OpenStax Principles of Accounting, Volume 2: Managerial Accounting
Chapter 10: Short-Term Decision Making
Principles of Accounting, Volume 2: Managerial Accounting
Chapter 10: Short-Term Decision Making
Multiple Choice
1. LO 10.1 _______________ are the costs associated with not choosing the other alternative.
A. Sunk costs
B. Opportunity costs
C. Differential costs
D. Avoidable costs
Solution
B
2. LO 10.1 Which type of incurred costs are not relevant in decision-making (i.e., they have no
bearing on future events) and should be excluded in decision-making?
A. avoidable costs
B. unavoidable costs
C. sunk costs
D. differential costs
Solution
C
3. LO 10.1 The managerial decision-making process has which of the following as its third step?
A. Review, analyze and evaluate the results of the decision.
B. Decide, based upon the analysis, the best course of action.
C. Identify alternative courses of action to achieve a goal or solve a problem.
D. Perform a comprehensive differential (differential) analysis of potential solutions.
Solution
D
4. LO 10.1 Which of the following is not one of the five steps in the decision-making process?
A. identify alternatives
B. review, analyze, and evaluate decision
C. decide best action
D. consult with CFO concerning variable costs
Solution
D. The first step in decision-making is to identify the objective, and the third step is to perform
comprehensive differential analysis. The CFO should be provided with this information instead
of having input into the cost calculation.
5. LO 10.2 Which of the following is sometimes referred to as the “Anti Chain Store Act”?
A. Sarbanes-Oxley Act
B. Robinson-Patman Act
C. Wright-Patman Act
D. Securities Act of 1939
Solution
B
6. LO 10.2 Jansen Crafters has the capacity to produce 50,000 oak shelves per year and is
currently selling 44,000 shelves for $32 each. Cutrate Furniture approached Jansen about buying
1,200 shelves for bookcases it is building and is willing to pay $26 for each shelf. No packaging
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,OpenStax Principles of Accounting, Volume 2: Managerial Accounting
Chapter 10: Short-Term Decision Making
will be required for the bulk order. Jansen usually packages shelves for Home Depot at a price of
$1.50 per shelf. The $1.50 per-shelf cost is included in the unit variable cost of $27, with annual
fixed costs of $320,000. However, the $1.50 packaging cost will not apply in this case. The fixed
costs will be unaffected by the special order and the company has the capacity to accept the
order. Based on this information, what would be the profit if Jansen accepts the special order?
A. Profits will decrease by $1,200.
B. Profits will increase by $31,200.
C. Profits will increase by $600.
D. Profits will increase by $7,200.
Solution
C. ($26 × 1,200) – ($27 × 1,200) + ($1.50 × 1,200) = $31,200 – $32,400 + $1,800 = $600
7. LO 10.3 ________ is the act of using another company to provide goods or services that your
company requires.
A. Allocating
B. Outsourcing
C. Segmenting
D. Leasing
Solution
B
8. LO 10.3 Which of the following is a disadvantage of outsourcing?
A. freeing up capacity
B. freeing up capital
C. transferring production and technology risks
D. limiting ability to upsize or downsize production
Solution
D
9. LO 10.3 Which of the following is not a qualitative decision that should be considered in an
outsourcing decision?
A. employee morale
B. product quality
C. company reputation
D. relevant costs
Solution
D
10. LO 10.4 Which of the following is one of the two approaches used to analyze data in the
decision to keep or discontinue a segment?
A. comparing contribution margins and fixed costs
B. comparing contribution margins and variable costs
C. comparing gross margin and variable costs
D. comparing total contribution margin under each alternative
Solution
A
11. LO 10.4 When should a segment be dropped?
A. only when the decrease in total contribution margin is less than the decrease in fixed cost
B. only when the decrease in total contribution margin is equal to fixed cost
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,OpenStax Principles of Accounting, Volume 2: Managerial Accounting
Chapter 10: Short-Term Decision Making
C. only when the increase in total contribution margin is more than the decrease in fixed
cost
D. only when the decrease in total contribution margin is less than the decrease in variable
cost
Solution
A
12. LO 10.4 Youngstown Construction plans to discontinue its roofing segment. Last year, this
segment generated a contribution margin of $65,000 and incurred $70,000 in fixed costs.
Discontinuing the segment will allow the company to avoid half of the fixed costs. What effect is
expected to occur to the company’s overall profit?
A. a decrease of $5,000
B. a decrease of $30,000
C. a decrease of $5,000
D. an increase of $30,000
Solution
B. ($65,000) + 35,000 = ($30,000)
13. LO 10.5 Mallory’s Video Supply has changed its focus tremendously and as a result has
dropped the selling price of DVD players from $45 to $38. Some units in the work-in-process
inventory have costs of $30 per unit associated with them, but Mallory can only sell these units
in their current state for $22 each. Otherwise, it will cost Mallory $11 per unit to rework these
units so that they can be sold for $38 each. How much is the financial impact if the units are
processed further?
A. $5 per unit profit
B. $16 per unit profit
C. $3 per unit loss
D. $12 per unit loss
Solution
A. $22 + $11 = $33; $38 − $33 = $5 profit.
14. LO 10.6 A company produces two products, E and F, in batches of 100 units. The production
and cost data are:
The company can only perform 12,000 set-ups each period yet there is unlimited demand for
each product. What is the differential profit from producing product E instead of product F for
the year?
A. $216,000
B. $204,000
C. $12,000
D. $54,000
Solution
C. [$450 × (12,000 ÷ 25)] – [$340 × (12,000 ÷ 20)] = $216,000 − $204,000 = $12,000.
15. LO 10.6 When operating in a constrained environment, which products should be produced?
A. products with the highest contribution margin per unit
B. products with the highest contribution margin per unit of the constrained process
C. products with the highest selling price
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, OpenStax Principles of Accounting, Volume 2: Managerial Accounting
Chapter 10: Short-Term Decision Making
D. products with the lowest allocated joint cost
Solution
B
Questions
1. LO 10.1 Your roommate at school believes that all fixed costs are always avoidable. Do you
agree? How would you explain your point of view to your roommate?
Solution
Primarily disagree, but there are a few times where fixed costs can be avoided or partially
avoided. Variable costs are avoidable costs since variable costs do not exist if the product is no
longer made, or if the portion of the business (such as a segment or division) that generated the
variable costs ceases to operate. Fixed costs, on the other hand, may be unavoidable, partially
unavoidable, or avoidable only in certain circumstances. When a company discontinues a
product or service, certain fixed costs may not be required.
2. LO 10.1 Explain how to differentiate short-term decisions from long-term decisions of a
business and the changes in analyses that influence these decisions.
Solution
Short-term decisions often address a temporary circumstance or an immediate need, whereas
long-term decisions are more aligned with permanent problem-solving and meeting of strategic
goals. Not only is there a difference in the general nature of these decisions but also in the time
frame upon which these decisions typically have a financial impact on the company. A short-
term decision, such as to make or buy a product, can relatively easily or quickly be changed if
the decision turns out to be a bad one. However, a long-term decision, such as building a new
factory, affects the finances of the company for a longer period of time and is a more difficult
decision to reverse or change.
3. LO 10.1 Felipe’s Restaurant and Pie Shop needs help defining the costs for his business. He
also wants to know which costs are relevant or irrelevant to his decision. Identify each cost as
relevant or irrelevant. Then identify the type of cost (sunk, fixed, variable, or opportunity).
Cost Relevant or Sunk, Fixed, Variable, or
Irrelevant? Opportunity?
Rent
Baker wages
Felipe’s culinary school tuition
Berries for pies
Painting dining area last year
Felipe’s decision not to attend
graduate school
Solution
Sunk, Fixed, Variable,
Cost Relevant or Irrelevant
or Opportunity?
Rent Relevant Fixed
Baker wages Relevant Variable
Felipe’s culinary school tuition Irrelevant Sunk
Berries for pies Relevant Variable
Painting dining area last year Irrelevant Sunk
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Chapter 10: Short-Term Decision Making
Principles of Accounting, Volume 2: Managerial Accounting
Chapter 10: Short-Term Decision Making
Multiple Choice
1. LO 10.1 _______________ are the costs associated with not choosing the other alternative.
A. Sunk costs
B. Opportunity costs
C. Differential costs
D. Avoidable costs
Solution
B
2. LO 10.1 Which type of incurred costs are not relevant in decision-making (i.e., they have no
bearing on future events) and should be excluded in decision-making?
A. avoidable costs
B. unavoidable costs
C. sunk costs
D. differential costs
Solution
C
3. LO 10.1 The managerial decision-making process has which of the following as its third step?
A. Review, analyze and evaluate the results of the decision.
B. Decide, based upon the analysis, the best course of action.
C. Identify alternative courses of action to achieve a goal or solve a problem.
D. Perform a comprehensive differential (differential) analysis of potential solutions.
Solution
D
4. LO 10.1 Which of the following is not one of the five steps in the decision-making process?
A. identify alternatives
B. review, analyze, and evaluate decision
C. decide best action
D. consult with CFO concerning variable costs
Solution
D. The first step in decision-making is to identify the objective, and the third step is to perform
comprehensive differential analysis. The CFO should be provided with this information instead
of having input into the cost calculation.
5. LO 10.2 Which of the following is sometimes referred to as the “Anti Chain Store Act”?
A. Sarbanes-Oxley Act
B. Robinson-Patman Act
C. Wright-Patman Act
D. Securities Act of 1939
Solution
B
6. LO 10.2 Jansen Crafters has the capacity to produce 50,000 oak shelves per year and is
currently selling 44,000 shelves for $32 each. Cutrate Furniture approached Jansen about buying
1,200 shelves for bookcases it is building and is willing to pay $26 for each shelf. No packaging
Page 1 of 35
,OpenStax Principles of Accounting, Volume 2: Managerial Accounting
Chapter 10: Short-Term Decision Making
will be required for the bulk order. Jansen usually packages shelves for Home Depot at a price of
$1.50 per shelf. The $1.50 per-shelf cost is included in the unit variable cost of $27, with annual
fixed costs of $320,000. However, the $1.50 packaging cost will not apply in this case. The fixed
costs will be unaffected by the special order and the company has the capacity to accept the
order. Based on this information, what would be the profit if Jansen accepts the special order?
A. Profits will decrease by $1,200.
B. Profits will increase by $31,200.
C. Profits will increase by $600.
D. Profits will increase by $7,200.
Solution
C. ($26 × 1,200) – ($27 × 1,200) + ($1.50 × 1,200) = $31,200 – $32,400 + $1,800 = $600
7. LO 10.3 ________ is the act of using another company to provide goods or services that your
company requires.
A. Allocating
B. Outsourcing
C. Segmenting
D. Leasing
Solution
B
8. LO 10.3 Which of the following is a disadvantage of outsourcing?
A. freeing up capacity
B. freeing up capital
C. transferring production and technology risks
D. limiting ability to upsize or downsize production
Solution
D
9. LO 10.3 Which of the following is not a qualitative decision that should be considered in an
outsourcing decision?
A. employee morale
B. product quality
C. company reputation
D. relevant costs
Solution
D
10. LO 10.4 Which of the following is one of the two approaches used to analyze data in the
decision to keep or discontinue a segment?
A. comparing contribution margins and fixed costs
B. comparing contribution margins and variable costs
C. comparing gross margin and variable costs
D. comparing total contribution margin under each alternative
Solution
A
11. LO 10.4 When should a segment be dropped?
A. only when the decrease in total contribution margin is less than the decrease in fixed cost
B. only when the decrease in total contribution margin is equal to fixed cost
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,OpenStax Principles of Accounting, Volume 2: Managerial Accounting
Chapter 10: Short-Term Decision Making
C. only when the increase in total contribution margin is more than the decrease in fixed
cost
D. only when the decrease in total contribution margin is less than the decrease in variable
cost
Solution
A
12. LO 10.4 Youngstown Construction plans to discontinue its roofing segment. Last year, this
segment generated a contribution margin of $65,000 and incurred $70,000 in fixed costs.
Discontinuing the segment will allow the company to avoid half of the fixed costs. What effect is
expected to occur to the company’s overall profit?
A. a decrease of $5,000
B. a decrease of $30,000
C. a decrease of $5,000
D. an increase of $30,000
Solution
B. ($65,000) + 35,000 = ($30,000)
13. LO 10.5 Mallory’s Video Supply has changed its focus tremendously and as a result has
dropped the selling price of DVD players from $45 to $38. Some units in the work-in-process
inventory have costs of $30 per unit associated with them, but Mallory can only sell these units
in their current state for $22 each. Otherwise, it will cost Mallory $11 per unit to rework these
units so that they can be sold for $38 each. How much is the financial impact if the units are
processed further?
A. $5 per unit profit
B. $16 per unit profit
C. $3 per unit loss
D. $12 per unit loss
Solution
A. $22 + $11 = $33; $38 − $33 = $5 profit.
14. LO 10.6 A company produces two products, E and F, in batches of 100 units. The production
and cost data are:
The company can only perform 12,000 set-ups each period yet there is unlimited demand for
each product. What is the differential profit from producing product E instead of product F for
the year?
A. $216,000
B. $204,000
C. $12,000
D. $54,000
Solution
C. [$450 × (12,000 ÷ 25)] – [$340 × (12,000 ÷ 20)] = $216,000 − $204,000 = $12,000.
15. LO 10.6 When operating in a constrained environment, which products should be produced?
A. products with the highest contribution margin per unit
B. products with the highest contribution margin per unit of the constrained process
C. products with the highest selling price
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, OpenStax Principles of Accounting, Volume 2: Managerial Accounting
Chapter 10: Short-Term Decision Making
D. products with the lowest allocated joint cost
Solution
B
Questions
1. LO 10.1 Your roommate at school believes that all fixed costs are always avoidable. Do you
agree? How would you explain your point of view to your roommate?
Solution
Primarily disagree, but there are a few times where fixed costs can be avoided or partially
avoided. Variable costs are avoidable costs since variable costs do not exist if the product is no
longer made, or if the portion of the business (such as a segment or division) that generated the
variable costs ceases to operate. Fixed costs, on the other hand, may be unavoidable, partially
unavoidable, or avoidable only in certain circumstances. When a company discontinues a
product or service, certain fixed costs may not be required.
2. LO 10.1 Explain how to differentiate short-term decisions from long-term decisions of a
business and the changes in analyses that influence these decisions.
Solution
Short-term decisions often address a temporary circumstance or an immediate need, whereas
long-term decisions are more aligned with permanent problem-solving and meeting of strategic
goals. Not only is there a difference in the general nature of these decisions but also in the time
frame upon which these decisions typically have a financial impact on the company. A short-
term decision, such as to make or buy a product, can relatively easily or quickly be changed if
the decision turns out to be a bad one. However, a long-term decision, such as building a new
factory, affects the finances of the company for a longer period of time and is a more difficult
decision to reverse or change.
3. LO 10.1 Felipe’s Restaurant and Pie Shop needs help defining the costs for his business. He
also wants to know which costs are relevant or irrelevant to his decision. Identify each cost as
relevant or irrelevant. Then identify the type of cost (sunk, fixed, variable, or opportunity).
Cost Relevant or Sunk, Fixed, Variable, or
Irrelevant? Opportunity?
Rent
Baker wages
Felipe’s culinary school tuition
Berries for pies
Painting dining area last year
Felipe’s decision not to attend
graduate school
Solution
Sunk, Fixed, Variable,
Cost Relevant or Irrelevant
or Opportunity?
Rent Relevant Fixed
Baker wages Relevant Variable
Felipe’s culinary school tuition Irrelevant Sunk
Berries for pies Relevant Variable
Painting dining area last year Irrelevant Sunk
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