Question 1

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

Accepted Answer

Financial information, such as budgets and revenue streams, is fundamental to any business decision. But it is also important to weigh nonfinancial information, such as the impact on staff morale and the community, as well as legal and ethical considerations.

Question 2

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

Accepted Answer

False

Question 3

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

Accepted Answer

Sunk costs are costs that have already been incurred and cannot be recovered or changed. The book value of the old equipment is the historical cost minus any accumulated depreciation, and it has already been incurred and cannot be changed. Therefore, it is considered a sunk cost and should not be taken into account when making a decision about whether to replace the old equipment with new equipment.

Question 4

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

Accepted Answer

Sometimes a company may offer a discount or promotion on its products to attract customers or to move excess inventory. Therefore, accepting an order at a price lower than the regular sales price can be a part of the company's marketing strategy.

Question 5

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

Accepted Answer

This is true. Evaluating possible courses of action is a crucial step in the decision-making process, as it allows management to weigh the pros and cons of different options and choose the best one for the organization.

Question 6

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.

Accepted Answer

Accepting an order at a price less than the unit variable cost would result in a loss on each unit sold, as the company would not cover the variable costs of production. To be profitable, the special unit price must at least cover the variable costs.

Question 7

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.

Accepted Answer

Management must consider other factors beyond just cost, such as quality, reliability, supplier relationships, strategic control, and long-term impacts on the business, before making a decision.

Question 8

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

Accepted Answer

This is the definition of opportunity cost.

Question 9

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

Accepted Answer

Incremental analysis involves comparing the additional (incremental) revenues and costs of different decisions. While it's common for total variable costs to change because they are directly tied to the level of activity or volume of production, it's not accurate to say that total fixed costs will always remain constant under alternative courses of action. Fixed costs can change if a decision involves a significant change in operations or capacity, such as adding a new production facility.

Question 10

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

Accepted Answer

Accepting a one-time order with a unit sales price lower than the unit variable cost will result in a loss for the company. It is not a profitable decision.

Question 11

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.

Accepted Answer

This is the correct basic decision rule in a sell or process further decision. The decision should be to process further only if the additional revenue generated by processing the product is greater than the additional processing costs.

Question 12

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.

Accepted Answer

The answer of In a sell or process further decision,...

Question 13

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

Accepted Answer

An incremental make-or-buy decision takes into account factors beyond just cost, such as availability of resources, quality control, and strategic considerations. Therefore, the decision may not solely depend on cost.

Question 14

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.

Accepted Answer

If a company is operating at less than capacity, it means they have unused resources, including fixed costs. Therefore, the incremental costs of a special order would include both variable manufacturing costs and a portion of the fixed costs.

Question 15

Decision-making involves choosing among alternative courses of action.

Accepted Answer

Decision-making is the process of selecting among different options, weighing the pros and cons, and choosing the best course of action.

Question 16

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

Accepted Answer

Accountants are primarily responsible for providing financial information to management, such as financial statements, budgets, and cost analyses. While they may also provide nonfinancial information, this is not their main role. Other professionals, such as marketing analysts or operations managers, may be more involved in developing nonfinancial information for management's consideration.

Question 17

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

Accepted Answer

The decision to sell now or process further depends on the incremental benefits and costs associated with further processing. If the additional revenue from processing exceeds the additional costs (including the opportunity cost of time), it may be more profitable to process further despite the time value of money.

Question 18

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.

Accepted Answer

This statement accurately describes the factors that go into deciding whether to produce a product in-house or purchase it from an external supplier. The cost analysis should consider the external price as well as the variable and fixed costs that would be eliminated by outsourcing production. However, the decision may also consider any alternative uses of resources and other strategic factors.

Question 19

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

Accepted Answer

The book value of old equipment is not an opportunity cost. Opportunity cost refers to the value of the next best alternative forgone, such as the profit that could be earned if the old equipment were used for another purpose or if the funds used to buy new equipment were used for an alternative investment. The book value is simply the amount at which the old equipment is recorded on the company's balance sheet.

Question 20

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.

Accepted Answer

Financial data are developed for a course of action under both incremental and differential bases, but they are not compared before a decision is made. The two methods are used to analyze different types of decisions and the choice between them depends on the specific circumstances of the decision being made.

Quiz 19: Incremental Analysis