ACC Test Bank Questions Test 2

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CHAPTER 7

INCREMENTAL ANALYSIS

CHAPTER STUDY OBJECTIVES

1. Identify the steps in management's decision-making process. Management's decision-making process consists of (a) identifying the problem or opportunity, (b) assigning responsibility for the decision, (c) determining possible courses of action, (d) developing data relevant to each course of action, (e) making the decision, and (f) reviewing the results of the decision. 2. Describe the concept of incremental analysis. Incremental analysis identifies financial data that change under alternative courses of action. These data are relevant to the decision because they will vary in the future among the possible alternatives. 3. Identify the relevant costs in accepting an order at a special price. The relevant information in accepting an order at a special price is the difference between the variable manufacturing costs to produce the special order and expected revenues. 4. Identify the relevant costs in a make-or-buy decision. In a make-or-buy decision, the relevant costs are (a) the variable manufacturing costs that will be saved, (b) the purchase price, and (c) opportunity costs.

5. Give the decision rule for whether to sell or process materials further. The decision rule for whether to sell or process materials further is: Process further as long as the incremental revenue from processing exceeds the incremental processing costs. 6. Identify the factors to consider in retaining or replacing equipment. The factors to consider in determining whether equipment should be retained or replaced are the effects on variable costs and the cost of the new equipment. Also, any disposal value of the existing asset must be considered.

7. Explain the relevant factors in whether to eliminate an unprofitable segment. In deciding whether to eliminate an unprofitable segment, determine the contribution margin, if any, produced by the segment and the disposition of the segment's fixed expenses.

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MULTIPLE CHOICE QUESTIONS

31. 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.

Ans: B, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Decision Analysis

32. Which of the following stages of the management decision-making process is improperly sequenced? a. Evaluate possible courses of action → Make decision.

b. Assign responsibility for the decision → Identify the problem. c. Identify the problem → Determine possible courses of action.

d. Assign responsibility for decision → Determine possible courses of action.

Ans: B, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Strategic/Critical Thinking, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Decision Analysis

33. Internal reports that review the actual impact of decisions are prepared by a. department heads.

b. the controller.

c. management accountants. d. factory workers.

Ans: C, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Performance Measurement

34. 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

35. Which is the first step in the management decision-making process? a. Determine and evaluate possible courses of action.

b. Review results of the decision.

c. Identify the problem and assign responsibility. d. Make a decision.

Ans: C, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Decision Analysis

36. Which of the following will always be a relevant cost? a. Sunk cost

b. Fixed cost c. Variable cost d. Opportunity cost

Ans: D, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Decision Analysis

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37. Costs that will differ between alternatives and influence the outcome of a decision are a. sunk costs.

b. unavoidable costs. c. relevant costs. d. product costs.

38. A revenue that differs between alternatives and makes a difference in decision-making is called a(n) a. sales revenue.

b. incremental revenue. c. unavoidable revenue. d. irrelevant revenue.

39. Alvarez Company is considering the following alternatives: Alternative A Alternative B

Revenues $50,000 $60,000

Variable costs 30,000 30,000

Fixed costs 10,000 16,000

What is the incremental profit? a. $10,000

b. $0 c. $6,000 d. $4,000

Ans: D, SO: 2, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Decision Analysis

40. Which of the following is an irrelevant cost? a. An avoidable cost

b. An incremental cost c. A sunk cost

d. An opportunity cost

41. Relevant costs are always a. fixed costs.

b. variable costs. c. avoidable costs. d. sunk costs.

42. 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.

Ans: C, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Risk Analysis, AICPA PC: Problem Solving, IMA: Decision Analysis

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43. 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.

Ans: B, SO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics

44. Incremental analysis is synonymous with a. difficult analysis.

b. differential analysis. c. gross profit analysis. d. derivative analysis.

Ans: B, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Decision Analysis

45. 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.

Ans: C, SO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Decision Analysis

46. Incremental analysis is most useful

a. in developing relevant information for management decisions. b. in choosing between capital budgeting methods.

c. in evaluating the master budget.

d. as a replacement technique for variance analysis.

Ans: A, SO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Decision Analysis

47. 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.

Ans: D, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Information Management

48. 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.

Ans: B, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Decision Analysis

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49. 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.

Ans: D, SO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Decision Analysis

50. 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.

Ans: D, SO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Decision Analysis

51. 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. 1

b. 2 c. 3 d. 2 and 3

Ans: B, SO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Decision Analysis

52. A company is considering the following alternatives: Alternative 1 Alternative 2

Revenues $120,000 $120,000

Variable costs 60,000 70,000

Fixed costs 35,000 35,000

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

Ans: A, SO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Decision Analysis

53. It costs Garner Company $12 of variable and $5 of fixed costs to produce one bathroom scale which normally sells for $35. A foreign wholesaler offers to purchase 2,000 scales at $15 each. Garner would incur special shipping costs of $1 per scale if the order were accepted. Garner has sufficient unused capacity to produce the 2,000 scales. If the special order is accepted, what will be the effect on net income?

a. $4,000 increase b. $4,000 decrease c. $6,000 decrease d. $30,000 increase

Ans: A, SO: 3, Bloom: AN, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Decision Analysis

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54. Baden Company manufactures a product with a unit variable cost of $50 and a unit sales price of $88. Fixed manufacturing costs were $240,000 when 10,000 units were produced and sold. The company has a one-time opportunity to sell an additional 1,000 units at $70 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 $4,000.

b. Income would increase by $4,000. c. Income would increase by $70,000. d. Income would increase by $20,000.

Ans: D, SO: 3, Bloom: AN, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Decision Analysis

55. 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.

Ans: B, SO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Decision Analysis

56. 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.

Ans: D, SO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics

57. Miley, 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

58. 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.

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59. 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.

Ans: B, SO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics

60. 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.

Ans: A, SO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics

61. Martin Company incurred the following costs for 50,000 units: Variable costs $180,000

Fixed costs 240,000

Martin has received a special order from a foreign company for 5,000 units. There is sufficient capacity to fill the order without jeopardizing regular sales. Filling the order will require spending an additional $8,500 for shipping.

If Martin wants to break even on the order, what should the unit sales price be? a. $10.10

b. $5.30 c. $3.60 d. $8.40

Ans: B, SO: 3, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics

62. Martin Company incurred the following costs for 50,000 units: Variable costs $180,000

Fixed costs 240,000

Martin has received a special order from a foreign company for 5,000 units. There is sufficient capacity to fill the order without jeopardizing regular sales. Filling the order will require spending an additional $8,500 for shipping.

If Martin wants to earn $8,000 on the order, what should the unit price be? a. $3.30

b. $11.70 c. $5.20 d. $6.90

Ans: D, SO: 3, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics

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63. Canosta, Inc. determined that it must expand its capacity to accept a special order. Which situation is likely? a. Unit variable costs will increase.

b. Fixed costs will not be relevant.

c. Both variable and fixed costs will be relevant. d. The company should accept the order.

Ans: C, SO: 3, Bloom: C, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics

64. A company is within plant capacity. It is contemplating whether a special order should be accepted. The order will not impact regular sales. If the company accepts the special order, what will occur?

a. Incremental costs will not be affected.

b. Net income will increase if the special sales price per unit exceeds the unit variable costs. c. There are no incremental revenues.

d. Both fixed and variable costs will increase.

Ans: B, SO: 3, Bloom: C, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics

65. Argus Company anticipates that other sales will be affected by the acceptance of a special order. What should the company do?

a. Reject the order.

b. Consider the opportunity cost of lost sales in the incremental analysis. c. Accept the order.

d. Accept the order if the plant is below capacity.

Ans: B, SO: 3, Bloom: C, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics

66. It costs Lannon Fields $21 of variable costs and $9 of allocated fixed costs to produce an industrial trash can that sells for $45. A buyer in Mexico offers to purchase 3,000 units at $27 each. Lannon Fields has excess capacity and can handle the additional production. What effect will acceptance of the offer have on net income?

a. Decrease $9,000 b. Increase $9,000 c. Increase $81,000 d. Increase $18,000

67. A factory is operating at less than 100% capacity. Potential additional business will not use up the remainder of the plant capacity. Given the following list of costs, which one should be ignored in a decision to produce additional units of product? a. Variable selling expenses

b. Fixed factory overhead c. Direct labor

d. Contribution margin of additional units

Ans: B, SO: 3, Bloom: K, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics

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68. A company is contemplating the acceptance of a special order. The order would not affect regular sales and could be filled without exceeding plant capacity. However, a new stamping machine would have to be purchased in order to stamp the customer’s name on the product. Which of the following is likely?

a. Total variable costs will be irrelevant. b. Only variable costs will be relevant. c. Only fixed costs will be relevant.

d. Both variable and fixed costs will be relevant.

Ans: D, SO: 3, Bloom: C, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics

69. A company contemplating the acceptance of a special order has the following unit cost behavior, based on 10,000 units:

Direct materials $ 4

Direct labor 10

Variable overhead 8

Fixed overhead 6

A foreign company wants to purchase 1,000 units at a special unit price of $25. The normal price per unit is $40. In addition, a special stamping machine will have to be purchased for $2,000 in order to stamp the foreign company’s name on the product. The incremental income (loss) from accepting the order is

a. $3,000. b. $1,000. c. $(3,000). d. $(1,000).

Use the following information for questions 70 and 71. A company’s unit costs based on 100,000 units are:

Variable costs $25

Fixed costs 10

The normal unit sales price per unit is $55. A special order from a foreign company has been received for 5,000 units at $45 a unit. In order to fulfill the order, 3,000 units of regular sales would have to be foregone.

70. The opportunity cost associated with this order is a. $75,000.

b. $165,000. c. $90,000. d. $135,000.

Ans: C, SO: 3, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics

71. The incremental profit (loss) from accepting the order would be a. $10,000.

b. $(50,000). c. $60,000. d. $(30,000).

Ans: A, SO: 3, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics

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72. Able Company’s unit manufacturing cost is:

Variable Costs $50

Fixed Costs 25

A special order for 1,000 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

a. $(23,000). b. $3,000. c. $(20,000). d. $5,000.

73. In the analysis concerning the acceptance or rejection of a special order, which items are relevant? a. Variable costs only

b. Fixed costs only

c. Variable costs and fixed costs d. Variable costs and unavoidable costs

Ans: D, SO: 3, Bloom: C, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics

74. What of the following would not be relevant in a make-or-buy decision? a. Unavoidable variable costs

b. Incremental fixed costs c. Opportunity costs d. Avoidable fixed cost

Ans: A, SO: 4, Bloom: K, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics

75. Which of the following is not a qualitative factor to be considered in a make-or-buy decision? a. Possible lost jobs from buying outside

b. Supplier’s ability to satisfy quality standards c. Incremental benefit from buying outside d. Supplier’s ability to meet production schedule

Ans: C, SO: 4, Bloom: C, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics

Use the following information for questions 76–78.

Clemente Inc. incurs the following costs to produce 10,000 units of a subcomponent:

Direct materials $14,000

Direct labor 18,750

Variable overhead 21,000

Fixed overhead 27,000

An outside supplier has offered to sell Clemente the subcomponent for $4.75 a unit.

76. If Clemente accepts the offer, by how much will net income increase (decrease)? a. $6,250

b. $33,250 c. $(14,750) d. $(4,750)

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77. If Clemente could avoid $5,000 of fixed overhead by accepting the offer, net income would increase (decrease) by a. $1,250.

b. $(9,750). c. $(5,250). d. $11,250.

78. If Clemente accepts the offer, it could use the production capacity to produce another product that would generate additional income of $6,000. The increase (decrease) in net income from accepting the offer would be

a. $250. b. $12,250. c. $(250). d. $(6,000).

Use the following information for questions 79 and 80.

Ortiz Co. produces 5,000 units of part A12E. The following costs were incurred for that level of production:

Direct materials $ 45,000

Direct labor 160,000

Variable overhead 75,000

Fixed overhead 175,000

If Ortiz buys the part from an outside supplier, $40,000 of the fixed overhead is avoidable. 79. What is the relevant cost per unit of part A12E?

a. $56 b. $83 c. $91 d. $64

80. If the outside supplier offers a unit price of $65, net income will increase (decrease) by a. $(5,000).

b. $130,000. c. $(45,000). d. $90,000.

81. In a make-or-buy decision, which costs can be considered relevant? a. Unavoidable variable costs, incremental fixed costs, and sunk costs b. Incremental variable costs, unavoidable fixed costs, and opportunity costs c. Incremental variable costs, incremental fixed costs, and sunk costs d. Incremental variable costs, incremental fixed costs, and opportunity costs

Ans: D, SO: 4, Bloom: K, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics

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82. Billings Company has the following costs when producing 100,000 units:

Variable costs $800,000

Fixed costs 1,200,000

An outside supplier has offered to make the item at $6 a unit. If the decision is made to purchase the item outside, current production facilities could be leased to another company for $220,000. The net increase (decrease) in the net income of accepting the supplier’s offer is

a. $380,000. b. $420,000. c. $(20,000). d. $1,120,000.

Ans: B, SO: 4, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics

83. Sandusky Inc. has the following costs when producing 100,000 units:

Variable costs $800,000

Fixed costs 1,200,000

An outside supplier is interested in producing the item for Sandusky. If the item is produced outside, Sandusky could use the released production facilities to make another item that would generate $200,000 of net income. At what unit price would Sandusky accept the outside supplier’s offer if Sandusky wanted to increase net income by $160,000?

a. $11.60 b. $8.40 c. $10.00 d. $7.60

Ans: B, SO: 4, Bloom: AN, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics

84. Which statement is true concerning the decision rule on whether to make or buy? a. The company should buy if the cost of buying is less than the cost of producing. b. The company should buy if the incremental revenue exceeds the incremental costs. c. The company should buy as long as total revenue exceeds present revenues. d. The company should buy assuming no additional fixed costs are incurred.

Ans: A, SO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics

85. Which one of the following does not affect a make-or-buy decision? a. Variable manufacturing costs

b. Opportunity costs c. Incremental revenue d. Direct labor

Ans: C, SO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics

86. During 2010, it cost Westa, Inc. $18 per unit to produce part T5. During 2011, it has increased to $21 per unit. In 2011, Southside Company has offered to provide Part T5 for $14 per unit to Westa. As it pertains to the make-or-buy decision, which statement is true?

a. Differential costs are $7 per unit. b. Incremental costs are $4 per unit. c. Net relevant costs are $4 per unit. d. Incremental revenues are $3 per unit.

Ans: A, SO: 4, Bloom: AN, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics

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87. Chapman Company manufactures widgets. Embree Company has approached Chapman with a proposal to sell the company widgets at a price of $120,000 for 100,000 units. Chapman is currently making these components in its own factory. The following costs are associated with this part of the process when 100,000 units are produced:

Direct materials $ 46,500

Direct labor 43,500

Manufacturing overhead 60,000

Total $150,000

The manufacturing overhead consists of $24,000 of costs that will be eliminated if the components are no longer produced by Chapman. From Chapman’s point of view, how much is the incremental cost or savings if the widgets are bought instead of made?

a. $30,000 incremental savings b. $6,000 incremental cost c. $6,000 incremental savings d. $30,000 incremental cost

88. The cost to produce Part A was $20 per unit in 2010. During 2011, it has increased to $22 per unit. In 2011, Supplier Company has offered to supply Part A for $18 per unit. For the make-or-buy decision,

a. incremental revenues are $4 per unit. b. incremental costs are $2 per unit. c. net relevant costs are $2 per unit. d. differential costs are $4 per unit.

Ans: D, SO: 4, Bloom: AN, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics

89. Max Company uses 15,000 units of Part A in producing its products. A supplier offers to make Part A for $7. Max Company has relevant costs of $8 a unit to manufacture Part A. If there is excess capacity, the opportunity cost of buying Part A from the supplier is

a. $0. b. $15,000. c. $105,000. d. $120,000.

Use the following information for questions 90 and 91.

Truckel, Inc. currently manufactures a wicket as its main product. The costs per unit are as follows: Direct materials and direct labor $33

Variable overhead 15

Fixed overhead 24

Total $72

90. The fixed overhead is an allocated common cost. How much is the relevant cost of the wicket? a. $72

b. $48 c. $33 d. $57

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91. Saran Company has contacted Truckel with an offer to sell it 5,000 of the wickets for $54 each. If Truckel makes the wickets, variable costs are $48 per unit. Fixed costs are $24 per unit; however, $15 per unit is unavoidable. Should Truckel make or buy the wickets?

a. Buy; savings = $45,000 b. Buy; savings = $15,000 c. Make; savings = $30,000 d. Make; savings = $15,000

92. Galley Industries can produce 100 units of a necessary component part with the following costs: Direct Materials $40,000

Direct Labor 18,000

Variable Overhead 42,000

Fixed Overhead 16,000

If Galley Industries purchases the component externally, $4,000 of the fixed costs can be avoided. Below what external price for the 100 units would Galley choose to buy instead of make?

a. $100,000 b. $112,000 c. $88,000 d. $104,000

Ans: D, SO: 4, Bloom: AN, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics

93. 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

Ans: A, SO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics

94. 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.

Ans: C, SO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics

95. Opportunity cost must be considered in decisions involving a. budgeting.

b. financial accounting. c. CVP analysis.

d. resources that have alternative uses.

(15)

96. 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.

97. 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.

98. 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.

Ans: C, SO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics

99. Tex's Manufacturing Company can make 100 units of a necessary component part with the following costs: Direct Materials $60,000

Direct Labor 10,000

If Tex's Manufacturing Company purchases the component externally, $15,000 of the fixed costs can be avoided. At what external price for the 100 units is the company indifferent between making or buying?

a. $120,000 b. $85,000 c. $115,000 d. $100,000

Ans: C, SO: 4, Bloom: AN, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Cost Management

(16)

100. Tex's Manufacturing Company can make 100 units of a necessary component part with the following costs: Direct Materials $60,000

Direct Labor 10,000

If Tex's Manufacturing Company can purchase the component externally for $110,000 and only $5,000 of the fixed costs can be avoided, what is the correct make-or-buy decision?

a. Make and save $5,000 b. Buy and save $5,000 c. Make and save $15,000 d. Buy and save $15,000

Ans: A, SO: 4, Bloom: AN, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Cost Management

101.Bell's Shop can make 1,000 units of a necessary component with the following costs: Direct Materials $72,000

Direct Labor 18,000

Fixed Overhead ?

The company can purchase the 1,000 units externally for $117,000. The unavoidable fixed costs are $6,000 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. $24,000 b. $18,000 c. $12,000

d. Cannot be determined.

102.Ruth Company produces 1,000 units of a necessary component with the following costs: Direct Materials $24,000

Direct Labor 16,000

Ruth Company could avoid $3,000 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 Ruth Company would accept to acquire the 1,000 units externally?

a. $51,000 b. $47,000 c. $48,000 d. $44,000

Ans: B, SO: 4, Bloom: AN, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Cost Management

(17)

103. Ruth Company produces 1,000 units of a necessary component with the following costs: Direct Materials $24,000

Direct Labor 16,000

None of Ruth Company's fixed overhead costs can be reduced, but another product could be made that would increase profit contribution by $8,000 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 Ruth Company would be willing to accept to acquire the 1,000 units externally?

a. $43,000 b. $55,000 c. $48,000 d. $52,000

Ans: D, SO: 4, Bloom: AN, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Cost Management

104.Fornelli, Inc. can produce 100 units of a component part with the following costs: Direct Materials $30,000

Direct Labor 13,000

If Fornelli, Inc. can purchase the units externally for $80,000, by what amount will its total costs change? a. An increase of $80,000

b. An increase of $5,000 c. An increase of $17,000 d. A decrease of $22,000

105.Fornelli, Inc. can produce 100 units of a component part with the following costs: Direct Materials $30,000

Direct Labor 13,000

If Fornelli, Inc. can purchase the component part externally for $88,000 and only $8,000 of the fixed costs can be avoided, what is the correct make-or-buy decision?

a. Make and save $1,000 b. Buy and save $1,000 c. Make and save $5,000 d. Buy and save $13,000

(18)

106. Crigui Music produces 60,000 CDs on which to record music. The CDs have the following costs: Direct Materials $11,000

Direct Labor 15,000

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?

a. $32,000 b. $29,000 c. $36,000 d. $33,000

107. Crigui Music produces 60,000 CDs on which to record music. The CDs have the following costs: Direct Materials $11,000

Direct Labor 15,000

None of Crigui’s fixed overhead costs can be reduced, but another product could be made that would increase profit contribution by $4,000 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 Crigui would be willing to accept to acquire the 60,000 units externally?

a. $36,000 b. $32,000 c. $33,000 d. $40,000

108. Tasty Bites produces corn chips. The cost of one batch is below:

Direct materials $18.00

Direct labor 13.00

Variable overhead 11.00

Fixed overhead 14.00

An outside supplier has offered to produce the corn chips for $25 per batch. How much will Tasty Bites save if it accepts the offer?

a. $2.00 per batch b. $17.00 per batch c. $31.00 per batch d. $6.00 per batch

Ans: B, SO: 4, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Cost Management

(19)

109.NF Toy Company is unsure of whether to sell its product assembled or unassembled. The unit cost of the unassembled product is $30 and NF Toy would sell it for $65. 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 NF Toy 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 $20 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.

110. Moreland Clean Company spent $4,000 to produce Product 89, which can be sold as is for $5,000, or processed further incurring additional costs of $1,500 and then be sold for $7,000. Which amounts are relevant to the decision about Product 89?

a. $4,000, $5,000, and $7,000 b. $4,000, $1,500, and $7,000 c. $5,000, $1,500, and $7,000 d. $4,000, $5,000, $1,500 and $7,000

111. Pratt Company has old inventory on hand that cost $12,000. Its scrap value is $16,000. The inventory could be sold for $40,000 if manufactured further at an additional cost of $12,000. What should Pratt do?

a. Sell the inventory for $16,000 scrap value

b. Dispose of the inventory to avoid any further decline in value c. Hold the inventory at its $12,000 cost

d. Manufacture further and sell it for $40,000

112. New Age Makeup produces face cream. Each bottle of face cream costs $10 to produce and can be sold for $13. The bottles can be sold as is, or processed further into sunscreen at a cost of $14 each. New Age Makeup could sell the sunscreen bottles for $23 each.

a. Face cream must be processed further because its profit is $9 each.

b. Face cream must not be processed further because costs increase more than revenue. c. Face cream must not be processed further because it decreases profit by $1 each. d. Face cream must be processed further because it increases profit by $3 each.

113.Janssen Company has old inventory on hand that cost $18,000. Its scrap value is $24,000. The inventory could be sold for $60,000 if manufactured further at an additional cost of $18,000. What should Janssen do?

a. Sell the inventory for $24,000 scrap value

b. Dispose of the inventory to avoid any further decline in value c. Hold the inventory at its $18,000 cost

d. Manufacture further and sell it for $60,000.

Ans: D, SO: 5, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Cost Management

(20)

114.A company has a process that results in 15,000 pounds of Product A that can be sold for $8 per pound. An alternative would be to process Product A further at a cost of $100,000 and then sell it for $14 per pound. Should management sell Product A now or should Product A be processed further and then sold? What is the effect of the action?

a. Process further, the company will be better off by $10,000. b. Sell now, the company will be better off by $10,000. c. Process further, the company will be better off by $90,000. d. Sell now, the company will be better off by $100,000.

Ans: B, SO: 5, Bloom: AN, Difficulty: Hard, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Cost Management

115.The decision rule on whether to sell or process further a. varies from situation to situation.

b. is process further as long as total revenue exceeds present revenues.

c. is process further if incremental revenue from such processing exceeds incremental fixed costs.

d. is process further if incremental revenue from such processing exceeds the incremental processing costs.

Ans: D, SO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Strategic/Critical Thinking, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Cost Management

116.Eddy Company is starting business and is unsure of whether to sell its product assembled or unassembled. The unit cost of the unassembled product is $80 and Eddy Company would sell it for $180. The cost to assemble the product is estimated at $36 per unit and Eddy Company believes the market would support a price of $232 on the assembled unit. What is the correct decision using the sell or process further decision rule?

a. Sell before assembly, the company will be better off by $36 per unit. b. Sell before assembly, the company will be better off by $52 per unit. c. Process further, the company will be better off by $52 per unit. d. Process further, the company will be better off by $16 per unit.

Ans: D, SO: 5, Bloom: AN, Difficulty: Hard, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Cost Management

117.Mallory Company manufactures widgets. Bowden Company has approached Mallory with a proposal to sell the company widgets at a price of $80,000 for 100,000 units. Mallory is currently making these components in its own factory. The following costs are associated with this part of the process when 100,000 units are produced:

Direct material $ 31,000

Direct labor 29,000

Manufacturing overhead 40,000

Total $100,000

The manufacturing overhead consists of $16,000 of costs that will be eliminated if the components are no longer produced by Mallory. From Mallory's point of view, how much is the incremental cost or savings if the widgets are bought instead of made?

a. $20,000 incremental savings b. $4,000 incremental cost c. $4,000 incremental savings d. $20,000 incremental cost

Ans: B, SO: 5, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Cost Management

(21)

118.The focus of a sell or process further decision is a. incremental revenue.

b. incremental cost.

c. both incremental revenue and incremental cost. d. neither incremental revenue nor incremental cost.

Ans: C, SO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Strategic/Critical Thinking, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics

119.Marcus Company gathered the following data about the three products that it produces: Present Estimated Additional Estimated Sales Product Sales Value Processing Costs if Processed Further

A $12,000 $8,000 $21,000

B 14,000 5,000 18,000

C 11,000 3,000 16,000

Which of the products should not be processed further? a. Product A

b. Product B c. Product C d. Products A and C

120.Serene Dairy has four product lines: sour cream, ice cream, yogurt, and butter. The total cost of producing the milk base for the products is $45,000, which has been allocated based on the gallons of milk base used by each product. Results for July follow:

Sour Cream Ice Cream Yogurt Butter Total

Units sold 2,000 500 400 2,000 4,900

Revenue $10,000 $20,000 $10,000 $20,000 $60,000

Variable departmental costs 6,000 13,000 4,200 4,800 28,000 Fixed costs 5,000 2,000 3,000 7,000 17,000 Net income (loss) $ (1,000) $ 5,000 $ 2,800 $ 8,200 $15,000 How much are total joint costs of the products?

a. $28,000 b. $17,000 c. $45,000 d. $15,000

Ans: C, SO: 5, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Cost Management

121. Which of the following is not involved in the sell or process further decision? a. Revenues

b. Variable costs c. Opportunity costs d. Fixed costs

Ans: D, SO: 5, Bloom: K, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Cost Management

122. All of the following are relevant to the sell or process further decision except a. costs incurred beyond the split-off point.

b. revenues at the split-off point.

c. costs incurred before the split-off point. d. revenues beyond the split-off point.

Ans: C, SO: 5, Bloom: K, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Cost Management

(22)

(23)

123. Costs incurred before the split-off point are a. sunk costs.

b. incremental costs. c. relevant costs. d. opportunity costs.

Ans: A, SO: 5, Bloom: K, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Cost Management

124. Which of the following terms are synonymous? a. Avoidable costs and irrelevant costs

b. Unavoidable costs and incremental costs c. Sunk costs and relevant costs

d. Joint costs and sunk costs

Paul Bunyon Lumber Co. produces several products that can be sold at the split-off point or processed further and then sold. The following results are from a recent period:

Sales Value Additional Sales Value after

Product at Split-off _ Variable Costs Further Processing

Green lumber $159,600 $24,000 $178,000

Rough lumber 124,000 28,200 173,600

Sawdust 102,000 19,600 130,000

125. The additional profit that would result from processing rough lumber further is a. $21,400.

b. $49,600. c. $145,400. d. $95,800.

Ans: A, SO: 5, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Cost Management

126. Which products should be processed further? a. Green lumber and rough lumber

b. Green lumber and sawdust c. Rough lumber and sawdust d. All three products

Ans: C, SO: 5, Bloom: K, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Cost Management

127. What is the increase in profit if the appropriate products are processed further? a. $24,200

b. $29,800 c. $96,000 d. $255,800

Ans: B, SO: 5, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Cost Management

128. The point in the production process when joint products are readily identifiable is the a. separation point.

b. split-off point. c. common point. d. break-even point.

(24)

Ans: B, SO: 5, Bloom: K, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Cost Management

(25)

129. The costs incurred prior to the split-off point are referred to as a. separable costs.

b. split-off costs. c. joint product costs. d. joint costs.

Hi-Tech Inc. has several outdated computers that cost a total of $8,900 and could be sold as scrap for $2,300. They could be updated for an additional $1,200 and sold. If Hi-Tech updates the computers and sells them, net income will increase by $4,500.

130. At what price were the updated versions sold? a. $13,400

b. $6,600 c. $6,800 d. $8,000

Ans: D, SO: 5, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Cost Management

131. What amount would be considered sunk costs? a. $1,200

b. $4,500 c. $8,900 d. $10,100

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

Ans: D, SO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Strategic/Critical Thinking, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics

133. In an equipment replacement decision, the cost of the old equipment is a(n) a. incremental cost.

b. sunk cost. c. relevant cost. d. opportunity cost.

Ans: B, SO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Strategic/Critical Thinking, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics

Chung Inc. is considering the replacement of a piece of equipment with a newer model. The following data has been collected: Old Equipment New Equipment

Purchase price $150,000 $250,000

Accumulated depreciation 60,000 0

-Annual operating costs 200,000 160,000

If the old equipment is replaced now, it can be sold for $40,000. Both the old equipment’s remaining useful life and the new equipment’s useful life is 5 years.

(26)

134. Which of the following amounts is irrelevant to the replacement decision? a. $250,000

b. $90,000 c. $210,000 d. $40,000

Ans: B, SO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Strategic/Critical Thinking, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics

135. What is the net cost of the new equipment? a. $250,000

b. $210,000 c. $100,000 d. $50,000

Ans: B, SO: 6, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Strategic/Critical Thinking, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics

136. The net advantage (disadvantage) of replacing the old equipment with the new equipment is a. $40,000

b. $(10,000) c. $(50,000) d. $60,000

Ans: B, SO: 6, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Strategic/Critical Thinking, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics

137.Which of the following is relevant information in a decision whether old equipment presently being used should be replaced by new equipment?

a. The cost of the old equipment

b. The salvage value of the old equipment c. The book value of the old equipment

d. The accumulated depreciation of the old equipment

138. A company is deciding whether or not to replace some old equipment with new equipment. Which of the following is not considered in the incremental analysis?

a. Annual operating cost of the new equipment b. Annual operating cost of the old equipment c. Net cost of the new equipment

d. Book value of the old equipment

139. What role does a trade-in allowance on old equipment play in a decision to retain or replace equipment? a. It is relevant since it increases the cost of the new equipment.

b. It is not relevant since it reduces the cost of the old equipment.

c. It is not relevant to the decision since it does not impact the cost of the new equipment. d. It is relevant since it reduces the cost of the new equipment.

(27)

140. A company decided to replace an old machine with a new machine. Which of the following is considered a relevant cost? a. The book value of the old equipment

b. Depreciation expense of the old equipment c. The loss on disposal of the old equipment d. The current disposal price of the old equipment

141.A company decided to replace an old machine with a new machine. Which of the following is considered a relevant cost? a. The book value of the old equipment

b. Depreciation expense on the old equipment c. The loss on the disposal of the old equipment d. The current disposal price of the old equipment

142.Which of the following is not relevant information in a decision whether old equipment presently being used should be replaced by new equipment?

a. The cash price of the new equipment b. The salvage value of the old equipment c. The book value of the old equipment

d. The cost savings if the new equipment is purchased

143.Book value of old equipment is considered to be a a. relevant cost.

b. semi-relevant cost. c. sunk cost.

d. cost that can be changed by a present or future decision.

144.A company is deciding on whether to replace some old equipment with new equipment. Which of the following is not a relevant cost for incremental analysis?

a. Annual operating cost of the new equipment b. Annual operating cost of the old equipment c. Net cost of the new equipment

d. Accumulated depreciation on the old equipment

145.A company is considering replacing old equipment with new equipment. Which of the following is a relevant cost for incremental analysis?

a. Annual depreciation charge on the old equipment b. Book value of the old equipment

c. Estimated annual depreciation of the new equipment d. Cost of the new equipment

(28)

146. In a retain or replace equipment decision, trade-in allowance available on old equipment a. increases the cost of the new equipment.

b. is relevant because it will not be realized if the old equipment is retained. c. is not relevant to the decision.

d. reduces the cost of the old equipment.

147.Sala Co. is contemplating the replacement of an old machine with a new one. The following information has been gathered:

Old Machine New Machine

Price $250,000 $500,000

Accumulated Depreciation 75,000

-0-Remaining useful life 10 years

-0-Useful life -0- 10 years

Annual operating costs $200,000 $150,500 If the old machine is replaced, it can be sold for $20,000.

Which of the following amounts is a sunk cost? a. $200,000

b. $150,500 c. $500,000 d. $175,000

Ans: D, SO: 6, Bloom: C, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Cost Management

Price $250,000 $500,000

Accumulated Depreciation 75,000 -0-Remaining useful life 10 years

Which of the following amounts is relevant to the replacement decision? a. $175,000

b. $250,000 c. $49,500 d. $75,000

(29)

Price $250,000 $500,000

Accumulated Depreciation 75,000 -0-Remaining useful life 10 years

The net advantage (disadvantage) of replacing the old machine is a. $15,000

b. $20,000 c. $(5,000) d. $(50,000)

Ans: A, SO: 6, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Cost Management

150.Abel Company produces three versions of baseball bats: wood, aluminum, and hard rubber. A condensed segmented income statement for a recent period follows:

Wood _ Aluminum Hard Rubber Total _

Sales $500,000 $200,000 $65,000 $765,000

Variable expenses 325,000 140,000 58,000 523,000

Contribution margin 175,000 60,000 7,000 242,000

Fixed expenses 75,000 35,000 22,000 132,000

Net income (loss) $100,000 $ 25,000 $(15,000) $110,000

Assume none of the fixed expenses for the hard rubber line are avoidable. What will be total net income if the line is dropped?

a. $125,000 b. $103,000 c. $105,000 d. $140,000

(30)

151.Abel Company produces three versions of baseball bats: wood, aluminum, and hard rubber. A condensed segmented income statement for a recent period follows:

Wood _ Aluminum Hard Rubber Total _

Sales $500,000 $200,000 $65,000 $765,000

Variable expenses 325,000 140,000 58,000 523,000

Contribution margin 175,000 60,000 7,000 242,000

Fixed expenses 75,000 35,000 22,000 132,000

Net income (loss) $100,000 $ 25,000 $(15,000) $110,000

Assume all of the fixed expenses for the hard rubber line are avoidable. What will be total net income if the line is dropped? a. $125,000

b. $103,000 c. $105,000 d. $140,000

152.What will most likely occur if a company eliminates an unprofitable segment when a portion of fixed costs are unavoidable?

a. All expenses of the eliminated segment will be eliminated. b. Net income will decrease.

c. Net income will increase.

d. The company's variable costs will increase.

Ans: B, SO: 7, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Cost Management

153.A company has three product lines, one of which reflects the following results:

Sales $215,000

Variable expenses 125,000

Contribution margin 90,000

Fixed expenses 140,000

Net loss $ (50,000)

If this product line is eliminated, 60% of the fixed expenses can be eliminated and the other 40% will be allocated to other product lines. If management decides to eliminate this product line, the company's net income will

a. increase by $50,000. b. decrease by $90,000. c. decrease by $6,000. d. increase by $6,000.

(31)

154.A company is considering eliminating a product line. The fixed costs currently allocated to the product line will be allocated to other product lines upon discontinuance. If the product line is discontinued,

a. total net income will increase by the amount of the product line's fixed costs. b. total net income will decrease by the amount of the product line's fixed costs.

c. the contribution margin of the product line will indicate the net income increase or decrease. d. the company's total fixed costs will decrease.

Ans: C, SO: 7, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Cost Management

155.A segment has the following data:

Sales $350,000

What will be the incremental effect on net income if this segment is eliminated, assuming the fixed expenses will be allocated to profitable segments?

a. $200,000 increase b. $200,000 decrease c. $275,000 decrease

d. Cannot be determined from the data provided.

156.Corn Crunchers has three product lines. Its only unprofitable line is Corn Nuts, the results of which appear below for 2011:

Sales $1,050,000

Net loss $ (90,000)

If this product line is eliminated, 30% of the fixed expenses can be eliminated. How much are the relevant costs in the decision to eliminate this product line?

a. $135,000 b. $1,140,000 c. $1,005,000 d. $825,000

157. North Division has the following information:

Sales $900,000

If this division is eliminated, the fixed expenses will be allocated to the company’s other divisions. What is the incremental effect on net income if the division is dropped?

a. $45,000 increase b. $465,000 decrease c. $420,000 decrease d. $435,000 increase