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Chapter10:Short-TermBusinessDecisions
10.1-1Financialdataisrelevanttoadecisionifitinvolvesacashflowinthefutureandthecashflowdiffers
amongalternatives.
Answer:True
Difficulty:1
LO:10-1
EOCRef:S10-1
AACSB:ReflectiveThinking
AICPABusinessPerspectiveCompetencies:CriticalThinking
AICPAFunctionalCompetencies:Measurement
10.1-2Adepreciableasset'soriginalcostisrelevantwithrespecttoconsideringwhethertoreplacethe
depreciableasset.
Answer:False
Difficulty:1
LO:10-1
EOCRef:S10-1
AACSB:ReflectiveThinking
AICPABusinessPerspectiveCompetencies:CriticalThinking
AICPAFunctionalCompetencies:Measurement
10.1-3Unavoidablefixedcostsareirrelevanttothedecisionmakingprocess.
Answer:True
Difficulty:1
LO:10-1
EOCRef:S10-1
AACSB:ReflectiveThinking
AICPABusinessPerspectiveCompetencies:CriticalThinking
AICPAFunctionalCompetencies:Measurement
10.1-4Asunkcostisacostthatwaspreviouslyincurredandisirrelevanttothedecisionmakingprocess.
Answer:True
Difficulty:1
LO:10-1
EOCRef:S10-1
AACSB:ReflectiveThinking
AICPABusinessPerspectiveCompetencies:CriticalThinking
AICPAFunctionalCompetencies:Measurement
10.1-5Managers9decisionsarebasedprimarilyonquantitativedatabecausethequalitativefactorsarenot
usuallyrelevanttothedecisionmakingprocess.
Answer:False
Difficulty:1
LO:10-1
EOCRef:S10-1
AACSB:ReflectiveThinking
AICPABusinessPerspectiveCompetencies:CriticalThinking
AICPAFunctionalCompetencies:Measurement
10.1-6Fixedcosts,whilegenerallyirrelevanttothedecision-makingprocess,maychangeandbecomerelevant.
Answer:True
Difficulty:1
LO:10-1
EOCRef:S10-1
AACSB:ReflectiveThinking
AICPABusinessPerspectiveCompetencies:CriticalThinking
AICPAFunctionalCompetencies:Measurement
10.1-7Fixedcoststhatdonotdifferbetweentwoalternativesare:
A)relevanttothedecision.
B)consideredopportunitycosts.
C)irrelevanttothedecision.
D)importantonlyiftheyrepresentamaterialdollaramount.
Answer:C
Difficulty:1
LO:10-1
EOCRef:E10-ll
AACSB:ReflectiveThinking
AICPABusinessPerspectiveCompetencies:CriticalThinking
AICPAFunctionalCompetencies:Measurement
10.1-8Whichofthefollowingisasunkcost?
A)Depreciationonnewvehicle
B)Trade-invalueofoldvehicle
C)Purchasepriceofnewvehicle
D)Purchasepriceofvehicletobetradedin
Answer:D
Difficulty:1
LO:10-1
EOCRef:S10-l
AACSB:ReflectiveThinking
AICPABusinessPerspectiveCompetencies:CriticalThinking
AICPAFunctionalCompetencies:Measurement
10.1-9Allofthefollowingarerelevanttothedecisiontoreplaceequipmentexceptthe:
A)costofnewequipment.
B)sellingpriceofoldequipment.
C)futuremaintenancecostsofoldequipment.
D)costofoldequipment.
Answer:D
Difficulty:1
LO:10-1
EOCRef:S10-1
AACSB:ReflectiveThinking
AICPABusinessPerspectiveCompetencies:CriticalThinking
AICPAFunctionalCompetencies:Measurement
10.1-10Inmakingashort-termdecision,whichofthefollowingismostimportant?
A)Separatevariablecostsfromfixedcosts
B)Focusontotalcosts
C)Useaconventionalabsorptioncostingapproach
D)Discountcashflowstotheirpresentvalue
Answer:A
Difficulty:1
LO:10-1
EOCRef:S10-1
AACSB:ReflectiveThinking
AICPABusinessPerspectiveCompetencies:CriticalThinking
AICPAFunctionalCompetencies:Measurement
10.1-11Whichofthefollowingdescribesasunkcost?
A)Itisrelevanttoadecisionbecauseitchangesdependingonthealternativecourseofaction
selected.
B)Anoutlayexpectedtobeincurredinthefuture.
C)Ahistoricalcostthatisalwaysirrelevant.
D)Ahistoricalcostthatmayberelevant.
Answer:C
Difficulty:1
LO:10-1
EOCRef:E10-ll
AACSB:ReflectiveThinking
AICPABusinessPerspectiveCompetencies:CriticalThinking
AICPAFunctionalCompetencies:Measurement
10.1-12Whichofthefollowingistheformatoftheincomestatementthatismostusefulindecision-making?
A)Absorptioncostingformat
B)Multiple-stepformat
C)Single-stepformat
D)Contributionmarginformat
Answer:D
Difficulty:1
LO:10-1
EOCRef:Pl0-23A
AACSB:ReflectiveThinking
AICPABusinessPerspectiveCompetencies:CriticalThinking
AICPAFunctionalCompetencies:Measurement,Reporting
10.1-13SmithIndustriesisconsideringreplacingamachinethatispresentlyusedinitsproductionprocess.The
followinginformationisavailable:
OldMachineReplacement
Machine
Originalcost$45,000$35,000
Remainingusefullifeinyears55
Currentageinyears50
Bookvalue$25,000
Currentdisposalvalueincash$8,000
Futuredisposalvalueincash(in5years)$0$0
Annualcashoperatingcosts$7,000$4,000
Whichoftheinformationprovidedinthetableisirrelevanttothereplacementdecision?
A)Theannualoperatingcostoftheoldmachine
B)Theoriginalcostoftheoldmachine
C)Thecurrentdisposalvalueoftheoldmachine
D)BothAandCarecorrect
Answer:B
Difficulty:2
LO:10-1
EOCRef:P10-29B
AACSB:ReflectiveThinking
AICPABusinessPerspectiveCompetencies:CriticalThinking
AICPAFunctionalCompetencies:Measurement
9.1-14SmithIndustriesisconsideringreplacingamachinethatispresentlyusedinitsproductionprocess.The
followinginformationisavailable:
OldMachineReplacement
Machine
Originalcost$45,000$35,000
Remainingusefullifeinyears55
Currentageinyears50
Bookvalue$25,000
Currentdisposalvalueincash$8,000
Futuredisposalvalueincash(in5years)$0$0
Annualcashoperatingcosts$7,000$4,000
Foramachinereplacementdecisionwhichoftheinformationprovidedinthetableisasunkcost?
A)Theoriginalcostoftheoldmachine
B)Thecurrentdisposalvalueoftheoldmachine
C)Thecurrentannualoperatingcostoftheoldmachine
D)BothAandBarecorrect
Answer:A
Difficulty:I
LO:10-1
EOCRef:P10-29B
AACSB:ReflectiveThinking
AICPABusinessPerspectiveCompetencies:CriticalThinking
AICPAFunctionalCompetencies:Measurement
9.1-15SmithIndustriesisconsideringreplacingamachinethatispresentlyusedinitsproductionprocess.The
followinginformationisavailable:
OldMachineReplacement
Machine
Originalcost$45,000$35,000
Remainingusefullifeinyears55
Currentageinyears50
Bookvalue$25,000
Currentdisposalvalueincash$8,000
Futuredisposalvalueincash(in5years)$0$0
Annualcashoperatingcosts$7,000$4,000
Howmucharethetotalrelevantcostsassociatedwithkeepingtheoldmachine?
A)$35,000
B)$40,000
C)$47,000
D)$60,000
Answer:A
Difficulty:2
LO:10-1
EOCRef:P10-29B
AACSB:ReflectiveThinking
AICPABusinessPerspectiveCompetencies:CriticalThinking
AICPAFunctionalCompetencies:Measurement
10.1-16Thebenefitforegonebynotchoosinganalternativecourseofactionisreferredtoasa(n):
A)opportunitycost.
B)sunkcost.
C)variablecost.
D)incrementalcost.
Answer:A
Difficulty:1
LO:10-1
EOCRef:S10-1
AACSB:ReflectiveThinking
AICPABusinessPerspectiveCompetencies:CriticalThinking
AICPAFunctionalCompetencies:Measurement
10.1-17Fixedcoststhatmaybeavoidedinthefuturearereferredtoas:
A)replacementcosts.
B)opportunitycosts.
C)relevantcosts.
D)sunkcosts.
Answer:C
Difficulty:1
LO:10-1
EOCRef:S10-1
AACSB:ReflectiveThinking
AICPABusinessPerspectiveCompetencies:CriticalThinking
AICPAFunctionalCompetencies:Measurement
10.1-18Theeffectofaplantclosingonemployeemoraleisanexampleofwhichofthefollowing?
A)Aquantitativefactor
B)Aqualitativefactor
C)Asunkcost
D)Avariablecost
Answer:B
Difficulty:1
LO:10-1
EOCRef:E10-ll
AACSB:ReflectiveThinking
AICPABusinessPerspectiveCompetencies:CriticalThinking
AICPAFunctionalCompetencies:Measurement
10.1-19Whichofthefollowingisnotimportantwithrespecttoshort-rundecisionmaking?
A)Focusingonrelevantrevenuesandcosts.
B)Usingacontributionmarginincomestatementformatratherthananabsorptioncostingformat.
C)Focusingonmaximizingthegrossprofitofeachunitsold.
D)Focusingonanalyzingincrementalrevenuesandcosts.
Answer:C
Difficulty:2
LO:10-1
EOCRef:E10-ll
AACSB:ReflectiveThinking
AICPABusinessPerspectiveCompetencies:CriticalThinking
AICPAFunctionalCompetencies:Measurement
10.1-20Whichofthefollowingisirrelevantwhenmakingadecision?
A)Thecostofanassetthatthecompanyisconsideringreplacing.
B)Thefixedoverheadcoststhatdifferamongdecisionalternatives.
C)Thecostoffurtherprocessingaproductthatcouldbesoldasis.
D)Theexpectedincreaseincontributionmarginofoneproductlineasaresultofadecisionto
dropaseparateunprofitableproductline.
Answer:A
Difficulty:2
LO:10-1
EOCRef:E10-ll
AACSB:ReflectiveThinking
AICPABusinessPerspectiveCompetencies:CriticalThinking
AICPAFunctionalCompetencies:Measurement
10.2-1Specialsalesordersincreaseoperatingincomeiftherevenuefromtheorderexceedstheincremental
variableandfixedcostsincurredtofilltheorder.
Answer:True
Difficulty:2
LO:10-2
EOCRef:SI0-2
AACSB:ReflectiveThinking
AICPABusinessPerspectiveCompetencies:CriticalThinking
AICPAFunctionalCompetencies:Measurement,Reporting
10.2-2Indecidingwhethertoacceptaspecialsalesorder,managementshouldconsiderthequantitativedataas
wellasthequalitativefactors.
Answer:True
Difficulty:2
LO:10-2
EOCRef:SI0-2
AACSB:ReflectiveThinking
AICPABusinessPerspectiveCompetencies:CriticalThinking
AICPAFunctionalCompetencies:Measurement
10.2-3Fixedcostsarerelevanttoaspecialsalesorderdecisionwhenthosefixedcostschangeasaresultofthe
specialorder.
Answer:True
Difficulty:1
LO:10-2
EOCRef:SI0-2
AACSB:ReflectiveThinking
AICPABusinessPerspectiveCompetencies:CriticalThinking
AICPAFunctionalCompetencies:Measurement
10.2-4Whendeterminingsellingprices,acompanymustconsiderwhetheritisaprice-takeroraprice-setterfor
eachproductthatitsells.
Answer:True
Difficulty:1
LO:10-2
EOCRef:SI0-2
AACSB:ReflectiveThinking
AICPABusinessPerspectiveCompetencies:CriticalThinking
AICPAFunctionalCompetencies:Measurement
10.2-5Acompanyviewingitselfasaprice-takergenerallyutilizesatargetpricingapproach.
Answer:True
Difficulty:1
LO:10-2
EOCRef:SI0-3
AACSB:ReflectiveThinking
AICPABusinessPerspectiveCompetencies:CriticalThinking
AICPAFunctionalCompetencies:Measurement
10.2-6Revenueatmarketpriceplusdesiredoperatingprofitequalsaproduct'stargetfullcost.
Answer:False
Difficulty:1
LO:10-2
EOCRef:SI0-3
AACSB:ReflectiveThinking
AICPABusinessPerspectiveCompetencies:CriticalThinking
AICPAFunctionalCompetencies:Measurement
10.2-7Anopportunitycostmustbetakenintoconsiderationforaspecialsalesorderdecision.
Answer:True
Difficulty:1
LO:10-2
EOCRef:S10-1
AACSB:ReflectiveThinking
AICPABusinessPerspectiveCompetencies:CriticalThinking
AICPAFunctionalCompetencies:Measurement
10.2-8Whenmakingapricingdecision,itisnotnecessarytoseparatecostsintofixedandvariablesinceonly
totalcostsmatter.
Answer:False
Difficulty:1
LO:10-2
EOCRef:S10-1
AACSB:ReflectiveThinking
AICPABusinessPerspectiveCompetencies:CriticalThinking
AICPAFunctionalCompetencies:Measurement
10.2-9Whichofthefollowingcostsisirrelevantwithrespecttoaspecialsalesorderdecision?
A)Additionalfixedcoststhatwillbeincurredtocompletetheorder.
B)Fixedcoststhataredeterminedtobeunavoidable.
C)Specialpackagingcostsassociatedwiththeorder.
D)Variablemanufacturingcostsincun-edtocompletetheorder.
Answer:B
Difficulty:2
LO:10-2
EOCRef:E10-12
AACSB:ReflectiveThinking
AICPABusinessPerspectiveCompetencies:CriticalThinking
AICPAFunctionalCompetencies:Measurement
10.2-10Inaspecialsalesorderdecision,incrementalfixedcostsincurredbecauseofanadditionalpurchaseof
equipmentareconsideredtobe:
A)relevanttothedecision.
B)irrelevanttothedecision.
C)opportunitycosts.
D)sunkcosts.
Answer:A
Difficulty:1
LO:10-2
EOCRef:E10-12
AACSB:ReflectiveThinking
AICPABusinessPerspectiveCompetencies:CriticalThinking
AICPAFunctionalCompetencies:Measurement
10.2-11Eachmonth,TuttleCorporationproduces400unitsofaproductthathasunitvariablecostsof$16.00.
Totalfixedcostsforthemonthare$3,400.Aspecialsalesorderisreceivedfor100unitsoftheproduct
atapriceof$18perunit.Indecidingtoacceptorrejectthespecialsalesorder,itisappropriateto
consider:
A)newfixedcostperunitof$6.80.
B)currentfixedcostperunitof$8.50.
C)thedifferencebetweentheofferedpriceandthevariablecostperunit,or$2.00.
D)thedifferencebetweenthetwofixedcostsperunit,or$1.70.
Answer:C
Difficulty:2
LO:10-2
EOCRef:E10-12
AACSB:AnalyticSkills
AICPABusinessPerspectiveCompetencies:CriticalThinking
AICPAFunctionalCompetencies:Measurement
10.2-12LowwaterSailmakersmanufacturessailsforsailboats.Thecompanyhasthecapacitytoproduce25,000
sailsperyear,andiscurrentlyproducingandselling20,000sailsperyear.Thefollowinginformation
relatestocurrentproduction:
Salepriceperunit$150
Variablecostsperunit:
Manufacturing$55
Marketingandadministrative$25
Totalfixedcosts:
Manufacturing$640,000
Marketingandadministrative$280,000
Ifaspecialsalesorderisacceptedfor5,000sailsatapriceof$125perunit,andfixedcostsremain
unchanged,whatisthechangeinoperatingincome?
A)Operatingincomedecreases$5,000.
B)Operatingincomeincreases$190,000.
C)Operatingincomedecreases$125,000.
D)Operatingincomeincreases$225,000.
Answer:D
Difficulty:2
LO:10-2
EOCRef:E10-12
AACSB:AnalyticSkills
AICPABusinessPerspectiveCompetencies:CriticalThinking
AICPAFunctionalCompetencies:Measurement,Reporting
10.2-13LowwaterSailmakersmanufacturessailsforsailboats.Thecompanyhasthecapacitytoproduce25,000
sailsperyear,andiscurrentlyproducingandselling20,000sailsperyear.Thefollowinginformation
relatestocurrentproduction:
Salepriceperunit$150
Variablecostsperunit:
Manufacturing$55
Marketingandadministrative$25
Totalfixedcosts:
Manufacturing$640,000
Marketingandadministrative$280,000
Ifaspecialsalesorderisacceptedfor3,000sailsatapriceof$75perunit,fixedcostsremainunchanged,
andtherearenoadditionalvariablemarketingandadministrativecostsforthisorder,whatisthechange
inoperatingincome?
A)Operatingincomedecreases$5,000.
B)Operatingincomedecreases$36,000.
C)Operatingincomeincreases$35,000.
D)Operatingincomeincreases$60,000.
Answer:D
Difficulty:2
LO:10-2
EOCRef:Pl0-24A
AACSB:AnalyticSkills
AICPABusinessPerspectiveCompetencies:CriticalThinking
AICPAFunctionalCompetencies:Measurement,Reporting
10.2-14LowwaterSailmakersmanufacturessailsforsailboats.Thecompanyhasthecapacitytoproduce25,000
sailsperyear,andiscurrentlyproducingandselling20,000sailsperyear.Thefollowinginformation
relatestocurrentproduction:
Salepriceperunit$150
Variablecostsperunit:
Manufacturing$55
Marketingandadministrative$25
Totalfixedcosts:
Manufacturing$640,000
Marketingandadministrative$280,000
Ifaspecialsalesorderisacceptedfor2,000sailsatapriceof$95perunit,andfixedcostsincreaseby
$10,000,whatisthechangeinoperatingincomeaffected?
A)Operatingincomedecreases$34,000.
B)Operatingincomedecreases$44,000.
C)Operatingincomeincreases$20,000.
D)Operatingincomeincreases$25,000.
Answer:C
Difficulty:2
LO:10-2
EOCRef:Pl0-24A
AACSB:AnalyticSkills
AICPABusinessPerspectiveCompetencies:CriticalThinking
AICPAFunctionalCompetencies:Measurement,Reporting
10.2-15LowwaterSailmakersmanufacturessailsforsailboats.Thecompanyhasthecapacitytoproduce25,000
sailsperyear,andiscurrentlyproducingandselling20,000sailsperyear.Thefollowinginformation
relatestocurrentproduction:_______________________________
Salepriceperunit$150
Variablecostsperunit:
Manufacturing$55
Marketingandadministrative$25
Totalfixedcosts:
Manufacturing$640,000
Marketingandadministrative$280,000
Ifaspecialsalesorderisacceptedfor2,500sailsatapriceof$70perunit,fixedcostsincreaseby
$10,000,andvariablemarketingandadministrativecostsforthatorderdecreaseby$5perunit,what
isthechangeinoperatingincome?
A)Operatingincomedecreases$22,500.
B)Operatingincomedecreases$82,500.
C)Operatingincomedecreases$10,000.
D)Operatingincomeincreases$22,500.
Answer:A
Difficulty:3
LO:10-2
EOCRef:Pl0-24A
AACSB:AnalyticSkills
AICPABusinessPerspectiveCompetencies:CriticalThinking
AICPAFunctionalCompetencies:Measurement,Reporting
10.2-16DakokaCorporationprovidedthefollowinginformationregardingitsonlyproduct:
Salespriceperunit$60
Directmaterialsused$160,000
Directlaborcostsincurred$230,000
Variablemanufacturingoverheadcostsincurred$150,000
Variablesellingandadministrativecostsincurred$60,000
Fixedmanufacturingoverheadcostsincurred$80,000
Fixedsellingandadministrativecostsincurred$10,000
Unitsproducedandsold12,000
Assumenobeginninginventory
Assumingthereisexcesscapacity,whatwouldbethechangeinoperatingincomeasaresultofaccepting
aspecialorderfor1,000unitsatasalespriceof$40perunit?
A)Operatingincomedecreases$10,000.
B)Operatingincomedecreases$15,000.
C)Operatingincomeincreases$10,000.
D)Operatingincomeincreases$80,000.
Answer:A
Difficulty:2
LO:10-2
EOCRef:Pl0-24A
AACSB:AnalyticSkills
AICPABusinessPerspectiveCompetencies:CriticalThinking
AICPAFunctionalCompetencies:Measurement,Reporting
10.2-17DakokaCorporationprovidedthefollowinginformationregardingitsonlyproduct:
Salespriceperunit$60
Directmaterialsused$160,000
Directlaborcostsincurred$230,000
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