Question

Q5) ABC Inc. wishes to enter a highly competitive market, and studies have determined that products in this industry nearly all sell for $20 per unit. ABC estimates that it can produce and sell 500,000 units annually. ABC uses operating assets valued $20 million and desires a return on these assets of 15%. Calculate ABC's target cost based on the information provided.

Multiple Choice

• $30

• $20

• $12

• $14

Q6)

For decision-making purposes, sunk costs are always irrelevant.

True or False

Q7)

ADL company produces a single component with variable and fixed production costs of $7 and $3. The product currently sells for $12 per unit. The company is currently operating at 50% of its 10,000 unit annual production capacity. A customer recently approached the company with a one-time special order for 7,000 units, offering the company only $10 per unit. Because of the specific nature of this order, the company would have to invest in a special machine (which would cost an additional $10,000) to satisfy this order. Variable production costs would remain unchanged. If the special order was accepted, the machine would be sold immediately after the order was delivered for $2,000. Should the company accept the special order?

Multiple Choice

• Yes, as the company would earn an additional $4,000.

• No, as the company would lose $7,000.

• Yes, as the company would earn an additional $3,000.

• No, as the company would lose $15,000.

Q8)

ADL company produces a single component with variable and fixed production costs of $7 and $3. The product currently sells for $12 per unit. The company is currently operating at 50% of its 10,000 unit annual production capacity. A customer recently approached the company with a one-time special order for 5,000 units, offering the company only $10 per unit. Because of the specific nature of this order, the company would have to invest in a special machine (which would cost an additional $10,000) to satisfy this order. Variable production costs would remain unchanged. If the special order was accepted, the machine would be sold immediately after the order was delivered for $2,000. Should the company accept the special order?

Multiple Choice

• Yes, as the company would earn an additional $7,000.

• No, as the company would lose $7,000.

• Yes, as the company would earn an additional $15,000.

• No, as the company would lose $15,000

Answer 1

Answer 5

Operating assets value = $20 million

Targeted return = 15% x $20 million = $3 million

No. of units that can be sold = 500,000 units

Targeted profit = $6

Selling price =$20

Targeted cost = Selling price - Targeted profit = $20 - $6 = $14

Option $14 is the correct answer

Answer 6

The correct answer to this question is (i) True

The cost of the old machine is irrelevant in this case as the cost is already incurred in the past and would have no effect on the decision making. These costs are also known as Sunk Costs.

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