Deck 21: Incremental Analysis

Question 1

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

Answer 1

True

Question 2

Differential costs are those that are the same among alternatives.

Answer 2

False

Question 3

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

Answer 3

False

Question 4

Opportunity costs are recorded in the accounting records.

Question 5

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 6

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

Question 7

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

Question 8

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

Question 9

Sunk costs are relevant to decisions about replacing plant assets.

Question 10

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 11

The relevant costs and revenues to consider in a special order decision include variable costs,fixed costs,and incremental revenues.

Question 12

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

Question 13

Nonfinancial considerations are relevant in decision-making.

Question 14

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

Question 15

Incremental revenue is relevant in decision-making.

Question 16

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

Question 17

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

Question 18

Opportunity costs are irrelevant in decision-making.

Question 19

Incremental analysis rarely requires the decision maker to exercise judgment.

Question 20

All incremental revenue or incremental costs are relevant.

Question 21

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 22

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 23

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

Question 24

Assuming that the MR Corporation has an inventory of 200 defective motors costing $450,000 to produce and $150,000 to repair,the repaired units can be sold for $425,000.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.

Question 25

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

Question 26

In addition to quantitative information,many nonfinancial factors must be taken into consideration when making a decision.

Question 27

Which cost is not relevant in making financial decisions?

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

Question 28

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 29

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

Question 30

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 31

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

Question 32

Sunk costs are relevant costs when considering a special order.

Question 33

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

Question 34

Assuming that the MR Corporation has an inventory of 200 defective motors costing $450,000 to produce and $150,000 to repair,the repaired units can be sold for $275,000.The company receives an offer to purchase these motors for $100,000 before repairing them.The company's decision should be to sell the motors at the offered price.

Question 35

Joint costs are the middle costs of a product.

Question 36

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 for $25,000 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 37

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 38

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 39

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 40

Maple syrup and pancakes are examples of joint products.

Question 41

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 per unit
B)$83 per unit
C)$95 per unit
D)$119 per unit

Question 42

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 43

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 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

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 46

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 47

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 48

[The following information applies to the questions displayed below.]
John Boyd Corporation manufactures and sells 1,000 tractors each month.The primary component in each tractor is the motor.John Boyd has the monthly capacity to produce 1,300 motors.The variable costs associated with manufacturing each motor are shown below:
Fixed manufacturing overhead per month (for up to 1,300 units of production)averages $27,000.Joan Reid,Inc.has offered to purchase 200 motors from John Boyd per month to be used in its own outboard motors.
If Joan Reid's order is rejected,what will be John Boyd 's average unit cost of manufacturing each motor?

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

Question 49

[The following information applies to the questions displayed below.]
John Boyd Corporation manufactures and sells 1,000 tractors each month.The primary component in each tractor is the motor.John Boyd has the monthly capacity to produce 1,300 motors.The variable costs associated with manufacturing each motor are shown below:
Fixed manufacturing overhead per month (for up to 1,300 units of production)averages $27,000.Joan Reid,Inc.has offered to purchase 200 motors from John Boyd per month to be used in its own outboard motors.
What is the incremental cost of producing each additional motor?

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

Question 50

[The following information applies to the questions displayed below.]
Fancy Furniture produced a batch of 2,000 coffee tables at a cost of $355,000.It was discovered that the entire batch was finished improperly.Fancy can sell the tables as seconds for $305,000 or spend an additional $315,000 to refinish them and sell them for $605,000.
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 51

Which is an example of joint products?

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

Question 52

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 53

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 54

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 55

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 56

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 charging Allen is:

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

Question 57

[The following information applies to the questions displayed below.]
Burns Industries currently manufactures and sells 20,000 power saws per month,although it has the capacity to produce 35,000 units per month.At the 20,000-unit-per-month level of production,the per-unit cost is $65,consisting of $40 in variable costs and $25 in fixed costs.Burns sells its saws to retail stores for $80 each.Allen Distributors has offered to purchase 5,000 saws per month at a reduced price.Burns can manufacture these additional units with no change in its present level of fixed manufacturing costs.
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 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

[The following information applies to the questions displayed below.]
JCN Industries normally produces and sells 5,000 keyboards for personal computers each month.Variable manufacturing costs amount to $25 per unit,and fixed costs are $146,000 per month.The regular sales price of the keyboards is $86 per unit.JCN has been approached by a foreign company that wants to purchase an additional 1,000 keyboards per month at a reduced price.Filling this special order would not affect JCN 's regular sales volume or fixed manufacturing costs.
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)The fixed manufacturing costs of $146,000 are not relevant to this decision regarding the special order.

Question 60

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 61

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 62

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 63

Speedy Co.manufactures four products.Direct materials and direct labor are available in sufficient quantities,but machine capacity is limited to 3,000 hours.Cost and revenue data for the four products are given below: Of the four products,which is the most profitable for Speedy Co.?

A)Product A
B)Product B
C)Product C
D)Product D

Question 64

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

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

Question 65

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 compared to selling them for scrap?

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

Question 66

[The following information applies to the questions displayed below.]
BT&T Corporation manufactures telephones.Recently,the company produced a batch of 600 defective telephones at a cost of $9,000.BT&T can sell these telephones as scrap for $9 each.It can also rework the entire batch at a cost of $6,500,after which the telephones could be sold for $20 per unit.
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 67

[The following information applies to the questions displayed below.]
Perry's Cycle Company manufactures annually 20,000 units of TushSeat,a bicycle seat used on many of the company's products,and also sold directly to retailers for $38 per unit.At the current level of production,the cost per unit to produce TushSeat consists of:
It has come to the attention of management that a seat of similar quality can be purchased from outside suppliers.
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 68

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 69

[The following information applies to the questions displayed below.]
Express,Inc. ,is considering replacing equipment.The following data are available:

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 70

[The following information applies to the questions displayed below.]
Creative Star Corporation produces three lines of desks from wood: Classic,Royal,and Standard.Cost and revenue data pertaining to each product are shown below:
Classic desks require five square yards of wood,Royal requires ten square yards,and Standard requires three square yards.High demand for each product line far exceeds the company's production capacity.
If Creative Star 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 71

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 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

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 74

[The following information applies to the questions displayed below.]
General Chemical Company (GCC)manufactures two products as part of a joint process: A1 and B1.Joint costs up to the split-off point total $22,000.The joint costs are allocated to A1 and B1 in proportion to their relative sales values.At the split-off point,product A1 can be sold for $42,000,whereas product B1 can be sold for $63,000.Product A1 can be processed further to make product A2,at an incremental cost of $38,000.A2 can be sold for $85,000.Product B1 can be processed further to make product B2,at an incremental cost of $48,000.B2 can be sold for $95,000.
Joint costs allocated to product B1 total:

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

Question 75

[The following information applies to the questions displayed below.]
BT&T Corporation manufactures telephones.Recently,the company produced a batch of 600 defective telephones at a cost of $9,000.BT&T can sell these telephones as scrap for $9 each.It can also rework the entire batch at a cost of $6,500,after which the telephones could be sold for $20 per unit.
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 total costs incurred 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 additional costs if it decides to rework the defective units.

Question 76

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 77

[The following information applies to the questions displayed below.]
Perry's Cycle Company manufactures annually 20,000 units of TushSeat,a bicycle seat used on many of the company's products,and also sold directly to retailers for $38 per unit.At the current level of production,the cost per unit to produce TushSeat consists of:
It has come to the attention of management that a seat of similar quality can be purchased from outside suppliers.
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)$23.

Question 78

[The following information applies to the questions displayed below.]
Creative Star Corporation produces three lines of desks from wood: Classic,Royal,and Standard.Cost and revenue data pertaining to each product are shown below:
Classic desks require five square yards of wood,Royal requires ten square yards,and Standard requires three square yards.High demand for each product line far exceeds the company's production capacity.
If Creative Star 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 79

[The following information applies to the questions displayed below.]
Creative Star Corporation produces three lines of desks from wood: Classic,Royal,and Standard.Cost and revenue data pertaining to each product are shown below:
Classic desks require five square yards of wood,Royal requires ten square yards,and Standard requires three square yards.High demand for each product line far exceeds the company's production capacity.
If Creative Star 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 80

[The following information applies to the questions displayed below.]
General Chemical Company (GCC)manufactures two products as part of a joint process: A1 and B1.Joint costs up to the split-off point total $22,000.The joint costs are allocated to A1 and B1 in proportion to their relative sales values.At the split-off point,product A1 can be sold for $42,000,whereas product B1 can be sold for $63,000.Product A1 can be processed further to make product A2,at an incremental cost of $38,000.A2 can be sold for $85,000.Product B1 can be processed further to make product B2,at an incremental cost of $48,000.B2 can be sold for $95,000.
Joint costs allocated to product A1 total:

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