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Exam 6: Relevant Information for Special Decisions

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Question 1

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

A) Machine setup costs
B) Patent filing costs
C) Materials and labor costs
D) Shipping and handling costs

E) None of the above
F) B) and C)

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Question 2

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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?

A) The impact on employee morale
B) The book value of equipment used in making the component
C) The importance of vertical integration to the company
D) The reliability of the supplier

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

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Question 3

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King Company has two divisions whose most recent financial statements are shown below: $\begin{array}{lrr}&\text { Commercial } & \text { Residential } \\&\text { Division } & \text { Division }\\\text { Unit sales } & 5,000 & 1,000\\\text { Sales } & \$ 400,000 & \$ 100,000\\\text { Less: cost of goods sold: } &\\\text { Unit-level production costs } & 175,000& 60,000 \\\text { Depreciation, production equipment } & \underline{75,000 }& \underline{ 25,000} \\\text { Gross margin } & \$ 150,000 & \$ 15,000\\\text { Less: operating expenses: } & \\\text { Unit-level selling and administrative } &40,000 & 10,000 \\\text { Corporate-level facility costs (fixed) } & \underline{12,500 }& \underline{7,500}\\\text { Net income (loss) } & \underline{\$ 97,500 }& \underline{ \$(2,500)}\end{array}$ Required: 1)Compute the impact on profit if the Residential Division is eliminated. 2)Do you recommend that King eliminate the Residential Division?

Direct labor is an example of a product-level cost.

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

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

Which of the following is a true statement regarding product-level costs?

The Mansfield Company manufactures and sells two lines of fishing rods.During the most recent accounting period,the Pro line and the Novice line sold 15,000 and 2,000 units,respectively.The company's most recent financial statements are shown below: $\begin{array}{lrr}&\text {Pro}&\text {Novice}\\\text { Sales } & \$ 900,000 & \$ 240,000\\\text { Less cost of goods sold }\\\text { Unit-level production cost } & 600,000 & 135,000 \\\text { Depreciation, production equipment } & \underline{ 125,000}& \underline{50,000 }\\\text { Gross margin } & \$ 175,000& \$ 55,000\\\text { Less operating expenses: }\\\text { Unit-level selling and administrative costs } & 40,000 & 65,000 \\\text { Corporate-level facility expenses (fixed) } & \underline{ 36,000} & \underline{36,000 }\\\text { Net income (loss) } & \underline{\$ 99,000 }& \underline{\$(46,000) }\end{array}$ Based on this information,the company should:

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.

Select the correct statement regarding relevant costs and revenues.

If managers' performance is evaluated solely on the current year's profitability,managers are likely to make decisions that lead to the company's long-term profitability.

Select the correct statement regarding quantitative and qualitative information.

Qualitative information is relevant when:

A company that provides services (not goods)to its customers may incur costs that are appropriately classified as product-level costs.

Relevant costs are often referred to as:

Special order decisions involve:

Facility-level costs are not involved in decisions to eliminate a segment of a business.

Max bought a ticket to the championship baseball game for $75.Someone approaches him outside the stadium and offers him $175 for his ticket.If Max decides to go to the game instead of selling his ticket,how much does it cost Max to go to the game?

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