Deck 7: Incremental Analysis

Question 1

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

Answer 1

True

Question 2

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.

Answer 2

False

Question 3

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

Answer 3

True

Question 4

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

Question 5

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

Question 6

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 7

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

Question 8

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 9

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

Question 10

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

Question 11

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

Question 12

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

Question 13

Incremental analysis is also known as differential analysis.

Question 14

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

Question 15

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

Question 16

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

Question 17

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 18

Incremental costs are always relevant.

Question 19

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

Question 20

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

Question 21

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 22

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 23

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 24

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

Question 25

Which one of the following is non-financial 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 26

Equipment which is NOT fully depreciated should always be replaced.

Question 27

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

Question 28

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

Question 29

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 30

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

Question 31

The book value of old equipment is an opportunity cost.

Question 32

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 33

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 34

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

Question 35

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 36

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 37

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 38

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 39

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

Question 40

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

Question 41

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 42

Truckel, Inc.currently manufactures a wicket as its main product.The costs per unit are as follows: $$\begin{array} { l r } \text { Direct materials and direct labour } & \$ 11.00 \\\text { Variable overhead } & 3.00 \\\text { Fixed overhead } & \$ 2.00 \\\text { Total } & \$ 22.00\end{array}$$ 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 43

Use the following information for questions 6
Eminen Music produces 60,000 blank CDs on which to record music.The CDs have the following costs: $$\begin{array} { l r } \text { Direct Materials } & \$ 11,000 \\\text { Direct Labour } & 15,000 \\\text { Variable Overhead } & 3,000 \\\text { Fixed Overhead } & 7,000\end{array}$$

-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 44

Specik, Inc.is considering the following alternatives: $\begin{array}{lcc}&\text { Alternative } 1&\text { Alternative } 2\\\text { Revenues } & \$ 120,000 & \$ 120,000 \\\text { Variable costs } & 60,000 & 65,000 \\\text { Fixed costs } & 35,000 & 39,000\end{array}$ 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 45

Which of the following statements is true?

A)All variable costs are relevant costs.
B)Only those variable costs that differ between alternatives are relevant costs.
C)Fixed costs are never relevant costs.
D)All fixed costs are relevant costs as they impact on overall unit costs.

Question 46

Use the following information for questions 6
Eminen Music produces 60,000 blank CDs on which to record music.The CDs have the following costs: $$\begin{array} { l r } \text { Direct Materials } & \$ 11,000 \\\text { Direct Labour } & 15,000 \\\text { Variable Overhead } & 3,000 \\\text { Fixed Overhead } & 7,000\end{array}$$

-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 47

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 48

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 49

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 50

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 51

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 52

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 53

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 54

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 55

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 56

Costs that are relevant for future decision making in a manufacturing environment include

A)only variable manufacturing costs.
B)only fixed manufacturing costs.
C)all manufacturing costs.
D)only future costs that impact on the alternatives presented.

Question 57

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 58

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 59

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 60

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 will existing customers 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 61

The cost to produce Part A was $5 per unit in 2015.During 2016, it has increased to $8 per unit.In 2016, 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 62

Excess capacity decisions for management involve

A)decreasing sales prices to stimulate demand.
B)accepting special orders.
C)outsourcing some products to specialist manufacturers.
D)mixing production to reduce variable costs.

Question 63

Wishnell Toys can make 5,000 toy robots with the following costs: $$\begin{array} { l r } \text { Direct Materials } & \$ 74,000 \\\text { Direct Labour } & 30,000 \\\text { Variable Overhead } & 23,000 \\\text { Fixed Overhead } & 15,000\end{array}$$ 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

Question 64

Which one of the following does NOT affect a make or buy decision?

A)variable manufacturing costs
B)opportunity cost
C)incremental revenue
D)direct labour

Question 65

A factory is operating at less than 100% capacity.Potential additional business will NOT use up the remainder of the plant capacity.Given the following list of costs, which one should be ignored in a decision to produce additional units of product?

A)variable selling expenses
B)fixed factory overhead
C)direct labour
D)contribution margin of additional units

Question 66

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 67

When management has excess capacity available to it in the short run, which of the following would be the best path to follow?

A)Consider ways to reduce its fixed costs.
B)Consider accepting special orders.
C)Consider outsourcing certain products.
D)Consider mixing its product offerings in a new way.

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

Galley Industries can produce 500 units of a necessary component part with the following costs: $$\begin{array} { l r } \text { Direct Materials } & \$ 75,000 \\\text { Direct Labour } & 20,000 \\\text { Variable Overhead } & 60,000 \\\text { Fixed Overhead } & 10,000\end{array}$$ 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 70

What non-financial factors should be considered when making a decision about buying rather than making a component of a company's product?

A)Is the quality of the purchased component acceptable?
B)Will the outside supplier increase prices significantly in the future?
C)Will the supplier deliver on time?
D)all of the above

Question 71

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 72

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 73

Use the following information for questions
Hermantic, Inc.can produce 100 units of a component part with the following costs: $$\begin{array} { l r } \text { Direct Materials } & \$ 30,000 \\\text { Direct Labour } & 13,000 \\\text { Variable Overhead } & 32,000 \\\text { Fixed Overhead } & 22,000\end{array}$$

-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 74

When making a decision to accept a special order, management must consider

A)the impact that additional manufacturing time will have on unit costs of its current products.
B)whether the purchaser will accept additional high costs of a special order.
C)whether a lower price will convince the purchaser to become a regular customer.
D)whether capacity exists to meet the demand of the order.

Question 75

Litto Fray's produces corn chips.The cost of one batch is below: $$\begin{array} { l r } \text { Direct materials } & \$ 18.00 \\\text { Direct labour } & 13.00 \\\text { Variable overhead } & 12.00 \\\text { Fixed overhead } & 14.00\end{array}$$ An outside supplier has offered to produce the corn chips for $26 per batch.How much will Litto Fray save if it accepts the offer?

A)$2.00 per batch
B)$17.00 per batch
C)$31.00 per batch
D)$6.00 per batch

Question 76

When a company does NOT have sufficient capacity to fill an order for less than the current selling price, what additional factor must be taken into consideration?

A)The decision process is the same whether there is sufficient capacity or not.
B)How will the lack of capacity affect the quality of the product?
C)Can resources be transferred from producing product to sell at the current price to producing product at the special price?
D)opportunity costs

Question 77

Peters, Inc.produces chocolate chip cookies.Costs for producing one batch appear below: $$\begin{array} { l r } \text { Direct materials } & \$ 8.00 \\\text { Direct labour } & 3.00 \\\text { Variable overhead } & 1.00 \\\text { Fixed overhead } & 4.00\end{array}$$ 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 pay?

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

Question 78

It costs Fortune Company $12 of variable and $5 of fixed costs to produce one bathroom scale which normally sells for $35.A foreign wholesaler offers to purchase 1,000 scales at $16 each.Fortune would incur special shipping costs of $2 per scale if the order were accepted.Fortune has sufficient unused capacity to produce the 1,000 scales.If the special order is accepted, what will be the effect on net income?

A)$2,000 increase
B)$2,000 decrease
C)$3,000 decrease
D)$15,000 increase

Question 79

Use the following information for questions
Hermantic, Inc.can produce 100 units of a component part with the following costs: $$\begin{array} { l r } \text { Direct Materials } & \$ 30,000 \\\text { Direct Labour } & 13,000 \\\text { Variable Overhead } & 32,000 \\\text { Fixed Overhead } & 22,000\end{array}$$

-If Hermantic, Inc.purchases the units externally for $80,000, by what amount will its total costs change? Fixed costs are not avoidable if they purchase externally.

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 80

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? What are the savings of this choice?

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