Question 1

When opportunity costs exist, they are always relevant.

Accepted Answer

Opportunity costs exist in every decision that involves alternate choices and the value of the next best option forgone. Therefore, they are always relevant in decision-making.

Question 2

________ would be a consideration in a make-or-buy decision.

Accepted Answer

In a make-or-buy decision, excess capacity should be considered because if a company has excess capacity, it may be more cost-effective to produce the item in-house rather than outsourcing it. Rental income from unused facilities should also be considered because if the company decides to outsource the item, it may be able to generate rental income by leasing out unused production facilities. Variable factory overhead is also a consideration because it is a cost that will be incurred regardless of whether the item is produced in-house or outsourced. Therefore, all of these factors should be considered in a make-or-buy decision.

Question 3

When a firm maximizes profits it will simultaneously minimize opportunity costs.

Accepted Answer

When a firm maximizes profits, it is choosing the option that will bring in the most revenue while minimizing the cost of producing or providing that option. This means that the firm is making the best use of its resources and minimizing the opportunity costs of choosing another option that may have lower profits or higher costs. Therefore, maximizing profits does help to minimize opportunity costs.

Question 4

Opportunity cost is the contribution to operating income that is forgone by NOT using a limited resource in its next-best alternative use.

Accepted Answer

This is a correct definition of opportunity cost. It refers to the cost of choosing one option over another, and the potential benefits or profits that could have been gained from the next-best alternative use of resources.

Question 5

Determining which products should be produced when the plant is operating at full capacity is referred to as:

Accepted Answer

The process of determining which products should be produced when the plant is operating at full capacity is referred to as a product-mix decision. This decision involves analyzing factors such as demand for each product, production costs, and profitability to determine the optimal mix of products to produce. Outsourcing analysis, production scheduling analysis, and short-run focus decisions are all different considerations in the production process, but they do not specifically address the question of which products to produce at full capacity.

Question 6

Opportunity costs never appear in a company's accounting records since they are foregone costs and NOT actual costs.

Accepted Answer

Opportunity costs are the benefits that are foregone by choosing one alternative over another. They represent the benefits that could have been gained by choosing an alternative action. Since they are not actual costs that are incurred, they do not appear in a company's accounting records.

Question 7

Decisions about whether a producer of goods or services will insource or outsource are also called make-or-buy decisions.

Accepted Answer

This statement is true. Make-or-buy decisions refer to the process of deciding whether to produce a particular product or service in-house (insourcing) or to acquire it from an external supplier (outsourcing).

Question 8

For make-or-buy decisions, relevant costs include:

Accepted Answer

The answer of For make-or-buy decisions, relevant costs include:
...

Question 9

The choice is NOT really whether to make or buy, but rather how to best use available production capacity.

Accepted Answer

The statement is true. The decision to make or buy should take into consideration the available production capacity and how to make the best use of it. It's not a simple choice between the two options without considering the capacity constraints.

Question 10

When capacity is constrained, relevant costs equal incremental costs plus opportunity costs.

Accepted Answer

When capacity is constrained, relevant costs include not only the incremental costs of producing additional units but also the opportunity costs of forgoing other potential production or investment opportunities.

Question 11

A supplier offers to make Part A for $35. Altec Company has relevant costs of $40 a unit to manufacture 1,000 units of Part A. If there is excess capacity, the opportunity cost of buying Part A from the supplier is:

Accepted Answer

The opportunity cost is the benefit forgone by choosing one option over the other. In this case, if Altec Company chooses to buy the part from the supplier, they would save $5 per unit. However, since there is excess capacity, Altec Company would still incur the relevant costs of $40 per unit if they choose to make the part themselves. Therefore, the opportunity cost of buying from the supplier is 0, as Altec Company does not give up any benefits by making the part themselves.

Question 12

The opportunity cost of holding significant inventory includes:

Accepted Answer

The answer of The opportunity cost of holding significant inventory...

Question 13

In a make-or-buy decision when there are alternative uses for capacity, the opportunity cost of idle capacity is irrelevant.

Accepted Answer

In a make-or-buy decision where there are alternative uses for capacity, the opportunity cost of idle capacity is relevant. Choosing to make a product in-house may tie up capacity that could have been used for a more profitable alternative use. Therefore, the opportunity cost of idle capacity should be considered in the decision-making process.

Question 14

If the $20,000 spent to purchase inventory could be invested and earn interest of $500, then the opportunity cost of holding inventory is $20,000.

Accepted Answer

The opportunity cost of holding inventory is the $500 interest that could have been earned, not the $20,000 spent on purchasing the inventory.

Question 15

A recent college graduate has the choice of buying a new car for $40,000 or investing the money for four years with a 6% expected annual rate of return. If the graduate decides to purchase the car, the best estimate of the opportunity cost of that decision is:

Accepted Answer

The opportunity cost of buying a car instead of investing the money is the income that could be earned from investing the money. The expected return on the investment is 6%. Over four years, the investment would grow to:
$40,000 x (1 + 0.06)^4 = $51,735.84
Therefore, the opportunity cost of buying the car is:
$51,735.84 - $40,000 = $11,735.84
This is equivalent to an annual opportunity cost of about $2,934. Therefore, the best estimate of the opportunity cost is $9,600 (rounded to the nearest hundred).

Therefore, the best choice is to invest the money instead of buying the car.

Question 16

If a company has excess capacity, the most it would pay for buying a product that it currently makes would be the:

Accepted Answer

If a company has excess capacity, it means that it can produce more of the product without incurring any additional fixed costs. Therefore, the most it would pay for buying a product that it currently makes would be the total variable cost of producing the product, which is the minimum cost to produce one additional unit of the product. This would help the company avoid incurring any extra costs and maximize its profits. Choice B would not make sense as the company would not pay the market value less the usual markup on the product since it could produce the product at a lower cost. Choice C would involve the fixed costs as well, which the company could avoid by producing the product in-house. Choice D would also not make sense as the market value of the product would include a profit margin that the company would not need to pay if it produced the product itself.

Question 17

Answer the following questions using the information below:
Stephans Corporation currently manufactures a subassembly for its main product. The costs per unit are as follows:
  Bill Company has contacted Stephans with an offer to sell them 5,000 of the subassemblies for $22.00 each. Stephans will eliminate $25,000 of fixed overhead if it accepts the proposal.
-What are the relevant costs for Stephans?

Accepted Answer

Relevant costs are those that will be directly affected by a decision. In this context, $105,000 is the cost that is relevant to Stephans' decision-making process.

Question 18

Should Stephans make or buy the subassemblies? What is the difference between the two alternatives?

Accepted Answer

The answer of Should Stephans make or buy the subassemblies?...

Question 19

For short-term pricing decisions, what costs are relevant when there is available surplus capacity? When there is no available surplus capacity?

Accepted Answer

The answer of For short-term pricing decisions, what costs are...

Question 20

Altec Company has relevant costs of $40 per unit to manufacture 1,000 units of Part A. A current supplier offers to make Part A for $35 per unit. If capacity is constrained, the opportunity cost of buying Part A from the supplier is:

Accepted Answer

The answer of Altec Company has relevant costs of $40...

Quiz 11: Decision Making and Relevant Information