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Exam 13: Relevant Information for Special Decisions

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Question 21

Multiple Choice

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Breezy Company is disposing of equipment that was originally purchased for $600,000 and has $240,000 of accumulated depreciation to date. The same equipment would cost $800,000 to replace. What is the total amount of sunk cost?

A) $240,000
B) $360,000
C) $840,000
D) $800,000

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

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Question 22

Multiple Choice

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Which of the following is a true statement regarding product-level costs?

A) Product-level costs are only relevant to a decision when adding a product to a company's product line.
B) Product-level costs are generally relevant to outsourcing decisions.
C) Product-level costs are generally relevant to special order decisions.
D) Product-level costs are incurred to support the entire company.

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

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Question 23

Multiple Choice

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All of the following are variables that could be considered in a decision to outsource a component that is currently being produced in house. Which of the following is not likely to be relevant?

The Mendez Company is trying to decide whether to replace a packing machine that it uses to pack salsa into individual serving size packages. The following information is provided: Required: 1) Compute the increase or decrease in total net income over the five-year period if the company chooses to buy the new machine. 2) Compute the impact on the company's net income in the first year if the current machine is replaced. Do not take depreciation into account. 3) Under what circumstances might a manager not take the action that is in the best interest of the firm in the long run?

Natalie purchased a concert ticket recently for $50. She is trying to decide whether to drive, take a taxi, or ride the public transit bus. The cost of driving to the concert is a sunk cost because Natalie purchased her car several years ago.

Western Classics Publishing Company produces updated versions of literary classics targeted for children. Its book binding machines are capable of producing 50 books per hour. The unit-related cost of producing books is $2.50, and Western Classics sells its books for $9.50 each. Reading Ready Publishing has asked the company to produce 10,000 copies of a book for $7.50. Western Classics estimates that unit-level costs for the new book will be $3.00, and due to the size of the book, its binding machines will only be able to produce 20 books per hour. Western Classics has a total of 5,000 machine hours of capacity. In addition, to complete the special order, Western Classics will have to purchase an additional special-purpose machine that will cost $8,000. Required: Assume that existing demand for Western Classics' children's classics is 230,000 units and that the special order has to be either taken in full or rejected. Prepare an analysis that indicates whether or not the special order should be accepted.

Which of the following costs is an example of a batch-level cost?

Asset replacement decisions involve:

Costs that are not related to any specific product, batch, or unit of production are referred to as facility-level costs.

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

When evaluating alternatives, what type of costs should be considered?

Qualitative information is only relevant for decision making if it can be quantified.

What characteristics must qualitative information have to be relevant to a particular decision?

Terrain Tents makes backpacking tents. It has the capacity to produce 10,000 tents per year and currently is producing and selling 7,000 tents. Normal selling price for a tent is $450. Unit-level costs are $90 for direct materials, $220 for direct labor, and $15 for other manufacturing costs. Facility-level costs of $110 are allocated to each tent. Terrain has received a special order for 2,500 tents at $320 each. Required: Should Terrain accept the special order? Support your answer with appropriate computations.

Although opportunity costs are not recorded in the financial records, they nevertheless are useful for decision making.

To be relevant in decision making, cost or revenue information must be future-oriented and must not differ between the alternatives.

Only variable costs are relevant for decision making.

All of the following are examples of product-level costs except:

Eastern Company currently produces a component that it uses in making some of its products. The company has calculated the following costs for making the part: $\begin{array} { | l | r | } \hline \text { Unit-level costs } & \\\hline \text { Materials } & \$ 20 \\\hline \text { Labor } & 28 \\\hline \text { Overhead } & 2 \\\hline \text { Allocated facility-level costs } & \underline { 10 } \\\hline \text { Total cost } & \$ 60 \\\hline\end{array}$ Eastern is considering outsourcing the component. A supplier has offered to sell the component to Eastern for $55 each. Eastern needs 10,000 units each year. If Eastern does outsource the component, it can use the facilities to make another product that would yield contribution margin of $60,000 per year. Required: 1) Should Eastern outsource the component? Support your answer with appropriate computations. 2) What qualitative factors should be considered in this decision?

Indicate whether each of the following statements is true or false. 1. To be relevant in decision making, information must be based on past experience. 2. All quantitative information that differs among the decision alternatives under consideration is relevant. 3. Costs that cannot be changed are not relevant to a decision. 4. Sunk costs may appropriately be considered in decision making if they are significant in amount. 5. Differential revenues are relevant in decision making.