Chapter 8 Flashcards
(22 cards)
Which of the following is a sunk cost?
A.Trade in value of old vehicle
B.purchase price of new vehicle
C.Operating costs for a new vehicle
D.Purchase price of vehicle to be traded in
D.Purchase price of vehicle to be traded in
Common fixed costs that are allocated between departments are generally _______.
Question content area bottom
Part 1
A.irrelevant to the decision of whether to drop the department
C.relevant to the decision of whether to drop the department
D.direct fixed costs of other departments
A.irrelevant to the decision of whether to drop the department
The most relevant costs are:
A. current costs. C. estimated future costs.
B. nominal costs. D. costs already incurred
C. estimated future costs.
When making decisions, managers should
A. consider sunk costs.
B. consider costs that do not differ between alternatives.
C. consider both quantitative and qualitative factors.
D. consider both relevant and irrelevant costs
C. consider both quantitative and qualitative factors.
Soundbass Corporation received a special order request for 50,000 new speakers at a
sales price of $20 each. This is a $20 reduction in the normal sales price. The variable
costs per speaker are $19. The total fixed costs of $100,000 will not change. Which of the
following is TRUE?
A. Management should accept the order if the variable costs per unit and fixed costs
in total will not change with the order.
B. Management should accept the order if they have no excess capacity.
C. Management should accept the order if the customers will expect the price
decrease as the standard price in the future.
D. Management should reject the special order because the contribution margin per
unit is small.
A. Management should accept the order if the variable costs per unit and fixed costs
in total will not change with the order.
A stamp production company has the capacity to produce 15,000 units per month while
incurring the following costs:
Direct materials $3.00
Direct labour $4.00
Variable manufacturing
overhead $1.50
Variable selling expense $0.50
Fixed manufacturing overhead $1.00
A special order has been received from a customer who wants to pay a reduced price of
$11 per unit. There would be no selling expense in connection with this order and no other
expenses or sales will be affected. If the order is for 5,000 units, the impact on operating income
would be a(n):
A. increase in operating income of $7,500.
B. increase in operating income of $12,500.
C. decrease in operating income of $12,500.
D. decrease in operating income of $7,500.
B. increase in operating income of $12,500.
Which of the following is relevant to Amazon’s decision to accept a special order at a
low price from a large customer in China?
A. The cost of Amazon’s warehouses in the US.
B. Amazon’s investment in its website.
C. The cost of shipping the order to the customer.
D. CEO Jeff Bezos’s salary.
C. The cost of shipping the order to the customer.
In deciding whether to drop its electronics product line, Amazon.com would consider:
A. the costs it could save by dropping the product line.
B. the revenues it would lose from dropping the product line.
C. how dropping the electronics product line would affect sales of its other products,
such as CDs.
D. all of the above
D. all of the above
Signature Corporation has three product lines: silver, gold, and platinum. All three
products have a positive contribution margin, but the gold line has an operating loss.
Management is considering eliminating the product line because all of gold’s variable
costs can be eliminated as well. If all other factors remain the same and management
eliminates the product line, what will happen to operating income?
A. Operating income will increase.
B. Operating income will decrease.
C. Operating income will not change.
D. Not enough information is present to make that determination.
B. Operating income will decrease.
Thematics Publishing produces 10,000 binders each year. Each binder has a variable cost
of $12 and total fixed costs of $80,000 per year. The binders can be purchased from an
outside supplier for $18 each. The production space will remain idle, but fixed costs can
be reduced by 25%. The annual impact of purchasing the binders will be to:
A. increase operating income by $40,000.
B. increase operating income by $20,000.
C. decrease operating income by $20,000.
D. decrease operating income by $40,000.
D. decrease operating income by $40,000.
Which of the following costs are irrelevant to business decisions?
A. Sunk costs
B. Costs that differ between alternatives
C. Variable costs
D. Avoidable costs
A. Sunk costs
Smythe Company manufactures and sells ceramic pots. Leone Corporation has offered
Smythe Company $10 per pot for 2,000 pots. Smythe Company’s normal selling price is
$12 per pot. The total manufacturing cost per pot is $9 and consists of variable costs of
$7 per vase and fixed overhead costs of $2 per vase. (NOTE: Assume excess capacity and
no effect on regular sales.) Should Smythe Company accept or reject the special sales
order?
A. Accept, because operating income would increase $6,000.
B. Reject, because operating income would decrease $6,000.
C. Reject, because operating income would decrease $34,000.
D. Accept, because operating income would increase $34,000.
A. Accept, because operating income would increase $6,000.
In order to sell its products, a company must meet the competition’s price. Which of the
following is TRUE about the company’s product?
A. The company is a price-setter.
B. There is not a lot of competition for the product.
C. The product lacks uniqueness.
D. The company uses cost-plus pricing
C. The product lacks uniqueness.
If a company has a policy of charging its customers 15% above direct materials and
direct labour costs, the company:
A. is a price-setter.
B. is a price-taker.
C. can control its production costs.
D. considers production costs before setting prices.
A. is a price-setter.
1) What are the steps of the decision making process?
The steps include:
(a) identifying the business problem,
(b) identifying alternatives,
(c) gathering
information and evaluating alternatives,
(d) choosing the best alternative
(e) evaluating
results.
2) What are the main characteristics of relevant information?
Relevant information has to be future-oriented and differ across alternatives. Costs incurred in the
past are sunk costs.
3) What are the three considerations in special order decisions?
The primary special-order-decision considerations include: (1) whether there is idle capacity;
(2) whether the order acceptance will affect regular sales;
(3) whether the deal is profitable. We evaluate the profitability of the special order by subtracting the order costs from the order revenues. Pay attention to the current fixed costs which won’t change with the special order. On the other hand, incremental fixed costs that have to be paid for the order (e.g., buying a new machine to engrave the customer’s logo on the product) have to be included in the analysis.
4) What are the considerations in make-buy decisions?
Managers need to evaluate both quantitative and qualitative factors. As to quantitative factors, the
cost of making is contrasted against the cost of buying and the cheaper option is selected.
Qualitative factors include employee morale resulting from outsourcing, reliability of suppliers,
economic conditions, …etc. Also, managers should pay attention to the common (unavoidable)
fixed costs and the direct (avoidable) fixed costs. Common FC are those that are incurred for the
whole factory and won’t be saved if the company chooses to outsource (e.g., rent), whereas direct
FC are attributable only to a single product line, i.e., can be saved. Finally, managers have to also
incorporate the profit from alternative use of the freed capacity resulting from outsourcing into
their analysis.
5) What are the considerations in keep/drop product lines decisions?
These decisions resemble outsourcing decisions (by outsourcing the company is eliminating the
product line), so the considerations are also similar. They include both qualitative (e.g., employee
morale) and quantitative factors: (a) whether fixed costs are avoidable;
(b) profit from alternative
use of freed capacity
(c) effect on sales of other products.
6) How to set regular pricing decisions?
The pricing approach employed by a company depends on the profit level desired by shareholders
as well as the price that customers are willing to pay for the product, which is a function of the
uniqueness of the product in relation to products offered by competitors. The uniqueness of the
product further determines if the company is a price taker or a price setter.
A price taker operates in a perfectly competitive market which is characterized by a large number
of companies selling identical (or very similar) products, e.g., food and beverage companies;
producers of natural resources (gas stations). Price takers have little or no control over the price,
so they adopt a target costing approach in which they determine the target cost of a product as
follows:
Target product cost = market price – target profit
A price setter produces products that can be differentiated from those of competitors; therefore,
can dictate the product price, e.g., electronics manufacturers. Price setters adopt a cost-plus pricing
approach in which the product price is determined as follows:
Cost-plus price = product cost + target profit
Target product cost =
Target product cost= market price – target profit
Cost-plus price =
Cost-plus price = product cost + target profi
