Class Test 1

Marks 35
Time: 30 minutes
Question 1: 5 Marks

The following are a company’s monthly unit costs to manufacture and market a particular product.

Manufacturing Costs:
Direct materials BDT 2.00
Direct labor 2.40
Variable indirect 1.60
Fixed indirect 1.00
Marketing Costs:
Variable 2.50
Fixed 1.50

The company must decide to continue making the product or buy it from an outside supplier.

The supplier has offered to make the product at a level of quality that the company prescribes.
Fixed marketing costs would be unaffected, but variable marketing costs would continue at 30% if the
company were to accept the proposal.

What is the maximum amount per unit that the company can pay the supplier without decreasing its
operating income?

Question 2: 10 Marks

a. Sunk costs are irrelevant for decision making – explain.

b. “Sunk costs are easy to spot—they’re simply the fixed costs associated with a decision.” Do
you agree? Explain.
c. Define responsibility accounting. What are the primary types of responsibility centers?
d. Decentralized organizations need responsibility accounting systems that link lower-level
managers’ decision-making authority with accountability for the outcomes of those decisions.
Please explain.
e. How does opportunity cost enter into the make or buy decision?

Question 3: 20 Marks