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Exam 6: Relevant Information for Special Decisions

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Question 21

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 of 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) C) and D)
F) All of the above

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Question 22

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When evaluating alternatives, what type of costs should be considered?

A) Relevant costs
B) Sunk costs
C) Prevention costs
D) Fixed costs

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

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Question 23

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Bates Company plans to add a new item to its line of consumer product offerings. Two possible products are under consideration. Each unit of Product A costs $6 to produce and has a contribution margin of $3, while each unit of Product B costs $12 and has a contribution margin of $4. What is the differential revenue for this decision?

Select the correct statement regarding quantitative and qualitative information.

Sherman Manufacturing Company currently manufactures a component used in one of its products. The annual production costs for 10,000 components are as follows: $\begin{array} { | l | c | } \hline \text { Material cost } & \$ 5 \text { per unit } \\\hline \text { Labor cost } & \$ 4 \text { per unit } \\\hline \text { Overhead } & \$ 1 \text { per unit } \\\hline \text { Batch-level set-up costs for the year } & \$ 5,000 \\\hline \text { Product-level manager's salary } & \$ 18,000 \\\hline \text { Allocated facility-level costs } & \$ 12,000 \\\hline\end{array}$ An outside company has offered to supply 10,000 units of the component for $12.50 each. If the company outsources the component, it will be able to rent out the idled factory space for $1,000 per month but will not terminate the product manager.Required: 1) Which items are not relevant to this outsourcing decision? 2) Identify any opportunity costs associated with this decision.3) Prepare a quantitative analysis that indicates whether the component should be outsourced.

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:

Jason is trying to decide which one of two job offers he will accept. Several items are presented below: Which of the above items would be considered relevant costs? $\begin{array}{|l|r|r|}\hline \text { (1) Base salary } & \$ 40,000 & \$ 40,000 \\\hline\text { (2) Overtime compensation } & \text { Comp. time } & \text { Hourly rate } \\\hline\text { (3) Moving allowance } & \$ 2,000 & \$ 2,000 \\\hline \text { (4) Signing bonus } & \$ 1,000 & \$ 0 \\\hline\text { (5) Job search costs } & \$ 500 & \$ 500\\\hline\end{array}$

How can a manager's time horizon affect his/her decision making?

Which costs are relevant for equipment replacement decisions?

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: Easton Clothiers has offered to purchase 500 suits as a one-time special purchase at a price of $135. $\begin{array} { | l | r | } \hline \text { Unit-level material cost per suit } & \$ 80 \\\hline \text { Unit-level labor cost per suit } & \$ 40 \\\hline \text { Unit-level overhead per suit } & \$ 20 \\\hline \text { Batch-level set-up cost for each batch of } 500 \text { suits } & \$ 1,200 \\\hline \text { Annual product-level costs } & \$ 15,000 \\\hline \text { Allocated facility-level costs } & \$ 50,000 \\\hline\end{array}$ Required: Prepare a quantitative analysis that indicates whether the special order should be accepted.

For purposes of decision making, avoidable costs are costs that:

What are constraints? Provide an example.

Select the correct statement regarding relevant revenues.

Qualitative information is relevant when:

The Page Turner Publishing Company is trying to decide whether or not to accept a special order for its latest blockbuster. In making this decision, which level of costs will most likely be relevant to the decision?

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

For decision-making purposes, qualitative factors are relevant if they differ among the alternatives and relate to the future.

All of the following statements describe qualities of relevance except:

Which of the following statements is true?

A company's compensation system for its managers should provide incentives for the managers to maximize the company's long-term profitability.