Title: Relevant Revenues and Costs
Course: Question Banks

Q: If we have the opportunity to purchase a raw material at a lower cost, that will save production time what are the differential costs?
- The cost of the raw material is the differential cost.
- The value of the labor saved is the differential cost.
- The costs of raw material and labor are the differential costs.
A: The costs of raw material and labor are the differential costs.

Q: Differential analysis can be defined as:
- Finding the cheapest option by looking at all of the costs for two or more options.
- Finding the lowest cost raw material regardless of the quality.
- The evaluation of the differences in costs and benefits based on reviewing the pros and cons of a variety of options.
A: The evaluation of the differences in costs and benefits based on reviewing the pros and cons of a variety of options.

Q: If you have the option of purchasing raw material for $8 per unit that requires one hour of labor, or raw material that costs $5 per unit but will require two hours of labor, what would your differential costs be?
- The cost of the raw materials, since the lower priced one would save direct material cost.
- The cost of labor, since the more expensive product would save on direct labor.
- The cost of the material and labor would both be part of the decision.
A: The cost of the material and labor would both be part of the decision.

Q: Your company is looking at dropping the second shift production. What costs would be avoidable costs?
- Insurance and utilities would be avoidable costs.
- Office staff during regular working hours would be avoidable costs.
- Wages and benefits for the second shift production workers would be avoidable costs.
A: Wages and benefits for the second shift production workers would be avoidable costs.

Q: Costs that will change or be eliminated depending on the decision we make are:
- unavoidable costs
- budgeted costs
- avoidable costs
A: avoidable costs

Q: On a whim you signed up to run a half marathon and the fee was $100. Now, it is three days before the race and you haven’t trained at all. What would be the best option?
- Run the race anyway, even without training at all. You paid for it, you should do it.
- Call the race director and ask for your money back. Since you aren’t running the race, you shouldn’t have to pay for it.
- Cut your losses. The fee is a sunk cost.
A: Cut your losses. The fee is a sunk cost.

Q: Sunk costs are always:
- A cost that may be relevant to future decisions if we try hard to figure out a way to use the item.
- A cost that should be refunded since we didn’t use the item.
- Irrelevant to future decisions as they happened, and there is nothing we can do to recoup the investment.
A: Irrelevant to future decisions as they happened, and there is nothing we can do to recoup the investment.

Q: Bill bought a tennis racket five years ago and played one game with a friend. He hurt his knee and vowed never to play tennis again. The racket is sitting in his closet and he is still sad that he spent all that money on it. What should Bill do with the racket?
- Keep it. He may change his mind.
- Return it to the store for a full and prompt refund.
- Donate it to his local youth tennis club. It is a sunk cost.
A: Donate it to his local youth tennis club. It is a sunk cost.

Q: When you give up one thing for a decision that you made to get something else, it is called:
- A sunk cost
- A differential cost
- An opportunity cost.
A: An opportunity cost.

Q: Different people and businesses will make different decisions based on their own needs. An opportunity cost may be:
- Financial in nature. An opportunity to earn more money will always be chosen over other options.
- Irrelevant to a decision, if one does not produce as much revenue as the other decision
- Important to one person or business and not to another. Using space for employee fitness might be more important than income gained on an additional product line.
A: Important to one person or business and not to another. Using space for employee fitness might be more important than income gained on an additional product line.

Q: XYZ Corp has asked you to help them decide if they should add a product line. Looking at the space they have available for production, you note that they would need to discontinue one product to add another. What costs would be important for this decision?
- Rent and insurance
- All of the costs would be relevant to this decision.
- The wages and benefits paid to employees, direct materials and labor for both the current and proposed product.
A: The wages and benefits paid to employees, direct materials and labor for both the current and proposed product.

Q: Whether a cost is used in a decision or not is called:
- Sunk cost
- Opportunity cost
- Relevant cost identification.
A: Relevant cost identification.

Q: Qualitative costs of decisions are:
- Depreciation and repairs
- Rent and other fixed expenses.
- Non-monetary costs such as time or health benefits derived.
A: Non-monetary costs such as time or health benefits derived.

Q: Unavoidable costs will:
- Will not happen if one decision is chosen over another.
- Will be reallocated depending on the decision made.
- Happen no matter which decision we choose.
A: Happen no matter which decision we choose.

Q: Keeping a product line that is not profitable will:
- Is ok if it keeps all of the employees working and the space utilized.
- Contributes to the contribution margin available to cover fixed expenses, so is always worth keeping.
- Typically not a good decision, as many times, the saved costs will allow the business to develop other product lines or better use the space.
A: Typically not a good decision, as many times, the saved costs will allow the business to develop other product lines or better use the space.

Q: Costs that should be considered when making an add, keep or drop decision include:
- Only the expenses directly related to the product line being examined.
- All of the variable expenses that contribute to the contribution margin, thus being available to cover fixed costs.
- All expenses, and then determine from there which ones are relevant to the decision being made
A: All expenses, and then determine from there which ones are relevant to the decision being made

Q: Farmer Jane is contemplating buying her seeds next year instead of processing them from her own production each year. She invested $15,000 in a dryer to dry seeds, and that piece of equipment has no resale value or use if she decides to purchase her seeds. This cost would be:
- Added to the cost of making and buying since it has already been incurred.
- Rolled into overhead so the investment can be recovered if she decides to quit drying her own seeds.
- A sunk cost. It happened, and she can get it back, so it is not relevant to the decision to make or buy.
A: A sunk cost. It happened, and she can get it back, so it is not relevant to the decision to make or buy.

Q: An idle space was left when ZFit decided to discontinue teaching their Cardio Drumming class. They are looking for ideas for this space. They could:
- They should rent the space out for additional income.
- They could start another small business in the space so it doesn’t sit idle.
- They could start a new class, rent it to another group, or leave it sit idle. An analysis would need to be completed to make the decision.
A: They could start a new class, rent it to another group, or leave it sit idle. An analysis would need to be completed to make the decision.

Q: In a make or buy decision, the costs involved in buying will include:
- The charge from the vendor, plus the depreciation of any equipment you were unable to sell when making the change from making to buying.
- All of your manufacturing overhead, since it did not change when you decided to buy.
- The charge from the vendor for the product.
A: The charge from the vendor for the product.

Q: A new cutter is going to be needed at a cost of $15,000 for C-Print Shop to take a special order for note pads for a customer. This customer intends to purchase 100,000 notepads at $1 each, which is a 10% discount off C-Print’s normal price. If the direct material,labor and variable overhead for the notepads totals $.50 each, and you are not sure if they will ever order again, what would the cost be per notepad for the new cutter?
- The cutter is a sunk cost, so $.50 per notepad is the cost.
- $.15 plus $1 per notepad so, $1.15 each.
- An additional $.15 per notepad for the cutter, so a total of $.65/notepad.
A: An additional $.15 per notepad for the cutter, so a total of $.65/notepad.

Q: A request for a special order comes in, that would take 20% of your manufacturing time for the next three weeks. Your regular production is already taking 90% of the available manufacturing time. Should you consider the special order?
- Do not consider the special order since you don’t have room in your manufacturing facility.
- Take the special order and worry about the space later.
- Consider the special order if they are willing to pay a premium price so that you can pay your staff overtime to produce it.
A: Consider the special order if they are willing to pay a premium price so that you can pay your staff overtime to produce it.

Q: A special order request for 20,000 widgets just showed up on your desk. The customer has asked for special engraving, at an additional cost of $1 per widget. They are also asking for a 20% discount on your regular price of $10 (so they want to pay $8 per widget). If you have some idle production space, and this job would net $5,000 after all expenses, do you take the special order?
- No, since they are asking for a discount, plus there is an additional engraving cost, we will not take the special order.
- No, since they are asking for a discount and require additional engraving cost, we will use the idle time to build up inventory of our regular priced widget and turn down the special order.
- Yes, since it will show a net profit and we have the idle time, we will take the special order.
A: Yes, since it will show a net profit and we have the idle time, we will take the special order.

Q: A resource that is limited in quantity, time or space is:
- A bottleneck
- A resource your company will need to change in order to grow.
- A constrained resource
A: A constrained resource

Q: The Hot yoga classes you teach at your studio have become crazy popular. You can teach 10 classes per week, and the hot yoga classes net $18 per hour, the vinyasa classes net $12 per hour and the beginner classes net $13 per hour. How would you put your schedule together to make the most money?
- Have all yoga classes on the schedule to meet everyone’s needs.
- Only offer hot yoga since that class nets the most per hour.
- Hot yoga, beginner classes and vinyasa last if there is still time available.
A: Hot yoga, beginner classes and vinyasa last if there is still time available.

Q: A machine in the middle of your manufacturing process can only complete 20 widgets per minute, while the machine before it is producing 40 widgets per minute. The slower machine is:
- The constrained resource.
- A machine that needs to be replaced to keep up with production.
- The bottleneck in the process
A: The bottleneck in the process