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Exam 13: Relevant Information for Special Decisions

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Question 71

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For purposes of decision making, avoidable costs are costs that:

A) were incurred in the past.
B) will not be incurred in the future, regardless of the alternative chosen.
C) differ among alternatives.
D) None of these answers are correct.

E) A) and C)
F) B) and D)

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Question 72

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The benefits sacrificed when one alternative is chosen over another are referred to as:

A) Avoidable costs.
B) Opportunity costs.
C) Sacrificial costs.
D) Beneficial costs.

E) B) and C)
F) A) and D)

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Question 73

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Indicate whether each of the following statements is true or false.

The Mighty Music Company produces and sells a desktop speaker for $100. The company has the capacity to produce 50,000 speakers each period. At capacity, the costs assigned to each unit are as follows: $\begin{array} { l c } \text { Unit level costs } & \$ 45 \\\text { Product level costs } & \$ 15 \\\text { Facility level costs } & \$ 5\end{array}$ The company has received a special order for 500 speakers. If this order is accepted, the company will have to spend $15,000 on additional costs. Assuming that no sales to regular customers will be lost if the order is accepted, at what selling price will the company be indifferent between accepting and rejecting the special order?

Great Outdoors Company operates a store in downtown Denver that has five departments including a fishing department. If the fishing department is closed, the store manager's position will not be affected, but if the entire store is closed, the manager will be terminated. Which of the following lessons should be learned from this example?

Osprey Company is trying to decide between the following two alternatives: $\begin{array}{lrc}&\text { Alternative A }&\text { Alternative B }\\\text { Projected revenue } & \$ 50,000 & \$ 60,000 \\\text { Direct material } & 6,000 & 12,000 \\\text { Assembly labor } & 9,000 & 9,000 \\\text { Production supervisor's salary } & 10,000 & 10,000\\\text { Facility-related costs}&\underline{10,000}&\underline{15,000}\\\text { Profit}&\underline{\$15,000}&\underline{\$14,000}\end{array}$ Which of the following conclusions can be drawn from this example?

The practice of buying goods and services from other companies is commonly known as vertical integration.

The Mansfield Company manufactures and sells two lines of fishing rods. During the most recent accounting period, the Pro line and the Novice line sold 15,000 and 2,000 units, respectively. The company's most recent financial statements are shown below: Based on this information, the company should:

An alternative under consideration involves incurring $50 in costs to generate $60 in revenue. The differential revenue for this alternative is $10.

For an equipment replacement decision, what costs are relevant, and what costs are not relevant?

Ethan paid $3 for a bottle of ThirstAid. Later, while on a hiking trip, he was offered $8 for the ThirstAid. Select the correct statement from the following:

Chavez Company is considering purchasing new equipment or overhauling its existing equipment. The manager has gathered the following information: Required:Identify the sunk costs associated with this decision.Compute the increase or decrease in total income over the five-year period if the company chooses to buy the new equipment.Compute the increase or decrease in total income over the five-year period if the company chooses to overhaul its existing machinery.What is your recommendation for this decision?

Indicate whether each of the following statements is true or false.

The cost that is avoided when a company eliminates a single item of a product or service is a:

Indicate whether each of the following statements is true or false.

Discuss why qualitative characteristics must be considered when making decisions such as special orders, outsourcing, elimination and replacement decisions, and scarce resource allocation decisions. Give examples.

Special order decisions involve: