Question 1

Decision-making involves choosing among alternative courses of action.

Accepted Answer

Decision-making indeed involves choosing among alternative courses of action.

Question 2

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

Accepted Answer

False

Question 3

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 4

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

Accepted Answer

An incremental make-or-buy decision involves weighing the cost of making a product or service in-house versus purchasing it externally. However, other factors such as quality, production capacity, resources, and expertise also need to be considered in addition to cost. Therefore, the decision cannot solely depend on the lowest cost alternative.

Question 5

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

Accepted Answer

While accountants may provide some nonfinancial information, their primary role is to provide financial information and analysis for management's consideration in making decisions. Other professionals, such as management consultants or market researchers, are typically responsible for developing nonfinancial information.

Question 6

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 7

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 sunk cost because it has already been incurred and cannot be recovered. It should not be taken into account when deciding whether to replace the old equipment with new equipment, as the decision should be based on the incremental costs and benefits of the new equipment compared to the old equipment.

Question 8

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 9

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

This is because variable manufacturing costs increase with each unit produced, but fixed costs remain the same regardless of the level of production. Therefore, if a company is operating at less than capacity, the special order would only require additional variable manufacturing costs to produce the units needed, and not any fixed costs.

Question 10

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 11

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 12

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 is a correct statement about the factors to consider when deciding whether to make a product or buy it from an external supplier. The external price and the costs that can be eliminated by not producing the item internally are key factors in this decision.

Question 13

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

Accepted Answer

Management considers both financial and nonfinancial information while making decisions as nonfinancial information provides a broader perspective on the impact of the decision on various stakeholders and the overall organizational environment.

Question 14

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 not an opportunity cost, as it is not a cost incurred by choosing to replace it with new equipment. Opportunity cost refers to the cost of forgoing the next best alternative.

Question 15

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

The basic decision rule in a sell or process further decision is to process further only if the incremental revenue from processing exceeds the incremental processing costs.

Question 16

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 17

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 18

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 special one-time order with a unit sales price that is less than the unit variable cost will result in a loss for the company. Therefore, it should not be accepted.

Question 19

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 the decision-making process for management. This involves considering all options and weighing their potential outcomes and consequences before making a final decision.

Question 20

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

Accepted Answer

A company may accept orders for its product at less than its regular sales price in certain circumstances, such as to clear out inventory, to generate cash flow or to entice new customers. This is known as discounting or offering a promotional price. However, the company should set clear guidelines for how often and under what conditions it will offer discounted prices to avoid damaging its brand reputation and profitability in the long run.

Quiz 20: Incremental Analysis