Exam 20: Incremental Analysis

A company is deciding whether or not to replace some old equipment with new equipment. Which of the following is not considered in the incremental analysis?

In a decision on whether an order should be accepted at a special price when there is plant capacity available, a major consideration is whether the special price exceeds __________________.

Larkin, Inc. uses 1,000 units of the component NJF1 every month to manufacture one of its products. The unit costs incurred to manufacture the component are as follows: Overhead costs include variable material handling costs of $10, which are applied to products on the basis of direct material costs. The remainder of the overhead costs are applied on the basis of direct labor dollars and consist of 50% variable costs and 50% fixed costs. A vendor has offered to supply the NJF1 component at a price of $175 per unit. Instructions (a) Should Larkin purchase the component from the outside vendor if its capacity remains idle? (b) Should Larkin purchase the component from the outside vendor if it can use its facilities to manufacture another product? What information will Larkin need to make an accurate decision? Show your calculations.

Pratt Company has old inventory on hand that cost $15,000. Its scrap value is $20,000. The inventory could be sold for $50,000 if manufactured further at an additional cost of $15,000. What should Pratt do?

An important step in management's decision-making process is to determine and evaluate possible courses of action.

An important purpose of management accounting is to provide _____________________ for decision making.

When will the elimination of a product line have no effect on the company's overall profit?

The potential benefit that may be obtained by following an alternative course of action is called an _________________ cost.

Use the following information for questions . Clemente Inc. incurs the following costs to produce 10,000 units of a subcomponent: An outside supplier has offered to sell Clemente the subcomponent for $2.85 a unit. -If Clemente could avoid $3,000 of fixed overhead by accepting the offer, net income would increase (decrease) by

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

The potential effects of the decision to eliminate a line of business on existing employees and the community are

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?

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?

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

A company has a process that results in 24,000 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 $160,000 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?

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

Which of the following is true if a company can accept a special order without affecting its regular sales and is within plant capacity?

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?

Kasten, Inc. budgeted 10,000 widgets for production during 2016. Kasten has capacity to produce 12,000 units. Fixed factory overhead is allocated to production. The following estimated costs were provided: Instructions Answer each of the following independent questions: 1. Kasten received an order for 1,000 units from a new customer in a country in which Kasten has never done business. This customer has offered $43 per widget. Should Kasten accept the order? 2. Kasten received an offer from another company to manufacture the same quality widgets for $39. Should Kasten let someone else manufacture all 10,000 widgets and focus only on distribution?

Harris Timber Corporation uses a machine that removes the bark from cut timber. The machine is unreliable and results in a significant amount of downtime and excessive labor costs. The management is considering replacing the machine with a more efficient one which will minimize downtime and excessive labor costs. Data are presented below for the two machines: It is estimated that the new machine will produce annual cost savings of $85,000. The old machine can be sold to a scrap dealer for $8,000. Both machines will have a salvage value of zero if operated for the remainder of their useful lives. Instructions Determine whether the company should purchase the new machine.