ADMS 2510 Chapter 13 Relevant Costs for Decision Making Questions and Answers York University

Chapter 13 Relevant Costs for Decision Making 652 Garrison, Managerial Accounting, 12th Edition True/False Questions 1. Fixed costs are sunk costs and are therefore irrelevant in decisions. Answer: False Level: Easy LO: 1 2. A complete income statement must be prepared as part of a differential cost analysis. Answer: False Level: Medium LO: 1 3. Future costs that do not differ between the alternatives in a decision are avoidable costs. Answer: False Level: Medium LO: 1 4. The book value of an old machine is always considered a sunk cost in a decision. Answer: True Level: Easy LO: 1 5. A product that does not cover its allocated share of general corporate administrative expenses should be dropped. Answer: False Level: Easy LO: 2 6. In a decision to drop a product, the product should be charged for rent in proportion to the space it occupies even if the space has no alternative use and the rental payment is unavoidable. Answer: False Level: Easy LO: 2 7. Making rather than buying a part that goes into one of the company's products would increase the company's degree of vertical integration. Answer: True Level: Easy LO: 3 8. In a special order situation that involves using existing idle capacity, opportunity costs are zero. Answer: True Level: Easy LO: 4 Chapter 13 Relevant Costs for Decision Making Garrison, Managerial Accounting, 12th Edition 653 9. 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. Answer: True Level: Easy LO: 5 10. Payment of overtime to a worker in order to relax a production constraint could increase the profits of a company. Answer: True Level: Medium LO: 5 11. In a plant operating at capacity, every machine and person in the plant would be working at the maximum possible rate. Answer: False Level: Hard LO: 5 12. Lumber produced in a lumber mill results in several different products being produced from each log; such products are called joint products. Answer: True Level: Easy LO: 6 13. In a sell or process further decision, an avoidable fixed production cost incurred after the split-off point is relevant to the decision. Answer: True Level: Medium LO: 6 14. Joint processing after the split-off point is profitable if the incremental revenue from such processing exceeds the incremental processing costs. Answer: True Level: Easy LO: 6 15. A cost that is traceable to a segment through activity-based costing is always an avoidable cost for decision making. Answer: False Level: Easy LO: 1 Chapter 13 Relevant Costs for Decision Making 654 Garrison, Managerial Accounting, 12th Edition Multiple Choice Questions 16. Hal Etoesus currently works as the fry guy at Burger Breath Drive Thru but is thinking of quitting his job to attend college full time next semester. Which of the following would be considered an opportunity cost in this decision? A) the cost of the textbooks B) the cost of the cola that Hal will consume during class C) Hal's lost wages at Burger Breath D) both A and B above Answer: C Level: Easy LO: 1 17. Which of the following would be relevant in the decision to sell or throw out obsolete inventory? Direct material Fixed overhead cost assigned cost assigned to the inventory to the inventory A) Yes Yes B) Yes No C) No Yes D) No No Answer: D Level: Medium LO: 1 18. Buff Corp. is considering replacing an old machine with a new machine. Which of the following items is relevant to Buff's decision? (Ignore income tax considerations.) Book value Disposal value of old machine of new machine A) Yes No B) No Yes C) No No D) Yes Yes Answer: B Level: Medium LO: 1 Source: CPA, adapted 19. In a make-or-buy decision, relevant costs include: A) unavoidable fixed costs B) avoidable fixed costs C) fixed factory overhead costs applied to products D) fixed selling and administrative expenses Answer: B Level: Easy LO: 3 Source: CMA, adapted Chapter 13 Relevant Costs for Decision Making Garrison, Managerial Accounting, 12th Edition 655 20. In situations where management must decide between accepting or rejecting a onetime-only special order where there is sufficient idle capacity to fill the order, which one of the following is NOT relevant in making the decision? A) absorption costing unit product costs B) variable costs C) incremental costs D) differential costs Answer: A Level: Easy LO: 4 Source: CMA, adapted 21. When a multi-product factory operates at full capacity, decisions must be made about what products to emphasize. In making such decisions, products should be ranked based on: A) selling price per unit B) contribution margin per unit C) contribution margin per unit of the constraining resource D) unit sales volume Answer: C Level: Easy LO: 5 Source: CMA, adapted 22. Two or more products produced from a common input are called: A) common costs. B) joint products. C) joint costs. D) sunk costs. Answer: B Level: Easy LO: 6 Chapter 13 Relevant Costs for Decision Making 656 Garrison, Managerial Accounting, 12th Edition 23. Product X-547 is one of the joint products in a joint manufacturing process. Management is studying whether to sell X-547 at the split-off point or to process X547 further into Xylene. The following data have been gathered: I. Selling price of X-547 II. Variable cost of processing X-547 into Xylene. III. The avoidable fixed costs of processing X-547 into Xylene. IV. The selling price of Xylene. V. The joint cost of the process from which X-547 is produced. Which of the above items are relevant in a decision of whether to sell the X-547 as is or process it further into Xylene? A) I, II, and IV. B) I, II, III, and IV. C) II, III, and V. D) I, II, III, and V. Answer: B Level: Medium LO: 6 Source: CMA, adapted 24. Wenig Inc. has some material that originally cost $73,500. The material has a scrap value of $45,600 as is, but if reworked at a cost of $6,600, it could be sold for $58,100. 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? A) -$22,000 B) -$67,600 C) $51,500 D) $5,900 Answer: D Level: Medium LO: 1 Source: CIMA, adapted Chapter 13 Relevant Costs for Decision Making Garrison, Managerial Accounting, 12th Edition 657 25. Bosques Corporation has in stock 35,800 kilograms of material L that it bought five years ago for $5.55 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 $1.67 per kilogram. An alternative would be to use material L in one of the company's current products, Q08C, which currently requires 2 kilograms of a raw material that is available for $9.15 per kilogram. Material L can be modified at a cost of $0.78 per kilogram so that it can be used as a substitute for this material in the production of product Q08C. However, after modification, 4 kilograms of material L is required for every unit of product Q08C that is produced. Bosques Corporation has now received a request from a company that could use material L in its production process. Assuming that Bosques Corporation could use all of its stock of material L to make product Q08C or the company could sell all of its stock of the material at the current scrap price of $1.67 per kilogram, what is the minimum acceptable selling price of material L to the company that could use mat