Test bank cost and management accounting 4e by barfield ch12

CHAPTER 12
RELEVANT COSTING
MULTIPLE CHOICE
1.

Which of the following is not a characteristic of relevant costing information? It is
a.
b.
c.
d.

associated with the decision under consideration.
significant to the decision maker.
readily quantifiable.
related to a future endeavor.

ANSWER:
2.

a future cost.
avoidable.
sunk.
a product cost.

ANSWER:

b

EASY

Relevant costs are

a.
b.
c.
d.

all fixed and variable costs.
all costs that would be incurred within the relevant range of production.
past costs that are expected to be different in the future.
anticipated future costs that will differ among various alternatives.

ANSWER:
4.

EASY

A fixed cost is relevant if it is
a.
b.
c.
d.

3.

c

d

EASY

Which of the following is the least likely to be a relevant item in deciding whether to

replace an old machine?
a.
b.
c.
d.

acquisition cost of the old machine
outlay to be made for the new machine
annual savings to be enjoyed on the new machine
life of the new machine

ANSWER:

a

EASY

12–1


12–2

5.

Chapter 12

If a cost is irrelevant to a decision, the cost could not be
a.
b.
c.

d.

a sunk cost.
a future cost.
a variable cost.
an incremental cost.

ANSWER:
6.

EASY

incremental fixed costs
all costs of inventory
total variable costs that are the same in the considered alternatives
the cost of a fixed asset that could be used in all the considered alternatives

ANSWER:

a

EASY

The term incremental cost refers to
a.
b.
c.
d.

the profit foregone by selecting one choice instead of another.

the additional cost of producing or selling another product or service.
a cost that continues to be incurred in the absence of activity.
a cost common to all choices in question and not clearly or feasibly allocable to
any of them.

ANSWER:
8.

d

Which of the following costs would be relevant in short-term decision making?
a.
b.
c.
d.

7.

Relevant Costing

b

EASY

A cost is sunk if it
a.
b.
c.
d.

is not an incremental cost.
is unavoidable.
has already been incurred.
is irrelevant to the decision at hand.

ANSWER:

c

EASY


Chapter 12

9.

Relevant Costing

Most___________ are relevant to decisions to acquire capacity, but not to short-run
decisions involving the use of that capacity.
a.
b.
c.
d.

sunk costs
incremental costs
fixed costs
prime costs

ANSWER:
10.

sunk costs
yes
yes
no
yes

ANSWER:

EASY

d

historical costs
yes
no
no
yes

allocated costs
no
no
yes
yes

EASY

In deciding whether an organization will keep an old machine or purchase a new

machine, a manager would ignore the
a.
b.
c.
d.

estimated disposal value of the old machine.
acquisition cost of the old machine.
operating costs of the new machine.
estimated disposal value of the new machine.

ANSWER:
12.

c

Irrelevant costs generally include
a.
b.
c.
d.

11.

12–3

b

EASY

The potential rental value of space used for production activities
a.
b.
c.
d.

is a variable cost of production.
represents an opportunity cost of production.
is an unavoidable cost.
is a sunk cost of production.

ANSWER:

b

EASY


12–4

13.

Chapter 12

The opportunity cost of making a component part in a factory with excess capacity for
which there is no alternative use is
a.
b.
c.
d.

the total manufacturing cost of the component.
the total variable cost of the component.
the fixed manufacturing cost of the component.
zero.

ANSWER:
14.

Variable
costs
no
yes
no
yes

ANSWER:

EASY

d

Avoidable fixed
costs
yes
no
no
yes

Unavoidable fixed

costs
yes
yes
yes
no

EASY

In a make or buy decision, the opportunity cost of capacity could
a.
b.
c.
d.

be considered to decrease the price of units purchased from suppliers.
be considered to decrease the cost of units manufactured by the company.
be considered to increase the price of units purchased from suppliers.
not be considered since opportunity costs are not part of the accounting records.

ANSWER:
16.

d

Which of the following are relevant in a make or buy decision?

a.
b.
c.
d.

15.

Relevant Costing

a

EASY

Which of the following are relevant in a make or buy decision?
a.
b.
c.
d.

Prime costs
yes
yes
yes
no

ANSWER:

b

Sunk costs
yes
no
no
no

EASY

Incremental costs
yes
yes
no
yes


Chapter 12

17.

Relevant Costing

In a make or buy decision, the reliability of a potential supplier is
a.
b.
c.
d.

an irrelevant decision factor.
relevant information if it can be quantified.
an opportunity cost of continued production.
a qualitative decision factor.

ANSWER:
18.

EASY

maintaining a long-term relationship with suppliers
quality control is critical
utilization of idle capacity
part is critical to product

ANSWER:

a

EASY

When a scarce resource, such as space, exists in an organization, the criterion that
should be used to determine production is
a.
b.
c.
d.

contribution margin per unit.
selling price per unit.
contribution margin per unit of scarce resource.
total variable costs of production.

ANSWER:
20.

d

Which of the following qualitative factors favors the buy choice in a make or buy

decision for a part?
a.
b.
c.
d.

19.

12–5

c

EASY

Fixed costs are ignored in allocating scarce resources because
a.
b.
c.
d.

they are sunk.
they are unaffected by the allocation of scarce resources.
there are no fixed costs associated with scarce resources.
fixed costs only apply to long-run decisions.

ANSWER:

b

EASY

12–6

21.

Chapter 12

The minimum selling price that should be acceptable in a special order situation is equal
to total
a.
b.
c.
d.

production cost.
variable production cost.
variable costs.
production cost plus a normal profit margin.

ANSWER:
22.

EASY

direct labor
equipment depreciation
variable cost of utilities
opportunity cost of production

ANSWER:

b

EASY

The _______________ prohibits companies from pricing products at different amounts
unless these differences reflect differences in the cost to manufacture, sell, or distribute
the products.
a.
b.
c.
d.

Internal Revenue Service
Governmental Accounting Office
Sherman Antitrust Act
Robinson-Patman Act

ANSWER:
24.

c

Which of the following costs is irrelevant in making a decision about a special order
price if some of the company facilities are currently idle?
a.
b.
c.
d.

23.

Relevant Costing

d

EASY

An ad hoc sales discount is
a.
b.
c.
d.

an allowance for an inferior quality of marketed goods.
a discount that an ad hoc committee must decide on.
brought about by competitive pressures.
none of the above.

ANSWER:

c

MEDIUM


Chapter 12

25.

Relevant Costing

A manager is attempting to determine whether a segment of the business should be
eliminated. The focus of attention for this decision should be on
a.
b.
c.
d.

the net income shown on the segment’s income statement.
sales minus total expenses of the segment.
sales minus total direct expenses of the segment.
sales minus total variable expenses and avoidable fixed expenses of the segment.

ANSWER:
26.

EASY

contribution margin per hour of machine time.
gross margin per unit.
contribution margin per unit.
sales price per unit.

ANSWER:

c

EASY

For a particular product in high demand, a company decreases the sales price and
increases the sales commission. These changes will not increase
a.
b.
c.
d.

sales volume.
total selling expenses for the product.
the product contribution margin.
the total variable cost per unit.

ANSWER:
28.

d

Assume a company produces three products: A, B, and C. It can only sell up to 3,000
units of each product. Production capacity is unlimited. The company should produce
the product (or products) that has (have) the highest
a.
b.
c.
d.

27.

12–7

c

EASY

An increase in direct fixed costs could reduce all of the following except
a.
b.
c.
d.

product line contribution margin.
product line segment margin.
product line operating income.
corporate net income.

ANSWER:

a

EASY


12–8

29.

Chapter 12

When a company discontinues a segment, total corporate costs may decrease in all of
the following categories except

a.
b.
c.
d.

variable production costs.
allocated common costs.
direct fixed costs.
variable period costs.

ANSWER:
30.

EASY

segment variable costs
segment fixed costs
costs allocated to the segment
period costs

ANSWER:

c

EASY

K Co. uses 10,000 units of a part in its production process. The costs to make a part are:
direct material, $12; direct labor, $25; variable overhead, $13; and applied fixed
overhead, $30. K Co. has received a quote of $55 from a potential supplier for this part.
If K Co. buys the part, 70 percent of the applied fixed overhead would continue. K Co.

would be better off by
a.
b.
c.
d.

$50,000 to manufacture the part.
$150,000 to buy the part.
$40,000 to buy the part.
$160,000 to manufacture the part.

ANSWER:
32.

b

In evaluating the profitability of a specific organizational segment, all
_______________ would be ignored.
a.
b.
c.
d.

31.

Relevant Costing

c

MEDIUM

P Co. has only 25,000 hours of machine time each month to manufacture its two
products. Product X has a contribution margin of $50, and Product Y has a contribution
margin of $64. Product X requires 5 hours of machine time, and Product Y requires 8
hours of machine time. If P wants to dedicate 80 percent of its machine time to the
product that will provide the most income, P will have a total contribution margin of
a.
b.
c.
d.

$250,000.
$240,000.
$210,000.
$200,000.

ANSWER:

b

DIFFICULT


Chapter 12

33.

Relevant Costing

12–9

Down Co. has 3 divisions: R, S, and T. Division R’s income statement shows the
following for the year ended December 31, 2001:
Sales
Cost of goods sold
Gross profit
Selling expenses
Administrative expenses
Net loss

$1,000,000
(800,000 )
$ 200,000
$100,000
250,000

(350,000 )
$ (150,000 )

Cost of goods sold is 75 percent variable and 25 percent fixed. Of the fixed costs, 60
percent are avoidable if the division is closed. All of the selling expenses relate to the
division and would be eliminated if Division R were eliminated. Of the administrative
expenses, 90 percent are applied from corporate costs. If Division R were eliminated,
Down Co. income would
a.
b.
c.
d.

increase by $150,000.

decrease by $ 75,000.
decrease by $155,000.
decrease by $215,000.

ANSWER:
34.

c

MEDIUM

Sandow Co. is currently operating at a loss of $15,000. The sales manager has received
a special order for 5,000 units of product, which normally sells for $35 per unit. Costs
associated with the product are: direct material, $6; direct labor, $10; variable overhead,
$3; applied fixed overhead, $4; and variable selling expenses, $2. The special order
would allow the use of a slightly lower grade of direct material, thereby lowering the
price per unit by $1.50 and selling expenses would be decreased by $1. If Sandow wants
this special order to increase the total net income for the firm to $10,000, what sales
price must be quoted for each of the 5,000 units?
a.
b.
c.
d.

$23.50
$24.50
$27.50
$34.00

ANSWER:

a

MEDIUM


12–10

35.

Chapter 12

Relevant Costing

Q Co. produces a part that has the following costs per unit:
Direct material
Direct labor
Variable overhead
Fixed overhead
Total

$ 8
3
1
5
$17

Z Corp. can provide the part to Q for $19 per unit. Q Co. has determined that 60 percent
of its fixed overhead would continue if it purchased the part. However, if Q no longer
produces the part, it can rent that portion of the plant facilities for $60,000 per year. Q

Co. currently produces 10,000 parts per year. Which alternative is preferable and by
what margin?
a.
b.
c.
d.

Make—$20,000
Make—$50,000
Buy—$10,000
Buy—$40,000

ANSWER:
36.

c

MEDIUM

Armstrong Co. has 15,000 units in inventory that had a production cost of $3 per unit.
These units cannot be sold through normal channels due to a significant technology
change. These units could be reworked at a total cost of $23,000 and sold for $28,000.
Another alternative is to sell the units to a junk dealer for $8,500. The relevant cost for
Armstrong to consider in making its decision is
a.
b.
c.
d.

$45,000 of original product costs.

$23,000 for reworking the units.
$68,000 for reworking the units.
$28,000 for selling the units to the junk dealer.

ANSWER:

b

EASY


Chapter 12

Relevant Costing

12–11

Use the following information for questions 37 and 38.
37.

R Corp. sells a product for $18 per unit, and the standard cost card for the product
shows the following costs:
Direct material
Direct labor
Overhead (80% fixed)
Total

$ 1
2
7

$10

R received a special order for 1,000 units of the product. The only additional cost to R
would be foreign import taxes of $1 per unit. If R is able to sell all of the current
production domestically, what would be the minimum sales price that R would consider
for this special order?
a.
b.
c.
d.

$18.00
$11.00
$5.40
$19.00

ANSWER:
38.

d

EASY

Assume that R has sufficient idle capacity to produce the 1,000 units. If R wants to
increase its operating profit by $5,600, what would it charge as a per-unit selling price?
a.
b.
c.
d.

$18.00
$10.00
$11.00
$16.60

ANSWER:

c

MEDIUM


12–12

39.

Chapter 12

Relevant Costing

Handy Combs, Inc. makes and sells brushes and combs. It can sell all of either product it
can make. The following data are pertinent to each respective product:
Units of output per machine hour
Selling price per unit
Product cost per unit
Direct material
Direct labor
Variable overhead

Brushes

8
$12.00

Combs
20
$4.00

$1.00
2.00
0.50

$1.20
0.10
0.05

Total fixed overhead is $380,000.
The company has 40,000 machine hours available for production. What sales mix will
maximize profits?
a.
b.
c.
d.

320,000 brushes and 0 combs
0 brushes and 800,000 combs
160,000 brushes and 600,000 combs
252,630 brushes and 252,630 combs

ANSWER:
40.

a

EASY

Boston Shoe Cobblers has been asked to submit a bid on supplying 1,000 pairs of
military dress boots to the Pentagon. The company’s costs per pair of boots are as
follows:
Direct material
Direct labor
Variable overhead
Variable selling cost (commission)
Fixed overhead (allocated)
Fixed selling and administrative cost

$8
6
3
3
2
1

Assuming that there would be no commission on this potential sale, the lowest price the
firm can bid is some price greater than
a.
b.
c.
d.

$23.

$20.
$17.
$14.

ANSWER:

c

EASY


Chapter 12

41.

Relevant Costing

12–13

Schoof Company has two sales territories—North and South. Financial information for
the two territories for 2001 follows:
Sales
Direct costs:
Variable
Fixed
Allocated common costs
Net income (loss)

North
$980,000

South
$750,000

(343,000)
(450,000)
(275,000)
$ (88,000)

(225,000)
(325,000)
(175,000)
$ 25,000

Because the company is in a start-up stage, corporate management feels that the North
sales territory is creating too much of a cash drain on the company and it should be
eliminated. If North is discontinued, one sales manager (whose salary is $40,000 per
year) will be relocated to the South territory. By how much would Schoof’s income
change if the North territory is eliminated?
a.
b.
c.
d.

increase by $88,000
increase by $48,000
decrease by $267,000
decrease by $227,000

ANSWER:

d

MEDIUM


12–14

Chapter 12

Relevant Costing

Use the following information for questions 42–45.
Big City Motors is trying to decide whether it should keep its existing car washing machine or
purchase a new one that has technological advantages (which translate into cost savings) over
the existing machine. Information on each machine follows:
Original cost
Accumulated depreciation
Annual cash operating costs
Current salvage value of old machine 2,000
Salvage value in 10 years
Remaining life
42.

500
10 yrs.

1,000
10 yrs.

sunk cost.
irrelevant cost.
future avoidable cost.
opportunity cost.

ANSWER:

b

EASY

The $9,000 cost of the original machine represents a(n)
a.
b.
c.
d.

sunk cost.
future relevant cost.
historical relevant cost.
opportunity cost.

ANSWER:
44.

New machine
$20,000
0
4,000

The $4,000 of annual operating costs that are common to both the old and the new
machine are an example of a(n)
a.
b.
c.
d.

43.

Old machine
$9,000
5,000
9,000

a

EASY

The $20,000 cost of the new machine represents a(n)
a.
b.
c.
d.

sunk cost.
future relevant cost.
future irrelevant cost.
opportunity cost.

ANSWER:

b

EASY


Chapter 12

45.

Relevant Costing

12–15

The estimated $500 salvage value of the existing machine in 10 years represents a(n)
a.
b.
c.
d.

sunk cost.
opportunity cost of selling the existing machine now.
opportunity cost of keeping the existing machine for 10 years.
opportunity cost of keeping the existing machine and buying the new machine.

ANSWER:

b

EASY

Use the following information for questions 46 and 47.
Robco manufactures and sells FM radios. Information on last year’s operations (sales and
production of the 2000 model) follows:
Sales price per unit
Costs per unit:
Direct material
Direct labor
Overhead (50% variable)
Selling costs (40% variable)
Production in units
Sales in units
46.

7
4
6
10
10,000
9,500

At this time (April 2001), the 2001 model is in production and it renders the 2000 model
radio obsolete. If the remaining 500 units of the 2000 model radios are to be sold
through regular channels, what is the minimum price the company would accept for the
radios?
a.
b.
c.
d.

$30
$27
$18
$4

ANSWER:
47.

$30

d

MEDIUM

Assume that the remaining 2000 model radios can be sold through normal channels or to
a foreign buyer for $6 per unit. If sold through regular channels, the minimum
acceptable price will be
a.
b.
c.
d.

$30.
$33.
$10.
$4.

ANSWER:

c

MEDIUM


12–16

Chapter 12

Relevant Costing

Use the following information for questions 48–50.
The Chip Division of Supercomp Corp. produces a high-quality computer chip. Unit production
costs (based on capacity production of 100,000 units per year) follow:
Direct material
Direct labor
Overhead (20% variable)
Other information:
Sales price
SG&A costs (40% variable)
48.

$100
$72
$81
$94

ANSWER:

d

MEDIUM

Assume, for this question only, that the Chip Division is operating at a level of 70,000
chips per year. What is the minimum price that the division would consider on a
“special order” of 1,000 chips to be distributed through normal channels?
a.
b.
c.
d.

$78
$95
$100
$81

ANSWER:
50.

100
15

Assume, for this question only, that the Chip Division is producing and selling at
capacity. What is the minimum selling price that the division would consider on a
“special order” of 1,000 chips on which no variable period costs would be incurred?
a.
b.
c.
d.

49.

$50
20
10

a

MEDIUM

Assume, for this question only, that the Chip Division is presently operating at a level of
80,000 chips per year. Accepting a “special order” on 2,000 chips at $88 will
a.
b.
c.
d.

increase total corporate profits by $4,000.
increase total corporate profits by $20,000.
decrease total corporate profits by $14,000.
decrease total corporate profits by $24,000.

ANSWER:

b

MEDIUM


Chapter 12

Relevant Costing

12–17

Use the following information for questions 51–53.
The capital budgeting committee of the Virginia Iron Works is evaluating the possibility of
replacing its old pipe-bending machine with a more advanced model. Information on the
existing machine and the new model follows:
Original cost
Market value now
Market value in year 5
Annual cash operating costs
Remaining life
51.

20,000
10,000
5 yrs.

$30,000 of annual savings in operating costs.
$20,000 of salvage in 5 years on the new machine.
lost sales resulting from the inefficient existing machine.
$400,000 cost of the new machine.

ANSWER:

a

EASY

The $80,000 market value of the existing machine is
a.
b.
c.
d.

a sunk cost.
an opportunity cost of keeping the old machine.
irrelevant to the equipment replacement decision.
an historical cost.

ANSWER:
53.

New machine
$400,000

The major opportunity cost associated with the continued use of the existing machine is
a.
b.
c.
d.

52.

Existing machine
$200,000
80,000
0
40,000

5 yrs.

b

EASY

If the company buys the new machine and disposes of the existing machine, corporate
profit over the five-year life of the new machine will be ____________________ than
the profit that would have been generated had the existing machine been retained for
five years.
a.
b.
c.
d.

$150,000 lower
$170,000 lower
$230,000 lower
$150,000 higher

ANSWER:

a

MEDIUM


12–18

54.

Chapter 12

Relevant Costing

Golden, Inc. has been manufacturing 5,000 units of Part 10541, which is used in the
manufacture of one of its products. At this level of production, the cost per unit of
manufacturing Part 10541 is as follows:
Direct material
Direct labor
Variable overhead
Fixed overhead applied
Total

$ 2
8
4
6
$20

Brown Company has offered to sell Golden 5,000 units of Part 10541 for $19 a unit.
Golden has determined that it could use the facilities currently used to manufacture Part
10541 to manufacture Part RAC and generate an operating profit of $4,000. Golden has
also determined that two-thirds of the fixed overhead applied will continue even if Part
10541 is purchased from Brown. To determine whether to accept Brown’s offer, the net
relevant costs to make are
a.
b.
c.
d.

$70,000.
$84,000.
$90,000.
$95,000.

ANSWER:
55.

b

MEDIUM

Relay Corporation manufactures batons. Relay can manufacture 300,000 batons a year
at a variable cost of $750,000 and a fixed cost of $450,000. Based on Relay’s
predictions, 240,000 batons will be sold at the regular price of $5.00 each. In addition, a
special order was placed for 60,000 batons to be sold at a 40 percent discount off the
regular price. The unit relevant cost per unit for Relay’s decision is
a.
b.
c.
d.

$1.50.
$2.50.
$3.00.
$4.00.

ANSWER:

b

MEDIUM


Chapter 12

56.

Relevant Costing

12–19

Big City Motors is trying to decide whether it should keep its existing car washing
machine or purchase a new one that has technological advantages (which translate into
cost savings) over the existing machine. Information on each machine follows:
Original cost
Accumulated depreciation
Annual cash operating costs
Current salvage value of old machine
Salvage value in 10 years
Remaining life

Old machine
$9,000
5,000
9,000
2,000
500
10 yrs.

New machine
$20,000
0
4,000
1,000
10 yrs.

The incremental cost to purchase the new machine is
a.
b.
c.
d.

$11,000.
$20,000.
$13,000.
$18,000.

ANSWER:

d

EASY

THE FOLLOWING MULTIPLE CHOICE RELATE TO MATERIAL COVERED IN
THE APPENDIX OF THE CHAPTER.
57.

The objective in solving the linear programming problem is to determine the optimal

levels of the
a.
b.
c.
d.

coefficients.
dependent variables.
independent variables.
slack variables.

ANSWER:
58.

c

EASY

A linear programming problem can have
a.
b.
c.
d.

no more than three resource constraints.
only one objective function.
no more than two dependent variables for each constraint equation.
no more than three independent variables.

ANSWER:

b

EASY


12–20

59.

Chapter 12

A linear programming model must
a.
b.
c.
d.

have only one objective function.
have as many independent variables as it has constraint equations.
have at least two dependent variables for each equation.
consider only the constraints that can be expressed as inequalities.

ANSWER:
60.

b

EASY

The feasible region for an LP solution is
a.
b.
c.
d.

defined only by binding constraints on the optimal solution.
defined as the solution space that satisfies all constraints.
identified by iso-cost and iso-profit lines.
identified by all of the above.

ANSWER:

b

EASY

A linear programming solution
a.
b.
c.
d.

always involves more than one constraint.
always involves a corner point.
is the one with the highest vertex coordinates.
is provided by the input-output coefficients.

ANSWER:
63.

EASY

the independent variables.
the dependent variables in the constraint equations.
the coefficients of the objective function.
iso-cost lines.

ANSWER:

62.

a

In a linear programming problem, constraints are indicated by
a.
b.
c.
d.

61.

Relevant Costing

b

EASY

The objective function and the resource constraints have the same
a.

b.
c.
d.

dependent variables.
coefficients.
independent variables.
all of the above.

ANSWER:

c

EASY


Chapter 12

64.

Relevant Costing

Which of the following items continuously checks for an improved solution from the
one previously computed?
a.
b.
c.
d.

An algorithm

yes
yes
no
no

ANSWER:
65.

Surplus
yes
yes
no
no

ANSWER:

EASY

Slack
yes
no
yes
no

c

EASY

____________________ programming relates to a variety of techniques that are used
to allocate limited resources among activities to achieve a specific objective.

a.
b.
c.
d.

Integer
Input-output
Mathematical
Regression

ANSWER:
67.

a

Simplex method
yes
no
no
yes

Which of the following variables is associated with the “less than or equal to”
constraints?
a.
b.
c.
d.

66.

12–21

c

EASY

The graphical approach to solving a linear programming problem becomes much more
complex when there are more than two
a.
b.
c.
d.

constraints
yes
no
yes
no

ANSWER:

c

decision variables
no
yes
yes
no
EASY

12–22

68.

Chapter 12

Relevant Costing

The feasible region for a graphical solution to a profit maximization problem includes
a.
b.
c.
d.

all vertex points.
all points on every resource constraint line.
the origin.
all of the above.

ANSWER:

c

EASY

Use the following information for questions 69–71.
In the two following constraint equations, X and Y represent two products (in units) produced
by the Generic Co.
Constraint 1: 3X + 5Y < 4,200

Constraint 2: 5X + 2Y > 3,000
69.

What is the maximum number of units of Product X that can be produced?
a.
b.
c.
d.

4,200
3,000
600
1,400

ANSWER:
70.

MEDIUM

What is the feasible range for the production of Y?
a.
b.
c.
d.

840 to 1,500 units
0 to 840 units
0 to 631 units
0 to 1500 units

ANSWER:
71.

d

b

MEDIUM

A solution of X = 500 and Y = 600 would violate
a.
b.
c.
d.

Constraint 1.
Constraint 2.
both constraints.
neither constraint.

ANSWER:

a

EASY


Chapter 12

72.

Relevant Costing

12–23

One constraint in an LP problem is:
12X + 7Y > 4,000.
If the optimal solution is X = 100 and Y = 500, this resource has
a.
b.
c.
d.

slack variable of 700.
surplus variable of 700.
output coefficient of 700.
none of the above.

ANSWER:
73.

b

EASY

Consider the following linear programming problem and assume that non-negativity
constraints apply to the independent variables:
Max CM = $14X + $23Y
Subject to
Constraint 1: 4X + 5Y < 3,200

Constraint 2: 2X + 6Y < 2,400
Which of the following are feasible solutions to the linear programming problem?
a.
b.
c.
d.

X = 600, Y = 240
X = 800, Y = 640
X = 0, Y = 400
X = 1,200, Y = 0

ANSWER:
74.

c

MEDIUM

Contracting with vendors outside the organization to obtain or acquire goods and/or
services is called
a.
b.
c.
d.

target costing.
insourcing.
outsourcing.
product harvesting.

ANSWER:

c

EASY


12–24

75.

Chapter 12

Which of the following activities within an organization would be least likely to be
outsourced?
a.
b.
c.
d.

accounting
data processing
transportation
product design

ANSWER:
76.

EASY

contract vendor.
lessee.
network organization.
centralized insourcer.

ANSWER:

a

EASY

Costs forgone when an individual or organization chooses one option over another are
a.
b.
c.
d.

budgeted costs.
sunk costs.
historical costs.
opportunity costs.

ANSWER:
78.

d

An outside firm selected to provide services to an organization is called a
a.

b.
c.
d.

77.

Relevant Costing

d

EASY

Which of the following costs would not be accounted for in a company’s recordkeeping
system?
a.
b.
c.
d.

an unexpired cost
an expired cost
a product cost
an opportunity cost

ANSWER:

d

EASY

Chapter 12

Relevant Costing

12–25

SHORT ANSWER/PROBLEMS
1.

Why is depreciation expense irrelevant to most managerial decisions, even when it is a
future cost?
ANSWER: Depreciation expense is simply the systematic write-off of a sunk cost
(the cost of a long-lived asset). Depreciation expense is therefore always irrelevant
unless it pertains to an asset that is not yet acquired.
MEDIUM

2.

What is an opportunity cost and why is it a relevant cost?
ANSWER: An opportunity cost is not a “cost” in the traditional out-of-pocket sense.
Opportunity costs are benefits that are sacrificed to pursue one alternative rather than
another. Once an alternative is selected, the opportunity costs associated with that
alternative will not appear directly in the accounting records of the firm as other costs
of that alternative will. These costs are, however, relevant because the company is
giving up one set of benefits to accept a second set. Rational decision making assumes
that the chosen alternative provides the greater benefit.
MEDIUM

3.

Define segment margin and explain why it is a relevant measure of a segment’s
contribution to overall organizational profitability.
ANSWER: Segment margin is the amount of income that remains after deducting all
avoidable (both variable and fixed) costs from sales. This measure is the appropriate
gauge of a segment’s viability because it is a direct measure of how total organizational
profits would change if the segment was discontinued.
MEDIUM

4.

What is the relationship between scarce resources and an organization’s production
capacity?
ANSWER: In the long run, capacity is likely to be constrained by two fundamental
resources: labor and machinery. However, in the short run, additional constraints can
push capacity to levels below labor and machine capacity. Constraints can be induced
by raw material shortages, interruptions in distribution channels, labor strikes in the
plants of suppliers of important components, or governmental restrictions on markets
(gas rationing, Quotas).
MEDIUM