ACG 203 - Chapter 13 Quiz

Fixed costs are sunk costs.

False

A set of activities ranging from development to production to after-sales service is called ______.

the value chain

The total cost approach and the differential approach methods of decision analysis ______ provide the same correct answer.

will always

When a resource, such as space in the factory, has no alternative use, its opportunity cost is ______.

zero

Which of the following attempts to match the sunk cost of an asset with the periods that benefit from that cost?

Accounting depreciation only

A company is considering buying a component part that they currently make. Items related to the equipment being used to make the component that are relevant to this decision include ______.

Alternative uses for the equipment, salvage value

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

An avoidable cost

Variable costs are always relevant costs in decisions.

False

Costs that can be eliminated in whole or in part if a particular business segment is discontinued are called:

avoidable costs.

The first step in decision making is to ______.

define the alternatives

opportunity costs are not found in accounting records because they are not relevant to decision

false

One of the great dangers in allocating common __________ costs is that such allocations can make a product line look less profitable than it really is.

fixed

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

income statements

Synonyms for differential costs include ______ cost.

incremental and avoidable

Costs and benefits that should be ignored when making decisions are called ______ costs and benefits.

irrelevant

In order to prevent confusion and keep attention focused on critical information, it is desirable to _____

isolate relevant costs from irrelevant costs

If, by dropping a product line, a company cannot avoid as much in fixed costs as it loses in contribution margin, the company should ______ the product line.

keep

Differential costs and benefits that should be considered in a decision ____

may be qualitative or quantitative

The potential benefit given up when selecting one alternative over another is a(n) ______ cost.

opportunity costs

When planning a trip and deciding whether to drive or fly, the ______ is a sunk cost and should be ignored.

original cost of the car

When making a decision only ______ costs and benefits should to be included in the analysis.

relevant

When making a decision, qualitative differences between alternatives ______ be ignored.

should not

Allocated common costs are ______ avoidable and/or relevant to a decision.

sometimes

When a company is involved in more than one activity in the entire value chain, it is

vertically integrated

A special order should be accepted ______.

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

Goodstone Tire Corporation sells tires for $100 each. Per unit costs associated with producing and selling the tires are: Direct materials and labor $45; Factory overhead $20; Selling and administrative $15. The variable portion of the factory overhead is $8 per unit. A foreign company wants to purchase 10,000 tires for $70 each. The order would not require any selling or administrative costs. The purchaser will pay the shipping costs, but Goodstone will have to pay a $100,000 inspection fee in order to be able to make the foreign sale. Accepting the special order will not affect current sales or production. What effect would accepting the special order have on Goodstone's net operating income?

$70,000 increase

which of the following are ways in which to calculate the benefit of selecting one alternative over another?

-An analysis that looks at all costs and benefits and identifies those that are differential.-An analysis that just looks at the relevant costs and benefits.-The difference between the net operating income for the two alternatives.

Average costs______

-contain sunk costs -are often misleading

Irrelevant costs include:

-future costs that do not differ between alternatives -sunk costs

Managers may choose to retain an unprofitable product line because it ______.

-helps sell other products -attracts customers

Which of the following can make a product line look less profitable than it really is?

Allocated common fixed costs

Andrews Co. can purchase 20,000 units of Part XYZ from a supplier for $18 per part. The relevant manufacturing costs for the part is $15 per unit. If the company decides to purchase the part, the space now being used can be used to produce another product that will generate a segment margin of $80,000 per year. Should Andrews continue to make or should they buy the part?

Buy -- $20,000 advantage[The total buy price = 20,000 x $18 or $360,000. The cost to make equals (20,000 x $15) + $80,000 forgone opportunity or 380,000. Thus, there is a $20,000 advantage to buying the part.]

Focusing on future costs and benefits that are not the same between alternatives is ______.

Differential analysis

Which of the following is an advantage of buying a part instead of making it?

Economies of scale can result in higher quality and lower costs from suppliers.

Opportunity costs represent costs that can be reduced by effective management of operations.

False

Some decisions only have one alternative.

False

Opportunity costs should ______ be included in a make or buy analysis.

always

A cost that can be eliminated in whole or in part by choosing one alternative over another is a(n) ______ cost.

avoidable cost

A business segment should only be dropped if a company can avoid more in fixed costs than it gives up in ______.

contribution margin

When considering decision alternatives, only relevant costs are included when using the ________ approach.

differential cost

Depreciation of existing assets is relevant to decisions.

false

There is never a justifiable reason to keep an unprofitable product line.

false

When estimating the cost of taking a 300 mile trip, the average cost per mile × 300 is the best way to evaluate the total cost.

false

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

income statement

Stephens, Inc. is considering dropping a product line. During the prior year, the line had sales of $170,000, variable costs of $86,000 and total fixed expenses of $110,000. Of the fixed expenses, $95,000 are avoidable. If Stephens drops the product line, net operating income will ______.

increase by $11,000

Future costs and benefits that do not differ between alternatives are ______ costs to the decision-making process

irrelevant

The present trend appears to be towards ______ vertical integration.

less

A decision to carry out one of the activities in the value chain internally rather than to purchase externally from a supplier is a ______ decision.

make or buy

Allocated common costs are ______.

only relevant to decisions if they are avoidable

The reduction in resale value of an asset through use or over time is called ___ or ______ depreciation.

real, economic

A one-time order that is not considered part of the company's normal ongoing business is called a ______ order.

special

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

special order

A cost that has already been incurred and cannot be avoided regardless of what a manager decides to do is referred to as a

sunk cost

Which of the following costs are always irrelevant in decision making?

sunk costs

If a company is using a resource that could be used for some other purpose, the opportunity cost of that resource is ______.

the profit from the best alternative use of the resource

When making a decision, irrelevant items are included in the analysis of both alternatives when using ______.

the total cost approach only

A cost that can be avoided by choosing one alternative over another is relevant for decision purposes.

true

Sunk costs are never relevant in decision making.

true

Activities ranging from development to production to after-sales service are called a(n)

value chain

Less dependence on suppliers is an advantage of ______.

vertical integration

Which term refers to a company that is involved in more than one activity in the value chain?

vertical integration

Being less dependent on suppliers and making profits on both parts and the final product are advantages of

vertical integrations

The key to effective decision making is ______.

differential analysis

When considering decision alternatives, both relevant and irrelevant costs are included when using the _____ approach

total cost

The opportunity cost of making a component part in a factory with excess capacity for which there is no alternative use is:

zero.

Fabri Corporation is considering eliminating a department that has an annual contribution margin of $38,000 and $76,000 in annual fixed costs. Of the fixed costs, $19,000 cannot be avoided. The annual financial advantage (disadvantage) for the company of eliminating this department would be:

$19,000

Accepting a special order will improve overall net operating income if the revenue from the special order exceeds:

the incremental costs associated with the order.

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 ______ costs.

irrelevant

Isolating relevant costs is desirable because ______.

-Critical information may be overlooked with the total cost approach -All information needed for the total cost approach is rarely available - Irrelevant costs may be used incorrectly in the analysis

Goodstone Tire Corporation sells tires for $100 each. Per unit costs associated with producing and selling the tires are: Direct materials and labor $45; Factory overhead $20; Selling and administrative $15. The variable portion of the factory overhead is $8 per unit. A foreign company wants to purchase 5,000 tires for $70 each. The order would not require any selling or administrative costs. The purchaser will pay the shipping costs, but Goodstone will have to pay a $100,000 inspection fee in order to be able to make the foreign sale. Accepting the special order will not affect current sales or production. If Goodstone accepts this order, net income will ____ (increase/decrease) by a total of $______

decrease, 15000

An increase in cost between two alternatives is a(n)

incremental or differential cost

When deciding whether to fly or take the train on a trip, the cost of putting your pet in a boarding facility while you are away is a(n) ______ cost

irrelevant

A decision to carry out one of the activities in the value chain internally, rather than to buy externally from a supplier, is called a(n) ________ or _________ decision.

make or buy decision

Costs that have already been incurred and cannot be avoided regardless of what a manager decides to do are ______ costs.

sunk

When making a decision, only relevant items are included in the analysis of the alternatives when using ______.

the differential cost approach only

When considering accepting a special order, ______.

there must be idle capacity normal sales must not be affected