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Exam 13: Relevant Information for Special Decisions

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Question 41

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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 D)
F) B) and C)

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Question 42

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

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Question 43

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QRC Company is trying to decide which one of two alternatives it will accept. The costs and revenues associated with each alternative are listed below: $\begin{array}{lrc}&\text {Alternative A}&\text {Alternative B}\\\text { Projected revenue } & \$ 185,000 & \$ 250,000 \\\text { Unit-level costs } & 35,000 & 46,000 \\\text { Batch-level costs } & 22,500 & 34,000 \\\text { Croduct-level costs } & 25,000 & 27,000 \\\text { Tacility-level costs } & 20,000 & 22,500\end{array}$ What is the differential revenue for this decision?

Pilot Motors Corporation is an automobile manufacturer. The company produces its own motors, tires, and other automobile parts. Pilot has the opportunity to purchase tires from another manufacturer instead of producing the tires in its own facility. This type of decision is typically known as a(n) :

Sherman Manufacturing Company currently manufactures a component used in one of its products. The annual production costs for 10,000 components are as follows: $\begin{array}{lc}\text { Material cost } & \$ 5 \mathrm{per} \text { unit } \\\text { Labor cost } & \$ 4 \text { per unit } \\\text { overhead } & \$ 1 \mathrm{per} \text { unit }\\\text { Batch-level set-up costs for year } & \$ 5,000 \\\text { Product-level manager's salary } & \$ 18,000 \\\text { Allocated facility-level costs } & \$ 12,000\end{array}$ 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 idle factory space for $1,000 per month but will not terminate the product manager.Required:Which items are not relevant to this outsourcing decision?Identify any opportunity costs associated with this decision.Prepare a quantitative analysis that indicates whether the component should be outsourced.

Sunk costs:

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

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

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?

Relevant costs are frequently called unavoidable costs.

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 variable manufacturing costs. Which type of cost is considered a sunk cost to Outdoor Living's decision whether to accept or reject the special order?

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 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 facility-level cost?

Grady Corporation is evaluating two decision alternatives. Alternative One has costs of $2,000 and revenues of $3,000 while Alternative Two has costs of $3,200 and revenues of $4,000. The amount of differential revenue is $1,000.

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

Scholastic Tours is trying to decide which one of two tours it will introduce. The costs and revenues associated with each alternative are listed below: $\begin{array}{lcc}&\text { Eastern Tour}&\text { Western Tour }\\\text { Projected revenue } & \$ 8,000 & \$ 11,000 \\\text { Variable costs } & 1,000 & 6,000\\\text { Fixed costs } & \underline{4,000 }&\underline{ 4,000} \\\text { Profit } &\underline{ \$ 3,000} &\underline{ \$ 1,000}\end{array}$ What are the incremental (differential) costs of the Western Tour?

The Mendez Company is trying to decide whether to replace a packing machine that it uses to pack salsa into individual serving size packages. The following information is provided: Required:Compute the increase or decrease in total net income over the five-year period if the company chooses to buy the new machine.Compute the impact on the company's net income in the first year if the current machine is replaced. Do not take depreciation into account.Under what circumstances might a manager not take the action that is in the best interest of the firm in the long run?

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

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

Relevant costs are often referred to as:

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