Chapter 11

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Chapter 11
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  1. 1. A cost is not relevant for decision making if it:
    A. Does not differ for each option available to the decision maker.
  2. 2. Variable costs will generally be relevant for decision making because they:
    C. Have not been committed and differ between options.
  3. 3. Fixed costs will often be irrelevant
    for decision making because they:
    C. Typically do not differ between and among decision alternatives.
  4. 4. A special sales order is:
    C. A one-time opportunity to sell a specified quantity of a product or service.
  5. 5. Special sales orders:
    B. Typically come directly from the customer rather than normal sales or distribution channels.
  6. 6. Committed or "sunk" costs are
    generally:
    D. Those that have been incurred in the past.
  7. 7. All the following are characteristic of
    relevant costs except:
    E. They are inventory-related costs.
  8. 8. The major problem with relevant cost determination is that it fails to recognize the:
    B. Long-term nature of most product-related decisions.
  9. 9. Depreciation expense is a relevant cost in a decision only in the context of:
    C. Reducing the tax liability of the organization.
  10. 10. Operating at or near full capacity will require a firm considering a special sales order
    to potentially recognize the:
    A. Opportunity cost from lost sales.
  11. 11. Done on a regular basis, relevant cost pricing in special order decisions can erode
    normal pricing policies and lead to:


    B. A decrease in the firm's long-term profitability.
  12. 12. The value chain analysis used in connection with the make-or-buy decision often leads a
    firm to make use of:

    C. Outsourcing options.
  13. 13. The decision to keep or drop products or services involves strategic consideration of all the following except:
    E. The desired inventory levels of the product.
  14. 14. A useful device for solving production problems involving multiple products and limited resources is:
    B. Contribution per unit of scarce resource.
  15. 15. One of the behavioral problems with relevant cost analysis is the overemphasis on:
    A. Short-term goals.
  16. 16. When using relevant cost analysis, it is a common mistake for untrained managers to include in their analysis all the following except:
    D. Unit variable costs.
  17. 17. Which one of the following is correct for determining relevant costs for decision-making?
    A. Differential.
  18. 18. Which one of the following is most descriptive of a strategic analysis conducted as part of a decision analysis?
    B. Customer focus.
  19. 19. Which one of the following issues would least likely be addressed during the regular review of product profitability?
    C. Which products provide the greatest contribution margin per unit of the scarce resource
  20. 20. Determination of the optimum short-term product mix needs to include an analysis of:
    B. Production constraints.
  21. 22. A boat, costing $108,000 and uninsured, was wrecked the very first day it was used. It can either be disposed of for $11,000 cash and be replaced with a similar boat costing
    $110,000, or rebuilt for $98,000 and be brand new as far as operating characteristics and looks are concerned. A relevant cost analysis of the decision to replace the boat shows:
    C. A $1,000 cost advantage associated with the decision to fix the old boat.
  22. 25. Joint (common) costs in a joint production process are relevant for determining:
    A. Whether to produce at all.
  23. 26. In a joint production process, the allocation of joint (common) costs to the joint products is
    needed:
    A. To meet external reporting requirements (i.e., for financial statement preparation purposes).
  24. 27. In a joint production process, joint product costs are:
    D. Those that are incurred before the point in the process when individual products arise.
  25. 28. Which of the following statements regarding a joint production process is NOT true?
    C. Costs incurred up to the split-off point are referred to as joint production costs.
  26. 29. To make a decision whether to accept
    or reject a special sales order, managers need critical information about all the following except:
    B. Prior period operating costs.
  27. 34. In a make-or-buy decision:
    B. Fixed costs that can be avoided in the future are relevant.
  28. 42. In deciding whether to accept or a reject a special sales order, which of the following costs are likely relevant to the decision?
    C. A portion of batch-level costs.
  29. 45. Lyman Company has the opportunity to
    increase annual credit sales $100,000 by selling to a new, riskier group of customers. The expenses of collecting credit sales are expected to be 15 percent of credit sales. The company's manufacturing and selling expenses are 70% of sales, and its effective tax rate is 40%. If Lyman should accept this
    opportunity, the company's after-tax profits would increase by:
    A. $9,000.
  30. 46. The opportunity cost of making a component part in a factory with no excess capacity is the:
    E. Net benefit foregone from the best alternative use of the capacity required.
  31. 47. The opportunity cost of making a component part in a factory with excess capacity for which there is no alternative use is:
    E. Zero.
  32. 51. For short-run product-mix decisions, relevant costs (for the seller) include
    short-run costs plus any costs.
    B. variable; opportunity.
  33. 52. Opportunity costs:
    B. Unless zero are always relevant for decision making.
  34. 53. The contribution margin per machine hour is calculated as:
    E. Selling price per unit less total variable cost per unit, divided by number of machine-hours per unit.
  35. 54.   When there is limited capacity, the minimum acceptable price for a special sales order will equal the from the product that is sacrificed plus the variable costs of the ordered product.
    D. Contribution margin.
  36. 55. When a firm has surplus capacity as opposed to constrained capacity (i.e., resource constraints), relevant costs for decision-making (e.g., determining short-term product mix) will be:
    A. Lower.
  37. 56. In the situation where a firm
    produces multiple products and the firm has a single resource constraint (e.g., machine hours), the most profitable use of available capacity (machine hours) requires that we assess:
    D. The contribution margin of each product per machine hour.
  38. 57. The practice of setting prices below average variable cost and plans to raise prices later to recover the losses from the lower prices, is referred to as:
    E. Predatory pricing.
  39. 58. When deciding to purchase a new cutting machine or continue using the existing
    machine, the following costs are all relevant EXCEPT the:
    A. $60,000 cost of the old machine.
  40. 59. Relevant costs for a make-or-buy decision for a component part include all of the following EXCEPT:
    D. Special machinery for the part that has no resale value.
  41. 60. When deciding whether to discontinue a segment of a business, managers should
    focus on:
    E. The total contribution margin generated by the segment relative to any traceable (avoidable) fixed costs associated with the segment.
  42. 61. In deciding whether to drop or keep a product line, all of the following are relevant to the decision EXCEPT:
    A. The level of unavoidable fixed costs.
  43. 63. Employee morale and social responsibility
    represent two examples of:
    A. Qualitative decision factors.
  44. 64. Which of the following items does NOT have to be considered when evaluating a make-or-buy decision?
    C. Net book value of the production equipment used to make the item in question.
  45. 65. Relevant costs in a make-vs.-buy
    decision of a part include:
    C.Currently used manufacturing capacity that has alternative uses if the part is outsourced.
  46. 73. Smith Co., maker of high-quality eyewear, incurs fixed costs of $18 and variable costs of $36 in making one unit
    of its matrix line of sunglasses. Smith Co.'s major supplier has offered to make all 100,000 matrix sunglasses for $44 each. If Smith accepts the offer of the supplier, Smith will save $4 per unit in fixed costs. Based on this information, should Smith Co. make or buy the sunglasses and how much will be
    saved?
    C. Smith Co. should make the sunglasses in order to save $400,000.
  47. 74. Orange Computer Co. is quickly
    becoming a major player in the personal computer market. The company currently
    has multiple companies producing products that go into an Orange computer. This practice of having an outside firm provide a function for Orange Computer Co. is called:
    A. Outsourcing.
  48. 75. One of the key management functions is to perform a regular review of product profitability. Which question(s) below would not be asked when performing the analysis?
    E. What was the product manager paid last year?
  49. 76. Value streams are useful in decision-making because:
    C. Special orders can be evaluated within the context of the value stream.
  50. 77. Zippy Company has a product which it
    currently sells in the market for $50 per unit. Zippy has developed a new feature which, if added to the existing product, will allow Zippy to receive a price of $65 per unit. The cost of adding this new feature is $26,000 and Zippy
    expects to sell 1,600 units over the next year. What is the effect on operating income of adding the feature to the product?
    E. $2,000 decrease in operating income.
  51. 78. The Robinson-Patman Act, administered by the U.S. Federal Trade Commission,
    addresses pricing that could substantially damage the competition in an industry. This pricing is called:
    B. Predatory pricing.
  52. 80. In deciding between alternative choices for a given situation, managers usually employ a five-step process. Which of the following is not a step in the decision-making process?
    E. Review the audit report.
  53. 81. Maxwell Manufacturing is contemplating
    the purchase of a new machine to replace a machine that has been in use for seven years. The old machine has a net book value of $50,000 and still has five years of useful life remaining. The old machine has a current market value of $5,000, and would have no market value after five years. The variable operating costs and depreciation expenses (straight-line) are $135,000 per year. The new machine will cost $90,000, has an estimated useful life of five years with zero
    disposal value after five years, and an annual operating expense of $118,000 (including straight-line depreciation). Considering the five years in total and ignoring the time value of money and income taxes, what is the difference in total relevant decision-making costs if the old machine is replaced?
    D. $40,000.
  54. 82. You just bought a new car for $125,000. Before you had time to get insurance, the car was wrecked. Weird Wally offers to take it off your hands for $10,000. You can then purchase a similar model for $128,000. A body-shop with an excellent reputation offers to rebuild it for $90,000 and loan you a similar model while the vehicle is being rebuilt. Once rebuilt, the body-shop claims, it will run like a new car and nobody will be able to tell the difference. What would you do from a financial point of view?
    B. Rebuild to save $28,000.
  55. 83. A truck, costing $25,000 and uninsured, was wrecked the very first day it was used. It can either be disposed of for $5,000 cash and be replaced with a similar truck costing $27,000, or rebuilt for $20,000 and be brand new as far as operating characteristics and looks are concerned. The net relevant cost of the replacing option is:
    C. $22,000.
  56. 84. A truck, costing $25,000 and
    uninsured, was wrecked the very first day it was used. It can either be disposed of for $5,000 cash and be replaced with a similar truck costing $27,000, or rebuilt for $20,000 and be brand new as far as operating characteristics and looks are concerned. The best choice provides a net cost savings of:
    A. $2,000.
  57. 85. The mathematical tool used to determine the optimum short-term product (or service) mix is:
    B. Linear programming.
  58. 86. The make-or-buy decision can apply to decisions about all of the following except:
    E. Strategic management.
  59. 87. A decision bias is an inherent tendency of most decision makers that leads to incorrect decisions. An example of decision bias is:
    B. Failure to properly identify sunk costs as irrelevant.
  60. 88. In a sell-or-process-further decision, joint production costs:
    A. Are irrelevant to the decision.
  61. 89. In a manufacturing environment the best short-term profit-maximizing approach would be to:
    D. Maximize the contribution margin per unit times the number of units sold.
  62. 90. A company's approach to a make-or-buy decision:
    C. Involves an analysis of avoidable costs.
  63. 91. Sunk costs:
    B. In and of themselves are not relevant to decision making.
  64. 93. If the plugs are purchased and the facility rented, Regis Company wishes to realize $100,000 in net savings annually. To achieve this goal, the minimum annual rent on the
    facility must be:
    D. $190,000.
  65. 94. Costs relevant to a make-versus-buy decision include variable manufacturing costs as well as:
    A. Avoidable fixed costs.
  66. 95. Opportunity costs are:
    E. Relevant to decision making.
  67. 96. Relevant or differential cost analysis:
    D. Considers all variable and fixed costs as they change with each decision alternative.
  68. 99. Which of the following costs would be relevant in short-term decision making?
    A. Incremental fixed costs.
  69. 100.When a decision is made in an organization, it is selected from a group of
    alternative courses of action. The loss associated with choosing the alternative that does not maximize the benefit is the:
    C. Opportunity cost.
  70. 101.The best way to allocate scare resources to attain a specific objective, such as the maximization of operating income, is:
    E. Linear programming.
  71. 102.Sensitivity analysis in linear programming is used to:
    D. Determine how the optimal decision would react to changes in parameters.
  72. 103.The shadow price in a linear programming model is:
    C. The price one would be willing to pay for an additional unit of the scarce resource.
  73. 107.Which one of the following is most relevant to a manufacturing equipment-replacement decision?
    B. Disposal (salvage) value of the old equipment.
  74. 108. In situations when management must
    decide on accepting or rejecting one-time-only special orders, where there is
    sufficient idle capacity, which one of the following is not relevant to the decision?
    A. Absorption costs.
  75. 109.Southern Company packages and sells
    nuts in cans. Pecans, cashews, Brazil nuts, hazelnuts, and peanuts are packaged individually as well in combinations and mixtures. Southern wants to package
    the nuts so that it can maximize its operating profit while considering market
    demand. In addition, there are limited supplies for some types of nuts. The
    technique that Southern should employ is:
    E. Linear programming.
  76. 111.United Industries manufactures three
    products in its highly automated factory. The products are all popular with demand far exceeding the company's ability to supply the marketplace. To maximize (short-­term) operating income, management should focus on each product's:
    E. Contribution per machine hour.

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