Accounting Ch 20

Front 1

In which steps of the management decision-making process does accounting make its primary contribution?

Back 1

Evaluating possible courses of action and reviewing the results of the decision.
Accounting’s contribution to the decision-making process occurs primarily in evaluating the possible courses of action and reviewing the results of the decision.

Front 2

Accounting's contribution to the decision-making process occurs in all of the following steps except to:

Back 2

identify the problem and assign responsibility.
ccounting's involvement in the decision-making process occurs in all of the options except to identify the problem and assign responsibility.

Front 3

Three of the steps in management’s decision process are: (1) review results of decision, (2) determine and evaluate possible courses of action, and (3) make the decision. The steps are prepared in the following order.

Back 3

(2), (3), (1).
The order of the steps in the decision process is (2) determine and evaluate possible courses of action, (3) make the decision and (1) review the results of decision.

Front 4

he process used to identify the financial data that changes under alternative courses of action is called incremental analysis.

Back 4

True

Front 5

Incremental analysis is the process of identifying the financial data that:

Back 5

change under alternative courses of action.
Incremental analysis is the process of identifying the financial data that change under alternative courses of action.

Front 6

All of the following types of decisions involve incremental analysis except:

Back 6

sell or process further.

all of these options are involved in incremental analysis.

allocate limited resources.

make or buy.

Front 7

In incremental analysis, the only costs to be considered are:

Back 7

relevant costs.

Front 8

When deciding to accept an order at a special price, variable manufacturing overhead costs are not relevant.

Back 8

False
When deciding to accept an order at a special price, variable manufacturing overhead costs are relevant because they increase if the special order is accepted.

Front 9

Relevant costs in accepting an order at a special price include all of the following except:

Back 9

fixed manufacturing overhead
Fixed manufacturing overhead is not a relevant cost in accepting an order at a special price.

Front 10

When the units required to fill a special order can be produced within existing plant capacity, which of the following will not increase?

Back 10

Fixed costs.
if plant capacity does not have to be increased, then fixed costs will not change.

Front 11

It costs Orkid Company $17 of variable costs and $3 of fixed costs to produce its product. The company currently has unused capacity. The product sells for $25. Homer Industries offers to purchase 5,000 units at $19 each. In the deal, Orkid will incur special shipping costs of $1.50 per unit. If the special offer is accepted and produced with unused capacity, net income will:

Back 11

increase $2,500.
If the offer is accepted with unused capacity, net income will increase by $2,500. The variable cost per unit will be $18.50 ($17 + $1.50); the income per unit is $.50 ($19 – $18.50); and the total increase in net income will be $2,500 ($.50 X 5,000 units).

Front 12

Which one of the following is an important assumption that is made when considering the decision to accept an order at a special price?

Back 12

The firm is not currently operating at full capacity.
This is one of the assumptions made when considering the decision to accept an order at a special price.

Front 13

It costs Bluffton Company $18.20 of variable costs and $7.80 of fixed costs to produce its product that sells for $39. Osborne Company, a foreign buyer, offers to purchase 3,000 units at $23.40 each. If the special offer is accepted and produced with unused capacity, net income will:

Back 13

increase $15,600.
If the offer is accepted with unused capacity, fixed costs will not increase. The amount of the sales price above variable costs will contribute to covering fixed costs. The firm will have $15,600 [3,000 units X ($23.40 - $18.20)] more than if it does not accept the offer. Thus, net income will increase by $15,600.

Front 14

Opportunity cost is a cost that cannot be changed by any present or future decision.

Back 14

False
Opportunity cost is the potential benefit that may be obtained by following an alternative course of action.

Front 15

It costs HHI Company $7 of variable costs and $3 of fixed costs to produce its product at full capacity. However, the company currently has unused capacity. The product sells for $15. Burlington Company offers to purchase 3,000 units at $9 each. HHI will incur special shipping costs of $2.50 per unit. If the special offer is accepted and produced with unused capacity, net income will:

Back 15

decrease $1,500
If the offer is accepted with unused capacity, net income will decrease by $1,500. The variable cost per unit will be $9.50 ($7 + $2.50), the loss per unit $.50 ($9 – $9.50) and the total decrease in net income will be $1,500 ($.50 X 3,000 units).

Front 16

In a make-or-buy decision, relevant costs are:

Back 16

the purchase price of the units.

opportunity costs.

all of these answer choices are correct.

manufacturing costs that will be saved.
All the costs mentioned above are relevant in a make-or-buy decision. Therefore this is the correct answer.

Front 17

Another name for the option to buy a component from a supplier is

Back 17

outsourcing.
This term describes the decision of a manufacturer to buy components from another firm.

Front 18

Taser Industries must decide whether to make or buy some of its components. The costs of producing 175,000 battery packs for its product are as follows:

Direct Materials $15,000
Direct Labor $5,000
Variable overhead $6,000
Fixed overhead $9,000

The company has an opportunity to purchase the battery packs for $0.18 per unit, which would eliminate all variable costs, and $2,000 of fixed costs. Based on your analysis, what is the net income increase or decrease if the company purchases the battery packs?

Back 18

a decrease in net income of $3,500
Cost to buy = ($0.18 x 175,000 units) + $7,000 fixed cost that cannot be eliminated = $38,500 - $35,000 = $3,500 decrease in net income.

Front 19

Zoomer Company produces Optimist sailboats. The costs of producing 100,000 tiller extensions for use in the boats are as follows:

Direct labor $250,000
Direct materials 300,000
Variable overhead 65,000
Fixed overhead 185,000

An outside supplier has offered to supply the tiller extensions for $720,000. If Zoomer accepts the offer $85,000 of fixed costs can be avoided. What is the financial advantage (disadvantage) of accepting the supplier’s offer?

Back 19

($5,000)
The relevant costs of making are ($250,000 + $300,000 + $65,000 + $100,000) or $715,000 versus the cost of purchasing $720,000, results in a $5,000 disadvantage in purchasing.

Front 20

Which of the following will not affect a make-or-buy decision?

Back 20

Incremental revenue.

Front 21

In a make or buy decision, opportunity costs are:

Back 21

added to the make total cost.
Opportunity costs are added to the make total cost in a make or buy decision.

Front 22

Incremental costs are the costs that differ between the alternatives being considered.

Back 22

True

Front 23

The basic rule in a sell or process further decision is to process further as long as the incremental revenue is:

Back 23

more than the incremental processing costs.
The basic rule is to process further as long as the incremental revenue exceeds the incremental processing costs.

Front 24

In a sell or process further decision, joint costs are:

Back 24

sunk costs.

Front 25

Sunk costs are not relevant in incremental analysis.

Back 25

True

Front 26

When a company is deciding to retain or replace equipment, trade-in value of the existing equipment is irrelevant.

Back 26

FALSE
Trade-in value of existing equipment is relevant because this value will not be realized if the asset is continued in use.

Front 27

The cash disposal value of existing equipment is considered a sunk cost and is therefore irrelevant in a decision to retain or replace the equipment.

Back 27

False

Front 28

The decision rule in a sell-or-process-further decision is: process further as long as the incremental revenue from processing exceeds:

Back 28

incremental processing costs.
The decision rule in a sell-or-process-further decision is to process further as long as the incremental revenue from such processing exceeds incremental processing costs.

Front 29

Costs incurred prior to the split-off are

Back 29

joint costs.
All costs incurred prior to the split-off point are called joint costs.

Front 30

In a decision to retain or replace equipment, the book value of the old equipment is a(an):

Back 30

sunk cost.
In the decision to retain or replace equipment, the book value of the old equipment is a sunk cost. This is because the book value reflects the original cost less accumulated depreciation and neither of these values is relevant to the decision.

Front 31

Bergeron Company is considering replacing equipment with a cost of $30,000, accumulated depreciation of $20,000, and a 2 year remaining useful life. The new equipment has a cost of $42,000 and a useful life of 6 years. The seller has offered a trade-in allowance of $7,500. The new equipment is much more efficient. Bergeron projects cost savings of $10,000 per year if the new equipment is purchased. Which of the following is not relevant in deciding whether to retain or replace equipment?

Back 31

Book value of existing equipment.

Front 32

In a retain or replace equipment decision, all of the following are considered except the:

Back 32

book value of the old asset.
The book value of the old asset is a sunk cost and is ignored in a retain or replace equipment decision.

Front 33

If a company decides to eliminate an unprofitable segment, its net income will always increase.

Back 33

If an unprofitable segment is eliminated net income may actually decrease if fixed costs absorbed by the segment are not eliminated.

Front 34

The key to making the best decision concerning eliminating an unprofitable segment is to focus on relevant costs.

Back 34

TRUE

Front 35

If a company decides to eliminate an unprofitable segment, its net income will increase if the segment’s contribution margin is less than the fixed costs which are eliminated.

Back 35

TRUE

Front 36

Vegas Company is considering eliminating an unprofitable segment. The segment’s fixed costs are avoidable and are less than its contribution margin. Which of the following is a true consequence of eliminating this unprofitable segment?

Back 36

Overall net income will decrease.
Elimination of an unprofitable segment that has avoidable fixed costs less than the lost contribution margin will result in a decrease of overall company profits.

Front 37

When a firm operates in a multiple-product environment, joint costs should be treated as ________ and ignored in the decision to sell or process further.

Back 37

sunk costs
Because joint costs are incurred before products are separated, they should be treated as sunk costs and ignored in the decision to sell or process further.

Front 38

following results last period:

Sales $1,040,000
Variable expenses (640,000)
Contribution margin 400,000
Fixed expenses (540,000)
Net loss $(140,000)

If the Duchess Doggy Biscuit segment is eliminated, 50% of the fixed expenses can also be eliminated, the other 50% will be reallocated. What will happen to company net income if this product line is eliminated?

Back 38

Decrease by $130,000.
Lost contribution margin is $400,000 and fixed expenses saved are $270,000. Therefore, lost net income is ($400,000 - $270,000) or $130,000.