QUIZ 8- TACTICAL DECISION MAKING, DECENTRALIZATION

Question 1
0 / 2 pts
ABC Inc. has the capacity to make 100,000 windows. ABC is currently operating at
100% capacity. The windows usually sell for $20.00 each. Costs for each window
follow:

Direct materials $ 5.00

Direct labor 3.00

Variable factory overhead 2.00

Fixed factory overhead 4.00

Total $14.00

The Army has offered to buy 10,000 windows for $12.00 each for barracks. ABC
should:

Accept the offer because the company will realize $40,000 in additional contribution
margin.

Correct Answer

Reject the offer because it currently does not have enough capacity to accept the order.

Accept the offer because the company will realize $20,000 in additional contribution
margin.

You Answered

Reject the order because the company will lose $20,000 on the order.
Question 2
2 / 2 pts
ABC Company joint cost of producing 6,000 gallons of product A and 8,000 gallons of
product B is $74,000. The company could sell product A at split-off for $11 per gallon
and the product B for $6.75. Alternatively, the product A can be processed further at a
cost of $8 per gallon (of product A) into product C. It takes 3 gallons of product A for
every gallon of product C. A gallon of product C sells for $60.
ABC should:

Sell at split-off the product B to have a profit of $34,286

Process further and have a $37,714 additional income

Sell at split-off the product A to avoid loss.

Correct!

Process further and have a $6,000 additional income

Question 3
2 / 2 pts
ABC Company produces a special gear used in automatic transmissions. Each gear
sells for $30, and the company sells approximately 500,000 gears each year. Unit cost
data for the year follows:

Direct material $9.00

Direct labor 8.00

Other costs: Variable Fixed

Manufacturing $3.00 $7.00

 Distribution 5.00 3.00

ABC has received an offer from a foreign manufacturer to purchase 25,000

gears. Domestic sales would be unaffected by this transaction. If the offer is accepted,
variable distribution costs will increase $1.00 per gear for insurance, shipping, and
import duties. The relevant unit cost to a pricing decision on this offer is:

$20.00

$18.00

$24.00

Correct!

$26.00

Question 4
2 / 2 pts
ABC Co. provides two products. The projected income statement for the two products
are as follows:
Product A Product B
Sales $4,200,000 $12,000,000
Less variable expenses 3,830,000 9,600,000
Contribution margin $370,000 $2,400,000
Less direct fixed expenses 400,000 500,000
Segment margin (30,000) 1,900,000
Less common fixed expenses
100,000 200,000
(allocated
$ (130,000) $1,700,000

If ABC drops product A, by how much will income increase or decrease?

$228,000 decrease

Correct!

$30,000 increase

$258,000 decrease

$130,000 increase

Question 5
2 / 2 pts
ABC Corporation manufactures lamps. Management is currently studying whether the
company should continue to make the cord assembly or purchase them from Graham
Company for $5.25. ABC needs 20,000 cord assemblies a year. If the part is
purchased, the company can not use the released facilities for another manufacturing
activity.

ABC’s unit cost to manufacture the cord assembly is:

Direct materials $2.25

Direct labor 1.75

Factory overhead (70%

2.50
variable)

Total $6.50

ABC should:

Make the assembly and enjoy a differential income of $10,000

Buy from Graham and enjoy a differential income of $25,000

Correct!

Buy from Graham and enjoy a differential income of $10,000

Make the assembly and enjoy a differential income of $25,000

Question 6
2 / 2 pts
ABC Company provided the following information:
Turnover 0.8250
Margin 12%
Operating income $7,920

If the WACC is 8% and tax rate is 35%, what is the company's EVA?

$1,252.00

Correct!

$(1,252.00)

$1,520.00

$(1,520.00)

Question 7
2 / 2 pts
ABC Company provided the following information:
Turnover 0.8250
Margin 12%
Operating income $7,920
Compute the Sales.

$9,600

$65,340

$80,000

Correct!

$66,000

Question 8
2 / 2 pts
ABC Company provided the following information:
Assets (average) 40,000.00
Margin 16%
Turnover 0.6250

Compute the ROI

27.50%

Correct!

10%

84%

1%
Question 9
2 / 2 pts
Division A makes a part that can either be sold to outside customers or transferred
internally to Division B for further processing. Annual data relating to this part are as
follows:

Annual production capacity 100,000 units

Selling price of the item to outside customers $50.00

Variable cost per unit 40.00

Fixed cost per unit 5.00

Division B required 20,000 units per year and is currently paying an outside supplier $48
per unit.
If outside customers demand only 90,000 units, what is the lowest acceptable transfer
price from the viewpoint of the selling division for each of the 20,000 units needed by B?

$50

$40.00

Correct!

$45.00

$47.50

Question 10
2 / 2 pts
ABC, Inc. has a Dyestuff division in Manila that makes dyestuff in a variety of colors
used to dye denim for jeans, and Clothing division located in Iloilo that manufactures
denim clothing. The Dyestuff division incurs manufacturing costs of $2.68 for one pound
of powdered dye.
The Clothing Division cannot buy this type of powder externally. The shipping cost will
be $0.34 per pound from Manila to Iloilo.
Calculate the transfer price using cost-plus method.

$3.80

$2.34

$2.68

Correct!

$3.02

Question 1
10 / 10 pts
Correct!
It will be affected by management decision.

Relevant Cost

Correct!
The amount varies in direct proportion to changes in level of activity within a
relevant range.

Variable cost

Correct!
Historical cost.

Sunk cost

Correct!
It is constant in amount within a relevant range.

Fixed cost
Correct!
Establishment of an individual’s accountability based on his scope of authority.

Responsibility Accounting

Correct!
Salary income that a student foregoes by devoting full time to his studies.

Opportunity cost

Correct!
The practice of delegating decision-making authority to the lower levels.

Decentralization

Correct!
It shows how productively assets are being used to generate sales.

Turnover

Correct!
The excess of revenue over variable costs, including manufacturing, selling and
administrative costs.

Contribution Margin

Correct!
The prices charged for goods produced by one division and transferred to
another

transfer prices

Question 2
0 / 1 pts
The manager of an investment center is responsible for generating revenue as well as
controlling expenses.
Correct Answer

True

You Answered

False
Question 3
0 / 1 pts
The salary of the department manager is a direct cost of his department, but not
controllable by such manager.
Correct Answer

True

You Answered

False

Question 4
1 / 1 pts
Past costs are sunk and sometimes may also be relevant.

True

Correct!

False

Question 5
1 / 1 pts
One of the advantages of decentralization is that developing authority to managers may
make conflicting decisions.

True

Correct!

False
Question 6
1 / 1 pts
The manager of an investment center cannot improve ROI by decreasing the amount of
inventory.

True

Correct!

False

Question 7
1 / 1 pts
The invested capital employed turnover rate would include profit in the numerator.

True

Correct!

False

Question 8
1 / 1 pts
Depreciation on an existing assets is always irrelevant.
Correct!

True

False

Question 9
0 / 1 pts
If a firm has unused production capacity and sufficient unused activity capacity, a one-
time special order may bring in more revenues even if it will be sold at lower than the
regular selling price.
Correct Answer

True

You Answered

False

Question 10
0 / 1 pts
The imputed interest rate used is ordinarily the target return on investment set by the
company's management and should be equal to the weighted-average cost of capital or
discount rate.
You Answered

True

Correct Answer

False

Question 11
1 / 1 pts
Recognition and definition of the problem is the first step among the six steps of the
decision-making model.
Correct!

True

False
Question 12
1 / 1 pts
Each year, ABC Company produces 18,000 units of a component used in microwave
ovens. An outside supplier has offered to supply the part for $1.38. The unit cost is
$0.78 for direct materials, $0.34 for direct labor, $0.13 for variable overhead and $2.75
for fixed overhead.
What is the relevant cost of buying the part?
Correct!

Purchase price

all variable cost

Fixed costs

Direct materials and direct labor

Question 13
1 / 1 pts
Given the two alternatives of either to sell a product at split-off or process it further into
another product, what is normally the relevant cost of processing it further?

Joint cost

fixed cost

sales revenue

Correct!

Further processing cost

Question 14
1 / 1 pts
Each year, ABC Company produces 18,000 units of a component used in microwave
ovens. An outside supplier has offered to supply the part for $1.38. The unit cost is
$0.78 for direct materials, $0.34 for direct labor, $0.13 for variable overhead and $2.75
for fixed overhead.
What is the relevant cost of making the part?

purchase price

Fixed cost

prime cost

Correct!

Direct materials, direct labor and variable overhead

Question 15
1 / 1 pts
The following cost may be considered as relevant in tactical decision making, except:

Fuel

rent

salaries

Correct!
depreciation of old equipment

Question 16
1 / 1 pts
Future costs that differ across alternatives are:
Correct!

Relevant costs

Variable costs

Sunk costs

Opportunity costs

Question 17
1 / 1 pts
A company had WACC equal to 8.96%. If the company pays off mortgage bonds with
an interest rate of 4% and issues an equal amount of new stock considered to be
relatively risky by the market, which of the following is true?

Correct!

WACC will increase

WACC will decrease

ROI will decrease

residual income will increase

Question 18
1 / 1 pts
The following are the reasons why firms choose to decentralize, except:

Cognitive limitations

It permits trainings and motivating local managers

Correct!

So that the only top management should do the decision-making.

local managers can make better decisions using local information

Question 19
1 / 1 pts
A transfer price is

only useful in s segment that deals with outsiders as well as with segments of the same
company

Correct!

the price charged by one segment of the company for goods or service provided to
another segment

the amount charged by a cost center for a service performed for a profit center
an accounting device to turn profit centers into investment centers

Question 20
1 / 1 pts
Transfer prices

are necessary for investment centers

are not used for departments with high amounts of fixed costs

reduce employee turnover

Correct!

Should encourage the kinds of behavior that upper-level management wants

Question 21
1 / 1 pts
With two autonomous division managers, the price of goods transferred between the
divisions needs to be approved by

corporate management and the manager of the buying division

both divisional managers and corporate management

corporate management

Correct!
Both divisional managers