Question 1

If BT&T reworks the defective telephones, by how much will its operating income change?

Accepted Answer

A)  Increase by $500. 
B)  Decrease by $1,600. 
C)  Increase by $5,500. 
D)  Decrease by $6,500. 
A)  Increase by $500. 
B)  Decrease by $1,600. 
C)  Increase by $5,500. 
D)  Decrease by $6,500.

Question 2

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 at least:

Accepted Answer

A)  $50 per unit. 
B)  $35 per unit. 
C)  $12 per unit. 
D)  $10 per unit. 
A)  $50 per unit. 
B)  $35 per unit. 
C)  $12 per unit. 
D)  $10 per unit.

Question 3

Which cost is not relevant in making financial decisions?

Accepted Answer

A)  Sunk costs. 
B)  Opportunity costs. 
C)  Incremental costs. 
D)  All three are relevant. 
A)  Sunk costs. 
B)  Opportunity costs. 
C)  Incremental costs. 
D)  All three are relevant.

Question 4

Which of the following would be an example of a sunk cost?

Accepted Answer

A)  The cost of a new oil burner that replaced a destroyed one. 
B)  The cost of an old inefficient oil burner that will be replaced by a more modern and efficient one. 
C)  Depreciation expense. 
D)  Lost revenue from a bad debt. 
A)  The cost of a new oil burner that replaced a destroyed one. 
B)  The cost of an old inefficient oil burner that will be replaced by a more modern and efficient one. 
C)  Depreciation expense. 
D)  Lost revenue from a bad debt.

Question 5

Seidman Company manufactures and sells 30,000 units of product X per month. Each unit of product X sells for $16 and has a contribution margin of $7. If product X is discontinued, $85,000 in fixed monthly overhead costs would be eliminated and there would be no effect on the sales volume of Seidman Company's other products. If product X is discontinued, Seidman Company's monthly income before taxes should:

Accepted Answer

A)  Increase by $210,000. 
B)  Increase by $125,000. 
C)  Decrease by $210,000. 
D)  Decrease by $125,000. 
A)  Increase by $210,000. 
B)  Increase by $125,000. 
C)  Decrease by $210,000. 
D)  Decrease by $125,000.

Question 6

A sunk cost is the benefit that could have been obtained by pursuing an alternate course of action.

Accepted Answer

A) True 
 B)False

Question 7

Assume that the price offered by the foreign company is $43 per unit. Accepting the special order will cause JCN's operating income to:

Accepted Answer

A)  Increase by $18,000. 
B)  Decrease by $2,000. 
C)  Decrease by $33,000. 
D)  Decrease by $35,000. 
A)  Increase by $18,000. 
B)  Decrease by $2,000. 
C)  Decrease by $33,000. 
D)  Decrease by $35,000.

Question 8

Joint costs allocated to product B1 total:

Accepted Answer

A)  $8,800. 
B)  $13,200. 
C)  $13,500. 
D)  $22,000. 
A)  $8,800. 
B)  $13,200. 
C)  $13,500. 
D)  $22,000.

Question 9

Assuming John Boyd wants to earn a pretax profit of $10,000 on this special order, what price must it charge Joan Reid?

Accepted Answer

A)  $69. 
B)  $83. 
C)  $95. 
D)  Some other amount. 
A)  $69. 
B)  $83. 
C)  $95. 
D)  Some other amount.

Question 10

An opportunity cost is a relevant cost when making a business decision.

Accepted Answer

A) True 
 B)False

Question 11

Incremental analysis
Information regarding current operations of the Farrell Corporation is given below:
$$\begin{array} { | l | l | } 
\hline \text { Sales } & \$ 950,000 \
\hline \text { Variable Costs } & \$ 450,000 \
\hline \text { Fixed Costs } & \$ 310,000 \
\hline
\end{array}$$ A proposed addition to Farrell's factory is estimated by the sales manager to increase sales by a maximum of $750,000. The company's accountants have determined that the proposed addition will add $320,000 to fixed costs each year.
(a) Explain why the existing $310,000 of fixed costs is a sunk cost while the $320,000 of fixed costs associated with the proposed addition is an out-of-pocket cost.
(b) Calculate by how much the proposed addition will either increase or reduce operating income.

Accepted Answer

(a) The $310,000 of current fixed cost i

Question 12

A decision to discontinue a given product on the basis of contribution margin data should include consideration of the probable impact of the discontinuance on the sales of other products.

Accepted Answer

A) True 
 B)False

Question 13

Limited resources
Portable Enterprises produces two lines of mobile homes: double-wide and single-wide. Unit cost and revenue data pertaining to each product are shown below:
 
Each double-wide home requires 350 different labor hours and 125 machine hours. Each single-wide home requires 175 direct labor hours and 150 machine hours. Demand for each line of homes far exceeds the company's total production capacity.
(a) If Portable's production capacity is constrained by limited direct labor hours, which line of homes should it produce? ___________________ (b) If Portable's total production capacity is constrained by machine hours, which line of homes should it produce? ____________________ Computations

Accepted Answer

(a) Single

Question 14

By choosing to go into business for himself, Jim Lazar foregoes the possibility of getting a highly paid job with a large company. This is called a(n):

Accepted Answer

A)  Sunk cost. 
B)  Out-of-pocket cost. 
C)  Opportunity cost. 
D)  Joint cost. 
A)  Sunk cost. 
B)  Out-of-pocket cost. 
C)  Opportunity cost. 
D)  Joint cost.

Question 15

Using an incremental analysis approach, Burns should consider accepting this special order only if the price per unit offered by Allen is at least:

Accepted Answer

A)  $20. 
B)  $50. 
C)  $80. 
D)  $40. 
A)  $20. 
B)  $50. 
C)  $80. 
D)  $40.

Question 16

In deciding whether to rework the tables or sell them as is, management should:

Accepted Answer

A)  Compare the $305,000 proceeds from the sale of the tables as is, with the $355,000 cost of the tables. 
B)  Compare the $605,000 possible revenue from refinished tables with the total cost of $355,000 plus $315,000 to refinish. 
C)  Compare the $315,000 cost to refinish the tables with the incremental revenue of $300,000 if the tables are refinished. 
D)  Eliminate any alternative that results in a loss on the sale of the product. 
A)  Compare the $305,000 proceeds from the sale of the tables as is, with the $355,000 cost of the tables. 
B)  Compare the $605,000 possible revenue from refinished tables with the total cost of $355,000 plus $315,000 to refinish. 
C)  Compare the $315,000 cost to refinish the tables with the incremental revenue of $300,000 if the tables are refinished. 
D)  Eliminate any alternative that results in a loss on the sale of the product.

Question 17

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:

Accepted Answer

A)  Increase by $26,000. 
B)  Increase by $30,000. 
C)  Increase by $6,000. 
D)  Decrease by $10,000. 
A)  Increase by $26,000. 
B)  Increase by $30,000. 
C)  Increase by $6,000. 
D)  Decrease by $10,000.

Question 18

Assume that Phoenix decides to accept the special order at a unit sales price that will add $400,000 per month to its operating income. The unit price of the special order will be:

Accepted Answer

A)  $85. 
B)  $70. 
C)  $55. 
D)  Some other amount. 
A)  $85. 
B)  $70. 
C)  $55. 
D)  Some other amount.

Question 19

Maple syrup and pancakes are examples of joint products.

Accepted Answer

A) True 
 B)False

Question 20

Even though costs, revenues, and other factors do not vary among possible courses of action, they may be relevant to a decision.

Accepted Answer

A) True 
 B)False

Exam 21: Incremental Analysis

If BT&T reworks the defective telephones, by how much will its operating income change?

Which cost is not relevant in making financial decisions?

Which of the following would be an example of a sunk cost?

A sunk cost is the benefit that could have been obtained by pursuing an alternate course of action.

Assume that the price offered by the foreign company is $43 per unit. Accepting the special order will cause JCN's operating income to:

Joint costs allocated to product B1 total:

Assuming John Boyd wants to earn a pretax profit of $10,000 on this special order, what price must it charge Joan Reid?

An opportunity cost is a relevant cost when making a business decision.

A decision to discontinue a given product on the basis of contribution margin data should include consideration of the probable impact of the discontinuance on the sales of other products.

By choosing to go into business for himself, Jim Lazar foregoes the possibility of getting a highly paid job with a large company. This is called a(n):

Using an incremental analysis approach, Burns should consider accepting this special order only if the price per unit offered by Allen is at least:

In deciding whether to rework the tables or sell them as is, management should:

Assume that Phoenix decides to accept the special order at a unit sales price that will add $400,000 per month to its operating income. The unit price of the special order will be:

Maple syrup and pancakes are examples of joint products.

Even though costs, revenues, and other factors do not vary among possible courses of action, they may be relevant to a decision.

Accounting: Information for Decision Making

Basic Financial Statements

The Accounting Cycle: Capturing Economic Events

The Accounting Cycle: Accruals and Deferrals

The Accounting Cycle: Reporting Financial Results

Merchandising Activities

Financial Assets

Inventories and the Cost of Goods Sold

Plant and Intangible Assets

Liabilities

Stockholders Equity: Paid-In Capital

Income and Changes in Retained Earnings

Statement of Cash Flows

Financial Statement Analysis

Global Business and Accounting

Management Accounting: a Business Partner

Job Order Cost Systems and Overhead Allocations

Process Costing

Costing and the Value Chain

Cost-Volume-Profit Analysis

Responsibility Accounting and Transfer Pricing

Operational Budgeting

Standard Cost Systems

Rewarding Business Performance

Capital Budgeting

Forms of Business Organization

The Time Value of Money: Future Amounts and Present Values Answer Key

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