Exam 7: Incremental Analysis

It is always better to sell now rather than process further because of the time value of money.

Fornelli, Inc. can produce 100 units of a component part with the following costs: Direct Materials \ 15,000 Direct Labor 6,500 Variable Overhead 16,000 Fixed Overhead 11,000 If Fornelli, Inc. can purchase the component part externally for $44,000 and only $4,000 of the fixed costs can be avoided, what is the correct make-or-buy decision?

Use the following information for questions Chung Inc. is considering the replacement of a piece of equipment with a newer model. The following data has been collected: Old Equipment New Equipment Purchase price \ 225,000 \ 375,000 Accumulated depreciation 90,000 -0- Annual operating costs 300,000 240,000 If the old equipment is replaced now, it can be sold for $60,000. Both the old equipment's remaining useful life and the new equipment's useful life is 5 years. -Which of the following amounts is irrelevant to the replacement decision?

Janssen Company has old inventory on hand that cost $24,000. Its scrap value is $32,000. The inventory could be sold for $80,000 if manufactured further at an additional cost of $24,000. What should Janssen do?

Miley, Inc. has excess capacity. Under what situations should the company accept a special order for less than the current selling price?

If a company is operating at full capacity, the incremental costs of a special order will likely include fixed manufacturing costs.

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.

Which of the following is not a true statement?

A company is considering eliminating a product line. The fixed costs currently allocated to the product line will be allocated to other product lines upon discontinuance. If the product line is discontinued,

Serene Dairy has four product lines: sour cream, ice cream, yogurt, and butter. The total cost of producing the milk base for the products is $45,000, which has been allocated based on the gallons of milk base used by each product. Results for July follow: Sour Cream Ice Cream Yogurt Butter Total Units sold 2,000 500 400 2,000 4,900 Revenue \ 10,000 \ 20,000 \ 10,000 \ 20,000 \ 60,000 Variable departmental costs 6,000 13,000 4,200 4,800 28,000 Fixed costs 5,000 2,000 3,000 7,000 17,000 Net income (loss) \1 ,000 \5 ,000 \2 ,800 \8 ,200 \1 5,000 How much are total joint costs of the products?

Sandusky Inc. has the following costs when producing 100,000 units: Variable costs \ 600,000 Fixed costs 900,000 An outside supplier is interested in producing the item for Sandusky. If the item is produced outside, Sandusky could use the released production facilities to make another item that would generate $150,000 of net income. At what unit price would Sandusky accept the outside supplier's offer if Sandusky wanted to increase net income by $120,000?

Opportunity cost must be considered in decisions involving

An incremental make-or-buy decision depends solely on which alternative is the lowest cost alternative.

Sala Co. is contemplating the replacement of an old machine with a new one. The following information has been gathered: Old Machine New Machine Price \ 300,000 \ 600,000 Accumulated Depreciation 90,000 -0- Remaining useful life 10 years -0 - Useful life -0 - 10 years Annual operating costs \ 240,000 \ 180,600 If the old machine is replaced, it can be sold for $24,000. The net advantage (disadvantage) of replacing the old machine is

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?

A company contemplating the acceptance of a special order has the following unit cost behavior, based on 10,000 units: Direct materials \ 4 Direct labor 10 Variable overhead 8 Fixed overhead 6 A foreign company wants to purchase 2,000 units at a special unit price of $25. The normal price per unit is $40. In addition, a special stamping machine will have to be purchased for $4,000 in order to stamp the foreign company's name on the product. The incremental income (loss) from accepting the order is

Max Company uses 20,000 units of Part A in producing its products. A supplier offers to make Part A for $7. Max Company has relevant costs of $8 a unit to manufacture Part A. If there is excess capacity, the opportunity cost of not buying Part A from the supplier is

Which of the following would generally not affect a make-or-buy decision?

Use the following information for questions Clemente Inc. incurs the following costs to produce 10,000 units of a subcomponent: Direct materials \ 8,400 Direct labor 11,250 Variable overhead 12,600 Fixed overhead 16,200 An outside supplier has offered to sell Clemente the subcomponent for $2.85 a unit. -If Clemente accepts the offer, by how much will net income increase (decrease)?

Fornelli, Inc. can produce 100 units of a component part with the following costs: Direct Materials \ 15,000 Direct Labor 6,500 Variable Overhead 16,000 Fixed Overhead 11,000 If Fornelli, Inc. can purchase the units externally for $40,000, by what amount will its total costs change?