Question 1

Janssen Company has old inventory on hand that cost $18,000. Its scrap value is $24,000. The inventory could be sold for $60,000 if manufactured further at an additional cost of $18,000. What should Janssen do?
A) Sell the inventory for $24,000 scrap value
B) Dispose of the inventory to avoid any further decline in value
C) Hold the inventory at its $18,000 cost
D) Manufacture further and sell it for $60,000.

Accepted Answer

Manufacturing the inventory further and selling it for $60,000 provides a higher return on investment than selling it for scrap value or holding it at its current cost. The additional cost of $18,000 for manufacturing is a reasonable investment as the return is higher. Disposing of the inventory would result in a loss and is therefore not a good option.

Question 2

Mallory Company manufactures widgets. Bowden Company has approached Mallory with a proposal to sell the company widgets at a price of $80,000 for 100,000 units. Mallory is currently making these components in its own factory. The following costs are associated with this part of the process when 100,000 units are produced:  The manufacturing overhead consists of $16,000 of costs that will be eliminated if the components are no longer produced by Mallory. From Mallory's point of view, how much is the incremental cost or savings if the widgets are bought instead of made?
A) $20,000 incremental savings
B) $4,000 incremental cost
C) $4,000 incremental savings
D) $20,000 incremental cost

Accepted Answer

The answer of Mallory Company manufactures widgets. Bowden Company has...

Question 3

New Age Makeup produces face cream. Each bottle of face cream costs $10 to produce and can be sold for $13. The bottles can be sold as is, or processed further into sunscreen at a cost of $14 each. New Age Makeup could sell the sunscreen bottles for $23 each.
A) Face cream must be processed further because its profit is $9 each.
B) Face cream must not be processed further because costs increase more than revenue.
C) Face cream must not be processed further because it decreases profit by $1 each.
D) Face cream must be processed further because it increases profit by $3 each.

Accepted Answer

Processing the face cream into sunscreen increases costs by $14 but only increases revenue by $10, resulting in a net loss of $4 per bottle compared to selling the face cream as is.

Question 4

Marcus Company gathered the following data about the three products that it produces:  Which of the products should not be processed further?
A) Product A
B) Product B
C) Product C
D) Products A and C

Accepted Answer

Product B has a lower contribution margin per unit compared to its variable costs, indicating that processing it further would decrease profits rather than increase them. Therefore, it should not be processed further. Products A and C have contribution margins per unit that exceed their variable costs, indicating that processing them further would increase profits.

Question 5

Eddy Company is starting business and is unsure of whether to sell its product assembled or unassembled. The unit cost of the unassembled product is $80 and Eddy Company would sell it for $180. The cost to assemble the product is estimated at $36 per unit and Eddy Company believes the market would support a price of $232 on the assembled unit. What is the correct decision using the sell or process further decision rule?
A) Sell before assembly, the company will be better off by $36 per unit.
B) Sell before assembly, the company will be better off by $52 per unit.
C) Process further, the company will be better off by $52 per unit.
D) Process further, the company will be better off by $16 per unit.

Accepted Answer

The additional revenue from selling the assembled product is $52 ($232 - $180), while the additional cost to assemble is $36. Therefore, the company will be better off by $16 per unit if they process further ($52 - $36).

Question 6

Sala Co. is contemplating the replacement of an old machine with a new one. The following information has been gathered:  If the old machine is replaced, it can be sold for $20,000.
Which of the following amounts is a sunk cost?
A) $200,000
B) $150,500
C) $500,000
D) $175,000

Accepted Answer

The sunk cost is the amount that has already been incurred and cannot be recovered, regardless of the decision made. In this case, the $20,000 that the old machine can be sold for is not a sunk cost because it is a future revenue and not an amount that has already been incurred. Therefore, the best choice is D, $175,000 which is the cost of the new machine that Sala Co. is considering purchasing.

Question 7

Book value of old equipment is considered to be a
A) relevant cost.
B) semi-relevant cost.
C) sunk cost.
D) cost that can be changed by a present or future decision.

Accepted Answer

The book value of old equipment is a sunk cost, meaning it is a cost that has already been incurred and cannot be recovered or changed by present or future decisions. It is not relevant to future decision making and should not be factored into the decision-making process.

Question 8

A company decided to replace an old machine with a new machine. Which of the following is considered a relevant cost?
A) The book value of the old equipment
B) Depreciation expense on the old equipment
C) The loss on the disposal of the old equipment
D) The current disposal price of the old equipment

Accepted Answer

The current disposal price of the old equipment is a relevant cost because it represents the value that can be gained or lost by choosing to replace the old machine with a new one. The book value of the old equipment, depreciation expense on the old equipment, and the loss on the disposal of the old equipment are not relevant costs for this decision, as they are based on past or sunk costs and do not affect the future cash flows of the company.

Question 9

The focus of a sell or process further decision is
A) incremental revenue.
B) incremental cost.
C) both incremental revenue and incremental cost.
D) neither incremental revenue nor incremental cost.

Accepted Answer

The decision to sell or process further involves comparing the incremental revenue gained from selling the product in its current form versus the incremental cost of processing it further to potentially increase its value. Therefore, both incremental revenue and incremental cost are important factors in this decision.

Question 10

Pratt Company has old inventory on hand that cost $12,000. Its scrap value is $16,000. The inventory could be sold for $40,000 if manufactured further at an additional cost of $12,000. What should Pratt do?
A) Sell the inventory for $16,000 scrap value
B) Dispose of the inventory to avoid any further decline in value
C) Hold the inventory at its $12,000 cost
D) Manufacture further and sell it for $40,000

Accepted Answer

Manufacturing further and selling for $40,000 will result in a profit of $16,000 ($40,000 - $12,000 for additional manufacturing cost - $12,000 for original cost). This is a better option than disposing of the inventory or selling for scrap value as it generates more revenue for the company. Holding at its $12,000 cost would not benefit the company as it is not generating any additional revenue.

Question 11

Abel Company produces three versions of baseball bats: wood, aluminum, and hard rubber. A condensed segmented income statement for a recent period follows:  Assume none of the fixed expenses for the hard rubber line are avoidable. What will be total net income if the line is dropped?
A) $125,000
B) $103,000
C) $105,000
D) $140,000

Accepted Answer

If the hard rubber line is dropped, the total revenue will decrease by $300,000 and the total variable expenses will decrease by $150,000. However, the fixed expenses for the hard rubber line of $47,000 are unavoidable and will continue to be an expense even if the line is dropped. Therefore, the net income will decrease by $103,000 ($300,000 - $150,000 - $47,000 = $103,000). So, the best choice is B.

Question 12

A company has a process that results in 15,000 pounds of Product A that can be sold for $8 per pound. An alternative would be to process Product A further at a cost of $100,000 and then sell it for $14 per pound. Should management sell Product A now or should Product A be processed further and then sold? What is the effect of the action?
A) Process further, the company will be better off by $10,000.
B) Sell now, the company will be better off by $10,000.
C) Process further, the company will be better off by $90,000.
D) Sell now, the company will be better off by $100,000.

Accepted Answer

The answer of A company has a process that results...

Question 13

Abel Company produces three versions of baseball bats: wood, aluminum, and hard rubber. A condensed segmented income statement for a recent period follows:  Assume all of the fixed expenses for the hard rubber line are avoidable. What will be total net income if the line is dropped?
A) $125,000
B) $103,000
C) $105,000
D) $140,000

Accepted Answer

The answer of Abel Company produces three versions of baseball...

Question 14

Sala Co. is contemplating the replacement of an old machine with a new one. The following information has been gathered:  If the old machine is replaced, it can be sold for $20,000.
The net advantage (disadvantage) of replacing the old machine is
A) $15,000
B) $20,000
C) $(5,000)
D) $(50,000)

Accepted Answer

The answer of Sala Co. is contemplating the replacement of...

Question 15

A company is considering replacing old equipment with new equipment. Which of the following is a relevant cost for incremental analysis?
A) Annual depreciation charge on the old equipment
B) Book value of the old equipment
C) Estimated annual depreciation of the new equipment
D) Cost of the new equipment

Accepted Answer

The cost of the new equipment is a relevant cost for incremental analysis as it represents an additional cost that will be incurred if the company decides to replace the old equipment with the new one. The annual depreciation charge on the old equipment and book value are sunk costs and do not affect the decision to replace the equipment. The estimated annual depreciation of the new equipment is also not relevant as it represents a future cost that will be incurred regardless of whether the equipment is replaced or not.

Question 16

Which of the following is not relevant information in a decision whether old equipment presently being used should be replaced by new equipment?
A) The cash price of the new equipment
B) The salvage value of the old equipment
C) The book value of the old equipment
D) The cost savings if the new equipment is purchased

Accepted Answer

The book value of the old equipment is not relevant because it is a sunk cost and does not affect the future cash flows of the decision. The cash price of the new equipment, the salvage value of the old equipment, and the cost savings if the new equipment is purchased are all relevant factors that should be considered in the decision-making process.

Question 17

In a retain or replace equipment decision, trade-in allowance available on old equipment
A) increases the cost of the new equipment.
B) is relevant because it will not be realized if the old equipment is retained.
C) is not relevant to the decision.
D) reduces the cost of the old equipment.

Accepted Answer

The trade-in allowance available on old equipment is relevant to the decision because it represents a potential cash inflow that will not be realized if the old equipment is retained. Therefore, it should be considered when deciding whether to retain or replace the equipment.

Question 18

The decision rule on whether to sell or process further
A) varies from situation to situation.
B) is process further as long as total revenue exceeds present revenues.
C) is process further if incremental revenue from such processing exceeds incremental fixed costs.
D) is process further if incremental revenue from such processing exceeds the incremental processing costs.

Accepted Answer

The answer of The decision rule on whether to sell...

Question 19

Sala Co. is contemplating the replacement of an old machine with a new one. The following information has been gathered:  If the old machine is replaced, it can be sold for $20,000.
Which of the following amounts is relevant to the replacement decision?
A) $175,000
B) $250,000
C) $49,500
D) $0

Accepted Answer

The answer of Sala Co. is contemplating the replacement of...

Question 20

A company is deciding on whether to replace some old equipment with new equipment. Which of the following is not a relevant cost for incremental analysis?
A) Annual operating cost of the new equipment
B) Annual operating cost of the old equipment
C) Net cost of the new equipment
D) Accumulated depreciation on the old equipment

Accepted Answer

Accumulated depreciation on the old equipment is not a relevant cost for incremental analysis because it represents the past cost of the old equipment and is not affected by the decision to replace the equipment. The relevant costs for incremental analysis are the costs that differ between the alternatives being considered, such as the annual operating costs and the net cost of the new equipment.

Quiz 26: Standard Costs and Balanced Scorecard

Janssen Company has old inventory on hand that cost $18,000. Its scrap value is $24,000. The inventory could be sold for $60,000 if manufactured further at an additional cost of $18,000. What should Janssen do?

New Age Makeup produces face cream. Each bottle of face cream costs $10 to produce and can be sold for $13. The bottles can be sold as is, or processed further into sunscreen at a cost of $14 each. New Age Makeup could sell the sunscreen bottles for $23 each.

Marcus Company gathered the following data about the three products that it produces: Which of the products should not be processed further?

Sala Co. is contemplating the replacement of an old machine with a new one. The following information has been gathered: If the old machine is replaced, it can be sold for $20,000. Which of the following amounts is a sunk cost?

Book value of old equipment is considered to be a

A company decided to replace an old machine with a new machine. Which of the following is considered a relevant cost?

The focus of a sell or process further decision is

Pratt Company has old inventory on hand that cost $12,000. Its scrap value is $16,000. The inventory could be sold for $40,000 if manufactured further at an additional cost of $12,000. What should Pratt do?

Abel Company produces three versions of baseball bats: wood, aluminum, and hard rubber. A condensed segmented income statement for a recent period follows: Assume none of the fixed expenses for the hard rubber line are avoidable. What will be total net income if the line is dropped?

Abel Company produces three versions of baseball bats: wood, aluminum, and hard rubber. A condensed segmented income statement for a recent period follows: Assume all of the fixed expenses for the hard rubber line are avoidable. What will be total net income if the line is dropped?

Sala Co. is contemplating the replacement of an old machine with a new one. The following information has been gathered: If the old machine is replaced, it can be sold for $20,000. The net advantage (disadvantage) of replacing the old machine is

A company is considering replacing old equipment with new equipment. Which of the following is a relevant cost for incremental analysis?

Which of the following is not relevant information in a decision whether old equipment presently being used should be replaced by new equipment?

In a retain or replace equipment decision, trade-in allowance available on old equipment

The decision rule on whether to sell or process further

Sala Co. is contemplating the replacement of an old machine with a new one. The following information has been gathered: If the old machine is replaced, it can be sold for $20,000. Which of the following amounts is relevant to the replacement decision?

A company is deciding on whether to replace some old equipment with new equipment. Which of the following is not a relevant cost for incremental analysis?