Title: Managerial Decisions
Course: Question Banks

Q: The costs and revenues that remain constant in all decision scenarios are:
- Relevant costs and revenues
- Opportunity costs and sunk costs.
- Irrelevant, sunk or unavoidable costs.
A: Irrelevant, sunk or unavoidable costs.

Q: Your company purchased a $10,000 piece of equipment for a product line that never took off. That equipment is sitting in your warehouse, and has no resale value, nor can it be used for any other type of product. You are now looking at adding a new line. Your supervisor mentions the equipment in the warehouse. How do you respond?
- We can look at that investment and see how it fits into this new product line analysis.
- That piece of equipment is an unavoidable cost in this new product analysis.
- That piece of equipment was for a different product and is not of concern with this decision since it is a sunk cost.
A: That piece of equipment was for a different product and is not of concern with this decision since it is a sunk cost.

Q: Farmer Jane is considering expanding her apple orchard. She already owns the land and planting equipment for the expansion. The relevant costs in her decision may include.
- The direct labor, materials and land purchase to expand her orchard.
- The direct labor, materials and depreciation on the equipment related to the expansion.
- The direct labor, materials and variable overhead directly related to adding more apple trees to her orchard.
A: The direct labor, materials and variable overhead directly related to adding more apple trees to her orchard.

Q: The last batch of glue you received to put together your widgets doesn’t seem to be sticking like it usually does. In talking with your vendor, they changed formulations. They offered you a 20% discount to keep the glue. From a qualitative standpoint, how might you respond?
- We will take the discount if you make it 25%.
- Can we continue to get this formulation at the lower price going forward?
- We would like the old formulation, since our customers are expecting a certain level of quality from us.
A: We would like the old formulation, since our customers are expecting a certain level of quality from us.

Q: You have the opportunity to fly to your vacation destination for $500 or you could drive for $100. From a qualitative perspective, what might you consider?
- Flying is too costly, so you should drive.
- Driving is cheaper, so hop in the car!
- Flying will get you there quicker, so you have more time to sightsee.
A: Flying will get you there quicker, so you have more time to sightsee.

Q: You are having a company party! You have two meal options. The first is a fully catered meal at a cost of $2,500. The second is your husband cooking dinner for all 100 employees and having them at your home for dinner at a cost of $600. What might the qualitative advantages be of the catered meal?
- The catered dinner will be a higher quality food than you could make at home, since it costs more..
- Since you can write off the cost of the meal as a business expense, it doesn’t matter if you spend more.
- Less clean-up, a happy husband and time to spend talking with your employees over dinner
A: Less clean-up, a happy husband and time to spend talking with your employees over dinner

Q: A question to consider when we look at a customer elimination decision may include:
- Does the client generate the most revenue for the company?
- Would the client be able to find a new service provider if you eliminated them?
- Is the revenue the client generates more than the expenses incurred for providing the services to this client?
A: Is the revenue the client generates more than the expenses incurred for providing the services to this client?

Q: How might you, as a manager, keep employees all working after eliminating a customer?
- Reduce their hours until you can secure a new client.
- Just let them fill in their hours with busy work until you find a new customer/client.
- Build up a different component of your business, or seek new, better fitting customers.
A: Build up a different component of your business, or seek new, better fitting customers.

Q: Mary is considering dropping one of her clothing lines. She is running out of space in her retail space and has come to you to review her sales. What will be part of your analysis process?
- What has the biggest market share (highest sales)?
- What item is Mary selling for the highest price per item?
- Which lines are the best use of the constrained resource to create the highest contribution margin, thus the highest net profit for Mary’s space?
A: Which lines are the best use of the constrained resource to create the highest contribution margin, thus the highest net profit for Mary’s space?

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
- The charge from the vendor for the product.
A: The charge from the vendor for the product.

Q: The net profit or loss of a final product can be calculated:
- Incremental revenue from further processing is the net profit/(loss)
- Original purchase price of raw material- processing costs=net profit of the final product.
- Sales value after all processing-sales value at the split point-cost of further processing= net profit of the final product.
A: Sales value after all processing-sales value at the split point-cost of further processing= net profit of the final product.

Q: A final product would sell for $80 after an additional separate processing cost of $40. The intermediate product could be sold for $25. This product should be:
- Should be sold at the intermediate product point.
- Should not be processed further due to the high additional cost.
- Processed further, since the final selling price plus the cost of further processing still creates a higher net profit than selling the intermediate product.
A: Processed further, since the final selling price plus the cost of further processing still creates a higher net profit than selling the intermediate product.

Q: Incremental revenue is the revenue that will:
- Be the final revenue of the product, regardless of additional processing costs.
- Be the sales value at the split off point
- Be left at the end of all of the processing and is calculated by taking the sales value after all of the processing, less the sales value at the split-off point.
A: Be left at the end of all of the processing and is calculated by taking the sales value after all of the processing, less the sales value at the split-off point.

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: Farmer Jane grows the best tomatoes in the land. She doesn’t worry about what other farmers are charging for theirs, since she has never had trouble getting her price, based on her total costs plus a 50% profit margin. Jane prices:
- Using target costing, since she has lots of competition.
- Using cost-plus pricing, since her product has lots of substitutes in the market.
- Using cost-plus pricing, because she has differentiated her product from the rest of the market.
A: Using cost-plus pricing, because she has differentiated her product from the rest of the market.

Q: CTL sells a stapler that has taken the market by storm. It never jams and can staple 100 sheets of paper at one time! If their costs are $12 per stapler, and they want a 125% profit, what should they charge for their stapler?
- $27 using the target costing method.
- $24 using the cost-plus pricing method.
- $27 using the cost-plus pricing method
A: $27 using the cost-plus pricing method

Q: Price takers must:
- Price their products using the cost-plus method, since their product has many substitutes and the pricing is set by the market.
- Price their products using the target cost method since it is unique and has little if any competition in the market.
- Price their products using the target costing method, since their product has many substitutes and the pricing is set by the market.
A: Price their products using the target costing method, since their product has many substitutes and the pricing is set by the market.