12. Costs which are always relevant in decision making are those costs which are
ID: 2593773 • Letter: 1
Question
12. Costs which are always relevant in decision making are those costs which are: a) variable. b) avoidable. e) sunk. d) fixed. 13. The Wyeth Company produces three products, A. B, and C, from a single raw material input. Product A can be sold at the split-ofrport for $40,000, or it can be processed further at aiotal cost ofsis 0:00 and then sold for sssoo . Joint product costs total $60,000 annually, Product A should be: a) discontinued since revenues after further processing are less than total joint product costs b) sold at the split-off point d) processed further only if its share of the total joint prodact costs is less than the incremental revenues from further processing. a decision facing a firm of either acepting or rejecting a special offer for one of its products. A cost that is not relevant a) direct materials. b) variable overhcad c) fixed overhead that will be avoided if the special offer is accepted d) common fixed overhead that will continue if the special offer is not accepted. 15. A segment of a business responsible for both revenues and expenses would be called a) a cost center b) an investment center. c) a profit center d) residual income. 16. When computing ROl, tunover is determined by dividing average operating assets into: a) invested capital. b) total assets c) net operating income. d) sales. 17. Products A. B, and C are produced from a single raw material input. The raw material costs $90,000, from which 5,000 units of A, 10,000 units of B, and 15,000 units of C can be produced each period. Product A can be sold at the split-off point for $2 per unit, or it can be processed further at a cost of $12500 and then sold for $5 per unit. Product A should be: a) sold at the split-off point, since further processing would result in a loss of $0.50 per unit b) processed further, since this will increase profits by $2,500 each period. c) sold at the split-off point, since further processing will result in a loss of $2,500 each period. d) processed further, since this will increase profits by $12,500 each period. 18. Which of the following is NOT a component of the ROl calculation? a) Sales b) Average total liabilities c) Operating income d) Average operating assets 19. Division B had an ROI last year of 15% The division's minimum required rate of return is 10%. If the division's average operating assets last year were $450,000, then the division's residual income for last year was: a) $67,500. b) $22,500. c) $37,500. d) S45,000.Explanation / Answer
Solution:
(12) Option(a) is correct
Generally, Variable costs are more relevant to production decision than fixed cost.
(13) Option(c) is correct
The product A should be further processed and then sold.
Net Revenue at split-level point =$40,000
Net Revenue after further processing = 58000 - 15000
= $43,000
Therefore, Gain from further processing
= 43000-40000 =$3,000
(14) Option(d) is correct.
Since, the common fixed cost will continue to incurr whether we accept the special offer or not. It is a sunk cost which is irrelevant to our decision making process.
(15) Option(c) is correct.
A profit center is responsible for both revenue and costs.
(16) Option(d) is correct.
Turnover= Sales/Average Operating assets
(17) Option(c) is correct .
The product A should be sold at splitoff point because further processing will result in a loss of $2,500
Here, incremental revenue (i.e.5000*2=10,000) is less than incremental costs(i.e 12,500)
(18)Option(b) is correct.
The average total liabilities is not a component while calculating ROI. We will always consider average Operating assets.
(19) Option(b) is correct.
ROI = net operating income/average Operating assets
15% = Net Operating income/450000
Net operating income= 15%*450000 = $67,500
Therefore, Residual Income= Net Operating income - (minimum rate of return*Average Operating assets)
= 67500-(10%*450000)
=67500-45000= $22,500
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