CHAPTER 5:
Quiz/Demonstration Exercises
Learning Objective 1
1.
In making managerial decisions, irrelevant information is everything but
_____ costs that _____between alternatives.
a.
c.
d.
2.
future ; do notb.
past ; do not differ
past ; differ
future ; differ
For a revenue to be relevant to a particular decision, the revenue must
_____.
a.
b.
c.
d.
e.
f.
differ between the alternatives being considered
be a past revenue
be a future revenue
a. and b.
a. and c.
only c.
Learning Objective 2
3.
The role of historical data from the accounting system in making managerial
decisions is _____.
a.
b.
c.
d.
to serve directly as inputs in decision models
to assist in making predictions about other information needed for
making decisions
to assist in making predictions that are inputs to a decision model
none of the above
4. What is the last portion of the decision process?
a.
b.
c.
d.
feedback
prediction method
implementation and evaluation
decision model
Learning Objective 3
Items 5 and 6 are based on the following data:
In 20X0, its first year of operations, Janice, Inc., manufactured 150,000 units of its
single product, cakes. Variable manufacturing costs were $3 per unit of product.
Fixed manufacturing costs were $60,000 and are based on the production volume
of 150,000 units. Janice sold 120,000 cakes during the year at an average selling
price of $5. Variable selling costs were 50¢ per pie and fixed selling and
administrative costs were $100,000.
5.
Janice's operating income using the absorption approach for 20X0 is _____.
a. $0
6.
b. $10,000
c. $20,000
d. $32,000
Janice's operating income using the contribution approach for 20X0 is
_____.
a. $0
b. $10,000
c. $20,000
d. $32,000
Learning Objective 4
Use the following information for questions 7 and 8.
Look-N-Cook sells uncooked pies that can be heated at home and taste
delicious. An income statement for a typical month is given below.
Sales (5,000 pies)
Costs:
Ingredients
Direct Labor
Overhead (50% variable)
Before-tax Income
$ 50,000
$ 19,000
6,000
20,000
45,000
$ 5,000
A local car dealer, who loves Look-N-Cook pies, has offered to buy 300
pies for an upcoming promotion to launch the new SPEEDY line of sports
cars he will carry. While the normal selling price is $9 per pie, the dealer
has offered $6 each citing the large volume of the order as the reason for
cutting the price.
7.
If Look-N-Cook accepts this order, the effect on the company's income,
assuming regular sales are unaffected, is a _____.
a. $900 decrease
c. $300 decrease
b. $900 increase
d. $300 increase
8.
The fixed overhead of $2 per pie _____.
a.
b.
c.
d.
is irrelevant in making the decision because the total fixed costs are
unaffected
is irrelevant in making the decision because the fixed costs per unit
are unaffected
will increase to above $2 per pie if the order is accepted
will increase to above $2 per pie if the order is not accepted
Learning Objective 5
9.
In _____ competition , all competing firms will sell the same type of
product at the same price.
a.
b.
c.
d.
10.
imperfect
fair
perfect
unfair
In perfect competition, the _____ curve is a horizontal line equal to the
price per unit at all volumes of sales.
a.
b.
c.
d.
marginal revenue
marginal cost
incremental cost
step revenue
Learning Objective 6
11.
_____ influence(s) pricing decisions.
a.
b.
c.
d.
12.
Costs
Customer demands
Competitors’ actions
All of the above
Which of the following legal requirements influences pricing in practice?
a.
b.
c.
d.
predatory pricing
competitive pricing
nondiscriminatory pricing
markup pricing
Learning Objective 7
13.
Popular markup formulas for pricing do not include a percentage of _____.
a.
b.
c.
d.
variable manufacturing costs
total variable costs
variable overhead
full costs
Learning Objective 8
14.
The majority of costs are committed in which stage of the value chain?
a.
b.
c.
d.
15.
design
research and development
production
customer service
A factor not usually included in determining the feasibility of earning the
desired target profit margin is _____.
a.
b.
c.
d.
depreciation
competitor pricing
inflation rates
interest rates
CHAPTER 5:
Exercises
1. [b]
5. [d]
Solutions to Quiz/Demonstration
2. [e]
3. [c]
4. [a]
Income under Absorption Approach
Sales (120,000 * $5)
COGS ((120,000 * ($3 + $.40))
$600,000
(408,000)
Gross Profit
192,000
Selling and Administrative Expenses
(120,000 * 50¢) + $100,000
160,000
Operating income
6. [c]
$ 32,000
Income under Contribution Approach
Sales (120,000 * $5)
Variable costs:
Manufacturing (120,000 * $3)
Selling (120,000 * 50¢)
Contribution Margin
Fixed Expenses:
Manufacturing
Selling and Administrative
Operating Income
$600,000
$360,000
60,000
(200,000)
$180,000
$ 60,000
100,000
(160,000)
$20,000
7. [c]
The solution to this problem requires determining the
variable cost per pies and comparing those to the offer price. In this
case, the variable costs are $19,000 for ingredients, $6,000 for direct
labor, and $10,000 for variable overhead (1/2 of $20,000) for a total
of $35,000. For 5,000 pies, this is a variable cost per pie of $7.00
($35,000/5,000). Since the offer is for $6 per pie, each pie will
subtract $1.00 in contribution margin and profits will decrease by
$300.
8. [a]
Total fixed costs should be used in comparing the
alternatives. If the totals do not differ, fixed costs are irrelevant for
the decision at hand.
9. [c]
13. [c]
10. [b]
14. [a]
11. [d] 12. [a]
15. [a]