6.

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Gnome Company is trying to decide whether to continue to manufacture a particular component or to buy the component from a supplier. Which of the following is relevant to this decision?

A.

the potential uses of the facilities that are currently used to manufacture the component

B.

allocated corporate fixed costs which would have to be allocated to other products if the component is no longer manufactured

C.

the cost of the equipment that is currently being used to manufacture the component

D.

the insurance on the manufacturing facility which will continue regardless of the decision

7.

Which of the following is a major consideration when analyzing a special order?

A.

The price must be high enough to cover any incremental costs to fill the order.

B.

The company must have a good stock turnover ratio.

C.

The sunk costs of the decision must not exceed the irrelevant costs.

D.

The profit margin of the special sale must be higher than the regular sales.

8.

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Which of the following pieces of information would be irrelevant when deciding to upgrade a company's heating and air conditioning system?

A.

the safety of the new equipment compared to the old equipment

B.

the purchase price of the old equipment compared to the purchase price of the new equipment

C.

the energy efficiency of the old equipment versus the energy efficiency of the new equipment

D.

the productivity of the old equipment compared to that of the new equipment

9.

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In deciding whether to drop its electronics product line, a company's manager should ignore ________.

A.

the variable and fixed costs it could save by dropping the product line

B.

the amount of unavoidable fixed costs

C.

the effect of dropping the electronics product line on the sales of its other products, like CDs

D.

the revenues it would lose from dropping the product line

10.

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Seven Seas Sailboats Company manufactures 100 luxury yachts per month. Included in each yacht is a compact media center. Seven Seas Sailboats manufactures the media center

inminushouse.

The company is considering the possibility of outsourcing the production of media centers in order to close down some of its facilities and reduce the administrative costs. At present, the variable cost per unit is $275 and fixed costs are $39,000 per month. Assume that if they outsource, fixed costs could be reduced by 40%. The production manager advised the company to contract with a foreign supplier who offered a contract rate of $420 per unit. If they outsource the media center, how would that affect operating income?

A.

Operating income would improve by $4,000.

B.

Operating income would improve by $1,100.

C.

Operating income would remain the same.

D.

Operating income would decline by $14,500.