Question 1

The purpose of incremental analysis is to find the alternative:

Accepted Answer

The purpose of incremental analysis is to find the alternative that contributes the most to profit. Incremental analysis involves comparing the additional revenues and costs associated with each alternative, and choosing the option that maximizes the overall contribution to profit. Therefore, option D is the best choice.

Question 2

Petnet Corporation purchased capital equipment two years ago for $50 000. The firm is considering selling the equipment outright for $20 000 or, alternatively, trading it in on new equipment for an allowance of $24 000 The sunk cost associated with the equipment is:

Accepted Answer

The sunk cost is the original purchase price of the equipment, which is $50,000. This cost has already been incurred and cannot be recovered, regardless of whether the equipment is sold outright or traded in. Therefore, the best choice is to keep the equipment since both options result in a loss.

Question 3

Which of these is not relevant in the evaluation of a make-or-buy decision?

Accepted Answer

Unavoidable costs are always relevant in the evaluation of a make-or-buy decision as it directly impacts the cost-effectiveness of the decision. Quality control, alternative uses of unused capacity, and potential adverse effects on business relationships are all relevant factors in the evaluation of a make-or-buy decision.

Question 4

Sunk costs are omitted from decision analysis:

Accepted Answer

Sunk costs are costs that have already been incurred and cannot be recovered. They are irrelevant to future decisions because they will remain the same regardless of the outcome of a decision. Therefore, they are always omitted from decision analysis.

Question 5

A sunk cost is a:

Accepted Answer

A sunk cost is a cost that has already been incurred and cannot be recovered regardless of the decision taken. Therefore, it is not relevant to decision making as it cannot be changed.

Question 6

A cost which differs between alternative courses of action is a:

Accepted Answer

Relevant costs are those that differ between alternatives and are important for decision-making, while sunk costs have already been incurred and cannot be recovered, controllable costs can be influenced by a manager's decisions, and non-joint costs are not related to the production of multiple products from a single process or cost source.

Question 7

List the following steps in the decision-making process in the order in which they are carried out.
I Gather information
II Evaluate the alternatives
III Define the problem
IV Choose a course of action

Accepted Answer

It is important to first define the problem before gathering information, then gather information to evaluate alternatives, and finally choose a course of action. This order ensures that the decision is based on a clear understanding of the problem and all available information.

Question 8

The term incremental cost refers to:

Accepted Answer

Incremental cost refers to the difference in total costs between alternatives.

Question 9

The point in the production process at which joint products become separate products is called the:

Accepted Answer

The split-off point is the point in the production process where joint products become separate products. This is the point where the costs incurred up to that point can be allocated to each of the individual products. The other answer choices are not relevant to this concept.

Question 10

Which of these is irrelevant in the evaluation of a special order?

Accepted Answer

Average production cost is irrelevant in the evaluation of a special order because it does not factor in the specific costs and revenues associated with the order. Differential income and differential cost are important because they compare the potential financial impact of accepting or rejecting the special order. Idle capacity is also important because it allows the business to consider whether or not it has the resources available to fulfill the special order without negatively impacting regular operations.

Question 11

In relation to joint products the objective of the sell or process further decision is to:

Accepted Answer

The objective of the sell or process further decision is to maximize profit. This means that the decision should be made based on whether selling the joint products at the split-off point would generate more profit than processing them further into separate products. If processing the joint products further results in higher revenues and lower costs than selling them at the split-off point, then processing further is the best option to maximize profit.

Question 12

Accepted Answer

The cost per dish is $4, so for 1200 dishes, the total cost is:
$4 x 1200 = $4800.

Question 13

In differential analysis irrelevant costs include costs that are:

Accepted Answer

Irrelevant costs are costs that do not differ between alternatives and cannot be avoided or changed, regardless of the decision made. Sunk costs are one type of irrelevant cost as they cannot be recovered or changed. Therefore, option C is the correct choice.

Question 14

If a firm has limited production capacity in one part of a sequential production operation, it can maximise profits by producing those items having the highest:

Accepted Answer

Maximizing profits in a situation of limited production capacity involves making the most efficient use of the available resources. When one part of a sequential production operation has limited capacity, the firm can maximize profits by producing those items that have the highest contribution margin per unit of the scarce resource. This ensures that the firm makes the most profitable use of the limited capacity available. Therefore, option C is the best choice.

Question 15

The decision to further process a joint product is influenced by the:

Accepted Answer

The decision to further process a joint product is primarily influenced by the increased costs of further processing versus the additional revenue that the further processing will generate. The focus is on future costs and revenues, not on costs that have already been incurred (sunk costs) or on how overhead or joint costs have been allocated.

Question 16

The decision to process a joint product further is influenced by:

Accepted Answer

The cost of further processing is a key factor in the decision to process a joint product further. It must be compared to the expected revenue from the sale of the processed product to determine whether it is worth the additional cost. The other factors listed may also be considered but are not as important as the cost of further processing.

Question 17

Top managers of Arctic Cruises are alarmed at the firm's latest income statement which shows a continuing decline in profits. In approaching this situation what is the first step management should take?

Accepted Answer

The first step in approaching a decline in profits is to define the problem and determine the objective to be accomplished. Without understanding the root cause of the decline, any changes made to personnel, entertainment, or customer service may not have a significant impact on the bottom line. Therefore, choice D is the best option as it sets the foundation for a strategic plan to address the decline in profits.

Question 18

Accepted Answer

The answer of 
...

Question 19

In incremental analysis estimated future costs that differ between alternative courses of action are called:

Accepted Answer

Relevant costs are the estimated future costs that differ between alternative courses of action and are considered in incremental analysis. The other options are not specifically related to future costs or alternative courses of action.

Question 20

The difference in total costs between two alternatives is referred to as the:

Accepted Answer

The difference in total costs between two alternatives is referred to as incremental cost. This is the relevant cost when making a decision between two options. Direct cost is the cost that can be directly attributed to a specific activity or product. Opportunity cost is the cost of the next best alternative forgone in order to pursue a certain action or decision. Sunk cost is a cost that has already been incurred and cannot be recovered.

Quiz 14: Differential Analysis, Profitability Analysis and Capital Budgeting