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Exam 6: Relevant Information for Special Decisions

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Question 71

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Which of the following statements is incorrect?

A) An outsourcing decision typically affects only product-level costs.
B) Accepting a special order will involve incurring unit-level costs.
C) Eliminating a business segment often allows a company to avoid some facility-level costs.
D) Facility-level costs generally are not relevant in special order decisions.

E) B) and C)
F) None of the above

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Question 72

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Taylor Company is considering whether or not to replace a drill press that is several years old.The current market value of the old equipment is an opportunity cost of replacing the drill press.

A) True
B) False

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Question 73

Multiple Choice

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Select the incorrect statement regarding relevant costs and revenues.

Talladega produces the clock used in the product.Talladega has received an offer from Daytona,Inc.,to supply the clock.If Talladega discontinues production of the clock,the company will be able to eliminate its product-level costs because no other products along the same line are produced by the company.However,due to its concern for quality,the company will have to inspect each clock.Various costs and items are described below: Required: For each item in the table,place a check mark or X in the column that best describes the item in the context of the described outsourcing decision.A cost varies if the amount of the cost or the incurrence of the cost differs between the two alternatives: continuing to make the clocks or purchasing the clocks from Daytona.

To be relevant in decision making,cost or revenue information must be future-oriented and must not differ among the alternatives.

The decision to accept a lower than normal selling price may depend on the availability of excess capacity.

Differential revenues are expected future revenues that vary among the alternatives under consideration.

Which of the following items is qualitative?

Outsourcing reduces the extent of a company's vertical integration.

Eastern Company currently produces a component that it uses in making some of its products.The company has calculated the following costs for making the component: $\begin{array} { l r } \text { Unit-level costs } & \\\text { Materials } & \$ 2 0 \\\text { Labor } & 28 \\\text { Overhead } & 2 \\\text { Allocated facility-level costs } & \underline {10} \\ \text { Total cost } & \underline {\$ 6 0 } \\\end{array}$ Eastern is considering outsourcing the component.A supplier has offered to sell the component to Eastern for $55 each.Eastern needs 10,000 units each year.If Eastern does outsource the component,it can use the facilities to make another product that would yield a contribution margin of $60,000 per year. Required: 1)Should Eastern outsource the component? Support your answer with appropriate computations. 2)What qualitative factors should be considered in this decision?

A company's compensation system for its managers should provide incentives for the managers to maximize the company's long-term profitability.

When evaluating alternatives,what type of costs should be considered?

For many managerial decisions (such as outsourcing and special order decisions),unit-level costs are avoidable costs.

All of the following statements describe qualities of relevance except:

Farris Company reported the following information for its two products: $\begin{array} { l c c } & \text { Product X } & \text { Product } Y \\\text { Selling price per unit } & \$ 2 5 &\$3 5\\\text { Variable cost per unit } & 15 & 20\end{array}$ Due to labor constraints,demand for each of the products is greater than its supply.Product X requires one hour of labor to produce and product Y requires three hours of labor to produce.Which of the following statements is true?

Select the incorrect statement concerning opportunity costs.

Select the term from the list provided that best matches each of the following descriptions.

Select the term from the list provided that best matches each of the following descriptions.Put the number of the term in the column for Your Answer.

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: $\begin{array} { l c r } & \text { Alternative A } & \text { Alternative B } \\\text { Projected revenue } & \$ 62,500 & \$ 75,000 \\\text { Unit-level costs } & 12,500 & 18,000 \\\text { Batch-level costs } & 6,250 & 12,000 \\\text { Product-level costs } & 7,500 & 8,500 \\\text { Facility-level costs } & 5,000 & 6,250\end{array}$ What is the differential revenue for this decision?

ServicePro provides two kinds of services.During the most recent accounting period,the two service lines produced the following operating results: $\begin{array} { l l l l } & \text { Service } 1 &{ \text { Service } 2 } \\\text { Service revenue } & \$ 80,000 & \$ 20,000 \\ \text { Unit-level materials } & \$ ( 20,000 ) & \$ ( 2,000 ) \\\text { Unit-level labor }& \$ ( 30,000 ) & \$ ( 14,000 ) \\\text { Product-level selling \& adrninistrative costs } & \$ ( 10,000 ) & \$ ( 2,500 ) \\\text { Comparywide facility-level costs } & \underline{\$ ( 5,000 ) } &\underline{ \$ ( 5,000 ) } \\\text { Net income }&\underline{ \$ 15,000 }& \underline{\$ ( 3,500 ) }\end{array}$ If the company stops providing Service 2: