Deck 21: Incremental Analysis

Question 1

In making a decision, management will look thoroughly at both relevant and irrelevant data.

Answer 1

False

Question 2

A sunk cost is an expenditure that has proven to be nonproductive.

Answer 2

False

Question 3

Maple syrup and pancakes are examples of joint products.

Answer 3

False

Question 4

The term "out-of-pocket cost" is often used to describe costs which have not yet been incurred and which may vary among alternative courses of action.

Question 5

The split-off point is the point at which joint products can be separated into two or more products.

Question 6

In determining whether to scrap or to rebuild defective units of product, the cost already incurred in producing the defective units is not relevant.

Question 7

Differential analysis is a tool for evaluating alternative courses of action always resulting in higher profits for the organization.

Question 8

Opportunity costs are recorded in the accounting records.

Question 9

Sunk costs are relevant to decisions about replacing plant assets.

Question 10

A sunk cost is the benefit that could have been obtained by pursuing an alternate course of action.

Question 11

A decision to discontinue a given product on the basis of contribution margin data should include consideration of the probable impact of the discontinuance on the sales of other products.

Question 12

Joint costs are the middle costs of a product.

Question 13

When sales of one product contribute to the sales of another product they are called contribution products.

Question 14

Incremental analysis rarely requires the decision maker to exercise judgment.

Question 15

Identifying information relevant to a particular business decision requires an understanding of both quantitative and qualitative considerations.

Question 16

Joint products are similar products that serve the same exact function.

Question 17

An opportunity cost is a relevant cost when making a business decision.

Question 18

Sunk costs may be defined as unavoidable future costs resulting from past decisions.

Question 19

All incremental revenue or incremental costs are relevant.

Question 20

Products resulting from a shared manufacturing process are referred to as complimentary products.

Question 21

Even though costs, revenues, and other factors do not vary among possible courses of action, they may be relevant to a decision.

Question 22

Which factor is not relevant in deciding whether or not to accept a special order?

A) Incremental revenue that will be earned.
B) Additional costs that will be incurred.
C) The effect that the order will have on the company's regular sales volume and selling prices.
D) The average cost of production if the special order is accepted.

Question 23

Assuming that the MR Corporation has an inventory of 200 defective motors costing $450,000 to produce and $150,000 to repair, if the company receives an offer to purchase these motors for $100,000, the company's decision should be to sell the motors at the offered price.
The $450,000 production costs are sunk costs and therefore irrelevant to the decision. The relevant costs are the repair costs of $150,000 compared to the offer to purchase for $100,000. Since the offer is less than the repair costs, the decision should be not to sell the motors at the offered price.

Question 24

Assuming that the MR Corporation has an inventory of 200 defective motors costing $450,000 to produce and $150,000 to repair, if the company receives an offer to purchase these motors for $325,000 before repairing them, the company's decision should be to sell the motors at the offered price.
The $450,000 production costs are sunk costs and therefore irrelevant to the decision. The relevant costs are the repair costs of $150,000 compared to the offer to purchase for $325,000. Since the offer is more than the repair costs, the decision should be to sell the motors at the offered price.

Question 25

A cost that has already been incurred and cannot be changed is called a(n):

A) Opportunity cost.
B) Out-of-pocket cost.
C) Joint cost.
D) Sunk cost.

Question 26

By choosing to go into business for himself, Jim Lazar foregoes the possibility of getting a highly paid job with a large company. This is called a(n):

A) Sunk cost.
B) Out-of-pocket cost.
C) Opportunity cost.
D) Joint cost.

Question 27

Opportunity costs are irrelevant in decision making.

Question 28

Nonfinancial considerations are relevant in decision making.

Question 29

Differential costs are those that are the same among alternatives.

Question 30

Costs that have not yet been incurred and that may vary among different courses of action are called:

A) Opportunity costs.
B) Out-of-pocket costs.
C) Joint costs.
D) Sunk costs.

Question 31

Incremental revenues:

A) Always increase revenue when one course of action is selected over another.
B) Always decrease revenue when one course of action is selected over another.
C) May increase or decrease when one course of action is selected over another.
D) Cause revenues to remain steady.

Question 32

Which of the following types of cost are always relevant to a decision?

A) Sunk costs.
B) Average costs.
C) Incremental costs.
D) Fixed costs.

Question 33

Sunk costs have already been incurred and cannot be changed by future actions.

Question 34

Direct material costs are always considered relevant costs in a make or buy decision.

Question 35

After January 1, 2009, in order to be consistent with IASB Standards, U.S. GAAP now requires that borrowing costs on assets that require a substantial period to bring them to a marketable condition be expensed immediately.

Question 36

Which is an example of joint products?

A) Sugar and beef.
B) Pens and erasers.
C) Granulated coal and methyl alcohol.
D) Iron and plastic.

Question 37

The most common method to allocate joint costs is in proportion to the relative sales value of the products.

Question 38

Sunk costs are relevant costs when considering a special order.

Question 39

Incremental revenue is relevant in decision making.

Question 40

In deciding whether or not to accept a special order, what is the opportunity cost of using machinery for which the firm has sufficient excess capacity to accept the order?

A) The historical cost of the machinery.
B) The undepreciated cost of the machinery.
C) The same machinery cost allocated to regular production orders.
D) Zero.

Question 41

In deciding whether to rework the tables or sell them as is, management should:

A) Compare the $305,000 proceeds from the sale of the tables as is, with the $355,000 cost of the tables.
B) Compare the $605,000 possible revenue from refinished tables with the total cost of $355,000 plus $315,000 to refinish.
C) Compare the $315,000 cost to refinish the tables with the incremental revenue of $300,000 if the tables are refinished.
D) Eliminate any alternative that results in a loss on the sale of the product.

Question 42

Which of the following is not a relevant factor in Burns' decision concerning whether to accept the special order from Allen?

A) The opportunity cost involved in accepting Allen's order.
B) The incremental cost of manufacturing an additional 5,000 saws per month.
C) The $65 average cost per unit to manufacture a power saw.
D) Where and at what price Allen intends to sell the saws.

Question 43

Assume that Allen Distributors offers to purchase the additional 5,000 saws at a price of $47 per unit. If Burns accepts this price, Burns' monthly gross profit on sales of power saws will:

A) Increase by $35,000.
B) Increase by $185,000.
C) Decrease by $40,000.
D) Decrease by $240,000.

Question 44

Using an incremental analysis approach, Burns should consider accepting this special order only if the price per unit offered by Allen is at least:

A) $20.
B) $50.
C) $80.
D) $40.

Question 45

Products for which sales of one contribute to the sales of another are called:

A) Complementary products.
B) Competing products.
C) Contributory products.
D) Codependent products.

Question 46

Which of the following would be an example of a sunk cost?

A) The cost of a new oil burner that replaced a destroyed one.
B) The cost of an old inefficient oil burner that will be replaced by a more modern and efficient one.
C) Depreciation expense.
D) Lost revenue from a bad debt.

Question 47

The cost of draining sap out of a maple tree to manufacture maple syrup and maple sugar is an example of:

A) After-split-off costs.
B) Sunk costs.
C) Incremental costs.
D) Joint costs.

Question 48

Which cost is not relevant in making financial decisions?

A) Sunk costs.
B) Opportunity costs.
C) Incremental costs.
D) All three are relevant.

Question 49

Mell Co. manufactured 100 personal computers at a cost of $30,000. It can sell them as is for $65,000, or install hard disks in them and sell them for $105,000. The $30,000 original manufacturing cost is:

A) An out-of-pocket cost because it has already been paid.
B) A sunk cost because it is not relevant to the decision.
C) An incremental cost because it is relevant to the decision.
D) A fixed cost because it will remain the same no matter which action is taken.

Question 50

Products which emerge from a shared manufacturing process are referred to as:

A) Complementary products.
B) Joint products.
C) Contributory products.
D) Codependent products.

Question 51

Incremental costs can be defined as:

A) Costs that are expected to increase regardless of the course of action chosen.
B) The differences between costs incurred under alternative courses of action.
C) Costs incurred in the past.
D) Costs that are irrelevant in decision making.

Question 52

The Magic Microbrewery has a limited amount of vat capacity available in which it can ferment beer. In deciding which beers to brew, Magic management should consider:

A) The contribution margins of the individual beers.
B) The unit contribution margins of the individual beers.
C) The contribution margin ratios of the individual beers.
D) The contribution margin per unit of vat capacity of the individual beers.

Question 53

Perfect Plumbing Corporation currently manufactures a valve for use in water pumps that it produces for sale. The company is considering purchasing the valves from an outside supplier rather than manufacturing them. Which of the following costs is not relevant to the decision?

A) The cost of direct material required to make the valve.
B) The price charged by the outside supplier for an identical valve.
C) The cost of the machinery owned by Perfect Plumbing used exclusively to manufacture this valve.
D) The salvage value of the machinery owned by Perfect Plumbing used exclusively to manufacture this valve.

Question 54

If Joan Reid's order is rejected, what will be John Boyd 's average unit cost of manufacturing each motor?

A) $68.
B) $70.
C) $96.
D) Some other amount.

Question 55

Burns decides to accept the special order for 5,000 units from Allen at a unit sales price that will add $100,000 per month to its operating income. The unit price Burns is charging Allen is:

A) $20.80.
B) $60.00.
C) $62.50.
D) $55.00.

Question 56

Assuming John Boyd wants to earn a pretax profit of $10,000 on this special order, what price must it charge Joan Reid?

A) $69.
B) $83.
C) $95.
D) Some other amount.

Question 57

What is the incremental cost of producing each additional motor?

A) $29.
B) $69.
C) $95.
D) Some other amount.

Question 58

Accepting a special order is profitable whenever the revenue from the special order exceeds:

A) The average unit cost of production multiplied by the number of units in the order.
B) The incremental cost of producing the order.
C) The materials and direct labor costs of producing the order.
D) The fixed manufacturing costs for the period.

Question 59

Sunk costs:

A) Have already been incurred as a result of past actions.
B) Vary among the alternative courses of action being considered.
C) Are benefits that could have been obtained by following another course of action.
D) Result from unfavorable cost variances.

Question 60

Which of the following is not relevant to management's decision regarding refinishing the tables or selling them as is?

A) The additional $300,000 revenue that can be generated if the tables are refinished.
B) The $355,000 manufacturing cost of the tables already incurred.
C) The additional $315,000 cost to refinish the tables.
D) The effect of selling "seconds" on Fancy's reputation as a fine-furniture manufacturer.

Question 61

Joint costs allocated to product B1 total:

A) $8,800.
B) $13,200.
C) $13,500.
D) $22,000.

Question 62

Legendary Motors has 7,000 defective autos on hand which cost $12,880,000 to manufacture. Legendary can either sell these defective autos as scrap for $8,000 per auto, or spend an additional $18,320,000 on repairs and then sell them for $12,000 per unit. What is the net advantage to repair the autos?

A) $84,000,000.
B) $18,320,000.
C) $9,680,000.
D) $56,000,000.

Question 63

Seidman Company manufactures and sells 30,000 units of product X per month. Each unit of product X sells for $16 and has a contribution margin of $7. If product X is discontinued, $85,000 in fixed monthly overhead costs would be eliminated and there would be no effect on the sales volume of Seidman Company's other products. If product X is discontinued, Seidman Company's monthly income before taxes should:

A) Increase by $210,000.
B) Increase by $125,000.
C) Decrease by $210,000.
D) Decrease by $125,000.

Question 64

If Creative Corporation has a limited supply of wood available, which products should it produce?

A) Royal only.
B) Classic and royal.
C) Royal and standard.
D) Classic only.

Question 65

Joint costs allocated to product A1 total:

A) $8,800.
B) $13,500.
C) $13,200.
D) $22,000.

Question 66

Which of the following statements is false regarding the defective units?

A) BT&T will not recover its costs if it sells the defective units as scrap.
B) BT&T will recover its costs if it reworks the defective units.
C) BT&T will not recover its costs if it reworks the defective units.
D) BT&T will recover more of its costs if it decides to rework the defective units.

Question 67

On the basis of the above information only, which of the following is not true?

A) At the 5,000-unit level of production, JCN's average cost per unit is $54.20.
B) At the 6,000-unit level of production, JCN's average cost per unit is $49.33.
C) It would not be profitable for JCN to consider the special order at a price less than $49 per unit.
D) Neither the fixed manufacturing costs of $146,000 nor the variable manufacturing costs of $25 per unit is relevant to this decision regarding the special order.

Question 68

The Fine Point Company currently produces all of the components for its one product; an electric pencil sharpener. The unit cost of manufacturing the motor for this pencil sharpener is: The company is considering the possibility of buying this motor from a subcontractor and has been quoted a price of $3.60 per unit. The relevant cost of manufacturing the motor to be considered in reaching the decision is:

A) $4.75.
B) $4.15.
C) $3.55.
D) $4.05.

Question 69

If Creative Corporation has only 250,000 square yards of wood available, what is the highest total amount of fixed cost the company can incur and still break-even?

A) $2,500,000.
B) $4,000,000.
C) $5,000,000.
D) $6,000,000.

Question 70

Aircraft Products, a manufacturer of aircraft landing gear, makes 1,000 units each year of a special valve used in assembling one of its products. The unit cost of producing this valve includes variable costs of $70 and fixed costs of $60. The valves could be purchased from an outside supplier at $77 each. If the valve were purchased from the outside supplier, 40% of the total fixed costs incurred in producing this valve could be eliminated. Buying the valves from the outside supplier instead of making them would cause the company's operating income to:

A) Increase by $26,000.
B) Increase by $17,000.
C) Decrease by $9,000.
D) Decrease by $29,000.

Question 71

If BT&T reworks the defective telephones, by how much will its operating income change?

A) Increase by $500.
B) Decrease by $1,600.
C) Increase by $5,500.
D) Decrease by $6,500.

Question 72

The net change in operating income resulting from a decision to manufacture product B2 is:

A) $6,000 (decrease).
B) $16,000 (decrease).
C) $48,000 (decrease).
D) $48,000 (increase).

Question 73

Assume that Perry's fixed costs remain unchanged if the seats are purchased from an outside supplier. In order to operate more profitably by buying the seats rather than manufacturing them, Perry must negotiate a price per unit from the outside supplier that is less than:

A) $27.
B) $25.
C) $22.
D) $16.

Question 74

The net change in operating income resulting from a decision to manufacture product A2 is:

A) $15,000 (increase).
B) $15,000 (decrease).
C) $5,000 (increase).
D) $45,000 (increase).

Question 75

If Creative Corporation has an unlimited supply of wood available, which products should it produce?

A) Royal only.
B) Classic and royal.
C) Royal and standard.
D) Classic only.

Question 76

Assume that the price offered by the foreign company is $43 per unit. Accepting the special order will cause JCN's operating income to:

A) Increase by $18,000.
B) Decrease by $2,000.
C) Decrease by $33,000.
D) Decrease by $35,000.

Question 77

Assume that seats can be purchased from the outside supplier at $25 each, and that 60% of total fixed costs incurred in producing TushSeat will be eliminated by this strategy. Buying the seats instead of manufacturing them would cause Perry's operating income to:

A) Decrease by $20,000.
B) Increase by $36,000.
C) Increase by $16,000.
D) Decrease by $24,000.

Question 78

What are the total relevant costs of keeping the old equipment?

A) $8,000.
B) $50,000.
C) $10,000.
D) $45,000.

Question 79

Which of the data above is a sunk cost?

A) The annual cost of operating the new equipment.
B) The annual cost of operating the old equipment.
C) The disposal value of the old equipment.
D) The original cost of the old equipment.

Question 80

Accounting terminology
Listed below are eight technical accounting terms introduced or emphasized in this chapter:
Each of the following statements may (or may not) describe one of these technical terms. In the space provided beside each statement, indicate the accounting term described, or answer "None" if the statement does not correctly describe any of the terms. ______ (a) Data pertaining to future time periods which may vary among alternative courses of action. ______ (b) The point at which manufacturing costs are split between finished goods inventory and work in progress. ______ (c) The benefit foregone by pursuing one course of action over another. ______ (d) Products which emerge from common materials and shared production processes. ______ (e) A cost incurred in the past that will not change as a result of future actions. ______ (f) Costs yet to be incurred which are expected to vary under different courses of action. ______ (g) The examination of differences between future costs and revenue under varying courses of action.