Chapter 11
Relevant Costs for Decision Making
True/False
1. Fixed costs are sunk costs and are therefore irrelevant in decisions.
Level: Easy LO: 1 Ans: F
2. A complete income statement must be prepared as part of a differential cost analysis.
Level: Medium LO: 1 Ans: F
3. Future costs that do not differ between the alternatives in a decision are avoidable costs.
Level: Medium LO: 1 Ans: F
4. The book value of an old machine is always considered a sunk cost in a decision.
Level: Easy LO: 1 Ans: T
5. A product that does not cover its allocated share of general corporate administrative expenses should be
dropped.
Level: Easy LO: 2 Ans: F
6. In a decision to drop a product, the product should be charged for rent in proportion to the space it
occupies even if the space has no alternative use and the rental payment is unavoidable.
Level: Easy LO: 2 Ans: F
7. Making rather than buying a part that goes into one of the company’s products would increase the
company’s degree of vertical integration.
Level: Easy LO: 3 Ans: T
8. In a special order situation that involves using existing idle capacity, opportunity costs are zero.
Level: Easy LO: 4 Ans: T
9. When a company has a production constraint, the product with the highest contribution margin per unit
of the constrained resource should be given highest priority.
Level: Easy LO: 5 Ans: T
10. Payment of overtime to a worker in order to relax a production constraint could increase the profits of
a company.
Level: Medium LO: 5 Ans: T
Brewer, Introduction to Managerial Accounting, 3/e 533
,11. In a plant operating at capacity, every machine and person in the plant would be working at the
maximum possible rate.
Level: Hard LO: 5 Ans: F
Multiple Choice
12. Hal Etoesus currently works as the fry guy at Burger Breath Drive Thru but is thinking of quitting his
job to attend college full time next semester. Which of the following would be considered an opportunity
cost in this decision?
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 Breath
D) both A and B above
Level: Easy LO: 1 Ans: C
13. Which of the following would be relevant in the decision to sell or throw out obsolete inventory?
A) A Above
B) B Above
C) C Above
D) D Above
Level: Medium LO: 1 Ans: D
14. Buff Corp. is considering replacing an old machine with a new machine. Which of the following
items is relevant to Buff’s decision? (Ignore income tax considerations.)
A) A Above
B) B Above
C) C Above
D) D Above
Source: CPA, adapted
Level: Medium LO: 1 Ans: B
534 Brewer, Introduction to Managerial Accounting, 3/e
,15. 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
Source: CMA, adapted
Level: Easy LO: 3 Ans: B
16. In situations where management must decide between accepting or rejecting a one-time-only special
order where there is sufficient idle capacity to fill the order, 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
Source: CMA, adapted
Level: Easy LO: 4 Ans: A
17. When a multi-product factory operates at full capacity, decisions must be made about what products
to emphasize. In making such decisions, products should be ranked based on:
A) selling price per unit
B) contribution margin per unit
C) contribution margin per unit of the constraining resource
D) unit sales volume
Source: CMA, adapted
Level: Easy LO: 5 Ans: C
18. Wenig Inc. has some material that originally cost $73,500. The material has a scrap value of $45,600
as is, but if reworked at a cost of $6,600, it could be sold for $58,100. What would be the incremental
effect on the company’s overall profit of reworking and selling the material rather than selling it as is as
scrap?
A) -$22,000
B) -$67,600
C) $51,500
D) $5,900
Source: CIMA, adapted
Level: Medium LO: 1 Ans: D
Brewer, Introduction to Managerial Accounting, 3/e 535
, 19. Bosques Corporation has in stock 35,800 kilograms of material L that it bought five years ago for
$5.55 per kilogram. This raw material was purchased to use in a product line that has been discontinued.
Material L can be sold as is for scrap for $1.67 per kilogram. An alternative would be to use material L in
one of the company’s current products, Q08C, which currently requires 2 kilograms of a raw material that
is available for $9.15 per kilogram. Material L can be modified at a cost of $0.78 per kilogram so that it
can be used as a substitute for this material in the production of product Q08C. However, after
modification, 4 kilograms of material L is required for every unit of product Q08C that is produced.
Bosques Corporation has now received a request from a company that could use material L in its
production process. Assuming that Bosques Corporation could use all of its stock of material L to make
product Q08C or the company could sell all of its stock of the material at the current scrap price of $1.67
per kilogram, what is the minimum acceptable selling price of material L to the company that could use
material L in its own production process?
A) $5.36
B) $3.80
C) $2.13
D) $1.67
Source: CIMA, adapted
Level: Hard LO: 1 Ans: B
20. Mankus Inc. is considering using stocks of an old raw material in a special project. The special project
would require all 120 kilograms of the raw material that are in stock and that originally cost the company
$816 in total. If the company were to buy new supplies of this raw material on the open market, it would
cost $7.25 per kilogram. However, the company has no other use for this raw material and would sell it at
the discounted price of $6.75 per kilogram if it were not used in the special project. The sale of the raw
material would involve delivery to the purchaser at a total cost of $50.00 for all 120 kilograms. What is
the relevant cost of the 120 kilograms of the raw material when deciding whether to proceed with the
special project?
A) $810
B) $870
C) $760
D) $816
Source: CIMA, adapted
Level: Hard LO: 1 Ans: C
21. Narciso Corporation is preparing a bid for a special order that would require 880 liters of material
R19S. The company already has 280 liters of this raw material in stock that originally cost $6.20 per liter.
Material R19S is used in the company’s main product and is replenished on a periodic basis. The resale
value of the existing stock of the material is $5.45 per liter. New stocks of the material can be readily
purchased for $6.20 per liter. What is the relevant cost of the 880 liters of the raw material when deciding
how much to bid on the special order?
A) $5,006
B) $5,456
C) $4,796
D) $5,456
Source: CIMA, adapted
Level: Hard LO: 1 Ans: B
536 Brewer, Introduction to Managerial Accounting, 3/e
Relevant Costs for Decision Making
True/False
1. Fixed costs are sunk costs and are therefore irrelevant in decisions.
Level: Easy LO: 1 Ans: F
2. A complete income statement must be prepared as part of a differential cost analysis.
Level: Medium LO: 1 Ans: F
3. Future costs that do not differ between the alternatives in a decision are avoidable costs.
Level: Medium LO: 1 Ans: F
4. The book value of an old machine is always considered a sunk cost in a decision.
Level: Easy LO: 1 Ans: T
5. A product that does not cover its allocated share of general corporate administrative expenses should be
dropped.
Level: Easy LO: 2 Ans: F
6. In a decision to drop a product, the product should be charged for rent in proportion to the space it
occupies even if the space has no alternative use and the rental payment is unavoidable.
Level: Easy LO: 2 Ans: F
7. Making rather than buying a part that goes into one of the company’s products would increase the
company’s degree of vertical integration.
Level: Easy LO: 3 Ans: T
8. In a special order situation that involves using existing idle capacity, opportunity costs are zero.
Level: Easy LO: 4 Ans: T
9. When a company has a production constraint, the product with the highest contribution margin per unit
of the constrained resource should be given highest priority.
Level: Easy LO: 5 Ans: T
10. Payment of overtime to a worker in order to relax a production constraint could increase the profits of
a company.
Level: Medium LO: 5 Ans: T
Brewer, Introduction to Managerial Accounting, 3/e 533
,11. In a plant operating at capacity, every machine and person in the plant would be working at the
maximum possible rate.
Level: Hard LO: 5 Ans: F
Multiple Choice
12. Hal Etoesus currently works as the fry guy at Burger Breath Drive Thru but is thinking of quitting his
job to attend college full time next semester. Which of the following would be considered an opportunity
cost in this decision?
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 Breath
D) both A and B above
Level: Easy LO: 1 Ans: C
13. Which of the following would be relevant in the decision to sell or throw out obsolete inventory?
A) A Above
B) B Above
C) C Above
D) D Above
Level: Medium LO: 1 Ans: D
14. Buff Corp. is considering replacing an old machine with a new machine. Which of the following
items is relevant to Buff’s decision? (Ignore income tax considerations.)
A) A Above
B) B Above
C) C Above
D) D Above
Source: CPA, adapted
Level: Medium LO: 1 Ans: B
534 Brewer, Introduction to Managerial Accounting, 3/e
,15. 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
Source: CMA, adapted
Level: Easy LO: 3 Ans: B
16. In situations where management must decide between accepting or rejecting a one-time-only special
order where there is sufficient idle capacity to fill the order, 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
Source: CMA, adapted
Level: Easy LO: 4 Ans: A
17. When a multi-product factory operates at full capacity, decisions must be made about what products
to emphasize. In making such decisions, products should be ranked based on:
A) selling price per unit
B) contribution margin per unit
C) contribution margin per unit of the constraining resource
D) unit sales volume
Source: CMA, adapted
Level: Easy LO: 5 Ans: C
18. Wenig Inc. has some material that originally cost $73,500. The material has a scrap value of $45,600
as is, but if reworked at a cost of $6,600, it could be sold for $58,100. What would be the incremental
effect on the company’s overall profit of reworking and selling the material rather than selling it as is as
scrap?
A) -$22,000
B) -$67,600
C) $51,500
D) $5,900
Source: CIMA, adapted
Level: Medium LO: 1 Ans: D
Brewer, Introduction to Managerial Accounting, 3/e 535
, 19. Bosques Corporation has in stock 35,800 kilograms of material L that it bought five years ago for
$5.55 per kilogram. This raw material was purchased to use in a product line that has been discontinued.
Material L can be sold as is for scrap for $1.67 per kilogram. An alternative would be to use material L in
one of the company’s current products, Q08C, which currently requires 2 kilograms of a raw material that
is available for $9.15 per kilogram. Material L can be modified at a cost of $0.78 per kilogram so that it
can be used as a substitute for this material in the production of product Q08C. However, after
modification, 4 kilograms of material L is required for every unit of product Q08C that is produced.
Bosques Corporation has now received a request from a company that could use material L in its
production process. Assuming that Bosques Corporation could use all of its stock of material L to make
product Q08C or the company could sell all of its stock of the material at the current scrap price of $1.67
per kilogram, what is the minimum acceptable selling price of material L to the company that could use
material L in its own production process?
A) $5.36
B) $3.80
C) $2.13
D) $1.67
Source: CIMA, adapted
Level: Hard LO: 1 Ans: B
20. Mankus Inc. is considering using stocks of an old raw material in a special project. The special project
would require all 120 kilograms of the raw material that are in stock and that originally cost the company
$816 in total. If the company were to buy new supplies of this raw material on the open market, it would
cost $7.25 per kilogram. However, the company has no other use for this raw material and would sell it at
the discounted price of $6.75 per kilogram if it were not used in the special project. The sale of the raw
material would involve delivery to the purchaser at a total cost of $50.00 for all 120 kilograms. What is
the relevant cost of the 120 kilograms of the raw material when deciding whether to proceed with the
special project?
A) $810
B) $870
C) $760
D) $816
Source: CIMA, adapted
Level: Hard LO: 1 Ans: C
21. Narciso Corporation is preparing a bid for a special order that would require 880 liters of material
R19S. The company already has 280 liters of this raw material in stock that originally cost $6.20 per liter.
Material R19S is used in the company’s main product and is replenished on a periodic basis. The resale
value of the existing stock of the material is $5.45 per liter. New stocks of the material can be readily
purchased for $6.20 per liter. What is the relevant cost of the 880 liters of the raw material when deciding
how much to bid on the special order?
A) $5,006
B) $5,456
C) $4,796
D) $5,456
Source: CIMA, adapted
Level: Hard LO: 1 Ans: B
536 Brewer, Introduction to Managerial Accounting, 3/e
