ACCT 202 - Chapter 13 Learnsmart
Which of the following are ways to increase the capacity of a bottleneck?
- Investing in additional machines at the bottleneck - Shifting workers from processes that are not bottlenecks to the process that is the bottleneck
The Yoga Corporation has sales of $325,000, net operating income of $175,000 and average net assets of $500,000. The corporation's return on investment (ROI) is ____%
35
The formula to calculate the target cost includes _____________.
desired profit per unit anticipated selling price
An increase in cost between two alternatives is a(n) ________ cost.
differential
Focusing on future costs and benefits that are not the same between alternatives is ______.
differential analysis
True or false: There is never a justifiable reason to keep an unprofitable product line.
false
True or 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
A business segment should only be dropped if a company can save more in ______ costs than it loses in contribution margin.
fixed
A company's price floor is determined by ______.
incremental costs
Future costs and benefits that do not differ between alternatives are ______ costs to the decision-making process.
irrelevant
Joint costs are ______.
irrelevant in decisions regarding what to do with a product after split-off
The costs incurred up to the split-off point in a process in which two or more products are produced from a common input are known as ______ costs.
joint
Differential costs and benefits that should be considered in a decision ______.
may be qualitative or quantitative
If a cost is traced to a segment using activity-based costing, it ______.
may or may not be an avoidable cost of the segment
If a cost is traced to a segment using activity-based costing, it ______.
may or may not be avoidable cost of the segment
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 or economic
A product's differentiation value can arise by enabling customers to ______ the best available alternative.
realize greater cost savings than generate more sales and contribution margin than
Managers may choose to retain an unprofitable product line because it ______.
attracts customers helps sell other products
The present trend appears to be towards _________ vertical integration
less
In general, the more sensitive customers are to price, the ______ the optimal selling price will be.
lower
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
Product markup is generally expressed as a(n) ________ of cost.
percentage
The costs provided by a well-designed activity-based costing system are ______ relevant to a decision.
potentially
Establishing selling prices based on the economic worth of benefits their goods and services provide to customers is the basis of ______.
value-based pricing
Which term refers to a company that is involved in more than one activity in the value chain?
vertical integration
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 should ______ be included in a make or buy analysis.
always
In general, the less sensitive customers are to price, the _____ the optimal selling price will be.
higher
To maximize total contribution margin when a constrained resource exists, produce the products with the ______.
highest contribution margin per unit of the constrained resource
When planning a trip and deciding to drive your car or take the train, gasoline is a(n) ______ cost.
relevant
Which of the following should not be included in the analysis when making a decision?
sunk costs non-differential future costs
Anticipated selling price - Desired profit =
target cost
When dealing with a constrained resource, managers should focus their attention on managing the ______.
bottleneck
When a company applies a predetermined markup to a cost base to determine the selling price, it is using _______________- ______________ pricing
cost plus
When a product has an established ___________________ price, customers will not pay more for it and there is no reason for a supplier to charge less.
market
The product development team is given the responsibility of designing a product so that it can be made for no more than the
target cost
The process of determining the maximum allowable cost for a product and developing a profitable prototype is called ______.
target costing
When considering decision alternatives, both relevant and irrelevant costs are included when using the ____________ ________________ approach
total cost
To effectively deal with a constraint ______.
efforts should be focused on the weakest link improvements should focus on the constraint
Being less dependent on suppliers and making profits on both parts and the final product are advantages of __________ _______.
vertical integration
When a company is involved in more than one activity in the entire value chain, it is
vertically integrated
When demand for products exceeds the production capacity, a(n) ___________ ________-_________ decision must be made.
volume trade-off
When considering accepting a special order, ______.
normal sales must not be affected there must be idle capacity
When making a decision, irrelevant items are included in the analysis of both alternatives when using ______.
the total cost approach only
The formula used to calculate markup percentage on absorption cost includes ______. Multiple select question. unit product cost multiplied by unit sales selling, general and administrative expenses required ROI multiplied by fixed costs required ROI multiplied by investment
unit product cost multiplied by unit sales selling, general and administrative expenses required ROI multiplied by investment
Costs and benefits that always differ between alternatives are ______ costs and benefits.
relevant
True or false: Depreciation of existing assets is relevant to decisions.
false
True or false: If a company prices all of its products above the price floor, they will always make a profit.
false
True or false: In a sell or process decision, either all joint products must be processed or all must be sold.
false
True or false: In the absorption approach to cost-plus pricing, the cost base is the variable costing unit product cost.
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
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 ______.
(170,000-86,000) = 84,000 95,000 - 84,000 = 11,000
Product DGH has a monthly demand of 7,000 units. Its contribution margin is $18 per unit and $36 per direct labor hour. Product RBG has a monthly demand of 5,000 units. It's contribution margin is $15 per unit and $60 per direct labor hour. If the company only has 2,000 direct labor hours available, the company should produce ___________ units of Product DGH and ____________ units of Product RBG.
1500 5000
Calculate the return on investment based on the following information. Sales $200,000 Net operating income $80,000 Net assets, 1/1/2020 $350,000 Net assets 12/31/2020 $490,000
19% Reason: $80,000 ÷ (($350,000 + $490,000) ÷ 2) = 0.19 or 19%
ABC Lumber spent $1,000 cutting down a tree. The result was 40 pieces of unfinished lumber that sell for $20.00 each and 100 bags of sawdust that sell for $1.00 each. If the unfinished pieces of lumber are processed into finished lumber at a cost of $8.00 each, they will sell for $35.00. A bag of sawdust can be processed into Presto Logs that sell for $1.25 at a cost of $0.75 per bag. Which of the following statements are true concerning whether the unfinished pieces of lumber should be processed into finished lumber and whether the sawdust should be processed into Presto Logs?
The pieces of unfinished lumber should be processed. The sawdust should be sold as is without being processed into Presto Logs.
When a constraint exists, companies need to focus on maximizing ______.
contribution margin per unit of constraint
Applying a predetermined markup percentage to a cost base to determine the selling price is called ______.
cost-plus pricing
Given a reference value of $3,500 and a differential value of $4,200, the value-based price will be greater than or equal to $ _________ and less than or equal to $____________
3500 7700 (3500+4200)
The total cost approach and the differential approach methods of decision analysis ______ provide the same correct answer.
will always
A company is considering buying a component part that they currently make. Which of the following items related to the equipment currently being used to make the component are relevant to the decision?
salvage value alternative uses for the equipment
When making a decision, qualitative differences between alternatives ______ be ignored.
should not
Allocated common costs are ______ avoidable and/or relevant to a decision.
sometimes
Costs that have no impact on future cash flows and are irrelevant to decisions are ______ costs.
sunk
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 a product has an established market price ______.
there is no reason for suppliers to charge less than the established price consumers will not pay more than the established price
True or false: Effectively managing an organization's constraints is a key to increased profits.
true
Activities ranging from development to production to after-sales service are called a(n) _____________ _____________
value chain
Companies establish selling prices based on the economic worth of benefits their goods and services provide to customers when using
value-based
Competitors have an important effect on a company's pricing decisions because they provide ____________ prices that influence the price of elasticity of demand.
reference
A product's economic value to the customer is based on the __________ value and the ____________ value.
reference differentiation
Which of the following involves increasing the capacity of a bottleneck?
relaxing the constraint
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
Less dependence on suppliers is an advantage of ______.
vertical integration
Product DGH has a monthly demand of 5,000 units. Its contribution margin is $18 per unit and $36 per direct labor hour. Product RBG has a monthly demand of 4,000 units. It's contribution margin is $15 per unit and $60 per direct labor hour. If the company only has 1,500 direct labor hours available, the company should produce _________ units of Product DGH and __________ units of Product RBG.
1,000 4,000
Miracle Clean's variable costs are $3.00 per bottle and Fixed Expenses are $350,000 per year. The company currently sells 150,000 bottles for $6.50 which results in profit of $175,000. The company is considering raising the selling price to $7.00 per bottle which is expected to decrease sales by 20%. If the price is raised, the number of units that must be sold to keep the profits unchanged is
131,250
Product ABC has a contribution margin per unit of $10.00. Each unit of ABC requires 5 minutes of machine time. Product XYZ has a contribution margin per unit of $15.00 and each unit requires 10 minutes of machine time. If the company's constraint is machine hours, to maximize profit, they should first fill the demand for Product ______.
ABC Reason: The company should fill the demand for the product with the highest CM per unit of the constrained resource. ABC's is $2 per minute of machine time (CM of $10 ÷ 5 minutes) while XYZ's is only $1.50 per minute of machine time (CM of $15 ÷ 10 minutes).
Anything that prevents you from getting more of what you want is a(n)
constraint
Average costs ______.
contain sunk costs are often misleading
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?
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).
To calculate the optimal selling price using Microsoft Excel's Solver requires ______.
current selling price current unit sales percentage change in selling price
The first step in decision making is to ______.
define the alternatives
The key to effective decision making is ______.
differential analysis
When considering decision alternatives, only relevant costs are included when using the _______ _____ approach.
differential cost
Enabling customers to realize greater cost savings than the best alternative available raises a product's _______ value
differentiation
The price of a customer's best available alternative plus the value of what differentiates the product from that alternative is the product's ______.
economic value to the customer
True or false: Opportunity costs are not found in accounting records because they are not relevant to decisions.
false
Pricing all a company's products above the price floor does not guarantee a profit because all ______ costs may not be covered.
fixed
Irrelevant costs include ______.
future costs that do not differ between alternatives sunk costs
When making a product line decision, a company may focus on lost contribution margin and avoidable fixed costs or prepare comparative _________________ ______________.
income statements
Miracle Clean's variable costs are $3.00 per bottle and Fixed Expenses are $350,000 per year. The company currently sells 150,000 bottles for $6.50 which results in profit of $175,000. The company is considering raising the selling price to $6.75 per bottle which is expected to decrease sales by 5%. If the price is raised profits are expected to ______________ by $_______ per year.
increase 9375
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
True or false: Given a reference value of $5,500 and a differential value of $3,200, the value-based price will be greater than $3,200 and less than $5,500.
False
True or false: Some decisions only have one alternative.
False
When making a volume-trade off decision, managers should ignore ______.
fixed costs
It is assumed under the _________ ______________ approach that customers are required to buy a product at whatever price the seller deems appropriate.
absorption costing
Steps in the absorption costing approach are ______.
calculate unit product costs multiply unit product cost by 1 + markup percentage determine markup percentage on absorption cost
Synonyms for differential costs include ______ cost.
incremental avoidable
When making a decision to either buy a movie ticket or rent a DVD, the cost of the movie ticket is an example of a(n) ______ cost.
incremental avoidable
A joint product should be processed after split-off if the ______.
incremental revenue after split-off exceeds the incremental processing cost after split-off
Generally speaking, managers should set higher prices when demand is:
inelastic
Costs and benefits that should be ignored when making decisions are called ______ costs and benefits.
irrelevant
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.
make or buy
Determining whether to carry out an activity in the value chain internally or use a supplier is a ______ decision.
make or buy
The target costing approach was developed because ______. Multiple select question. a product must be designed before it can be priced most of a product's cost is determined in the design stage cost reduction opportunities are primarily found during production the market really determines prices
most of a product's cost is determined in the design stage the market really determines prices
Joint costs incurred prior to the split-off point are ______ relevant in decisions regarding what to do from the split-off point forward.
never
If a product costs $500 and the company applies a 50% markup on cost, the selling price of the product will be ______.
750
Goodstone Tire Corporation sells tires for $100 each. Per unit costs associated with producing and selling the tires are: Direct materials $35 Direct labor 10 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 Reason: The revenue per tire is $70 and the cost is $63 (direct materials, direct labor, variable overhead and inspection fee of $10 ($100,000/10,000) tires) so each tire will generate $7 in net operating income or $70,000 total.
Which of the following techniques describe how a bottleneck should be managed?
- Find ways to increase the capacity of the bottleneck. - Ensure there is minimal lost time at the bottleneck due to breakdowns and set-ups. - Focus business process improvement efforts on the bottleneck.
Calculate the return on investment based on the following information. Sales $200,000 Net operating income $80,000 Net assets, 1/1/2020 $350,000 Net assets 12/31/2020 $490,000
Reason: $80,000 ÷ (($350,000 + $490,000) ÷ 2) = 0.19 or 19%
Which of the following best describes the price elasticity of demand?
This is the degree to which a change in price affects the unit sales of a product.
Goodstone Tire Corporation sells tires for $100 each. Per unit costs associated with producing and selling the tires are: Direct materials $35 Direct labor 10 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 15,000
Miracle Clean's variable costs are $3.00 per bottle and Fixed Expenses are $350,000 per year. The company currently sells 150,000 bottles for $6.50 which results in profit of $175,000. The company is considering raising the selling price to $7.00 per bottle which is expected to decrease sales by 20%. If the price is raised profits are expected to___________ (increase/decrease) by $ _________ per year.
decrease by 45,000
The degree to which a change in price affects unit sales of a product or service is the ______________ _______________ of ________________.
price elasticity of demand
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 - do not have enough capacity to satisfy the demand for all of its products
Miracle Clean's variable costs are $3.00 per bottle and Fixed Expenses are $350,000 per year. The company currently sells 150,000 bottles for $6.50 which results in profit of $175,000. The company is considering raising the selling price to $6.75 per bottle which is expected to decrease sales by 5%. If the price is raised, the number of units that must be sold to keep the profits unchanged is
140,000
If a product costs $150 and the company applies a 40% markup on cost, the selling price of the product will be $
210
DSA, Inc. has a total of $200,000 of operating assets. They sell 50,000 units per year of a single product. Unit product cost is $30. Selling and administrative expenses are $15,000 fixed and $7 per unit variable. Calculate the mark-up percentage on absorption cost given a required ROI of 18%.
26.7% Reason: [(18% × $200,000) + ($7 × 50,000 + $15,000)] ÷ ($30 × 50,000) = 26.7%
Product ABC has a contribution margin per unit of $10.00. Each unit of ABC requires 5 minutes of machine time and 10 minutes of labor time. Product XYZ has a contribution margin per unit of $15.00 and each unit requires 10 minutes of machine time and 5 minutes of labor time. If the company's constraint is labor hours, the contribution margin per unit of constraint for Product XYZ is $_____________ per minute.
3
Which of the following are ways in which to calculate the benefit of selecting one alternative over another?
An analysis that just looks at the relevant costs and benefits. The difference between the net operating income for the two alternatives. An analysis that looks at all costs and benefits and identifies those that are differential.
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. Reason: 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.
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. Reason: 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
Which of the following attempts to match the sunk cost of an asset with the periods that benefit from that cost?
accounting depreciation only
Factors in determining the markup percentage using the absorption costing approach to cost-plus pricing include: ______.
adequate return on investment absorption costing unit product cost selling, general, and administrative expenses
Which of the following can make a product line look less profitable than it really is?
allocated common fixed costs
Potential advantages of dropping a product line or other segment include:
an overall increase in net operating income avoiding more fixed costs
Because they provide reference prices that influence the price elasticity of demand, ______ have an important effect on a company's pricing decisions
competitors
The highest price customers are willing to pay is called the price _____________
ceiling
When planning a trip and making a decision to drive or take the train, the cost of car repairs and maintenance is a(n) ______ cost.
relevant
The absorption costing approach to cost-plus pricing ______.
relies on forecasted unit sales assumes that customers will pay whatever price the company decides to charge