Exam 21: Incremental Analysis

Make-or-buy decision Currier, Inc., manufactures and distributes a large number of products. The costs per unit for one product, a pole, are as follows: Currier recently decided to buy the pole from another manufacturer for $32 per unit because the unit cost was less than its unit cost of $34. Solely on the basis of the cost data given, evaluate this decision.

Identifying information relevant to a particular business decision requires an understanding of both quantitative and qualitative considerations.

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

The net change in operating income resulting from a decision to manufacture product B2 is:

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

The Fine Point Company currently produces all of the components for its one product; an electric pencil sharpener. The unit cost of manufacturing the motor for this pencil sharpener is: The company is considering the possibility of buying this motor from a subcontractor and has been quoted a price of $3.60 per unit. The relevant cost of manufacturing the motor to be considered in reaching the decision is:

Which of the following is not relevant to management's decision regarding refinishing the tables or selling them as is?

Products resulting from a shared manufacturing process are referred to as complimentary products.

Opportunity costs represent:

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): $_____________

Accepting a special order is profitable whenever the revenue from the special order exceeds:

Incremental revenues:

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

Widmark Company originally made cell phones at a cost of $60,000 that have since become obsolete due to new technology. They can sell the phones to a dealer for scrap for $11,500 or put more work into them to bring them up-to-date. To re-do the phones would cost $13,000 and they then could be sold for $20,000. (A.) Should the company scrap them or rework them (show calculations) (B.) If the original cost had been $50,000 and the company could now sell the phones for $25,000 what should Heston do?

Joint costs allocated to product MB total: $_____________

Robbins Co. has been producing a part for a camera they manufacture. The costs for this part are as follows: Fixed costs \ 392,000 Total variable costs \ 112,000 Units produced 28,000 Robbins has an opportunity to purchase this part rather than manufacture it. To purchase the part will cost $3 a unit. If the part is purchased, fixed costs will be reduced by 20%. Should Robbins Co. make or buy this part. Show how you arrived at your decision.

Joint products are similar products that serve the same exact function.

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

Incremental analysis-accepting a special order Essential Company normally produces and sells 4,000 video monitors for personal computers each month. Variable manufacturing costs amount to $62 per unit, and fixed manufacturing costs are $170,000 per month. The regular sales price of the monitors is $140 per unit. The company is considering a special order from a foreign computer maker to buy an additional 1,000 monitors per month at a special price of $70 per unit. Filling this special order would not affect Essential Company's regular sales volume or fixed manufacturing costs. (a) The average cost per unit at the 4,000-unit-per-month production level is $________________ per unit. (b) The average cost per unit at the 5,000-unit-per-month production level is $________________ per unit. (c) The amount of increase or decrease (indicate the correct term) in Essential Company's operating income that would result from accepting the special order is $_______________.