Deck 7: Incremental Analysis

Question 1

An incremental make or buy decision depends solely on which alternative is the lowest cost alternative.

Answer 1

False

Question 2

Incremental analysis identifies the probable effects of management decisions on future earnings.

Answer 2

True

Question 3

An opportunity cost is the potential benefit given up by using resources in an alternative course of action.

Answer 3

True

Question 4

In a sell or process further decision, management should process further as long as the incremental revenues from additional processing are greater than the incremental costs.

Question 5

Equipment which is not fully depreciated should always be replaced.

Question 6

In a decision to keep or replace old equipment, the salvage value of the old equipment is a sunk cost in incremental analysis.

Question 7

The elimination of an unprofitable product line will always increase the total profits of a company.

Question 8

Max Company has excess capacity.A customer proposes to buy 400 widgets at a special unit price even though the price is less than the unit variable cost to manufacture the item.Max should accept the special order if demand on other products is unaffected.

Question 9

A decision whether to continue to buy a product instead of producing it externally depends specifically on the incremental costs and incremental revenues of making the change.

Question 10

Incremental analysis is also known as differential analysis.

Question 11

It is better to process further rather than sell now if the sales price increases.

Question 12

A special one-time order is acceptable if the unit sales price is greater than the unit variable cost.

Question 13

Decisions made using incremental analysis focus on the amounts which differ among the alternatives.

Question 14

When a company has limited resources to manufacture products, it should manufacture those products which have the highest contribution margin per unit.

Question 15

Decision-making involves reviewing the results of a decision once the decision has been made.

Question 16

In a decision concerning replacing old equipment with new equipment, the book value of the old equipment can be considered an opportunity cost.

Question 17

In making decisions, management considers only financial information because accounting is presented in financial context.

Question 18

In incremental analysis, total fixed costs will always remain constant under alternative courses of action.

Question 19

A company should accept an order for its product at less than its regular sales price if the incremental revenue exceeds the incremental costs.

Question 20

A company should eliminate any segment in which the contribution margin is less than the fixed costs that are unavoidable.

Question 21

If a company has limited machine hours available for production, it is generally more profitable to produce and sell the product with the highest contribution margin per machine hour.

Question 22

Corn Crunchers has three product lines.Its only unprofitable line is Corn Nuts, the results of which appear below for 2012: If this product line is eliminated, 30% of the fixed expenses can be eliminated.How much are the relevant costs in the decision to eliminate this product line?

A)$54,000
B)$410,000
C)$335,000
D)$284,000

Question 23

If a company is operating at less than capacity, the incremental costs of a special order will likely include variable manufacturing costs, but not fixed costs.

Question 24

The process used to identify the financial data that change under alternative courses of action is called incremental analysis.

Question 25

Direct materials, direct labour, and allocated fixed and variable manufacturing overhead are all relevant in a make or buy decision.

Question 26

The basic decision rule in a sell or process further decision is: process further if the incremental revenue from processing exceeds the incremental processing costs.

Question 27

The cost to produce Part A was $5 per unit in 2011.During 2012, it has increased to $8 per unit.In 2012, Supplier Company has offered to supply Part A for $6 per unit.For the make-or-buy decision,

A)incremental revenues are $1 per unit.
B)incremental costs are $3 per unit.
C)net relevant costs are $3 per unit.
D)differential costs are $2 per unit.

Question 28

North Division has the following information: If this division is eliminated the fixed expenses will be allocated to the company's other divisions.What is the incremental effect on net income if the division is dropped?

A)$130,000 increase
B)$410,000 decrease
C)$280,000 decrease
D)$190,000 increase

Question 29

The book value of old equipment is an opportunity cost.

Question 30

Peters, Inc.produces chocolate chip cookies.Costs for producing one batch appear below: An outside supplier has offered to produce the cookies for $14 per batch.If Peters decides to buy instead of make the cookies, what is the maximum price it would may?

A)$16.00
B)$12.00
C)$13.60
D)$14.40

Question 31

Incremental costs are always relevant.

Question 32

In deciding on the future status of an unprofitable segment, management should recognize that net income will increase by eliminating the unprofitable segment.

Question 33

If an unprofitable product is eliminated, fixed expenses allocated to the eliminated segment will likely be eliminated.

Question 34

Max Company uses 10,000 units of Part A in producing its products.A supplier offers to make Part A for $7.Max Company has relevant costs of $8 a unit to manufacture Part A.If there is excess capacity, the opportunity cost of buying Part A from the supplier is

A)$0.
B)$10,000.
C)$70,000.
D)$80,000.

Question 35

A disadvantage of using an outside supplier is the associated loss of control over the production process.

Question 36

Seran Company has contacted Truckel Inc.with an offer to sell it 5,000 of the wickets for $18.00 each.If Truckel makes the wickets, variable costs are $11 per unit.Fixed costs are $12 per unit however $5 per unit is avoidable.Should Truckel make or buy the wickets?

A)Buy; savings = $25,000
B)Buy; savings = $10,000
C)Make; savings = $20,000
D)Make; savings = $10,000

Question 37

Galley Industries can produce 500 units of a necessary component part with the following costs: If Galley Industries purchases the component externally, $3,000 of the fixed costs can be avoided.Below what external price for the 500 units would Galley choose to buy instead of make?

A)$95,000
B)$165,000
C)$155,000
D)$158,000

Question 38

One incremental analysis decision is the allocation of limited resources.

Question 39

Truckel, Inc.currently manufactures a wicket as its main product.The costs per unit are as follows: The fixed overhead is an allocated common cost.How much is the relevant cost of the wicket?

A)$24.00
B)$14.00
C)$11.00
D)$19.00

Question 40

Sunk costs are considered relevant when choosing among alternatives because they are differential.

Question 41

Which of the following statements about incremental analysis is true?

A)It cannot be used if more than two alternatives are available.
B)It considers only cost factors, not revenue.
C)Its focus is on the past activities.
D)It only considers factors that are different for each alternative, and only those factors that will occur in the future.

Question 42

For which of the following is incremental analysis appropriate?

A)Acceptance of a special order and a make or buy decision
B)A retain or replace equipment decision and CVP analysis
C)A sell or process further decision and allocation of indirect costs
D)Elimination of an unprofitable segment and allocation of indirect costs

Question 43

Which of the following describes one aspect of incremental analysis?

A)Both costs and revenues that stay the same between alternate courses of action will be analyzed.
B)Both costs and revenues that differ between alternate courses of action will be analyzed.
C)All costs and revenues, regardless if they stay the same or differ between alternate courses of action, will be analyzed.
D)Only costs relating to the decisions at hand are analyzed.

Question 44

It costs Lannon Fields $14 of variable costs and $6 of allocated fixed costs to produce an industrial trash can that sells for $30.A buyer in Mexico offers to purchase 3,000 units at $18 each.Lannon has excess capacity and can handle the additional production.What effect will acceptance of the offer have on net income?

A)decrease $4,000
B)increase $4,000
C)increase $54,000
D)increase $12,000

Question 45

Which one of the following is a true statement about incremental analysis?

A)It is another name for capital budgeting.
B)It is the same as CVP analysis.
C)It is used primarily for long-term planning.
D)It focuses on decisions that involve a choice among alternative courses of action.

Question 46

Which one of the following is nonfinancial information that management might evaluate in making a decision?

A)Opportunity costs of a decision
B)Contribution margin
C)The effect on profit of a decision
D)The corporate profile in the community

Question 47

Who prepares relevant revenue and cost data for the decision making process?

A)Department heads
B)The controller
C)Management accountants
D)Factory supervisors

Question 48

Which steps do accountants mostly contribute to in the decision-making process?

A)Identifying the problem and then assigning responsibility.
B)Determining and evaluating possible courses of action and then reviewing the results of the decision.
C)Determining and evaluating possible courses of action, and then making a decision.
D)Making a decision and then reviewing the results of that decision.

Question 49

Rosen, Inc.has 10,000 obsolete calculators, which are carried in inventory at a cost of $20,000.If the calculators are scrapped, they can be sold for $1.10 each (for parts).If they are repackaged, at a cost of $15,000, they could be sold to toy stores for $2.50 per unit.What alternative should be chosen, and why?

A)Scrap; profit is $1,000 greater.
B)Repackage; revenue is $5,000 greater than cost.
C)Scrap; incremental loss is $9,000.
D)Repackage; receive profit of $10,000.

Question 50

Specik, Inc.is considering the following alternatives: Which of the following are relevant in choosing between the alternatives?

A)Variable costs
B)Revenues
C)Fixed costs
D)Variable costs and fixed costs

Question 51

Ace Company sells office chairs with a selling price of $45 and a contribution margin per unit of $20.It takes 5 machine hours to produce one chair.How much is the contribution margin per unit of limited resource?

A)$4
B)$5
C)$9
D)$20

Question 52

Which of the following is a true statement about costs in incremental analysis?

A)Variable costs are always relevant.
B)Fixed costs are never relevant.
C)Fixed costs are always relevant.
D)Both variable and fixed costs can be relevant.

Question 53

Seville Company manufactures a product with a unit variable cost of $42 and a unit sales price of $75.Fixed manufacturing costs were $80,000 when 10,000 units were produced and sold, equating to $8 per unit.The company has a one-time opportunity to sell an additional 1,500 units at $55 each in an international market which would not affect its present sales.The company has sufficient capacity to produce the additional units.How much is the relevant income effect of accepting the special order?

A)$63,000
B)$7,500
C)$50,000
D)$19,500

Question 54

Which one of the following is an alternative name for incremental analysis?

A)Managerial analysis
B)Cost analysis
C)Contribution margin analysis
D)Differential analysis

Question 55

Which of the following statements about making decisions is correct?

A)Only relevant financial information should be considered.
B)All information should be considered in the final decision.
C)Management should consider both relevant financial and non-financial information.
D)Management accountants should provide the information, but they should not make recommendations.It is up to the managers to make decisions.

Question 56

Which one of the following stages of the management decision-making process is properly sequenced?

A)Evaluate possible courses of action, Make decision
B)Review the actual impact of the decision, Determine possible courses of action
C)Assign responsibility for the decision, Identify the problem
D)Make a decision, Assign responsibility

Question 57

What is a sunk cost?

A)A significant cost that has the potential to "sink" the organization.
B)A cost that has already occurred, but still must be considered in the decision process.
C)A cost that has already occurred and therefore is not relevant in the decision process.
D)A cost that cannot be changed.

Question 58

Walton, Inc.is unsure of whether to sell its product assembled or unassembled.The unit cost of the unassembled product is $16, while the cost of assembling each unit is estimated at $17.Unassembled units can be sold for $55, while assembled units could be sold for $71 per unit.What decision should Walton make?

A)Sell before assembly, the company will save $1 per unit.
B)Sell before assembly, the company will save $15 per unit.
C)Process further, the company will save $1 per unit.
D)Process further, the company will save $16 per unit.

Question 59

What is the process of evaluating financial data that changes under alternative courses of action called?

A)Incremental analysis
B)Decision-making analysis
C)Contribution margin analysis
D)Cost-benefit analysis

Question 60

For which of the following decisions is incremental analysis not appropriate?

A)Elimination of an unprofitable segment
B)Determining cost behaviour
C)A make or buy decision
D)An allocation of limited resource decision

Question 61

Use the following information for questions
Eminen Music produces 60,000 blank CDs on which to record music.The CDs have the following costs:
Eminem could avoid $4,000 in fixed overhead costs if it acquires the CDs externally.If cost minimization is the major consideration and the company would prefer to buy the 60,000 units externally, what is the maximum external price that Eminem would expect to pay for the units?

A)$32,000
B)$29,000
C)$36,000
D)$33,000

Question 62

Use the following information for questions
Hermantic, Inc.can produce 100 units of a component part with the following costs:
If Hermantic, Inc.can purchase the component externally for $88,000 and only $8,000 of the fixed costs can be avoided, what is the correct "make or buy decision"?

A)Make and save $1,000
B)Buy and save $1,000
C)Make and save $5,000
D)Buy and save $13,000

Question 63

A company is within plant capacity.It is contemplating whether a special order should be accepted.The order will not impact regular sales.If the company accepts a special order, what will occur?

A)Incremental costs will not be affected.
B)Net income will increase if the special sales price per unit exceeds the unit variable costs.
C)There are no incremental revenues.
D)Both fixed and variable costs will increase.

Question 64

Harrison Company determines that an opportunity cost of an alternate course of action is relevant to a make or buy decision.Which statement is true of the opportunity cost?

A)Should be added to the "Buy" costs
B)Should be subtracted from the "Make" costs
C)Should be added to the "Make" costs
D)Should be ignored if it does not involve a cash outlay.

Question 65

Argus Company anticipates that other sales will be affected by the acceptance of a special order.What should the company do?

A)Reject the order.
B)Consider the opportunity cost of lost sales in the incremental analysis.
C)Accept the order.
D)Accept the order if the plant is below capacity.

Question 66

Use the following information for questions
Hermantic, Inc.can produce 100 units of a component part with the following costs:
If Hermantic, Inc.purchases the units externally for $80,000, by what amount will its total costs change?

A)An increase of $80,000
B)An increase of $5,000
C)An increase of $17,000
D)A decrease of $22,000

Question 67

Which statement is true of an opportunity cost?

A)It is the cost of a special order option.
B)It reduces the possibility of accepting a particular course of action.
C)It is the potential benefit as a result of following an alternative course of action.
D)It is a variable cost.

Question 68

In which situations should opportunity costs be considered?

A)Decision making that involves alternative uses
B)Forecasting sales
C)Financial accounting
D)Breakeven analysis

Question 69

What is the nature of a sell or process further decision?

A)It is an incremental revenue decision.
B)It is an incremental cost decision.
C)It is both an incremental revenue and incremental cost decision.
D)It is neither incremental revenue nor incremental cost.

Question 70

M&H Ltd.has sufficient capacity to fill an order at a special price below its usual price.The special price exceeds its variable costs.What non-financial factors should also be considered in the decision?

A)Is there the potential for additional sales to the customer in the future?
B)How existing customers will respond if they find out about the special price.
C)If there is the potential for additional sales to the customer in the future, can a higher price be charged?
D)All of the above.

Question 71

Use the following information for questions
Eminen Music produces 60,000 blank CDs on which to record music.The CDs have the following costs:
None of Eminem's fixed overhead costs can be reduced, but another product could be made that would increase profit contribution by $4,000 if the CDs were acquired externally.If cost minimization is the major consideration and the company would prefer to buy the CDs, what is the maximum external price that Eminem would be willing to accept to acquire the 60,000 units externally?

A)$36,000
B)$32,000
C)$33,000
D)$40,000

Question 72

Which statement is true about relevant costs in incremental analysis?

A)All costs are relevant if they change between alternatives.
B)Only fixed costs are relevant.
C)Only variable costs are relevant.
D)Relevant costs should be ignored.

Question 73

What is the nature of an opportunity cost?

A)It is always variable.
B)It is a potential benefit.
C)It is included as part of cost of goods sold.
D)It is a sunk cost.

Question 74

A company has a process that results in 1,000 kilograms of Product X that can be sold for $10 per kilogram.An alternative would be to process Product X further at a cost of $2,000 and then sell it for $13 per kilogram.Should management sell Product X now or should Product X be processed further and then sold?

A)Process further, the company will be better off by $1,000.
B)Sell now, the company will be better off by $1,000.
C)Process further, the company will be better off by $3,000.
D)Sell now, the company will be better off by $10,000.

Question 75

Which of the following is relevant information in a decision whether old equipment presently being used should be replaced by new equipment?

A)The cost of the old equipment
B)The salvage value of the old equipment
C)The book value of the old equipment
D)The accumulated depreciation of the old equipment

Question 76

PH Toy is unsure of whether to sell its product assembled or unassembled.The unit cost of the unassembled product is $30 and PH Toy Company would sell it for $65.The cost to assemble the product is estimated at $21 per unit and PH Toy Company believes the market would support a price of $85 on the assembled unit.What decision should PH Toy make?

A)Sell before assembly, the company will be better off by $1 per unit.
B)Sell before assembly, the company will be better off by $20 per unit.
C)Process further, the company will be better off by $29 per unit.
D)Process further, the company will be better off by $14 per unit.

Question 77

Canosta, Inc.determined it must expand its capacity to accept a special order.Which situation is likely?

A)Unit variable costs will increase.
B)Fixed costs will not be relevant.
C)Both variable and fixed costs will be relevant.
D)The company should accept the order.

Question 78

Which statement is true concerning the decision rule on whether to make or buy?

A)The company should buy if the cost of buying is less than the cost of producing.
B)The company should buy if the incremental revenue exceeds the incremental costs.
C)The company should buy as long as total revenue exceeds present revenues.
D)The company should buy assuming no additional fixed costs are incurred.

Question 79

Coggin Company gathered the following data about the three products that it produces: Which of the products should be processed further?

A)Product A
B)Product B
C)Product C
D)All three products

Question 80

Wishnell Toys can make 5,000 toy robots with the following costs: The company can purchase the 5,000 robots externally for $145,000.The avoidable fixed costs are $15,000 if the units are purchased externally.What is the cost savings if the company makes the robots?

A)$18,000
B)$15,000
C)$5,000
D)$3,000