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Exam 13: Relevant Information for Special Decisions

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Question 21

True/False

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Equipment should be evaluated for possible replacement only as it nears the end of its useful life.

A) True
B) False

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Question 22

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Easton Company makes and sells scooters. Easton incurred the following costs in its most recent fiscal year: Easton can currently purchase the scooters it makes from another company. If the company purchases the scooters, Easton would still continue to use its own logo, sales staff, and advertising programs. Which of the following costs would be classified as a unit-level cost?

A) Company president's salary
B) Depreciation on manufacturing equipment
C) Materials cost
D) Real estate taxes on factory

E) A) and B)
F) B) and C)

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Question 23

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

Terrain Tents makes backpacking tents. It has the capacity to produce 10,000 tents per year and currently is producing and selling 7,000 tents. Normal selling price for a tent is $450. Unit-level costs are $90 for direct materials, $220 for direct labor, and $15 for other manufacturing costs. Facility-level costs of $110 are allocated to each tent. Terrain has received a special order for 2,500 tents at $320 each.Required:Should Terrain accept the special order? Support your answer with appropriate computations.

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.

A potential danger from outsourcing is that a company may become too dependent on the supplier.

Classifying costs into one of four hierarchical levels can facilitate the identification of relevant costs. Place an "X" in the appropriate column to classify the following costs as Unit-Level, Batch-Level, Product-Level, and Facility-Level.

Which of the following is a true statement regarding product-level costs?

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

The market value of equipment owned by a company is a sunk cost and should not be taken into account in deciding whether or not to replace the equipment.

Natalie purchased a concert ticket recently for $50. She is trying to decide whether to drive, take a taxi, or ride the public transit bus. The cost of driving to the concert is a sunk cost because Natalie purchased her car several years ago.

The costs and revenues associated with two alternatives are listed below: $\begin{array}{lrc}&\text {Alternative 1}&\text {Alternative 2}\\\text { Projected revenue } & \$ 100,000& \$125,000 \\\text { Unit-level costs } & 20,000 & 30,000 \\\text { Batch-level costs } &20,000 & 25,000 \\\text { Croduct-level costs } &15,000 &15,000 \\\text { Tacility-level costs } &10,000 & 10,000\end{array}$ Which alternative should be selected based on this information?

One of the potential dangers from outsourcing is the possible occurrence of low-ball pricing.

Which costs are relevant for equipment replacement decisions?

Mary must decide between two alternatives for the weekend: babysitting or yard work. If she babysits, she will receive $40 and will incur $15 in transportation costs. If she does yard work, she will receive $40 and will incur $3 in lawn mower gas and oil costs and $5 in transportation costs. The payment she would receive for the jobs is relevant in deciding which alternative to select.

Qualitative information is relevant when:

The Clock Builder makes grandfather clock kits that it sells to hobbyists who then assemble and finish the clocks. The company has the capacity to make 5,000 of the kits, and its current volume is 3,000 kits. The costs of a clock kit are $300 for unit-level materials, $200 for unit-level labor, and $150 for an allocation of facility-level overhead. The normal selling price is $950. The Clock Builder has received a special order for 600 clock kits at a price of $600 each.Required:Should The Clock Builder accept the special order? Support your answer with appropriate computations.

Harris Company currently produces a component that it uses in making some of its products. Harris has calculated the following costs for making the component: $\begin{array}{lr}\text { Unst-level costs }\\\\\text { Materials } & \$ 20 \\\text { Labor } & 28 \\\text { Overhead } & 2 \\\text { Allocated facility-level costs } & 10 \\\text { Total cost } & \$ 60\end{array}$ Harris is considering outsourcing the component. A supplier has offered to sell the component to Harris for $52 each. Harris needs 8,000 units each year.Required:Should Harris outsource the component? Support your answer with appropriate computations.

Easton Company makes and sells scooters. Easton incurred the following costs in its most recent fiscal year: Easton can currently purchase the scooters it makes from Weston Company. If the company purchases the scooters, Easton would still continue to use its own logo, sales staff, and advertising programs. If Easton outsources the scooters to Weston, which of the following costs would be relevant to the outsourcing decision?

Jack currently works for a law firm full time and earns $60,000 a year. He is thinking of quitting his job to pursue a medical degree. Medical school will cost him $100,000 per year. If Jack quits his job and goes to medical school, the salary he currently earns would be considered what type of cost?