ESSAY

1. What Factors Determine The Relevance Of Information To Decision Making? (5

points)

2. What Are Sunk Costs, And Why Are They Not Relevant In Making Decisions? (2
points)

3. What Information Is Relevant In An Outsourcing Decision? (3 points)

4. How Can Management Achieve The Highest Return From Use Of A Scarce Resource?
(5 points)

5. What Variables Do Managers Use To Manipulate Sales Mix? (2 points)

6. How Are Special Prices Set, And When Are They Used? (3 points)

7. How Do Managers Determine Whether A Product Line Should Be Retained Or

Discontinued? (2 points)

8. How Is Linear Programming Used To Optimally Manage Multiple Resource

Constraints? (3 points)

9. Which of the following is NOT a required characteristic of relevant information?

a. must be associated with the decision under consideration
b. must be verifiable by an independent reviewer or auditor
c. have a connection to or bearing on some future endeavor
d. must be important to the decision maker

10. Select the incorrect statement from the following:

a. A cost that is the same for multiple alternatives under consideration is
not relevant.
b. The cost to acquire a component in a make or buy decision is relevant.
c. The salvage, or residual, value of a piece of machinery is relevant in a
keep-or-replace decision.
d. The cost of acquiring the machine that is currently used to produce a
component is relevant in making an outsourcing decision.

11. Song Company currently manufactures all component parts used in the manufacture
of various small appliances. A steel handle is used in three different products. The
current year budget for 20,000 handles has the following unit cost:

Direct material $0.60

Direct labor 0.40
Variable overhead 0.10
Fixed overhead 0.20
Total unit cost $1.30

NuSteel has offered to supply 20,000 handles to Song for $1.25 each, delivered. If
Song currently has idle capacity that cannot be used, accepting the offer will:
a. increase the handle unit cost by $.15.
b. decrease the handle unit cost by $.15.
c. decrease the handle unit cost by $.25.
d. increase the handle unit cost by $.05.
12. Total unit costs are:
a. relevant for cost-volume-profit analysis.
b. needed for determining sunk costs.
c. needed for determining product contribution.
d. irrelevant in marginal analysis.

13. Alpine Ski Company recently expanded its manufacturing capacity, which will allow
it to produce up to 15,000 pairs of cross-country skis of the mountaineering model
or the touring model. The Sales Department assures management that it can sell
between 9,000 pairs and 13,000 pairs of either product this year. Because the
models are very similar, Alpine Ski will produce only one of the two models. The
following information was compiled by the Accounting Department:

Per Unit (Pair) Data

Mountaineering Touring
Selling price $88.00 $80.00
Variable costs 52.80 52.80

Fixed costs will total $369,600 if the mountaineering model is produced but will be
only $316,800 if the touring model is produced. Alpine Ski is subject to a 40%
income tax rate. If Alpine Ski Company desires an after-tax net income of $24,000,
how many pairs of touring model skis will the company have to sell?
a. 12,529 pairs
b. 13,118 pairs
c. 13,853 pairs
d. 4,460 pairs

14. A company’s approach to a make-buy decision:

a. depends on whether the company is operating at or below breakeven.
b. involves an analysis of avoidable costs.
c. should use absorption costing.
d. should use activity-based costing.

15. Sunk costs are:

a. not relevant to decision making.
b. relevant to decision making.
c. relevant to long-run decisions but not to short-run decisions.
d. fixed costs.

16. Select the correct definition of segment margin from the following:
a. Revenue - Expenses
b. Revenue – Variable Costs
c. Revenue – Variable Costs – Avoidable Fixed Costs
d. Revenue – Variable Costs – Unavoidable Fixed Costs

17.-25.The following costs relate to a variety of decision settings:

Cost Decision
17. Allocated corporate overhead Closing a money-losing department
18. Cost of an old car Vehicle replacement
19. Direct materials Make or buy a product
20. Salary of marketing manager Project discontinuance; manager to be transferred
elsewhere in the firm
21. Home theater installation Purchase of a new home
22. Unavoidable fixed overhead Plant closure
23. Research expenditures incurred last Product introduction to marketplace
year, related to new product
24. $4 million advertising program Whether to promote product A or B with the $4
million program
25. Manufactured cost of existing Whether to discard the goods or sell them to a
inventory third-world country

Required:
Consider each of the nine costs listed and determine whether it is relevant or
irrelevant to the decision cited. If the cost is irrelevant, briefly explain why.