managerial accounting exam 2

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

- Salvage value - Alternative uses for the equipment

irrelevant costs include

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

isolating relevant costs is desirable because

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

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 its products

net present value

-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

capital budgeting decisions include

-choosing to lease or buy new equipment -deciding to replace old equipment -acquiring a new facility to increase capacity -determining which equipment to purchase among available alternatives -purchasing new equipment to reduce cost

if the internal rate of return is

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

the payback method ___

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

typical capital budgeting cash outflows include

-initial equipment investments -installation costs -working capital invested

capital budgeting methods that focus on cash flows rather than incremental operating income are

-net present value -internal rate of return -payback

the capital budgeting approaches that use discounted cash flows

-net present value method -internal rate of return method

when considering accepting a special order _________

-normal sales must not be affected -there must be idle capacity

capital budgeting decisions _______

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

the net present value of a project is ______

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

the internal rate of return

-the discount rate that makes NPV equal zero for a project -the rate of return of an investment over its useful life

what assumption underlies the net present value analysis

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

potential advantages of dropping a product line or other segment include

an overall increase in net operating income avoiding more fixed costs than the company loses in contribution margin

when a project with a negative NPV has significant intangible benefits, the

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

the net present value method assumes that all cash flows other than initial investment occur ______ the period

at the end of

the cost of capital

average rate of return a company must pay for its long-term creditors and shareholders for the use of their funds

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

avoidable

to screen out undesirable, ____ use(s) of the cost of capital

both the net present value and internal rate of return methods

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?

both the original purchase price and annual depreciation

another term for the minimum required return rate is the cost of _____

capital

how manager plan significant investments in projects that have long term implications such as purchasing new equipment or introducing new products is called

capital budgeting

a limited resource of some type that restricts the company's ability to satisfy demand is a(n)

constraint

anything that prevents you from getting more of what you want it a(n)

constraint

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

contribution margin

which is not a typical budgeting outflow

cost reductions

the first step in the decision making process is

define the alternatives being considered

focusing on future costs and benefits that are not the same between the choices

differential analysis

the key to effective decision-making is

differential analysis

when considering decision alternatives, only relevant costs are included when using the

differential cost approach

because of the time value of money, projects that promise ______ returns are preferable to those that promise the opposite

earlier

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

false

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

false, not the best way to compare two investments

the basic premise of the payback period is the _____, the more desirable the investment

faster the cost of the investment is recovered

a business segment should only be dropped if a company can save more in ______ fixed costs than it loses in contribution margin

fixed

when making a volume-trade off decision, managers should ignore

fixed costs

to maximize total contribution margin when a constrained resource exists, produce the products with the

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

hurdle rate

the simple rate of return

ignores the time value of money fluctuates from year to year along with fluctuations in revenue and expense

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

when making the 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 and avoidable

investment required/annual net cash inflow is the formula to find the factor needed to calculate the

internal rate of return

in an equipment capital budgeting decision, recovering the original investment means the _____

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

costs and benefits that should be ignored when making decisions are called ____ costs and benefits

irrelevant

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

irrelevant

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

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

isolate relevant costs from irrelevant costs

a capital investment project's payback period is the

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

the term capital budgeting is used to describe how managers plan significant investments in projects that have ______ implications

long-term

differential costs and benefits that should be considered in a decision

may be qualitative or quantitative

working capital _____

often increases when a company takes on a new project

when making a preference decision, comparing the net present value of one project to the net present value of another project can

only be done if the initial investments are equal

the potential benefit given up when selecting one alternative over another is a(n) _____ cost

opportunity

the two broad categories into which capital budgeting decisions fall are ______ and ______ decisions

preference and screening

the term discounting cash flows refers to the process of calculating the ____ value of those cash flows

present

costs and benefits that always differ between alternatives are _____ costs and benefits

relevant

differential revenue is an example of a(n) ______ benefit

relevant

when planning a trip and deciding to drive your car or take the train, gasoline is a(n) _________ cost

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) ________ cost

relevant

when computing the simple rate of return, the initial investment should be reduced by any ______ value realized from the sale of the old equipment

salvage

the cost of capital serves as a ______ tool

screening

when making a decision, qualitative differences between alternatives ______ be ignored

should not

the capital budgeting methods that focus on incremental operating income rather than cash flows is

simple rate of return

whether to perform various organization activities such as payroll and accounting internally or use an external provider is a _______ decision

sourcing

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

special

what type of cost is never relevant and should be disregarded when making decisions

sunk

which of the following are true

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

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

the differential cost approach only

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

a set of activities ranging from development to production to after-sales service is called

the value chain

when a constraint exists, companies need to focus on maximizing

total contribution margin

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

total cost

every decision has at least _____ alternatives

two

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

vertical integration

when demand for products exceeds the production capacity, a ______ decision must be made

volume trade-off

a special order should be accepted

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

current assets minus current liabilities are called

working capital

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

zero

a project is acceptable if the net present value is _______

zero or above