Q: A company is considering outsourcing a component. The variable manufacturing cost is $$8 per unit for 5,000 units. The purchase price from a supplier is 10 $$per unit. If $$5,000 of fixed costs can be avoided and the freed capacity can be rented for 3$$,000, what is the total cost to buy?

Total cost to buy is $42,000. $$(10 \times 5,000) - 5,000 - 3,000 = 42,000$$

Question 1

Which of the following is NOT a characteristic of relevant information for short-term decision making?

Accepted Answer

It is based on sunk costs.

Question 2

A company is considering accepting a special order for 1,000 units at a discounted price of $$15 per unit. The variable cost per unit is 12$$, and there are no additional fixed costs. What is the incremental effect on income if the order is accepted?

Accepted Answer

The incremental effect is $3,000 increase in income. 
$$(15 - 12) 	imes 1,000 = 3,000$$

Question 3

Which of the following costs should be ignored when making a short-term decision?

Accepted Answer

Fixed costs that are unavoidable

Question 4

A company is a price-taker in a highly competitive market. Which pricing method should it use?

Accepted Answer

Target Costing

Question 5

A product has a sales price of $$40, variable cost per unit of 25$$, and 8 units can be produced per machine hour. What is the contribution margin per machine hour?

Accepted Answer

The contribution margin per machine hour is $120. 
$$(40 - 25) 	imes 8 = 120$$

Question 6

When analyzing a discontinue decision, which of the following would INCREASE income if the product is discontinued?

Accepted Answer

Avoidable fixed costs eliminated

Question 7

A company is considering outsourcing a component. The variable manufacturing cost is $$8 per unit for 5,000 units. The purchase price from a supplier is 10 $$per unit. If $$5,000 of fixed costs can be avoided and the freed capacity can be rented for 3$$,000, what is the total cost to buy?

Accepted Answer

Total cost to buy is $42,000. 
$$(10 	imes 5,000) - 5,000 - 3,000 = 42,000$$

Question 8

Which of the following best describes a sunk cost?

Accepted Answer

A cost that has already occurred and cannot be changed

Question 9

In a product mix decision with a constraint, what is the key metric used to decide which product to emphasize?

Accepted Answer

Contribution margin per unit of constraint

Question 10

A company has two products. Product X has a contribution margin per unit of $$10 and can produce 5 units per machine hour. Product Y has a contribution margin per unit of 8 $$and can produce 8 units per machine hour. Which product should be prioritized if machine hours are the constraint?

Accepted Answer

Product Y, because its contribution margin per machine hour is higher. 
$$(8 	imes 8) = 64 vs$$ $$(10 	imes 5) = 50$$

Question 11

Which of the following is a misleading metric that should be ignored in short-term decision making?

Accepted Answer

Fixed cost per unit

Question 12

A company is considering discontinuing a department. The department generates a contribution margin of $$20,000 and has avoidable fixed costs of 15$$,000. If discontinued, the company can rent the freed space for $5,000. What is the net effect on income?

Accepted Answer

Net effect is $0. 
$$-20,000 + 15,000 + 5,000 = 0$$

Question 13

In a special order decision, which of the following is NOT relevant?

Accepted Answer

Normal sales price for regular customers

Question 14

A company is a price-setter and wants to use cost-plus pricing. If total cost is $$100,000, desired profit is 20$$,000, and 5,000 units are produced, what is the price per unit?

Accepted Answer

Price per unit is $24. 
$$\frac{100,000 + 20,000}{5,000} = 24$$

Question 15

Which of the following is a potential benefit of outsourcing a product?

Accepted Answer

Avoidable fixed costs can be eliminated

Question 16

A company is considering a special order for 500 units at $$18 per unit. Variable cost per unit is 16$$, and there are $1,000 additional fixed costs. What is the net effect on income?

Accepted Answer

Net effect is $0. 
$$(18 - 16) 	imes 500 - 1,000 = 0$$

Question 17

In a make-or-buy decision, which of the following is NOT relevant?

Accepted Answer

Unavoidable fixed costs

Question 18

A company wants to achieve a target profit of $$50,000. The market price per unit is 25$$, and 4,000 units will be sold. What is the target cost?

Accepted Answer

Target cost is $50,000. 
$$(25 	imes 4,000) - 50,000 = 50,000$$

Question 19

Which of the following is a reason to separate variable and fixed costs in short-term decision analysis?

Accepted Answer

Variable and fixed costs behave differently and require different calculations.

Chapter 8: Relevant Costs for Short-Term Decisions – Study Notes

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