Differential Analysis: The Key to Decision Making
True / False Questions
1. A cost that is traceable to a segment through activity-based costing may or may not be an avoidable cost for decision making.
True False
2. Only future costs that differ between alternatives are relevant in decision making.
True False
3. Future costs that do not differ between the alternatives in a decision are avoidable costs.
True False
4. The book value of a machine, as shown on the balance sheet, is not relevant in a decision concerning the replacement of that machine by another machine. (Ignore taxes.)
True False
5. A cost that is relevant in one decision may not be relevant in another decision.
True False
6. Opportunity costs are not usually recorded in the accounts of a business.
True False
7. A cost that can be avoided by choosing one alternative over another is not relevant for decision purposes.
True False
8. The book value of old equipment is a relevant cost in a decision to replace that equipment. (Ignore taxes.)
True False
9. An avoidable cost is a cost that can be completely eliminated irrespective of whether one chooses one alternative or another in a decision.
True False
10. A fixed cost cannot be a differential cost.
True False
11. One of the advantages of allocating common fixed costs to a product is that such allocations more accurately reflect the product's true profitability.
True False
12. Fixed costs may or may not be sunk costs.
True False
13. A product whose revenues do not cover the sum of its variable costs, its traceable fixed costs, and its allocated share of general corporate administrative expenses should usually be dropped.
True False
14. In a decision to drop a segment, the opportunity cost of the space occupied by the segment is the cost of renting or building similar space nearby.
True False
15. Fixed costs may or may not be relevant in decisions about whether a product should be dropped.
True False
16. In a decision to drop a product, the product should not be charged for factory rent if the space in which the product is produced has no alternative use and the rental payment is unavoidable.
True False
17. When a company is involved in only one activity in the entire value chain, it is vertically integrated.
True False
18. A vertically integrated company is more dependent on its suppliers than a company that is not vertically integrated.
True False
19. A disadvantage of vertical integration is that by pooling demand for parts from a number of companies, a supplier will face diseconomies of scale that result in lower quality and higher cost than if every company makes its own parts.
True False
20. In a special order situation, any fixed cost that could be avoided if the special order were not accepted would be irrelevant.
True False
Multiple Choice Questions
21. Hal currently works as the fry guy at Burger Haven but is thinking of quitting his job to attend college full time next semester. Which of the following would be considered an opportunity cost of attending college?
A. the cost of the textbooks
B. the cost of the cola that Hal will consume during class
C. Hal's lost wages at Burger Haven
D. the cost of commuting to the Burger Haven job
22. Opportunity costs are:
A. not used for decision making.
B. the same as variable costs.
C. the same as historical costs.
D. relevant in decision making.
23. Consider the following statements:
I. A division's net operating income, after deducting both traceable and allocated common fixed costs, is negative.
II. The division's avoidable fixed costs exceed its contribution margin.
III. The division's traceable fixed costs plus its allocated common corporate costs exceed its contribution margin.
Which of the above statements is a valid reason for eliminating the division?
A. Only I
B. Only II
C. Only III
D. Only I and II
24. In a make-or-buy decision, relevant costs include:
A. unavoidable fixed costs
B. avoidable fixed costs
C. fixed factory overhead costs applied to products
D. fixed selling and administrative expenses
25. Management is considering a one-time-only special order. There is sufficient idle capacity to fill the order without affecting any normal sales. Which one of the following is NOT relevant in making the decision?
A. absorption costing unit product costs
B. variable costs
C. incremental costs
D. differential costs.