Module 8 – Information for Decisions

Revision materials

TRUE/FALSE

1. The concept of a relevant cost can be defined as a past cost that differs among
alternatives.

2. One of the dangers of allocating common fixed costs to a product line is that such allocations
can make the line appear less profitable than it really is.

3. Variable costs are always relevant costs.

4. A cost may be relevant for one decision, but not relevant for a different decision.

5. Qualitative factors are outcomes that are measured in numerical terms, such as the costs of
direct labor.

6. Relevant revenues and relevant costs are the only information managers need to select
among alternatives.

7. For one-time-only special orders, variable costs may be relevant but not fixed costs.

8. Producing another 10,000 units may increase the fixed cost of rent.

9. Outsourcing is risk free to the manufacturer because the supplier now has the responsibility
of producing the part.

10. A company is considering adding a fourth product to use available capacity. A relevant factor
to consider is that corporate costs can now be allocated over four products rather than only
three.
MULTIPLE CHOICE

1. Consider a decision facing a firm of either accepting or rejecting a special offer for one
of its products. A cost that is not relevant is:
a. direct materials.
b. variable overhead.
c. fixed overhead that will be avoided if the special offer is accepted.
d. common fixed overhead that will continue if the special offer is not accepted.

2. An accounting information system should be designed to provide information that is

useful. To be useful the information must be:
a. unique and unavailable through other sources.
b. historical in nature and not purport to predict the future.
c. marginal between two alternatives.
d. relevant, accurate, and timely.

3. A trade-off in a decision situation sometimes occurs between information:

a. accuracy and relevance.
b. relevance and uniqueness.
c. accuracy and timeliness.
d. sensitivity and accuracy.

4. Elegant, Inc., has $125,000 of inventory that suffered minor smoke damage from a fire
in the warehouse. The company can sell the goods "as is" for $45,000; alternatively, the
goods can be cleaned and shipped to the firm's outlet center at a cost of $23,000. There
the goods could be sold for $80,000. What alternative is more desirable and what is the
relevant cost for that alternative?
a. Clean and ship to outlet center, $23,000.
b. Clean and ship to outlet center, $103,000.
c. Clean and ship to outlet center, $148,000.
d. Neither alternative is desirable, as both produce a loss for the firm.

5. In early July, Mike Gottfried purchased a $70 ticket to the December 15 game of the
Chicago Titans. (The Titans belong to the Midwest Football League and play their
games outdoors on the shore of Lake Michigan.) Parking for the game was expected to
cost approximately $22, and Gottfried would probably spend another $15 for a souvenir
program and food. It is now December 14. The Titans were having a miserable season
and the temperature was expected to peak at 5 degrees on game day. Mike therefore
decided to skip the game and took his wife to the movies, with tickets and dinner
costing $50. The sunk cost associated with this decision situation is:
a. $20.
b. $50.
c. $70.
d. $107.
6. Two months ago, Victory purchased 4,500 pounds of Hydrol, paying $15,300. The
demand for this product has been very strong since the acquisition, with the market
price jumping to $4.05 per pound. (Victory can buy or sell Hydrol at this price.) The
company recently received a special-order inquiry, one that would require the use of
4,200 pounds of Hydrol. Which of the following is (are) relevant in deciding whether to
accept the special order?
a. The 300-pound remaining inventory of Hydrol.
b. The $4.05 market price.
c. The $3.40 purchase price.
d. 4,500 pounds of Hydrol.

THE FOLLOWING INFORMATION APPLIES TO QUESTIONS 7 AND 8.

Northwoods manufactures rustic furniture. The cost accounting system estimates
manufacturing costs to be $90 per table, consisting of 80% variable costs and 20% fixed
costs. The company has surplus capacity available. It is Northwoods’ policy to add a 50%
markup to full costs.

7. Northwoods is invited to bid on a one-time-only special order to supply 100 rustic

tables. What is the lowest price Northwoods should bid on this special order?
a. $6,300
b. $7,200
c. $9,000
d. $13,500

8. A large hotel chain is currently expanding and has decided to decorate all new hotels
using the rustic style. Northwoods Incorporated is invited to submit a bid to the hotel
chain. What is the lowest price per unit Northwoods should bid on this long-term order?
a. $63
b. $72
c. $90
d. $135

9. Opportunity cost is best defined as:

a. the amount of money that is paid for something.
b. the amount of money that is paid for something, considering inflation.
c. the highest valued benefit given up in making a choice.
d. all of the benefits that are given up in making a choice.

10. Which of the following costs are NEVER relevant in the decision-making process?
a. fixed costs
b. historical costs
c. opportunity costs
d. variable costs
11. When evaluating a make-or-buy decision, which of the following does NOT need to be
considered?
a. Alternative uses of the production capacity
b. The original cost of the production equipment
c. The quality of the supplier's product
d. The reliability of the supplier's delivery schedule

THE FOLLOWING INFORMATION APPLIES TO QUESTIONS 12 THROUGH 14.

Konrade’s Engine Company manufactures part TE456 used in several of its engine models.
Monthly production costs for 1,000 units are as follows:

Direct materials $ 40,000

Direct labor 10,000
Variable overhead costs 30,000
Fixed overhead costs 20,000
Total costs $100,000

It is estimated that 10% of the fixed overhead costs assigned to TE456 will no longer be
incurred if the company purchases TE456 from the outside supplier. Konrade’s Engine
Company has the option of purchasing the part from an outside supplier at $85 per unit.

12. If Konrade’s Engine Company accepts the offer from the outside supplier, the monthly
avoidable costs (costs will no longer be incurred) total
a. $ 82,000.
b. $ 98,000.
c. $ 50,000.
d. $100,000.

13. If Konrade’s Engine Company purchases 1,000 TE456 parts from the outside supplier
per month, then its monthly operating income will
a. increase by $2,000.
b. increase by $80,000.
c. decrease by $3,000.
d. decrease by $85,000.

14. The maximum price that Konrade’s Engine Company should be willing to pay the
outside supplier is
a. $80 per TE456 part.
b. $82 per TE456 part.
c. $98 per TE456 part.
d. $100 per TE456 part.
 Solutions
True/False

1. Answer: False

2. Answer: True

3. Answer: False

4. Answer: True

5. Answer: False
Quantitative factors are outcomes that are measured in numerical terms, such as the
costs of direct labor.

6. Answer: False
Qualitative factors, as well as relevant revenues and relevant costs need to be
considered when selecting among alternatives.

7. Answer: True

8. Answer: True

9. Answer: False
Outsourcing has risks since the manufacturer is dependent on the supplier for a quality
product, delivered in a timely manner, for a reasonable price.

10. Answer: False

It appears that corporate costs will not change in total, and therefore are not relevant
costs for deciding whether to add a fourth product.
MCQs

1. D

2. D

3. C

4. A

5. C

6. B

7. B
$90 x 80% x 100 tables = $7,200

8. D
$90 + ($90 x 50%) = $135

9. C

10. B

11. B

12. A
$40,000 + $10,000 + $30,000 + ($20,000 x 10%) = $82,000

13. C
Avoidable costs $82,000 – ($85 x 1,000 units) = decrease of $3,000

14. B
Avoidable costs $82,000 / 1,000 units = $82 per part