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Exam 6: Relevant Information for Special Decisions

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Question 31

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

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Question 32

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The following information is provided for two products: $\begin{array} { l c c } & \text { Product X } & \text { Product } Y \\\text { Selling price per unit } & \$ 3 5& \$ 2 5 \\\text { Variable cost per unit } &2 0& 15\end{array}$ Assume the products will be sold in a store where shelf space is a scarce resource and there is sufficient room for only one of the two products.Expected sales for Product X are 6,000 units,and expected sales for Product Y are 8,000 units.Which product should be sold and why?

A) Product Y should be sold solely because the expected demand for this product is greater than the expected demand for Product X.
B) Product Y should be sold because sales of this product will provide a greater profit.
C) Product X should be sold because it provides a greater contribution margin per unit.
D) Product X should be sold because sales of this product will provide a greater profit.

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

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Question 33

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Mary must decide between two alternatives for the weekend: babysitting or yard work.If she babysits,she will receive $40 and will incur $15 in transportation costs.If she does yard work,she will receive $40 and will incur $3 in lawn mower gas and oil costs and $5 in transportation costs.The payment she would receive for the jobs is relevant in deciding which alternative to select.

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

An alternative under consideration involves incurring $50 in costs to generate $60 in revenue.The differential revenue for this alternative is $10.

Easton Company makes and sells scooters.Easton incurred the following costs in its most recent fiscal year: $\begin{array}{c}\text { Cost Items Appearing on the Income Statement }\\\begin{array}{|l|l|}\hline\text { Materials cost ( } \$ 10 \text { per unit) } & \text { Depreciation on manufacturing equipment } \\\hline \text { Company president's salary } & \text { Salaries of administrative personnel } \\\hline \text { Labor cost ( } \$ 4 \text { per unit) } & \text { Research and development costs } \\\hline \text { Advertising costs }(150,000 \text { per year) } & \text { Real estate taxes on factory } \\\hline \text { Shipping and handling (\$0.15 per unit) } & \text { Inspection costs } \\\hline\end{array}\end{array}$ 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?

Osprey Company is trying to decide between the following two alternatives: $\begin{array} { l c r } &\text { Alternative A } & \text { Alternative B } \\\text { Projected reveruse } &\$ 50,000 & \$ 60,000 \\\text { Direct material } & 6,000 & 12,000\\\text { Assembly labor } &9,000 & 9,000 \\\text { Production supervisor's salary } & 10,000 & 10,000 \\\text { Facility-related costs } &\underline{ 10,000} &\underline{ 15,000}\\\text { Profit } & \underline{ \$ 15,000 }& \underline{ \$ 14,000}\\\end{array}$ Which of the following conclusions can be drawn from this example?

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 relevant costs and revenues.

How would you determine whether a particular cost is unit level or batch level? Use as an example: product inspection costs.

Variable costs are always relevant in decision making.

The benefits sacrificed when one alternative is chosen over another are referred to as:

A manager refuses to replace an existing asset even though an extensive analysis indicates that replacement is desirable.One possible explanation for the manager's action is that:

Terrain Tents makes backpacking tents.It has the capacity to produce 10,000 tents per year and currently is producing and selling 7,000 tents.Normal selling price for a tent is $450.Unit-level costs are $90 for direct materials,$220 for direct labor,and $15 for other manufacturing costs.Facility-level costs of $110 are allocated to each tent.Terrain has received a special order for 2,500 tents at $320 each. Required: Should Terrain accept the special order? Support your answer with appropriate computations.

Which of the following statements is true?

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

Monica paid $12 for a music CD for which she later was offered $15.After that someone offered her $18 for the CD.If Monica keeps the CD,the amount of her opportunity cost is $33.

Costs that are not related to any specific product,batch,or unit of production are referred to as facility-level costs.

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.

Easton Company makes and sells scooters.Easton incurred the following costs in its most recent fiscal year: $\begin{array}{c}\text { Cost Items Appearing on the Income Statement }\\\begin{array}{|l|l|}\hline\text { Materials cost ( } \$ 10 \text { per unit) } & \text { Depreciation on manufacturing equipment } \\\hline \text { Company president's salary } & \text { Salaries of administrative personnel } \\\hline \text { Labor cost ( } \$ 4 \text { per unit) } & \text { Research and development costs } \\\hline \text { Advertising costs }(150,000 \text { per year) } & \text { Real estate taxes on factory } \\\hline \text { Shipping and handling (\$0.15 per unit) } & \text { Inspection costs } \\\hline\end{array}\end{array}$ Easton can currently purchase the scooters it makes from another company.If the company purchases the scooters,Easton would still continue to use its own logo,sales staff,and advertising programs.Which of the following costs would be classified as a unit-level cost?