Deck 7: Incremental Analysis for Short-Term Decision Making

Question 1

Opportunity costs are important in special-order and make-or-buy decisions, but not in keep-or-drop decisions

Answer 1

False

Question 2

In deciding whether to eliminate a business segment, managers should consider which costs and benefits will change as a result of the decision

Answer 2

True

Question 3

If machine hours are a constraining factor, the product with the highest contribution margin per machine hour should be prioritized in production

Answer 3

True

Question 4

A relevant cost is one that will not change depending upon which alternative is selected

Question 5

Which of the following is not a step in the managerial decision-making process?

A) Identify the activity cost drivers.
B) Review the results of the decision-making process.
C) Determine the alternatives.
D) Evaluate the costs and benefits of the alternatives.

Question 6

A product should be processed further if no additional fixed costs are incurred in its processing

Question 7

A sunk cost is never a relevant cost

Question 8

Which of the following steps in the managerial decision-making process involves differential analysis?

A) Identify the decision problem.
B) Determine the decision alternatives.
C) Evaluate the costs and benefits of the alternatives.
D) Make the decision.

Question 9

The segment margin is the contribution margin of a particular segment

Question 10

Which of the following is not a step in the managerial decision-making process?

A) Identify the decision problem.
B) Calculate the payback period.
C) Determine the decision alternatives.
D) Evaluate the costs and benefits of the alternatives.

Question 11

When managers make a decision, they base it strictly on the numerical analysis performed in step three of the decision making process

Question 12

An avoidable cost is one that has already been spent

Question 13

Opportunity costs are not relevant when a company has idle capacity

Question 14

The final step in the decision making process is to:

A) make the decision.
B) identify the decision problem.
C) evaluate costs and benefits of alternatives.
D) review the results of the decision.

Question 15

The first step in the managerial decision making process is to:

A) identify the decision problem.
B) determine the decision alternatives.
C) make the decision.
D) evaluate costs and benefits.

Question 16

If a company has idle capacity, it means it has reached the limit on its resources

Question 17

A special-order decision analysis should not be used if the firm is operating at full capacity

Question 18

An opportunity cost is the foregone benefit of choosing to do one thing instead of another

Question 19

The quality of the goods in question is irrelevant to a make-or-buy decision

Question 20

A special-order decision analysis should not be used to make long-term pricing decisions

Question 21

Which of the following is not another term for relevant costs?

A) differential costs
B) incremental costs
C) opportunity costs
D) avoidable costs

Question 22

Which of the following types of decisions involves deciding whether to accept or reject an order that is outside the scope of normal sales?

A) Special-order
B) Make-or-buy
C) Continue or discontinue
D) Sell-or-process further

Question 23

The manager of Hampton, Inc. is trying to decide whether to make or buy a component of the product it sells. Which of the following costs and benefits is not relevant to the decision?

A) Direct labor cost involved in making the component
B) The purchase price of the component if it is bought
C) Variable manufacturing overhead involved in making the component
D) The selling price of the product

Question 24

Which of the following is not a true statement about capacity?

A) Capacity is a measure of the limit placed on a specific resource.
B) Opportunity costs are relevant when capacity of a critical resource is limited.
C) Opportunity costs are relevant when capacity of a critical resource is unlimited.
D) The number of people that will fit in a restaurant is an example of capacity.

Question 25

You wish to take an Excel course. (Step 1 of the decision-making process.) You may enroll at one within your school or you may take a community class at the local library. (Step 2 of the decision-making process.) You've gathered the following information to aid in your decision-making process. This information illustrates which step in the decision-making process?

A) Determine the decision alternatives.
B) Evaluate the costs and benefits of the alternatives.
C) Make the decision.
D) Review the results of the decision.

Question 26

Which of the following statements is false?

A) Sunk costs are never relevant.
B) Sunk costs are costs that occurred in the past.
C) To be relevant, a cost must be an opportunity cost.
D) To be relevant, a cost must occur in the future.

Question 27

You wish to take an Excel course. You may enroll at one within your school or you may take a community class at the local library. You've gathered the following information to aid in your decision-making process. Which of the following is not relevant to the decision?

A) Enrollment cost
B) Distance to course
C) Perceived value of convenience
D) Apartment rent

Question 28

You wish to take an Excel course. You may enroll at one within your school or you may take a community class at the local library. You've gathered the following information to aid in your decision-making process. Consider the transportation cost. At what point would you be indifferent between alternatives?

A) Transportation cost of $200 per class for the community course
B) Transportation cost of $150 per class for the community course
C) Transportation cost of $250 per class for the community course
D) Transportation cost of $300 per class for the community course

Question 29

A relevant cost is:

A) the foregone benefit of choosing to do one thing instead of another.
B) a cost that differs across decision alternatives.
C) a cost that has already been incurred.
D) a cost that is the same regardless of the alternative the manager chooses.

Question 30

Which of the following is not a step in the managerial decision-making process?

A) Identify the decision problem.
B) Review the results of the decision-making process.
C) Choose the appropriate hurdle rate.
D) Evaluate the costs and benefits of the alternatives.

Question 31

Costs that change across decision alternatives are:

A) accounting costs.
B) activity-based costs.
C) differential costs.
D) capital costs.

Question 32

Which of the following is not a step in the managerial decision-making process?

A) Identify the decision problem.
B) Review the results of the decision-making process.
C) Determine the decision alternatives.
D) Forecast the potential sales.

Question 33

You wish to take an Excel course. You may enroll at one within your school or you may take a community class at the local library. You've gathered the following information to aid in your decision-making process. If you enroll in the community class, you will be unable to work at your regular job on weekends for the eight weekend days when the class meets. If you typically earn $500 per weekend shift, which option would you choose (considering enrollment cost and opportunity cost)?

A) Neither alternative
B) College course
C) Community course
D) Both alternatives

Question 34

You wish to take an Excel course. You may enroll at one within your school or you may take a community class at the local library. You've gathered the following information to aid in your decision-making process. If you earn a scholarship that covers 95% of your tuition costs at the college (but cannot be applied to other learning opportunities), which option would you choose (based on net enrollment cost)?

A) Neither alternative
B) College course
C) Community course
D) Both alternatives

Question 35

The decision-making approach that focuses on factors that will change between alternatives is sometimes called all of the following except:

A) incremental analysis.
B) actual costing.
C) differential analysis.
D) relevant costing.

Question 36

You wish to take an Excel course. You may enroll at one within your school or you may take a community class at the local library. You've gathered the following information to aid in your decision-making process. Considering solely the enrollment cost of each alternative, which would you choose?

A) Neither alternative
B) College course
C) Community course
D) Both alternatives

Question 37

Which of the following is true of a firm that has reached the limit on its resources?

A) It has idle capacity.
B) Opportunity costs are now relevant.
C) It has no relevant costs.
D) It has excess capacity.

Question 38

The foregone benefit of choosing one alternative over another is measured by:

A) opportunity costs.
B) activity-based costs.
C) differential costs.
D) capital costs.

Question 39

You wish to take an Excel course. You may enroll at one within your school or you may take a community class at the local library. You've gathered the following information to aid in your decision-making process. Pretend transportation (gas, mileage, and parking) cost $200 per class session at the library. If you consider solely the cost - including transportation - of each alternative, which would you choose?

A) Neither alternative
B) College course
C) Community course
D) Both alternatives

Question 40

___________ is/are excluded from the incremental analysis because they will be incurred regardless of whether or not the company accepts the special order.

A) Direct materials
B) Direct labor
C) Variable overhead costs
D) Fixed overhead costs

Question 41

Cranberry has received a special order for 100 units of its product at a special price of $2,100. The product normally sells for $2,800 and has the following manufacturing costs: Assume that Cranberry has sufficient capacity to fill the order without harming normal production and sales. If Cranberry accepts the order, what effect will the order have on the company's short-term profit?

A) $42,000 decrease
B) $42,000 increase
C) $70,000 decrease
D) $28,000 increase

Question 42

Violet has received a special order for 100 units of its product. The product normally sells for $2,000 and has the following manufacturing costs: Assume that Violet has sufficient capacity to fill the order without harming normal production and sales. What minimum price should Violet charge to achieve a $25,000 incremental profit?

A) $1,300
B) $1,550
C) $1,680
D) $1,800

Question 43

Cotton Corp. currently makes 10,000 subcomponents a year in one of its factories. The unit costs to produce are: An outside supplier has offered to provide Cotton Corp with the 10,000 subcomponents at a $84.50 per unit price. Fixed overhead is not avoidable. If Cotton Corp accepts the outside offer, what will be the effect on short-term profits?

A) $260,000 increase
B) $195,000 decrease
C) no change
D) $65,000 increase

Question 44

Avocado has received a special order for 2,000 units of its product at a special price. The product normally sells for $400 and has the following manufacturing costs: Assume that Avocado has sufficient capacity to fill the order. What special order price should Avocado charge to make a $20,000 incremental profit?

A) $400
B) $360
C) $270
D) $260

Question 45

Dot has received a special order for 2,000 units of its product at a special price. The product normally sells for $200 and has the following manufacturing costs: Assume that Dot has sufficient capacity to fill the order without harming normal production and sales. What minimum price should Dot charge to achieve a $50,000 incremental profit?

A) $225
B) $155
C) $168
D) $180

Question 46

Almond has received a special order for 6,000 units of its product at a special price of $90. The product normally sells for $120 and has the following manufacturing costs: Assume that Almond has sufficient capacity to fill the order. If Almond accepts the order, what effect will the order have on the company's short-term profit?

A) $72,000 increase
B) $180,000 increase
C) $252,000 decrease
D) zero

Question 47

Be cautious of __________ expressed on a per-unit basis when weighing make-or-buy decisions. The total value (instead of the per unit value) is relevant to the decision.

A) variable costs
B) fixed costs
C) opportunity costs
D) relevant costs

Question 48

Potter has received a special order for 10,000 units of its product at a special price of $24. The product normally sells for $32 and has the following manufacturing costs: Potter is currently operating at full capacity and cannot fill the order without harming normal production and sales. If Potter accepts the order, what effect will the order have on the company's short-term profit?

A) $64,000 decrease
B) $64,000 increase
C) $80,000 decrease
D) $16,000 increase

Question 49

Pinto Co. has received a special order for 2,000 units of its product at a special price of $75. The product normally sells for $100 and has the following manufacturing costs: Assume that Pinto Co. has sufficient capacity to fill the order without harming normal production and sales. If Pinto Co. accepts the order, what effect will the order have on the company's short-term profit?

A) $30,000 decrease
B) $30,000 increase
C) $50,000 decrease
D) $20,000 increase

Question 50

What are the decision alternatives in a special-order decision?

A) To make or buy the product.
B) To continue or discontinue the product.
C) To accept or reject the offer.
D) To sell-or-process further.

Question 51

Crystal has received a special order for 2,000 units of its product. The product normally sells for $200 and has the following manufacturing costs: Crystal is currently operating at full capacity and cannot fill the order without harming normal production and sales. What minimum price should Crystal charge to earn an incremental profit of $50,000?

A) $175
B) $200
C) $225
D) $155

Question 52

Ross has received a special order for 10,000 units of its product at a special price of $30. The product normally sells for $40 and has the following manufacturing costs: Assume that Ross has sufficient capacity to fill the order. If Ross accepts the order, what effect will the order have on the company's short-term profit?

A) $40,000 decrease
B) $180,000 increase
C) $60,000 decrease
D) $80,000 increase

Question 53

A make-or-buy decision is the same as:

A) an outsourcing decision.
B) an opportunity cost.
C) a keep-or-drop decision.
D) a sunk cost.

Question 54

Which of the following costs is not relevant in a special-order decision?

A) Direct labor
B) Direct materials
C) Variable overhead
D) Fixed overhead

Question 55

Cotton Corp. currently makes 10,000 subcomponents a year in one of its factories. The unit costs to produce are: An outside supplier has offered to provide Cotton Corp with the 10,000 subcomponents at a $84.50 per unit price. Fixed overhead is not avoidable. If Cotton Corp rejects the outside offer, what will be the effect on short-term profits?

A) $260,000 increase
B) $195,000 decrease
C) no change
D) $65,000 increase

Question 56

Cotton Corp. currently makes 10,000 subcomponents a year in one of its factories. The unit costs to produce are: An outside supplier has offered to provide Cotton Corp with the 10,000 subcomponents at a $84.50 per unit price. Fixed overhead is not avoidable. What is the maximum price Cotton Corp should pay the outside supplier?

A) $65.00
B) $84.50
C) $91.00
D) $58.50

Question 57

Which of the following is an example of how a service firm might turn unused capacity into revenue using incremental analysis?

A) An instructor agrees to add an additional student to a class.
B) An accountant with no extra time agrees to do an extra client's tax return during busy season.
C) A manufacturing firm that rents assembly line space to a complementary company.
D) A train company uses a last-minute app to fill empty seats and makes long-term pricing decisions based on average revenue.

Question 58

Walnut has received a special order for 2,000 units of its product at a special price of $270. The product normally sells for $360 and has the following manufacturing costs: Walnut is currently operating at full capacity and cannot fill the order without harming normal production and sales. If Walnut accepts the order, what effect will the order have on the company's short-term profit?

A) $108,000 decrease
B) $108,000 increase
C) $180,000 decrease
D) zero

Question 59

Peach has received a special order for 10,000 units of its product. The product normally sells for $20 and has the following manufacturing costs: Assume that Peach has sufficient capacity to fill the order. What price should Peach charge to make a $10,000 incremental profit?

A) $20
B) $17
C) $12
D) $15

Question 60

Which of the following types of decisions involves deciding whether to perform a particular activity in-house or purchase it from an outside supplier?

A) Special-order
B) Make-or-buy
C) Continue or discontinue
D) Sell-or-process further

Question 61

Which of the following types of decisions involves deciding whether to eliminate a particular division or segment of the business?

A) Special-order
B) Make-or-buy
C) Continue-or-discontinue
D) Sell-or-process further

Question 62

Olive Corp. currently makes 20,000 subcomponents a year in one of its factories. The unit costs to produce are: An outside supplier has offered to provide Olive Corp with the 20,000 subcomponents at a $36 per unit price. Fixed overhead is not avoidable. What is the maximum price Olive Corp should pay the outside supplier?

A) $32
B) $36
C) $40
D) $44

Question 63

A ______________ is one that can be attributed to a specific segment of the business.

A) common fixed cost
B) direct fixed cost
C) variable fixed cost
D) fixed variable cost

Question 64

Franklin, Inc. has two divisions, Seward and Charles. Following is the income statement for the previous year: Of the total fixed costs, $300,000 are common fixed costs that are allocated equally between the divisions. How much did the Charles division incur in direct fixed costs?

A) $20,000
B) $150,000
C) $170,000
D) $300,000

Question 65

Olive Corp. currently makes 20,000 subcomponents a year in one of its factories. The unit costs to produce are: An outside supplier has offered to provide Olive Corp with the 20,000 subcomponents at a $36 per unit price. Fixed overhead is not avoidable. If Olive Corp accepts the outside offer, what will be the effect on short-term profits?

A) $160,000 decrease
B) $320,000 increase
C) $160,000 increase
D) $80,000 decrease

Question 66

Manor, Inc. currently manufactures 1,000 subcomponents per month in one of its factories. The unit costs to produce the subcomponents are: The unit costs to produce are: Manor is considering purchasing the subcomponents from an outside supplier, who normally charges $300 per unit. The supplier also has an "Exclusive Buyer's Club" which costs $30,000 per month to join, but whose members can purchase the subcomponents for $250 per unit. Fixed overhead is not avoidable. How many units would Manor need to order per month to make it worth it to join the "Exclusive Buyer's Club"?

A) 800
B) 1,000
C) 1,200
D) 1,500

Question 67

Clifford, Inc. currently manufactures 2,000 subcomponents in one of its factories. The current unit costs to produce the subcomponents are: Due to a labor strike, Clifford is considering purchasing the subcomponents from an outside supplier for $250 per unit rather than paying the 10% increase in direct labor costs demanded by the union. Fixed overhead is not avoidable. If Clifford purchases the subcomponent from the outside supplier, how much will profit differ from what it would be if it manufactured the subcomponents with the increase in direct labor cost?

A) $30,000 less
B) $20,000 less
C) $10,000 less
D) $20,000 more

Question 68

Power Inc. has two divisions, Windsor and Ridge. Following is the income statement for the past month: What would Power's profit margin be if the Windsor division was dropped and all fixed costs are unavoidable?

A) $0
B) $80,000 loss
C) $42,00 profit
D) $80,000 profit

Question 69

Olive Corp. currently makes 20,000 subcomponents a year in one of its factories. The unit costs to produce are: An outside supplier has offered to provide Olive Corp with the 20,000 subcomponents at a $36 per unit price. Fixed overhead is not avoidable. If Olive Corp rejects the outside offer, what will be the effect on short-term profits?

A) $80,000 increase
B) no change
C) $160,000 decrease
D) $80,000 decrease

Question 70

The accounting firm of Pie and Lowell is examining its client base to determine how profitable its regular clients are. Its analysis indicates that Chico, Inc. paid $116,000 in fees last year, but cost the firm $124,000 ($106,000 in billable labor, supplies, and copying, and $18,000 in allocated common fixed costs). If Pie and Lowell dropped Chico, Inc. as a client, and all fixed costs are unavoidable, how would profit be affected?

A) $0
B) Increase $8,000
C) Decrease $10,000
D) Decrease $116,000

Question 71

Which of the following is irrelevant to the decision to eliminate an unprofitable segment?

A) The segment margin
B) Direct fixed costs
C) Common fixed costs
D) Segment revenue

Question 72

Davenport Inc. has two divisions, Howard and Jones. Following is the income statement for the past month: What would Davenport's profit margin be if the Jones division was dropped?

A) $80,000 loss
B) $100,000 loss
C) $50,000 profit
D) $70,000 profit

Question 73

Moss, Inc. currently processes payroll in its accounting department, which costs the following per month: Moss could use a payroll processing firm instead, which would cost $1,350 per month, but the firm would provide all supplies. If Moss used the outside firm, the accountants who currently process payroll would be reassigned to other accounting tasks. How much would monthly costs be affected if Moss switched to the payroll processing firm?

A) Increase $875
B) Decrease $475
C) Increase $225
D) Decrease $225

Question 74

Chafford, Inc. currently manufactures 2,000 subcomponents in one of its factories. The unit costs to produce the subcomponents are: Due to a labor strike, Chafford is considering purchasing the subcomponents from an outside supplier for $250 per unit. The union is demanding a 20% increase in pay for direct labor. Fixed overhead is not avoidable. How much could Chafford increase their pay before it would be more advantageous to purchase the subcomponents from the outside supplier?

A) 5%
B) 15%
C) 50%
D) 75%

Question 75

Market Inc. has two divisions, Talbot and Heather. Following is the income statement for the past month: What would Market's profit margin be if the Talbot division was dropped and all fixed costs are unavoidable?

A) $500 loss
B) $79,000 loss
C) $33,500 profit
D) $213,000 profit

Question 76

Clay Inc. has two divisions, Myrtle and Laurel. Following is the income statement for the previous year: What would Clay's profit margin be if the Laurel division was dropped and all fixed costs are unavoidable?

A) $99,625 profit
B) $91,000 profit
C) $384,000 profit
D) $71,000 loss

Question 77

Franklin, Inc. has two divisions, Seward and Charles. Following is the income statement for the previous year: Of the total fixed costs, $300,000 are common fixed costs that are allocated equally between the divisions. What is Seward's segment margin?

A) $230,000
B) $380,000
C) $405,000
D) $600,000

Question 78

The law firm of Regal and Porter is examining its client base to determine how profitable its regular clients are. Its analysis indicates that Hawthorne, Inc. paid $179,200 in fees last year, but cost the firm $208,600 ($168,000 in billable labor, supplies, and copying, and $40,600 in allocated common fixed costs). If Regal and Porter dropped Hawthorne, Inc. as a client, and all fixed costs are unavoidable, how would profit be affected?

A) $0
B) Increase $29,400
C) Decrease $11,200
D) Decrease $179,200

Question 79

Manor, Inc. currently manufactures 1,000 subcomponents per month in one of its factories. The unit costs to produce the subcomponents are: Manor is considering purchasing the subcomponents from an outside supplier, who normally charges $300 per unit. The supplier also has an "Exclusive Buyer's Club" which costs $30,000 per month to join, but whose members can purchase the subcomponents for $250 per unit. Fixed overhead is not avoidable. If Manor chose to purchase the subcomponents using the cheaper of the two buying options, what would be the effect on profit?

A) Decrease $25,000
B) Decrease $5,000
C) Increase $20,000
D) Increase $75,000

Question 80

Franklin, Inc. has two divisions, Seward and Charles. Following is the income statement for the previous year: Of the total fixed costs, $300,000 are common fixed costs that are allocated equally between the divisions. What would Franklin's profit margin be if Charles were dropped?

A) $60,000
B) $80,000
C) $100,000
D) $230,000