1. Future costs that do not differ among the alternatives are not relevant in a decision. True False
2. Fixed costs are irrelevant in a decision. True False
3. Sunk costs are considered to be avoidable costs. True False
4. Avoidable costs are also called relevant costs. True False
5. An avoidable cost is a cost that can be eliminated (in whole or in part) as a result of choosing one alternative over another.
6. A sunk cost is a cost that has already been incurred and that cannot be avoided regardless of what action is chosen.
7. The book value of a machine, as shown on the balance sheet, is relevant in a decision concerning the replacement of that machine by another machine.
8. If by dropping a product a firm can avoid more in fixed costs than it loses in contribution margin, then the firm is better off economically if the product is dropped.
9. Generally, a product line should be dropped when the fixed costs that can be avoided by dropping the product line are less than the contribution margin that will be lost.
10. The cost of a resource that has no alternative use in a make or buy decision problem has an opportunity cost of zero.
11. Vertical integration is the involvement by a company in more than one of the steps from securing basic raw materials to the production and distribution of a finished product.
12. Depreciation expense on existing factory equipment is generally relevant to a decision of whether to accept or reject a special offer for a company’s product.
13. When a company has a production constraint, the product with the highest contribution margin per unit of the constrained resource should be given highest priority.
14. Managers should not authorize working overtime at a work station that contains a bottleneck. True False
15. Joint costs are not relevant to the decision to sell a product at the split-off point or to process the product further.
16. Joint production costs are relevant costs in decisions about what to do with a product from the split-off point onward in the production process.
17. Costs which are always relevant in decision making are those costs which are:
18. A general rule in relevant cost analysis is:
A. variable costs are always relevant.
B. fixed costs are always irrelevant.
C. differential future costs and revenues are always relevant.
D. depreciation is always irrelevant.
19. The opportunity cost of making a component part in a factory with no excess capacity is the:
A. variable manufacturing cost of the component.
B. fixed manufacturing cost of the component.
C. total manufacturing cost of the component.
D. net benefit foregone from the best alternative use of the capacity required.
20. Freestone Company is considering renting Machine Y to replace Machine X. It is expected that Y will waste less direct materials than does X. If Y is rented, X will be sold on the open market. For this decision, which of the following factors is (are) relevant?
I. Cost of direct materials used
II. Resale value of Machine X
A. Only I
B. Only II
C. Both I and II
D. Neither I nor II
21. Which of the following are valid reasons for eliminating a product line?
I. The product line’s contribution margin is negative.
II. The product line’s traceable fixed costs plus its allocated common corporate costs are less than its contribution margin.
A. Only I
B. Only II
C. Both I and II
D. Neither I nor II
22. When there is a production constraint, a company should emphasize the products with:
A. the highest unit contribution margins.
B. the highest contribution margin ratios.
C. the highest contribution margin per unit of the constrained resource.
D. the highest contribution margins and contribution margin ratios.
23. In a sell or process further decision, which of the following costs are relevant?
I. A variable production cost incurred prior to the split-off point.
II. An avoidable fixed production cost incurred after the split-off point.
A. Only I.
B. Only II.
C. Both I and II.
D. Neither I nor II.
24. Scherer Corporation is preparing a bid for a special order that would require 720 liters of material U48N. The company already has 560 liters of this raw material in stock that originally cost $6.30 per liter. Material U48N is used in the company’s main product and is replenished on a periodic basis. The resale value of the existing stock of the material is $5.80 per liter. New stocks of the material can be readily purchased for $6.65 per liter. What is the relevant cost of the 720 liters of the raw material when deciding how much to bid on the special order?
25. Cung Inc. has some material that originally cost $68,400. The material has a scrap value of $30,100 as is, but if reworked at a cost of $1,400, it could be sold for $30,800. What would be the incremental effect on the company’s overall profit of reworking and selling the material rather than selling it as is as scrap?
26. Liffick Corporation is a specialty component manufacturer with idle capacity. Management would like to use its extra capacity to generate additional profits. A potential customer has offered to buy 6,200 units of component VFG. Each unit of VFG requires 8 units of material C79 and 6 units of material X70. Data concerning these two materials follow:
Material C79 is in use in many of the company’s products and is routinely replenished. Material X70 is no longer used by the company in any of its normal products and existing stocks would not be replenished once they are used up.
What would be the relevant cost of the materials, in total, for purposes of determining a minimum acceptable price for the order for product VFG?
27. Schemm Inc. regularly uses material F04E and currently has in stock 460 liters of the material for which it paid $2,622 several weeks ago. If this were to be sold as is on the open market as surplus material, it would fetch $5.25 per liter. New stocks of the material can be purchased on the open market for $5.85 per liter, but it must be purchased in lots of 1,000 liters. You have been asked to determine the relevant cost of 800 liters of the material to be used in a job for a customer. The relevant cost of the 800 liters of material F04E is:
28. Stampka Corporation is a specialty component manufacturer with idle capacity. Management would like to use its extra capacity to generate additional profits. A potential customer has offered to buy 4,200 units of component JJF. Each unit of JJF requires 6 units of material O38 and 9 units of material P56. Data concerning these two materials follow:
Material O38 is in use in many of the company’s products and is routinely replenished. Material P56 is no longer used by the company in any of its normal products and existing stocks would not be replenished once they are used up.
What would be the relevant cost of the materials, in total, for purposes of determining a minimum acceptable price for the order for product JJF?
29. Janus Corporation has in stock 43,700 kilograms of material L that it bought five years ago for $6.10 per kilogram. This raw material was purchased to use in a product line that has been discontinued. Material
L can be sold as is for scrap for $3.23 per kilogram. An alternative would be to use material L in one of the company’s current products, E99D, which currently requires 2 kilograms of a raw material that is available for $9.45 per kilogram. Material L can be modified at a cost of $0.62 per kilogram so that it can be used as a substitute for this material in the production of product E99D. However, after modification, 3 kilograms of material L is required for every unit of product E99D that is produced. Janus Corporation has now received a request from a company that could use material L in its production process. Assuming that Janus Corporation could use all of its stock of material L to make product E99D or the company could sell all of its stock of the material at the current scrap price of $3.23 per kilogram, what is the minimum acceptable selling price of material L to the company that could use material L in its own production process?
30. Lampshire Inc. is considering using stocks of an old raw material in a special project. The special project would require all 160 kilograms of the raw material that are in stock and that originally cost the company $1,136 in total. If the company were to buy new supplies of this raw material on the open market, it would cost $7.25 per kilogram. However, the company has no other use for this raw material and would sell it at the discounted price of $6.50 per kilogram if it were not used in the special project. The sale of the raw material would involve delivery to the purchaser at a total cost of $75 for all 160 kilograms. What is the relevant cost of the 160 kilograms of the raw material when deciding whether to proceed with the special project?