Question 1

Delta Airlines uses Wipro, an Indian company, to handle its customer service calls.This is an example of
A)offshoring.
B)outshoring.
C)outsourcing.
D)offsourcing.

Accepted Answer

Offshoring involves moving business operations to a foreign country, typically to take advantage of lower labor costs. In this case, Delta Airlines is using Wipro, an Indian company, to handle its customer service calls, which is an example of offshoring.

Question 2

Which of the following is not relevant in the decision to accept a special order?
A)Depreciation on factory equipment
B)Variable cost of the product
C)Sales commissions based on a percentage of the sales price
D)Direct labor associated with the product

Accepted Answer

Depreciation on factory equipment is a fixed cost and not relevant in the decision to accept a special order. Variable cost of the product, sales commissions based on a percentage of the sales price, and direct labor associated with the product are all relevant in the decision to accept a special order because they impact the overall profitability of the order.

Question 3

Harmony Forge manufactures saddles for show horses.The company has received a special order for 290 saddles for an international competition.Each of these saddles would include the specialized logo of the competition.Last year Harmony produced 710 saddles, and the company has the capacity to produce 1,000 saddles per year.Harmony's saddles normally sell for $650 each, but the special offer is for $179,800 ($620 per saddle).The controller has provided information to management that estimates the variable cost per saddle is $435; fixed manufacturing overhead is $60/saddle.Of the fixed costs assigned to this special order, $15,950 is for the specialized logos, the remainder is attributable to costs that will be incurred regardless of whether the special order is produced.What is the operating income generated by the special order?
A)$53,650
B)$37,700
C)$36,250
D)$20,300

Accepted Answer

The operating income is calculated by subtracting the total costs from the total revenue of the special order. Total revenue from the special order is 290 saddles * $620 = $179,800. The total variable cost is 290 saddles * $435 = $126,150. The fixed costs specific to the order are $15,950. Therefore, the total cost is $126,150 + $15,950 = $142,100. The operating income is $179,800 - $142,100 = $37,700.

Question 4

When a customer requests a special order and the supplier has capacity constraints, which of the following is most likely not an option for the customer?
A)Reject the special order.
B)Reduce the special order.
C)Accept the special order and cut back on normal production.
D)Accept the special order and fill it whenever capacity becomes available.

Accepted Answer

The answer of When a customer requests a special order...

Question 5

An auto body shop is trying to decide whether or not to purchase a new piece of diagnostic equipment.Which of the following costs would not be relevant to the decision?
A)The cost of the new equipment
B)The increase in property taxes as a result of purchasing the expensive equipment
C)The book value of the old equipment
D)The cost of training a technician to operate the equipment

Accepted Answer

The book value of the old equipment is a sunk cost, meaning it has already been incurred regardless of future decisions, and thus is not relevant to the decision of purchasing new equipment.

Question 6

Moving the delivery of services from within the organization to a provider outside the organization is referred to as
A)outcome sourcing.
B)outsourcing.
C)delivery diffusion.
D)delivery transfer.

Accepted Answer

Outsourcing refers to the practice of contracting out some tasks or processes to an external provider rather than performing them in-house. This is done with the aim of reducing costs, improving efficiency, or focusing on core competencies.

Question 7

Moving the production of goods from within the organization to a provider outside the organization is referred to as
A)transfer pricing.
B)product diffusion.
C)segment slicing.
D)outsourcing.

Accepted Answer

Outsourcing refers to the practice of moving the production of goods or services from within an organization to an external provider. This can include outsourcing manufacturing, customer service, IT services, and other business operations. This strategy is often used to reduce costs, improve efficiency, and allow the organization to focus on its core competencies. Transfer pricing refers to the practice of setting the price of goods or services between different divisions or subsidiaries of the same organization. Product diffusion refers to the spread of a product through a market or population. Segment slicing is not a commonly used business term.

Question 8

If a special order results in a positive contribution margin of $8 when the contribution margin for regular orders is $15, which of the following decisions is the most likely to be chosen?
A)Accept the order, because $8 per unit is generated as profit
B)Reject the order, because $7 per unit is lost
C)Accept the order, but only if the customer agrees to an increase in the selling price to match the $15 regular contribution margin
D)Accept the order, but only if the customer agrees to an increase of $7 in the selling price

Accepted Answer

Accepting the special order is beneficial as long as the contribution margin is positive, meaning it covers the variable costs and contributes to fixed costs and profit. The difference from the regular contribution margin does not represent a loss but a lower profit margin.

Question 9

Your friend purchased a non-refundable ticket to a popular Broadway play for Friday night.Yesterday she was invited to spend Friday on the lake with a group of sorority sisters.Her only cost will be for personal items such as lunch.The lake is two hours away from her apartment and the play is another hour in the opposite direction.She knows that if she goes to the lake, she will not get back in time to attend the play.Which of the following is not a relevant cost in making her decision on whether to go to the play or to the lake?
A)The price of the ticket to the play
B)The price of eating out at the lake
C)The price of renting an umbrella at the lake
D)The price of driving to the play

Accepted Answer

The price of the ticket to the play is a sunk cost, meaning it has already been incurred and cannot be recovered, so it is not relevant to the decision-making process about future activities.

Question 10

Lark Company manufactures dog food for distribution in Washington, Oregon, and California.A dog food distributor from Florida has approached Lark and offered to purchase 240,000 pounds of dog food for $1.40 per pound.Lark can produce 2,000,000 pounds of dog food per year, and its results for last year are as follows:  If Lark accepts the offer, it will only be able to sell 1,760,000 pounds of dog food at the regular price due to its capacity constraints.What will Lark's total operating income be next year if it accepts the offer?
A)$1,358,000
B)$1,250,000
C)$1,310,000
D)$2,040,000

Accepted Answer

The answer of Lark Company manufactures dog food for distribution...

Question 11

Which of the following is not a qualitative issue in a special order pricing decision?
A)Will accepting the order generate a positive contribution margin?
B)If the special order generates new business, will the customer purchase again at the regular price?
C)If the special order uses a lower quality component that is used for regular orders, will it negatively affect the company's reputation?
D)Will accepting the special order require the hiring of extra workers or payment of overtime?

Accepted Answer

A) is not a qualitative issue because it involves calculating a specific financial metric (contribution margin), which is a quantitative analysis.

Question 12

Glade Industries manufactures and bottles energy drinks.Last year the company made and bottled 2,500,000 units.Glade has the capacity to manufacture and bottle 3,000,000 units per year.Glade has received a special offer from a grocery chain for 500,000 bottles with a special label to be sold as the house brand energy drink.Glade's normal selling price is $0.80 per bottle.The special offer is for $360,000 total ($0.72/bottle).Management estimates that the variable cost per bottle is $0.34; fixed manufacturing overhead is $0.22/bottle.Of the fixed costs assigned to this special order, $2,500 is for the special labels, the remainder is attributable to costs that will be incurred regardless of whether the special order is produced.What is the operating income generated by the special order?
A)$190,000
B)$187,500
C)$80,000
D)$77,500

Accepted Answer

First, we need to calculate the contribution margin per bottle:
Revenue per bottle - Variable cost per bottle = Contribution margin per bottle
$0.80 - $0.34 = $0.46

Next, we need to allocate the fixed costs:
Fixed manufacturing overhead per bottle + Cost of special labels per bottle = Total fixed cost per bottle
$0.22 + ($2,500/500,000) = $0.0225

Now we can calculate the operating income per bottle:
Contribution margin per bottle - Total fixed cost per bottle = Operating income per bottle
$0.46 - $0.0225 = $0.4375

Finally, we can multiply the operating income per bottle by the number of bottles in the special order:
Operating income per bottle x Number of bottles = Operating income from special order
$0.4375 x 500,000 = $218,750

However, we need to subtract the fixed costs that are not attributable to the special order:
Total fixed cost per bottle x Number of bottles in normal production = Fixed costs not attributable to special order
$0.22 x 2,000,000 = $440,000

Operating income from special order - Fixed costs not attributable to special order = Total operating income
$218,750 - $440,000 = -$221,250

Since the total operating income is negative, it means that producing the special order would result in a loss for the company. Therefore, it is not the best choice for Glade Industries.

Question 13

Many small businesses hire a local CPA firm to process their payroll.This is an example of
A)transfer pricing.
B)offshoring.
C)offsourcing.
D)outsourcing.

Accepted Answer

Hiring a local CPA firm to handle payroll is an example of outsourcing, as the business is contracting this functional area to an external entity instead of performing it in-house. Transfer pricing refers to the pricing of goods and services between related entities within the same company, while offshoring and outsouring both involve the delegation of certain business activities to an external party, with offshoring specifically involving the transfer of these activities to another country. Offsourcing is not a commonly used term in business, and may refer to either offshoring or outsourcing depending on context.

Question 14

Moving a company's business processes to a foreign country is referred to as
A)outsourcing.
B)offsourcing.
C)offshoring.
D)outshoring.

Accepted Answer

Offshoring is the process of relocating some business operations or processes to another country. This is commonly done to reduce costs or tap into a foreign market. Outsourcing, on the other hand, refers to contracting out work to an external company or service provider, whether that be within the same country or in a foreign country. Offsourcing and outshoring are not commonly used or recognized terms.

Question 15

Which of the following is not a qualitative issue in a special order pricing decision?
A)Will accepting the special order require the hiring of extra workers or payment of overtime?
B)Will accepting the special order result in the loss of regular customers?
C)Will accepting the order generate an increase in operating income?
D)If the special order generates new business, will the customer purchase again at the regular price?

Accepted Answer

Option C is a quantitative issue because it involves determining the actual increase in operating income resulting from accepting the special order. Options A, B, and D are all qualitative issues because they involve assessing the impact of the special order on various aspects of the business, such as labor costs, customer loyalty, and the potential for repeat business.

Question 16

Which of the following operations would be the most likely to accept a special order based on seasonality?
A)H&R Block tax service
B)Federal Express
C)An attorney specializing in estate planning
D)A hospital approached by a patient negotiating on the price of kidney stone surgery

Accepted Answer

H&R Block tax service is likely to accept a special order based on seasonality because their services are in high demand during tax season.

Question 17

Your professor is considering retirement.Which of the following will not be relevant in his decision?
A)The amount of retirement benefits he will receive if he retires
B)The amount of salary he will receive if he does not retire
C)The cost of commuting to and from school
D)The cost of his many books and his library of exams he uses in his classes

Accepted Answer

The cost of his books and exams may be a consideration for his finances, but it is not a major factor in his decision to retire. The other options are relevant: A) retirement benefits, B) salary, and C) commuting costs will affect his financial situation and may impact his decision to retire.

Question 18

A dance studio is considering a plan to add ballroom dance to its offerings.Which of the following is not a relevant consideration in this decision?
A)Will the studio have to hire an additional instructor?
B)Will another class have to be dropped if ball room dancing is offered?
C)Is there a demand for ballroom dancing?
D)What are the unavoidable costs of the proposed addition?

Accepted Answer

Unavoidable costs are those that will be incurred regardless of the decision made, so they are not relevant to the decision of adding a new class. Relevant considerations involve changes or requirements directly tied to the new offering, such as demand, staffing, and scheduling impacts.

Question 19

Impala Industries manufactures a component used by car manufacturers.Impala can produce 1,000,000 components per year.A foreign car manufacturer has approached Impala with an offer to purchase 120,000 components at price of $6 per unit.Impala's results for last year are as follows:  If Impala accepts the offer, it will only be able to sell 880,000 units at the regular price due to its capacity constraints.What will Impala's total operating income be next year if it accepts the offer?
A)$2,710,000
B)$2,410,000
C)$2,650,000
D)$4,760,000

Accepted Answer

If Impala accepts the offer, it will have to sell 120,000 units at $6 per unit, resulting in extra revenue of $720,000 (=$6 x 120,000). However, it will lose the revenue of the 120,000 units it could have sold at the regular price, resulting in a loss of $5,880,000 (=$20 x 120,000 x 0.7). Thus, the net operating income will be $4,760,000 (=$11,880,000 - $720,000). Therefore, it is not the best choice for Impala to accept the offer, as it will result in a significant loss of operating income. The best choice is for Impala to continue selling all of its components at the regular price, as it will result in an operating income of $2,410,000 (=$20 x 1,000,000 x 0.7).

Question 20

If a special order is being considered when the product normally sells for $10, and relevant costs are $6 to produce a unit and $2 to sell the unit, which of the following decisions is the most likely to be chosen?
A)Accept the order if the sales price is $6 or more.
B)Accept the order if the sales price is $8 or more.
C)Accept the order if the sales price is at least $10.
D)Reject the order.

Accepted Answer

The relevant costs to produce and sell a unit are $6 + $2 = $8. Accepting the order at a sales price of $8 or more would cover the relevant costs and provide a profit margin of at least $2 per unit. Accepting the order at a sales price lower than $8 would result in a loss. Therefore, option B is the most likely to be chosen.

Quiz 8: Using Accounting Information to Make Managerial Decisions

Delta Airlines uses Wipro, an Indian company, to handle its customer service calls.This is an example of

Which of the following is not relevant in the decision to accept a special order?

When a customer requests a special order and the supplier has capacity constraints, which of the following is most likely not an option for the customer?

An auto body shop is trying to decide whether or not to purchase a new piece of diagnostic equipment.Which of the following costs would not be relevant to the decision?

Moving the delivery of services from within the organization to a provider outside the organization is referred to as

Moving the production of goods from within the organization to a provider outside the organization is referred to as

If a special order results in a positive contribution margin of $8 when the contribution margin for regular orders is $15, which of the following decisions is the most likely to be chosen?

Which of the following is not a qualitative issue in a special order pricing decision?

Many small businesses hire a local CPA firm to process their payroll.This is an example of

Moving a company's business processes to a foreign country is referred to as

Which of the following is not a qualitative issue in a special order pricing decision?

Which of the following operations would be the most likely to accept a special order based on seasonality?

Your professor is considering retirement.Which of the following will not be relevant in his decision?

A dance studio is considering a plan to add ballroom dance to its offerings.Which of the following is not a relevant consideration in this decision?

If a special order is being considered when the product normally sells for $10, and relevant costs are $6 to produce a unit and $2 to sell the unit, which of the following decisions is the most likely to be chosen?