Deck 4: Relevant Costs for Nonroutine Operating Decision

Question 1

Management decisions rarely require analysis of qualitative factors.

Answer 1

False

Question 2

Because many management decisions are unique, managers cannot use a standard decision process for addressing them.

Answer 2

False

Question 3

Management decisions involve primarily decisions about long-term strategic plans.

Answer 3

False

Question 4

The effect of production practices on the environment is an example of a qualitative factor to be considered in a management decision.

Question 5

If idle capacity exists, a special order must cover its full cost to be profitable.

Question 6

Average costs are appropriate to use when deciding whether to keep a product or product line.

Question 7

A key aspect of special order decisions is being at least as well off after the decision as before it.

Question 8

The process for making a management decision starts with identifying the decision type.

Question 9

In multi-product firms, managers need to consider the effect on demand for other products when they make a keep or drop decision about one product.

Question 10

Special order decisions are long-term decisions that may need to include the time value of money.

Question 11

The general rule is to discontinue a segment of the business when its total contribution margin does not cover avoidable fixed costs.

Question 12

The general rule is to discontinue a service when its total fixed costs are less than its avoidable fixed costs.

Question 13

The general rule is to discontinue a product line when its total profit margin is greater than its avoidable fixed cost.

Question 14

The general rule for make or buy decisions is to choose the option with the lowest total cost.

Question 15

Make or buy decisions are sometimes known as outsourcing decisions.

Question 16

Emphasizing products with higher contribution margins assumes that fixed costs are unaffected by product mix.

Question 17

Managers should always emphasize products with the highest total contribution margin.

Question 18

An order from a new customer always constitutes a special order.

Question 19

Opportunity costs are often relevant in make or buy decisions.

Question 20

If a service organization is at capacity, it would only accept a special order for service if it was priced at or above the price that regular customers pay for the service.

Question 21

The process for addressing management decisions begins with

A) Applying relevant quantitative techniques
B) Applying relevant qualitative techniques
C) Questioning managers' judgment
D) Identifying the type of decision involved

Question 22

The general rule for special orders is

A) Profit should be greater after the special order than before it
B) Only take special orders when excess capacity exists
C) The organization should be as well off after taking the order as it was before taking it
D) Ignore all fixed costs associated with the special order

Question 23

In applying a relevant quantitative analysis technique to a decision, managers must

A) Identify input variables
B) Identify a dependent variable
C) Not use estimates
D) Interpret results in the most favorable way possible

Question 24

Product quality is seldom a factor in make or buy decisions.

Question 25

When resources are constrained, managers should emphasize products and services that maximize the contribution margin per unit of constrained resource.

Question 26

Because many management decisions are unique, managers address them using a (an)

A) Cookbook
B) Process
C) Information system
D) Team

Question 27

A product emphasis decision may involve

A) Sunk costs and opportunity costs
B) Multiple resource constraints and sunk costs
C) Multiple products and qualitative factors
D) Sunk costs and qualitative factors

Question 28

Managers may outsource a service because they do not consider it a core competency.

Question 29

One way to deal with constrained resources is to spend money to alleviate them.

Question 30

Which of the following is the best definition of a qualitative factor?

A) Factors related to product or service quality
B) Factors that cannot be identified in a decision-making process
C) Factors that are not valued in monetary terms
D) Factors that are superior to quantitative factors in decision making

Question 31

The accessibility and timeliness of information can affect decision quality.

Question 32

The process for making management decisions

A) Is the same as the process for making routine decisions
B) Involves qualitative techniques only
C) Begins with identifying the type of decision
D) Ignores qualitative factors

Question 33

Qualitative factors can be difficult to identify because

A) They are not usually relevant in management decisions
B) They are usually unimportant
C) No set formula assures managers they have considered the important issues
D) They are typically the same as sunk costs

Question 34

To make a decision about a special order, managers need to know whether

A) The order replaces regular business
B) The customer will buy the same product in the future
C) The customer is a not-for-profit organization
D) The order has a long-term strategic effect

Question 35

Sunk costs should be considered in

A) Both routine and nonroutine operating decisions
B) Neither routine or nonroutine operating decisions
C) Routine decisions only
D) Nonroutine operating decisions only

Question 36

Nonroutine management decisions differ from routine decisions in that nonroutine decisions

A) Ignore cash flows
B) Consider cash flows
C) Do not happen on a regular basis
D) Involve small dollar amounts

Question 37

The number of lawnmowers available could be a constraint for a lawn care service.

Question 38

Rapid growth may require a company to outsource certain products or services.

Question 39

PRO Shops has a capacity of 45,000 units, and is currently producing and selling 40,000 at $25 a unit. The present cost structure, on a per unit basis, is: An order for 7,000 units has been received from a Japanese company at a price of $20 per unit. If the order is accepted, profit will

A) Decrease by $2,000
B) Increase by $14,000
C) Increase by $7,000
D) Increase by $4,000

Question 40

In nonroutine situations, managers must identify the type of decision to be made. Which of the following is not an example of a nonroutine operating decision?

A) Make or buy
B) Special order pricing
C) Budgeting
D) Managing limited resources

Question 41

Managers should discontinue a business if which of the following is less than the sum of relevant fixed costs and opportunity costs?

A) Profit
B) Variable cost
C) Total cost
D) Contribution margin

Question 42

Yvonne and Ken own and operate Deluxe Housecleaning Service. Which of the following is a qualitative factor associated with dropping carpet cleaning from their current line of services?

A) The timeliness with which they can provide other cleaning services
B) The quality of their current carpet cleaning equipment
C) The potential effect on demand for their other services
D) The lost revenue from current customers

Question 43

Managers should accept a special order if its price is greater than the sum of

A) All variable costs and all fixed costs
B) All variable costs and all opportunity costs
C) All fixed costs and all opportunity costs
D) Variable costs, relevant fixed costs and opportunity costs

Question 44

In general, a company should outsource if the cost to buy is

A) Less than the sum of variable costs and fixed costs
B) Less than the relevant variable costs.
C) Greater than or equal to (variable costs + relevant fixed costs - opportunity costs)
D) Less than or equal to (variable costs + relevant fixed costs - opportunity costs)

Question 45

Financial institutions often consider outsourcing their information technology functions internationally. Which of the following are qualitative factors that should managers consider in the decision? I. Potential language barriers
II) Political stability
III) The tax cash flows

A) I only
B) II and III only
C) I, II, and III
D) I and II only

Question 46

In an outsourcing decision, the general rule managers should follow is to

A) Choose the option with the lowest relevant cost
B) Maximize the use of constrained resources
C) Outsource if the price is greater than the sum of variable costs and fixed costs
D) Do not outsource if the cost is less than the sum of relevant fixed costs and opportunity costs

Question 47

Which of the following statements about outsourcing is true? I. Outsourcing is the process of finding external suppliers
II) Outsourcing is not very common in today's business world
III) Outsourcing is used for manufactured goods, but not for services

A) I only
B) I and III only
C) II and III only
D) I, II, and III

Question 48

Sebastian is a manager at DLL Restaurant. He is considering accepting a special order from a neighborhood homeless shelter for 150 Thanksgiving meals. Which of the following is a relevant qualitative factor he should consider?

A) The number of homeless who will be served
B) His production capacity
C) The potential publicity for his restaurant
D) The price concerns of his competitors

Question 49

If financial statement data are used to evaluate a decision to discontinue a business

A) Average costs are often mistakenly included as relevant information
B) Average costs are often correctly included as relevant information
C) Qualitative factors are irrelevant
D) Financial statement data is useless in this decision-making context

Question 50

In an outsourcing decision, fixed costs are

A) Never relevant
B) Relevant if they are greater than associated opportunity costs
C) Relevant if the company is operating outside the relevant range
D) Relevant if they can be avoided through outsourcing

Question 51

In the decision to drop a product line, fixed costs are often classified as

A) Avoidable or sunk
B) Sunk or opportunity
C) Product or period
D) Incremental or avoidable

Question 52

PQK Corporation produces and sells bookends. Its managers are considering whether to outsource the task of cutting the wood for the bookends to DLN Corporation. Which of the following is most likely to be a qualitative factor that managers will consider in making the decision?

A) Cost of delivery
B) Timeliness of delivery
C) Whether DLN will outsource the delivery process
D) Depreciation on DLN's fleet of delivery trucks

Question 53

In making a decision to drop a product line, variable costs are

A) Always relevant
B) Never relevant
C) Usually relevant
D) Usually sunk

Question 54

N.G., Inc. currently buys 9,000 subcomponents from an outside supplier at $10 each. The company has excess capacity, which it sublets to another company for $20,000 per year. If the company were to use the idle capacity to produce the subcomponent internally, it would incur variable production costs of $6 per unit, and it would hire a new supervisor for $15,000 per year. Other fixed overhead costs would not change, but the average overhead cost per subcomponent unit would be $2. What is the advantage or disadvantage (in dollars) if N.G. makes the subcomponent instead of continuing to buy outside and subletting the excess capacity?

A) $6,000 disadvantage
B) $21,000 disadvantage
C) $1,000 advantage
D) $21,000 advantage

Question 55

Which of the following is an opportunity cost associated with dropping a business segment?

A) The revenue given up
B) The avoidable fixed costs
C) The benefits from using excess capacity for something else
D) The increase in employee morale

Question 56

For manufacturers, outsourcing decisions are often known as

A) Make or buy
B) Routine
C) Constrained resource decisions
D) Special order decisions

Question 57

Managers should discontinue a business if its contribution margin is less than the sum of

A) Relevant fixed costs and opportunity costs
B) Relevant fixed costs and sunk costs
C) Relevant opportunity costs and sunk costs
D) Relevant opportunity costs and profits

Question 58

In making a special order decision, which of the following is a relevant fixed cost?

A) Incremental fixed costs associated with current business
B) Contribution margin of any current business replaced
C) Depreciation on existing production equipment
D) Incremental fixed costs associated with the order

Question 59

A company will only incur an opportunity cost for a special order when

A) Current capacity is constrained
B) The price of the order is less than its variable cost
C) The cost of the order is greater than the average cost for current business
D) Qualitative factors can be ignored

Question 60

In deciding whether to manufacture a part or buy it from an outside supplier, which of the following is an irrelevant cost?

A) Direct labor
B) Variable overhead
C) Fixed overhead that will be avoided if the part is purchased from an outside supplier
D) Fixed overhead that will continue even if the part is purchased from an outside supplier

Question 61

If an organization cannot deliver goods or services quickly because of a constraint, managers might relax that constraint to

A) Protect customer loyalty
B) Ensure optimal profitability
C) Increase the selling price of the product
D) Find the next bottleneck

Question 62

Managers should generally consider opportunity costs in both "keep or drop" and "make or buy" decisions. Which of the following is an opportunity cost they should consider in both situations?

A) Avoidable fixed costs
B) Benefits from alternate uses of released capacity
C) Depreciation on new machinery
D) Market share

Question 63

When resources are constrained, managers are most likely to use the following method to develop decision making information

A) Simple or multiple regression
B) Analysis at the account level
C) Linear programming
D) High-low method

Question 64

Use the following data for the next 2 questions:
Amsat Company has equipment that is in high demand, but has a limited amount of time available. The equipment can be used to produce a number of different products. The following data are available:
Which product should be emphasized last?

A) L
B) M
C) N
D) O

Question 65

Use the following data for next 2 questions:
Tieton Co. has two departments, Fabrication and Assembly. They produce 2 products. Product T needs 6 hours in fabrication and 6 hours in assembly. Product S needs 2 hours in fabrication and 4 hours in assembly. Fabrication has 24 hours available and Assembly 18. Total variable costs are $ 20 and $15 for T and S respectively. T sells for $22 and S for $16.
The objective function to maximize Tieton's profits is

A) MAX$22T+ $16S
B) MAX$20T+ $15S
C) MAX$1T + $2S
D) MAX$2T + $1S

Question 66

Use the following data for next 2 questions:
Tieton Co. has two departments, Fabrication and Assembly. They produce 2 products. Product T needs 6 hours in fabrication and 6 hours in assembly. Product S needs 2 hours in fabrication and 4 hours in assembly. Fabrication has 24 hours available and Assembly 18. Total variable costs are $ 20 and $15 for T and S respectively. T sells for $22 and S for $16.
Flox Hill Consulting has its own printing department with the following annual costs: The managers would like to outsource the printing function because it is not considered a core competency. The overhead is 60% fixed. Of the fixed overhead, $60,000 is the salary of the printing department director. The remaining overhead is an allocation of overhead costs for the entire consulting firm. The department director would still oversee the printing activities and coordinate all of the printing activities for the organization with the outside printing vendor. The maximum amount that Flox Hill is willing to pay an outside firm to replace the printing services is a $820,000
B $900,000
C) $700,000
D) $840,000

Question 67

"Whether delivery timeliness is an important factor" is an example of a

A) Quantitative factor
B) Qualitative factor
C) Constrained resource
D) Cost driver

Question 68

Managers relax constraints by I. Using constrained resources more effectively
II) Increasing available resources
III) Emphasizing the product with the highest contribution margin per unit

A) I only
B) II only
C) I and II only
D) I, II, and III

Question 69

Use the following data for next 2 questions:
Tieton Co. has two departments, Fabrication and Assembly. They produce 2 products. Product T needs 6 hours in fabrication and 6 hours in assembly. Product S needs 2 hours in fabrication and 4 hours in assembly. Fabrication has 24 hours available and Assembly 18. Total variable costs are $ 20 and $15 for T and S respectively. T sells for $22 and S for $16.
The shadow price of a slack variable in a linear programming solution that maximizes the total contribution margin reflects

A) The amount of excess capacity available for the associated constraint
B) The decrease in contribution margin that occurs if a unit of the associated product is produced
C) The contribution margin returned by the firm's profitable product
D) The increase in contribution margin that would occur if another unit of the constrained resource were available

Question 70

Which of the following is a relevant qualitative factor in a special order decision?

A) The cost of constrained resources
B) The effect of production processes on the political environment
C) The effect of production processes on the legal environment
D) How easily customers might share price information

Question 71

Effect on brand name recognition is a qualitative factor that managers should consider in

A) Product line keep and drop decisions
B) Special order decisions
C) Cost prediction decisions
D) Make or buy decisions

Question 72

In a linear programming problem, slack resources are the same as

A) Idle capacity
B) Constraints
C) Limits on production
D) Mixed costs

Question 73

To ensure high quality in outsourcing decisions, organizations typically negotiate contracts with

A) A high margin for error
B) No uncertainties
C) Specific performance criteria
D) The lowest overall cost

Question 74

Use the following data for next 2 questions:
Tieton Co. has two departments, Fabrication and Assembly. They produce 2 products. Product T needs 6 hours in fabrication and 6 hours in assembly. Product S needs 2 hours in fabrication and 4 hours in assembly. Fabrication has 24 hours available and Assembly 18. Total variable costs are $ 20 and $15 for T and S respectively. T sells for $22 and S for $16.
A company should always promote the product

A) With the highest per unit contribution margin
B) That results in the highest total contribution margin
C) With the lowest variable cost per unit
D) With the least waste

Question 75

Why are qualitative factors often difficult to identify?

A) They are unimportant in decision making
B) No set formula provides assurance that managers have considered the correct issues
C) They are only important when a company operates internationally
D) Qualitative factors are not difficult to identify

Question 76

In a special order decision, which of the following is most likely a qualitative factor that managers should consider?

A) Can we deliver without disrupting current schedules?
B) Will layoffs affect worker morale?
C) Does this order reflect our core competencies?
D) Will the decision affect future supply costs?

Question 77

Which of the following is an opportunity cost that should be considered in an outsourcing decision?

A) Avoidable fixed costs
B) Benefits from alternate uses of released capacity
C) Unavoidable fixed costs
D) Employee morale

Question 78

Use the following data for the next 2 questions:
Amsat Company has equipment that is in high demand, but has a limited amount of time available. The equipment can be used to produce a number of different products. The following data are available:
Which product should be emphasized first?

A) L
B) M
C) N
D) O

Question 79

Use the following data for next 2 questions:
Tieton Co. has two departments, Fabrication and Assembly. They produce 2 products. Product T needs 6 hours in fabrication and 6 hours in assembly. Product S needs 2 hours in fabrication and 4 hours in assembly. Fabrication has 24 hours available and Assembly 18. Total variable costs are $ 20 and $15 for T and S respectively. T sells for $22 and S for $16.
The constraints for Tieton's 2 departments are

A) 6T + 2S <= 24 AND 6T + 4S <= 18
B) 6T + 2S <= 18 AND 6T + 4S <= 24
C) 6T + 6S <= 24 AND 2T + 4S <= 18
D) 6T + 6S <= 18 AND 2T + 4S <= 24

Question 80

When resources are constrained, managers should emphasize the product with the

A) Highest contribution margin per unit
B) Highest contribution margin per unit of constrained resource
C) Lowest average cost
D) Largest market share