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.

Accepted Answer

This statement is true.

Question 2

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, processing further could be more beneficial despite the time value of money.

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.

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, leading to a decrease in overall profitability.

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.

Accepted Answer

This statement is true as the decision to make or buy a product is influenced by the cost of producing it internally (variable and fixed costs) compared to the cost of purchasing it externally. The decision is based on factors such as the pricing of external suppliers and the costs that can be saved by producing it internally.

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.

Accepted Answer

When a company is operating at less than capacity, it means that there is spare capacity available to produce additional units without incurring any additional fixed costs. Therefore, the incremental costs of a special order will likely include only variable manufacturing costs, such as direct material and direct labor. Fixed costs, such as rent and salaries, remain the same regardless of the number of units produced.

Question 6

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

Accepted Answer

In incremental analysis, total fixed costs may change if the alternatives involve changes in capacity or other factors affecting fixed costs.

Question 7

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

Accepted Answer

Accountants are primarily concerned with financial information and its analysis. While they may provide some nonfinancial information, it is not their main focus. Therefore, option B is the correct answer.

Question 8

Decision-making involves choosing among alternative courses of action.

Accepted Answer

This is the definition of decision-making.

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.

Accepted Answer

The book value of the old equipment is a historical cost that has already been incurred and cannot be recovered or changed. Therefore, it is a sunk cost and should not be used to make decisions about replacing the equipment with new equipment.

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.

Accepted Answer

The book value of the old equipment is a sunk cost, not an opportunity cost, because it represents past expenses that cannot be recovered regardless of future actions.

Question 11

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

Accepted Answer

An incremental make-or-buy decision depends on several factors besides cost, such as availability of resources, expertise, quality control, strategic considerations, legal requirements, etc.

Question 12

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 13

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

Accepted Answer

Management uses both financial (e.g. budgets, financial statements, ratios) and nonfinancial information (e.g. customer satisfaction, employee morale, market trends) to make informed decisions that impact the organization.

Question 14

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

Accepted Answer

A company may accept an order for its product at less than its regular sales price for various reasons, such as to clear inventory or to attract new customers. However, it should carefully consider factors such as the impact on profitability and the potential perception of devaluing its products before making such a decision.

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.

Accepted Answer

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

Question 16

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

Accepted Answer

Determining and evaluating possible courses of action is a critical step in management's decision-making process as it allows them to consider and weigh the pros and cons of different options before making a final decision.

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.

Accepted Answer

Management should consider other factors such as quality, reliability of suppliers, potential for technological advancements, strategic control, and long-term implications on capacity and skills, not just the immediate cost savings.

Question 18

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

Accepted Answer

If the unit sales price is less than the unit variable cost, then accepting the order would result in a loss for the company. Therefore, it is not financially wise to accept such orders.

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.

Accepted Answer

Incremental and differential analysis are essentially the same concept in financial decision-making, both involving the comparison of relevant costs and benefits of different alternatives to make a decision. There is no step where data developed under an incremental basis are compared to data developed under a differential basis as they refer to the same analysis process.

Question 20

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 focuses on the relevant costs and benefits that will change as a result of a decision. While total variable costs often change under alternative courses of action due to their nature of varying with activity level, total fixed costs can also change if a decision affects the capacity or the fixed cost structure of the business.

Quiz 7: Incremental Analysis