Deck 26: Incremental Analysis and Capital Budgeting

Question 1

The eliminating of an unprofitable product line may actually decrease total company net income.

Answer 1

True

Question 2

It is always better to sell now rather than process further because of the time value of money.

Answer 2

False

Question 3

In a sell or process further decision management should process further as long as the incremental revenues from additional processing exceed the incremental variable costs.

Answer 3

False

Question 4

It is better not to replace old equipment if it is not fully depreciated.

Question 5

If a company has excess capacity and present markets will not be affected it would be profitable to accept an order at a special unit price even though the price is less than the unit variable cost to manufacture the item.

Question 6

A company should never accept an order for its product at less than its regular sales price.

Question 7

In a decision to retain or replace old equipment the salvage value of the old equipment is relevant in incremental analysis.

Question 8

A decision whether to continue to make a product or buy it externally depends on the external price and the amount of variable and fixed costs that can be eliminated assuming no alternative uses of resources.

Question 9

In making decisions management ordinarily considers both financial and nonfinancial information.

Question 10

Decision-making involves choosing among alternative courses of action.

Question 11

The elimination of an unprofitable product line may adversely affect the remaining product lines.

Question 12

In incremental analysis total variable costs will always change under alternative courses of action and total fixed costs will always remain constant.

Question 13

A special one-time order should never be accepted if the unit sales price is less than the unit variable cost.

Question 14

If an incremental make or buy analysis indicates that it is cheaper to buy rather than make an item management should always make the decision to choose the lowest cost alternative.

Question 15

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

Question 16

From a quantitative standpoint a segment should be eliminated if its contribution margin is less than the fixed costs that can be eliminated.

Question 17

Financial data are developed for a course of action under an incremental basis and then it is compared to data developed under a differential basis before a decision is made.

Question 18

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

Question 19

An opportunity cost is the potential benefit obtained by using resources in an alternative course of action.

Question 20

Accountants are mainly involved in developing nonfinancial information for management's consideration in choosing among alternatives.

Question 21

In deciding on the future status of an unprofitable segment management should recognize that net income could decrease by eliminating the unprofitable segment.

Question 22

A hurdle rate is the rate of return set by applying ideal standards.

Question 23

The cash payback method is frequently used as a screening tool but it does not take into consideration the profitability of a project.

Question 24

A major accounting contribution to the managerial decision-making process in evaluating possible courses of action is to

A) assign responsibility for the decision.
B) provide relevant revenue and cost data about each course of action.
C) determine the amount of money that should be spent on a project.
D) decide which actions that management should consider.

Question 25

The interest rate yielded by a project is a rate that will cause the present value of the proposed capital expenditure to equal the present value of the expected annual cash inflows.

Question 26

The discounted cash flow technique considers estimated total cash inflows from the investment but not the time value of money.

Question 27

Using the net present value method a net present value of zero indicates that the project would be acceptable.

Question 28

Capital budgeting decisions usually involve large investments and can have a significant impact on a company's future profitability.

Question 29

Accounting contributes to management's decision-making process through internal reports that review the actual impact of the decision.

Question 30

Which of the following stages of the management decision-making process is improperly sequenced?

A) Evaluate possible courses of action $\rightarrow$ Make decision.
B) Assign responsibility for the decision $\rightarrow$ Identify the problem.
C) Identify the problem $\rightarrow$ Determine possible courses of action.
D) Assign responsibility for decision $\rightarrow$ Determine possible courses of action.

Question 31

The net present value method can only be used in capital budgeting if the expected cash flows from a project are an equal amount each year.

Question 32

A major advantage of the annual rate of return technique is that it considers the time value of money.

Question 33

The cash payback capital budgeting technique is a quick way to calculate a project's net present value.

Question 34

The annual rate of return technique requires dividing a project's annual cash inflows by the economic life of the project.

Question 35

Internal reports that review the actual impact of decisions are prepared by

A) department heads.
B) the controller.
C) management accountants.
D) factory workers.

Question 36

The process used to identify the financial data that change under alternative courses of action is called allocation of limited resources.

Question 37

If a company is operating at full capacity the incremental costs of a special order will likely include fixed manufacturing costs.

Question 38

The basic decision rule in a sell or process further decision is: sell without further processing as long as the incremental revenue from processing exceeds the incremental processing costs.

Question 39

The annual rate of return is computed by dividing expected annual net income by average investment.

Question 40

In deciding on the future status of an unprofitable segment management does not usually consider the effect of elimination on related product lines.

Question 41

If a company must expand capacity to accept a special order it is likely that there will be

A) an increase in unit variable costs.
B) no increase in fixed costs.
C) an increase in variable and fixed costs per unit.
D) an increase in fixed costs.

Question 42

Preston Company manufactures a product with a unit variable cost of $140 and a unit sales price of $264. Fixed manufacturing costs were $720000 when 10000 units were produced and sold. The company has a one-time opportunity to sell an additional 3000 units at $210 each in a foreign market which would not affect its present sales. If the company has sufficient capacity to produce the additional units acceptance of the special order would affect net income as follows:

A) Income would decrease by $162000.
B) Income would increase by $156000.
C) Income would increase by $6000.
D) Income would increase by $210000.

Question 43

In incremental analysis

A) only costs are analyzed.
B) only revenues are analyzed.
C) both costs and revenues may be analyzed.
D) both costs and revenues that stay the same between alternate courses of action will be analyzed.

Question 44

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

A) Never
B) When additional fixed costs must be incurred to accommodate the order
C) When the company thinks it can use the cheaper materials without the customer's knowledge
D) When incremental revenues exceed incremental costs

Question 45

Incremental analysis is synonymous with

A) difficult analysis.
B) differential analysis.
C) gross profit analysis.
D) derivative analysis.

Question 46

Which of the following is a true statement about cost behaviors in incremental analysis?
1) Fixed costs will not change between alternatives.
2) Fixed costs may change between alternatives.
3) Variable costs will always change between alternatives.

A) only 1
B) only 2
C) only 3
D) both 2 and 3

Question 47

Incremental analysis would be appropriate for

A) acceptance of an order at a special price.
B) a retain or replace equipment decision.
C) a sell or process further decision.
D) all of these answer choices are correct.

Question 48

It costs Maker Company $22 of variable and $15 of fixed costs to produce one Panini press which normally sells for $57. A foreign wholesaler offers to purchase 1000 Panini presses at $40 each. Maker would incur special shipping costs of $5 per press if the order were accepted. Maker has sufficient unused capacity to produce the 1000 Panini presses. If the special order is accepted what will be the effect on net income?

A) $13000 decrease
B) $13000 increase
C) $22000 decrease
D) $7000 increase

Question 49

If a company anticipates that other sales will be affected by the acceptance of a special order then

A) lost sales should be considered in the incremental analysis.
B) lost sales should not be considered in the incremental analysis.
C) the order should not be accepted.
D) the order will only be accepted if the plant is below capacity.

Question 50

Which of the following is not a true statement?

A) Incremental analysis might also be referred to as differential analysis.
B) Incremental analysis is the same as CVP analysis.
C) Incremental analysis is useful in making decisions.
D) Incremental analysis focuses on decisions that involve a choice among alternative courses of action.

Question 51

Incremental analysis is most useful

A) in developing relevant information for management decisions.
B) in choosing between the net present value method and the internal rate of return method.
C) in evaluating the master budget.
D) as a replacement technique for variance analysis.

Question 52

If a plant is operating at full capacity and receives a one-time opportunity to accept an order at a special price below its usual price then

A) only variable costs are relevant.
B) fixed costs are not relevant.
C) the order will likely be accepted.
D) the order will likely be rejected.

Question 53

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

A) Net income will not be affected.
B) Net income will increase if the special sales price per unit exceeds the unit variable costs.
C) Net income will decrease.
D) Additional fixed costs will probably be incurred.

Question 54

Incremental analysis would not be appropriate for

A) a make or buy decision.
B) an allocation of limited resource decision.
C) elimination of an unprofitable segment.
D) analysis of manufacturing variances.

Question 55

The process of evaluating financial data that change under alternative courses of action is called

A) double entry analysis.
B) contribution margin analysis.
C) incremental analysis.
D) cost-benefit analysis.

Question 56

The source of data to serve as inputs in incremental analysis is generated by

A) market analysts.
B) engineers.
C) accountants.
D) All of these answer choices are correct.

Question 57

Which of the following steps in the management decision-making process does not generally involve the managerial accountant?

A) Determine possible courses of action
B) Make the appropriate decision based on relevant data
C) Prepare internal reports that review the impact of decisions
D) None of these answer choices are correct.

Question 58

A company is considering the following alternatives: $$\begin{array} { l r r } & \text { Option 1 } & \text { Option 2 } \\\text { Revenues } & \$ 330,000 & \$ 330,000 \\\text { Variable costs } & 120,000 & 98,000 \\\text { Fixed costs } & 165,000 & 165,000\end{array}$$ Which of the following are relevant in choosing between the alternatives?

A) Variable costs
B) Revenues
C) Fixed costs
D) Variable costs and fixed costs

Question 59

Nonfinancial information that management might evaluate in making a decision would not include

A) employee turnover.
B) contribution margin.
C) the environment.
D) the corporate profile in the community.

Question 60

In incremental analysis

A) costs are not relevant if they change between alternatives.
B) all costs are relevant if they change between alternatives.
C) only fixed costs are relevant.
D) only variable costs are relevant.

Question 61

Sutton Inc. can produce 100 units of a component part with the following costs: $$\begin{array} { l r } \text { Direct Materials } & \$ 130,000 \\\text { Direct Labor } & 103,000 \\\text { Variable Overhead } & 82,000 \\\text { Fixed Overhead } & 62,000\end{array}$$ If Sutton Inc. can purchase the units externally for $300000 by what amount will its total costs change?

A) An decrease of 67000
B) An increase of $15000
C) An increase of $135000
D) A decrease of $47000

Question 62

Nelson Manufacturing Company can make 100 units of a necessary component part with the following costs: $$\begin{array} { l r } \text { Direct Materials } & \$ 120,000 \\\text { Direct Labor } & 25,000 \\\text { Variable Overhead } & 45,000 \\\text { Fixed Overhead } & 70,000\end{array}$$ If Nelson Manufacturing Company purchases the component externally $30000 of the fixed costs can be avoided. At what external price for the 100 units is the company indifferent between making or buying?

A) $190000
B) $200000
C) $210000
D) $220000

Question 63

Each of the following is a disadvantage of buying rather than making a component of a company's product except that

A) quality control specifications may not be met.
B) the outside supplier could increase prices significantly in the future.
C) profitable product lines may be dropped.
D) the supplier may not deliver on time.

Question 64

Karpentry Company is unsure of whether to sell its product assembled or unassembled. The unit cost of the unassembled product is $30 and Karpentry would sell it for $66. The cost to assemble the product is estimated at $21 per unit and the company believes the market would support a price of $85 on the assembled unit. What decision should Karpentry make?

A) Sell before assembly the company will be better off by $1 per unit.
B) Sell before assembly the company will be better off by $2 per unit.
C) Process further the company will be better off by $29 per unit.
D) Process further the company will be better off by $14 per unit.

Question 65

Opportunity cost must be considered in decisions involving

A) budgeting.
B) financial accounting.
C) CVP analysis.
D) resources that have alternative uses.

Question 66

The opportunity cost of an alternate course of action that is relevant to a make-or-buy decision is

A) subtracted from the "Make" costs.
B) added to the "Make" costs.
C) added to the "Buy" costs.
D) None of these answer choices are correct.

Question 67

Greenwond Inc. can make 1000 units of a necessary component with the following costs: T $\begin{array}{lr}\text { Direct Materials } & \$ 72,000 \\\text { Direct Labor } & 18,000 \\\text { Variable Overhead } & 9,000 \\\text { Fixed Overhead } & ?\end{array}$ he company can purchase the 1000 units externally for $117000. The avoidable fixed costs are $6000 if the units are purchased externally. An analysis shows that at this external price the company is indifferent between making or buying the part. What are the fixed overhead costs of making the component?

A) $24000
B) $18000
C) $12000
D) Cannot be determined.

Question 68

Flamingo Music produces 60000 CDs on which to record music. The CDs have the following costs: $$\begin{array} { l r } \text { Direct Materials } & \$ 11,000 \\\text { Direct Labor } & 15,000 \\\text { Variable Overhead } & 3,000 \\\text { Fixed Overhead } & 7,000\end{array}$$ Flamingo could avoid $6000 in fixed overhead costs if it acquires the CDs externally. If cost minimization is the major consideration and the company would prefer to buy the 60000 units externally what is the maximum external price that Flamingo would expect to pay for the units?

A) $30000
B) $29000
C) $35000
D) $36000

Question 69

Which decision will involve no incremental revenues?

A) Make or buy decision
B) Drop a product line
C) Accept a special order
D) Additional processing decision

Question 70

Sutton Inc. can produce 100 units of a component part with the following costs: $$\begin{array} { l r } \text { Direct Materials } & \$ 130,000 \\\text { Direct Labor } & 103,000 \\\text { Variable Overhead } & 82,000 \\\text { Fixed Overhead } & 62,000\end{array}$$ If Sutton Inc. can purchase the component part externally for $345000 and only $28000 of the fixed costs can be avoided what is the correct make-or-buy decision?

A) Make and save $99000
B) Buy and save $4000
C) Make and save $2000
D) Buy and save $32000

Question 71

Flamingo Music produces 60000 CDs on which to record music. The CDs have the following costs: $$\begin{array} { l r } \text { Direct Materials } & \$ 11,000 \\\text { Direct Labor } & 15,000 \\\text { Variable Overhead } & 3,000 \\\text { Fixed Overhead } & 7,000\end{array}$$ None of Flamingo's fixed overhead costs can be reduced but another product could be made that would increase profit contribution by $4000 if the CDs were acquired externally. If cost minimization is the major consideration and the company would prefer to buy the CDs what is the maximum external price that Flamingo would be willing to accept to acquire the 60000 units externally?

A) $36000
B) $32000
C) $33000
D) $40000

Question 72

Lagusta Company incurred the following costs for 50000 units:
Variable costs $180000
Fixed costs 240000
Lagusta has received a special order from a foreign company for 5000 units. There is sufficient capacity to fill the order without jeopardizing regular sales. Filling the order will require spending an additional $8500 for shipping.
If Lagusta wants to earn $9000 on the order what should the unit price be?

A) $3.60
B) $11.90
C) $7.10
D) $5.30

Question 73

Opportunity cost is usually

A) a standard cost.
B) a potential benefit.
C) a sunk cost.
D) included as part of cost of goods sold.

Question 74

An opportunity cost

A) should be initially recorded as an asset.
B) is the cost of a new product proposal.
C) is the potential benefit that may be obtained by following an alternative course of action.
D) is classified as manufacturing overhead.

Question 75

Wayne Company spent $13000 to produce Product 612 which can be sold as is for $15000 or processed further incurring additional costs of $11500 and then be sold for $17000. Which amounts are relevant to the decision about Product 612?

A) $13000 $15000 and $17000
B) $13000 $11500 and $17000
C) $15000 $11500 and $17000
D) $13000 $15000 $11500 and $17000

Question 76

D'Arien Company incurred the following costs for 70000 units: Variable costs $420000
Fixed costs 392000
D'Arien has received a special order from an Armenian company for 3000 units. There is sufficient capacity to fill the order without jeopardizing regular sales. Filling the order will require spending an additional $6600 for shipping.
If D'Arien wants to break even on the order what should the unit sales price be?

A) $8.20
B) $6.00
C) $11.60
D) $13.80

Question 77

Nelson Manufacturing Company can make 100 units of a necessary component part with the following costs: $$\begin{array} { l r } \text { Direct Materials } & \$ 120,000 \\\text { Direct Labor } & 25,000 \\\text { Variable Overhead } & 45,000 \\\text { Fixed Overhead } & 20,000\end{array}$$ If Nelson Manufacturing Company can purchase the component externally for $190000 and only $5000 of the fixed costs can be avoided what is the correct make-or-buy decision?

A) Make and save $5000
B) Buy and save $5000
C) Make and save $15000
D) Buy and save $15000

Question 78

Lean Foods produces a variety of snack products including fried pork rinds. The cost of one batch of pork rinds is below: $$\begin{array} { l r } \text { Direct materials } & \$ 12.00 \\\text { Direct labor } & 10.00 \\\text { Variable overhead } & 7.00 \\\text { Fixed overhead } & 9.00\end{array}$$ An outside supplier has offered to produce the pork rinds for $25 per batch. How much will Lean save if it accepts the offer?

A) $3.00 per batch
B) $4.00 per batch
C) $18.00 per batch
D) $13.00 per batch

Question 79

Red Company produces 1000 units of a necessary component with the following costs: $$\begin{array} { l r } \text { Direct Materials } & \$ 34,000 \\\text { Direct Labor } & 15,000 \\\text { Variable Overhead } & 8,000 \\\text { Fixed Overhead } & 10,000\end{array}$$ Red's Company could avoid $6000 in fixed overhead costs if it acquires the components externally. If cost minimization is the major consideration and the company would prefer to buy the components what is the maximum external price that Red Company would accept to acquire the 1000 units externally?

A) $57000
B) $61000
C) $59000
D) $63000

Question 80

Red Company produces 1000 units of a necessary component with the following costs: $$\begin{array} { l r } \text { Direct Materials } & \$ 34,000 \\\text { Direct Labor } & 15,000 \\\text { Variable Overhead } & 8,000 \\\text { Fixed Overhead } & 10,000\end{array}$$ None of Red fixed overhead costs can be reduced but another product could be made that would increase profit contribution by $12000 if the components were acquired externally. If cost minimization is the major consideration and the company would prefer to buy the components what is the maximum external price that Red Company would be willing to accept to acquire the 1000 units externally?

A) $55000
B) $46000
C) $79000
D) $69000