Exam 7: 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?

It costs Dryer Company $26 per unit ($18 variable and $8 fixed) to produce its product, which normally sells for $38 per unit. A foreign wholesaler offers to purchase 5,000 units at $21 each. Dryer would incur special shipping costs of $2 per unit if the order were accepted. Dryer has sufficient unused capacity to produce the 5,000 units. If the special order is accepted, what will be the effect on net income?

Costs incurred before the split-off point are

Ruth Company produces 1,000 units of a necessary component with the following costs: Direct Materials \ 27,000 Direct Labor 16,000 Variable Overhead 4,000 Fixed Overhead 7,000 None of Ruth Company's fixed overhead costs can be reduced, but another product could be made that would increase profit contribution by $8,000 if the components were acquired externally. If cost minimization is the major consideration and the company would prefer to buy the components, what is the maximum external price that Ruth Company would be willing to accept to acquire the 1,000 units externally?

What will most likely occur if a company eliminates an unprofitable segment when a portion of fixed costs are unavoidable?

The source of data to serve as inputs in incremental analysis is generated by

Relevant costs are always

Chapman Company manufactures widgets. Embree Company has approached Chapman with a proposal to sell the company widgets at a price of $125,000 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 materials \ 46,500 Direct labor 43,500 Manufacturing overhead 60,000 Total \ 150,000 The manufacturing overhead consists of $24,000 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?

Use the following information for questions Ortiz Co. produces 5,000 units of part A12E. The following costs were incurred for that level of production: Direct materials \ 55,000 Direct labor 160,000 Variable overhead 75,000 Fixed overhead 175,000 If Ortiz buys the part from an outside supplier, $40,000 of the fixed overhead is avoidable. -What is the relevant cost per unit of part A12E?

Martin Company incurred the following costs for 70,000 units: Variable costs $\quad\$ 420,000$ Fixed costs $\quad\quad 392,000$ Martin has received a special order from a foreign company for 3,000 units. There is sufficient capacity to fill the order without jeopardizing regular sales. Filling the order will require spending an additional $6,300 for shipping. If Martin wants to earn $6,000 on the order, what should the unit price be?

In an equipment replacement decision, the cost of the old equipment is a(n)

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

A cost that cannot be changed by any present or future decision is a(n)

Galley Industries can produce 100 units of a necessary component part with the following costs: Direct Materials \ 20,000 Direct Labor 9,000 Variable Overhead 21,000 Fixed Overhead 8,000 If Galley Industries purchases the component externally, $2,000 of the fixed costs can be avoided. Below what external price for the 100 units would Galley choose to buy instead of make?

In a decision concerning replacing old equipment with new equipment, the book value of the old equipment can be considered a sunk cost.

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.

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.

A company is considering the following alternatives: . Alternative 1 Alternative 2 Revenues \ 120,000 \ 120,000 Variable costs 60,000 70,000 Fixed costs 35,000 35,000 Which of the following are relevant in choosing between the alternatives?

North Division has the following information: Sales \ 1,200,000 Variable expenses 640,000 Fixed expenses 620,000 If this division is eliminated, the fixed expenses will be allocated to the company's other divisions. What is the incremental effect on net income if the division is dropped?

NF Toy Company is unsure of whether to sell its product assembled or unassembled. The unit cost of the unassembled product is $24 and NF Toy would sell it for $52. The cost to assemble the product is estimated at $17 per unit and the company believes the market would support a price of $68 on the assembled unit. What decision should NF Toy make?