Multiple Choice Questions
1. The Beach Hut sells hotdogs for $2 each. The costs associated with each hotdog are estimated to be $1.00 of variable costs and $0.35 of fixed overhead costs. A summer camp, whose campers will be visiting the beach once during the summer, wishes to buy 100 hotdogs for $1.25 each. Assuming that the Beach Hut does not face any capacity constraints and can make the extra hotdogs without impacting other sales, if the special order were accepted, net income would:
a. Increase by $125
b. Increase by $25
c. Decrease by $75
d. Decrease by $10

2. Shoeworks produces and sells athletic shoes for children. The costs associated with each pair of shoes are estimated to be $12 of variable costs and $4 of fixed overhead costs. The shoes typically sell for $20 per pair. A local children€™s football league has contacted Shoeworks with an offer to purchase 50 pairs of sneakers for $15 each. Which of the following factors should be considered before making this special-order decision?
a. Does Shoeworks have the available capacity to produce these 50 pairs of shoes in addition to its usual sales?
b. Will regular customers become angry if they learn that the football players paid less for their shoes?
c. Will the relevant costs of providing these 50 pairs of shoes be covered?
d. Each of the above should be considered.

3. Which of the following costs is least likely to be relevant in deciding whether to accept a special order?
a. Variable direct labor costs
b. Variable selling costs
c. Fixed manufacturing overhead
d. Variable packaging and shipping costs

4. Book Manufacturer, Inc., operates a bookbinding division. Management is considering whether the binding should be done internally or should be outsourced at a cost of $25 per book. The current internal binding costs average $26.50, including fixed costs of $4,000 for the 1,000 books bound annually; however, 75 percent of the fixed costs can be avoided if the binding is outsourced. What would you recommend Book Manufacturer do in this situation, and what is the effect on net income?
a. Make internally; increases net income by $500
b. Make internally; increases net income by $1,500
c. Outsource; increases net income by $500
d. Outsource; increases net income by $1,500

5. Which of the following statements most accurately describes vertical integration?
a. Vertical integration is achieved when a company saturates one critical aspect of the value chain.
b. Vertical integration is achieved when a company saturates one noncritical aspect of the value chain.
c. Vertical integration is achieved when a company is involved in multiple steps of the value chain.
d. Vertical integration is achieved when a company is not involved in any critical aspects of the value chain.

6. Make-or-buy decisions are often complicated by a number of strategic factors. Which of the following factors is least likely to be a strategic disadvantage associated with outsourcing?
a. Perceived lack of stability in the company
b. Reduced product cost
c. Reduced employee morale
d. Lack of loyalty in the workforce

7. Bubblemania has three product lines: A, B, and C.

Product line B appears unprofitable, and management is considering discontinuing the line. If it is discontinued, $1,000 of the line€™s fixed costs can be avoided. The discontinuation of product line B would:
a. Increase net income by $3,000
b. Decrease net income by $3,000
c. Increase net income by $1,000
d. Decrease net income by$1,000

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Sales Variable costs Contribution margin Fixed costs Net income $10,000 4,500 5,500 3,500 2,000 $ 9,000 7,000 $ 2,000 6,000 S (4,000) $12,000 6,000 $ 6,000 3,000 $ 3,000 Total $31,000 17,500 $13,500 12,500 $1,000