Managerial Accounting Final CH 11,13,14

Calderon Kitchen Supplies is planning to invest $210,000 in a new product. If the present value of the cash inflows is $266,700, the project profitability index is ______.

1.27

Which of the following statements is correct?

A manager might reject a proposal using ROI that the manager would accept using residual income.

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

Allocated common fixed costs

True or false: Some decisions only have one alternative.

False

True or 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

Assume the selling division has no idle capacity and must give up outside sales, but does not lose anything by selling internally rather than outside. In addition, the buying division has an accurate assessment of how much it costs the company for the transfer to take place. Under this situation, which pricing method is being used?

Market Price

Which of the following should not be included in the analysis when making a decision?

Non-differential future costs Sunk costs

Which of the following statements is not a weakness of using return on investment (ROI) to evaluate performance?

ROI does not include the investment in non-operating assets, such as land held for investment or stock in other companies.

Which of the following statements are true?

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.

True or false: Mingling irrelevant and relevant costs may cause confusion and distract attention from critical information.

True

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

Potential advantages of dropping a product line or other segment include ______.

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

Valid criticisms of evaluating performance based on return on investment (ROI) include managers may ______.

be put in charge of a business segment that includes committed costs over which a manager has no control reject investment opportunities that are profitable for the company but have a negative impact on a manager's ROI take actions that increase ROI in the short-run at the expense of long-term performance

To screen out undesirable investments, ______ use(s) the cost of capital.

both the net present value and internal rate of return methods

In a decentralized organization ______.

changes in the operating environment can be responded to rapidly lower-level managers are trained for higher positions. top management can concentrate on issues such as overall strategy

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

contribution margin

Lower-level managers are empowered to make decisions in a ______ organization, which can ________ motivation and job satisfaction.

decentralized, increase

The first step in decision making is to ______.

define the alternatives

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

differential

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

fixed

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

Service department _______ costs represent the costs of making capacity available for use. These costs should be charged in predetermined lump-sum amounts.

fixed

When making a volume-trade off decision, managers should ignore ______.

fixed costs

The payback method ______.

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

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

Two or more products produced from a common input are called ______.

joint products

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

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

make, buy

If cost is used as a transfer price, the only division with an opportunity to make a profit on the transfer is the division that ______.

makes the final sale to an outside party

When managers are evaluated on residual income, rather than on return on investment (ROI), they will be ______ likely to pursue projects that will benefit the entire company.

more

Discussions between the buying and selling divisions result in a(n) ______ transfer price.

negotiated

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

opportunity

If the transfer has no effect on fixed cost, the transfer price from the selling division's standard must be equal to or greater than the (variable cost per unit + _______) ÷ number of units transferred.

opportunity cost of lost sales

Reggie's Refrigerators is considering the purchase of some new equipment. The company has limited its purchase options to two alternatives. Option A has an internal rate of return of 10%, and option B has an internal rate of return of 13%. If the required rate of return on the project is 9.5%, ______.

option B is the preferred choice

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

Negotiated transfer prices ______.

preserve the autonomy of the divisions are consistent with decentralization use the expertise of managers in weighing the costs and benefits of the transfer

Costs and benefits that always differ between alternatives are ______ costs and benefits.

relevant

Lower-level managers' decision-making authority can be linked to the outcomes of those decisions through __________ accounting systems.

responsibility

Drawbacks of using variable or full costing to set transfer prices include ______.

suboptimization that may occur as fixed costs per unit may push the transfer price above market price a lack of incentive to control costs because they are simply passed to another department a lack of departmental profit for the supplying department

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

sunk

When using the internal rate of return method to rank competing investment projects ______.

the higher the internal rate of return, the more desirable the project

The internal rate of return is ______.

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

Using the market price to set transfer prices may not be the best approach when ______.

the selling division has idle capacity

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

the total cost approach only

Operations are able to respond quickly to customers and changes in the environment in a decentralized organization because ______.

there are fewer managers that must be consulted before a decision is made

The internal rate of return is the discount rate that results in a net present value of ________ for the investment

zero

When a transfer has no effect on fixed costs, to be acceptable to the selling division, the transfer price must ______.

cover any lost contribution margin due to the transfer cover the variable costs per unit cover any opportunity cost from lost sales

Isolating relevant costs is desirable because ______.

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

The Eye Clinic of Dr. Christensen is investing in some equipment to perform corrective eye surgery. It is expected that the equipment purchase will 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 ______.

less than the internal rate of return of the corrective eye surgery equipment