Multiple Choice Questions
1. A manufacturing company is considering purchasing a new machine that doubles capacity from 500 to 1,000 units per week. The machine will occupy approximately 500 square feet of vacant (unused) space on the factory floor. Which of the following costs are irrelevant in the decision to purchase this machine?
a. The additional cost of utilities necessary to run the machine
b. Monthly rental expense associated with the 10,000-square-foot factory
c. Additional machinists who will need to be hired to run the machine
d. Maintenance costs for regular repair and cleaning of the machine
2. A company manufactures both pens and pencils in the same facility. The firm’s production capacity is shared between these two products. Due to a federal ruling requiring all elementary school students to use only pencils, the overall demand for pencils has shifted outward leading to an increase in pencil prices. Surprisingly, this has had no effect on pen demand. The firm will find in the short term that:
a. The cost of producing pencils rises.
b. The cost of producing pens falls.
c. Pencils are less profitable than pens.
d. The cost of producing pens rises.
3. In comparing a firm’s accounting costs with its economic costs, the accounting costs:
a. Are the same, if the firm is earning a normal rate of return?
b. Are larger.
c. Take account of the implicit cost of owned resources.
d. Are smaller.
4. The average capital invested in Firm X during the year is $20,000. During that same year, Firm X produces after-tax income of $3,200. If the firm’s cost of capital is 12%, what is the economic profit?
a. $0
b. $800
c. $1,200
d. $3,200
5. Which of the following costs always must be considered relevant in decision making?
a. Variable costs
b. Avoidable costs
c. Fixed costs
d. Sunk costs