Deck 7: Incremental Analysis

Question 1

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.

Answer 1

True

Question 2

It is always better to sell now rather than process further because of the time value of money.

Answer 2

False

Question 3

If a company has excess capacity and present markets will not be affected, it would be profitable to accept an order at a special unit price even though the price is less than the unit variable cost to manufacture the item.

Answer 3

False

Question 4

A decision whether to continue to make a product or buy it externally depends on the external price and the amount of variable and fixed costs that can be eliminated assuming no alternative uses of resources.

Question 5

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 6

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

Question 7

Accountants are mainly involved in developing nonfinancial information for management's consideration in choosing among alternatives.

Question 8

Decision-making involves choosing among alternative courses of action.

Question 9

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

Question 10

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

Question 11

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

Question 12

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

Question 13

In making decisions, management ordinarily considers both financial and nonfinancial information.

Question 14

A company should never accept an order for its product at less than its regular sales price.

Question 15

In a sell or process further decision, management should process further as long as the incremental revenues from additional processing exceed the incremental variable costs.

Question 16

An important step in management's decision-making process is to determine and evaluate possible courses of action.

Question 17

If an incremental make or buy analysis indicates that it is cheaper to buy rather than make an item, management should always make the decision to choose the lowest cost alternative.

Question 18

A special one-time order should never be accepted if the unit sales price is less than the unit variable cost.

Question 19

Financial data are developed for a course of action under an incremental basis and then compared to data developed under a differential basis before a decision is made.

Question 20

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

Question 21

The process used to identify the financial data that change under alternative courses of action is called allocation of limited resources.

Question 22

Internal reports that review the actual impact of decisions are prepared by

A) department heads.
B) the controller.
C) management accountants.
D) factory workers.

Question 23

In a decision to retain or replace old equipment, the salvage value of the old equipment is relevant in incremental analysis.

Question 24

From a quantitative standpoint, a segment should be eliminated if its contribution margin is less than the fixed costs that can be eliminated.

Question 25

Which of the following stages of the management decision-making process is improperly sequenced?

A) Evaluate possible courses of action $\rightarrow$ Make decision.
B) Assign responsibility for the decision $\rightarrow$ Identify the problem.
C) Identify the problem $\rightarrow$ Determine possible courses of action.
D) Assign responsibility for decision $\rightarrow$ Determine possible courses of action.

Question 26

Many of the decisions involving incremental analysis have qualitative features, but since they are not easily measured they should be ignored.

Question 27

Which of the following will always be a relevant cost?

A) Sunk cost
B) Fixed cost
C) Variable cost
D) Opportunity cost

Question 28

A major accounting contribution to the managerial decision-making process in evaluating possible courses of action is to

A) assign responsibility for the decision.
B) provide relevant revenue and cost data about each course of action.
C) determine the amount of money that should be spent on a project.
D) decide which actions that management should consider.

Question 29

The elimination of an unprofitable product line may adversely affect the remaining product lines.

Question 30

Which is the first step in the management decision-making process?

A) Determine and evaluate possible courses of action.
B) Review results of the decision.
C) Identify the problem and assign responsibility.
D) Make a decision.

Question 31

It is better not to replace old equipment if it is not fully depreciated.

Question 32

If a company is operating at full capacity, the incremental costs of a special order will likely include fixed manufacturing costs.

Question 33

The basic decision rule in a sell or process further decision is: sell without further processing as long as the incremental revenue from processing exceeds the incremental processing costs.

Question 34

Costs that will differ between alternatives and influence the outcome of a decision are

A) sunk costs.
B) unavoidable costs.
C) relevant costs.
D) product costs.

Question 35

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

Question 36

Accounting contributes to management's decision-making process through internal reports that review the actual impact of the decision.

Question 37

A revenue that differs between alternatives and makes a difference in decision-making is called a(n)

A) sales revenue.
B) incremental revenue.
C) unavoidable revenue.
D) irrelevant revenue.

Question 38

Which of the following is an irrelevant cost?

A) An avoidable cost
B) An incremental cost
C) A sunk cost
D) An opportunity cost

Question 39

Which of the following steps in the management decision-making process does not generally involve the managerial accountant?

A) Determine possible courses of action
B) Make the appropriate decision based on relevant data
C) Prepare internal reports that review the impact of decisions
D) None of these answers are correct.

Question 40

Alvarez Company is considering the following alternatives: $\begin{array}{lrr}&\text { Alternative A }&\text { Alternative B }\\\text { Revenues } & \$ 50,000 & \$ 60,000 \\\text { Variable costs } & 30,000 & 30,000 \\\text { Fixed costs } & 10,000 & 16,000\end{array}$ What is the incremental profit?

A) $10,000
B) $0
C) $6,000
D) $4,000

Question 41

If a company anticipates that other sales will be affected by the acceptance of a special order, then

A) lost sales should be considered in the incremental analysis.
B) lost sales should not be considered in the incremental analysis.
C) the order should not be accepted.
D) the order will only be accepted if the plant is below capacity.

Question 42

Baden Company manufactures a product with a unit variable cost of $100 and a unit sales price of $176. Fixed manufacturing costs were $480,000 when 10,000 units were produced and sold. The company has a one-time opportunity to sell an additional 1,000 units at $140 each in a foreign market which would not affect its present sales. If the company has sufficient capacity to produce the additional units, acceptance of the special order would affect net income as follows:

A) Income would decrease by $8,000.
B) Income would increase by $8,000.
C) Income would increase by $140,000.
D) Income would increase by $40,000.

Question 43

Incremental analysis is synonymous with

A) difficult analysis.
B) differential analysis.
C) gross profit analysis.
D) derivative analysis.

Question 44

Relevant costs are always

A) fixed costs.
B) variable costs.
C) avoidable costs.
D) sunk costs.

Question 45

Which of the following is a true statement about cost behaviors in incremental analysis?
1. Fixed costs will not change between alternatives.
2. Fixed costs may change between alternatives.
3. Variable costs will always change between alternatives.

A) 1
B) 2
C) 3
D) 2 and 3

Question 46

Which of the following is true if a company can accept a special order without affecting its regular sales and is within plant capacity?

A) Net income will not be affected.
B) Net income will increase if the special sales price per unit exceeds the unit variable costs.
C) Net income will decrease.
D) Additional fixed costs will probably be incurred.

Question 47

Incremental analysis is most useful

A) in developing relevant information for management decisions.
B) in choosing between capital budgeting methods.
C) in evaluating the master budget.
D) as a replacement technique for variance analysis.

Question 48

A company is considering the following alternatives: . $\begin{array}{lrr}&\text { Alternative 1 }&\text { Alternative 2 }\\\text { Revenues } & \$ 120,000 & \$ 120,000 \\\text { Variable costs } & 60,000 & 70,000 \\\text { Fixed costs } & 35,000 & 35,000\end{array}$ 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 49

Which of the following is not a true statement?

A) Incremental analysis might also be referred to as differential analysis.
B) Incremental analysis is the same as CVP analysis.
C) Incremental analysis is useful in making decisions.
D) Incremental analysis focuses on decisions that involve a choice among alternative courses of action.

Question 50

Incremental analysis would not be appropriate for

A) a make or buy decision.
B) an allocation of limited resource decision.
C) elimination of an unprofitable segment.
D) analysis of manufacturing variances.

Question 51

Miley, Inc. has excess capacity. Under what situations should the company accept a special order for less than the current selling price?

A) Never
B) When additional fixed costs must be incurred to accommodate the order
C) When the company thinks it can use the cheaper materials without the customer's knowledge
D) When incremental revenues exceed incremental costs

Question 52

Incremental analysis would be appropriate for

A) acceptance of an order at a special price.
B) a retain or replace equipment decision.
C) a sell or process further decision.
D) All of these answers are correct.

Question 53

The process of evaluating financial data that change under alternative courses of action is called

A) double entry analysis.
B) contribution margin analysis.
C) incremental analysis.
D) cost-benefit analysis.

Question 54

The source of data to serve as inputs in incremental analysis is generated by

A) market analysts.
B) engineers.
C) accountants.
D) All of these answers are correct.

Question 55

In incremental analysis,

A) only costs are analyzed.
B) only revenues are analyzed.
C) both costs and revenues may be analyzed.
D) both costs and revenues that stay the same between alternate courses of action will be analyzed.

Question 56

If a plant is operating at full capacity and receives a one-time opportunity to accept an order at a special price below its usual price, then

A) only variable costs are relevant.
B) fixed costs are not relevant.
C) the order will likely be accepted.
D) the order will likely be rejected.

Question 57

If a company must expand capacity to accept a special order, it is likely that there will be

A) an increase in unit variable costs.
B) no increase in fixed costs.
C) an increase in variable and fixed costs per unit.
D) an increase in fixed costs.

Question 58

It costs Garner 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 3,000 scales at $15 each. Garner would incur special shipping costs of $1 per scale if the order were accepted. Garner has sufficient unused capacity to produce the 3,000 scales. If the special order is accepted, what will be the effect on net income?

A) $6,000 increase
B) $6,000 decrease
C) $9,000 decrease
D) $45,000 increase

Question 59

In incremental analysis,

A) costs are not relevant if they change between alternatives.
B) all costs are relevant if they change between alternatives.
C) only fixed costs are relevant.
D) only variable costs are relevant.

Question 60

Nonfinancial information that management might evaluate in making a decision would not include

A) employee turnover.
B) contribution margin.
C) the environment.
D) the corporate profile in the community.

Question 61

It costs Lannon Fields $28 of variable costs and $12 of allocated fixed costs to produce an industrial trash can that sells for $60. A buyer in Mexico offers to purchase 3,000 units at $36 each. Lannon Fields has excess capacity and can handle the additional production. What effect will acceptance of the offer have on net income?

A) Decrease $12,000
B) Increase $12,000
C) Increase $108,000
D) Increase $24,000

Question 62

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 labor
D) Contribution margin of additional units

Question 63

Use the following information for questions
Clemente Inc. incurs the following costs to produce 10,000 units of a subcomponent: $$\begin{array} { l l } \text { Direct materials } & \$ 8,400 \\\text { Direct labor } & 11,250 \\\text { Variable overhead } & 12,600 \\\text { Fixed overhead } & 16,200\end{array}$$ An outside supplier has offered to sell Clemente the subcomponent for $2.85 a unit.

-If Clemente accepts the offer, it could use the production capacity to produce another product that would generate additional income of $3,600. The increase (decrease) in net income from accepting the offer would be

A) $150.
B) $7,350.
C) $(150).
D) $(3,600).

Question 64

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 the 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 65

Use the following information for questions
Ortiz Co. produces 5,000 units of part A12E. The following costs were incurred for that level of production: $$\begin{array} { l r } \text { Direct materials } & \$ 55,000 \\\text { Direct labor } & 160,000 \\\text { Variable overhead } & 75,000 \\\text { Fixed overhead } & 175,000\end{array}$$ If Ortiz buys the part from an outside supplier, $40,000 of the fixed overhead is avoidable.

-What is the relevant cost per unit of part A12E?

A) $58
B) $85
C) $93
D) $66

Question 66

Martin Company incurred the following costs for 70,000 units: Variable costs $420,000
Fixed costs 392,000
Martin has received a special order from a foreign company for 3,000 units. There is sufficient capacity to fill the order without jeopardizing regular sales. Filling the order will require spending an additional $6,300 for shipping.
If Martin wants to break even on the order, what should the unit sales price be?

A) $6.00
B) $8.10
C) $11.60
D) $13.70

Question 67

A company contemplating the acceptance of a special order has the following unit cost behavior, based on 10,000 units: $$\begin{array} { l r } \text { Direct materials } & \$ 4 \\\text { Direct labor } & 10 \\\text { Variable overhead } & 8 \\\text { Fixed overhead } & 6\end{array}$$ A foreign company wants to purchase 2,000 units at a special unit price of $25. The normal price per unit is $40. In addition, a special stamping machine will have to be purchased for $4,000 in order to stamp the foreign company's name on the product. The incremental income (loss) from accepting the order is

A) $6,000.
B) $2,000.
C) $(6,000).
D) $(2,000).

Question 68

Able Company's unit manufacturing cost is: $\begin{array}{lr}\text { Variable Costs } & \$ 50 \\\text { Fixed Costs } & 25\end{array}$ A special order for 2,000 units has been received from a foreign company. The unit price requested is $55. The normal unit price is $80. If the order is accepted, unit variable costs will increase by $2 for additional freight costs. If the order is accepted, incremental profit (loss) will be

A) $(46,000).
B) $6,000.
C) $(40,000).
D) $10,000.

Question 69

Use the following information for questions
Clemente Inc. incurs the following costs to produce 10,000 units of a subcomponent: $$\begin{array} { l l } \text { Direct materials } & \$ 8,400 \\\text { Direct labor } & 11,250 \\\text { Variable overhead } & 12,600 \\\text { Fixed overhead } & 16,200\end{array}$$ An outside supplier has offered to sell Clemente the subcomponent for $2.85 a unit.

-If Clemente accepts the offer, by how much will net income increase (decrease)?

A) $3,750
B) $19,950
C) $(8,850)
D) $(2,850)

Question 70

Use the following information for questions
Ortiz Co. produces 5,000 units of part A12E. The following costs were incurred for that level of production: $$\begin{array} { l r } \text { Direct materials } & \$ 55,000 \\\text { Direct labor } & 160,000 \\\text { Variable overhead } & 75,000 \\\text { Fixed overhead } & 175,000\end{array}$$ If Ortiz buys the part from an outside supplier, $40,000 of the fixed overhead is avoidable.

-If the outside supplier offers a unit price of $68, net income will increase (decrease) by

A) $(10,000).
B) $125,000.
C) $(50,000).
D) $85,000.

Question 71

Which of the following is not a qualitative factor to be considered in a make-or-buy decision?

A) Possible lost jobs from buying outside
B) Supplier's ability to satisfy quality standards
C) Incremental benefit from buying outside
D) Supplier's ability to meet production schedule

Question 72

In the analysis concerning the acceptance or rejection of a special order, which items are relevant?

A) Variable costs only
B) Fixed costs only
C) Variable costs and fixed costs
D) Variable costs and avoidable costs

Question 73

What of the following would not be relevant in a make-or-buy decision?

A) Unavoidable variable costs
B) Incremental fixed costs
C) Opportunity costs
D) Avoidable fixed cost

Question 74

Martin Company incurred the following costs for 70,000 units: Variable costs $\quad\$ 420,000$
Fixed costs $\quad\quad 392,000$ Martin has received a special order from a foreign company for 3,000 units. There is sufficient capacity to fill the order without jeopardizing regular sales. Filling the order will require spending an additional $6,300 for shipping. If Martin wants to earn $6,000 on the order, what should the unit price be?

A) $9.70
B) $15.70
C) $8.00
D) $10.10

Question 75

Use the following information for questions
A company's unit costs based on 100,000 units are: $\begin{array}{l}\text { Variable costs }&\$75 \\\text { Fixed costs }&30\end{array}$ The normal unit sales price per unit is $165. A special order from a foreign company has been received for 5,000 units at $135 a unit. In order to fulfill the order, 3,000 units of regular sales would have to be foregone.

-The opportunity cost associated with this order is

A) $225,000.
B) $495,000.
C) $270,000.
D) $405,000.

Question 76

Use the following information for questions
Clemente Inc. incurs the following costs to produce 10,000 units of a subcomponent: $$\begin{array} { l l } \text { Direct materials } & \$ 8,400 \\\text { Direct labor } & 11,250 \\\text { Variable overhead } & 12,600 \\\text { Fixed overhead } & 16,200\end{array}$$ An outside supplier has offered to sell Clemente the subcomponent for $2.85 a unit.

-If Clemente could avoid $3,000 of fixed overhead by accepting the offer, net income would increase (decrease) by

A) $750.
B) $(5,850).
C) $(3,150).
D) $6,750.

Question 77

Canosta, Inc. determined that 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 78

A company is contemplating the acceptance of a special order. The order would not affect regular sales and could be filled without exceeding plant capacity. However, a new stamping machine would have to be purchased in order to stamp the customer's name on the product. Which of the following is likely?

A) Total variable costs will be irrelevant.
B) Only variable costs will be relevant.
C) Only fixed costs will be relevant.
D) Both variable and fixed costs will be relevant.

Question 79

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 80

Use the following information for questions
A company's unit costs based on 100,000 units are: $\begin{array}{l}\text { Variable costs }&\$75 \\\text { Fixed costs }&30\end{array}$ The normal unit sales price per unit is $165. A special order from a foreign company has been received for 5,000 units at $135 a unit. In order to fulfill the order, 3,000 units of regular sales would have to be foregone.

-The incremental profit (loss) from accepting the order would be

A) $30,000.
B) $(150,000).
C) $180,000.
D) $(90,000).