Question

1. When a product or segment of a business is determined to be generating a loss, the total income from operations for the company will always increase if management eliminates the product or segment? T/F

2. When deciding to make or buy a part needed for the manufacturing process, management needs to consider whether the plant has excess production capacity available to make the part or if current production will need to be interrupted to manufacture the part? T/F

3.In addition to the differential costs in an equipment replacement decision, the difference between the remaining useful life of the old equipment and the estimated life of the new equipment is an important consideration? T/F

4.When choosing whether or not to replace a fixed asset, management will consider the price at which the asset can be sold? T/F

5. Manufacturers must conform to the Robinson-Patman Act, which prohibits price discrimination within the United States unless differences in prices can be justified by different costs? T/F

6. In deciding whether to accept business at a special price when the company is operating below full capacity, the special price should be set high enough to cover both the fixed and variable costs? T/F

7. In deciding whether to accept business at a special price when the company is operating at full capacity, the special price should be set high enough to cover all fixed and variable costs and expenses? T/F

Answer 1

1)The statement is False.

It may possible that none of the fixed cost is avoidable and will be continued to be incurred even if segment is eliminated .since fixed cost is constant and will be incurred (unless avoidable) whether product is produced or not.

2)The statement is True.

In deciding about make or buy , whether excess production capacity is available or not to meet demand is a relevant factor to be considered as same will result in loss of regular sales or any other factor if existing production is interrupted

Thus it is an opportunity cost.

3)The statement is True.

while making decision ,the remaining useful life of old equipment and useful life of new equipment is important to be considered ,since the same is relevant for calculation of cash flows over the useful life of an asset.

4)The statement is True.

In case of replacement decision ,any cash flow from sale of old /new asset should be considered since the same is considered as incremental cashflow .