Multiple Choice Questions

2-1 Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.Chapter 02 The Nature of Costs

Multiple Choice Questions

1. Opportunity Costs:

• must never be negative

• may be found in financial statements (annual report)

• reflect the benefit of the next best alternative

• are pecuniary in nature

• none of the above

• John invested $12,000 in the stock of Hyper Cyber Eight years later, Hyper Cyber's shares

reached $125,000, but John held onto the shares in the belief that their price would double in the next five years. Unfortunately, Hyper Cyber did not double. Rather the market value of John's shares today is $4,000. If the shares were sold and the proceeds invested in another investment, they would likely earn 5% per annum. Which of the following terms and values is correct?

• $125,000 is the opportunity cost of selling the shares today

• $12,000 is a sunk cost

• $250,000 is the opportunity cost

• $2000 is the opportunity cost

• None of the above

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2-2 Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

• Which of the following can be an opportunity cost?

• Interest on cost of inventory

• Cost of idle capacity

• Cost of underutilized labor

• The decline in an asset's value

• All of the above

• Davos Inc. makes fiberglass ski-boards in Switzerland. Identify the correct matching of terms.

• Fiberglass is factory overhead

• Plant real estate taxes are a period cost

• Depreciation on delivery trucks is a product cost

• Payroll taxes for workers in the Packaging Department are direct labor

• None of the above

• Pamela in Bamplona makes bull-repellent scent according to a traditional Spanish recipe, which

normally sells at €9 (Euros) per unit. Normal production volume is 10,000 ounces per month.Average cost is €5 per ounce, of which €2 is direct material and €1 is variable conversion cost.This product is seasonal. After July, demand for this product drops to 6,000 ounces monthly. In November, Umberto offers to buy 1,500 ounces for €6,000.

If Pamela accepts the order, she must design a special label for Umberto at a cost of €500. Each

label will cost 25 cents to make and apply. Pamela should:

• accept the order, at a gain of €625

• reject the order, at a loss of €1,875

• reject the order, at a loss of €2,375

• accept the order, at a gain of €1,125

• none of the above

2-3 Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

• Pamela in Bamplona makes bull-repellent scent according to a traditional Spanish recipe, which

normally sells at €9 (Euros) per unit. Normal production volume is 10,000 ounces per month.Average cost is €5 per ounce, of which €2 is direct material and €1 is variable conversion cost.This product is seasonal. After July, demand for this product drops to 6,000 ounces monthly. In November, Umberto offers to buy 1,500 ounces for €6,000.

Now assume that the order is received in July, peak season. If Pamela accepts the order, she

will turn away regular customers who order 500 ounces. Pamela should:

• reject the order, which loses €1,875

• reject the order as it is less than her cost

• accept the order if Umberto raises the price higher than €6.58/ounce

• accept the order if Umberto raises the price higher than €5.58/ounce

• none of the above

• Francois French manufactures cheese, which he normally sells at €20/kg, on which sales

commission of 5% is paid. Plant capacity is 7,500 kg/month. Income tax is levied at 30%.

Fixed costs Costs per kg.Plant depreciation €8,000 Direct materials €4 Other plant costs 15,000 Direct labor 2 Corporate salaries 10,000 Var. factory O/H 3 Advertising 3,000

The number of kilograms to sell to break-even is:

A. 3,273

B. 3,600

C. 3,000

D. 2,300

• none of the above

2-4 Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

• Francois French manufactures cheese, which he normally sells at €20/kg, on which sales

commission of 5% is paid. Plant capacity is 7,500 kg/month. Income tax is levied at 30%.

Fixed costs Costs per kg.Plant depreciation €8,000 Direct materials €4 Other plant costs 15,000 Direct labor 2 Corporate salaries 10,000 Var. factory O/H 3 Advertising 3,000

If sales are 5,000 kgs, which of the following is true?

• Total contribution margin is €50,000

• Ratio of total contribution margin to net income before taxes is 3.57

• Taxes payable are €4,200

• Operating leverage is 42%

• All of the above