Question

1)Costs which are always relevant in decision making are those costs which are:

a.		sunk.
b.		avoidable.
c.		variable.
d.		fixed.

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2) A labor efficiency variance resulting from the use of poor quality materials should be charged to:

a.		the production manager.
b.		manufacturing overhead.
c.		the industrial engineering department.
d.		the purchasing agent.

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3) The Gomez Corporation is considering two projects, T and V. The following information has been gathered on these projects:

                                                                                        Project T                        Project V

Initial Investment Needed                                            $112,500                        $75,000

Present Value of Future Cash Inflows                            $168,000                        $107,000

Useful Life                                                                     10 year                           10 years
  

Based on this information, which of the following statements is (are) true?

I. Project T has the highest ranking according to the project profitability index criterion.
II. Project V has the highest ranking according to the net present value criterion.

a.		Both I and II
b.		Neither I nor II
c.		Only II
d.		Only I

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Answer 1

1. Costs which are always relevant in decision making are those costs which are Avoidable

Option b. is the correct answer.

2. A labor efficiency variance resulting from the use of poor quality materials should be charged to production agent.

Option d. Is the correct answer.

3. Net present value

Project T = ($168,000-$112,500) = $55,500   

Project V = ($107,000-$75,000) = $32,000

Project T has rank 1 and project V has rank 2

Profitability index = (N. P. V./Initial investment)

Project T = 0.4933

Project V = 0.4266

Project T has rank 1 and a project V has rank 2

Therefore statement 1 is correct

Option d. Is the right answer