Exam 2 SB-Hw Content

Select all that apply Isolating relevant costs is desirable because Blank______. . all information needed for the total cost approach is rarely available . managers prefer to see all costs and benefits associated with a decision . critical information may be overlooked with the total cost approach . irrelevant costs may be used incorrectly in the analysis

-all information needed for the total cost approach is rarely available. -irrelevant costs may be used incorrectly in the analysis .-critical information may be overlooked with the total cost approach.

A company must make a volume trade-off decision when they Blank______. have excess capacity that is not currently being utilized must trade off units of one product for units of another do not have enough capacity to satisfy all product demand

-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.

Select all that apply Capital budgeting decisions include Blank______. choosing to lease or buy new equipment purchasing new equipment to reduce cost deciding to replace old equipment hiring new factory workers increasing the salary of the current company president acquiring a new facility to increase capacity

. choosing to lease or buy new equipment . purchasing new equipment to reduce cost . deciding to replace old equipment . acquiring a new facility to increase capacity

View Perfect is considering an investment in a new line of windows. The project is expected to last 10 years. If the factor of the internal rate of return is 5.889, the internal rate of return is Blank______. 14% 5% 10% 11%

11%

Every decision has at least Blank______ alternative(s).

2

The factor of the internal rate of return is 5.033 for a project lasting 7 years. The internal rate of return is BLANK%

9

What assumption underlies net present value analysis? If the net present value of a project is positive, its payback period will be acceptable. All cash flows generated by an investment project are immediately reinvested at a rate of return equal to the discount rate. All cash flows including the initial investment are paid/received at the beginning of the period. If the net present value of a project is positive, the company's net income will increase.

All cash flows generated by an investment project are immediately reinvested at a rate of return equal to the discount rate.

When making a decision whether to keep an existing piece of equipment or replace it, which of the following is (are) considered a sunk cost? . Neither the original purchase price or annual depreciation expense. . Only the annual depreciation expense. . Both the original purchase price and annual depreciation expense. . Only the original purchase price.

Both the original purchase price and annual depreciation expense.

Which of the following is NOT a typical capital budgeting cash outflow? Working capital invested Initial equipment investment Cost reductions Installation costs

Cost reductions

Opportunity costs are not found in accounting records because they are not relevant to decisions. True False

False

Select all that apply Select the capital budgeting approaches that use discounted cash flows. Net present value method Payback method Simple rate of return method Internal rate of return method

Net present value method Internal rate of return method

Select all that apply Which of the following statements are true? The net present value method does not provide for return of the original investment. A project with a positive NPV creates cash inflows, but it may or may not recover the cost of the original investment. The net present value method automatically provides for return of the original investment. A project with a positive NPV will recover the original cost of the investment plus sufficient cash inflows to compensate for tying up funds.

The net present value method automatically provides for return of the original investment. A project with a positive NPV will recover the original cost of the investment plus sufficient cash inflows to compensate for tying up funds.

The net present value of one project can only be directly compare to the net present value of another project if the initial investments are equal. True false question.

True

Which term refers to a company that is involved in more than one activity in the value chain? Vertical integration Horizontal integration Non-integrated value chain Integrated value chain

Vertical integration

A special order should be accepted Blank______. almost always, because it means more business 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

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

Select all that apply Which of the following statements are true? In order for a project to be acceptable, the discount rate must be higher than the minimum acceptable rate of return. When the net present value method is used, the discount rate equals the hurdle rate. When using the internal rate of return method, the cost of capital is used as the hurdle rate. The cost of capital may be used to screen out undesirable projects.

When the net present value method is used, the discount rate equals the hurdle rate. When using the internal rate of return method, the cost of capital is used as the hurdle rate. The cost of capital may be used to screen out undesirable projects.

When a project with a negative NPV has significant intangible benefits, the Blank______. annual intangible benefit necessary to make the investment worthwhile should be calculated total present value of the project's cash outflows should be compared to the estimated intangible benefits intangible benefits should not be considered since the NPV is negative

annual intangible benefit necessary to make the investment worthwhile should be calculated

The net present value method assumes that all cash flow other than the initial investment occur Blank______ the period at the beginning of evenly throughout at the end of

at the end of

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

avoidable

Another term for the minimum required rate of return is the cost of

capital

How managers plan significant investments in projects that have long term implications such as purchasing new equipment or introducing new products is called Blank______. directing funds capital budgeting controlling costs investment initiative

capital budgeting

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

constraint

Anything that prevents you from getting more of what you want is a(n)

constraint

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 as follows: If the part is purchased, the supervisor position will be eliminated. The special equipment has no other use and no salvage value. Total allocated fixed overhead would be unaffected by the decision. The company should Blank______. continue to make the part — $40,000 advantage buy the part — $80,000 advantage continue to make the part — $60,000 advantage buy the part — $100,000 advantage

continue to make the part — $60,000 advantage

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 as follows: If the part is purchased, the supervisor position will be eliminated. The special equipment has no other use and no salvage value. Total allocated fixed overhead would be unaffected by the decision. The company should Blank______. continue to make the part — $40,000 advantage buy the part — $80,000 advantage buy the part — $100,000 advantage continue to make the part — $60,000 advantage

continue to make the part — $60,000 advantage

A business segment should only be dropped if a company can avoid more in fixed costs than it gives up in Blank______. variable costs net operating income segment sales contribution margin

contribution margin

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

contribution margin per unit of constrained resource

Abba, Inc. is considering dropping a product line. During the prior year, the line had sales of $207,000 and a contribution margin of $124,000. Fixed expenses consist of: The product line manager's $60,000 salary is avoidable as is the $20,000 of advertising. Of the administrative expenses, $10,000 is avoidable. The rest are general allocated expenses that will not change if the product is dropped. The rent expense is allocated to product lines based on sales and represents a share of the total cost for the building. If this product line is dropped overall net operating income will Blank______. decrease by $34,000 increase by $41,000 increase by $16,000 decrease by $124,000

decrease by $34,000

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

define the alternatives

The net present value of a project is the Blank______. expected net operating income sum of the present value of cash inflows and the present value of cash outflows actual return on investment difference between the present value of cash inflows and the present value of cash outflows

difference between the present value of cash inflows and the present value of cash outflows

A future cost that is not the same between any two alternatives is known as a(n) BLANK ,incremental, or avoidable cost.

differential

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

differential

When considering decision alternatives, only relevant costs are included when using the Blank cost approach

differential

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

differential analysis

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

differential analysis

Select all that apply The payback method Blank______. Multiple select question. does not consider how quickly an investment is recovered does not consider the time value of money cannot evaluate projects with uneven cash flows is not a true measure of investment profitability ignores all cash flows that occur after the payback period

does not consider the time value of money is not a true measure of investment profitability ignores all cash flows that occur after the payback period

Because of the time value of money, projects that promise Blank______ returns are preferable to those that promise the opposite. earlier higher lower later

earlier

When a capital investment decision is being made between two or more alternatives, the project with the shortest payback period is always the most desirable investment. True false question.

false

When a company is involved in more than one activity in the entire value chain, it is horizontally integrated. True false question. True False

false

The basic premise of the payback method is the Blank______, the more desirable the investment. slower the cost of the investment is recovered lower the internal rate of return faster the cost of the investment is recovered higher the net present value

faster the cost of the investment is recovered

A business segment should only be dropped if a company can save more in Blank______ costs than it loses in contribution margin. fixed product variable mixed

fixed

When making a volume-trade off decision, managers should ignore Blank______. contribution margin variable costs fixed costs

fixed costs

Irrelevant costs include Blank______. sunk costs all fixed costs future costs that do not differ between alternatives future costs that differ between alternatives

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 Blank______. highest contribution margin per unit of the constrained resource lowest contribution margin per unit of the constrained resource highest unit contribution margin lowest unit contribution margin

highest contribution margin per unit of the constrained resource

To determine if a project is acceptable compare the internal rate of return to the company's Blank______. hurdle rate tax rate profit margin sales ratio

hurdle rate

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 Blank______. decrease by $60,000 increase by $26,000 increase by $11,000 increase by $9,000

increase by $11,000

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) Blank______ cost. sunk incremental irrelevant avoidable

incremental cost avoidable cost

Select all that apply Synonyms for differential costs include Blank______ cost. Multiple select question. incremental sunk irrelevant avoidable

incremental; avoidable

Investment required ÷ Annual net cash inflow is the formula to find the factor that needed to calculate the Blank______. internal rate of return simple rate of return cost of capital net present value

internal rate of return

In an equipment capital budgeting decision, recovering the original investment means that the Blank______. funds used to pay for the equipment were provided by selling an old piece of equipment equipment was returned and the funds used to pay for the equipment were taken back investment has generated enough cash inflows to completely cover the cost of the equipment

investment has generated enough cash inflows to completely cover the cost of the equipment

When net cash inflow is the same every year, the equation used to calculate the factor of the internal rate of return is Blank______. . investment required ÷ annual net cash inflow . accounting net income from the project ÷ annual net cash inflow . investment required ÷ accounting net income from the project . annual net cash ÷ required investment

investment required ÷ annual net cash inflow

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

irrelevant

Future costs and benefits that do not differ between alternatives are Blank______ costs to the decision-making process. sunk irrelevant relevant opportunity

irrelevant

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) Blank______ cost. relevant irrelevant sunk

irrelevant

The internal rate of return Blank______. is the rate of return required for all investments made by a company is also known as the simple rate of return method does not consider the time value of money is the discount rate that makes NPV equal zero for a project

is the discount rate that makes NPV equal zero for a project

The internal rate of return Blank______. Multiple choice question. is the rate of return required for all investments made by a company does not consider the time value of money is also known as the simple rate of return method is the discount rate that makes NPV equal zero for a project

is the discount rate that makes NPV equal zero for a project

In order to prevent confusion and keep attention focused on critical information, it is desirable to Blank______. . isolate relevant costs from irrelevant costs . ignore relevant costs and focus on irrelevant one . combine relevant and irrelevant costs to obtain a total cost

isolate relevant costs from irrelevant costs

A capital investment project's payback period is the Blank______. . length of time it takes for the project to begin to generate cash inflows . length of time it takes for the project to recover its initial cost from the net cash inflows generated . useful life of the capital asset purchased . estimated length of the capital investment project from the initial cash outflow to the end of the project

length of time it takes for the project to recover its initial cost from the net cash inflows generated

An Eye Clinic invested in some equipment to perform corrective eye surgery that is expected to generate an internal rate of return of 24%. This equipment was chosen over equipment to perform cataract eye surgery. Thus, the internal rate of return of the cataract eye surgery equipment must have been Blank______. less than 24% 0% greater than 24%

less than 24%

Select all that apply If the internal rate of return is Blank______. greater than the hurdle rate the project should be rejected less than the hurdle rate the project should be rejected less than the hurdle rate the project is acceptable greater than the hurdle rate the project is acceptable

less than the hurdle rate the project should be rejected greater than the hurdle rate the project is acceptable

The term capital budgeting is used to describe how managers plan significant investments in projects that have Blank______ implications. short-term both short-term and long-term long-term

long-term

Differential costs and benefits that should be considered in a decision Blank______. may be qualitative or quantitative are always quantitative are always qualitative

may be qualitative or quantitative

One dollar today is worth Blank______ a dollar a year from now. less than the same as more than

more than

Select all that apply The capital budgeting methods that focus on cash flows rather than incremental operating income are Blank______. Multiple select question. net present value payback simple rate of return internal rate of return

net present value internal rate of return payback

When considering accepting a special order, Blank______. incremental revenue should equal increment cost normal sales must not be affected there must be idle capacity opportunity costs should never be considered

normal sales must not be affected there must be idle capacity

Working capital Blank______. often increases when a company takes on a new project is the cost savings provided by the capital investment is the value recaptured after the end of an investment's use is the amount paid for ownership of the investment

often increases when a company takes on a new project

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

opportunity

The length of time that it takes for a project to recover its initial cost from the net cash inflows that it generates is the BLANK period.

payback

The more quickly the cost of an investment can be recovered, the more desirable the investment is the basic premise of the BLANK method.

payback

The term discounting cash flows refers to the process of calculating the Blank______ value of those cash flows. future present past

present

Costs and benefits that always differ between alternatives are Blank______ costs and benefits. Multiple choice question. relevant sunk variable irrelevant

relevant

When planning a trip and making a decision to drive or take the train, the cost of car repairs and maintenance is a(n) Blank______ cost. opportunity relevant irrelevant sunk

relevant

Select all that apply Capital budgeting decisions Blank______. require a great deal of analysis prior to acceptance require little or no thought before being made involve an immediate cash outlay in order to obtain a future return are day-to-day decisions made by managers

require a great deal of analysis prior to acceptance involve an immediate cash outlay in order to obtain a future return

The cost of capital serves as a Blank______ tool. screening preference

screening

Select all that apply The two broad categories into which capital budgeting decisions fall are Blank______ and Blank______ decisions. Multiple select question. replacement screening purchasing preference

screening; preference

The two broad categories into which capital budgeting decisions fall are BLANK decisions and BLANK decisions.

screening; preference

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

should not

The capital budgeting method that focus on incremental operating income rather than cash flows is Blank______. simple rate of return net present value payback internal rate of return

simple rate of return

Determining whether to carry out an activity in the value chain internally or use a supplier is a Blank______ decision. product line utilization of a constrained resource sourcing special order

sourcing

Whether to perform various organization activities such as payroll and accounting internally or use an external provider is a Blank______ decision. sourcing product line special order sell or process

sourcing

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

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

What type of cost is never relevant and should be disregarded when making decisions? Multiple choice question. Marginal Incremental Opportunity Sunk

sunk costs

Select all that applyThe net present value of a project is ______. the present value of the project's projected annual tax savings the difference between the present value of cash inflows and present value of cash outflows for a project the cost of an investment less the present value of the project's salvage value used in determining whether or not a project is an acceptable capital investment

the difference between the present value of cash inflows and present value of cash outflows used in determining whether or not a project is an acceptable capital investment

When making a decision, only relevant items are included in the analysis of the alternatives when using Blank______. neither the differential nor total cost approach the total cost approach only both the differential and total cost approaches the differential cost approach only

the differential cost approach only

When making a decision, only relevant items are included in the analysis of the alternatives when using Blank______. the differential cost approach only both the differential and total cost approaches the total cost approach only neither the differential nor total cost approach

the differential cost approach only

The internal rate of return is Blank______. Multiple choice question. the appropriate salvage value of purchased equipment a project's minimum required rate of return a discount rate of zero the rate of return of an investment project over its useful life

the rate of return of an investment project over its useful life

If a company is using a resource that could be used for some other purpose, the opportunity cost of that resource is Blank______. the segment margin from the best alternative use of the resource zero the segment margin from the current use of the resource

the segment margin from the best alternative use of the resource

When making a decision, irrelevant items are included in the analysis of both alternatives when using Blank______. . neither the differential nor total cost approach . both the differential and total cost approaches . the differential cost approach only . the total cost approach only

the total cost approach only

A set of activities ranging from development to production to after-sales service is called Blank______. a marketing strategy the value chain vertical integration

the value chain

When a constraint exists, companies need to focus on maximizing Blank______. net sales net income from sales total contribution margin

total contribution margin

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

total cost

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

value chain

Select all that apply A company is considering buying a component part that they currently make using some existing equipment. Relevant costs to this sourcing decision include Blank______. outside purchase price equipment depreciation charges variable overhead allocated general overhead

variable overhead outside purchasing price

Which term refers to a company that is involved in more than one activity in the value chain? Non-integrated value chain Horizontal integration Integrated value chain Vertical integration

vertical integration

When demand for products exceeds the production capacity, a Blank______ decision must be made. sourcing sell or process volume trade-off product line

volume trade-off

Current assets minus current liabilities is called

working capital

Select all that apply Typical capital budgeting cash outflows include Blank______. Multiple select question. salvage value of old equipment working capital invested installation costs cost reductions initial equipment investments

working capital invested initial equipment investments installation costs

When a resource, such as space in the factory, has no alternative use, its opportunity cost is Blank______. negative zero infinite not determinable

zero

A project has an acceptable rate of return, if the net present value is Blank______. zero or above zero or below above zero only below zero only

zero or above