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Exam 13: Relevant Information for Special Decisions

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Question 41

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Jason is trying to decide which one of two job offers he will accept. Several items are presented below: Which of the above items would be considered relevant costs?

A) (1) , (3) , (5)
B) (2) , (4)
C) (5)
D) None of these.

E) All of the above
F) C) and D)

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Question 42

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ServicePro provides two kinds of services. During the most recent accounting period, the two service lines produced the following operating results: If the company stops providing Service 2:

A) The company's income will decrease by $1,500 per year.
B) The company's income will increase by $1,500 per year.
C) The company's income will decrease by $3,500 per year.
D) The company's income will increase by $3,500 per year.

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

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Question 43

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Select the correct statement regarding relevant costs and revenues.

Mountain Gear has been using the same machines to make its name brand clothing for the last five years. A cost efficiency consultant has suggested that production costs may be reduced by purchasing more technologically advanced machinery. The old machines cost the company $100,000. The old machines presently have a book value of $60,000 and a market value of $6,000. They are expected to have a five-year remaining life and zero salvage value. The new machines would cost the company $50,000 and have operating expenses of $9,000 a year. The new machines are expected to have a five-year useful life and no salvage value. The operating expenses associated with the old machines are $15,000 a year. The new machines are expected to increase quality, justifying a price increase, and thereby increasing sales revenue by $5,000 a year. Select the true statement.

Safety Products currently outsources an electrical switch that is a component in its sprinkler systems. The switches are purchased for $20 each. The company is considering making the switches internally and has conducted a study to determine the costs involved. The costs below are projected annual production costs: $\begin{array} { | l | r | } \hline \text { Unit-level material cost } & \$ 3 \\\hline \text { Unit-level labor cost } & \$ 2 \\\hline \text { Unit-level overhead } & \$ 18 \\\hline \text { Batch-level cost } ( 5,000 \text { units per batch) } & \$ 5,000 \\\hline \text { Product-level supervisory salaries } & \$ 37,500 \\\hline \text { Allocated facility-level costs } & \$ 20,000 \\\hline\end{array}$ Assume that the company needs 15,000 of the switches, which would be produced in three batches. Assume also that the company will still be operating within the relevant range. If Safety decides to make the parts under these conditions, the total relevant costs will be:

Relevant costs are frequently called unavoidable costs.

The market value of equipment owned by a company is a sunk cost and should not be taken into account in deciding whether or not to replace the equipment.

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

Relevant costs are often referred to as:

Select the term from the list provided that best matches each of the following descriptions. Put the number of the term in the column for Your Answer. $\begin{array}{|l|l|l|}\hline \begin{array}{l}\text { Your } \\\text { Answer }\end{array} & \text { Description or Definition } & \text { Term } \\\hline & \begin{array}{l}\text { A. Efforts to open a bott kneck in order to allow more } \\\text { products or services to be produced or sold }\end{array} & \begin{array}{l}1 . \text { Albocation of scarce } \\\text { resources }\end{array} \\\hline &\text { B. Costs incurred on belalf of the whole company } & \text { 2. Bottleneck } \\\hline &\begin{array}{l}\text { C. Decisions which consider linited resources in } \\\text { determining which products to produce and sell }\end{array} & \text { 3. Certified suppliers } \\\hline & \begin{array}{l}\text { D. The numbers in decision making that are subject to } \\\text { mathematical manipulation }\end{array} & \begin{array}{l}\text { 4. Equipment rephcement } \\\text { decisions }\end{array} \\\hline & \begin{array}{l}\text { E. Evahuating whether an existing machine should be } \\\text { traded in for a newer machine }\end{array} & 5 . \text { Facility-level costs } \\\hline & \begin{array}{l}\text { F. An offer from someone other than a regular custoer } \\\text { to buy goods or services at bebw-normal selling prices }\end{array} & \text { 6. Quantitative characteristics } \\\hline& \begin{array}{l}\text { G. The attainment of control over the entire spectrum of } \\\text { business activity from production to sales }\end{array} & \text { 7. Relaxing the constraints } \\\hline & \begin{array}{l}\text { H. Constraint liming the capacity of the company to } \\\text { produce or sell its products }\end{array} & \text { 8. Special order decision } \\\hline &\begin{array}{l}\text { I. Companies that provide buyers with preferred } \\\text { customer status in exchange for guaranteed purchase }\end{array} & \text { 9. Theory of constraints } \\\hline &\begin{array}{l}\text { J. A practice used by many business to increase } \\\text { profitability through the management of bottlenecks }\end{array} & 10 . \text { Vertical integration } \\\hline\end{array}$

Jack currently works for a law firm full time and earns $60,000 a year. He is thinking of quitting his job to pursue a medical degree. Medical school will cost him $100,000 per year. If Jack quits his job and goes to medical school, the salary he currently earns would be considered what type of cost?

Select the correct statement regarding relevant costs and revenues.

A potential danger from outsourcing is that a company may become too dependent on the supplier.

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

Indicate whether each of the following statements is true or false. 1. Depreciation expense on a building or equipment is an example of a sunk cost. 2. Addison Company is using a hole-punching machine that originally cost $80,000 and has a current market value of $45,000. The $45,000 is a measure of the opportunity cost for continuing to use the machine. 3. The purchase price of a old machine is relevant to the decision of whether or not to replace an old machine. 4. The estimated salvage value of new equipment is relevant to the decision to purchase the new equipment even though it will not happen until the end of the asset's useful life. 5. A department manager who feels pressured to maintain short-term profitability may decide to keep old equipment, even when replacing the equipment would be in the company's best interest.

Direct labor is an example of a product-level cost.

Max bought a ticket to the championship baseball game for $75. Someone approaches him outside the stadium and offers him $175 for his ticket. If Max decides to go to the game, instead of selling his ticket, how much does it cost Max to go to the game?

Scholastic Tours is trying to decide which one of two tours it will introduce. The costs and revenues associated with each alternative are listed below: What are the incremental (differential) costs of the Western Tour?

Dapper Dan produces a man's suit that sells for $200. Although the company's production capacity is 3,000 suits per year, only 2,500 suits are currently being produced and sold. At this level of production, the company incurs the following costs: $\begin{array} { | l | r | } \hline \text { Unit-level material cost per suit } & \$ 80 \\\hline \text { Unit-level labor cost per suit } & \$ 40 \\\hline \text { Unit-level overhead per suit } & \$ 20 \\\hline \text { Batch-level set-up cost for each batch of } 500 \text { suits } & \$ 1,200 \\\hline \text { Annual product-level costs } & \$ 15,000 \\\hline \text { Allocated facility-level costs } & \$ 50,000 \\\hline\end{array}$ Easton Clothiers has offered to purchase 500 suits as a one-time special purchase at a price of $135. Required: Prepare a quantitative analysis that indicates whether the special order should be accepted.

Talladega Company manufactures an electric clock radio. The company expects production of 5,000 units this year. Currently, Talladega produces the clock used in the product. Talladega has received an offer from Daytona, Inc., to supply the clock. If Talladega discontinues production of the clock, the company will be able to eliminate its product-level costs because no other products along the same line are produced by the company. However, due to its concern for quality, the company will have to inspect each clock. Various costs and items are described below: Required: For each item in the table, place a check mark or X in the column that best describes the item in the context of the described outsourcing decision. A cost varies if the amount of the cost or the incurrence of the cost differs between the two alternatives: continuing to make the clocks or purchasing the clocks from Daytona.