ASU ACC241 Exam3 Practice Complete

ASU ACC241 EXAM3

PRACTICE COMPLETE

Question 1: Which of the following costs are considered relevant when making a

short-term business decision?

Choices:

1) Sunk costs and opportunity costs 2) Avoidable costs and opportunity costs 3) Unavoidable �xed costs and sunk costs 4) Sunk costs and future costs that do not di�er between alternatives

Correct Answer: Avoidable costs and opportunity costs

Explanation: Relevant costs are those that di�er between alternatives and occur in the future.Avoidable costs and opportunity costs are always relevant, whereas sunk costs are never relevant.Page 1

Question 2: A company purchased a special machine �ve years ago for $50,000. It now has a book value of $10,000 and can be sold for $2,000. In deciding whether to replace the machine, what is the $50,000 original purchase price considered?

Choices:

1) An opportunity cost 2) A di�erential cost 3) A sunk cost 4) An incremental cost

Correct Answer: A sunk cost

Explanation: Sunk costs are past costs that have already been incurred and cannot be changed. The original purchase price is a sunk cost and should be ignored in future decisions.Question 3: When a company is operating at full capacity, accepting a special order will likely require turning away regular customers. The lost contribution margin from

regular sales is known as a(n):

Choices:

1) Sunk cost 2) Opportunity cost 3) Fixed cost 4) Unavoidable cost

Correct Answer: Opportunity cost

Explanation: An opportunity cost is the potential bene�t given up when one alternative is selected over another. Turning away regular sales means giving up their contribution margin.Page 2

Question 4: In evaluating a special order decision, which of the following is the most critical factor if the company is operating below maximum capacity?

Choices:

1) The special order price must exceed the normal selling price.2) The special order price must cover all �xed and variable costs.3) The special order price must exceed the incremental costs of ful�lling the order.4) The special order must absorb a proportionate share of corporate overhead.Correct Answer: The special order price must exceed the incremental costs of ful�lling the order.Explanation: When excess capacity exists, a special order should be accepted if the incremental revenue exceeds the incremental variable (and any speci�c �xed) costs, providing a positive contribution margin.

Question 5: A company receives a special order for 1,000 units at $15 per unit.

Normal selling price is $25. Variable manufacturing costs are $10 per unit, and variable selling costs (which will not apply to this order) are $3 per unit. Fixed overhead is $5 per unit. What is the �nancial advantage (disadvantage) of accepting the order assuming excess capacity?

Choices:

1) $2,000 advantage 2) $5,000 advantage 3) $2,000 disadvantage 4) $10,000 disadvantage

Correct Answer: $5,000 advantage

Explanation: Incremental revenue = $15. Incremental cost = $10 (variable manufacturing only).Incremental pro�t = $5 per unit. Total advantage = 1,000 units * $5 = $5,000.Page 3