Question 1

The management accountant for Giada's Book Store has prepared the following income statement for the most current year:

If the travel book line had been discontinued,corporate profits for the current year would have decreased by ________.

Accepted Answer

$164,000 - $67,000 - $25,000 - $4,000 = $68,000

Question 2

Hartley's Meat Pies is considering replacing its existing delivery van with a new one.The new van can offer considerable savings in operating costs.Information about the existing van and the new van follow:

Sunk costs include ________.

Accepted Answer

Sunk costs are costs that have already been incurred and cannot be recovered. The accumulated depreciation of the existing van is a sunk cost because it has already been accounted for and cannot be recovered. The original cost of the new van, the current salvage value of the existing van, and the annual operating cost of the new van are not sunk costs as they represent future costs or potential recoverable values.

Question 3

A company decided to replace an old machine with a new machine.Which of the following is considered a relevant cost?

Accepted Answer

The setup cost of the new equipment is a relevant cost because it is a cost that will be incurred as a direct result of replacing the old machine with the new machine. The book value and depreciation of the old equipment, as well as any loss on disposal, are sunk costs and do not affect the decision of whether to replace the machine or not.

Question 4

Hartley's Meat Pies is considering replacing its existing delivery van with a new one.The new van can offer considerable savings in operating costs.Information about the existing van and the new van follow:

If Hartley's Meat Pies replaces the existing delivery van with the new one,over the next 10 years operating income will ________.

Accepted Answer

New van ($15,000 × 10 years)- Existing van ($22,500 × 10 years)= $75,000 less in operating costs,which results in a $75,000 increase in operating income.

Question 5

Biden Company sells two items,product A and product B.The company is considering dropping product B.It is expected that sales of product A will increase by 40% as a result.Dropping product B will allow the company to cancel its monthly equipment rental costing $200 per month.The other existing equipment will be used for additional production of product A.One employee earning $500 per month can be terminated if product B production is dropped.Biden's other fixed costs are allocated and will continue regardless of the decision made.A condensed,budgeted monthly income statement with both products follows:
  
Required:
Prepare an incremental analysis to determine the financial effect of dropping product B.

Accepted Answer

The answer of Biden Company sells two items,product A and...

Question 6

________ is relevant in a decision to replace equipment.

Accepted Answer

Salvage value is the amount of money that can be received from selling or disposing of the old equipment. It is relevant in the decision to replace equipment because it can offset the cost of purchasing new equipment. Options A, B, and C are not directly related to the decision to replace equipment.

Question 7

Depreciation allocated to a product line is a relevant cost when deciding to discontinue that product.

Accepted Answer

Depreciation is a sunk cost and never relevant.

Question 8

In a decision as to whether or not to drop a product,fixed costs that have been allocated to that product are generally not relevant unless there is a savings of fixed costs as a result of dropping the product.

Accepted Answer

Fixed costs that have already been allocated to a product are sunk costs and cannot be recovered by dropping the product. Therefore, they are not relevant in the decision-making process unless dropping the product would result in a reduction of fixed costs.

Question 9

Overhead costs allocated to the sales office and individual customers are always relevant when deciding whether to drop a customer.

Accepted Answer

Overhead costs allocated to the sales office and individual customers are always irrelevant.

Question 10

A company is considering adding a fourth product to use available capacity.A relevant factor to consider is that corporate costs can now be allocated over four products rather than only three.

Accepted Answer

It appears that corporate costs will not change in total,and therefore they are not relevant costs for deciding whether to add a fourth product.

Question 11

Avoidable variable and fixed costs should be considered relevant when deciding whether to discontinue a product,product line,business segment,or customer.

Accepted Answer

Avoidable variable and fixed costs are relevant because they can be eliminated if the product, product line, business segment, or customer is discontinued. Therefore, they should be considered when making the decision to discontinue.

Question 12

The management accountant for Giada's Book Store has prepared the following income statement for the most current year:

If the cookbook product line had been discontinued prior to this year,the company would have reported ________.

Accepted Answer

$63,000 - $37,000 - $19,000 - $3,000 = $4,000
The cookbook product line contributed $4,000 toward corporate profits.Without the cookbooks,corporate profits would be $4,000 less than currently reported.

Question 13

Managers are examining a possible replacement of a machine decision and generate the following numbers:
Book value of old machine $1,00,000
Current disposal value of old machine $50,000
Loss on disposal of old machine $300,000
Cost of new machine $600,000
In performing an analysis and in attempt to answer the question,"should we replace the old machine",which of the following statements would be true

Accepted Answer

The book value of the old machine is irrelevant because it pertains to accounting rather than decision-making. The current disposal value of the old machine is also not crucial because it pertains to the actual value of the machine in the marketplace rather than its relevance to the decision at hand. The loss on disposal of the old machine is also not relevant because it is a sunk cost (i.e., a cost that has already been incurred and cannot be recovered). The cost of the new machine is the only relevant item in this scenario because it represents the future cost of the decision to replace the old machine. However, the current disposal value of the old machine is also relevant insofar as it can potentially offset the cost of the new machine. Therefore, the correct answer is C.

Question 14

What role does a trade-in allowance on old equipment play in a decision to retain or replace equipment?

Accepted Answer

The trade-in allowance on old equipment is relevant to the decision to retain or replace equipment because it reduces the cost of the new equipment. Therefore, it is a factor that should be considered when making the decision.

Question 15

Which of the following is true in a decision to keep or replace existing equipment?

Accepted Answer

The disposal value of the old equipment is relevant because it represents the amount of cash that could be obtained from selling the equipment. This cash inflow should be considered when making the decision to keep or replace the equipment. The book value of the old equipment is not relevant because it represents the historical cost of the equipment and does not reflect its current market value. Property taxes and depreciation on the new equipment are also not relevant to the decision of whether to keep or replace existing equipment.

Question 16

The management accountant for the Chocolate S'more Company has prepared the following income statement for the most current year:
  
a.Do you recommend discontinuing the Other Candy product line? Why or why not?
b.If the Chocolate product line had been discontinued,corporate profits for the current year would have decreased by what amount?

Accepted Answer

The answer of The management accountant for the Chocolate S'more...

Question 17

Book value is defined as the ________.

Accepted Answer

Book value is calculated as the difference between the original cost of an asset and the accumulated depreciation. Option A is incorrect because it includes the original cost which is already factored into the book value calculation. Option B is incorrect because book value is not related to market value. Option D is incorrect because it includes market value which is not relevant to book value.

Question 18

Cassidy Products Inc.is considering eliminating Model EOS1 from its product line because of losses over the past quarter.The past three months of information for model EOS1 is summarized below:
  
Manufacturing costs:
  
Support costs are 70% variable and the remaining 30% is depreciation of special equipment for model EOS1 that has no resale value.
Should Cassidy eliminate Model EOS1 from its product line? Why or why not?

Accepted Answer

The answer of Cassidy Products Inc.is considering eliminating Model EOS1...

Question 19

Giant Company has three products,A,B,and C.The following information is available:

Giant Company is thinking of dropping Product C because it is reporting a loss.Assuming Giant drops Product C and does NOT replace it,operating income will ________.

Accepted Answer

Dropping Product C would mean Giant gives up $8,000 in contribution margin while only saving $2,000 in avoidable fixed costs.Without Product C,operating income would be $6,000 less than currently reported.

Question 20

Hartley's Meat Pies is considering replacing its existing delivery van with a new one.The new van can offer considerable savings in operating costs.Information about the existing van and the new van follow:

Relevant costs for this decision include ________.

Accepted Answer

The relevant costs for this decision include the annual operating cost, as this is where the new van can offer considerable savings. The original cost of the existing van and accumulated depreciation are sunk costs and are not relevant for this decision. The book value of the existing van is also not relevant as it is not a cash flow that will be affected by the decision to replace the van.

Quiz 11: Decision Making and Relevant Information

The management accountant for Giada's Book Store has prepared the following income statement for the most current year: If the travel book line had been discontinued,corporate profits for the current year would have decreased by ________.

Hartley's Meat Pies is considering replacing its existing delivery van with a new one.The new van can offer considerable savings in operating costs.Information about the existing van and the new van follow: Sunk costs include ________.

A company decided to replace an old machine with a new machine.Which of the following is considered a relevant cost?

________ is relevant in a decision to replace equipment.

Depreciation allocated to a product line is a relevant cost when deciding to discontinue that product.

In a decision as to whether or not to drop a product,fixed costs that have been allocated to that product are generally not relevant unless there is a savings of fixed costs as a result of dropping the product.

Overhead costs allocated to the sales office and individual customers are always relevant when deciding whether to drop a customer.

A company is considering adding a fourth product to use available capacity.A relevant factor to consider is that corporate costs can now be allocated over four products rather than only three.

Avoidable variable and fixed costs should be considered relevant when deciding whether to discontinue a product,product line,business segment,or customer.

The management accountant for Giada's Book Store has prepared the following income statement for the most current year: If the cookbook product line had been discontinued prior to this year,the company would have reported ________.

What role does a trade-in allowance on old equipment play in a decision to retain or replace equipment?

Which of the following is true in a decision to keep or replace existing equipment?

Book value is defined as the ________.

Giant Company has three products,A,B,and C.The following information is available: Giant Company is thinking of dropping Product C because it is reporting a loss.Assuming Giant drops Product C and does NOT replace it,operating income will ________.

Hartley's Meat Pies is considering replacing its existing delivery van with a new one.The new van can offer considerable savings in operating costs.Information about the existing van and the new van follow: Relevant costs for this decision include ________.