Question 1

Mary is considering leaving her current position to open an ice cream shop.Mary's current annual salary is $77,000.Annual ice cream shop revenue and costs are estimated at $260,000 and $210,000,respectively.What is Mary's annual opportunity cost of starting the ice cream shop?

Accepted Answer

Mary's annual opportunity cost of starting the ice cream shop is the income she is giving up by leaving her current job. Therefore, her opportunity cost is equal to her current salary, which is $77,000 per year. None of the other options are correct as they either represent the revenue, costs, or total income of the ice cream shop, which are not relevant to calculating Mary's opportunity cost.

Question 2

Marianne Company has an idle machine that originally cost $200,000.The book value of the machine is $100,000.The company is considering three alternative uses of the idle machine:
Alternative 1: Disposal of machine.Disposal value of machine is $50,000.
Alternative 2: Use the idle machine to increase production of Product A.Contribution margin from additional sales of Product A is estimated to be $60,000.
Alternative 3: Use the idle machine to increase production of Product B.Contribution margin from additional sales of Product B is estimated to be $70,000.
When considering Alternative 2,what is the opportunity cost of the idle machine?

Accepted Answer

C

Question 3

Johnston Company wants to double production of Product X from 1,000 units to 2,000 units.The variable manufacturing cost per unit is $10.The variable nonmanufacturing cost per unit is $20.There are no fixed costs.The selling price per unit is $50.What is the incremental cost of the proposed change?

Accepted Answer

The incremental cost is the additional variable costs incurred to produce the extra 1,000 units. The total variable cost per unit is $10 (manufacturing) + $20 (nonmanufacturing) = $30. Therefore, the incremental cost is 1,000 units * $30 = $30,000.

Question 4

The salary foregone by a person who quits a job to start a business is an example of a(n)________.

Accepted Answer

The salary foregone when quitting a job to start a business is an example of opportunity cost. Opportunity cost refers to the value of the best alternative forgone when making a decision. In this case, the salary that could have been earned by continuing to work is the next best alternative foregone when starting a business.

Question 5

Nestle Company paid $130,000 for a machine used to mill oats.The annual contribution margin from oat sales is $60,000.The machine could be sold for $80,000.The opportunity cost of producing the oats is ________.

Accepted Answer

The opportunity cost is the cost of the next best alternative foregone, which in this case is the machine's resale value. Therefore, the opportunity cost is the amount the machine could be sold for, which is $80,000.

Question 6

The key to determining the financial difference between two alternative courses of action is to identify the ________.

Accepted Answer

Differential costs and revenues refer to the costs and revenues that differ between two alternative courses of action. By subtracting the costs and revenues of one alternative from the costs and revenues of another alternative, we can determine the financial difference between the two alternatives and make an informed decision about which one to choose. A is incorrect because opportunity cost is only one aspect of the decision-making process, and it may not be enough to determine the financial difference between alternatives. B is incorrect because marginal cost only accounts for the additional cost of producing one additional unit, and it may not be enough to compare two different alternatives. D is incorrect because joint costs are costs that are incurred jointly for two or more products or services, and they cannot be used to determine the financial difference between two alternative courses of action.

Question 7

When evaluating alternative uses of a capital asset,equivalent decisions are reached using the opportunity cost approach and ________.

Accepted Answer

Incremental analysis is the most appropriate approach for evaluating alternative uses of a capital asset because it considers the incremental revenues and costs associated with each alternative. Opportunity cost approach is used to evaluate the cost of using a resource in one way versus its next best alternative use. Option A, B, and C are more appropriate for analyzing operational decisions related to pricing, production, and costing.

Question 8

Marjorie Company has an idle machine that originally cost $200,000.The book value of the machine is $100,000.The company is considering three alternative uses of the idle machine:
Alternative 1: Disposal of machine.Disposal value of machine is $50,000.
Alternative 2: Use the idle machine to increase production of Product A.Contribution margin from additional sales of Product A is estimated to be $60,000.
Alternative 3: Use the idle machine to increase production of Product B.Contribution margin from additional sales of Product B is estimated to be $70,000.
When considering Alternative 3,what is the opportunity cost of the idle machine?

Accepted Answer

The opportunity cost of choosing Alternative 3 is the next best alternative forgone, which is the contribution margin from additional sales of Product A ($60,000) under Alternative 2.

Question 9

Differential cost is the difference in ________ between two alternatives.

Accepted Answer

Differential cost refers to the difference in total cost between two alternatives, highlighting how costs change under different scenarios or choices.

Question 10

Determining the opportunity cost of a project depends on the alternatives available.

Accepted Answer

Opportunity cost is the value of the next best alternative foregone when making a decision. Therefore, the opportunity cost of a project depends on the alternatives available, because it is based on the comparison between the benefits and costs of the chosen project and those of the next best alternative.

Question 11

Nancy Company has an idle machine that originally cost $200,000.The book value of the machine is $100,000.The company is considering three alternative uses of the idle machine:
Alternative 1: Disposal of machine.Disposal value of machine is $50,000.
Alternative 2: Use the idle machine to increase production of Product A.Contribution margin from additional sales of Product A is estimated to be $60,000.
Alternative 3: Use the idle machine to increase production of Product B.Contribution margin from additional sales of Product B is estimated to be $70,000.
When considering the opportunity cost of the idle machine,what is the net financial benefit from Alternative 3?

Accepted Answer

The answer of Nancy Company has an idle machine that...

Question 12

An opportunity cost is ________.

Accepted Answer

An opportunity cost is the next best alternative foregone when a decision is made. It's the value of the highest foregone alternative, and that's why D is the correct answer.

Question 13

Opportunity costs and outlay costs are widely used synonyms.

Accepted Answer

Opportunity costs refer to the cost of the next best alternative that is foregone when making a decision, while outlay costs refer to the actual money spent or invested. They are not synonyms.

Question 14

Incremental benefits are the ________ generated by a proposed alternative.

Accepted Answer

Incremental benefits refer to the additional revenues or reduced costs that result from choosing a proposed alternative over the existing one. Therefore, option D is the correct choice. Options A and B describe costs, not benefits. Option C only considers profits, ignoring the possibility of reduced costs.

Question 15

Differential revenue is the difference in ________ between two alternatives.

Accepted Answer

Differential revenue refers to the difference in total revenue between two alternatives, such as choosing one project over another or producing one level of output versus another.

Question 16

A proposed project will require the use of ten machines in a company.Each machine has five alternative uses.What is the simplest way to evaluate the desirability of the project?

Accepted Answer

The opportunity cost approach is the simplest way to evaluate the desirability of the project in this scenario because it considers the value of the best alternative use of the machines that will be foregone if the project is undertaken. This approach directly addresses the trade-off involved in using the machines for the proposed project versus their next best alternative uses.

Question 17

The term opportunity cost applies to a resource that a company ________.

Accepted Answer

Opportunity cost refers to the cost of an alternative that must be forgone in order to pursue a certain action. Thus, it applies to resources a company already owns or has committed to purchase, as these resources could have been used differently.

Question 18

Jeffrey Company wants to double production of Product X from 1,000 units to 2,000 units.The variable manufacturing cost per unit is $10.The variable nonmanufacturing cost per unit is $20.There are no fixed costs.The selling price per unit is $50.What is the incremental revenue of the proposed change?

Accepted Answer

The incremental revenue is calculated by multiplying the increase in units by the selling price per unit: (2,000 - 1,000) units * $50 = $50,000.

Question 19

Incremental costs are the ________ generated by a proposed alternative.

Accepted Answer

Incremental costs are the additional costs or reduced revenues generated by a proposed alternative. They are the costs that would not have been incurred if the proposed alternative had not been considered or implemented. It is important to consider incremental costs when making business decisions in order to determine the true cost or benefit of a proposed alternative.

Question 20

Sue is considering leaving her current position to open a coffee shop.Sue's current annual salary is $83,000.Annual coffee shop revenue and costs are estimated at $260,000 and $210,000,respectively.What is Sue's opportunity cost of staying at her current work position?

Accepted Answer

Sue's opportunity cost of staying at her current job is the profit she foregoes by not opening the coffee shop, which is the difference between the coffee shop's revenue and costs: $260,000 - $210,000 = $50,000.

Quiz 6: Relevant Information for Decision Making With a Focus on Operational Decisions