Deck 25: Capital Budgeting and Managerial Decisions

Question 1

Capital budgeting decisions are risky because the outcome is uncertain, large amounts of money are usually involved, the investment involves a long-term commitment, and the decision could be difficult or impossible to reverse.

Answer 1

True

Question 2

When computing payback period, the year in which a capital investment is made is year 1.

Answer 2

False

Question 3

Capital budgeting is the process of analyzing alternative long-term investments and deciding which assets to acquire or sell.

Answer 3

True

Question 4

Neither the payback period nor the accounting rate of return methods of evaluating investments considers the time value of money.

Question 5

Additional business in the form of a special order of goods or services should be accepted when the incremental revenue equals the incremental costs.

Question 6

The decision to accept an additional volume of business should be based on a comparison of the revenue from the additional business with the sunk costs of producing that revenue.

Question 7

An advantage of the break-even time (BET) method over the payback period method is that it recognizes the time value of money.

Question 8

A sunk cost will change with a future course of action.

Question 9

Significant sunk costs are relevant to decisions about the future.

Question 10

Another name for relevant cost is unavoidable cost.

Question 11

An out-of-pocket cost requires a future outlay of cash and is relevant for current and future decision making.

Question 12

Part of the decision to accept additional business should be based on a comparison of the incremental (differential) costs of the added production with the additional revenues to be received.

Question 13

Relevant benefits refer to the additional or incremental revenue generated by selecting a particular course or action over another.

Question 14

In ranking choices with the break-even time (BET) method, the investment with the longest BET gets the highest rank.

Question 15

Incremental costs should be considered in a make or buy decision.

Question 16

If a company has the capacity to produce either 10,000 units of Product A or 10,000 units of Product B; assuming fixed costs are the same, production restrictions are the same for both products, and the markets for both products are unlimited; the company should commit 100% of its capacity to the product that has the higher contribution margin.

Question 17

If the internal rate of return (IRR) of an investment is lower than the hurdle rate, the project should be accepted.

Question 18

An opportunity cost is the potential benefit lost by taking a specific action when two or more alternative choices are available.

Question 19

In a make or buy decision, management should focus on costs that are the same under the two alternatives.

Question 20

The concept of incremental cost is the same as the concept of differential cost.

Question 21

If the straight-line depreciation method is used, the annual average investment amount used in calculating rate of return is calculated as (beginning book value + ending book value)/2.

Question 22

The process of analyzing alternative long-term investments and deciding which assets to acquire or sell is known as:

A) Variance analysis.
B) Planning and control.
C) Capital budgeting.
D) Managerial accounting.
E) Master budgeting.

Question 23

If net present values are used to evaluate two investments that have equal costs and equal total cash flows, the one with more cash flows in the early years has the higher net present value.

Question 24

Capital budgeting decisions are generally based on:

A) Results from past outcomes only.
B) Tentative and potentially unreliable predictions of future outcomes.
C) Speculation of interest rates and economic performance only.
D) Results from current outcomes only.
E) Predictions of future outcomes where risk is eliminated.

Question 25

Restating future cash flows in terms of their future value is called discounting.

Question 26

The accounting rate of return is based on cash flows rather than net income in its calculation.

Question 27

The payback period method of evaluating an investment fails to consider cash inflows after the point where an investment's costs are fully recovered.

Question 28

Restating future cash flows in terms of their present value is called discounting.

Question 29

Two investments with exactly the same payback periods are not equally valuable to an investor because the timing of net cash flows may be different.

Question 30

The net present value decision rule is: When an asset's expected cash flows yield a positive net present value when discounted at the required rate of return, the asset should be acquired.

Question 31

Capital budgeting decisions are risky because all of the following are true except:

A) The investment involves a long-term commitment.
B) The decision could be difficult or impossible to reverse.
C) They rarely produce net cash flows.
D) Large amounts of money are usually involved.
E) The outcome is uncertain.

Question 32

A shorter payback period reduces the company's ability to respond to unanticipated changes and increases the risk of having to keep an unprofitable investment.

Question 33

The internal rate of return equals the rate that yields a net present value of zero for an investment.

Question 34

The calculation of annual net cash flow from a particular investment project should include all of the following except:

A) General and administrative expenses.
B) Depreciation expense.
C) Income taxes.
D) Revenues generated by the investment.
E) Cost of products generated by the investment.

Question 35

If two projects have the same risks, the same payback periods, and the same initial investments, they are equally attractive.

Question 36

The internal rate of return method of evaluating capital investments cannot be used with uneven cash flows.

Question 37

Net cash flow is cash inflows minus cash outflows.

Question 38

Capital budgeting is the process of analyzing:

A) Long-term investments.
B) Short-term investments.
C) Investments with certain outcomes only.
D) Cash outflows only.
E) Operating revenues.

Question 39

The time value of money is considered when calculating the payback period of an investment.

Question 40

The payback period method, unlike the net present value method, does not ignore cash flows after the point of cost recovery.

Question 41

The potential benefits lost by taking a specific action when two or more alternative choices are available is known as a(n):

A) Out-of-pocket cost.
B) Sunk cost.
C) Alternative cost.
D) Opportunity cost.
E) Differential cost.

Question 42

Maxim manufactures a hamster food product called Green Health. Maxim currently has 10,000 bags of Green Health on hand. The variable production costs per bag are $1.80 and total fixed costs are $10,000. The hamster food can be sold as it is for $9.00 per bag or be processed further into Premium Green and Green Deluxe at an additional cost. The additional processing will yield 10,000 bags of Premium Green and 3,000 bags of Green Deluxe, which can be sold for $8 and $6 per bag, respectively.

-The incremental revenue of processing Green Health further into Premium Green and Green Deluxe would be:

A) $96,000.
B) $ 8,000.
C) $ 6,000.
D) $ 2,000.
E) $98,000.

Question 43

An additional cost incurred, only if a company pursues a particular course of action, is a(n):

A) Incremental cost.
B) Period cost.
C) Discount cost.
D) Pocket cost.
E) Sunk cost.

Question 44

The process of restating future cash flows in today's dollars is known as:

A) Discounting.
B) Capitalizing.
C) Payback period.
D) Annualization.
E) Budgeting.

Question 45

A company's required rate of return, typically its cost of capital, is called the:

A) Internal rate of return.
B) Hurdle rate.
C) Average rate of return.
D) Maximum rate.
E) Payback rate.

Question 46

Chang Industries has 2,000 defective units of product that have already cost $14 each to produce. A salvage company will purchase the defective units as they are for $5 each. Chang's production manager reports that the defects can be corrected for $6 per unit, enabling them to be sold at their regular market price of $21.

-Chang should:

A) Sell the units to the salvage company for $5 per unit.
B) Scrap the units.
C) Sell the units as they are because repairing them will cause their total cost to exceed their selling price.
D) Correct the defects and sell the units at the regular price.
E) Sell 1,000 units to the salvage company and repair the remainder.

Question 47

Epsilon Co. can produce a unit of product for the following costs: $\begin{array}{llr} \text { Direct material} &\$8\\ \text { Direct labor} &24\\ \text { Overhead } &40\\ \text {Total costs per unit } &\$72\end{array}$
An outside supplier offers to provide Epsilon with all the units it needs at $60 per unit. If Epsilon buys from the supplier, the company will still incur 40% of its overhead. Epsilon should choose to:

A) Buy since the relevant cost to make it is $56.
B) Make since the relevant cost to make it is $48.
C) Buy since the relevant cost to make it is $48.
D) Make since the relevant cost to make it is $56.
E) Buy since the relevant cost to make it is $72.

Question 48

Maxim manufactures a hamster food product called Green Health. Maxim currently has 10,000 bags of Green Health on hand. The variable production costs per bag are $1.80 and total fixed costs are $10,000. The hamster food can be sold as it is for $9.00 per bag or be processed further into Premium Green and Green Deluxe at an additional cost. The additional processing will yield 10,000 bags of Premium Green and 3,000 bags of Green Deluxe, which can be sold for $8 and $6 per bag, respectively.

-Assuming Maxim further processes Green Health further into Premium Green and Green Deluxe, revenue from the two products would be:

A) $ 2,000.
B) $96,000.
C) $98,000.
D) $ 6,000.
E) $ 8,000.

Question 49

Product A requires 5 machine hours per unit to be produced, Product B requires only 3 machine hours per unit, and the company's productive capacity is limited to 240,000 machine hours. Product A sells for $16 per unit and has variable costs of $6 per unit. Product B sells for $12 per unit and has variable costs of $5 per unit. Assuming the company can sell as many units of either product as it produces, the company should:

A) Produce only Product A.
B) Produce A and B in the ratio of 40% A and 60% B.
C) Produce A and B in the ratio of 62.5% A to 37.5% B.
D) Produce only Product B.
E) Produce equal amounts of A and B.

Question 50

Gordon Corporation inadvertently produced 10,000 defective digital watches. The watches cost $8 each to produce. A salvage company will purchase the defective units as they are for $3 each. Gordon's production manager reports that the defects can be corrected for $5 per unit, enabling them to be sold at their regular market price of $12.50. Gordon should:

A) Sell the watches for $3 per unit.
B) Correct the defects and sell the watches at the regular price.
C) Scrap the watches.
D) Sell 5,000 watches to the salvage company and repair the remainder.
E) Sell the watches as they are because repairing them will cause their total cost to exceed their selling price.

Question 51

A cost that cannot be avoided or changed because it arises from a past decision, and is irrelevant to future decisions, is called a(n):

A) Out-of-pocket cost.
B) Incremental cost.
C) Uncontrollable cost.
D) Opportunity cost.
E) Sunk cost.

Question 52

A company paid $200,000 ten years ago for a specialized machine that has no salvage value and is being depreciated at the rate of $10,000 per year. The company is considering using the machine in a new project that will have incremental revenues of $28,000 per year and annual cash expenses of $20,000. In analyzing the new project, the $200,000 original cost of the machine is an example of a(n):

A) Variable cost.
B) Opportunity cost.
C) Out-of-pocket cost.
D) Sunk cost.
E) Incremental cost.

Question 53

A company is considering a new project that will cost $19,000. This project would result in additional annual revenues of $6,000 for the next 5 years. The $19,000 cost is an example of a(n):

A) Sunk cost.
B) Uncontrollable cost.
C) Fixed cost.
D) Opportunity cost.
E) Incremental cost.

Question 54

Factor Co. can produce a unit of product for the following costs: $\begin{array}{llr} \text { Direct material} &\$8\\ \text { Direct labor} &24\\ \text { Overhead } &40\\ \text {Total costs per unit } &\$72\end{array}$

An outside supplier offers to provide Factor with all the units it needs at $46 per unit. If Factor buys from the supplier, the company will still incur 60% of its overhead. Factor should choose to:

A) Buy since the relevant cost to make it is $48.
B) Buy since the relevant cost to make it is $32.
C) Buy since the relevant cost to make it is $56.
D) Make since the relevant cost to make it is $48.
E) Make since the relevant cost to make it is $32.

Question 55

Chang Industries has 2,000 defective units of product that have already cost $14 each to produce. A salvage company will purchase the defective units as they are for $5 each. Chang's production manager reports that the defects can be corrected for $6 per unit, enabling them to be sold at their regular market price of $21.

- The incremental income or loss on reworking the units is:

A) $12,000 loss.
B) $20,000 loss.
C) $32,000 income.
D) $20,000 income.
E) $30,000 income.

Question 56

A limitation of the internal rate of return method is that it:

A) Measures results in years.
B) Measures net income rather than cash flows.
C) Does not consider the time value of money.
D) Ignores varying risks over the life of a project.
E) Lacks ability to compare dissimilar projects.

Question 57

A cost that requires a future outlay of cash, and is relevant for current and future decision making, is a(n):

A) Opportunity cost.
B) Sunk cost.
C) Uncontrollable cost.
D) Out-of-pocket cost.
E) Operating cost.

Question 58

An opportunity cost:

A) Requires a current outlay of cash.
B) Results from past managerial decisions.
C) Is irrelevant in decision making because it occurred in the past.
D) Is an unavoidable cost because it remains the same regardless of the alternative chosen.
E) Is the potential benefit lost by choosing a specific alternative course of action among two or more.

Question 59

In business decision-making, managers typically examine the two fundamental factors of:

A) Capital investment and rate of return.
B) Risk and return.
C) Risk and payback.
D) Risk and capital investment.
E) Payback and rate of return.

Question 60

Listmann Corp. processes four different products that can either be sold as is or processed further. Listed below are sales and additional cost data: $\begin{array}{|l|r|r|r|}\hline & \text { Sales Valus } & \text { Add'tional } & \text { Sales Value ofter further} \\ \text { Prgeduct } & \text { with ne further } & \text { Procesaing } & \text { processing } \\& \text {Processing}& \text {Costs}\\\hline \text { Premier } & \$ .350 & \$ 900 & \$ 2,700 \\\hline \text { Deluxe } & 450 & 225 & 630 \\\hline \text { Super } & 900 & 450 & 1.800 \\\hline \text { Bssic } & 90 & 45 & 180 \\\hline\end{array}$

Which product(s) should not be processed further?

A) Super.
B) Premier.
C) Premier and Basic.
D) Basic.
E) Deluxe.

Question 61

Maxim manufactures a cat food product called Green Health. Maxim currently has 10,000 bags of Green Health on hand. The variable production costs per bag are $1.80 and total fixed costs are $10,000. The cat food can be sold as it is for $9.00 per bag or be processed further into Premium Green and Green Deluxe at an additional $2,000 cost. The additional processing will yield 10,000 bags of Premium Green and 3,000 bags of Green Deluxe, which can be sold for $8 and $6 per bag, respectively.

- If Green Health is processed further into Premium Green and Green Deluxe, the total gross profit would be:

A) $78,000.
B) $100,000.
C) $68,000.
D) $96,000.
E) $98,000.

Question 62

Ahngram Corp. has 1,000 defective units of a product that cost $3 per unit in direct costs and $6.50 per unit in indirect cost when produced last year. The units can be sold as scrap for $4 per unit or reworked at an additional cost of $2.50 and sold at full price of $12. The incremental net income (loss) from the choice of reworking the units, versus selling them as scrap, would be:

A) $2,500 higher if the units are reworked.
B) $5,500 higher if the units are reworked.
C) $4,000 higher if the units are reworked.
D) $2,500 lower if the units are reworked.
E) $12,000 higher if the units are reworked.

Question 63

A company has the choice of either selling 1,000 defective units as scrap or rebuilding them. The company could sell the defective units as they are for $4.00 per unit. Alternatively, it could rebuild them with incremental costs of $1.00 per unit for materials, $2.00 per unit for labor, and $1.50 per unit for overhead, and then sell the rebuilt units for $8.00 each. If the company rebuilds the units, rather than selling them as scrap, what is the incremental impact on income?

A) Income will increase by $8,000.
B) Income will decrease by $500.
C) Income will decrease by $4,500.
D) Income will increase by $4,000.
E) Income will increase by $500.

Question 64

Minor Electric has received a special one-time order for 1,500 light fixtures (units) at $5 per unit. Minor currently produces and sells 7,500 units at $6.00 each. This level represents 75% of its capacity. Production costs for these units are $4.50 per unit, which includes $3.00 variable cost and $1.50 fixed cost. To produce the special order, a new machine needs to be purchased at a cost of
$1,000 with a zero salvage value. Management expects no other changes in costs as a result of the additional production. Should the company accept the special order?

A) Yes, because incremental revenue exceeds incremental costs.
B) Yes, because incremental costs exceed incremental revenues.
C) No, because the incremental revenue is too low.
D) No, because incremental costs exceed incremental revenue.
E) No, because additional production would exceed capacity.

Question 65

Bluebird Mfg. has received a special one-time order for 15,000 bird feeders at $3 per unit. Bluebird currently produces and sells 75,000 units at $7.00 each. This level represents 80% of its capacity. These bird feeders would be marketed under the wholesaler's name and would not affect Bluebird's sales through its normal channels. Production costs for these units are $3.50 per unit, which includes $2.25 variable cost and $1.25 fixed cost.

-If Bluebird accepts this additional business, the effect on net income will be:

A) $45,000 increase.
B) $7,500 decrease.
C) $11,250 increase.
D) $33,750 increase.
E) $33,750 decrease.

Question 66

Minor Electric has received a special one-time order for 1,500 light fixtures (units) at $5 per unit. Minor currently produces and sells 7,500 units at $6.00 each. This level represents 75% of its capacity. Production costs for these units are $4.50 per unit, which includes $3.00 variable cost and $1.50 fixed cost. To produce the special order, a new machine needs to be purchased at a cost of
$1,000 with a zero salvage value. Management expects no other changes in costs as a result of the additional production. Should the company accept the special order?

A) Yes, because net income would increase by $2,000.
B) No, because net income would decrease by $1,500.
C) No, because net income would decrease by $2,000.
D) Yes, because net income would increase by $7,500.
E) No, because net income would decrease by $5,500.

Question 67

A company has the choice of either selling 1,000 defective units as scrap or rebuilding them. The company could sell the defective units as they are for $4.00 per unit. Alternatively, it could rebuild them with incremental costs of $1.00 per unit for materials, $2.00 per unit for labor, and $1.50 per unit for overhead, and then sell the rebuilt units for $8.00 each. What should the company do?

A) Neither sell nor rebuild because both alternatives produce a loss. Instead, the company should store the units permanently.
B) Scrap the units.
C) Sell the units as scrap.
D) Rebuild the units.
E) It does not matter because both alternatives have the same result.

Question 68

Lattimer Company had the following results of operations for the past year: $$\begin{array}{l}\text { Sales } ( 15,000 \text { units at } \$ 12 )&&\$18,000\\\text { Variable manufacturing costs } & \$ 97,500 & \\\text { Fixed manufacturing costs } & 21,000 & \\\text { Selling and administrative expenses (all fixed) } & 36,000 & ( 154,500 ) \\\text { Operating income } & & \$ 25,500\end{array}$$ A foreign company whose sales will not affect Lattimer's market offers to buy 5,000 units at $7.50 per unit. In addition to existing costs, selling these units would add a $0.25 selling cost for export fees. Lattimer's annual production capacity is 25,000 units. If Lattimer accepts this additional business, the special order will yield a:

A) $3,750 profit.
B) $3,250 loss.
C) $8,250 loss.
D) $2,000 loss.
E) $5,000 profit.

Question 69

Benjamin Company had the following results of operations for the past year: $\begin{array}{llr} \text { Sales }(16,000 \text { units at } \$ 10)&&\$160,000\\ \text { Direct materials and direct labor } &\$96,000\\ \text { Overhead ( \( 20 \% \) variable) } &16,000\\ \text { Selling and administrative expenses (all fixed) } &32,000&(144,000)\\ \text {Operating income } &&\$16,000\\\end{array}$
A foreign company (whose sales will not affect Benjamin's market) offers to buy 4,000 units at $7.50 per unit. In addition to variable manufacturing costs, selling these units would increase fixed overhead by $600 and selling and administrative costs by $300.

- Assuming Benjamin has excess capacity and accepts the offer, its profits will:

A) Increase by $4,300.
B) Increase by $6,000.
C) Decrease by $6,000.
D) Increase by $30,000.
E) Increase by $5,200.

Question 70

Markson Company had the following results of operations for the past year: $\begin{array} { | l | l | l | } \hline \text { Sales } ( 8,000 \text { units at } \$ 20 ) & \$ 160,000 & \\\hline \text { Variable manufacturing costs } & \$ 86,000 & \\\hline \text { Fixed manufacturing costs } & 15,000 & \\\hline \text { Variable selling and administrative expenses } & 12,000 & \\\hline \text { Fixed selling and administrative expenses } & 20,000 & ( 133,000 ) \\\hline \text { Operating income } & & \$ 27,000 \\\hline\end{array}$
A foreign company whose sales will not affect Markson's market offers to buy 2,000 units at $14 per unit. In addition to existing costs, selling these units would increase fixed overhead by $1,600 for the purchase of special tools. Markson's annual productive capacity is 12,000 units. If Markson accepts this additional business, its profits will:

A) Decrease by $1,600.
B) Increase by $1,900.
C) Decrease by $5,100.
D) Decrease by $5,650.
E) Increase by $3,500.

Question 71

Maxim manufactures a hamster food product called Green Health. Maxim currently has 10,000 bags of Green Health on hand. The variable production costs per bag are $1.80 and total fixed costs are $10,000. The hamster food can be sold as it is for $9.00 per bag or be processed further into Premium Green and Green Deluxe at an additional $2,000 cost. The additional processing will yield 10,000 bags of Premium Green and 3,000 bags of Green Deluxe, which can be sold for $8 and $6 per bag, respectively.

- The net advantage (incremental income) of processing Green Health further into Premium Green and Green Deluxe would be:

A) $98,000.
B) $2,000.
C) $96,000.
D) $8,000.
E) $6,000.

Question 72

Bluebird Mfg. has received a special one-time order for 15,000 bird feeders at $3 per unit. Bluebird currently produces and sells 75,000 units at $7.00 each. This level represents 80% of its capacity. These bird feeders would be marketed under the wholesaler's name and would not affect Bluebird's sales through its normal channels. Production costs for these units are $3.50 per unit, which includes $2.25 variable cost and $1.25 fixed cost.

- If Bluebird accepts this additional business, the incremental revenue will be:

A) $33,750.
B) $38,750.
C) $45,000.
D) $11,250.
E) $7,500.

Question 73

Bluebird Mfg. has received a special one-time order for 15,000 bird feeders at $3 per unit. Bluebird currently produces and sells 75,000 units at $7.00 each. This level represents 80% of its capacity. These bird feeders would be marketed under the wholesaler's name and would not affect Bluebird's sales through its normal channels. Production costs for these units are $3.50 per unit, which includes $2.25 variable cost and $1.25 fixed cost.

-If Bluebird accepts this additional business, the incremental cost will be:

A) $38,750.
B) $7,500.
C) $33,750.
D) $11,250.
E) $45,000.

Question 74

A company has the choice of either selling 600 defective units as scrap or rebuilding them. The company could sell the defective units as they are for $2.00 per unit. Alternatively, it could rebuild them with incremental costs of $0.60 per unit for materials, $1.00 per unit for labor, and $0.80 per unit for overhead, and then sell the rebuilt units for $5.00 each.

-What should the company do?

A) It does not matter because both alternatives have the same result.
B) Rebuild the units.
C) Sell the units as scrap.
D) Since both alternatives produce a loss, store the units in hopes of a better price later.
E) Scrap the units.

Question 75

Frederick Co. is thinking about having one of its products manufactured by an outside supplier. Currently, the cost of manufacturing 5,000 units follows: $$\begin{array} { l r } \text { Direct material } & \$ 62,000 \\\text { Direct labor } & 47,000 \\\text { Variable factory overhead } & 38,000 \\\text { Fired factory overhead } & 52,000\end{array}$$ If Frederick can buy 5,000 units from an outside supplier for $130,000, it should:

A) Buy the product because the total incremental costs of manufacturing are greater than $130,000.
B) Make the product because factory overhead is a sunk cost.
C) Make the product because the cost of direct material plus direct labor of manufacturing is less than $130,000.
D) Make the product because current factory overhead is less than $130,000.
E) Buy the product because total fixed and variable manufacturing costs are greater than $130,000.

Question 76

Benjamin Company had the following results of operations for the past year: $\begin{array}{llr} \text { Sales }(16,000 \text { units at } \$ 10)&&\$160,000\\ \text { Direct materials and direct labor } &\$96,000\\ \text { Overhead ( \( 20 \% \) variable) } &16,000\\ \text { Selling and administrative expenses (all fixed) } &32,000&(144,000)\\ \text {Operating income } &&\$16,000\\\end{array}$
A foreign company (whose sales will not affect Benjamin's market) offers to buy 4,000 units at $7.50 per unit. In addition to variable manufacturing costs, selling these units would increase fixed overhead by $600 and selling and administrative costs by $300.

- Assuming Benjamin's productive capacity is 16,000 units per year and accepts the offer, its profits will:

A) Decrease by $10,000.
B) Decrease by $ 6,000.
C) Decrease by $10,900.
D) Increase by $ 9,100.
E) Increase by $ 4,300.

Question 77

A company has the choice of either selling 600 defective units as scrap or rebuilding them. The company could sell the defective units as they are for $2.00 per unit. Alternatively, it could rebuild them with incremental costs of $0.60 per unit for materials, $1.00 per unit for labor, and $0.80 per unit for overhead, and then sell the rebuilt units for $5.00 each.

- What is the amount of incremental income (loss) from rebuilding?

A) $(3.00) per unit.
B) $3.00 per unit.
C) $(0.60) per unit.
D) $0.60 per unit.
E) $7.00 per unit.

Question 78

Bannister Co. is thinking about having one of its products manufactured by an outside supplier. Currently, the cost of manufacturing 1,000 units follows: $\begin{array} { l r } \text { Direct material } & \$ 45,000 \\\text { Direct labor } & 30,000 \\\text { Factory overhead (30\% is variable) } & 98,000\end{array}$
If Bannister can buy 1,000 units from an outside supplier for $100,000, it should:

A) Buy the product because the total incremental costs of manufacturing are greater than $100,000.
B) Buy the product because total fixed and variable manufacturing costs are greater than $100,000.
C) Make the product because current factory overhead is less than $100,000.
D) Make the product because the cost of direct material plus direct labor of manufacturing is less than $100,000.
E) Make the product because factory overhead is a sunk cost.

Question 79

A company has the choice of either selling 600 defective units as scrap or rebuilding them. The company could sell the defective units as they are for $2.00 per unit. Alternatively, it could rebuild them with incremental costs of $0.60 per unit for materials, $1.00 per unit for labor, and $0.80 per unit for overhead, and then sell the rebuilt units for $5.00 each.

- What is the amount of incremental revenue from rebuilding?

A) $0.60 per unit.
B) $7.00 per unit.
C) $2.40 per unit.
D) $5.00 per unit.
E) $3.00 per unit.

Question 80

A company has the choice of either selling 600 defective units as scrap or rebuilding them. The company could sell the defective units as they are for $2.00 per unit. Alternatively, it could rebuild them with incremental costs of $0.60 per unit for materials, $1.00 per unit for labor, and $0.80 per unit for overhead, and then sell the rebuilt units for $5.00 each.

- What is the amount of incremental cost from rebuilding?

A) $0.60 per unit.
B) $7.00 per unit.
C) $2.40 per unit.
D) $5.00 per unit.
E) $3.00 per unit.