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Exam 13: Relevant Information for Special Decisions

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Question 1

Multiple Choice

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Ethan paid $3 for a bottle of ThirstAid. Later while on a hiking trip, she was offered $8 for the ThirstAid. Select the correct statement from the following:

A) The $8 offer is not relevant if Ethan refuses to sell the ThirstAid.
B) If Ethan drinks the ThirstAid, no opportunity cost is associated with his decision.
C) The $3 original purchase price is irrelevant to his decision to sell the ThirstAid.
D) All of the above.

E) A) and C)
F) A) and D)

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Question 2

Multiple Choice

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Which of the following is not a possible alternate term for costs that can be eliminated by taking a specified course of action?

A) Avoidable costs
B) Opportunity costs
C) Relevant costs
D) Differential costs

E) A) and D)
F) None of the above

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Question 3

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All of the following are examples of product-level costs except:

The Mighty Music Company produces and sells a desktop speaker for $100. The company has the capacity to produce 50,000 speakers each period. At capacity, the costs assigned to each unit are as follows: The company has received a special order for 500 speakers. If this order is accepted, the company will have to spend $15,000 on additional costs. Assuming that no sales to regular customers will be lost if the order is accepted, at what selling price will the company be indifferent between accepting and rejecting the special order?

Which of the following items is qualitative?

Equipment should be evaluated for possible replacement only as it nears the end of its useful life.

Breezy Company is disposing of equipment that was originally purchased for $600,000 and has $240,000 of accumulated depreciation to date. The same equipment would cost $800,000 to replace. What is the total amount of sunk cost in this decision?

All of the following are variables that could be considered in a decision to outsource a component that is currently being produced in house. Which of the following is not likely to be relevant?

Easton Company makes and sells scooters. Easton incurred the following costs in its most recent fiscal year: Easton can currently purchase the scooters it makes from Weston Company. If the company purchases the scooters, Easton would still continue to use its own logo, sales staff, and advertising programs. If Easton outsources the scooters to Weston, which of the following costs would be relevant to the outsourcing decision?

The practice of buying goods and services from other companies is commonly known as vertical integration.

The market value of equipment owned by a company is a sunk cost and should not be taken into account in deciding whether or not to replace the equipment.

Variable costs are always relevant in decision making.

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

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: 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:

Only variable costs are relevant for decision making.

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

A business segment should be eliminated if the revenue generated by the segment exceeds only its fixed costs.

Which of the following costs is an example of a product-level cost?

Ann is trying to decide which one of two job offers she will accept. Several items are presented below: Select the items that are irrelevant to Ann's decision.

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 of whether to accept or reject the special order?