Exam 21: Incremental Analysis

After January 1, 2009, in order to be consistent with IASB Standards, U.S. GAAP now requires that borrowing costs on assets that require a substantial period to bring them to a marketable condition be expensed immediately.

Legendary Motors has 7,000 defective autos on hand which cost $12,880,000 to manufacture. Legendary can either sell these defective autos as scrap for $8,000 per auto, or spend an additional $18,320,000 on repairs and then sell them for $12,000 per unit. What is the net advantage to repair the autos?

What is the incremental cost of producing each additional motor?

Burns decides to accept the special order for 5,000 units from Allen at a unit sales price that will add $100,000 per month to its operating income. The unit price Burns is charging Allen is:

If Creative Corporation has a limited supply of wood available, which products should it produce?

Joint costs allocated to product A1 total:

Perfect Plumbing Corporation currently manufactures a valve for use in water pumps that it produces for sale. The company is considering purchasing the valves from an outside supplier rather than manufacturing them. Which of the following costs is not relevant to the decision?

Which factor is not relevant in deciding whether or not to accept a special order?

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.) $_____________

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

Differential costs are those that are the same among alternatives.

Pricing special orders Explain why an American corporation might sell a product in Eastern Europe at a price significantly below that for which it sells the same product in the United States.

When sales of one product contribute to the sales of another product they are called contribution products.

Products which emerge from a shared manufacturing process are referred to as:

Which of the following is not a relevant factor in Burns' decision concerning whether to accept the special order from Allen?

Opportunity costs are irrelevant in decision making.

Which is an example of joint products?

Incremental revenue is relevant in decision making.

Which of the data above is a sunk cost?

Incremental analysis-make-or-buy decision Paramount Bikes, Inc., uses 10,000 derailleurs in its bicycles each year. Derailleurs currently cost the company $20.90 per unit to manufacture, determined as follows: Direct materials \ 50,600 Direct labor 55,000 Variable manufacturing overhead 37,400 Fixed manufacturing overhead Total costs \ 209,000 Cost per unit (\ 209,000/10,000 units ) \ 20.90 Paramount Bikes, Inc., has been approached by an outside supplier that will provide derailleurs at a price of $16 per unit. If Paramount Bikes, Inc., stops producing derailleurs, the direct materials, direct labor, and variable manufacturing overhead will be eliminated, as will $30,000 of the fixed manufacturing overhead. Use incremental analysis to determine whether Paramount Bikes, Inc., should make or buy derailleurs. Complete the following schedule, and indicate in the space provided your decision to continue making, or to buy the part: Decision: ___________________________________________