ACCT 3224 Lecture Notes - Lecture 3: Sunk Costs
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MULTIPLE CHOICE: 1. Which of the following is never considered in incrementalanalysis? A. Incremental revenue B. Sunk costs C. Incremental profit D. Differential costs |
2. When deciding between two alternatives, the preferredalternative always has: A. No opportunity costs B. Greater revenues than the other alternatives C. Less expense than the other alternatives D. Greater incremental profit than the other alternatives |
3. A company is trying to decide whether to keep or drop thesporting goods department in its department store. If the segmentis dropped, the manager will be fired. The manager’s salary, inrelation to the decision ti keep or drop the sporting department,is: A. Avoidable and therefore relevant B. Not avoidable and therefore relevant C. Sunk and therefore not relevant D. The same for all alternatives and therefore not relevant |
4. A product line should be dropped when: A. It has a negative contribution margin B. Its avoidable fixed cost are greater than its contributionmargin C. There will be a positive change in income if the product lineis dropped D. All of above |
5. Joint cost are: A. The cost of the common inputs for joint products B. Greater when there are more joint products C. Unnecessary if the accounting system is moresophisticated D. Only used when there are no opportunity costs involved in thedecision |
Make-or-Buy Decision for a Service Company
The Theater Arts Guild of Dallas (TAG-D) employs five people in its Publication Department. These people lay out pages for pamphlets, brochures, magazines, and other publications for the TAG-D productions. The pages are delivered to an outside company for printing. The company is considering an outside publication service for the layout work. The outside service quoting a price of $12 per layout page. The budget for the Publication Department for the current year is as follows:
Salaries | $174,200 |
Benefits | 39,600 |
Supplies | 21,100 |
Office expenses | 26,400 |
Office depreciation | 23,800 |
Computer depreciation | 15,800 |
Total | $300,900 |
The department expects to lay out 22,000 pages for the current year. The Publication Department office space and equipment would be used for future administrative needs, if the department’s function were purchased from the outside.
a. Prepare a differential analysis dated February 22 to determine whether TAG-D should lay out pages internally (Alternative 1) or purchase layout services from the outside (Alternative 2). If an amount is zero, enter "0". For those boxes in which you must enter subtracted or negative numbers use a minus sign.
Differential Analysis | |||
Lay out Pages Internally (Alt. 1) or Purchase Lay out Services (Alt. 2) | |||
February 22 | |||
Lay out Pages Internally (Alternative 1) | Purchase Lay out Services (Alternative 2) | Differential Effect on Income (Alternative 2) | |
Selling Price | $0 | $0 | $0 |
Costs: | |||
Purchase price of lay out work | $ | $ | $ |
Salaries | |||
Benefits | |||
Supplies | |||
Office expenses | |||
Office depreciation | |||
Computer depreciation | |||
Income (loss) | $ | $ | $ |
b. The benefit from using an outside service is shown to be than performing the lay out work internally. The fixed costs (depreciation expenses) in the budget are to the decision. Thus, the work should purchased from the outside on a strictly financial basis.
c. Before electing to the five employees, the guild should consider the of the decision.
Make-or-Buy Decision for a Service Company
The Theater Arts Guild of Dallas (TAG-D) employs five people inits Publication Department. These people lay out pages forpamphlets, brochures, magazines, and other publications for theTAG-D productions. The pages are delivered to an outside companyfor printing. The company is considering an outside publicationservice for the layout work. The outside service quoting a price of$12 per layout page. The budget for the Publication Department forthe current year is as follows:
Salaries | $174,200 |
Benefits | 39,600 |
Supplies | 21,100 |
Office expenses | 26,400 |
Office depreciation | 23,800 |
Computer depreciation | 15,800 |
Total | $300,900 |
The department expects to lay out 22,000 pages for the currentyear. The Publication Department office space and equipment wouldbe used for future administrative needs, if the department’sfunction were purchased from the outside.
a. Prepare a differential analysis datedFebruary 22 to determine whether TAG-D should lay out pagesinternally (Alternative 1) or purchase layout services from theoutside (Alternative 2). If an amount is zero, enter "0". For thoseboxes in which you must enter subtracted or negative numbers use aminus sign.
Differential Analysis | |||
Layout Pages Internally (Alt. 1) or Purchase Lay out Services (Alt.2) | |||
February 22 | |||
Lay out Pages Internally (Alternative1) | Purchase Lay out Services (Alternative2) | Differential Effect on Income (Alternative2) | |
Selling Price | $0 | $0 | $0 |
Costs: | |||
Purchase price of lay out work | $ | $ | $ |
Salaries | |||
Benefits | |||
Supplies | |||
Office expenses | |||
Office depreciation | |||
Computer depreciation | |||
Income (loss) | $ | $ | $ |
b. The benefit from using an outside service isshown to be than performing the lay out work internally. The fixedcosts (depreciation expenses) in the budget are to the decision.Thus, the work should purchased from the outside on a strictlyfinancial basis.
c. Before electing to the five employees, theguild should consider the of the decision.