Chapter 6

True or false: Opportunity costs are not found in accounting records because they are not relevant to decisions.

False Reason: Opportunity costs are not found in accounting records because they are not cash outlays. Opportunity costs are relevant to decisions.

Select all that apply Which of the following should not be included in the analysis when making a decision? Multiple select question. Sunk costs Non-differential future costs Opportunity costs Avoidable costs

Sunk costs Non-differential future costs

A limited resource of some type that restricts the company's ability to satisfy demand is a(n) Multiple choice question. opportunity cost volume-trade off special order constraint

constraint

Differential costs and benefits that should be considered in a decision: Multiple choice question. may be qualitative or quantitative are always quantitative are always qualitative

may be qualitative or quantitative

Select all that apply A company must make a volume trade-off decision when they must trade off units of one product for units of another due to limited production capacity have excess capacity that is not currently being utilized do not have enough capacity to satisfy the demand for all of its products

must trade off units of one product for units of another due to limited production capacity do not have enough capacity to satisfy the demand for all of its products

If a company is using a resource that could be used for some other purpose, the opportunity cost of that resource is: Multiple choice question. the profit from the current use of the resource zero the profit from the best alternative use of the resource

the profit from the best alternative use of the resource

A cost that can be eliminated in whole or in part by choosing one alternative over another is a(n) ______ cost. Multiple choice question. irrelevant avoidable incremental sunk

avoidable

Focusing on future costs and benefits that are not the same between alternatives is: Multiple choice question. irrelevant cost analysis differential analysis defining the alternatives the total cost approach

differential analysis

When making a volume-trade off decision, managers should ignore: Multiple choice question. variable costs contribution margin fixed costs

fixed costs

Select all that apply Irrelevant costs include: future costs that do not differ between alternatives future costs that differ between alternatives sunk costs all fixed costs

future costs that do not differ between alternatives sunk costs

To maximize total contribution margin when a constrained resource exists, produce the products with the: Multiple choice question. lowest contribution margin per unit of the constrained resource highest contribution margin per unit of the constrained resource lowest unit contribution margin highest unit contribution margin

highest contribution margin per unit of the constrained resource

When deciding whether to drive your car or take a train to a destination, the costs for your car insurance and driver's license are: Multiple choice question. irrelevant costs avoidable costs relevant costs

irrelevant costs

If a company has a resource that could be used for something else, the _________ cost is the profit that could be derived from the best alternative use of the resource.

opportunity

The potential benefit given up when selecting one alternative over another is a(n) ________ cost. Multiple choice question. avoidable irrelevant sunk opportunity

opportunity

A one-time order that is not considered part of the company's normal ongoing business is a _______ order. Multiple choice question. standard special supplier relevant

special

A one-time sale that is not considered part of the company's normal ongoing business is referred to as a(n) ________ ________ decision.

special; order

Costs that have already been incurred and cannot be avoided regardless of what a manager decides to do are ______ costs. Multiple choice question. relevant differential avoidable sunk

sunk

True or false: Some decisions only have one alternative.

False Reason: Every decision involves choosing from at least two alternatives, even if the alternatives are yes or no.

When making a decision, qualitative differences between alternatives _______ be ignored. Multiple choice question. should should not may or may not

should not

A cost that can be eliminated by choosing one alternative over another is a(n) _________ cost.

avoidable

True or false: Depreciation of existing assets is relevant to decisions.

False Reason: Depreciation spreads sunk costs across the life of the assets and is not relevant.F

When making a product line decision, a company may focus on lost contribution margin and avoidable fixed costs or prepare comparative ________ _________.

income; statement

Differential revenue is an example of a(n) ______ benefit. Multiple choice question. avoidable sunk irrelevant relevant

relevant

When making a decision only ______ costs and benefits should to be included in the analysis. Multiple choice question. unavoidable relevant irrelevant opportunity

relevant

Costs that have no impact on future cash flows and are irrelevant to decisions are _____ costs. Multiple choice question. avoidable marginal unavoidable sunk

sunk

When a constraint exists, companies need to focus on maximizing Multiple choice question. net sales contribution margin per unit net income from sales total contribution margin

total contribution margin

Costs and benefits that should be ignored when making decisions are called ______ costs and benefits. Multiple choice question. incremental irrelevant relevant differential opportunity

irrelevant

Select all that apply When considering accepting a special order: Multiple select question. opportunity costs should never be considered incremental revenue should equal increment cost normal sales must not be affected there must be idle capacity

normal sales must not be affected there must be idle capacity

Select all that apply Synonyms for differential costs include ______ cost. incremental sunk irrelevant avoidable

incremental avoidable

When planning a trip and deciding whether to drive or fly, the _________ is a sunk cost and should be ignored. Multiple choice question. original cost of the car monthly parking fee that must be paid at your apartment while you are gone cost of car repairs and maintenance cost of gasoline for the trip

original cost of the car

A decision to carry out one of the activities in the value chain internally rather than to buy externally from a supplier is a ________ decision. Multiple choice question. sell or process special order product line make or buy

make or buy

Andrews Co. can purchase 20,000 units of Part XYZ from a supplier for $18 per part. Andrews' per unit manufacturing costs for 20,000 units is: Cost Per Unit Total Variable manufacturing cost $12 $240,000 Supervisor salary $3 $60,000 Depreciation $1 $20,000 Allocated fixed overhead $7 $140,000 If the part is purchased, the supervisor position would be eliminated. The special equipment has no other use and no salvage value. Total allocated fixed overhead would be unaffected by the decision. Should the company buy the part or continue to make it? Multiple choice question. Buy — $80,000 advantage. Buy — $100,000 advantage. Continue to make — $60,000 advantage. Continue to make — $40,000 advantage.

Continue to make — $60,000 advantage. Reason: The avoidable costs of making the product are the variable costs plus the supervisor salary or $15 per unit. The total savings is $60,000 ($18 buy price - $12 variable cost - $3 supervisor salary = $3 advantage to make X 20,000 units).

When should a special order be accepted? Multiple choice question. When the incremental revenue from the special order exceeds the incremental costs of the order Almost always, because it means more business and income, and will keep the employees productive When the incremental costs from the special order exceeds the incremental revenue of the order

When the incremental revenue from the special order exceeds the incremental costs of the order

If some products must be cut back because of a constraint, produce the products with the highest: Multiple choice question. net operating income per unit contribution margin per unit of product contribution margin per unit of constrained resource

contribution margin per unit of constrained resource

The first step in decision making is to: Multiple choice question. identify relevant costs and benefits define the alternatives perform a differential analysis

define the alternatives Reason: identify relevant costs and benefits (step 2) perform a differential analysis (step 3)

True or false: When deciding whether to take a train or drive for a weekend trip to visit an out-of-town friend, the monthly fee a student pays to park at school is not relevant to the decision.

True Reason: A monthly fee for parking at school is not relevant. It doesn't have anything to do with a trip to visit to a friend.

When a shortage or limited resource of some type restricts a company's ability to satisfy demand, the company has a(n) _________.

constraint

The key to effective decision making is: Multiple choice question. considering opportunity costs differential analysis knowing there are at least two alternatives

differential analysis