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Exam 13: Relevant Information for Special Decisions

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Question 61

Multiple Choice

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Expected future revenues that differ among the alternatives under consideration are often referred to as:

A) Alternative revenues.
B) Preferential revenues.
C) Relative revenues.
D) Differential revenues.

E) A) and B)
F) A) and C)

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Question 62

Multiple Choice

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Outdoor Living Company has just received a special order for 500 hammocks. Outdoor Living has sufficient idle capacity to accept the order. Accepting the order will increase Outdoor Living's total variable manufacturing costs. Which type of cost is considered relevant to Outdoor Living's decision whether to accept or reject the special order?

A) Raw materials to make the 500 hammocks
B) Company president's salary
C) Salary of the production manager
D) Depreciation on equipment that would be used to make the hammocks

E) A) and B)
F) B) and D)

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Question 63

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King Company has two divisions whose most recent financial statements are shown below: Required:Compute the impact on profit if the Residential Division is eliminated.Do you recommend that King eliminate the Residential Division?

Fixed costs are relevant for decision making if they vary among the alternatives and are future-oriented.

Rachel is deciding whether to remain in the home she has lived in for the past ten years, which is located very near her work, or to move into a newer home that is located in the suburbs farther from her job. The old house was purchased for $160,000 and has a market value of $220,000. The new home can be purchased for $285,000. Which of the following is not relevant to Rachel's decision?

Mountain Gear has been using the same machines to make its name-brand clothing for the last five years. A cost efficiency consultant has suggested that production costs may be reduced by purchasing more technologically advanced machinery. The old machines cost the company $100,000. The old machines presently have a book value of $60,000 and a market value of $6,000. They are expected to have a five-year remaining life and zero salvage value. The new machines would cost the company $50,000 and have operating expenses of $9,000 a year. The new machines are expected to have a five-year useful life and no salvage value. The operating expenses associated with the old machines are $15,000 a year. The new machines are expected to increase quality, justifying a price increase and thereby increasing sales revenue by $5,000 a year. Select the true statement.

Select the incorrect statement concerning opportunity costs.

Indicate whether each of the following statements about outsourcing decisions is true or false.

Breezy Company is disposing of equipment that was originally purchased for $616,000 and has $232,000 of accumulated depreciation to date. The same equipment would cost $785,000 to replace. What is the total amount of sunk cost in this decision?

Which of the following statements is incorrect?

Safety Products currently outsources an electrical switch that is a component in its sprinkler systems. The switches are purchased for $20 each. The company is considering making the switches internally and has conducted a study to determine the costs involved. The costs below are projected annual production costs: $\begin{array}{llr} \text { Unlt-level materlal cost } &\$3\\ \text { Unit-level labor cost } &\$2\\ \text { Unit-level overhead } &\$1\\ \text { Batch-level set-up cost ( 5,000 units per batch) } &\$5,000\\ \text {Product-level supervisory salaries } &\$37,500\\ \text { allocated facilitv-level costs } &\$20,000\\\end{array}$ Assume that the company needs 15,000 of the switches, which would be produced in three batches. Assume also that the company will still be operating within the relevant range. If Safety decides to make the parts under these conditions, the total relevant costs will be:

Dapper Dan produces a man's suit that sells for $200. Although the company's production capacity is 3,000 suits per year, only 2,500 suits are currently being produced and sold. At this level of production, the company incurs the following costs: $\begin{array}{llr} \text {Unit-level material cost per suit } &\$80\\ \text { Unit-level labor cost per suit } &\$40\\ \text {Unit-level overhead per suit } &\$20\\ \text { Batch-level set-up costs for each batch of 500 suits} &1,200\\ \text { Annul product-level costs} &\$15,000\\ \text { Allocated facility-level costs } &\$50,000\\\end{array}$ Easton Clothiers has offered to purchase 500 suits as a one-time special purchase at a price of $135.Required:Prepare a quantitative analysis that indicates whether the special order should be accepted.

Outdoor Living Company has just received a special order for 500 hammocks. Outdoor Living has sufficient idle capacity to accept the order. Accepting the order will increase Outdoor Living's variable manufacturing costs. Variable selling and administrative costs would be unaffected. What is the minimum price that Outdoor Living should accept for the special order?

Which of the following statements is true?

Which of the following statements is true?

Segment reports are used to evaluate the true profitability of a company's business segments.

The Enhanced Products Division of Forrest Industries makes ceramic pots that are used to hold large decorative plants. During the current year, the division produced 10,000 pots and incurred the following costs: $\begin{array}{llr} \text {\text { Unit-level materials costs }(10,000 @ \$ 15) } &\$150,000\\ \text {Unit-level labor costs (10,000 @ \( \$ 20) \) } &200,000\\ \text {Unit-level overhead costs \( (\mathbf{1 0 , 0 0 0} \) @ \$16) } &160,000\\ \text { Depreciation expenses on equipment* } &12,000\\ \text { other manufacturing overhead** } &36,000\\\end{array}$ *The equipment was purchased on January 1 last year for $60,000 and has a current book value of $48,000, a remaining useful life of four years, and a zero salvage value. If the equipment is not used to produce ceramic pots, it can be leased for $8,000 per year. **Includes supervisors' salaries and rent for manufacturing plant.Required:Assume Forrest Industries uses a cost plus pricing strategy. What price should be charged for the ceramic pot product if the division sets its price 40% above the unit product cost?A potential overseas customer who would not compete with the division's existing customers would like to purchase 1,000 ceramic pots but is not willing to pay the regular price. At what selling price would the division be indifferent about accepting the special order?Suppose the division has the opportunity to purchase the ceramic pot from another manufacturer for $60. The supplier is willing to hold sufficient inventories to meet Forrest's demand. Should the division outsource its ceramic pots? Why or why not?

Qualitative information is only relevant for decision making if it can be quantified.

Taylor Company is considering whether or not to replace a drill press that is several years old. The current market value of the old equipment is an opportunity cost of replacing the drill press.

Select the term from the list provided that best matches each of the following descriptions