Exam 7: Incremental Analysis

What is the process of evaluating financial data that changes under alternative courses of action called?

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.

Litto Fray's produces corn chips.The cost of one batch is below: Direct materials \ 18.00 Direct labour 13.00 Variable overhead 12.00 Fixed overhead 14.00 An outside supplier has offered to produce the corn chips for $26 per batch.How much will Litto Fray save if it accepts the offer?

In a sell or process further decision, management should process further as long as the incremental revenues from additional processing are greater than the incremental costs.

Which one of the following is an alternative name for incremental analysis?

A disadvantage of using an outside supplier is the associated loss of control over the production process.

Peters, Inc.produces chocolate chip cookies.Costs for producing one batch appear below: Direct materials \ 8.00 Direct labour 3.00 Variable overhead 1.00 Fixed overhead 4.00 An outside supplier has offered to produce the cookies for $14 per batch.If Peters decides to buy instead of make the cookies, what is the maximum price it would pay?

Use the following information for questions Hermantic, Inc.can produce 100 units of a component part with the following costs: Direct Materials \ 30,000 Direct Labour 13,000 Variable Overhead 32,000 Fixed Overhead 22,000 -If Hermantic, Inc.purchases the units externally for $80,000, by what amount will its total costs change? Fixed costs are not avoidable if they purchase externally.

Use the following information for questions 6 Eminen Music produces 60,000 blank CDs on which to record music.The CDs have the following costs: Direct Materials \ 11,000 Direct Labour 15,000 Variable Overhead 3,000 Fixed Overhead 7,000 -Eminem could avoid $4,000 in fixed overhead costs if it acquires the CDs externally.If cost minimization is the major consideration and the company would prefer to buy the 60,000 units externally, what is the maximum external price that Eminem would expect to pay for the units?

Harrison Company determines that an opportunity cost of an alternate course of action is relevant to a make or buy decision.Which statement is true of the opportunity cost?

A factory is operating at less than 100% capacity.Potential additional business will NOT use up the remainder of the plant capacity.Given the following list of costs, which one should be ignored in a decision to produce additional units of product?

EKP purchased a raw material in bulk for $10,000.It then spent an additional $500 to package the product into smaller quantities which it can sell for $12,000.Recently, a situation has arisen in which EKP can add an additional ingredient to the individual packages and sell them for $14,000.The cost of adding the additional ingredient is $1,700.Which amounts are relevant to the decision?

Use the following information for questions Hermantic, Inc.can produce 100 units of a component part with the following costs: Direct Materials \ 30,000 Direct Labour 13,000 Variable Overhead 32,000 Fixed Overhead 22,000 -If Hermantic, Inc.can purchase the component externally for $88,000 and only $8,000 of the fixed costs can be avoided, what is the correct "make or buy decision"?

Chapman Company manufactures widgets.Embree Company has approached Chapman with a proposal to sell the company widgets at a price of $60,000 for 100,000 units.Chapman 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: Direct material \ 23,000 Direct labour 22,000 Manufacturing overhead Total The manufacturing overhead consists of $12,000 of costs that will be eliminated if the components are no longer produced by Chapman.From Chapman's point of view, how much is the incremental cost or savings if the widgets are bought instead of made?

If an unprofitable product is eliminated, fixed expenses allocated to the eliminated segment will likely be eliminated.

Excess capacity decisions for management involve

Costs that are relevant for future decision making in a manufacturing environment include

Walton, Inc.is unsure of whether to sell its product assembled or unassembled.The unit cost of the unassembled product is $16, while the cost of assembling each unit is estimated at $17.Unassembled units can be sold for $55, while assembled units could be sold for $71 per unit.What decision should Walton make?

Specik, Inc.is considering the following alternatives: Alternative 1 Alternative 2 Revenues \ 120,000 \ 120,000 Variable costs 60,000 65,000 Fixed costs 35,000 39,000 Which of the following are relevant in choosing between the alternatives?

Diversified Machines has four product lines, one of which reflects the following results: $\begin{array}{lr}\text { Sales } & \$ 220,000 \\\text { Variable expenses } & 120,000 \\\text { Contribution margin } & 100,000 \\\text { Fixed expenses } & 120,000\\\text { Net loss }&\$(20,000)\end{array}$ If this product line is eliminated, 40% of the fixed expenses can be eliminated and the other 60% will be allocated to other product lines.If management decides to eliminate this product line, what will happen to the company's net income?