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K2 Short-term decision making

Written by Saad Rahman (ACCA)

ACCA · New at Knowledge level · 9 questions

Name: ____________________   Date: ____________

  1. Which of these is a relevant cost for a decision?

    • A A depreciation charge on existing equipment
    • B A cost that has already been paid
    • C A future cash flow that will change as a result of the decision
    • D An overhead that will be incurred anyway

  2. A job needs 100 kg of a material that is regularly used. It cost $5 a kg when bought. The replacement cost is $6 a kg. What is the relevant cost?

    • A $500
    • B $600
    • C $100
    • D $1,100

  3. Workers have spare time and are paid whatever they do. What is the relevant cost of using them on a new job?

    • A Nil
    • B Their full wages
    • C Their wages plus a bonus
    • D Their wages plus overheads

  4. Product X earns $12 contribution using 2 labour hours. Product Y earns $15 using 3 hours. Labour is the limiting factor. Which should be produced first?

    • A X, because it earns $6 a hour
    • B Y, because it earns $15 a unit
    • C Y, because it uses more hours
    • D Both equally

  5. With 1,000 labour hours, demand for X of 300 units (2 hours each) and Y of 200 units (3 hours each), what is the maximum contribution? Use X $12 a unit and Y $15 a unit.

    • A $5,600
    • B $6,000
    • C $6,600
    • D $5,000

  6. Product X earns $12 a unit using 2 labour hours and product Y earns $15 using 3 hours. There are 1,000 labour hours, demand for 300 units of X and 200 of Y, and the spare hours after making X go to Y. What is the shadow price of a labour hour?

    • A $12
    • B $6
    • C $5
    • D $15

  7. The selling price is $40, the variable cost $24 and fixed costs $64,000. What is the break-even point in units?

    • A 1,600 units
    • B 6,000 units
    • C 2,667 units
    • D 4,000 units

  8. The selling price is $40, the variable cost $24 and fixed costs $64,000. Budgeted sales are 5,000 units. What is the margin of safety?

    • A 25%
    • B 20%
    • C 4,000 units
    • D 80%

  9. The selling price is $40, the variable cost $24 and fixed costs $64,000. How many units are needed for a profit of $32,000?

    • A 4,000 units
    • B 2,000 units
    • C 6,000 units
    • D 8,000 units

Answer key

1. C, 2. B, 3. A, 4. A, 5. A, 6. C, 7. D, 8. B, 9. C

  1. Relevant costs are future, cash and incremental. Sunk costs, non-cash items and unavoidable overheads are not relevant.

  2. For regularly used materials the relevant cost is the replacement cost: 100 x $6.

  3. No extra cash is paid and no other work is given up.

  4. Rank by contribution per unit of the scarce resource: X $6 and Y $5.

  5. X uses 600 hours and earns $3,600. The other 400 hours make 133.3 units of Y, earning $2,000. Total $5,600.

  6. One extra hour would be used for Y, earning $15 / 3 hours = $5.

  7. Contribution per unit = $16. Break-even = 64,000 / 16.

  8. (5,000 - 4,000) / 5,000 = 20 percent.

  9. (64,000 + 32,000) / 16 = 6,000.