Exam 21: Incremental Analysis

Opportunity costs represent:

The decision to rework a defective batch of products will improve net income whenever the incremental revenue earned as a result of the decision exceeds:

Johnson produces 7,000 skateboards each month, which it sells for $60 each. Variable costs are $25 per unit, and fixed costs are $95,000 per month. A Canadian company has offered to buy an additional 1,000 skateboards for $30 per unit. Assuming that normal sales volume and fixed costs remain unchanged, filling this special order will cause Johnson's operating income to:

When constrained by a limiting resource, managers often seek to produce those products which have:

Which of the following would be least relevant in deciding whether to further process a joint product past the split-off point?

A job of 1,000 VCRs manufactured by K Corp. contains defective parts. The cost incurred in manufacturing these defective units is $140,000. K Corp. can sell these units as scrap materials for $45 per unit or repair all 1,000 units at a total cost of $70,000. If the units are repaired, they can be sold at the normal price of $200 per unit. -What will be the average per unit manufacturing cost of the VCR, including repair costs, assuming that K Corp. does the repairs? $____________ per unit

Which of the following costs is generally considered irrelevant in incremental analysis?

Technical Chemical manufactures two products as part of a joint process: MB and EB. Joint costs up to the split-off point total $70,000, and are allocated to each line of product in proportion to its relative sales value. At the split-off point, product MB can be sold for $85,000, and EB can be sold for $25,000. At an incremental cost of $30,000, MB can be processed into MB-2 and sold for $105,000. At an incremental cost of $25,000, EB can be processed into EB-2 and sold for $62,500. a) Joint costs allocated to product MB total (round your percentage calculations to a whole number): $____________ b) Joint costs allocated to product EB total (round your percentage calculations to a whole number): $____________ c) The net change in operating income resulting from a decision to manufacture MB-2 is (specify whether the change is an increase or a decrease): $____________ d) The net change in operating income resulting from a decision to manufacture EB-2 is (specify whether the change is an increase or a decrease): $____________ e) The net change in operating income resulting from a decision to manufacture both MB-2 and EB-2 is (specify whether the change is an increase or a decrease): $____________

The average total cost of producing Z-12 is $35 per unit. The average variable cost associated with the production of Z-12 is $12 per unit, of which $2 is manufacturing overhead. The normal selling price of Z-12 is $50 per unit. If excess capacity exists, a special order for Z-12 will increase net operating income if it is priced over at least:

ILF makes 2,000 waterproof mattresses annually to be used in one of its products. The unit cost of the mattresses includes variable costs of $45 and fixed costs of $30. If the mattresses were purchased from an outside supplier, 60% of the fixed costs could be eliminated. Buying mattresses from an outside supplier at a price of $50 each would cause ILF's operating income to:

A job of 1,000 VCRs manufactured by K Corp. contains defective parts. The cost incurred in manufacturing these defective units is $140,000. K Corp. can sell these units as scrap materials for $45 per unit or repair all 1,000 units at a total cost of $70,000. If the units are repaired, they can be sold at the normal price of $200 per unit. -What will be the total amount of the loss incurred by K Corp. on the sale of these units if they are repaired and sold for $200 per unit? $____________ loss

A job of 1,000 VCRs manufactured by K Corp. contains defective parts. The cost incurred in manufacturing these defective units is $140,000. K Corp. can sell these units as scrap materials for $45 per unit or repair all 1,000 units at a total cost of $70,000. If the units are repaired, they can be sold at the normal price of $200 per unit. -Should K Corp. (1) sell the units for scrap or (2) repair the units? Underline the most profitable action, and indicate the amount of the net financial benefit of this action to the company. $____________

When deciding whether to make or buy a component part, the most relevant consideration is often:

A job of 1,000 VCRs manufactured by K Corp. contains defective parts. The cost incurred in manufacturing these defective units is $140,000. K Corp. can sell these units as scrap materials for $45 per unit or repair all 1,000 units at a total cost of $70,000. If the units are repaired, they can be sold at the normal price of $200 per unit. -What will be the total amount of the loss incurred by K Corp. on the sale of these units if they are sold for scrap at $45 per unit? $____________ loss

Products for which sales of one contribute to the sales of another are called:

A job of 1,000 VCRs manufactured by K Corp. contains defective parts. The cost incurred in manufacturing these defective units is $140,000. K Corp. can sell these units as scrap materials for $45 per unit or repair all 1,000 units at a total cost of $70,000. If the units are repaired, they can be sold at the normal price of $200 per unit. -What is the relevant cost to K Corp. in deciding whether or not to repair the units? (State this cost as a total amount for all 1,000 units.) $____________