Question 1

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

Accepted Answer

The potential publicity for his restaurant is a relevant qualitative factor because it can impact the restaurant's reputation and future business opportunities.

Question 2

Assume the following cost data:  A special order for 100 units is received. The buyer wants his name stamped on each unit. This will increase labor costs by $0.25 per unit and cost $300 for the stamping machine. What price must be charged to earn $300 on the special order?

Accepted Answer

The answer of Assume the following cost data:  A...

Question 3

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

Accepted Answer

The answer of PRO Shops has a capacity of 45,000...

Question 4

Sunk costs should be considered in

Accepted Answer

Sunk costs are costs that have already been incurred and cannot be recovered. They should not be considered in making either routine or nonroutine operating decisions because they cannot be changed by any current or future action.

Question 5

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

Accepted Answer

The answer of Which of these is an opportunity cost...

Question 6

Wagner Ltd can manufacture 490,000 tennis rackets a year at a variable cost of $15 per racket and fixed costs of $500,000. Wagner budgeted that it can sell 400,000 at $25 each. An additional order of 100,000 was received, but at a discount of 35% from the regular price. If Wagner accepts the special order, profit before taxes will

Accepted Answer

The answer of Wagner Ltd can manufacture 490,000 tennis rackets...

Question 7

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

Accepted Answer

Managers need to know if the special order will replace regular business because it affects the company's capacity and profitability. If the order replaces regular business, it might not be beneficial unless it offers higher margins or strategic advantages.

Question 8

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

Accepted Answer

Incremental fixed costs associated with the order are relevant because they are additional costs that will be incurred only if the special order is accepted.

Question 9

Wolff Ltd. sells product P at a price of $38 a unit. The per-unit cost data are: direct materials $8, direct labor $10, and overhead $12 (25% fixed and 75% variable). Wolff has sufficient capacity to accept a special order for 40,000 units just received. Selling costs associated with this order would be $3 per unit. At a selling price of $33 per unit, the operating profit will

Accepted Answer

To calculate the operating profit for the special order, we need to subtract the total cost of producing and selling the 40,000 units from the revenue generated from selling those units.

Total cost per unit:

Direct materials: $8
Direct labor: $10
Variable overhead: 0.75 x $12 = $9
Fixed overhead: 0.25 x $12 = $3
Total variable cost per unit: $8 + $10 + $9 = $27
Total cost per unit: $27 + $3 (fixed overhead) = $30

Total cost for 40,000 units: 40,000 x $30 = $1,200,000

Selling cost per unit for the special order: $3

Revenue generated from selling 40,000 units at $33 per unit: 40,000 x $33 = $1,320,000

Operating profit for the special order: $1,320,000 - $1,203,000 = $117,000

Compared to not accepting the special order and continuing to sell at $38 per unit, the operating profit increases by:

($33 - $30) x 40,000 units - $3 x 40,000 units = $120,000 - $120,000 = $0

However, we need to take into consideration the selling cost of $3 per unit for the special order. This cost reduces the overall increase in profit.

Therefore, the correct answer is C) Increase by $120,000.

Question 10

Wagner Ltd can manufacture 490,000 tennis rackets a year at a variable cost of $15 per racket and fixed costs of $500,000. Wagner budgeted that it can sell 400,000 at $25 each. An additional order of 100,000 was received, but at a discount of 35% from the regular price. The relevant cost to Wagner of the special order is

Accepted Answer

The answer of Wagner Ltd can manufacture 490,000 tennis rackets...

Question 11

Redmond Ltd is closing one of its divisions. Operating data on this division follows:  Overhead consists of $30,000 in salary and $10,000 for rent and insurance. The salary is for the chief engineer, who will continue to work for Redmond even if the division is closed.
Assuming all overhead costs continue to be incurred even if the division closes, what will be the effect on overall company profits of closing the division?

Accepted Answer

The answer of Redmond Ltd is closing one of its...

Question 12

The general rule for special orders is

Accepted Answer

The general rule for special orders is that the organization should be as well off after taking the order as it was before taking it. This means that the special order should not result in any loss or negative impact on the organization's profitability, efficiency, or other important factors. It is important to consider all costs associated with the special order, including both variable and fixed costs, to determine whether it is financially beneficial for the organization. It is also important to only take special orders when there is capacity available to fulfill them, as taking on too many orders can lead to overburdening the organization and negatively impacting its overall performance. While profit is important, it should not be the only consideration when evaluating special orders.

Question 13

Wolff Ltd. sells product P at a price of $38 a unit. The per-unit cost data are: direct materials $8, direct labor $10, and overhead $12 (25% fixed and 75% variable). Wolff has sufficient capacity to accept a special order for 40,000 units just received. Selling costs associated with this order would be $3 per unit. The minimum selling price per unit should be

Accepted Answer

The minimum selling price should cover variable costs and selling costs. Variable costs per unit are direct materials ($8) + direct labor ($10) + variable overhead ($9, which is 75% of $12) + selling costs ($3), totaling $30.

Question 14

Redmond Ltd is closing one of its divisions. Operating data on this division follows:  Overhead consists of $30,000 in salary and $10,000 for rent and insurance. The salary is for the chief engineer, who will continue to work for Redmond even if the division is closed.
Rent and insurance that will cease if the division is closed is an

Accepted Answer

The answer of Redmond Ltd is closing one of its...

Question 15

A product emphasis decision may involve

Accepted Answer

A product emphasis decision involves choosing which product(s) to focus on and allocate resources towards. This decision may involve considering multiple products and qualitative factors such as market demand, profitability, and competition. Sunk costs and opportunity costs are not necessarily relevant in this decision as they pertain to past expenses and alternative uses of resources, respectively. Multiple resource constraints may be a factor, but are not as central to the decision as the selection of which products to emphasize.

Question 16

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

Accepted Answer

Opportunity cost arises when a company chooses one option over another, resulting in the loss of potential profits from the foregone option. If a company has excess capacity, accepting a special order would not result in an opportunity cost since the company would not be giving up any potential profits. However, if current capacity is constrained, accepting a special order would require the company to give up potential profits from other orders it could have fulfilled instead, resulting in an opportunity cost. Therefore, choice A is the best option. The other choices are not necessarily related to opportunity cost.

Question 17

Qualitative factors can be difficult to identify because

Accepted Answer

Qualitative factors are typically subjective and difficult to quantify, making it challenging to create a set formula that ensures all important issues are considered. Additionally, they may not be relevant in every decision, but when they are, managers need to carefully identify and evaluate them to ensure they make informed decisions. Qualitative factors are not the same as sunk costs, which are historical costs that cannot be changed and are not relevant in decision-making.

Question 18

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

Accepted Answer

Accepting a special order should provide a contribution margin that covers all relevant costs. Relevant costs include variable costs (which are directly related to production) and any additional fixed costs that will be incurred (such as additional labor or material costs). Opportunity costs are not relevant costs, as they do not involve any out-of-pocket expenses. Therefore, the best choice is D, which considers all relevant costs.

Question 19

The managers of Adamson Apple Ltd. are considering dropping one of their product lines. The product line typically has the following revenue and costs:  If the product line is discontinued, $4,000 of the fixed costs would be avoided. Also, the freed-up capacity would generate $4,000 of additional contribution margin from the expansion of other product lines. If Adamson discontinues the product line, the effect on overall profit will be

Accepted Answer

The answer of The managers of Adamson Apple Ltd. are...

Question 20

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

Accepted Answer

A qualitative factor is a factor that cannot be expressed in numerical terms or valued in monetary terms. It refers to subjective factors such as culture, ethics, reputation, customer satisfaction, and employee morale, which are difficult to quantify but have a significant impact on decision-making. Factors related to product or service quality (option A) can be either qualitative or quantitative, depending on how they are measured. Option B is incorrect because all factors can be identified in a decision-making process. Option D is incorrect because qualitative and quantitative factors have their respective strengths and weaknesses in decision-making, and neither is superior to the other.

Quiz 9: Relevant Costs for Decision Making