1. The cost of a machine purchased last year and used in the production process is called a(n):
Opportunity cost.
Relevant cost.
Incremental cost.
Sunk cost.
2. A revenue that differs between alternatives is called a(n):
Incremental revenue.
Irrelevant revenue.
Joint revenue.
Opportunity revenue.
3. A product line should be dropped when
it has a negative contribution margin.
its avoidable fixed costs are greater than its contribution margin.
there will be a positive change in income if the product line is dropped.
All of the above.
4. Which of the following is an example of a sunk cost?
Direct materials
Variable overhead
Equipment depreciation
Future cost
5. When deciding between two alternatives, the preferred alternative always has
no opportunity costs.
greater revenues than the other alternatives.
less expense than the other alternatives.
greater incremental profit than the other alternatives
6. A company is trying to decide whether to sell partially completed goods in their current state or incur additional costs to finish the goods and sell them as complete units. Which of the following is not relevant to the decision?
The selling price of the completed units.
The costs incurred to process the units to this point.
The selling price of the partially completed units.
The costs that will be incurred to finish the units.
7. When a department or product line is dropped, the common fixed costs which had been allocated to that department
are eliminated.
become variable costs.
are allocated to the remaining departments or product lines.
become sunk costs.
8. Common costs
are fixed costs that are not directly traceable to an individual product line.
normally not avoidable.
Both A and B are true.
Neither A nor B is true.
9. Which of the following is a direct cost of a specific department in a retail store?
Company president's salary.
Rent on the store.
Utilities for the store.
Cost of the department's inventory.
10. Which of the following would not be relevant in a make-or-buy decision?
Direct materials
Factory depreciation
Direct labor
Variable overhead
11. Which of the following is not normally relevant in a make or buy decision?
direct materials
supervisory salaries
incremental revenues
opportunity costs
12. Fixed costs that will be eliminated if a particular course of action is undertaken are called
optional costs.
opportunity costs.
direct costs.
avoidable costs.
13. A company is currently making a necessary component in house (the company is producing the component for its own use). The company has received an offer to buy the component from an outside supplier. A machine is being rented to make the component. If the company were to buy the component, the machine would no longer be rented. The rent on the machine, in relation to the decision to make or buy the component, is:
sunk and therefore not relevant.
avoidable and therefore not relevant.
avoidable and therefore relevant.
unavoidable and therefore relevant.
14. Which of the following costs is not relevant in decision making?
Sunk cost
Incremental cost
Opportunity cost
Differential cost
15. Manor Homes plans to discontinue a segment which last year generated a contribution margin of $65,000 and incurred $40,000 in fixed costs. If the segment is discontinued, half of the fixed costs will not be avoided. If Manor Homes decides to discontinue this segment the overall effect on profits will be:
a decrease of $65,000.
a decrease of $25,000.
a decrease of $45,000.
