True or False

1. Incremental costs are relevant to the decision to further process a product

beyond its current state. True
2. The opportunity cost of making a component part in a factory with excess
capacity for which there is no alternative use is equal to the contribution
margin lost. False, zero
3. The opportunity cost of making a component part in a factory with no
excess capacity is the net benefit forgone from the best alternative use of
the capacity required. True
4. Costs relevant to a make-or-buy decision include variable manufacturing
costs as well as unavoidable fixed costs. False
5. The term incremental cost refers to the difference in total costs that
results from selecting one choice instead of another. True
6. Relevant or differential cost analysis considers all variable and fixed costs
as they change with each decision alternative. True
7. The relevance of a particular cost to a decision is determined by the
potential effect on the decision, accuracy and verifiability of the cost,
riskiness of the decision and the size of the cost. False, only the
potential effect on the decision.
8. A decision-making concept, described as "the contribution to income that
is forgone by not using a limited resource for its best alternative use," is
called marginal cost. False, opportunity cost.
9. The term that best refers to past costs that have been incurred and are not
relevant to any future decisions is full absorption costs. False, sunk
costs.
10.
Relevant costs refer to anticipated future costs that will differ among various
alternatives. True.
11.
Incremental fixed costs would be relevant in short-term decision making.
True.
12.
Total unit costs are relevant for cost-volume-profit analysis. False, irrelevant
in marginal analysis.
13.
A company's approach to a make-or-buy decision involves an analysis of
avoidable costs. True.
14.
The sum of the average fixed costs and the average variable costs for a given
output is known as average total cost. True.
15.
The change in total product resulting from the use of one unit more of the
variable factor is known as marginal product. True.
16.
In a joint manufacturing process, joint costs incurred prior to a decision as to
whether to process the products after the split-off point should be viewed
as relevant costs. False, sunk costs.
17.
Marginal revenue, by definition, is the change in total revenue associated with
producing and selling one more unit. True.
18.
Profits that are lost by moving an input from one use to another are referred
to as cannibalization income. False, opportunity costs.
19.
Sunk costs are In and of themselves are not relevant to decision making.
True.
 20.
In a decision analysis situation, depreciation is not likely to contain a variable
cost component. True
21.
The disposal price of the old equipment is relevant to a manufacturing
equipment replacement decision. True.
22.
The replacement costs, out-of-pocket costs and differential costs are relevant
to a decision to accept or reject an order. True.
23.
When making a decision to increase the robotic automation equipment in an
existing facility, a firm takes into consideration the initial cost of the
current facility. True.
24.
Incremental (differential) costs are additional costs that result when
production, or some other factor is increased. True.
25.
Some fixed cost may vary among the alternatives and would be relevant, but
not all fixed cost are relevant. True.
26.
Absorption costing includes all variable and fixed manufacturing cost, of
which not all are relevant to the decision whether to make-or-buy decision.
True.
27.
Discretionary costs are costs that can be deferred to future periods without
creating a significant impact on the current period's results. True.
28.
An imputed cost is an opportunity cost. It is a benefit that is given up as a result
of using the company's resources elsewhere. It is a cost that is not stated and
must be calculated in some way. A common example of an imputed cost is the
interest cost of equity capital. True.
29.
The cash inflow that the company would be able to gain from disposing of the old
piece of equipment is most relevant because this cash inflow will only occur if
the decision is made to dispose of the old piece of equipment. True.
30.
General office costs will generally not differ among the options, therefore they are
not relevant. True.

Multiple Choice
1. D
2. A
3. C
4. B
5. A
6. B
7. A
8. C
9. A
10. A
11. C
12. A
13. C
14. C
15. B
 16. B
17. C
18. B
19. D
20. C
21. C
22. A
23. D
24. D
25. B
26. B
27. A
28. D
29. C
30. A
31. B
32. A
33. A
34. C
35. C
36. A
37. C
38. B
39. A
40. B
Straight Problems:
1.
1.1.Accept, Yes, profit of P1/unit or P10,000 >> (P7 P6 x 10, 000 units)
1.2.Reject, P10,000 decrease >> -5, 000 x (P10-P6) = - P20,000 less P10,000 (item 1.1)
1.3.Reject, P10,000 decrease >> (80,000 x -0.50) (3 x 10,000)
2.
2.1.Reject P4,500, >> 10, 000 x (7.5-6.25) 4,000 x 4.25
2.2.P7.95 >> Indifference point: 10,000x = 4,000 (4.25)
3.
3.1.Buy>> Make, P16.70 (P9 + P3 + P2.5 + P2.2) and Buy P16
3.2.P16.70
3.3..70 x 40,000 = P28,000 Increase
3.4.
3.4.1. Make >> Make P14.50 vs Buy P16
3.4.2. P14.50
3.4.3. 60,000 decrease (14.5-16 x 40,000)
4.
4.1.Make; Loss of P8,000 to Purchase
 4.2.Quality, reliability of suppliers, timeliness, availability of inventory
4.3.No effect the amount will still be avoided.
4.4.Should still make; loss of P23,000 if to purchase

5.
5.1.P512 >> P240 + P80 + P120 + P72
5.2.P872 >> VC P512 + OC P360

6.
6.1.Continue to operate, net advantage of P40, 000. Demand (8,000x2=16,000) is greater
than SDP so the decision is to continue.
 6.2.11,000 for 2 months (see above computation).

7. Decrease in profit of P350,000

8.
8.1.3, 4, 6
8.2.6
8.3.1
8.4.3, 4, 5, 6

9. Maximize Z = 5X + 14Y.

10.
10.1. No, the conclusion is incorrect because the order generates a net contribution of
P66,000 for the firm. Note: The fixed administrative cost is irrelevant to the decision.
Selling price P115
Less: Direct materials (P45 - P4) P41
Direct labor 3
0
Variable manufacturing overhead (2 hours 1 89
x P9*) 8
Unit contribution margin P 26

Total contribution margin (3,000 P78,000

units x P26)
Less: Additional set-up costs P8,70
0
Special device 3,3 12,000
00
Net contribution to profit P66,000
 *Fixed manufacturing overhead: P624,000 24,000 labor hours
= P26 per hour
Variable manufacturing overhead: P35 - P26 = P9

10.2. Yes, the order should be rejected. An environment of no excess capacity implies a
very strong marketplace. Success would be giving up sales at P180 per faucet, to be
replaced with sales of P115 per unit and the need to incur additional set-up costs and
the cost of a special device. Company profitability would suffer.
10.3. Yes, outsourcing is an option. Success could have another manufacturer produce the
faucets for Yale or perhaps even for another customer. Price, product quality, and
supplier reliability would be important considerations in this decision.