Question 1

The eliminating of an unprofitable product line may actually decrease total company net income.

Accepted Answer

Eliminating an unprofitable product line may result in a decrease in overall revenue and may also harm the company's reputation and market share in the industry. These factors can ultimately lead to a decrease in total company net income.

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 (including the opportunity cost of time), it may be more profitable to process further despite the time value of money.

Question 3

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

False

Question 4

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

Accepted Answer

The decision to replace old equipment should be based on its efficiency, maintenance costs, and how well it meets current needs, not solely on its depreciation status. Fully depreciated equipment can still be costly if it's inefficient or frequently needs repairs.

Question 5

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 6

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, attract new customers, compete with other businesses, etc. It is often done strategically and can lead to long-term benefits for the company.

Question 7

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

Accepted Answer

Salvage value is the amount of money that can be obtained from selling or disposing of old equipment. This value is relevant in incremental analysis because it represents cash flow that will be received if the old equipment is replaced.

Question 8

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 reflects the factors that should be considered when making a decision between make or buy. The external price and the costs that can be eliminated are key determinants of which option will be more cost-effective.

Question 9

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

Accepted Answer

Management needs to consider both financial and nonfinancial information in order to make informed and effective decisions. Financial information includes data related to revenues, expenses, profits, and investments, while nonfinancial information can include qualitative factors such as customer satisfaction, employee morale, and brand reputation. Without taking both types of information into account, management may not have a complete understanding of the impact and potential outcomes of their decisions.

Question 10

Decision-making involves choosing among alternative courses of action.

Accepted Answer

This statement is true.

Question 11

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

Accepted Answer

Eliminating an unprofitable product line may result in a decrease in overall revenue, which may then impact the profitability of the remaining product lines. This can happen if the unprofitable product was contributing to the overall revenue and/or was supporting the other product lines indirectly. However, in certain cases, eliminating an unprofitable product line may lead to a more streamlined and profitable operation.

Question 12

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 13

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

Accepted Answer

Accepting an order with a unit sales price less than the unit variable cost would result in a loss for the company. It is not financially feasible to accept such orders in the long run.

Question 14

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 15

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 crucial step in the decision-making process.

Question 16

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

Accepted Answer

If a segment's contribution margin is less than the fixed costs that can be eliminated by eliminating the segment, then the segment is not generating enough revenue to cover its direct and indirect costs. In this case, eliminating the segment would reduce overall costs and increase profits.

Question 17

Financial data are developed for a course of action under an incremental basis and then it is 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 revenues and costs that change under different alternatives. There is no step where data developed under an incremental basis is compared to data developed under a differential basis as they refer to the same process of analyzing the additional or incremental costs and benefits of one option over another.

Question 18

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, regardless of future decisions. The book value of old equipment falls under this category as it is the historical cost of the equipment and does not change with current market conditions or future decisions. Therefore, it should not be considered in the decision to replace the old equipment with new equipment.

Question 19

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

Accepted Answer

This is correct. Opportunity cost is the benefit that is foregone by choosing one option over another. It is the value of the next best alternative that is given up in order to undertake a certain action or make a particular choice.

Question 20

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

Accepted Answer

Accountants are primarily involved in providing financial information to management for decision-making, not nonfinancial information. Nonfinancial information may be considered, but it is not the main role of accountants.

Quiz 26: Incremental Analysis and Capital Budgeting