Horngren Ima16 Tif 06 GE

Introduction to Management Accounting, 16e, Global Edition (Horngren)
Chapter 6 Relevant Information for Decision Making with a Focus on Operational

Decisions
6.1 Questions
1) Differential cost is the difference in ________ between two alternatives.

A) average cost
B) marginal cost
C) median cost
D) total cost
Answer: D
Diff: 1
LO: 6-1
AACSB: Reflective thinking skills
Learning Outcome: Use incremental analysis to make short-term decisions
2) Differential revenue is the difference in ________ between two alternatives.

A) average revenue
B) marginal revenue
C) median revenue
D) total revenue
Answer: D
Diff: 1
LO: 6-1
3) Incremental costs are the ________ generated by a proposed alternative.

A) additional revenues
B) additional revenues or reduced costs
C) reduced costs
D) additional costs or reduced revenues
Answer: D
Diff: 2
LO: 6-1
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4) Incremental benefits are the ________ generated by a proposed alternative.
A) reduced revenues
B) additional costs
C) additional profits
D) additional revenues or reduced costs
Answer: D
Diff: 2
LO: 6-1
5) Johnston Company wants to double production of Product X from 1,000 units to 2,000 units. The
variable manufacturing cost per unit is $10. The variable nonmanufacturing cost per unit is $20. There are
no fixed costs. The selling price per unit is $50. What is the incremental cost of the proposed change?
A) $10,000
B) $20,000
C) $30,000
D) $60,000
Answer: C
Diff: 2
LO: 6-1
AACSB: Analytic skills
6) Jeffrey Company wants to double production of Product X from 1,000 units to 2,000 units. The variable
manufacturing cost per unit is $10. The variable nonmanufacturing cost per unit is $20. There are no fixed
costs. The selling price per unit is $50. What is the incremental revenue of the proposed change?
A) $10,000
B) $20,000
C) $30,000
D) $50,000
Answer: D
Diff: 2
LO: 6-1
2
7) Marjorie Company has an idle machine that originally cost $200,000. The book value of the machine is
$100,000. The company is considering three alternative uses of the idle machine:
Alternative 1: Disposal of machine. Disposal value of machine is $50,000.
Alternative 2: Use the idle machine to increase production of Product A. Contribution margin from
additional sales of Product A is estimated to be $60,000.
Alternative 3: Use the idle machine to increase production of Product B. Contribution margin from
additional sales of Product B is estimated to be $70,000.
When considering Alternative 3, what is the opportunity cost of the idle machine?
A) $50,000
B) $60,000
C) $70,000
D) $110,000
Answer: B
Diff: 2
LO: 6-1
8) Marianne Company has an idle machine that originally cost $200,000. The book value of the machine is
When considering Alternative 2, what is the opportunity cost of the idle machine?
A) $50,000
B) $60,000
C) $70,000
D) $110,000
Answer: C
Diff: 2
LO: 6-1
3
9) Nancy Company has an idle machine that originally cost $200,000. The book value of the machine is
When considering the opportunity cost of the idle machine, what is the net financial benefit from
Alternative 3?
A) $10,000
B) $20,000
C) $50,000
D) $70,000
Answer: A
Diff: 2
LO: 6-1
10) When evaluating alternative uses of a capital asset, equivalent decisions are reached using the
opportunity cost approach and ________.
A) cost-volume-profit analysis
B) contribution margin approach
C) absorption costing approach
D) incremental analysis
Answer: D
Diff: 1
LO: 6-1
11) A proposed project will require the use of ten machines in a company. Each machine has five
alternative uses. What is the simplest way to evaluate the desirability of the project?
A) incremental analysis
B) cost-volume-profit analysis
C) opportunity cost approach
D) scarce resource approach
Answer: C
Diff: 2
LO: 6-1
4
12) The key to determining the financial difference between two alternative courses of action is to identify
the ________.
A) opportunity cost of each alternative
B) marginal cost
C) differential costs and revenues
D) joint cost of both alternatives
Answer: C
Diff: 1
LO: 6-1
13) The term opportunity cost applies to a resource that a company ________.
A) is thinking about purchasing
B) already owns only
C) has committed to purchase only
D) already owns or has committed to purchase
Answer: D
Diff: 1
LO: 6-1
14) An opportunity cost is ________.

A) the additional costs generated by a proposed alternative
B) the difference in total cost between two alternatives
C) a cash disbursement in the future
D) the maximum available benefit foregone by using a resource for a particular purpose instead of the
best alternative use
Answer: D
Diff: 1
LO: 6-1
15) The salary foregone by a person who quits a job to start a business is an example of a(n) ________.
A) sunk cost
B) opportunity cost
C) depreciable cost
D) outlay cost
Answer: B
Diff: 2
LO: 6-1
5
16) Nestle Company paid $130,000 for a machine used to mill oats. The annual contribution margin from
oat sales is $60,000. The machine could be sold for $80,000. The opportunity cost of producing the oats is
________.
A) $20,000
B) $60,000
C) $80,000
D) $130,000
Answer: C
Diff: 2
LO: 6-1
17) Sue is considering leaving her current position to open a coffee shop. Sue's current annual salary is
$83,000. Annual coffee shop revenue and costs are estimated at $260,000 and $210,000, respectively. What
is Sue's opportunity cost of staying at her current work position?
A) $50,000
B) $83,000
C) $210,000
D) $343,000
Answer: A
Diff: 2
LO: 6-1
18) Mary is considering leaving her current position to open an ice cream shop. Mary's current annual
salary is $77,000. Annual ice cream shop revenue and costs are estimated at $260,000 and $210,000,
respectively. What is Mary's annual opportunity cost of starting the ice cream shop?
A) $50,000
B) $77,000
C) $210,000
D) $260,000
Answer: B
Diff: 2
LO: 6-1
19) Determining the opportunity cost of a project depends on the alternatives available.
Answer: TRUE
Diff: 1
LO: 6-1
6
20) Opportunity costs and outlay costs are widely used synonyms.
Answer: FALSE
Diff: 1
LO: 6-1
21) Opportunity costs apply to resources that a company has committed to purchase.
Answer: TRUE
Diff: 2
LO: 6-1
6.2 Questions
1) In a make-or-buy decision for a part for a product, which of the following qualitative factors play a
role?
A) quality of purchased part
B) credit terms offered by supplier of part
C) timeliness of delivery of purchased part by supplier
D) all of the above
Answer: D
Diff: 2
LO: 6-2
Learning Outcome: Distinguish between relevant and irrelevant costs, Use incremental analysis to make
short-term decisions
2) What is the most common value-chain function outsourced in most businesses?

A) production process
B) research and development
C) product design
D) corporate support
Answer: D
Diff: 2
LO: 6-2
7
3) In make-or-buy decisions for a part for a product, relevant costs include ________.
A) some variable costs of making the part
B) all variable costs of making the part
C) fixed costs that can be avoided in the future if the part is purchased
D) B and C
Answer: D
Diff: 2
LO: 6-2
4) In a make-or-buy decision, which of the following is the fundamental question that is asked in making
the decision?
A) What is the difference in present costs between the two alternatives?
B) What is the difference in present revenues between the two alternatives?
C) What is the difference in future revenues between the two alternatives?
D) What is the difference in future costs between the two alternatives?
Answer: D
Diff: 2
LO: 6-2
8
5) Bonneville Company is producing a subassembly used in the production of a product. The costs
incurred for the subassembly follow:
Per Unit
Direct materials $6.00
Direct labor 4.00
Variable factory overhead 1.00
Fixed supervisor salary 3.00
Depreciation expense on factory equipment 2.00
General fixed factory overhead allocated 5.00
Total costs $21.00
The above per unit costs are based on 8,000 units. An outside supplier will provide 8,000 subassemblies
for $19 per unit. The supervisor will be terminated if the subassemblies are not produced in house. The
idle factory will be used to manufacture another product with a contribution margin of $60,000. What
should Bonneville do?
A) make the subassemblies and save $20,000
B) make the subassemblies and save $40,000
C) buy the subassemblies and save $20,000
D) buy the subassemblies and save $40,000
Answer: C
Diff: 2
LO: 6-2
6) Blue Company is a small company with limited expertise with customer service. Blue Company has a
contract with New Company to handle all of Blue Company's customer service needs. For Blue
Company, this is an example of ________.
A) technology transfer
B) technology osmosis
C) outsourcing
D) none of the above
Answer: C
Diff: 1
LO: 6-2
9
7) Fixed overhead costs that will continue regardless of a make-or-buy decision are ________ to the make-
or-buy decision.
A) relevant
B) irrelevant
C) opportunity costs
D) incremental costs
Answer: B
Diff: 2
LO: 6-2
8) When making a make-or-buy decision for a part used in a product, which of the following item is
relevant to the decision?
A) variable costs of making the part
B) contribution margin on new products manufactured in idle area not used for making part
C) rental income from idle plant when not making the part
D) all of the above
Answer: D
Diff: 2
LO: 6-2
10
9) Buddy Company manufactures a part for its production cycle. The costs per unit for 5,000 units of the
part are as follows:
Per Unit
Direct labor 5.00
Fixed factory overhead 4.00
Total costs $16.00
The fixed factory overhead costs are avoidable. Spalding Company has offered to sell 5,000 units of the
same part to Buddy Company for $15 per unit. Assuming no other use for the facilities, Buddy Company
should ________.
A) make the part to save $5,000
B) make the part to save $15,000
C) buy the part from Spalding Company to save $5,000
D) buy the part from Spalding Company to save $15,000
Answer: C
Diff: 2
LO: 6-2
10) Benton Company manufactures a part for its production cycle. The costs per unit for 38,000 units of
the part are as follows:
Per Unit
Direct labor 5.00
Total costs $15.00
The fixed factory overhead costs are unavoidable. Assume no other use for the facilities. What is the
highest price Benton Company should pay for the part from an outside supplier?
A) $8
B) $11
C) $12
D) $15
Answer: B
Diff: 2
LO: 6-2
11
11) Christian Company manufactures a part for its production cycle. The annual costs per unit for 5,000
units of the part are as follows:
Per Unit
Direct labor 5.00
Total costs $14.00
The fixed factory overhead costs are unavoidable. Another company has offered to sell 5,000 units of the
same part to Christian Company for $15 per unit. The facilities currently used to make the part could be
rented out to another manufacturer for $20,000 a year. Christian Company should ________.
C) buy the part and rent facilities to save $5,000
D) buy the part and rent facilities to save $15,000
Answer: C
Diff: 2
LO: 6-2
12) Laskowski Company manufactures a part for its production cycle. The annual costs per unit for 5,000
Per Unit
Direct labor 5.00
Total costs $14.00
The fixed factory overhead costs are unavoidable. Hendricks Company has offered to sell 5,000 units of
the same part to Laskowski Company for $14 per unit. The facilities currently used for the part could be
used to make 5,000 units annually of a new product that would contribute $5 a unit to fixed expenses. No
additional fixed costs would be incurred with the new product. Laskowski Company should ________.
C) make the new product and buy the part to save $5,000
D) make the new product and buy the part to save $15,000
Answer: D
Diff: 2
LO: 6-2
12
13) Krakowski Company manufactures a part for its production cycle. The costs per unit for 10,000 units
of the part are as follows:
Per Unit
Direct labor 15.00
Total costs $61.00
The fixed factory overhead costs are unavoidable. Winters Company has offered to sell 10,000 units of the
same part to Krakowski Company for $55 per unit. Assuming no other use for the facilities, Krakowski
Company should ________.
C) buy the part from Winters Company to save $40,000
D) buy the part from Winters Company to save $60,000
Answer: A
Diff: 2
LO: 6-2
14) Corrao Company manufactures a part for its production cycle. The costs per unit for 10,000 units of
the part are as follows:
Per Unit
Direct labor 13.00
Total costs $62.00
The fixed factory overhead costs are unavoidable. Assuming no other use for the facilities, what is the
highest price that Corrao Company should be willing to pay for the part?
A) $33
B) $47
C) $48
D) $62
Answer: C
Diff: 2
LO: 6-2
13
15) Potter Company manufactures a part for its production cycle. The annual costs per unit for 10,000
Per Unit
Direct labor 15.00
Total costs $61.00
The fixed factory overhead costs are unavoidable. Paulson Company has offered to sell 10,000 units of the
same part to Potter Company for $60 per unit. The facilities currently used to make the part could be
rented out to another manufacturer for $100,000 per year. Potter Company should ________.
C) buy the part and rent the facilities to save $10,000
D) buy the part and rent the facilities to save $25,000
Answer: C
Diff: 2
LO: 6-2
16) Golden Company manufactures a part for its production cycle. The annual costs per unit for 10,000
Per Unit
Direct labor 15.00
Total costs $51.00
The fixed factory overhead costs are unavoidable. Olson Company has offered to sell 10,000 units of the
same part to Golden Company for $55 per unit. The facilities currently used to make the part could be
used to make 10,000 units per year of a new product that has a contribution margin of $20 per unit. No
additional fixed costs would be incurred with the new product. Golden Company should ________.
C) make the new product and buy the part to save $60,000
D) make the new product and buy the part to save $140,000
Answer: C
Diff: 2
LO: 6-2
14
17) Kaiman Company currently produces a key part at a total cost of $210,000. Annual variable costs are
$170,000. Of the annual fixed costs, $10,000 relate specifically to this part. The remaining fixed costs are
unavoidable.
Another manufacturer has offered to supply the part annually for $200,000. The facilities currently used
to manufacture the part could be used to manufacture a new product with an expected contribution
margin of $30,000 per year. Alternatively, the facilities could be rented out at $60,000 per year. Given all of
these alternatives, what is Kaiman Company's lowest net relevant cost for the parts?
A) $130,000
B) $140,000
C) $170,000
D) $180,000
Answer: B
Diff: 3
LO: 6-2
18) Dolphin Company currently produces 10,000 units of a key part at a total cost of $512,000 annually.
Variable costs are $300,000 annually. Of the annual fixed costs, $140,000 relate specifically to this part. The
remaining fixed costs are unavoidable.
Another manufacturer has offered to supply the part for $48 per unit. The facilities currently used to
manufacture the part could be used to manufacture a new product with an expected contribution margin
of $30,000 per year. Alternatively, the facilities could be rented out at $60,000 per year. Given all of these
alternatives, what is Dolphin Company's lowest net relevant cost for the parts?
A) $420,000
B) $440,000
C) $450,000
D) $480,000
Answer: A
Diff: 3
LO: 6-2
15
19) Thompson Company currently produces 10,000 units of a key part at a total cost of $512,000 annually.
Annual variable costs are $300,000. Of the annual fixed costs, $140,000 relate specifically to this part. The
remaining fixed costs are unavoidable.
Another manufacturer has offered to supply the part for $48 per unit. The facilities currently used to
manufacture the part could be used to manufacture a new product with an expected contribution margin
of $60,000 annually. Alternatively, the facilities could be rented out at $70,000 annually. If Thompson
Company makes the part, what is the annual opportunity cost of the facilities?
A) $13,000
B) $28,000
C) $60,000
D) $70,000
Answer: D
Diff: 3
LO: 6-2
20) Madison Company produces a part that is used in the manufacture of one of its products. The costs
associated with the production of 5,000 units of this part are as follows:
Direct materials $108,000

Direct labor 156,000
Variable factory overhead 72,000
Fixed factory overhead 168,000
Total costs $504,000
Of the fixed factory overhead costs, $72,000 are avoidable. Middleton Company has offered to sell 5,000
units of the same part to Madison for $87.00 per unit. Assuming there is no other use for the facilities,
Madison Company should ________.
C) buy the part to save $24,000
D) buy the part to save $27,000
Answer: B
Diff: 2
LO: 6-2
16
21) Davidson Company produces a part that is used in the manufacture of one of its products. The costs

Direct labor 156,000
Of the fixed factory overhead costs, $72,000 are avoidable. Assuming there is no other use for the
facilities. What is the highest price Davidson Company should be willing to pay for 5,000 units of the
part?
A) $264,000
B) $334,000
C) $406,000
D) $502,000
Answer: C
Diff: 2
LO: 6-2
22) Gonzalez Company produces a part that is used in the manufacture of one of its products. The annual
costs associated with the production of 5,000 units of this part are as follows:

Direct labor 56,000
Of the fixed factory overhead costs, $72,000 are avoidable. Another company has offered to sell 5,000
units of the same part to Gonzalez for $70.00 per unit. The facilities currently used to make the part can be
rented out to another manufacturer for $72,000 per year. What should Gonzalez Company do?
A) Make the part to save $22,000.
B) Make the part to save $50,000.
C) Buy the part and rent the facilities to save $22,000.
D) Buy the part and rent the facilities to save $72,000.
Answer: C
Diff: 2
LO: 6-2
17
23) Fast Company has just decided to outsource the production of a part for a product. Assume Fast
Company leaves the area of the manufacturing plant idle where it was producing the outsourced part. It
has no alternative uses of the plant. What is the opportunity cost of the idle area of the manufacturing
plant to Fast Company?
A) zero
B) definitely a negative number
C) the disposal value of the entire manufacturing plant
D) none of the above
Answer: A
Diff: 3
LO: 6-2
24) Outsourcing is the purchase of products or services by a company from an outside supplier.
Answer: TRUE
Diff: 1
LO: 6-2
25) Qualitative factors do not affect a make-or-buy decision.

Answer: FALSE
Diff: 1
LO: 6-2
26) In a make-or-buy decision, if plant facilities will remain idle when the decision is made to outsource a
part used in a product, then the opportunity cost of the plant facilities is zero. Assume there are no
alternative uses of the plant facilities available.
Answer: TRUE
Diff: 2
LO: 6-2
18
27) Each year, Madsen Company purchases 8,000 units of a part that it needs for production of its
product. The supplier notified Madsen Company that a price increase will take effect shortly, which will
bring the price of the part to $25 per part. Madsen Company is considering the use of idle facilities to
produce the part. The annual production costs to produce the needed 8,000 parts are as follows:

Direct labor 30,000
Variable indirect production costs 14,000
Fixed indirect production costs 33,500
The idle facilities could also be rented out at an annual rent of $99,000. All the fixed indirect production
costs are avoidable.
Required:
Determine if Madsen Company should buy the part or produce it internally.
Answer: Alternatives:
Buy Part: $25 × 8,000 units = $200,000
Buy Part and Rent Facilities: ($25 × 8,000) - $99,000 = $101,000
Make Part: ($17,500 + $30,000 + $14,000 + $33,500) = $95,000
Conclusion:
The lowest cost alternative is to make the part. Madsen Company should make the part.
Diff: 2
LO: 6-2
19
28) Andrea Company manufactures a part for its production cycle. The annual costs per unit for 20,000
units of this part are as follows:
Direct materials $15

Direct labor 12
Variable indirect production costs 19
Fixed indirect production costs 16
Total cost $62
Andrea Company has been approached by a supplier who will sell 20,000 units of the same part for
$940,000. All the fixed indirect production costs are unavoidable if Andrea Company ceases production of
the part.
Required:
A) Assuming there is no alternative use for the facilities, should Andrea Company buy or make the part?
B) Assume the facilities can be rented out for $100,000 per year. Should Andrea Company buy the part? If
so, how much money will be saved?
Answer:
A)
Alternatives:
Make part: ($15 + $12 + $19) × 20,000 = $920,000
Buy part: $940,000
Conclusion:
The least costly alternative is to make the part.
B)
Alternatives:
Make part: $920,000
Buy part: $940,000
Buy part and rent out facilities: $940,000 - $100,000 = $840,000
Conclusion:
The least costly alternative is to buy the part and rent out the facilities. In contrast to making the part, the
company would save $80,000 ($920,000 - $840,000) per year.
Diff: 2
LO: 6-2
20
29) Jeff Company produces a part that is used in the manufacture of one of its products. The annual costs

Direct labor 34,000
Variable indirect production costs 65,000
Fixed indirect production costs 40,000
A supplier is willing to sell 11,000 units of the part to Jeff Company for $12.50 per unit. When examining
the fixed indirect production costs, Jeff Company determines $10,000 is avoidable.
Required:
A) If there are no alternative uses for the facilities, should Jeff Company take advantage of the supplier's
offer?
B) If Jeff Company decides to buy the part from the supplier, Jeff Company can rent out the idle facilities
for $50,000 per year. Should Jeff Company take advantage of the supplier's offer?
Answer:
A)
Alternatives:
Make part: ($25,000 + $34,000 + $65,000 + $10,000) = $134,000
Buy part: ($12.50 × 11,000) = $137,500
Conclusion:
The least costly alternative is to make the part. Jeff should not accept the supplier's offer.
B)
Alternatives:
Make part: $134,000
Buy part: $137,500
Buy part and rent out facilities: $137,500 - $50,000 = $87,500
Conclusion:
The least costly alternative is to buy the part and rent out the facilities.
Diff: 2
LO: 6-2
21
6.3 Questions
1) If a department in a department store is under consideration to be eliminated, unavoidable fixed

expenses are ________ to the decision.
A) incremental
B) marginal
C) relevant
D) irrelevant
Answer: D
Diff: 2
LO: 6-3
2) Department A covers one section of a large factory building. Which of the following costs is relevant to
the decision to eliminate Department A?
A) Heating expenses of building allocated to Department A
B) General corporate overhead allocated to Department A
C) Depreciation Expense on store building allocated to Department A
D) Salary Expense of Supervisor in Department A; he only works in Department A
Answer: D
Diff: 1
LO: 6-3
3) If a department in a grocery store is under consideration to be eliminated, which of the following

cost(s) is(are) NOT relevant to the decision?
A) avoidable fixed expenses
B) unavoidable costs
C) common costs
D) B and C
Answer: D
Diff: 2
LO: 6-3
22
4) If a department in a department store is eliminated, ________ costs will not continue.
A) unavoidable
B) common
C) corporate
D) avoidable
Answer: D
Diff: 1
LO: 6-3
5) Central Industries has three product lines: A, B and C. The following information is available:
Product A Product B Product C

Sales $100,000 $90,000 $44,000
Variable costs 76,000 48,000 35,000
Contribution margin 24,000 42,000 9,000
Avoidable fixed costs 9,000 18,000 3,000
Unavoidable fixed costs 6,000 9,000 7,700
Operating income(loss) $9,000 $15,000 $(1,700)
Central Industries is thinking about dropping Product C because it is reporting a loss. Assume Central
Industries drops Product C and does not replace it. What will happen to operating income?
A) increase by $600
B) increase by $2,400
C) decrease by $6,000
D) decrease by $9,000
Answer: C
Diff: 2
LO: 6-3
23
6) Sahara Industries has three product lines: A, B and C. The following annual information is available:
Sales $100,000 $90,000 $88,000
Variable costs 76,000 48,000 79,000
Sahara Industries is thinking about dropping Product C because it is reporting a loss. Assume Sahara
Industries drops Product C and the space formerly used to produce Product C is rented out for $15,000
per year. What will happen to operating income?
A) increase by $6,600
C) increase by $14,400
D) increase by $15,000
Answer: B
Diff: 2
LO: 6-3
7) Cesar Company has three product lines: A, B and C. The following annual information is available:
Sales $100,000 $90,000 $44,000
Variable costs 76,000 48,000 35,000
Assume Cesar Company drops Product C. Cesar Company then doubles the production and sales of
Product B without increasing fixed costs. What will happen to operating income?
Answer: C
Diff: 3
LO: 6-3
24
8) Bally Company has three product lines: A, B and C. The following annual information is available:
Sales $60,000 $90,000 $24,000
Variable costs 36,000 48,000 20,000
Assume Bally Company drops Product C. What will happen to operating income?
D) decrease $1,400
Answer: C
Diff: 2
LO: 6-3
9) The most recent income statement for the Venetian Branch of Palm Harbor Bank is presented below:
Sales $57,000
Variable costs 31,500
Contribution margin 25,500
Avoidable fixed costs 13,500
Unavoidable fixed costs 20,000
Operating loss $(8,000)
Palm Harbor Bank is thinking about eliminating the Venetian Branch. If the branch is eliminated, Palm
Harbor Bank's operating income will ________.
Answer: C
Diff: 1
LO: 6-3
25
10) The most recent income statement for the South Branch of First Financial Bank is presented below:
Sales $57,000
Variable costs 31,500
Contribution margin 25,500
Avoidable fixed costs 13,500
Unavoidable fixed costs 18,000
Operating loss $(6,000)
First Financial Bank is thinking about eliminating the South Branch. If the branch is eliminated, First
Financial Bank's operating income will ________.
Answer: C
Diff: 1
LO: 6-3
11) ________ are relevant in deciding whether to add or delete a department from a department store.
A) Avoidable fixed expenses
B) Common costs
C) Unavoidable fixed expenses
D) None of the above
Answer: A
Diff: 1
LO: 6-3
12) In deciding whether to add or delete a product or service, common costs are probably ________.
A) relevant and avoidable
B) relevant and unavoidable
C) irrelevant and avoidable
D) irrelevant and unavoidable
Answer: D
Diff: 2
LO: 6-3
26
13) When deciding whether to add or delete a department, managers should keep the department as long
as ________ from the department exceeds ________.
A) contribution margin; variable costs
B) contribution margin; common costs
C) contribution margin; avoidable fixed costs
D) contribution margin; unavoidable fixed costs
Answer: C
Diff: 2
LO: 6-3
14) In deciding whether to add or delete a product, the insurance expense associated with the custom-
built equipment used to produce the product is an ________ cost. Assume the equipment will be sold if
the company discontinues the product.
A) avoidable fixed
B) avoidable variable
C) unavoidable fixed
D) unavoidable variable
Answer: A
Diff: 2
LO: 6-3
Learning Outcome: Distinguish between relevant and irrelevant cost, Use incremental analysis to make
15) In deciding whether to add or delete a product, the salary of the plant manager is an ________.
Assume the plant manager supervised the production of several products.
A) avoidable fixed cost
B) avoidable variable cost
C) unavoidable fixed cost
D) unavoidable variable cost
Answer: C
Diff: 2
LO: 6-3
16) Variable expenses are divided into avoidable and unavoidable costs.
Answer: FALSE
Diff: 1
LO: 6-3
27
17) Unavoidable costs are never relevant in deciding whether to eliminate a product or department.
Answer: TRUE
Diff: 2
LO: 6-3
18) Heating and air conditioning costs are examples of common costs to the different departments in a
retail store.
Answer: TRUE
Diff: 2
LO: 6-3
19) When adding or dropping a product line, variable costs are the only relevant costs.
Answer: FALSE
Diff: 2
LO: 6-3
20) When adding or dropping a product line, fixed avoidable costs may be relevant costs.
Answer: TRUE
Diff: 2
LO: 6-3
21) Qualitative information can influence decisions to add or drop a department.

Answer: TRUE
Diff: 2
LO: 6-3
28
22) Freedom Company has three departments. Data for the most recent year are presented below:
Dept. X Dept. Y Dept. Z

Sales $400 $200 $80
Variable expenses 128 52 34
Unavoidable fixed expenses 96 52 12
Avoidable fixed expenses 116 104 54
Required:
A) Compute the operating income for Freedom Company.
B) Compute the contribution margin for each department.
C) Compute the operating income for each department.
D) Which department(s) should be eliminated? Why?
Answer:
A)
Sales $680
Variable expenses (214)
Avoidable fixed expenses (274)
Unavoidable fixed expenses (160)
Operating income $32
B)
Dept. X: $400 - $128 = $272
Dept. Y: $200 - $52 = $148
Dept. Z: $80 - $34 = $46
C)
Dept. X: $272 - $212 = $60
Dept. Y: $148 - $156 = $(8)
Dept. Z: $46 - $66 = $(20)
D)
Dept. Z should be eliminated because the contribution margin of $46 is less than avoidable fixed expenses
of $54. Dept. Y should not be eliminated because the contribution margin of $148 exceeds the avoidable
fixed expenses of $104. Dept. X should not be eliminated because the contribution margin of $272 exceeds
the avoidable fixed expenses of $116.
Diff: 2
LO: 6-3
29
23) Olson Company has three departments. Data for the most recent year is presented below:
Dept. C Dept. A Dept. T

Sales $4,000 $1,920 $2,240
Variable expenses 3,280 1,420 520
Unavoidable fixed expenses 480 180 440
Avoidable fixed expenses 555 265 360
Operating income (loss) $(315) $55 $920
Olson Company is considering eliminating Dept. C because it is operating at a loss.
Required:
A) Compute the change in operating income if Olson Company eliminates Dept. C and does not replace
it.
B) Compute the change in operating income if Olson Company eliminates Dept. C and doubles the sales
of Dept. T without increasing fixed costs.
Answer:
A) Operating income will decrease by $165. $4,000 - ($3,280 + $555) = $165
B) Operating income will increase by $1,555. $2,240 - ($520 + $165) = $1,555
Diff: 3
LO: 6-3
6.4 Questions
1) A company can sell any mix of Product A and Product B at full capacity. The company has 100,000
hours of capacity. The demand for each product exceeds the capacity. It takes one hour to make one unit
of Product A and two hours to make one unit of Product B. The following information is available:
Product A Product B
Units produced from capacity available 100,000 50,000
Contribution margin per unit $20 $30
If capacity is the limiting factor, which product should be produced?

A) 0 units of Product A and 50,000 units of Product B
B) 20,000 units of Product A and 30,000 units of Product B
C) 30,000 units of Product A and 20,000 units of Product B
D) 100,000 units of Product A and 0 units of Product B
Answer: D
Diff: 1
LO: 6-4
Learning Outcome: None
30
2) A company has 100,000 hours of capacity and manufactures two products, Product X and Product Z.
Neither product has enough demand to utilize the entire capacity, but the combined demand of both
products exceeds the capacity of the plant. It takes one hour to make one unit of Product X and two hours
to make one unit of Product Z. The following information is available:
Product X Product Z
Units produced from capacity available 100,000 50,000
Contribution margin per unit $20 $30
What product or products should be made?

A) only make Product X
B) only make Product Z
C) make Product X to meet customer demand and then make Product Z
D) make Product Z to meet customer demand and then make Product X
Answer: C
Diff: 1
LO: 6-4
3) A company has 10,000 hours of capacity and manufactures two products. Product 1 takes 2 hours per
unit. Product 2 takes 3 hours per unit. The contribution margin per unit for Product 1 is $5. The
contribution margin per unit for Product 2 is $6. The demand for either product exceeds the factory
capacity. Which product or products should be manufactured?
A) 3,000 units of Product 1 and 2,000 units of Product 2
B) 2,500 units of Product 1 and 3,333 units of Product 2
C) make 5,000 units of Product 1 and 0 units of Product 2
D) make 3,333 units of Product 2 and 0 units of Product 1
Answer: C
Diff: 1
LO: 6-4
4) A company has 10,000 hours of capacity and manufactures two products. Product 1 takes 2 hours per
unit. Product 2 takes 3 hours per unit. The contribution margin per unit for Product 1 is $5. The
contribution margin per unit for Product 2 is $6. Neither product has enough demand to use all of the
plant capacity, but the demand for both products exceeds the plant capacity. Which product or products
should be manufactured?
A) 5,000 units of Product 1 and 0 units of Product 2
B) 0 units of Product 1 and 5,000 units of Product 2
C) make Product 1 first until meet customer demand, then make Product 2
D) make Product 2 first until meet customer demand, then make Product 1
Answer: C
Diff: 1
LO: 6-4
31
5) ________ is the item that restricts or constrains the production or sale of a product.
A) A limiting factor
B) A scarce resource
C) Floor space
D) All of the above
Answer: D
Diff: 1
LO: 6-4
6) If demand is the limiting factor, and there are no other scarce resources, managers should emphasize
the product with ________.
A) the highest selling price per unit
B) the lowest variable costs per unit
C) the highest contribution margin per unit
D) the highest contribution margin per hour
Answer: C
Diff: 2
LO: 6-4
7) Bronski Corporation manufactures two products, Simple and Complex. The following information was
gathered:
Simple Complex
Selling price per unit $37.00 $26.00
Variable cost per unit 32.00 22.00
Total fixed costs are $18,000. Assume demand for either product exceeds the factory's capacity. It takes
one hour of production time to make Simple and two hours to make Complex. The annual capacity of the
plant is 10,000 hours. How many units of Simple and Complex should Bronski Corporation produce and
sell to maximize profits?
A) 0 units of Simple and 5,000 units of Complex
B) 6,000 units of Simple and 3,000 units of Complex
C) 10,000 units of Simple and 0 units of Complex
D) 3,000 units of Simple and 6,000 units of Complex
Answer: C
Diff: 2
LO: 6-4
32
8) Watson Corporation manufactures two products, Simple and Complex. The following annual
information was gathered:
Simple Complex
Selling price per unit $47.00 $26.00
Variable cost per unit 42.00 22.00
Total annual fixed costs are $18,000. Assume demand for either product exceeds the factory's capacity. It
takes one hour to make one unit of Complex. However, Simple takes 50% longer to manufacture when
compared to Complex. Only 120,000 hours of plant capacity are available. How many units of Simple and
Complex should Watson Corporation produce and sell in a year to maximize profits?
A) an equal number of Simple and Complex
B) 80,000 units of Simple and 0 units of Complex
C) 0 units of Simple and 120,000 units of Complex
D) either Simple or Complex; it does not matter
Answer: C
Diff: 2
LO: 6-4
9) A scarce resource restricts or constrains the production or sale of a product.

Answer: TRUE
Diff: 1
LO: 6-4
10) Scarce resources include labor hours.

Answer: TRUE
Diff: 1
LO: 6-4
11) In retail sales, the limiting resource is often floor space.

Answer: TRUE
Diff: 1
LO: 6-4
12) If the limiting factor is demand, the most profitable product is the one with the highest contribution
margin per unit.
Answer: TRUE
Diff: 2
LO: 6-4
33
13) Inventory turnover is the number of times the average inventory is sold per year.
Answer: TRUE
Diff: 1
LO: 6-4
6.5 Questions
1) Which of the following is(are) characteristic(s) of joint products?

A) when two or more products can be identified before the split-off point.
B) when two or more products have significant sales value.
C) when two or more products are not separately identifiable as individual products until the split-off
point.
D) B and C
Answer: D
Diff: 2
LO: 6-5
2) When manufacturing multiple products that are not initially separately identifiable, manufacturing
costs incurred after the split-off point are known as ________ costs.
A) joint
B) product
C) split-off
D) separable
Answer: D
Diff: 1
LO: 6-5
3) The ________ is the juncture in manufacturing where the joint products become individually
identifiable.
A) joint processing juncture
B) split-off point
C) common point
D) joint processing point
Answer: B
Diff: 1
LO: 6-5
34
4) ________ costs are costs of manufacturing two or more products that are not separately identifiable as
individual products until their split-off point.
A) Separable
B) Joint
C) Incremental
D) Sunk
Answer: B
Diff: 1
LO: 6-5
5) Which of the following item is irrelevant to the decision whether to process joint products beyond the
split-off point?
A) separable costs
B) additional costs from further processing beyond the split-off point
C) additional revenue from further processing beyond the split-off point
D) joint costs
Answer: D
Diff: 2
LO: 6-5
6) Which of the following cost is relevant to the decision whether to process joint products beyond the
split-off point?
A) joint costs
B) allocated joint costs
C) separable costs
D) additional revenue from further processing beyond split-off point
Answer: C
Diff: 2
LO: 6-5
35
7) Joint products should be processed beyond the split-off point if ________.
A) sale of the products are guaranteed
B) additional revenue from further processing exceeds additional expenses from further processing
C) additional revenue from further processing exceeds the joint costs
D) the marginal revenue of the joint products before the split-off point exceeds the marginal cost of the
joint products
Answer: B
Diff: 2
LO: 6-5
8) Uptown Corporation has a joint process that produces three products: P, G and A. Each product may
be sold at split-off or processed further and then sold. Joint-processing costs for a year amount to $20,000.
Other data follows:
Sales Value Separable Processing Sales Value

Product at Split-Off Costs after Split-Off at Completion
P $32,000 $5,000 $39,000
G 16,500 7,500 29,000
A 6,400 8,000 10,000
Processing Product P beyond the split-off point will cause profits to ________.
A) be unchanged
Answer: B
Diff: 2
LO: 6-5
36
9) Mayfair Corporation has a joint process that produces three products: P, G and A. Each product may
be sold at split-off or processed further and then sold. Joint-processing costs for a year amount to $15,000.
Other data follows:

P $62,000 $5,000 $88,000
G 12,500 6,500 19,500
A 9,400 5,000 12,000
Processing Product G beyond the split-off point will cause profits to ________.
A) be unchanged
B) increase by $500
Answer: B
Diff: 2
LO: 6-5
10) Southridge Corporation has a joint process that produces two products: A and B. Each product may
be sold at the split-off point or processed further and then sold. Joint-processing costs for a year are
$20,000.
Product A can be sold at the split-off point for $32,000. Alternatively, Product A can be processed further
and sold for $40,000. Additional processing costs are $5,000.
When deciding whether to sell Product A at the split-off point or to process further, the ________ is NOT
relevant.
A) joint processing cost of $20,000
B) sales value at split-off of $32,000
C) sales value at completion of $40,000
D) additional processing cost of $5,000
Answer: A
Diff: 2
LO: 6-5
37
11) Brookfield Corporation has a joint process that produces three products: X, Y and Z. Each product
may be sold at split-off or processed further and then sold. Joint-processing costs for a year amount to
$100,000. Other data follows:

X $128,000 $16,000 $150,000
Y 75,000 26,000 99,000
Z 32,600 20,000 50,000
Processing Product X beyond the split-off point will cause profits to ________.
A) be unchanged
Answer: B
Diff: 2
LO: 6-5
12) Boston Corporation has a joint process that produces three products: X, Y and Z. Each product may be
sold at split-off or processed further and then sold. Joint-processing costs for a year amount to $100,000.
Other data follows:

X $128,000 $16,000 $160,000
Y 50,000 25,000 77,000
Z 25,600 20,000 40,000
Processing Product Y beyond the split-off point will cause profits to ________.
A) be unchanged
Answer: C
Diff: 2
LO: 6-5
38
13) Cleveland Corporation has a joint process that produces three products: X, Y and Z. Each product

X $128,000 $16,000 $140,000
Y 50,000 27,000 76,000
Z 25,600 10,000 40,000
To maximize profits, the corporation should process ________ further.

A) Product Z only
B) Product Y only
C) Product X only
D) Products X, Y and Z
Answer: A
Diff: 2
LO: 6-5
14) Chicago Corporation has a joint process that produces three products: X, Y and Z. Each product may
be sold at split-off or processed further and then sold. Joint-processing costs for a year amount to

X $128,000 $16,000 $152,000
Y 50,000 26,000 76,000
Z 25,600 20,000 40,000
Processing Product X beyond the split-off point will cause profits to ________.
A) be unchanged
Answer: B
Diff: 2
LO: 6-5
39
15) DesPlaines Corporation has a joint process that produces three products: P, G and A. Each product
$25,000. The production level for each product is 10,000 units. Other data follows:

P $12 $8 $20
G 10 4 17
A 15 6 19
If Product P is processed beyond the split-off point, profits will ________.

D) remain the same
Answer: D
Diff: 2
LO: 6-5
16) Lisle Corporation has a joint process that produces three products: P, G and A. Each product may be
sold at split-off or processed further and then sold. Joint-processing costs for a year amount to $25,000.
The production level for each product is 10,000 units. Other data follows:

P $12 $9 $21
G 10 3 17
A 15 6 19
Product G ________.
A) should be sold at split-off point to maximize profits
B) should be processed further to increase profits by $30,000
C) should be processed further to increase profits by $40,000
D) should be processed further to increase profits by $70,000
Answer: C
Diff: 2
LO: 6-5
40
17) Downers Grove Corporation has a joint process that produces three products: P, G and A. Each
product may be sold at split-off or processed further and then sold. Joint-processing costs for a year
amount to $25,000. The production level for each product is 10,000 units. Other data follows:

P $12 $10 $21
G 12 4 17
A 10 6 19
To maximize profits, Downers Grove Corporation should process ________ further.

A) Product P only
B) Product G only
C) Product A only
D) Products G and A only
Answer: D
Diff: 2
LO: 6-5
18) Naperville Corporation has a joint process that produces three products: P, G and A. Each product
P $12 $8 $21
G 10 4 17
A 15 6 19
Processing Product P beyond the split-off point will cause profits to ________.
A) be unchanged
Answer: B
Diff: 2
LO: 6-5
41
19) Woodridge Corporation has a joint process that produces three products: P, G and A. Each product

P $12 $9 $21
G 10 4 17
A 15 6 19
Assume Woodridge Corporation processes the joint products beyond the split-off point that will
maximize net income. Woodridge Corporation's net income is ________.
A) $12,000
B) $15,000
C) $17,000
D) $25,000
Answer: B
Diff: 3
LO: 6-5
20) Separable costs are part of a joint process and cannot be exclusively identified with individual
products.
Answer: FALSE
Diff: 2
LO: 6-5
21) The split-off point is the juncture in manufacturing where the joint products become individually
identifiable.
Answer: TRUE
Diff: 2
LO: 6-5
42
22) The relevant information for a sell or process further decision for joint products includes the costs
incurred before the split-off point.
Answer: FALSE
Diff: 2
LO: 6-5
23) It is profitable to extend processing or to incur additional costs on a joint product if the additional
revenue exceeds the joint cost.
Answer: FALSE
Diff: 2
LO: 6-5
24) The allocation of joint costs to joint products should affect the decision to sell or process the joint
products further.
Answer: FALSE
Diff: 2
LO: 6-5
43
25) Foster Corporation has a joint process, which produces three products, A, B and C. Each product may
be sold at split-off or processed further and then sold. Joint processing costs for a year are $40,000. Other
relevant data are:

Product at Split-Off Costs After Split-Off at Completion
A $15,500 $2,200 $17,700
B 18,000 8,000 23,000
C 24,000 11,500 37,500
Required:
A) Which products should be processed further? Why?
B) If the Foster Company maximizes profits, what is the operating income?
Answer:
A) Only Product C should be processed further. The additional revenues ($37,500 - $24,000) exceed the
additional costs ($11,500) of further processing.
B) Product A Revenue $15,500
Product B Revenue 18,000
Product C Revenue 37,500
Less: Joint Costs (40,000)
Less: Product C Addtl. Costs (11,500)
Operating income $19,500
Diff: 3
LO: 6-5
44
26) Sealy Company has a joint process, which produces three products called A, B and C. Each product
may be sold at split-off or processed further and then sold. Joint processing costs for a year are $20,000.
Other relevant data are:

Product at Split-Off Costs After Split-Off at Completion
A $94,000 $28,000 $115,000
B 60,000 10,000 82,000
C 66,000 14,000 79,000
Required:
A) Which products should be processed further? Why?
B) If the Sealy Company maximizes profits, what is the operating income?
Answer:
A) Only Product B should be processed further. The additional revenues ($82,000 - $60,000) exceed the
additional costs ($10,000) of further processing.
B) Product A Revenue $94,000
Product B Revenue 82,000
Product C Revenue 66,000
Less: Joint Costs (20,000)
Less: Product B Addtl. Costs (10,000)
Operating income $212,000
Diff: 3
LO: 6-5
6.6 Questions
1) Equipment to be sold has a book value of $4,000. The cost of the equipment is $10,000. The cash
received at sale is $2,000. What is the gain or loss on disposal of the equipment?
A) loss on disposal of $2,000
B) loss on disposal of $4,000
C) loss on disposal of $6,000
D) gain on disposal of $2,000
Answer: A
Diff: 2
LO: 6-6
45
2) When considering the replacement of old equipment, which of the following item is relevant?
A) loss on disposal of old equipment
B) book value of old equipment
C) accumulated depreciation on old equipment
D) future maintenance costs of old equipment
Answer: D
Diff: 2
LO: 6-6
3) Book value on a depreciable asset is defined as ________.

A) residual value less cost
B) residual value less accumulated depreciation
C) cost less accumulated depreciation
D) residual value
Answer: C
Diff: 1
LO: 6-6
4) Which of the following costs is NOT relevant to an equipment replacement decision?

A) cost of new equipment
B) operating cost of new equipment
C) operating cost of old equipment(several years left)
D) cost of old equipment
Answer: D
Diff: 2
LO: 6-6
5) Which of the following cost is relevant to an equipment replacement decision?

A) cost of old equipment
B) cost of new equipment
C) book value of old equipment
D) depreciation expense on old equipment
Answer: B
Diff: 2
LO: 6-6
46
6) BEE Company is considering the replacement of a machine that is presently used in production. Which
of the following items are irrelevant to the replacement decision?
A) annual operating cost of the old machine (2 years left)
B) original cost of the new machine
C) disposal value of the old machine at time of replacement
D) original cost of old machine
Answer: D
Diff: 2
LO: 6-6
7) Ernie Company is considering replacing a machine that is currently used in the production process.
The ________ is irrelevant to the replacement decision.
A) cost of the new machine
B) disposal value of old machine
C) book value of old machine
D) annual operating cost of old machine (2 years left)
Answer: C
Diff: 2
LO: 6-6
47
8) Benson Company is considering the replacement of a machine that is presently used in production. The
following data are available:
Old Machine New Machine

Original cost $57,000 $35,000
Useful life in years 17 5
Current age in years 12 0
Book value $39,000 -
Disposal value now $8,000 -
Disposal value in 5 years 0 0
Annual cash operating costs $7,000 $4,000
Adding all five years together, the total relevant costs to consider if the new machine is purchased is
________.
A) $12,000
B) $27,000
C) $47,000
D) $55,000
Answer: C
Diff: 2
LO: 6-6
48
9) Gray Lake Company is considering the replacement of a machine that is presently used in production.
The following data are available:

Adding all five years together, the total relevant costs to consider if the old machine is not replaced is
________.
A) $22,000
B) $31,000
C) $35,000
D) $39,000
Answer: C
Diff: 2
LO: 6-6
49
10) Inverness Company is considering the replacement of a machine that is presently used in production.

Adding all five years together, what is the difference in total relevant costs between the old machine and
the new machine?
A) $12,000
B) $15,000
C) $22,000
D) $37,000
Answer: A
Diff: 2
LO: 6-6
50
11) Amanda Company is considering the replacement of a machine that is presently used in production.

Original cost $200,000 $160,000
Adding all five years together, the total relevant costs to consider if the new machine is purchased is
________.
A) $70,000
B) $100,000
C) $198,000
D) $230,000
Answer: C
Diff: 2
LO: 6-6
12) Park Ridge Company is considering the replacement of a machine that is presently used in
production. The following data are available:

Original cost $200,000 $160,000
Adding all five years together, the total relevant costs to consider if the old machine is kept is ________.
A) $32,000
B) $68,000
C) $80,000
D) $100,000
Answer: D
Diff: 2
LO: 6-6
51
13) Gurnee Company is considering the replacement of a machine that is presently used in production.

Original cost $200,000 $160,000
Adding all five years together, what is the difference in total relevant costs between the old and new
machines?
A) $12,000
B) $30,000
C) $98,000
D) $130,000
Answer: C
Diff: 2
LO: 6-6
14) The gain or loss on the disposal of equipment is determined by ________.

A) subtracting the book value of the old equipment to the cost of the new equipment
B) subtracting the disposal value of the old equipment to the book value of the old equipment
C) subtracting the book value of the old equipment from the cash received for the old equipment
D) subtracting the book value of the old equipment from the cost of the new equipment
Answer: C
Diff: 2
LO: 6-6
52
15) Sunbury Company is considering the replacement of a machine that is presently used in production.

Adding all five years together, the total relevant costs to consider if the old machine is kept are ________.
A) $30,000
B) $50,000
C) $52,000
D) $60,000
Answer: D
Diff: 2
LO: 6-6
16) The disposal value of old equipment is relevant in equipment replacement decisions.
Answer: TRUE
Diff: 2
LO: 6-6
17) Sunk cost is used to describe a historical cost or past cost.

Answer: TRUE
Diff: 1
LO: 6-6
53
18) When making a decision to replace some old equipment with new equipment, the book value of the
old equipment is irrelevant information.
Answer: TRUE
Diff: 2
LO: 6-6
19) An equipment's book value is the original cost plus accumulated depreciation.
Answer: FALSE
Diff: 2
LO: 6-6
20) The cost of new equipment is relevant in deciding whether to keep or replace old equipment.
Answer: TRUE
Diff: 2
LO: 6-6
21) Past costs are irrelevant in equipment replacement decisions.

Answer: TRUE
Diff: 1
LO: 6-6
54
22) Jorgensen Company is considering the replacement of equipment used in operations. The following
data are available:
Old Equipment New Equipment

Required:
A) Prepare a cost comparison for replacing the old equipment. Use only relevant items and add the items
together for the next 7 years.
B) Should the old equipment be replaced?
Answer:
A)
Keep Replace Difference
Cash operating costs $63,000 $56,000 $7,000
Disposal value old equip. (30,000) 30,000
New equipment, cost ______ 40,000 (40,000)
Total relevant costs $63,000 $66,000 $(3,000)
B) The old equipment should not be replaced.

Diff: 2
LO: 6-6
55
23) Mueller Company is considering the replacement of equipment used in operations. The following
data are available:
Old Equipment New Equipment

Required:
A) Prepare a cost comparison for replacing the old equipment. Use only relevant items and add the items
together for the next 6 years.
B) Should the old equipment be replaced?
Answer:
A)
Keep Replace Difference
Cash operating costs $84,000 $66,000 $18,000
Disposal value of old equip. (50,000) 50,000
New equipment, cost ______ 60,000 (60,000)
Total relevant costs $84,000 $76,000 $8,000
B) The old equipment should be replaced.

Diff: 2
LO: 6-6
6.7 Questions
1) When choosing between two alternatives, what of the following are relevant costs?
A) future variable costs that are the same under two alternatives
B) future variable costs that are different under two alternatives
C) future fixed costs that are different under two alternatives
D) B and C
Answer: D
Diff: 2
LO: 6-7
Learning Outcome: Distinguish between relevant and irrelevant costs
56
2) The following is a useful rule of thumb when making operational decisions. Managers should NOT use
________.
A) variable cost per unit
B) total variable costs
C) fixed cost per unit
D) total fixed costs
Answer: C
Diff: 2
LO: 6-7
3) LL Company produces and sells a product that has variable costs of $9 per unit and fixed costs of
$200,000 per year. If production decreases from 50,000 to 40,000 units, the total cost per unit will
________.
A) increase by $1
B) increase by $13
C) decrease by $1
D) decrease by $14
Answer: A
Diff: 1
LO: 6-7
4) Melissa Company produces and sells a product that has variable costs of $8 per unit and fixed costs of
$240,000 per year. If 20,000 units are produced and sold in a year, what is the total cost per unit?
A) $5
B) $8
C) $12
D) $20
Answer: D
Diff: 1
LO: 6-7
5) Zach Company produces and sells a product that has variable costs of $7 per unit and fixed costs of
$200,000 per year. If 40,000 units are produced and sold in a year, what is the total cost per unit?
A) $7
B) $10
C) $12
D) $17
Answer: C
Diff: 1
LO: 6-7
57
6) Joshua Company produces and sells a product that has variable costs of $7 per unit and fixed costs of
$200,000 per year. If production increases from 20,000 units to 25,000 units, the total cost will ________.
B) decrease by $2 per unit
C) decrease by $8 per unit
D) stay the same
Answer: B
Diff: 1
LO: 6-7
7) When analyzing alternatives, it is not advisable to use fixed costs per unit because a new fixed cost per
unit must be calculated for every different volume of production.
Answer: TRUE
Diff: 2
LO: 6-7
8) Future costs are irrelevant if they are the same under all feasible alternatives.
Answer: TRUE
Diff: 2
LO: 6-7
6.8 Questions
1) Managers may be tempted to make decisions that are not in the best interests of the company because
________.
A) performance measures in use reward them for decisions that are in the best interests of the company
B) performance measures in use reward them for decisions that are not in the best interests of the
company
C) the managers do not understand the use of decision-making tools
D) the managers are evaluated several times each year
Answer: B
Diff: 2
LO: 6-8
58
2) A widespread problem in practice is that the decision model used by managers for ________ and the
model used by their superiors in ________ are different.
A) outsourcing; incremental analysis
B) outsourcing; differential analysis
C) decision making; performance evaluation
D) operational decisions; joint costing
Answer: C
Diff: 2
LO: 6-8
3) Since managers are usually evaluated based on the operating results in one year, they do not usually
consider the long range impact of their decisions.
Answer: TRUE
Diff: 2
LO: 6-8
4) Conflicts in the decision-making process can arise when superiors evaluate a manager's performance
using a model consistent with the decision model used by the manager.
Answer: FALSE
Diff: 2
LO: 6-8
5) Generally, companies use aggregate measures of performance when conducting performance

evaluations of managers.
Answer: TRUE
Diff: 2
LO: 6-8
59

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Introduction to Management Accounting, 16e, Global Edition (Horngren)

Chapter 6 Relevant Information for Decision Making with a Focus on Operational

1) Differential cost is the difference in ________ between two alternatives.

2) Differential revenue is the difference in ________ between two alternatives.

3) Incremental costs are the ________ generated by a proposed alternative.

Alternative 1: Disposal of machine. Disposal value of machine is $50,000.

Alternative 1: Disposal of machine. Disposal value of machine is $50,000.

Alternative 1: Disposal of machine. Disposal value of machine is $50,000.

14) An opportunity cost is ________.

2) What is the most common value-chain function outsourced in most businesses?

Direct materials $108,000

Direct materials $108,000

Direct materials $100,000

25) Qualitative factors do not affect a make-or-buy decision.

Direct materials $17,500

Direct materials $15

Direct materials $25,000

1) If a department in a department store is under consideration to be eliminated, unavoidable fixed

3) If a department in a grocery store is under consideration to be eliminated, which of the following

Product A Product B Product C

21) Qualitative information can influence decisions to add or drop a department.

Dept. X Dept. Y Dept. Z

Dept. C Dept. A Dept. T

Olson Company is considering eliminating Dept. C because it is operating at a loss.

If capacity is the limiting factor, which product should be produced?

What product or products should be made?

9) A scarce resource restricts or constrains the production or sale of a product.

10) Scarce resources include labor hours.

11) In retail sales, the limiting resource is often floor space.

1) Which of the following is(are) characteristic(s) of joint products?

Sales Value Separable Processing Sales Value

Sales Value Separable Processing Sales Value

Sales Value Separable Processing Sales Value

Sales Value Separable Processing Sales Value

Sales Value Separable Processing Sales Value

To maximize profits, the corporation should process ________ further.

Sales Value Separable Processing Sales Value

Sales Value Separable Processing Sales Value

If Product P is processed beyond the split-off point, profits will ________.

Sales Value Separable Processing Sales Value

Sales Value Separable Processing Sales Value

To maximize profits, Downers Grove Corporation should process ________ further.

Sales Value Separable Processing Sales Value

Sales Value Separable Processing Sales Value

Sales Value Separable Processing Sales Value

3) Book value on a depreciable asset is defined as ________.

4) Which of the following costs is NOT relevant to an equipment replacement decision?

5) Which of the following cost is relevant to an equipment replacement decision?

Old Machine New Machine

Old Machine New Machine

Old Machine New Machine

Old Machine New Machine

Old Machine New Machine

Old Machine New Machine

14) The gain or loss on the disposal of equipment is determined by ________.

Old Machine New Machine

17) Sunk cost is used to describe a historical cost or past cost.

21) Past costs are irrelevant in equipment replacement decisions.

Old Equipment New Equipment

B) The old equipment should not be replaced.

Old Equipment New Equipment

B) The old equipment should be replaced.

5) Generally, companies use aggregate measures of performance when conducting performance

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