Deck 4: Fundamentals of Cost Analysis for Decision Making

Question 1

Financial statements prepared in accordance with generally accepted accounting principles (GAAP)provide differential cost information.GAAP has a focus of comparability,not decision relevance.

Answer 1

False

Question 2

Fixed costs are always classified as sunk costs in differential cost analysis.Fixed costs can also be differential.

Answer 2

False

Question 3

The theory of constraints focuses on determining the optimal product mix when one or more resources restrict the attainment of a goal or objective.This is the core idea of the theory of constraints.

Answer 3

True

Question 4

With constrained resources,the important measure of profitability is the contribution margin per unit of scarce resource.You are concerned with the best use of the resource,so you want to maximize the profit.

Question 5

The differential analysis approach to pricing for special orders could lead to under-pricing in the long-run because fixed costs are not included in the analysis.In the long run fixed costs become differential and should be included.

Question 6

A decision must involve at least two alternative courses of action.If there is only one alternative there is no decision to make.

Question 7

The alternative courses of action in a make-or-buy decision are (a)manufacture needed items internally or (b)purchase needed items externally.Make = internal;buy = external

Question 8

Short-run decisions often have long-run implications.Most decisions have long-run implications.

Question 9

The reason opportunity costs are not included in the accounting system is because they involve estimates.They are not included in the system because they are not the result of a transaction.Many items included in the accounting system involve estimates (such as depreciation).

Question 10

Dumping occurs when a company exports its product to consumers in another country at an export price that is below the domestic price.This is the definition of dumping.

Question 11

If there is only one alternative course of action and the status quo is unacceptable,then there really is no decision to make.A decision needs at least two alternatives.

Question 12

Differential analysis involves the comparison of one or more alternative courses of action with the status quo.This is a definition of differential analysis.

Question 13

Target costs equal the difference between the target selling price and the desired profit margin.Target cost focuses on what level of costs would be allowed.

Question 14

Peak load pricing is the practice of setting prices lowest when the quantity demanded for the product approaches the physical capacity to produce it.Prices are set highest when capacity is being approached.

Question 15

The full cost fallacy occurs when a decision-maker fails to include fixed manufacturing overhead in the product's cost.The fallacy occurs when fixed costs are included.

Question 16

Differential analysis cannot be used for long-run decisions because it cannot incorporate the timing of revenues and costs (i.e. ,the time-value of money).The time value of money can be incorporated into the analysis.

Question 17

When deciding whether or not to accept a special order,a decision-maker should focus on differential costs instead of full costs.Full costs will include some costs that do not differ and should be excluded.

Question 18

Only variable costs can be differential costs.Fixed costs can differ between alternatives as well.

Question 19

In the short-run,plant capacity is fixed and product choices have to be made that optimize the use of available capacity.In the short run,capacity is set and cannot be expanded.

Question 20

Price discrimination is the practice of selling identical goods or services to different customers at different prices.This is the definition of price discrimination.

Question 21

The Regal Baking Company is considering the expansion of its business into door-to-door delivery service.This would require an additional $12,500 in labor costs per month.Company-owned vehicles now used to make morning deliveries to restaurants could be used in the afternoons to make the home deliveries.However,it is estimated that an additional $5,000 would be required per month for gas,oil,and maintenance.It is further estimated that the home delivery use of the trucks would be allocated 45% of the existing $6,500 fixed vehicle costs.What is the differential delivery cost per month for expanding into the home delivery market?

A)$12,500.
B)$17,500.
C)$19,750.
D)$20,425.

Question 22

Agreement among business competitors to set prices at a particular level:

A)predatory pricing.
B)target pricing.
C)peak-load pricing.
D)price fixing.

Question 23

The time from initial research and development to the time that support to the customer ends is the:

A)product life cycle.
B)short run.
C)target time.
D)predatory price.

Question 24

The practice of setting price below cost with the intent to drive competitors out of business:

A)predatory pricing.
B)target pricing.
C)target costing.
D)peak-load pricing.

Question 25

The CJP Company produces 10,000 units of item S10 annually at a total cost of $190,000. The XYZ Company has offered to supply 10,000 units of S10 per year for $18 per unit.If CJP accepts the offer,$4 per unit of the fixed overhead would be saved.In addition,some of CJP's facilities could be rented to a third party for $15,000 per year.At what price would CJP be indifferent to XYZ's offer?

A)$17.00.
B)$17.50.
C)$18.50.
D)$19.50.

Question 26

In a decision analysis situation,which one of the following costs is not likely to contain a variable cost component? (CMA adapted)

A)Labor.
B)Overhead.
C)Straight-line Depreciation.
D)Selling.

Question 27

The Blade Division of Axe Company produces hardened steel blades.One-third of Blade's 30,000 unit output is sold to the Forestry Products Division of Axe;the remainder is sold to outside customers.Blades' estimated operating profit for the year is: The Forestry Division has an opportunity to purchase 10,000 blades of the same quality from an outside supplier on a continuing basis.The purchase price would be $1.25.If the Blade Division is now operating at full capacity and can sell all its units to outside customers at the present selling price,what is the differential cost to Axe of requiring that the blades be made internally and sold to the Forestry Division?

A)$2,500.
B)$5,000.
C)$7,500.
D)$10,000.

Question 28

The CJP Company produces 10,000 units of item S10 annually at a total cost of $190,000. The XYZ Company has offered to supply 10,000 units of S10 per year for $18 per unit.If CJP accepts the offer,$4 per unit of the fixed overhead would be saved.In addition,some of CJP's facilities could be rented to a third party for $15,000 per year.What are the relevant costs for the "make" alternative?

A)$160,000.
B)$165,000.
C)$175,000.
D)$185,000.

Question 29

Differential costs are: (CMA adapted)

A)the difference in total costs that result from selecting one choice instead of another.
B)the profit foregone by selecting one choice instead of another.
C)a cost that continues to be incurred in the absence of activity.
D)a cost common to all choices in questions and not clearly allocable to any of them.

Question 30

The following information relates to the Tram Company for the upcoming year. The cost of goods sold includes $1,200,000 of fixed manufacturing overhead;the operating expenses include $100,000 of fixed marketing expenses.A special order offering to buy 50,000 units for $7.50 per unit has been made to Tram.Fortunately,there will be no additional operating expenses associated with the order and Tram has sufficient capacity to handle the order.How much will operate profits be increased if Tram accepts the special order?

A)$25,000.
B)$62,500.
C)$100,000.
D)$125,000.

Question 31

The practice of setting prices highest when the quantity demanded for the product approaches capacity:

A)predatory pricing.
B)target pricing.
C)peak-load pricing.
D)price fixing.

Question 32

The MNK Company has gathered the following information for a unit of its most popular product: The above cost information is based on 4,000 units.A foreign distributor has offered to buy 1,000 units at a price of $16 per unit.This special order would not disturb regular sales.Variable shipping and other selling expenses would be an additional $1 per unit for the special order.If the special order is accepted,MNK's operating profits will increase by:

A)$1,000.
B)$1,600.
C)$2,000.
D)$4,000.

Question 33

The AZ Company manufactures kitchen utensils.The company is currently producing well below its full capacity.The BV Company has approached AZ with an offer to buy 20,000 utensils at $0.75 each.AZ sells its utensils wholesale for $0.85 each;the average cost per unit is $0.83,of which $0.12 is fixed costs.If AZ were to accept BV's offer,what would be the increase in AZ's operating profits?

A)$400.
B)$800.
C)$1,600.
D)$2,000.

Question 34

The price based on customers' perceived value for the product and the price that competitors charge:

A)predatory price.
B)target price.
C)target cost.
D)dumping price.

Question 35

The period of time over which capacity will be unchanged is:

A)long run.
B)sunk cost.
C)short run.
D)product life cycle.

Question 36

The theory of constraints focuses on maximizing throughput contribution margin while minimizing all of the following except:

A)selling expenses per unit sold.
B)production bottlenecks.
C)investment in buildings.
D)investment in inventories.

Question 37

The relevance of a particular cost to a decision is determined by the: (CMA adapted)

A)riskiness of the decision.
B)number of decision variables.
C)amount of the cost.
D)potential effect on the decision.

Question 38

Which of the following costs are irrelevant for a special order that will allow an organization to utilize some of its present idle capacity?

A)Direct materials.
B)Indirect materials.
C)Variable overhead.
D)Unavoidable fixed overheaD.

Question 39

Which of the following costs are not considered in a differential analysis for a make-or-buy decision?

A)Indirect materials and indirect labor if the item is manufactured internally.
B)Direct materials and direct labor if the item is purchased.
C)Variable overhead if the item is manufactured internally.
D)Fixed overhead that can be avoided if the item is purchaseD.
E)Fixed overhead that will continue if the item is purchased.

Question 40

The Blade Division of Axe Company produces hardened steel blades.One-third of Blade's output is sold to the Forestry Products Division of Axe;the remainder is sold to outside customers.Blades' estimated operating profit for the year is: The Forestry Division has an opportunity to purchase 10,000 blades of the same quality from an outside supplier on a continuing basis.The Blade Division cannot sell any additional products to outside customers.Should the Axe Company allow its Forestry Division to purchase the blades from the outside supplier at $1.25 per unit?

A)No;making the blades will save Axe $1,500.
B)Yes;buying the blades will save Axe $1,500.
C)No;making the blades will save Axe $2,500.
D)Yes;buying the blades will save Axe $2,500.

Question 41

The Lemaire Company manufactures wiring tools.The company is currently producing well below its full capacity.The Boisvert Company has approached Lemaire with an offer to buy 10,000 tools at $1.75 each.Lemaire sells its tools wholesale for $1.85 each;the average cost per unit is $1.83,of which $0.27 is fixed costs.If Lemaire were to accept Boisvert's offer,what would be the increase in Lemaire's operating profits?

A)$800.
B)$1,000.
C)$1,900.
D)$2,900.

Question 42

Which of the following costs would continue to be incurred even if a segment is eliminated?

A)Direct fixed expenses
B)Variable cost of goods sold
C)Common fixed costs
D)Variable selling and administrative expenses

Question 43

The operations of Superior Corporation are divided into the Northrup Division and the Hawley Division.Projections for the next year are as follows: Operating income for Superior Corporation,as a whole,if the Hawley Division were dropped would be

A)$45,000.
B)$80,000.
C)$100,000.
D)$120,000.

Question 44

The Bremmer Company produces 5,000 units of item ZQ98 annually at a total cost of $200,000. The Daisy Company has offered to supply all 5,000 units of ZQ98 per year for $35 per unit.If Bremmer accepts the offer,$8 per unit of the fixed overhead would be saved.In addition,some of Bremmer's leased facilities could be vacated,reducing lease payments by $30,000 per year.What are the relevant costs for the "make" alternative?

A)$120,000.
B)$175,000.
C)$190,000.
D)$200,000.

Question 45

The Axle Division of Becker Company produces axles for off-road sport vehicles.One-third of Axle's 30,000 unit output is sold to an internal division of Becker;the remainder is sold to outside customers.Axles' estimated operating profit for the year is: The internal division has an opportunity to purchase 10,000 axles of the same quality from an outside supplier on a continuing basis.The purchase price would be $13.00.If the Axle Division is now operating at full capacity and can sell all its units to outside customers at the present selling price,what is the differential cost to Becker of requiring that the axles be made internally and sold to the internal division?

A)$25,000.
B)$50,000.
C)$70,000.
D)$100,000.

Question 46

The Axle Division of Becker Company produces axles for off-road sport vehicles.One-third of Axle's output is sold to an internal division of Becker;the remainder is sold to outside customers.Axle's estimated operating profit for the year is: The internal division has an opportunity to purchase 10,000 axles of the same quality from an outside supplier on a continuing basis.The Axle Division cannot sell any additional products to outside customers.Should the Becker Company allow its internal division to purchase the axles from the outside supplier at $13.00 per unit?

A)No;making the axles will save Becker $15,000.
B)Yes;buying the axles will save Becker $15,000.
C)No;making the axles will save Becker $30,000.
D)Yes;buying the axles will save Becker $30,000.

Question 47

If there is excess capacity,the minimum acceptable price for a special order must cover:

A)only variable costs associated with the special order.
B)variable and fixed manufacturing costs associated with the special order.
C)variable and incremental fixed costs associated with the special order.
D)variable costs and incremental fixed costs associated with the special order,plus the contribution margin usually earned on regular units.

Question 48

Miller Industries has two divisions: the West Division and the East Division.Information relating to the divisions for the year just ended is as follows: Common fixed expenses have been allocated equally to each of the two divisions.Miller's segment margin for the West Division is:

A)$150,000.
B)$102,000.
C)$30,000.
D)$110,000.

Question 49

Exporting a product to another country at a price below domestic cost:

A)dumping.
B)target pricing.
C)peak-load pricing.
D)price fixing.

Question 50

The following information relates to a product produced by Ashland Company: Fixed selling costs are $1,000,000 per year.Variable selling costs of $4 per unit sold are added to cover the transportation cost.Although production capacity is 500,000 units per year,Ashland expects to produce only 400,000 units next year.The product normally sells for $40 each.A customer has offered to buy 60,000 units for $30 each.The customer will pay the transportation charge on the units purchased.If Ashland accepts the special order,the effect on income would be a:

A)$60,000 increase.
B)$180,000 increase.
C)$420,000 increase.
D)$600,000 decrease.

Question 51

The operations of Blink Corporation are divided into the Adams Division and the Carter Division.Projections for the next year are as follows: Operating income for Blink Corporation as a whole if the Carter Division were dropped would be:

A)$133,000.
B)$112,000.
C)$91,000.
D)$49,000.

Question 52

Winton Inc has 12,000 machine hours available each month.The following information on the company's four products is available: If market demand exceeds the available capacity,in what sequence should orders be filled to maximize the company's profits?

A)Product W first,product X second,product Z third,and product Y last.
B)Product Z first,product W second,product X third,and product Y last.
C)Product X first,product W second,product Y third,and product Z last.
D)Product X first,product Z second,product Y third,and product W last.

Question 53

The Axle Division of Becker Company produces axles for off-road sport vehicles.One-third of Axle's output is sold to an internal division of Becker;the remainder is sold to outside customers.Axle's estimated operating profit for the year is: The internal division has an opportunity to purchase 10,000 axles of the same quality from an outside supplier on a continuing basis.The Axle Division cannot sell any additional products to outside customers.What is the minimum selling price that Axle should accept from the internal division?

A)$10.00.
B)$13.00.
C)$15.00.
D)$50.00.

Question 54

The Bremmer Company produces 5,000 units of item ZQ98 annually at a total cost of $200,000. The Daisy Company has offered to supply all 5,000 units of ZQ98 per year for $35 per unit.If Bremmer accepts the offer,$8 per unit of the fixed overhead would be saved.In addition,some of Bremmer's leased facilities could be vacated,reducing lease payments by $30,000 per year.At what price would Bremmer be indifferent to Daisy's offer?

A)$40.
B)$38.
C)$35.
D)$24.

Question 55

A target cost is computed as:

A)cost to manufacture plus a desired markup.
B)cost to manufacture plus designated selling expenses.
C)market willingness to pay-cost to manufacture.
D)market willingness to pay-desired profit.

Question 56

The Buchanan Company has gathered the following information for a unit of its most popular product: The above cost information is based on 10,000 units.A distributor has offered to buy 2,000 units at a price of $32 per unit.This special order would not disturb regular sales.Special packaging and other selling expenses would be an additional -$0.50 per unit for the special order.If the special order is accepted,Buchanan's operating profits will increase by:

A)$4,000.
B)$6,400.
C)$8,000.
D)$19,000.

Question 57

The Speedy Delivery Service is considering the expansion of its business into afternoon retail delivery service.This would require an additional $25,000 in labor costs per month.Company-owned vehicles now used to make morning deliveries to local manufacturers could be used in the afternoons to make retail deliveries.However,it is estimated that an additional $10,000 would be required per month for gas,oil,and maintenance.It is further estimated that the retail delivery use of the trucks would be allocated 45% of the existing $13,000 fixed vehicle costs.What is the differential delivery cost per month for expanding into the retail delivery market?

A)$25,000.
B)$35,000.
C)$39,500.
D)$40,850.

Question 58

The Axle Division of Becker Company produces axles for off-road sport vehicles.One-third of Axle's 30,000 unit output is sold to an internal division of Becker;the remainder is sold to outside customers.Axles' estimated operating profit for the year is: The internal division has an opportunity to purchase 10,000 axles of the same quality from an outside supplier on a continuing basis.The purchase price would be $13.00.If the Axle Division is now operating at full capacity and can sell all its units to outside customers at the present selling price,what is the minimum selling price that Axle should accept from the internal division?

A)$10.00.
B)$13.00.
C)$15.00.
D)$20.00.

Question 59

Lerner Inc has 6,600 machine hours available each month.The following information on the company's three products is available: If market demand exceeds the available capacity,in what sequence should orders be filled to maximize the company's profits?

A)Product X first,product Z second,and product Y third.
B)Product Y first,product Z second,and product X third.
C)Product Y first,product X second,and product Z third.
D)Product Z first,product X second,and product Y thirD.X CM/hr = 20/2 = $10;Y: 21/3 = $7;Z: 17.50/2 = 8.75

Question 60

Roswell Inc has 5,400 machine hours available each month.The following information on the company's three products is available: If market demand exceeds the available capacity,in what sequence should orders be filled to maximize the company's profits?

A)Product 1 first,product 2 second,and product 3 third.
B)Product 2 first,product 3 second,and product 1 third.
C)Product 3 first,product 2 second,and product 1 third.
D)Product 3 first,product 1 second,and product 2 thirD.P1 CM/hr = 15/3 = $5;P2: 18/2 = $9;P3: 7.50/1 = $7.50

Question 61

The opportunity cost of making a component part in a factory with no excess capacity is the: (CMA adapted)

A)variable manufacturing cost of the component.
B)fixed manufacturing cost of the component.
C)total manufacturing cost of the component.
D)net benefit foregone from the best alternative use of the capacity requireD.Opportunity costs and benefits are all about amounts foregone.

Question 62

The operations of Gadwell Corporation are divided into the Blink Division and the Blur Division.Projections for the next year are as follows: If the Blur Division were dropped,Blink Division's sales would increase by 30%.If this happened,the operating income for Gadwell Corporation as a whole would be:

A)$72,800.
B)$56,000.
C)$79,100.
D)$59,150.

Question 63

Schemm Inc.regularly uses material F04E and currently has in stock 460 liters of the material for which it paid $2,622 several weeks ago.If this were to be sold as is on the open market as surplus material,it would fetch $5.25 per liter.New stocks of the material can be purchased on the open market for $5.85 per liter,but it must be purchased in lots of 1,000 liters.You have been asked to determine the relevant cost of 800 liters of the material to be used in a job for a customer.The relevant cost of the 800 liters of material F04E is: (CIMA adapted)

A)$5,850.
B)$4,200.
C)$4,404.
D)$4,680.

Question 64

The Buchanan Company has gathered the following information for a unit of its most popular product: The above cost information is based on 10,000 units.A distributor has offered to buy 2,000 units at a price of $32 per unit.The distributor claims this special order would not disturb regular sales at $42.Special packaging and other selling expenses would be an additional $0.50 per unit for the special order.How many units of regular sales could be lost before this contract is not profitable?

A)0 units.
B)950 units.
C)1,000 units.
D)2,000 units.

Question 65

Which of the following costs are not considered in a differential analysis for a make-or-buy decision?

A)Indirect materials and indirect labor if the item is purchased.
B)Direct materials and direct labor if the item is manufactured internally.
C)Variable overhead if the item is purchased.
D)Fixed overhead that will continue if the item is purchaseD.

Question 66

Broze Company makes four products in a single facility.These products have the following unit product costs: Additional data concerning these products are listed below. The grinding machines are the constraint in the production facility.A total of 53,600 minutes are available per month on these machines.Direct labor is a variable cost in this company.Up to how much should the company be willing to pay for one additional minute of grinding machine time if the company has made the best use of the existing grinding machine capacity? (Round off to the nearest whole cent. )

A)$35.90.
B)$0.00.
C)$8.58.
D)$11.60.

Question 67

The following information relates to the Jax Company for the upcoming year. The cost of goods sold includes $2,400,000 of fixed manufacturing overhead;the operating expenses include $200,000 of fixed marketing expenses.A special order offering to buy 50,000 units for $15.00 per unit has been made to Jax.Fortunately,there will be no additional operating expenses associated with the order and Jax has sufficient capacity to handle the order.How much will operating profits increase if Jax accepts the special order?

A)$50,000.
B)$125,000.
C)$200,000.
D)$250,000.

Question 68

Scherer Corporation is preparing a bid for a special order that would require 720 liters of material U48N.The company already has 560 liters of this raw material in stock that originally cost $6.30 per liter.Material U48N is used in the company's main product and is replenished on a periodic basis.The resale value of the existing stock of the material is $5.80 per liter.New stocks of the material can be readily purchased for $6.65 per liter.What is the relevant cost of the 720 liters of the raw material when deciding how much to bid on the special order? (CIMA adapted)

A)$4,592.
B)$4,788.
C)$4,456.
D)$4,176.

Question 69

The following information relates to the Jax Company for the upcoming year. The cost of goods sold includes $2,400,000 of fixed manufacturing overhead;the operating expenses include $200,000 of fixed marketing expenses.A special order offering to buy 50,000 units for $15.00 per unit has been made to Jax.Fortunately,there will be no additional operating expenses associated with the order;however,Jax is operating at full capacity.How much will operating profits increase if Jax accepts the special order?

A)$50,000.
B)$125,000.
C)$200,000.
D)$250,000.
E)Operating profits will not increase as a result of accepting the special order.

Question 70

The operations of Gadwell Corporation are divided into the Blink Division and the Blur Division.Projections for the next year are as follows: Operating income for Gadwell Corporation as a whole if the Blur Division were dropped would be:

A)$66,500.
B)$56,000.
C)$45,500.
D)$24,500.

Question 71

The following information relates to a product produced by Ashland Company: Fixed selling costs are $1,000,000 per year.Although production capacity is 500,000 units per year,Ashland expects to produce only 400,000 units next year.The product normally sells for $80 each.A customer has offered to buy 60,000 units for $60 each.The customer will pay the transportation charge on the units purchased.If Ashland accepts the special order,the effect on income would be a:

A)$120,000 increase.
B)$360,000 increase.
C)$840,000 increase.
D)$1,200,000 decrease.

Question 72

When there is a production constraint,a company should emphasize the products with:

A)the highest unit contribution margins.
B)the highest contribution margin ratios.
C)the highest contribution margin per unit of the constrained resource.
D)the highest contribution margins and contribution margin ratios.