Question

Question 31

1. A company is considering whether to continue to make a product itself, or whether to buy it from another company. If it stops making the product, it will sell its existing factory and fire the workers who now make the product. Which of the following is NOT a “relevant” factor in making this decision:

   		The price per unit it would pay the other company
   		The amount of severance costs it will have to pay employees that it fires.
   		The original cost of the factory
   		The amount of cash that will be received when the old factory is sold.

2.85714 points

Question 32

1. The method of evaluating long term investment decisions that involves computing the interest rate at which the present value of future inflows exactly equals the cost of making the investment is called the:

   		Payback method
   		Internal rate of return method
   		Accounting rate of return method
   		Net present value method

2.85714 points

Question 33

1. The type of cost that exists when costs remain the same at certain levels of output, then jump to higher levels when the level of a cost driver increases past certain points, is a:

   		Fixed cost
   		Variable cost
   		Semivariable cost
   		Step cost

Answer 1

31. The original cost of the factory is not a relevant cost or consideration while making this decision. It is a sunk cost and has no relevance now. Hence, third option that is original cost of the factory is the correct option. 32. The method of evaluating long term investment decisions that involves computing the interest rate at which the present value of future inflows exactly equals the cost of making the investment is called the Net Present value method. Hence, second option, that is Internal rate of return method is the correct option. 33. The type of cost that exists when costs remain the same at certain levels of output, then jump to higher levels when the level of a cost driver increases past certain points, is a Step cost. Hence, last option, that is Step Cost is the correct option.