Question 1

Which one of the following does not affect a make-or-buy decision?

Accepted Answer

A)   Variable manufacturing costs
B)   Opportunity costs
C)   Incremental revenue
D)   Direct labor C

Question 2

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

Accepted Answer

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

Question 3

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

Accepted Answer

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

Question 4

When deciding whether or not to replace old equipment with new equipment, the overriding consideration is the

Accepted Answer

A)   book value of the old equipment.
B)   cost of replacing the old equipment.
C)   salvage value of the old equipment.
D)   difference between future cost savings and the new equipment's costs.

Question 5

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

Accepted Answer

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 6

Crigui Music produces 60,000 CDs on which to record music. The CDs have the following costs: $$\begin{array} { l r } 
\text { Direct Materials } & \$ 13,000 \
\text { Direct Labor } & 15,000 \
\text { Variable Overhead } & 3,000 \
\text { Fixed Overhead } & 7,000
\end{array}$$ Crigui could avoid $4,000 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 60,000 units externally, what is the maximum external price that Crigui would expect to pay for the units?

Accepted Answer

A)   $34,000
B)   $31,000
C)   $38,000
D)   $35,000

Question 7

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

Accepted Answer

A) True 
 B)False

Question 8

In the analysis concerning the acceptance or rejection of a special order, which items are relevant?

Accepted Answer

A)   Variable costs only
B)   Fixed costs only
C)   Variable costs and fixed costs
D)   Variable costs and avoidable costs

Question 9

Which of the following will always be a relevant cost?

Accepted Answer

A)   Sunk cost
B)   Fixed cost
C)   Variable cost
D)   Opportunity cost

Question 10

The potential effects of the decision to eliminate a line of business on existing employees and the community are

Accepted Answer

A)   ignored in incremental analysis.
B)   quantitative factors.
C)   qualitative factors.
D)   opportunity costs.

Question 11

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

Accepted Answer

A) True 
 B)False

Question 12

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

Accepted Answer

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 13

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

Accepted Answer

A) True 
 B)False

Question 14

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

Accepted Answer

A) True 
 B)False

Question 15

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

Accepted Answer

A) True 
 B)False

Question 16

The basic decision rule in a sell or process further decision is: process further if the incremental revenue from processing exceeds the incremental processing costs.

Accepted Answer

A) True 
 B)False

Question 17

Use the following information for questions 
Hi-Tech Inc. has several outdated computers that cost a total of $17,800 and could be sold as scrap for $4,600. They could be updated for an additional $2,400 and sold. If Hi-Tech updates the computers and sells them, net income will increase by $9,000.
-What amount would be considered sunk costs?

Accepted Answer

A)   $2,400
B)   $9,000
C)   $17,800
D)   $20,200

Question 18

Able Company's unit manufacturing cost is: $\begin{array}{lr}
\text { Variable Costs } & \$ 50 \
\text { Fixed Costs } & 25
\end{array}$ A special order for 2,000 units has been received from a foreign company. The unit price requested is $55. The normal unit price is $80. If the order is accepted, unit variable costs will increase by $2 for additional freight costs. If the order is accepted, incremental profit (loss) will be

Accepted Answer

A)   $(46,000) .
B)   $6,000.
C)   $(40,000) .
D)   $10,000.

Question 19

Incremental analysis would be appropriate for

Accepted Answer

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 answers are correct.

Question 20

Use the following information for questions 
Chung Inc. is considering the replacement of a piece of equipment with a newer model. The following data has been collected: $\begin{array}{lrr}&\text { Old Equipment}&\text { New Equipment }\
\text { Purchase price } & \$ 225,000 & \$ 375,000 \
\text { Accumulated depreciation } & 90,000 & -0- \
\text { Annual operating costs } & 300,000 & 240,000
\end{array}$ If the old equipment is replaced now, it can be sold for $60,000. Both the old equipment's remaining useful life and the new equipment's useful life is 5 years.
-What is the net cost of the new equipment?

Accepted Answer

A)   $375,000
B)   $315,000
C)   $150,000
D)   $75,000

Exam 7: Incremental Analysis

Which one of the following does not affect a make-or-buy decision?

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

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

When deciding whether or not to replace old equipment with new equipment, the overriding consideration is the

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

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

In the analysis concerning the acceptance or rejection of a special order, which items are relevant?

Which of the following will always be a relevant cost?

The potential effects of the decision to eliminate a line of business on existing employees and the community are

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

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

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

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

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

The basic decision rule in a sell or process further decision is: process further if the incremental revenue from processing exceeds the incremental processing costs.

Incremental analysis would be appropriate for