CLASS PARTICIPATION: SHORT-TERM DECISION-MAKING

True-False
1. If the results of a decision are not as good as expected, there has been an error in the decision-making process.
2. The costs of operating a joint process can be fixed or variable.
3. Incremental costs can be either fixed or variable.
4. In general, the smaller the segment being considered in a decision, the fewer the avoidable costs.
5. A given fixed cost might be separable and relevant for the purpose of one decision and common and irrelevant
for the purpose of another decision in the same company.
6. Opportunity cost is usually the amount paid for a resource.
7. Fixed costs that are allocated to several segments are normally irrelevant to decisions for one of those segments.
8. The only revenues or costs that are relevant in decision making are the differential revenues or costs.
9. Constraints may be internal to the firm or external to the firm.
10. Management's objective should be to exploit a constraint rather than to eliminate it.

Multiple Choice
11. The salary or wage that you could be earning while you are taking this test is
a. an opportunity cost.
b. a sunk cost.
c. an incremental cost.
d. a joint cost.
12. The kind of cost that can be ignored in short-term decision making is
a. a differential cost.
b. an opportunity cost.
c. a relevant cost.
d. a sunk cost.
13. The role of sunk costs in decision making can be summed up in which of the following sayings?
a. Nothing ventured, nothing gained.
b. Bygones are bygones.
c. A penny saved is a penny earned.
d. The love of money is the root of all evil.
14. Allocated costs are
a. generally separable.
b. generally variable.
c. generally common.
d. especially important in deciding whether to drop a segment.
15. A product should be dropped if
a. it has a negative incremental profit.
b. it has a negative contribution margin.
c. dropping it will increase the total profit of the company.
d. it is not essential to the company's product line.
16. From its refining process an oil company obtains three products, one of which can be processed further into a
different product, the other two of which can be sold after further refining. The refining process is
a. a joint process.
b. a mixed cost process.
c. an unavoidable process.
d. a process whose costs should be allocated to the resulting products.

17. A major factor in evaluating a special order is

a. the expected contribution margin on the order.
b. the possible effects on sales at regular prices.
c. the availability of capacity to produce the additional units.
d. all of the above.
18. Which of the following is true for a make-or-buy decision?
a. The reliability of the outside supplier of the component is important to the decision.
b. Depreciation on equipment used in making the component and having no other use is the critical factor in the
decision.
c. Opportunity costs are irrelevant.
d. The company should make the component if the purchase price is less than the per-unit variable cost to make
the component.

19. Which of the following costs is relevant in deciding whether to sell joint products at split-off or process them
further?
a. The unavoidable costs of further processing.
b. The avoidable costs of further processing.
c. The variable cost of operating the joint process.
d. The cost of materials used to make the joint products.

20. A manufacturing process that invariably produces two or more products

a. is a complementary process.
b. is a joint process.
c. normally has only fixed costs.
d. usually has primarily variable costs.

21. Which of the following is a short-term decision in which opportunity costs are not relevant?
a. Make-or-buy decision.
b. Special-order decision.
c. Drop-a-segment decision.
d. None of the above.

22. Which of the following is a true statement?

a. Theory of Constraints is useful for identifying physical constraints but cannot incorporate nonphysical
constraints.
b. Theory of Constraints is useful in analyzing internal constraints but cannot identify external
constraints.
c. Constraints may be either internal or external.
d. Internal constraints are physical while external constraints are imaginary.

23. A company has space that it uses to make a component. It could rent the space to another company. The rent is
a. a sunk cost.
b. an opportunity cost.
c. a joint cost.
d. an avoidable cost.

24. In a make-or-buy decision, which of the following is true?

a. Variable costs are the only relevant costs.
b. Allocated fixed costs are relevant.
c. Alternative uses of space and machinery are relevant.
d. Making is the correct decision when there is idle capacity.

25. The best characterization of an opportunity cost is that it is

a. relevant to decision making but is not usually reflected in accounting records.
b. not relevant to decision making and is not usually reflected in accounting records.
c. relevant to decision making and is usually reflected in accounting records.
d. not relevant to decision making and is usually reflected in accounting records.

26. A sunk cost is

a. not avoidable.
b. avoidable under one alternative but not under another.
 c. joint or common.
d. direct to a segment.

27. Differential costs are costs that are

a. not avoidable.
b. avoidable under one alternative but not under another.
c. joint or common.
d. not direct to a segment.

28. A common cost

a. relates to a process that produces more than one product.
b. should be allocated to the segments of a company.
c. can usually be avoided in its entirety by dropping a segment.
d. none of the above.

29. An opportunity cost commonly associated with a special order is

a. the contribution margin on lost sales.
b. the variable costs of the order.
c. additional fixed costs related to the increased output.
d. any of the above.

30. Which of the following statements pertaining to the Theory of Constraints is true?
a. Inventory is evil and should never be kept.
b. Inventory is important to keep immediately before a bottleneck process.
c. Inventory should be kept before every machining process to prevent any downtime.
d. None of the above are true.

31. Which of the following cost-classification schemes is most relevant to decision making?
a. Fixed--variable.
b. Joint--common
c. Avoidable--unavoidable.
d. Direct--common.

32. Which of the following is NOT relevant in deciding whether to process a joint product beyond its split-off
point?
a. The split-off value.
b. The price after additional processing.
c. The cost of further processing.
d. The cost of operating the joint process.

33. Which of the following is NOT a short-term decision?

a. Accept a special order.
b. Make-or-buy a component.
c. Replace a machine.
d. Sell a joint product at split-off or process it further.

34. The variable cost of a unit of product made yesterday is

a. an incremental cost.
b. an opportunity cost.
c. a differential cost.
d. a sunk cost.

35. The most profitable use of a resource that has limited capacity and is needed in the production of more than one
product is a function of which of the following?
a. The number of units of each product the company can sell.
b. The contribution margin of each product.
 c. The amount of resource-use required for each unit of each product.
d. All of the above.

36. Which of the following is NOT relevant in a make-or-buy decision about a part the entity uses in some of its
products?
a. The reliability of the outside supplier.
b. The alternative uses of owned equipment used to make the part.
c. The outside supplier's per-unit variable cost to make the part.
d. The number of units of the part needed each period.

37. Which of the following is NOT relevant to a decision about whether to drop a segment?
a. The contribution margin expected to be produced by the segment.
b. The avoidable fixed costs direct to that segment.
c. The complementary effects of dropping the segment.
d. "None of the above" is the best answer because all of the above are relevant.
38. Just-in-time manufacturers are less likely than conventional manufacturing companies to
a. operate a joint process that results in joint products.
b. be able to accommodate special orders.
c. have constraints on their productive capacity.
d. fit any of the above characterizations.

39. The total demand for Product Z is relevant to a decision about

a. the best use of a resource that is in limited supply and is used in the production of Product Z and one other of
the company's products.
b. whether to sell Product Z, a joint product, at split-off or process it further into another salable product.
c. replacing Product Z with another product.
d. all of the above decisions.

40. A cost is not relevant for decision making if it:

a. Does not differ for each option available to the decision maker.
b. Changes from period to period
c. Is a future cost.
d. Is a mixed cost.
e. Is a fixed cost.

41. Variable costs will generally be relevant for decision making because
they:
a. Differ between decision options.
b. Are volume-based.
c. Have not been committed and are likely to differ between decision
alternatives.
d. Differ between decision options and have been committed.
e. Measure opportunity cost.

42. Fixed costs will often be irrelevant for short-term decision making
because they:
a. Do not vary on a per-unit-of-output basis.
b. Are the same each time period.
c. Typically do not differ in total between decision alternatives being
considered.
d. Are not committed.
e. Cannot be estimated with precision.

` 43. A "special sales order" is:

a. Typically expected.
 b. A profitable opportunity to sell a specified quantity of a firm's
product or service.
c. A one-time opportunity to sell a specified quantity of a product or
service
d. A particularly large customer order.
e. In most cases, a rush order.
44. "Committed" and "Sunk" costs are:
a. Generally not fixed.
b. Generally small in amount.
c. The result of prior bad decisions.
d. Not relevant for decision-making.
e. Recoverable in trade.

45. All the following are characteristic of relevant costs except:

a. They are generally variable.
b. They are not committed.
c. They are different in amount for different options.
d. They are costs that will be incurred in the future.
e. They are confined to inventory-related (i.e., product) costs.

46. The value-chain analysis used regarding the "make-or-buy decision"

often leads a firm to make use of:
a. Activity-based costing (ABC).
b. Cost-volume profit (CVP) analysis.
c. Outsourcing options.
d. Relevant cost-based pricing.
e. Value stream accounting.

47. The decision to keep or drop products or services involves strategic

consideration of all the following except:
a. Potential impact of the decision on the demand for the remaining
products or services.
b. Potential impact of the decision on employee morale.
c. Potential impact of the decision on pricing of other products offered
by the firm.
d. Growth potential of the firm.
e. The desired inventory levels of the product.

48. A useful concept for solving production-planning problems involving

multiple products and limited resources is:
a. Gross profit per unit of product.
b. Contribution per unit of scarce resource.
c. Value-stream costing.
d. Relevant cost pricing.
e. The contribution income statement.

49. One of the behavioral problems with relevant cost analysis is a

possible overemphasis on:
a. Short-term goals.
 b. Unit fixed costs.
c. Opportunity costs.
d. Strategic goals.
e. Goal congruency issues.

50. When using relevant cost analysis, it is a common mistake for untrained
managers to include in their analysis all the following except:
a. Sunk costs.
b. Allocated fixed costs.
c. Average fixed costs.
d. Unit variable costs.
e. Total fixed costs.

51. Which one of the following concepts is correct for determining relevant
costs for short-term decision-making?
a. Differential.
b. Integrative.
c. Variable.
d. Subjective.
e. Absorption.

52. Which one of the following issues would least likely be addressed
during the regular review of product profitability?
a. Which product managers should be rewarded?
b. Which products are most profitable?
c. Which products provide the greatest contribution margin per unit of
any scarce resources?
d. Which products should be promoted and advertised most aggressively?
e. Are the products priced properly?

53. Determination of the optimum short-term product mix should focus on:
a. Fully absorbed costs.
b. Production (that is, resource) and demand constraints.
c. Sales-mix costs.
d. Revenue forecasts for each of the firm's products or services.
e. The relative sales values of the firm's outputs (goods or services).