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Question
What is a sunk cost? When would it be relevant to a short-term managerial decision?
Answer
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Related questions
Q:
The _______________________________ is computed by discounting the future net cash flows from the investment at the project's required rate of return and then subtracting the initial amount invested.
Q:
The _______________________________ is computed by dividing a project's after-tax net income by the average amount invested in it.
Q:
In evaluating capital budgeting alternatives, there are two primary methods that do not consider the time value of money. These methods are _______________ and __________________. There are also two primary methods that consider the time value of money; these are ___________________ and _______________________.
Q:
A company has the choice of either selling 500 defective units as scrap or rebuilding them. The company could sell the defective units as they are for $7.00 per unit. Alternatively, it could rebuild them with incremental costs of $2.00 per unit for materials, $3per unit for labor, and $1 per unit for overhead, and then sell the rebuilt units for $15 each. What should the company do?
A. Sell the units as scrap.
B. Rebuild the units.
C. It does not matter because both alternatives have the same result.
D. Neither sell nor rebuild because both alternatives produce a loss. Instead, the company should store the units permanently.
E. Throw the units away.
Q:
A company has the choice of either selling 1,000 defective units as scrap or rebuilding them. The company could sell the defective units as they are for $4.00 per unit. Alternatively, it could rebuild them with incremental costs of $1.00 per unit for materials, $2.00 per unit for labor, and $1.50 per unit for overhead, and then sell the rebuilt units for $8.00 each. What should the company do?
A. Sell the units as scrap.
B. Rebuild the units.
C. It does not matter because both alternatives have the same result.
D. Neither sell nor rebuild because both alternatives produce a loss. Instead, the company should store the units permanently.
E. Throw the units away.
Q:
If Special Export is processed further into Prime Cat Food and Feline Surprise, the total gross profit would be:
A. $68,000
B. $78,000
C. $96,000
D. $98,000
E. $100,000
Q:
Alpha Co. can produce a unit of Beta for the following costs: Direct material
$ 8 Direct labor
24 Overhead
40 Total costs per unit
$72 An outside supplier offers to provide Alpha with all the Beta units it needs at $60 per unit. If Alpha buys from the supplier, Alpha will still incur 40% of its overhead. Alpha should:
A. Buy Beta since the relevant cost to make it is $72.
B. Make Beta since the relevant cost to make it is $56.
C. Buy Beta since the relevant cost to make it is $48.
D. Make Beta since the relevant cost to make it is $48.
E. Buy Beta since the relevant cost to make it is $56.
Q:
A company paid $200,000 10 years ago for a specialized machine that has no salvage value and is being depreciated at the rate of $10,000 per year. The company is considering using the machine in a new project that will have incremental revenues of $28,000 per year and annual cash expenses of $20,000. In analyzing the new project, the $10,000 depreciation on the machine is an example of a(n):
A. Incremental cost
B. Opportunity cost
C. Variable cost
D. Sunk cost
E. Out-of-pocket cost
Q:
An additional cost that is incurred only if a particular action is taken is a(n):
A. Period cost
B. Pocket cost
C. Discount cost
D. Incremental cost
E. Sunk cost.
Q:
The total cost method determines a selling price equal to a products total costs plus a desired profit on the product.
Q:
The cost of equipment purchased by a company last year would be an avoidable cost.
Q:
Wages from a job a student gives up to attend summer school would be a sunk cost.
Q:
An ________________________ requires a future outlay of cash and is relevant for current future decision making.
Q:
Periods
12 Percent 1
8929 2
1.6901 3
2.4018 4
3.0373 Assuming all revenue is to be received at the end of each year, what are the net cash flows for this investment if net present value equals ($11,790)?
A. $78,210
B. $10,920
C. $25,750
D. $237,547
E. $33,513
Q:
Scott Corporation is considering the purchase of new equipment costing $30,000. The projected annual after-tax net income from the equipment is $1,200, after deducting $10,000 for depreciation. The revenue is to be received at the end of each year. The machine has a useful life of three years and a $4,000 salvage value. Scott requires a 12% return on its investments. The factors for the present value of $1 for different periods follow: Periods 12 Percent 1 8929 2 0.7972 3 0.7118 4 0.6355 What is the net present value of the machine and what is the maximum Scott would have been willing to pay for it?
A. $(251.52) but Scott would not pay any amount to acquire the machine because the NPV is negative.
B. $(251.52) and Scott would be willing to pay $29,748.48 for the machine.
C. $(251.52) but the price Scott would pay cannot be determined. D. $900 and Scott would be willing to pay $30,900 to acquire the machine
E. $900 but Scott would not be willing to acquire the machine.
Q:
A disadvantage of using the payback period to compare investment alternatives is that:
A. It ignores cash flows beyond the payback period.
B. It includes the time value of money.
C. It cannot be used when cash flows are not uniform.
D. It cannot be used if a company records depreciation.
E. It cannot be used to compare investments with different initial investments.
Q:
A given project requires a $25,000 investment and is expected to generate end-of-period annual cash inflows as follows: Year 1
Year 2
Year 3
Total $4,000
$15,000
$6,000
$25,000 Assuming a discount rate of 10%, what is the net present value of this investment? Selected present value factors for a single sum are shown in the table below: i = 10% n = 1
i = 10% n = 2
i = 10% n = 3 .9091
.8264
.7513 A. $6,217.50
B. ($4,459.80)
C. ($6,217.50)
D. $8,275.00
E. $0.00
Q:
Which methods of evaluating a capital investment project use cash flows as a measurement basis?
A. Net present value, accounting rate of return, and internal rate of return.
B. Internal rate of return, payback period, and accounting rate of return.
C. Accounting rate of return, net present value, and payback period.
D. Payback period, internal rate of return, and net present value.
E. Net present value, payback period, accounting rate of return, and internal rate of return.
Q:
Which of the following is an objective of capital budgeting?
A. To eliminate all risk.
B. To discount all future and past cash flows.
C. To earn a satisfactory return on investment.
D. To reverse past decisions.
E. To reduce the number of investment activities.
Q:
Are relevant costs useful to management in determining long-run pricing decisions?
Q:
What is the difference between an opportunity cost and a sunk cost?
Q:
Rocko Inc. has a machine with a book value of $50,000 and a five-year remaining life. A new machine is available at a cost of $85,000 and Rocko can also receive $38,000 for trading in the old machine. The new machine will reduce variable manufacturing costs by $14,000 per year over its five-year life. Should the machine be replaced?
A. Yes, because income will increase by $14,000 per year.
B. Yes, because income will increase by $23,000 in total.
C. No, because the company will be $23,000 worse off in total.
D. No, because the income will decrease by $14,000 per year.
E. Rocko will be not be better or worse off by replacing the machine.
Q:
A company expects its three departments to yield the following income for next year: Dept. Q
Dept. R
Dept. S Sales
$6,000
$7,000
$8,000 Expenses Avoidable
2,000
3,000
4,000 Unavoidable
1,500
2,500
4,500 Total expenses
3,500
5,500
8,500 Net income (loss)
$2,500
$1,500
$(500) Compute the change to the companys total net income if Dept. S is eliminated.
A. $500 increase
B. $500 decrease
C. $4,000 increase
D. $4,000 decrease
E. $3,500 decrease
Q:
Bandy Corporation owns a machine that manufactures lawn games. Production time for the croquet set is 10 units per hour and for the volley ball game is 8 units per hour. The machines capacity is 1,500 hours per year. Both products are sold to a single customer who has agreed to buy all of the companys output up to a maximum of 4,000 croquet sets and 10,000 volleyball games. Selling prices and variable costs per unit are shown below. Based on this information, what is Bandy Corporations most profitable sales mix? Croquet Set
Volleyball Game Selling price per unit
$75
$62 Variable costs per unit
42
25 A. 15,000 croquet sets.
B. 12,000 volleyball games.
C. 4,000 croquet sets and 10,000 volleyball games.
D. 4,000 croquet sets and 8,800 volleyball games.
E. 2,500 croquet sets and 10,000 volleyball games.
Q:
A company has already incurred a $24,000 cost in partially producing its two products. Their selling prices when partially and fully processed are shown in the following table with the additional costs necessary to finish their processing. Based on this information, should any products be processed further? Product
Unfinished Selling Price
Finished Selling Price
Further Processing Costs A
$900
$1,000
$65 B
600
675
76 A. Both product A and product B should be processed further.
B. Neither product A nor product B should be processed further.
C. Only product B should be processed further.
D. Only product A should be processed further.
E. A processing further decision cannot be made from the available data.
Q:
Altertech Inc. manufactures a product that contains a circuit board. The company has always purchased this circuit board from a supplier for $32 each. Altertech recently upgraded its own manufacturing capabilities and now has enough excess capacity (including trained workers) to begin manufacturing the circuit board instead of buying it. The company prepared the following per unit cost projections of making the circuit board, assuming that overhead is allocated to the part at the normal predetermined overhead rate of 110% of direct labor cost. Direct materials
$2 Direct labor
20 Overhead (fixed and variable)
22 Total
$44 The required volume of output to produce the circuit boards will not require any incremental fixed overhead. Incremental variable overhead cost is $3 per circuit board. What is the effect on income if Altertech decides to make the circuit boards?
A. Income will decrease by $7 per unit.
B. Income will increase by $7 per unit.
C. Income will increase by $12 per unit.
D. Income will decrease by $12 per unit.
E. Income will increase by $10 per unit.
Q:
A company expects to produce and sell 7,000 units of a single product. The following additional company information is available: Variable costs (per unit) Production costs
$20 Nonproduction costs
$3 Fixed costs (in total) Overhead
$175,000 Nonproduction
$14,000 Compute this companys total cost per unit.
A. $23
B. $45
C. $27
D. $50
E. $5
Q:
Assume markup percentage equals desired profit divided by total costs. What is the correct calculation to determine the dollar amount of the markup per unit?
A. Total cost times markup percentage.
B. Total cost per unit times markup percentage per unit.
C. Total cost per unit divided by markup percentage per unit.
D. Markup percentage per unit divided by total cost per unit.
E. Markup percentage divided by total cost.
Q:
Capital budgeting decisions are generally based on:
A. Tentative predictions of future outcomes.
B. Perfect predictions of future outcomes.
C. Results from past outcomes only.
D. Results from current outcomes only.
E. Speculation of interest rates and economic performance only.
Q:
If net present values are used to evaluate two investments that have equal costs and equal total cash flows, the one with more cash flows in the early years has the higher net present value.