1. Carter Co. paid $1,000,000 for land three years ago. Carter estimates it can sell the land for $1,200,000, net of selling costs. If the land is not sold, Carter plans to develop the land at a cost of $1,500,000. Carter estimates net cash flow from the development in the first year of operations would be $500,000. What is Carter's opportunity cost of the development?
a. $1,500,000
b. $1,200,000
c. $1,000,000
d. $500,000
2. Egan Company owns land that could be developed in the future. Egan estimates it can sell the land for $1,200,000, net of all selling costs. If it is not sold, Egan will continue with its plans to develop the land. As Egan evaluates its options for development or sale of the property, what type of cost would the potential selling price represent in Egan's decision?
a. Sunk
b. Opportunity
c. Future
d. Variable
3. A company is offered a one-time special order for its product and has the capacity to take this order without losing current business. Variable costs per unit and fixed costs in total will be the same. The gross profit for the special order will be 10 percent, which is 15 percent less than the usual gross profit. What impact will this order have on total fixed costs and operating income?
a. Total fixed costs increase, and operating income increases.
b. Total fixed costs do not change, and operating income does not change.
c. Total fixed costs do not change, and operating income increases.
d. Total fixed costs increase, and operating income decreases.
4. Jones Corp. had an opportunity to use its capacity to produce an extra 5,000 units with a contribution margin of $5 per unit, or to rent out the space for $10,000. What was the opportuity cost of using the capacity?
a. $35,000
b. $25,000
c. $15,000
d. $10,000
5. The ABC Company is trying to decide between keeping an existing machine and replacing it with a new machine. The old machine was purchased just two years ago for $50,000 and had an expected life of 10 years. It now costs $1,000 a month for maintenance and repairs due to a mechanical problem. A new machine is being considered to replace it at a cost of $60,000. The new machine is more efficient and it will only cost $200 a month for maintenance and repairs. The new machine has an expected life of 10 years. In deciding to replace the old machine, which of the following factors, ignoring income taxes, should ABC not consider?
a. Any estimated salvage value on the old machine
b. The original cost of the old machine
c. The estimated useful life of the new machine
d. The lower maintenance cost on the new machine