answer: C
Explanation: C) $89,000 + $125,000 + $59,000 + $58,000 = $331,000
Diff: 3
Objective: 2
AACSB: Analytical thinking

48) Past costs themselves are always irrelevant when making decisions.
Answer: TRUE
Diff: 2
Objective: 2
AACSB: Analytical thinking

49) Equal weight must be given to qualitative factors and quantitative nonfinancial factors while making
decisions.
Answer: FALSE
Explanation: Appropriate, not equal, weight must be given to qualitative factors and quantitative
nonfinancial factors while making decisions.
Diff: 1
Objective: 2
AACSB: Analytical thinking

50) The rent paid for an already existing facility is an example of a sunk cost.
Answer: TRUE
Diff: 1
Objective: 2
AACSB: Analytical thinking

51) A cost may be relevant for one decision, but NOT relevant for a different decision.
Answer: TRUE
Diff: 1
Objective: 2
AACSB: Analytical thinking

24
Copyright © 2021 Pearson Education, Ltd.
Objective 12.3

1) Relevant data in a make-or-buy decision of a part include which of the following?

A) the portion of fixed costs that would be incurred whether the product is made or purchased
B) some portion of fixed costs that would be saved if the product is outsourced
C) annual plant insurance costs
D) management consultant fees to restructure the organization framework of the company and improve
overall strategic planning
Answer: B
Diff: 2
Objective: 3
AACSB: Analytical thinking

2) In a make-or-buy decision, which of the following would NOT be relevant?

A) the quality of the product
B) the portion of fixed costs that could be eliminated by outsourcing
C) a lease that could be discontinued upon accepting the "buy proposal"
D) property taxes on the plant that will still be necessary even if the product is outsourced
Answer: D
Diff: 2
Objective: 3
AACSB: Analytical thinking

3) An incremental cost is:

A) an additional total cost for an activity
B) a cost that has already been incurred
C) the difference in total costs between two alternatives
D) always related to fixed costs
Answer: A
Diff: 2
Objective: 3
AACSB: Analytical thinking

4) Which of the following is a relevant cost to be included in a make-or-buy decision?

A) fixed salaries that will not be incurred if the part is outsourced
B) pension costs to the current employees
C) increase in the cost of repairing of all equipment of the firm
D) material-handling costs that cannot be eliminated even if the product is outsourced
Answer: A
Diff: 2
Objective: 3
AACSB: Analytical thinking

35
Copyright © 2021 Pearson Education, Ltd.
5) Which of following is a firm's risk of outsourcing the production of a part?
A) fluctuation in the manufacturing costs
B) leakage of intellectual property
C) increased need of skilled workers
D) scarcity of indirect labor
Answer: B
Diff: 2
Objective: 3
AACSB: Analytical thinking

6) Which of the following minimizes the risks of outsourcing?

A) the use of short-term contracts that specify price
B) shifting the firm's responsibility for on-time delivery to the supplier
C) building close partnerships with the supplier
D) increasing the contract price
Answer: C
Diff: 2
Objective: 3
AACSB: Analytical thinking

7) The cost to produce Part A was $20 per unit in 2013 and in 2014 it has increased to $22 per unit. In 2014,
Supplier ABC has offered to supply Part A for $18 per unit. For the make-or-buy decision:
A) incremental revenues are $4 per unit
B) incremental costs are $2 per unit
C) net relevant costs are $2 per unit
D) differential costs are $4 per unit
Answer: D
Diff: 2
Objective: 3
AACSB: Application of knowledge

8) When evaluating a make-or-buy decision, which of the following needs to be considered?

A) alternative uses of the production capacity
B) the original cost of the production equipment
C) pension costs to the current employees
D) material-handling costs that cannot be eliminated
Answer: A
Diff: 2
Objective: 3
AACSB: Analytical thinking

36
Copyright © 2021 Pearson Education, Ltd.
9) For make-or-buy decisions, a supplier's ability to maintain secrecy of intellectual property is
considered a(n):
A) qualitative factor
B) irrelevant cost
C) differential factor
D) opportunity cost
Answer: A
Diff: 1
Objective: 3
AACSB: Analytical thinking

10) Vien's Fashion Company retains the services of Kennywood Textiles to perform stain control
treatments on its women's dresses. This is practice is known as:
A) insourcing
B) outsourcing
C) fragmentation
D) in-housing
Answer: B
Diff: 1
Objective: 3
AACSB: Analytical thinking

11) Producing on schedule, quality of supplier products or services, reliability, along with costs are all
important considerations when:
A) when deciding to insource
B) making outsourcing decisions
C) when executing right-shoring
D) making decisions based on quantitative factors
Answer: B
Diff: 1
Objective: 3
AACSB: Analytical thinking

12) Which of the following would be considered in a make-or-buy decision?

A) fixed costs that will still be incurred
B) prepaid rent expense for warehousing finished goods and inventories
C) potential rental income from space occupied by the production area
D) unchanged supervisory costs
Answer: C
Diff: 2
Objective: 3
AACSB: Analytical thinking

37
Copyright © 2021 Pearson Education, Ltd.
13) W.T. Ginsburg Engine Company manufactures part ACT30107 used in several of its engine models.
Monthly production costs for 1100 units are as follows:

Direct materials $44,000

Direct labor 9500
Variable overhead costs 33,500
Fixed factory overhead 19,000
Total costs $106,000

It is estimated that 6% of the fixed overhead costs assigned to ACT30107 will no longer be incurred if the
company purchases ACT30107 from the outside supplier. W.T Ginsburg Engine Company has the option
of purchasing the part from an outside supplier at $96.75 per unit.

If the company accepts the offer from the outside supplier, the monthly avoidable costs (costs that will no
longer be incurred) total:
A) $88,140
B) $87,000
C) $106,000
D) $107,140
Answer: A
Explanation: A) Monthly avoidable costs = $44,000 + $9500 + $33,500 + ($19,000 × 6%) = $88,140
Diff: 2
Objective: 3
AACSB: Analytical thinking

38
Copyright © 2021 Pearson Education, Ltd.
14) W.T. Ginsburg Engine Company manufactures part ACT31107 used in several of its engine models.
Monthly production costs for 1000 units are as follows:

Direct materials $45,000

Direct labor 9500
Variable overhead costs 29,500
Fixed factory overhead 20,000
Total costs $104,000

It is estimated that 7% of the fixed overhead costs assigned to ACT31107 will no longer be incurred if the
company purchases ACT31107 from the outside supplier. W.T. Ginsburg Engine Company has the option
of purchasing the part from an outside supplier at $94.75 per unit.

If W.T. Ginsburg Engine Company purchases 1000 ACT31107 parts from the outside supplier per month,
then its monthly operating income will: (Round any intermediary calculations and your final answer to
the nearest cent.)
A) increase by $9350
B) increase by $21,650
C) decrease by $9350
D) decrease by $21,650
Answer: C
Explanation: C) Total avoidable costs = $45,000 + $9500 + $29,500 + ($20,000 × 7%) = $85,400
Change in monthly operating income = Avoidable costs $85,400 - ($94.75 × 1000 units) = decrease of $9350
Diff: 2
Objective: 3
AACSB: Analytical thinking

39
Copyright © 2021 Pearson Education, Ltd.
15) W.T. Ginsburg Engine Company manufactures part ACT31107 used in several of its engine models.
Monthly production costs for 1050 units are as follows:

Direct materials $43,000

Direct labor 9500
Variable overhead costs 34,500
Fixed factory overhead 18,000
Total costs $105,000

It is estimated that 8% of the fixed overhead costs assigned to ACT31107 will no longer be incurred if the
company purchases ACT31107 from the outside supplier. W.T. Ginsburg Engine Company has the option
of purchasing the part from an outside supplier at $95.75 per unit.

The maximum price that W.T. Ginsburg Engine Company should be willing to pay the outside supplier
is:
A) $83 per ACT31107 part
B) $84.23 per ACT31107 part
C) $100 per ACT31107 part
D) $101.37 per ACT31107 part
Answer: B
Explanation: B) Avoidable costs = $88,440 / 1050 units = $84.23 per part
Diff: 2
Objective: 3
AACSB: Analytical thinking

16) If a company does not use one of its limited resources in the best possible way, the lost contribution to
income could be called a(n):
A) business function cost
B) carrying cost
C) opportunity cost
D) sunk cost
Answer: C
Diff: 1
Objective: 3
AACSB: Analytical thinking

17) Opportunity costs is defined as:

A) the cost of manufacturing a one-time-only special order when a firm has excess capacity to make more
products
B) the contribution to operating income that is forgone by not using a limited resource in its next-best
alternative use
C) the sum of variable and fixed costs in a particular business function of the value chain, such as
manufacturing costs or marketing costs
D) the sum of variable and fixed costs in all business functions of the value chain, such as manufacturing
costs or marketing costs
Answer: B
Diff: 2
Objective: 3
AACSB: Analytical thinking

40
Copyright © 2021 Pearson Education, Ltd.
18) Which of the following is true of an opportunity cost?
A) It is the income foregone by not using a resource in an alternative way.
B) The higher the opportunity costs, the lower is the relevant cost.
C) It is recorded as an expense in the accounting records.
D) It is an unavoidable cost that cannot be changed no matter what action is taken.
Answer: A
Diff: 2
Objective: 3
AACSB: Analytical thinking

19) Which of the following is true regarding relevant costs?

A) Carrying cost of inventory is a type of opportunity cost and is relevant to outsourcing.
B) All variable costs are relevant.
C) All fixed costs are irrelevant.
D) Opportunity costs are relevant to financial accounting.
Answer: A
Diff: 2
Objective: 3
AACSB: Analytical thinking

20) Which of the following would be a consideration in a make-or-buy decision?

A) excess capacity
B) wages to CEO
C) marketing costs
D) audit expenses
Answer: A
Diff: 2
Objective: 3
AACSB: Analytical thinking

21) If a company has excess capacity, the most it would pay for buying a product that it currently makes
would be the:
A) total variable cost of producing the product
B) full cost of producing the product
C) total cost of producing the product
D) business function cost of the product
Answer: A
Diff: 2
Objective: 3
AACSB: Analytical thinking

41
Copyright © 2021 Pearson Education, Ltd.
22) For make-or-buy decisions, relevant costs include:
A) incremental costs plus sunk costs
B) incremental costs plus opportunity costs
C) differential costs plus fixed costs
D) incremental costs plus differential costs
Answer: B
Diff: 2
Objective: 3
AACSB: Analytical thinking

23) A study by a consultant shows that a company that had $1,000,000 of inventory was holding excess
inventory of $100,000 that could be eliminated with a few process improvements. It also has $400,000 in
marketable securities that yield 4% per year. What is the estimated annual opportunity cost of holding
the excess inventory?
A) $4000
B) $40,000
C) $16,000
D) $20,000
Answer: A
Explanation: A) $100,000 × 4% = $4000
Diff: 2
Objective: 3
AACSB: Analytical thinking

24) Rubium Micro Devices currently manufactures a subassembly for its main product. The costs per unit
are as follows:

Direct materials $55.00

Direct labor 38.00
Variable overhead 41.00
Fixed overhead 39.00
Total $173.00

Crayola Technologies Inc. has contacted Rubium with an offer to sell 6000 of the subassemblies for
$141.00 each. Rubium will eliminate $92,000 of fixed overhead if it accepts the proposal. What are the
relevant costs for Rubium?
A) $656,000
B) $650,000
C) $896,000
D) $1,130,000
Answer: C
Explanation: C) The relevant costs for Rubium = [($55.00 + $38.00 + $41.00) × 6000 + $92,000] = $896,000
Diff: 2
Objective: 3
AACSB: Application of knowledge

42
Copyright © 2021 Pearson Education, Ltd.
25) Rubium Micro Devices currently manufactures a subassembly for its main product. The costs per unit
are as follows:

Direct materials $51.00

Direct labor 35.00
Variable overhead 38.00
Fixed overhead 31.00
Total $155.00

Crayola Technologies Inc. has contacted Rubium with an offer to sell 10,000 of the subassemblies for
$140.00 each. Rubium will eliminate $93,000 of fixed overhead if it accepts the proposal. Should Rubium
make or buy the subassemblies? What is the difference between the two alternatives?
A) buy; savings = $93,000
B) buy; savings = $107,000
C) make; savings = $67,000
D) make; savings = $243,000
Answer: C
Explanation: C) Cost to buy: 10,000 × $140.00 = $1,400,000
Cost to make: [($51.00 + $35.00 + $38.00) × 10,000 + $93,000] = $1,333,000
Cost savings = $1,400,000 - $1,333,000 = $67,000; make the subassemblies
Diff: 3
Objective: 3
AACSB: Application of knowledge

26) A recent college graduate has the choice of buying a new car for $37,500 or investing the money for
four years with an 11% expected annual rate of return. He has an investment of $43,000 in equities and
bonds which yields 10% expected annual rate of return. If the graduate decides to purchase the car, the
best estimate of the opportunity cost of that decision is:
A) $4300
B) $16,500
C) $43,000
D) $18,920
Answer: B
Explanation: B) $37,500 × 11% × 4 years = $16,500 cost of the opportunity not chosen.
Diff: 2
Objective: 3
AACSB: Application of knowledge

43
Copyright © 2021 Pearson Education, Ltd.
27) A supplier offers to make Part A for $34. Altec Services Corporation has relevant costs of $45 a unit to
manufacture 1010 units of Part A. If there is excess capacity, the opportunity cost of buying Part A from
the supplier is:
A) $0
B) $45,450
C) $34,340
D) $79,790
Answer: A
Explanation: A) The opportunity cost is $0 as there is excess capacity. They will not forgo any profit
they can make on other products if they making and selling any other products.
Diff: 2
Objective: 3
AACSB: Application of knowledge

28) Altec Services Corporation has relevant costs of $41 per unit to manufacture 1090 units of Part A. A
current supplier offers to make Part A for $30 per unit. Alternatively, the company can rent out the
capacity for $28,000. If capacity is constrained, the opportunity cost of buying Part A from the supplier is:
A) $0
B) $11,990
C) $39,990
D) $28,000
Answer: D
Explanation: D) Alternative rent income = $28,000
Diff: 2
Objective: 3
AACSB: Application of knowledge

29) Opportunity costs are not recorded in financial accounting systems because historical record keeping
is limited to transactions involving alternatives that managers actually selected rather than alternatives
that they rejected.
Answer: TRUE
Diff: 2
Objective: 3
AACSB: Analytical thinking

30) For decision making, differential costs assist in choosing between alternatives.
Answer: TRUE
Diff: 1
Objective: 3
AACSB: Analytical thinking

31) International outsourcing adds another factor to relevant cost analysis as the decision to outsource
production to an overseas partner can increase exchange rate risk.
Answer: TRUE
Diff: 1
Objective: 3
AACSB: Analytical thinking

44
Copyright © 2021 Pearson Education, Ltd.
46) What are opportunity costs? Explain why opportunity costs are not recorded in financial accounting
systems.
Answer: Opportunity cost is the contribution to operating income that is forgone by not using a limited
resource in its next-best alternative use. Managers must consider opportunity costs in decision making
since deciding to use a resource one way means a manager must forgo the opportunity to use the
resource in any other way.
Opportunity costs are not recorded in financial accounting systems because historical record keeping is
limited to transactions involving alternatives that managers actually selected rather than alternatives that
they rejected. Rejected alternatives do not produce transactions and are not recorded.
Diff: 2
Objective: 3
AACSB: Analytical thinking

47) Factors used to decide whether to outsource a part include:

A) the supplier's cost of direct materials
B) if the supplier is reliable
C) the original cost of equipment currently used for production of that part
D) past design costs used to develop the current composition of the part
Answer: B
Diff: 2
Objective: 3
AACSB: Analytical thinking

Objective 12.4

1) Determining which products should be produced when the plant is operating at full capacity is
referred to as a(n):
A) outsourcing analysis
B) total alternative approach
C) product-mix decision
D) short-run focus decision
Answer: C
Diff: 1
Objective: 4
AACSB: Analytical thinking

2) Product mix decisions:

A) have a long-run focus
B) help determine how to maximize operating profits
C) focus on selling price per unit
D) help maximizing opportunity costs
Answer: B
Diff: 2
Objective: 4
AACSB: Analytical thinking

49
Copyright © 2021 Pearson Education, Ltd.
3) Capacity constraints include:
A) increased demand of warranty services for a pharmaceutical product
B) increased need of display space for a retailer
C) decreased demand for a pharmaceutical product
D) increased fuel efficiency of cars
Answer: B
Diff: 1
Objective: 4
AACSB: Analytical thinking

4) With a constraining resource, managers should choose the product with the:
A) lowest contribution margin per unit of the constraining resource
B) highest sales price
C) highest contribution margin per unit of the constraining resource
D) highest gross profit
Answer: C
Diff: 1
Objective: 4
AACSB: Analytical thinking

5) A company has three products possible products that it can produce in a machine intensive production
process. Capacity is constrained by the number of hours the machines can run during a period and the
products are so popular that all units produced will be sold. Here is additional information:

Product A Product B Product C

Contribution
per unit $20 $30 $40
Machine hours
per unit 2.5 3.25 4.5

Which of the following would be an accurate conclusion based on these facts?

A) A balanced mix of 1/3 A, 1/3 B, and 1/3 C should be the goal when maximizing operating income in
the short-run.
B) Since Product C has the greatest contribution margin per unit and therefore emphasizing its
production and sales will lead to the highest operating income in the short-run.
C) Since A takes less time to produce, maximization of operating income will occur by emphasizing
production and sales of A.
D) Product B should be emphasized if the goal is to maximize contribution margin.
Answer: D
Diff: 3
Objective: 4
AACSB: Analytical thinking

50
Copyright © 2021 Pearson Education, Ltd.
6) For managers attempting to maximize operating income for a product offering with a great deal of
variety, product-mix decisions must usually take into account:
A) more than one constraining resource
B) just those products with the greatest contribution margin per constraining resource
C) products that produce a profit above the full costs of the product
D) how to maximize the selling price of all the products
Answer: A
Diff: 3
Objective: 4
AACSB: Analytical thinking

7) Springer Products manufactures three different product lines, Model X, Model Y, and Model Z.
Considerable market demand exists for all models. The following per unit data apply:

Model X Model Y Model Z

Selling price $51 $68 $77
Direct materials 10 10 10
Direct labor ($16 per hour) 16 16 32
Variable support costs ($5 per machine-hour) 5 10 10
Fixed support costs 15 15 15

Which model has the greatest contribution margin per unit?

A) Model X
B) Model Y
C) Model Z
D) Both Model X and Model Y have the highest and same contribution margin per unit
Answer: B
Explanation: B)
Model X $51 - $10 - $16 - $5 = $20
Model Y $68 - $10 - $16 - $10 = $32 highest
Model Z $77 - $10 - $32 - $10 = $25
Diff: 2
Objective: 4
AACSB: Application of knowledge

51
Copyright © 2021 Pearson Education, Ltd.
8) Springer Products manufactures three different product lines, Model X, Model Y, and Model Z.
Considerable market demand exists for all models. The following per unit data apply:

Model X Model Y Model Z

Selling price $55 $61 $78
Direct materials 8 8 8
Direct labor ($17 per hour) 17 17 34
Variable support costs ($9 per machine-hour) 9 18 18
Fixed support costs 13 13 13

Which model has the greatest contribution margin per machine-hour?

A) Model X
B) Model Y
C) Model Z
D) Both Model X and Model Y have the highest and same contribution margin per machine-hour
Answer: A
Explanation: A)
Model X $55 - $8 - $17 - $9 = $21 / 1 = $21 highest
Model Y $61 - $8 - $17 - $18 = $18 / 2 = $9
Model Z $78 - $8 - $34 - $18 = $18 / 2 = $9
Diff: 2
Objective: 4
AACSB: Application of knowledge

9) Springer Products manufactures three different product lines, Model X, Model Y, and Model Z.
Considerable market demand exists for all models. The following per unit data apply:

Model X Model Y Model Z

Selling price $58 $70 $80
Direct materials 10 10 10
Direct labor ($12 per hour) 12 12 24
Variable support costs ($5 per machine-hour) 5 10 10
Fixed support costs 12 12 12

If there is excess capacity, which model is the most profitable to produce?

A) Model X
B) Model Y
C) Model Z
D) Both Model X and Model Y have same and highest profitability
Answer: B
Explanation: B)
Model Y, since it has the greatest contribution margin per unit
Model X $58 - $10 - $12 - $5 = $31
Model Y $70 - $10 - $12 - $10 = $38 highest
Model Z $80 - $10 - $24 - $10 = $36
Diff: 3
Objective: 4
AACSB: Application of knowledge

52
Copyright © 2021 Pearson Education, Ltd.
10) Springer Products manufactures three different product lines, Model X, Model Y, and Model Z.
Considerable market demand exists for all models. The following per unit data apply:

Model X Model Y Model Z

Selling price $54 $70 $72
Direct materials 10 10 10
Direct labor ($17 per hour) 17 17 34
Variable support costs ($5 per machine-hour) 5 10 10
Fixed support costs 14 14 14

If there is a machine breakdown, which model is the most profitable to produce?

A) Model X
B) Model Y
C) Model Z
D) Both Model X and Model Y have same and highest profitability
Answer: A
Explanation: A)
Model X since it has the greatest contribution margin per machine-hour
Model X $54 - $10 - $17 - $5 = $22 / 1 = $22 highest
Model Y $70 - $10 - $17 - $10 = $33 / 2 = $17
Model Z $72 - $10 - $34 - $10 = $18 / 2 = $9
Diff: 3
Objective: 4
AACSB: Application of knowledge

11) Springer Products manufactures three different product lines, Model X, Model Y, and Model Z.
Considerable market demand exists for all models. The following per unit data apply:

Model X Model Y Model Z

Selling price $59 $70 $78
Direct materials 6 6 6
Direct labor ($15 per hour) 15 15 30
Variable support costs ($6 per machine-hour) 6 12 12
Fixed support costs 10 10 10

How can Lisa Dynondo encourage her salespeople to promote the more profitable model?
A) Put all sales persons on fixed salary.
B) Provide higher sales commissions for higher priced items.
C) Provide higher sales commissions for items with the greatest contribution margin per constrained
resource.
D) Provide higher sales commissions for items which has the lowest cost and lower sales commissions for
items with highest cost.
Answer: C
Diff: 2
Objective: 4
AACSB: Analytical thinking

53
Copyright © 2021 Pearson Education, Ltd.
12) Kinnane's Fine Furniture manufactures two models, Standard and Premium. Weekly demand is
estimated to be 110 units of the Standard Model and 72 units of the Premium Model. The following per
unit data apply:

Standard Premium
Contribution margin per unit $24 $30
Number of machine-hours required 6 5

The contribution per machine-hour is:

A) $24 for Standard, $30 for Premium
B) $144 for Standard, $150 for Premium
C) $18 for Standard, $25 for Premium
D) $4 for Standard, $6 for Premium
Answer: D
Explanation: D) Standard $24 / 6 = $4; Premium $30 / 5 = $6
Diff: 2
Objective: 4
AACSB: Application of knowledge

13) Kinnane's Fine Furniture manufactures two models, Standard and Premium. Weekly demand is
estimated to be 100 units of the Standard Model and 72 units of the Premium Model. The following per
unit data apply:

Standard Premium
Contribution margin per unit $24 $30
Number of machine-hours required 3 5

If there are 495 machine-hours available per week, how many rockers of each model should Kinnane
produce to maximize profits?
A) 100 units of Standard and 39 units of Premium
B) 45 units of Standard and 72 units of Premium
C) 100 units of Standard and 72 units of Premium
D) 83 units of Standard and 50 units of Premium
Answer: A
Explanation: A) Standard (100 units × 3 mh) + Premium (39 units × 5 mh) = 495 machine-hours of the
constrained resource
Diff: 2
Objective: 4
AACSB: Application of knowledge

54
Copyright © 2021 Pearson Education, Ltd.
14) Kinnane's Fine Furniture manufactures two models, Standard and Premium. Weekly demand is
estimated to be 103 units of the Standard Model and 71 units of the Premium Model. The following per
unit data apply:

Standard Premium
Contribution margin per unit $18 $20
Number of machine-hours required 3 4

If there are 720 machine-hours available per week, how many rockers of each model should Kinnane
produce to maximize profits?
A) 103 units of Standard and 47 units of Premium
B) 71 units of Standard and 71 units of Premium
C) 103 units of Standard and 71 units of Premium
D) 83 units of Standard and 62 units of Premium
Answer: C
Explanation: C) Standard (103 units × 3 mh) + Premium (71 units × 4 mh) = 593 machine-hours for the
current demand
Diff: 2
Objective: 4
AACSB: Application of knowledge

15) A.C. Tech Manufacturing Appliances manufactures three sizes of kitchen appliances: small, medium,
and large. Product information is provided below.

Small Medium Large

Unit selling price $410 $600 $1220
Unit costs:
Variable manufacturing (240) (310) (510)
Fixed manufacturing (80) (140) (260)
Fixed selling and
administrative (80 ) (85) (170)
Unit profit $10 $65 $280

Demand in units 140 130 140

Machine-hours per unit 50 50 140

The maximum machine-hours available are 6500 per week.

What is the contribution margin per machine-hour for a medium appliance?

A) $0.50
B) $1.30
C) $5.80
D) $10.70
Answer: C
Explanation: C) Contribution margin = $600 - $310 = $290
Contribution margin per machine hour = $290 / 50 = $5.80
Diff: 2
Objective: 4
AACSB: Application of knowledge

55
Copyright © 2021 Pearson Education, Ltd.
16) A.C. Tech Manufacturing Appliances manufactures three sizes of kitchen appliances: small, medium,
and large. Product information is provided below.

Small Medium Large

Unit selling price $420 $610 $1220
Unit costs:
Variable manufacturing (240) (290) (540)
Fixed manufacturing (40) (140) (280)

Fixed selling and administrative (110 ) (125) (140)

Unit profit $30 $55 $260

Demand in units 150 130 150

Machine-hours per unit 30 40 150

The maximum machine-hours available are 6500 per week.

Which of the three product models should be produced first if management incorporates a short-run
profit maximizing strategy?
A) small appliance
B) medium appliance
C) large appliance
D) both medium and large appliance
Answer: B
Explanation: B)
Small ($420 - $240 ) = $180 / 30 = $6.00
Medium ($610 - $290 ) = $320 / 40 = $8.00 highest
Large ($1220 - $540 ) = $680 / 150 = $4.53
Diff: 2
Objective: 4
AACSB: Application of knowledge

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17) A. C .Tech Manufacturing Appliances manufactures three sizes of kitchen appliances: small, medium,
and large. Product information is provided below.

Small Medium Large

Unit selling price $400 $600 $1220
Unit costs:
Variable manufacturing (220) (280) (720)
Fixed manufacturing (60) (140) (280)
Fixed selling and
administrative (70 ) (25) (120)
Unit profit $50 $155 $100

Demand in units 170 120 170

Machine-hours per unit 50 50 170

The maximum machine-hours available are 6200 per week.

How many of each product should be produced per month using the short-run profit maximizing
strategy?
A) 0 120 7
B) 4 120 0
C) 170 170 0
D) 170 50 50
Answer: B
Explanation: B)
Small: (400 - 220) / 50 = 3.60
Medium: (600 - 280) / 50 = 6.40
Large: (1220 - 720) / 170 = 2.94
Medium (120 × 50) + Small (4 × 50) = 6200 total machine-hours
Diff: 3
Objective: 4
AACSB: Application of knowledge

57
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18) Granfield Corporation manufactures two products, Product A and Product B. The following
information was available:

Product A Product B
Selling price per unit $37 $26
Variable cost per unit 31 17

Total fixed costs $22,000

If Granfield Corporation could produce and sell either 10,600 units of Product A or 5800 units of Product
B at full capacity, it should produce and sell:
A) 10,600 units of A and none of B
B) 3667 units of B and 2444 units of A
C) 5800 units of B and none of A
D) 8700 units of A and 5800 units of b
Answer: A
Explanation: A) 10,600 × ($37 - $31) = $63,600
Diff: 3
Objective: 4
AACSB: Application of knowledge

19) Product-mix decisions usually have only a short-run focus because they typically arise in the context
of capacity constraints that can be relaxed in the long run.
Answer: TRUE
Diff: 2
Objective: 4
AACSB: Analytical thinking

20) For short-run product-mix decisions, managers should focus on minimizing total fixed costs.
Answer: FALSE
Explanation: For short-run product mix decisions, managers should focus on MAXIMIZING total
CONTRIBUTION MARGIN.
Diff: 2
Objective: 4
AACSB: Analytical thinking

21) For short-run product-mix decisions, maximizing contribution margin will also result in maximizing
operating income.
Answer: TRUE
Diff: 2
Objective: 4
AACSB: Analytical thinking

22) To maximize profits, managers should produce more of the product with the greatest contribution
margin per unit of the constraining resource.
Answer: TRUE
Diff: 2
Objective: 4
AACSB: Analytical thinking

58
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Objective 12.5

1) The theory of constraints (TOC) defines throughput margin as:

A) operating income minus the direct material costs of the goods sold
B) operating income minus the direct labor costs of the goods sold
C) revenues minus the direct material costs of the goods sold
D) revenues minus the full costs of the goods sold
Answer: C
Diff: 3
Objective: 5
AACSB: Analytical thinking

2) Based on the theory of constraints, investments equal:

A) the sum of material costs in direct and indirect materials, work-in-process, and finished goods
inventories; R&D costs; and business function costs
B) the sum of material costs in direct materials, work-in-process, and finished goods inventories; R&D
costs; and capital costs of equipment and buildings
C) the sum of material costs in direct and indirect materials, work-in-process, and finished goods
inventories; R&D costs; and full costs
D) the sum of material costs in direct materials, work-in-process, and finished goods inventories; R&D
costs; sunk costs, full costs, and business function costs
Answer: B
Diff: 3
Objective: 5
AACSB: Analytical thinking

3) The objective of the Theory of Constraints is to increase throughput margin while increasing
investment in plant and equipment.
Answer: FALSE
Explanation: The objective of the Theory of Constraints is to increase throughput margin while
decreasing investments and operating costs.
Diff: 1
Objective: 5
AACSB: Analytical thinking

4) The theory of constraints is more useful for the long-run management of costs since it takes a long-run
perspective and focuses on improving processes by eliminating non-value-added activities and reducing
the costs of performing value-added activities.
Answer: FALSE
Explanation: The theory of constraints is less useful for the long-run management of costs since it
regards operating costs as difficult to change in the short run, it does not identify individual activities and
drivers of costs.
Diff: 1
Objective: 5
AACSB: Analytical thinking

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5) Activity based costing (ABC) systems are less useful than the theory of constraints (TOC) for long-run
pricing, cost control, and capacity management.
Answer: FALSE
Explanation: Activity based costing (ABC) systems take a long-run perspective and focus on improving
processes by eliminating non-value-added activities and reducing the costs of performing value-added
activities. ABC systems are therefore more useful than TOC for long-run pricing, cost control, and
capacity management.
Diff: 2
Objective: 5
AACSB: Analytical thinking

6) Compare and contrast the theory of constraints and activity based costing. Which is more useful in
short-run and long-run management of costs?
Answer: The theory of constraints emphasizes management of bottleneck operations as the key to
improving performance of production operations as a whole. It focuses on short-run maximization of
contribution margin. Because TOC regards operating costs as difficult to change in the short run, it does
not identify individual activities and drivers of costs. Therefore, TOC is more useful for the short-run
management of costs.
In contrast, activity based costing (ABC) systems take a long-run perspective and focus on improving
processes by eliminating non-value-added activities and reducing the costs of performing value-added
activities. ABC systems are therefore more useful than TOC for long-run pricing, cost control, and
capacity management. The short-run TOC emphasis on maximizing contribution margin by managing
bottlenecks complements the long-run strategic-cost-management focus of ABC.
Diff: 2
Objective: 5
AACSB: Analytical thinking

7) Delicious Preserves currently makes jams and jellies and a variety of decorative jars used for
packaging. An outside supplier has offered to supply all of the needed decorative jars. For this
make-or-buy decision, a cost analysis revealed the following avoidable unit costs for the decorative jars:

Direct materials $0.57

Direct labor 0.07
Unit-related support costs 0.27
Batch-related support costs 0.29
Product-sustaining support costs 0.44
Facility-sustaining support costs 0.59
Total cost per jar $2.23

The relevant cost per jar is:

A) $0.64 per jar
B) $0.91 per jar
C) $1.64 per jar
D) $2.23 per jar
Answer: D
Explanation: D) All avoidable costs are relevant for this decision.
Diff: 2
Objective: 5
AACSB: Application of knowledge

63
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8) Delicious Preserves currently makes jams and jellies and a variety of decorative jars used for
packaging. An outside supplier has offered to supply all of the needed decorative jars. For this
make-or-buy decision, a cost analysis revealed the following avoidable unit costs for the decorative jars:

Direct materials $0.56

Direct labor 0.14
Unit-related support costs 0.20
Batch-related support costs 0.26
Product-sustaining support costs 0.46
Facility-sustaining support costs 0.57
Total cost per jar $2.19

The maximum price that Delicious Preserves should be willing to pay for the decorative jars is:
A) $0.70 per jar
B) $0.90 per jar
C) $0.46 per jar
D) $2.19 per jar
Answer: D
Explanation: D) Considering only quantitative factors, the company should not pay more than the
avoidable costs of $2.19 per jar. There may be qualitative factors that are also important.
Diff: 2
Objective: 5
AACSB: Application of knowledge

9) Throughput margin is equal to revenues minus direct materials and direct labor of the cost of goods
sold.
Answer: FALSE
Explanation: Throughput margin is equal to revenues minus direct materials of the cost of goods sold.
Diff: 2
Objective: 5
AACSB: Analytical thinking

64
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Objective 12.6

1) Which of the following is an irrelevant cost when considering where to drop a customer?
A) cost of goods sold
B) marketing support
C) depreciation
D) sales order and delivery processing
Answer: C
Diff: 2
Objective: 6
AACSB: Analytical thinking

2) When deciding to lease a new cutting machine or continue using the old machine, the irrelevant cost is:
A) $50,000, cost of the old machine
B) $20,000, cost of the new machine
C) $10,000, selling price of the old machine
D) $3,000, annual savings in operating costs if the new machine is purchased
Answer: A
Diff: 2
Objective: 6
AACSB: Analytical thinking

3) Which of the following is true of depreciation cost?

A) Depreciation cost on equipment is irrelevant in decision making because depreciation on equipment
that has already been purchased is a past cost.
B) Depreciation cost on equipment is relevant in decision making because depreciation on equipment that
has already been purchased is an opportunity cost.
C) Depreciation cost on equipment is irrelevant in decision making because there is no cash transaction.
D) Depreciation cost on equipment is irrelevant in decision making because depreciation on equipment
that has already been purchased is an opportunity cost.
Answer: A
Diff: 1
Objective: 6
AACSB: Analytical thinking

4) When deciding whether to discontinue a segment of a business, relevant costs include:

A) auditing expenses for the whole company
B) fees paid to a management consultant to study the feasibility of the business segment
C) annual insurance costs of the company
D) future administrative costs that can be eliminated
Answer: D
Diff: 2
Objective: 6
AACSB: Analytical thinking

65
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5) Colonial North Manufacturing, Inc. is considering eliminating one of its product lines. The fixed costs
currently allocated to the product line will be allocated to other product lines upon discontinuance. What
financial effects occur if the product line is discontinued?
A) net income will decrease by the amount of the contribution margin of the product line being
discontinued
B) the company's total fixed costs will increase by the amount of the contribution margin of the product
line being discontinued
C) the company's total fixed costs will decrease by the amount of the product line's fixed costs
D) net income will decrease by the amount of the product line's fixed costs
Answer: A
Diff: 2
Objective: 6
AACSB: Analytical thinking

6) Discontinuing unprofitable products will:

A) increase profitability if the resources no longer required by the discontinued product can be
eliminated
B) increase profitability if capacity constraints are adjusted
C) decrease profitability if the fixed costs does not change after discontinuing the particular business
segment
D) increase profitability when a large portion of the fixed costs are unavoidable
Answer: A
Diff: 2
Objective: 6
AACSB: Analytical thinking

7) A segment has the following data:

Sales $660,000
Variable costs 346,000
Fixed costs 345,500

What will be the incremental effect on net income if this segment is eliminated, assuming the fixed costs
will be allocated to profitable segments?
A) $314,500 increase
B) $346,000 decrease
C) $314,000 decrease
D) $345,500 decrease
Answer: C
Explanation: C) Change in net income = $660,000 - $346,000 = $314,000 decrease
Diff: 2
Objective: 6
AACSB: Application of knowledge

66
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8) State Road Fabricators Inc. is considering eliminating Model A02777 because of losses over the past
quarter. The past three months of information for Model A02777 are summarized below:

Sales (1200 units) $400,000

Manufacturing costs:
Direct materials 170,000

Direct labor ($15 per hour) 100,000

Overhead 140,000
Operating loss ($10,000)

Overhead costs are 60% variable and the remaining 40% is depreciation of special equipment for model
A02777 that has no resale value.

If Model A02777 is dropped from the product line, operating income will:
A) increase by $10,000
B) decrease by $46,000
C) increase by $56,000
D) decrease by $10,000
Answer: B
Explanation: B) $400,000 - $170,000 - $100,000 - $84,000 = $46,000 This product contributes $46,000
toward corporate profits, therefore, discontinuing this product will decrease operating income by $46,000.
Diff: 3
Objective: 6
AACSB: Application of knowledge

67
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9) The management accountant for Giada's Book Store has prepared the following income statement for
the most current year:
Cookbook Travel Book Classics Total
Sales $69,000 $198,000 $51,000 $318,000
Cost of goods sold 39,000 68,000 24,000 131,000
Contribution margin 30,000 130,000 27,000 187,000
Order and delivery
processing 20,000 25,000 10,000 55,000
Rent (per sq. foot used) 5000 4000 5000 14,000
Allocated corporate costs 9000 9000 9000 27,000
Corporate profit $(4000) $92,000 $3000 $91,000

If the cookbook product line had been discontinued prior to this year, the company would have reported:
A) greater corporate profits
B) the same amount of corporate profits
C) less corporate profits
D) resulting profits cannot be determined
Answer: C
Explanation: C) $69,000 - $39,000 - $20,000 - $5000 = $5000
The cookbook product line contributed $5000 toward corporate profits. Without the cookbooks, corporate
profits would be $5000 less than currently reported.
Diff: 3
Objective: 6
AACSB: Application of knowledge

10) The management accountant for Giada's Book Store has prepared the following income statement for
the most current year:
Cookbook Travel Book Classics Total
Sales $60,000 $100,000 $60,000 $220,000
Cost of goods sold 40,000 67,000 22,000 129,000
Contribution margin 20,000 33,000 38,000 91,000

Order and delivery processing 21,000 22,000 10,000 53,000

Rent (per sq. foot used) 5000 1000 5000 11,000
Allocated corporate costs 8000 8000 8000 24,000
Corporate profit $(14,000) $2000 $15,000 $3000

If the travel book line had been discontinued, corporate profits for the current year would have decreased
by: (Assume there is not an alternative use for the space rented.)
A) $33,000
B) $11,000
C) $10,000
D) $2000
Answer: C
Explanation: C) $100,000 - $67,000 - $22,000 - $1000 = $10,000
Diff: 3
Objective: 6
AACSB: Application of knowledge

68
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11) Giant Company has three products, A, B, and C. The following information is available:

Product A Product B Product C

Sales $60,000 $98,000 $23,000
Variable costs 38,000 53,000 12,000
Contribution
margin 22,000 45,000 11,000
Fixed costs:
Avoidable 6000 19,000 5000
Unavoidable 11,000 12,000 9400
Operating income $5000 $14,000 $(3400)

Giant Company is thinking of dropping Product C because it is reporting a loss. Assuming Giant drops
Product C and does NOT replace it, operating income will:
A) increase by $3400
B) increase by $5000
C) decrease by $6000
D) decrease by $14,400
Answer: C
Explanation: C) Dropping Product C would mean Giant gives up $11,000 in contribution margin while
only saving $5000 in avoidable fixed costs. Without Product C, operating income would be $6000 less
than currently reported.
Diff: 3
Objective: 6
AACSB: Application of knowledge

12) A company is analyzing whether to discontinuing selling its product to a particular customer. In
performing its analysis, it considers the allocated cost of corporate headquarters it usually associates with
each of its customers irrelevant and well as the cost of the space (rent) dedicated to the storage of the
work-in-process products earmarked for the delivery to the customer. The company does consider the
costs of deliveries and special customer services as relevant costs. Which of the following statements
about the treatment of these cost are factual?
A) Depreciation is not considered relevant because it is a noncash expense.
B) The cost allocation of headquarter expenses is irrelevant because it those costs will be incurred
whether the customer account is dropped or maintained.
C) Delivery and customer services costs may not be relevant because they are not part of the production
function or included in cost of goods sold.
D) Rent, even though it is a measure of the cost of the space dedicated to storage of products to be
shipped to the customer, unless the company can reduce its rental costs because of the loss of the
customer.
Answer: D
Diff: 2
Objective: 6
AACSB: Application of knowledge

69
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Objective 12.7

1) Managers are examining a possible replacement of a machine decision and generate the following
numbers:

Book value of old machine $1,000,000

Current disposal value of old machine $50,000
Loss on disposal of old machine $300,000
Cost of new machine $600,000

In performing an analysis and in attempt to answer the question, "should we replace the old machine",
which of the following statements would be true?
A) the book value of the old machine is relevant
B) the book value of the old machine and the current disposal value of the old machine are both relevant
C) the cost of the new machine and the current disposal value of the old machine are relevant
D) the book value of the old machine and the current disposal value of the old machine are the only
relevant items
Answer: C
Diff: 2
Objective: 7
AACSB: Analytical thinking

2) Book value is defined as the:

A) sum of the original cost of an asset and the accumulated depreciation
B) difference between the market value of an asset and the accumulated depreciation
C) difference between the original cost of an asset and the accumulated depreciation
D) sum of the market value of an asset and the accumulated depreciation
Answer: C
Diff: 1
Objective: 7
AACSB: Analytical thinking

3) ________ is relevant in a decision to replace equipment.

A) Warehouse rent costs
B) Book value of old equipment
C) Accumulated depreciation on old equipment
D) Salvage value
Answer: D
Diff: 1
Objective: 7
AACSB: Analytical thinking

74
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4) Which of the following is true in a decision to keep or replace existing equipment?
A) The book value of the old equipment is relevant.
B) The disposal value of the old equipment is relevant.
C) Property taxes is relevant.
D) Depreciation on the new equipment is relevant.
Answer: B
Diff: 1
Objective: 7
AACSB: Analytical thinking

5) A company decided to replace an old machine with a new machine. Which of the following is
considered a relevant cost?
A) the book value of the old equipment
B) the depreciation expense on the old equipment
C) the loss on the disposal of the old equipment
D) the setup cost of the new equipment
Answer: D
Diff: 1
Objective: 7
AACSB: Analytical thinking

6) What role does a trade-in allowance on old equipment play in a decision to retain or replace
equipment?
A) It is relevant since it increases the cost of the new equipment.
B) It is irrelevant since it reduces the cost of the old equipment.
C) It is irrelevant to the decision since it does not impact the cost of the new equipment.
D) It is relevant since it reduces the cost of the new equipment.
Answer: D
Diff: 1
Objective: 7
AACSB: Analytical thinking

75
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7) Hartley's Meat Pies is considering replacing its existing delivery van with a new one. The new van can
offer considerable savings in operating costs. Information about the existing van and the new van follow:

Existing van New van

Original cost $50,000 $92,000
Annual operating cost $19,500 $14,000
Accumulated depreciation $34,000 —

Current salvage value of the existing van $25,500 —

Remaining life 9 years 9 years
Salvage value in 9 years $0 $0
Annual depreciation $1778 $10,222

Sunk costs include:

A) the accumulated depreciation of the existing van
B) the original cost of the new van
C) the current salvage value of the existing van
D) the annual operating cost of the new van
Answer: A
Diff: 2
Objective: 7
AACSB: Application of knowledge

8) Hartley's Meat Pies is considering replacing its existing delivery van with a new one. The new van can
offer considerable savings in operating costs. Information about the existing van and the new van follow:

Existing van New van

Original cost $50,000 $98,000
Annual operating cost $20,500 $13,000
Accumulated depreciation $33,000 —

Current salvage value of the existing van $27,500 —

Remaining life 10 years 10 years
Salvage value in 10 years $0 $0
Annual depreciation $1700 $9800

Relevant costs for this decision include:

A) the original cost of the existing van
B) accumulated depreciation
C) the annual operating cost
D) the book value of the existing van
Answer: C
Diff: 2
Objective: 7
AACSB: Application of knowledge

76
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9) Hartley's Meat Pies is considering replacing its existing delivery van with a new one. The new van can
offer considerable savings in operating costs. Information about the existing van and the new van follow:

Existing van New van

Original cost $50,000 $92,000
Annual operating cost $19,500 $14,000
Accumulated depreciation $34,000 —

Current salvage value of the existing van $25,500 —

Remaining life 9 years 9 years
Salvage value in 9 years $0 $0
Annual depreciation $1778 $10,222

If Hartley's Meat Pies replaces the existing delivery van with the new one, over the next 8 years operating
income will:
A) decrease by $98,000
B) increase by $60,000
C) decrease by $60,000
D) increase by $98,000
Answer: B
Explanation: B) New van ($10,000 × 8 years) - Existing van ($17,500 × 8 years) = $60,000 less in operating
costs, which results in a $60,000 increase in operating income.
Diff: 3
Objective: 7
AACSB: Application of knowledge

10) Planet Design Services, Inc., is considering replacing a machine. The following data are available:

Replacement
Old Machine Machine
Original cost $660,000 $520,000
Useful life in years 10 5
Current age in years 5 0
Book value $400,000 —
Disposal value now $132,000 —
Disposal value in 5 years 0 0

Annual cash operating costs $98,000 $61,000

Which of the data provided in the table is a sunk cost?

A) the annual cash operating costs of the old machine
B) the annual cash operating costs of the replacement machine
C) the disposal value of the old machine
D) the original cost of the old machine
Answer: D
Diff: 2
Objective: 7
AACSB: Application of knowledge

77
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11) Planet Design Services, Inc., is considering replacing a machine. The following data are available:

Replacement
Old Machine Machine
Original cost $630,000 $530,000
Useful life in years 10 5
Current age in years 5 0
Book value $390,000 —
Disposal value now $112,000 —
Disposal value in 5 years 0 0
Annual cash operating
costs $103,000 $58,000

For the decision to keep the old machine, the relevant costs of keeping the old machine is:
A) $965,000
B) $515,000
C) $627,000
D) $103,000
Answer: B
Explanation: B) Relevant cost = $103,000 × 5 = $515,000
Diff: 3
Objective: 7
AACSB: Application of knowledge

12) Planet Design Services, Inc., is considering replacing a machine. The following data are available:

Replacement
Old Machine Machine
Original cost $650,000 $540,000
Useful life in years 10 5
Current age in years 5 0
Book value $380,000 —
Disposal value now $162,000 —
Disposal value in 5 years 0 0
Annual cash operating
costs $108,000 $60,000

The difference between keeping the old machine and replacing the old machine is:
A) $920,000 in favor of keeping the old machine
B) $138,000 in favor of keeping the old machine
C) $920,000 in favor of replacing the old machine
D) $138,000 in favor of replacing the old machine
Answer: B
Explanation: B) New [$540,000 + (5 × $60,000) - $162,000] - Old [(5 × $108,000)] = $138,000
Diff: 3
Objective: 7
AACSB: Application of knowledge

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13) A company's management team is considering replacing an old machine. It estimates that by keeping
the old machine, the related operating costs will be $1,200,000 but will drop to $750,000 a year if the old
machine is replaced with a new one. The disposal value of the old machine is $120,000, which is $10,000
below its book value ($10,000 loss on disposal.) The new machine will cost $520,000. Ignoring tax
implications of a replacement, which of the followings statements is correct?
A) The $10,000 loss on disposal is relevant.
B) The difference in total costs between the two alternatives is $50,000.
C) The relevant cost savings is $40,000.
D) Without consideration of nonfinancial factors, the old machine should be kept.
Answer: B
Explanation: B)
Keep Replace Difference
Operating costs $1,200,000 $750,000 $450,000
Disposal value $0 $120,000 $120,000
Cost of New Machine ($520,000) ($520,000)
$50,000

Replacing the old machine saves operating expenses of $450,000 and produces a $120,000 salvage value
that is greater, by $50,000, than the cost of the new machine.
Diff: 2
Objective: 7
AACSB: Application of knowledge

14) When replacing an old machine with a new machine, the new machine's depreciation expense is
relevant.
Answer: TRUE
Diff: 1
Objective: 7
AACSB: Analytical thinking

15) When replacing an old machine with a new machine, the book value of the old machine is a relevant
cost.
Answer: FALSE
Explanation: The original price of the old machine and the related accumulated depreciation is a sunk
cost and therefore an irrelevant cost.
Diff: 1
Objective: 7
AACSB: Analytical thinking

16) When replacing an old machine with a new machine, the disposal value of the old machine is
irrelevant.
Answer: FALSE
Explanation: The disposal value of the old machine is relevant and lowers the net cost of the decision to
replace the old machine.
Diff: 1
Objective: 7
AACSB: Analytical thinking

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18) Why is the depreciation of an old equipment irrelevant to decision making?
Answer: Depreciation expense is irrelevant in decision making because depreciation on equipment that
has already been purchased is a past cost. But, the cost of purchasing new equipment in the future that
will be written off as depreciation is relevant in decision making.
Diff: 2
Objective: 7
AACSB: Analytical thinking

Objective 12.8

1) If management takes a multiple-year view in the decision model and judges success according to the
current year's results, a problem will occur in the:
A) decision model
B) performance evaluation model
C) production evaluation model
D) quantitative model
Answer: B
Diff: 2
Objective: 7
AACSB: Analytical thinking

2) Top management faces a persistent challenge to make sure that the performance evaluation model of
lower level managers is:
A) focused on short-term performance
B) based solely on quantitative factors
C) consistent with the decision model
D) based solely on qualitative factors
Answer: C
Diff: 2
Objective: 8
AACSB: Analytical thinking

3) The company's performance evaluation system rewards managers for meeting profitability targets.
Which of the following actions could be considered unethical?
A) A manager makes a decision to replace old machines with an energy efficient machines but over the
short-run profits will suffer.
B) A senior manager design performance evaluation models that are inconsistent with the personal goals
of the middle managers.
C) Same facts as part B but the lower-level managers will be evaluated on the expectation that the first
year would be poor and the next year would be much better.
D) Lower level managers refuse to upgrade machinery because the first year will show lower than
expected profits despite significant long-term savings.
Answer: D
Diff: 2
Objective: 8
AACSB: Analytical thinking

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4) Performance evaluation focuses on responsibility centers for a specific period, not on projects or
individual items of equipment over their useful lives.
Answer: TRUE
Diff: 2
Objective: 8
AACSB: Analytical thinking

5) How can conflicts arise between the decision model and the performance evaluation model used to
evaluate managers? Provide an example of this type of conflict.
Answer: Since managers will act in their self-interest, they will make decisions that make their own
performance look best. At times, this does not lead to the best decision for the firm. An example of this
situation might include evaluating a managers performance on short-term results, when the firm would
like decisions made that would maximize long term performance.
Diff: 2
Objective: 8
AACSB: Analytical thinking

6) To minimize conflicts of interest because of performance evaluation models, managers should institute
codes of conduct and create cultures that focus on "doing the right thing."
Answer: TRUE
Diff: 2
Objective: 8
AACSB: Application of knowledge

Objective 12.A

1) Linear programming is a tool that maximizes total contribution margin of a mix of products with
multiple constraints.
Answer: TRUE
Diff: 1
Objective: A
AACSB: Analytical thinking

2) Which of the following is an assumption of linear programming?

A) Average variable costs remain constant throughout the year.
B) Opportunity costs are irrelevant in decision making.
C) Few sunk costs are relevant in decision making.
D) All costs are either variable or fixed for a single cost driver.
Answer: D
Diff: 2
Objective: A
AACSB: Analytical thinking

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3) In linear programming, the goals of management are expressed in:
A) an objective function
B) constraints
C) operating policies
D) business functions
Answer: A
Diff: 1
Objective: A
AACSB: Analytical thinking

4) A mathematical inequality or equality that must be appeased is known as a(n):

A) objective function
B) constraint
C) operating policy
D) business function
Answer: B
Diff: 2
Objective: A
AACSB: Analytical thinking

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5) Computer Products produces two keyboards, Regular and Special. Regular keyboards have a unit
contribution margin of $128, and Special keyboards have a unit contribution margin of $720. The demand
for Regulars exceeds Computer Product's production capacity, which is limited by available
machine-hours and direct manufacturing labor-hours. The maximum demand for Special keyboards is 80
per month. Management desires a product mix that will maximize the contribution toward fixed costs
and profits.

Direct manufacturing labor is limited to 1,600 hours a month and machine-hours are limited to 1,200 a
month. The Regular keyboards require 20 hours of labor and 8 machine-hours. Special keyboards require
34 labor-hours and 20 machine-hours.

Let R represent Regular keyboards and S represent Special keyboards. The correct set of equations for the
keyboard production process is:
A)
Maximize: $128R + $720S
Constraints:
Labor-hours: 20R + 34S ≤ 1,600
Machine-hours: 8R + 20S ≤ 1,200
Special: S ≤ 80
S≥0
Regular: R≥0
B)
Maximize: $128R + $720S
Constraints:
Labor-hours: 20R + 34S ≥ 1,600
Machine-hours: 8R + 20S ≥≤ 1,200
Special: S ≥ 80
S≥0
Regular: R≥0
C)
Maximize: $720S + $128R
Constraints:
Labor-hours: 20R + 8S ≤ 1,600
Machine-hours: 34R + 20S ≤ 1,200
Special: S ≤ 80
S≥0
Regular: R≥0
D)
Maximize: $128R + $720S
Constraints:
Labor-hours: 20R + 34S ≤ 1,600
Machine-hours: 8R + 20S ≤ 1,200
Special: S ≥ 80
S≤0
Regular: R≤0
Answer: A
Diff: 3
Objective: A
AACSB: Application of knowledge
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6) In linear programming, a constraint is a mathematical inequality or equality that must be satisfied by
the variables in a mathematical model.
Answer: TRUE
Diff: 2
Objective: A
AACSB: Analytical thinking

7) Local Steel Construction Company produces two products, steel and wood beams. Steel beams have a
unit contribution margin of $200, and wood beams have a unit contribution margin of $150. The demand
for steel beams exceeds Local Steel Construction Company's production capacity, which is limited by
available direct labor and machine-hours. The maximum demand for wood beams is 90 per week.
Management desires that the product mix should maximize the weekly contribution toward fixed costs
and profits.

Direct manufacturing labor is limited to 3,000 hours a week and 1,000 hours is all that the company's
outdated machines can run a week. The steel beams require 120 hours of labor and 60 machine-hours.
Wood beams require 150 labor hours and 120 machine-hours.

Required:
Formulate the objective function and constraints necessary to determine the optimal product mix.
Answer: S = steel beams W = wood beams

Maximize: $200S + $150W

Constraints: Labor hours: 120S + 150W ≤ 3,000

Machine-hours: 60S + 120W ≤ 1,000
Wood beams: W ≤ 90 W ≥ 0
Steel beams: S≥0
Diff: 2
Objective: A
AACSB: Application of knowledge

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