Test bank managerial accounting by kieso weygandt 5e ch07

CHAPTER 7
INCREMENTAL ANALYSIS
SUMMARY OF QUESTIONS BY OBJECTIVES AND BLOOM’S TAXONOMY
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True-False Statements
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Multiple Choice Questions
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Brief Exercises
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Test Bank for ISV Managerial Accounting, Fourth Edition

7-2

Exercises
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Completion Statements
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SUMMARY OF STUDY OBJECTIVES BY QUESTION TYPE
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Study Objective 1
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35. MC
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Study Objective 2
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Study Objective 3
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Study Objective 4
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Study Objective 5
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Study Objective 6
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C


Incremental Analysis

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Note: TF = True-False
MC = Multiple Choice

Study Objective 7
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C = Completion
BE = Brief Exercise

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7-3

Ex
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Ex = Exercise

The chapter also contains one set of three Matching questions and two Short-Answer Essay
questions.

CHAPTER STUDY OBJECTIVES
1. Identify the steps in management's decision-making process. Management's decisionmaking process consists of (a) identifying the problem and assigning responsibility for the
decision, (b) determining and evaluating possible courses of action, (c) making the decision,
and (d) 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 costs
are those that change if the order is accepted. These are typically variable manufacturing
costs. 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. Identify the relevant costs in determining 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 relevant costs to be considered in retaining or replacing equipment. The
relevant costs to be considered 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. Identify the relevant costs in deciding whether to eliminate an unprofitable segment. In
deciding whether to eliminate an unprofitable segment, the relevant costs are the variable
costs that drive the contribution margin, if any, produced by the segment. Disposition of the
segment's fixed expenses must also be considered.

7-4

Test Bank for ISV Managerial Accounting, Fourth Edition

TRUE-FALSE STATEMENTS
1.

In making decisions, management considers only financial information because
accounting is presented in financial context.

2.

Decision-making involves reviewing the results of a decision once the decision has been
made.

3.

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

4.

Incremental analysis is also known as differential analysis.

5.

Incremental analysis identifies the probable effects of management decisions on future
earnings.

6.

Decisions made using incremental analysis focus on the amounts which differ among the
alternatives.

7.

The process used to identify the financial data that change under alternative courses of
action is called incremental analysis.

8.

Sunk costs are considered relevant when choosing among alternatives because they are
differential.

9.

Incremental costs are always relevant in decision making.

10.

A special one-time order is acceptable if the unit sales price is greater than the unit
variable cost.

11.

Max company has excess capacity. A customer proposes to buy 400 widgets at a special
unit price even though the price is less than the unit variable cost to manufacture the
widget. Max should accept the special order if demand for other products is unaffected.

12.

A company should accept an order for its product at less than its regular sales price if the
incremental revenue exceeds the incremental costs.

13.

If a company is operating at less than capacity, the incremental costs of a special order
will likely include variable manufacturing costs, but not fixed costs.

14.

A decision whether to continue to buy a product instead of producing it internally depends
on the incremental costs and incremental revenues of making the change.

15.

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

16.

An incremental make-or-buy decision depends solely on which alternative is the lowest
cost alternative.

17.

Direct materials, direct labor, and allocated fixed and variable manufacturing overhead are
all relevant in a make-or-buy decision.

Incremental Analysis

7-5

18.

A disadvantage of using an outside supplier is the associated loss of control over the
production process.

19.

In a sell or process further decision, management should process further as long as the
incremental revenues from additional processing are greater than the incremental costs.

20.

It is better to process further rather than sell now if the sales price increases.

21.

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.

22.

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

23.

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

24.

Equipment that is not fully depreciated should always be replaced.

25.

The book value of old equipment is an opportunity cost.

26.

A company should eliminate any segment in which the contribution margin is less than the
fixed costs that are unavoidable.

27.

The elimination of an unprofitable product line will always increase the total profits of a
company.

28.

A company’s net income could decrease if an unprofitable segment is discontinued.

29.

In deciding the future status of an unprofitable segment, management should recognize

that net income will increase by eliminating the unprofitable segment.

30.

If an unprofitable product is eliminated, fixed expenses allocated to the eliminated
segment will likely be eliminated.

Answers to True-False Statements
Item

1.
2.
3.
4.
5.

Ans.

F
T
F
T
T

Item

6.
7.
8.
9.

10.

Ans.

T
T
F
T
T

Item

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Ans.

F
T
T
F
T

Item

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Ans.

F
F
T
T
F

Item

21.
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24.
25.

Ans.

T
F
F
F
F

Item

26.
27.
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29.
30.

Ans.

F
F
T
F
F


7-6

Test Bank for ISV Managerial Accounting, Fourth Edition

MULTIPLE CHOICE QUESTIONS
31.

Which of the following is a major accounting contribution to the managerial decisionmaking process in evaluating possible courses of action?
a. Determine who is responsible for the decision.
b. Prepare internal reports that review the actual impact of a decision made.
c. Calculate how much should be invested for each potential project.
d. Select possible actions that management should consider.

32.

Which of the following pairs of stages in the management decision-making process is
properly sequenced?
a. Evaluate possible courses of action  Make a decision
b. Review the actual impact of the decision  Determine possible courses of action
c. Assign responsibility for the decision  Identify the problem
d. Make a decision  Assign responsibility for the decision

33.

Who prepares relevant revenue and cost data for the decision-making process?
a. Department heads
b. The controller
c. Management accountants
d. Factory supervisors

34.

Which of the following steps in the management decision-making process generally
involves 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. Assign responsibility.

35.

Which one of the following is nonfinancial information that management might evaluate in
making a decision?
a. Opportunity costs of a decision
b. Contribution margin

c. The effect on profit of a decision
d. The corporate profile on the community

36.

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.

37.

Which of the following will never be a relevant cost?
a. Opportunity cost
b. Sunk cost
c. Variable cost
d. Fixed cost

38.

Which of the following will always be a relevant cost?
a. Sunk cost
b. Fixed cost
c. Variable cost


Incremental Analysis

7-7

d. Opportunity cost
39. 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.
40.

A previously incurred cost which will not change in the future is a(n)
a. opportunity cost.
b. historical cost.
c. fixed cost.
d. sunk cost.

41.

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.

42.

A cost that does not affect a decision is called an
a. opportunity cost.
b. incremental cost.
c. avoidable cost.

d. irrelevant cost.

43.

Alvarez Company is considering the following alternatives:
Revenues
Variable costs
Fixed costs

Alternative A
$50,000
30,000
10,000

Alternative B
$60,000
30,000
16,000

What is the incremental profit?
a. $10,000
b. $0
c. $6,000
d. $4,000
44. Costs that change between alternatives are called
a. fixed costs.
b. opportunity costs.
c. relevant costs.
d. sunk costs.
45.

Which of the following is an irrelevant cost?
a. An avoidable cost
b. An incremental cost
c. A sunk cost
d. An opportunity cost


7-8

Test Bank for ISV Managerial Accounting, Fourth Edition

46.

A cost incurred in the past that cannot be changed by any future action is a(n)
a. opportunity cost.
b. sunk cost.
c. relevant cost.
d. avoidable cost.

47.

Relevant costs are always
a. fixed costs.
b. variable costs.
c. avoidable costs.
d. sunk costs.

48.

What is the process of evaluating financial data that change under alternative courses of
action called?
a. Incremental analysis
b. Decision-making analysis
c. Contribution margin analysis
d. Cost-benefit analysis

49.

Which one of the following is an alternative name for incremental analysis?
a. Managerial analysis
b. Cost analysis
c. Contribution margin analysis
d. Differential analysis

50.

Which of the following describes one aspect of incremental analysis?
a. Both costs and revenues that stay the same between alternate courses of action will
be analyzed.
b. Both costs and revenues that differ between alternate courses of action will be
analyzed.
c. All costs and revenues, regardless if they stay the same or differ between alternate
courses of action, will be analyzed.
d. Only costs relating to the decisions at hand are analyzed.

51.

When is incremental analysis most useful?
a. After a decision has been made to determine its effectiveness

b. In choosing between capital budgeting methods
c. In evaluating the profitability of a company
d. In developing relevant information for management decisions

52.

Who generates the data used in incremental analysis?
a. Market analysts and engineers
b. Engineers and accountants
c. Market analysts, engineers, and accountants
d. Only the accountants

53.

Which of the following is a true statement about incremental analysis?
a. It is another name for capital budgeting.
b. It is the same as CVP analysis.
c. It is used primarily for long-term planning.
d. It focuses on decisions that involve a choice among alternative courses of action.


Incremental Analysis

7-9

54.

For which of the following decisions is incremental analysis not appropriate?
a. Elimination of an unprofitable segment
b. Determining cost behavior

c. A make-or-buy decision
d. An allocation of limited resource decision

55.

For which of the following is incremental appropriate?
a. Acceptance of a special order and a make-or-buy decision
b. A retain or replace equipment decision and CVP analysis
c. A sell or process further decision and allocation of indirect costs
d. Elimination of an unprofitable segment and allocation of indirect costs

56.

Which of the following is a true statement about cost behaviors in incremental analysis?
a. Total variable costs do not change between alternatives.
b. Fixed costs and variable costs will always change between alternatives.
c. Variable costs per unit will always change between alternatives.
d. Fixed costs will generally not change between alternatives.

57.

Specik, Inc. is considering the following alternatives:
Revenues
Variable costs
Fixed costs

Alternative 1
$120,000
60,000
35,000

Alternative 2
$120,000
70,000
39,000

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
58.

Which statement is true about relevant costs in incremental analysis?
a. All costs are relevant if they change between alternatives.
b. Only fixed costs are relevant.
c. Only variable costs are relevant.
d. Relevant costs should be ignored.

59.

Seville Company manufactures a product with a unit variable cost of $42 and a unit sales
price of $75. Fixed manufacturing costs were $80,000 when 10,000 units were produced
and sold, equating to $8 per unit. The company has a one-time opportunity to sell an
additional 2,000 units at $55 each in an international market which would not affect its
present sales. The company has sufficient capacity to produce the additional units. How
much is the relevant income effect of accepting the special order?
a. $84,000
b. $10,000
c. $40,000

d. $26,000


7-10

Test Bank for ISV Managerial Accounting, Fourth Edition

60.

Sorrento Company’s plant is operating at less than full capacity. The company just
received a one-time opportunity to accept an order at a special price below its usual price.
The special price exceeds its variable costs. Therefore, which statement is true?
a. Fixed costs are relevant.
b. The order will likely be accepted.
c. The order will likely be rejected.
d. Sorrento should expand its plant capacity before accepting the order.

61.

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.

62.

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.

63.

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. Considered the opportunity cost of lost sales in the incremental analysis.
c. Accept the order.
d. Accept the order if the plant is below capacity.

64.

It costs Lannon Fields $14 of variable costs and $6 of allocated fixed costs to produce an
industrial trash can that sells for $30. A buyer in Mexico offers to purchase 3,000 units at
$18 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 $6,000
b. Increase $6,000
c. Increase $54,000
d. Increase $12,000

65.

It costs Fortune Company $10 of variable and $4 of fixed costs to produce one bathroom

scale, which normally sells for $28. A foreign wholesaler offers to purchase 1,000 scales
at $12 each. Fortune would incur special shipping costs of $1 per scale if the order were
accepted. Fortune has sufficient unused capacity to produce the 1,000 scales. If the
special order is accepted, what will be the effect on net income?
a. $1,000 increase
b. $1,000 decrease
c. $2,000 decrease
d. $12,000 increase


Incremental Analysis

7-11

66.

Diggs, Inc. has excess capacity. Under what situation(s) 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 cheaper materials without the customer’s
knowledge.
d. When incremental revenues exceed incremental costs.

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

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.

69.

A company contemplating the acceptance of a special order has the following unit cost
behavior, based on 10,000 units:
Direct materials
Direct labor
Variable overhead
Fixed overhead

$ 4
10
8
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
Fixed costs

$50
20

The normal unit sales price per unit is $110. A special order from a foreign company has been
received for 5,000 units at $90 a unit. In order to fulfill the order, 3,000 units of regular sales
would have to be foregone.


7-12

Test Bank for ISV Managerial Accounting, Fourth Edition

70.

The opportunity cost associated with this order is
a. $150,000.
b. $330,000.
c. $180,000.

d. $270,000.

71.

The incremental profit (loss) from accepting the order would be
a. $20,000.
b. $(100,000).
c. $120,000.
d. $(60,000).

72.

Able Company’s unit manufacturing cost is:
Variable Costs
Fixed Costs

$50
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

Use the following information for two questions 74 and 75.
Martin Company incurred the following costs for 50,000 units:
Variable costs
Fixed costs

$180,000
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.
74.

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

75.

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


Incremental Analysis

7-13

76.

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

77.

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

Use the following information for questions 78–80.
Clemente Inc. incurs the following costs to produce 10,000 units of a subcomponent:
Direct materials
Direct labor
Variable overhead

Fixed overhead

$28,000
37,500
42,000
54,000

An outside supplier has offered to sell Clemente the subcomponent for $9.50 a unit.
78.

If Clemente accepts the offer, by how much will net income increase (decrease)?
a. $12,500
b. $66,500
c. $(29,500)
d. $(9,500)

79.

If Clemente could avoid $10,000 of fixed overhead by accepting the offer, net income
would increase (decrease) by
a. $2,500.
b. $(19,500).
c. $(10,500).
d. $22,500.

80.

If Clemente accepts the offer, it could use the production capacity to produce another
product that would generate additional income of $12,000. The increase (decrease) in net
income from accepting the offer would be

a. $500.
b. $24,500.
c. $(500).
d. $(12,000).

Use the following information for questions 81 and 82.
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


7-14

Test Bank for ISV Managerial Accounting, Fourth Edition

If Ortiz buys the part from an outside supplier, $40,000 of the fixed overhead is avoidable.
81.

What is the relevant cost per unit of part A12E?
a. $56
b. $83
c. $91
d. $64

82.

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.

83.

All of the following are ordinarily considered relevant costs in a make-or-buy decision
except
a. variable costs.
b. purchase price.
c. opportunity costs.
d. fixed costs.

84.

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

85.

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

Fixed costs

$400,000
600,000

An outside supplier has offered to make the item at $3 a unit. If the decision is made to
purchase the item outside, current production facilities could be leased to another
company for $110,000. The net increase (decrease) in the net income of accepting the
supplier’s offer is
a. $190,000.
b. $210,000.
c. $(10,000).
d. $560,000.
86.

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

$400,000
600,000

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 $100,000 of net income. At what unit price would Sandusky accept the
outside supplier’s offer if Sandusky wanted to increase net income by $80,000?
a. $5.80
b. $4.20
c. $5.00
d. $3.80

Incremental Analysis
87.

Which statement is true of an opportunity cost?
a. It is the cost of a special order option.
b. It reduces the possibility of accepting a particular course of action.
c. It is the potential benefit as a result of following an alternative course of action.
d. It is a variable cost.

88.

In which situations should opportunity costs be considered?
a. Decision making that involves alternative uses
b. Forecasting sales
c. Financial accounting
d. Break-even analysis

89.

What is the nature of an opportunity cost?
a. It is always variable.
b. It is a potential benefit.
c. It is included as part of cost of goods sold.
d. It is a sunk cost.

90.

Wishnell Toys can make 1,000 toy robots with the following costs:

Direct Materials
Direct Labor
Variable Overhead
Fixed Overhead

7-15

$70,000
26,000
15,000
15,000

The company can purchase the 1,000 robots externally for $120,000. The avoidable fixed
costs are $5,000 if the units are purchased externally. What is the cost savings if the
company makes the robots?
a. $1,000
b. $5,000
c. $10,000
d. $4,000
Use the following information for questions 91 and 92.
Hermantic, Inc. can produce 100 units of a component part with the following costs:
Direct Materials
Direct Labor
Variable Overhead
Fixed Overhead

$45,000
20,000
48,000
33,000

91.

If Hermantic, Inc. purchases the components externally for $120,000, by what amount will
its total costs change?
a. An increase of $120,000
b. An increase of $7,000
c. An increase of $26,000
d. A decrease of $33,000

92.

If Hermantic, Inc. can purchase the components externally for $132,000 and only $12,000
of the fixed costs can be avoided, what is the correct “make-or-buy” decision?
a. Make and save $2,000
b. Buy and save $2,000
c. Make and save $7,000
d. Buy and save $20,000


7-16

Test Bank for ISV Managerial Accounting, Fourth Edition

Use the following information for questions 93 and 94.
Eminem Music produces 60,000 CDs on which to record music. The CDs have the following
costs:
Direct Materials
$15,000
Direct Labor

20,000
Variable Overhead
4,000
Fixed Overhead
9,000
93.

Eminem could avoid $5,000 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 Eminem would expect to
pay for the units?
a. $43,000
b. $39,000
c. $48,000
d. $44,000

94.

None of Eminem's fixed overhead costs can be reduced, but another product could be
made that would increase profit contribution by $5,000 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 Eminem would be willing to accept
to acquire the 60,000 units externally?
a. $48,000
b. $43,000
c. $44,000
d. $53,000

95.

Harrison Company determines that an opportunity cost of an alternate course of action is
relevant to a make-or-buy decision. Which statement is true of the opportunity cost?
a. Should be added to the “Buy” costs
b. Should be subtracted from the “Make” costs
c. Should be added to the “Make” costs
d. Should be ignored if it does not involve a cash outlay

96.

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.

97.

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

98.

Which one of the following is not a disadvantage of buying rather than making a
component of a company’s product?
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.


Incremental Analysis
99.

7-17

Hungry Bites produces corn chips. The cost of one batch is below:
Direct Materials
Direct Labor
Variable Overhead
Fixed Overhead

$14
10
9
10

An outside supplier has offered to produce the corn chips for $20 per batch. How much
will Hungry Bites save if it accepts the offer?
a. $10 per batch
b. $13 per batch
c. $24 per batch
d. $4 per batch
100.

During 2008, it cost Westa, Inc. $18 per unit to produce part T5. During 2009, it has
increased to $21 per unit. In 2008, 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.

101.

Which decision will involve no incremental revenues?
a. Make-or-buy
b. Drop a product line
c. Accept a special order
d. Additional processing

102.

Chapman Company manufactures widgets. Embree Company has approached Chapman
with a proposal to sell the company widgets at a price of $80,000 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
Direct labor
Manufacturing overhead
Total

$ 31,000
29,000
40,000
$100,000

The manufacturing overhead consists of $16,000 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. $20,000 incremental savings
b. $4,000 incremental cost
c. $4,000 incremental savings
d. $20,000 incremental cost
103.

The cost to produce Part A was $20 per unit in 2008. During 2009, it has increased to $22
per unit. In 2009, 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.


7-18
104.

Test Bank for ISV Managerial Accounting, Fourth Edition
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 105 and 106.

Truckel, Inc. currently manufactures a wicket as its main product. The costs per unit are as
follows:
Direct materials and direct labor
$22
Variable overhead
10
Fixed overhead
16
Total
$48
105.

The fixed overhead is an allocated common cost. How much is the relevant cost of the
wicket?
a. $48
b. $32
c. $22
d. $38

106.

Saran Company has contacted Truckel with an offer to sell it 5,000 of the wickets for $36
each. If Truckel makes the wickets, variable costs are $22 per unit. Fixed costs are $16
per unit; however, $10 per unit is unavoidable. Should Truckel make or buy the wickets?
a. Buy; savings = $50,000
b. Buy; savings = $20,000
c. Make; savings = $40,000
d. Make; savings = $20,000

107.

Galley Industries can produce 100 units of a necessary component part with the following
costs:
Direct Materials
Direct Labor
Variable Overhead
Fixed Overhead

$20,000
9,000
21,000
8,000

If Galley Industries purchases the component externally, $2,000 of the fixed costs can be
avoided. Below what external price for the 100 units would Galley choose to buy instead
of make?
a. $50,000
b. $56,000
c. $44,000
d. $52,000


Incremental Analysis

7-19

108.

A company has a process that results in 15,000 pounds of Product X that can be sold for
$8 per pound. An alternative would be to process Product X further at a cost of $100,000

and then sell it for $14 per pound. Should management sell Product X now or should
Product X be processed further and then sold?
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.

109.

PH Toy Company is unsure of whether to sell its product assembled or unassembled. The
unit cost of the unassembled product is $36 and PH Toy would sell it for $78. The cost to
assemble the product is estimated at $25 per unit and PH Toy believes the market would
support a price of $102 on the assembled unit. What decision should PH Toy Company
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 $24 per unit.
c. Process further, the company will be better off by $35 per unit.
d. Process further, the company will be better off by $17 per unit.

110.

What is the nature of a sell or process further decision?
a. It is an incremental revenue decision.
b. It is an incremental cost decision.
c. It is both an incremental revenue and incremental cost decision.
d. It is neither an incremental revenue nor incremental cost decision.

111.

Coggin Company gathered the following data about the three products that it produces:

Product
A
B
C

Present
Sales Value
$ 9,000
15,000
11,000

Estimated Additional
Processing Costs
$6,000
5,000
8,000

Estimated Sales
if Processed Further
$16,000
18,000
16,000

Which of the products should be processed further?
a. Product A
b. Product B
c. Product C
d. All three products
112.

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
Units sold
2,000
Revenue
$10,000
Variable departmental costs
6,000
Fixed costs
5,000
Net income (loss)
$ (1,000)

Ice Cream
500
$20,000
13,000
2,000
$ 5,000

How much are total joint costs of the products?
a. $28,000
b. $17,000
c. $45,000
d. $15,000

Yogurt
400

$10,000
4,200
3,000
$ 2,800

Butter
2,000
$20,000
4,800
7,000
$ 8,200

Total
5,900
$60,000
28,000
17,000
$15,000


7-20

Test Bank for ISV Managerial Accounting, Fourth Edition

113.

Whisker Clean Company spent $8,000 to produce Product 89, which can be sold “as is”
for $10,000, or processed further incurring additional costs of $3,000 and then sold for
$14,000. Which amounts are relevant to the decision about Product 89?
a. $8,000, $10,000, and $14,000

b. $8,000, $3,000, and $14,000
c. $10,000, $3,000, and $14,000
d. $8,000, $10,000, $3,000, and $14,000

114.

Narst 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 Narst 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

115.

Market Makeup produces face cream. Each bottle of face cream costs $15 to produce and
can be sold for $20. The bottles can be sold as is, or processed further into sunscreen at
a cost of $21 each. Market Makeup could sell the sunscreen bottles for $35 each.
Therefore, the face cream must
a. be further processed because its profit is $14 each.
b. not be further processed because costs increase more than revenue.
c. not be further processed because it decreases profit by $1 each.
d. be further processed because it increases profit by $5 each.

116.

Walton, Inc. is unsure whether to sell its product assembled or unassembled. The unit
cost of the unassembled product is $32, while the cost of assembling each unit is
estimated at $34. Unassembled units can be sold for $110, while assembled units could

be sold for $142 per unit. What decision should Walton make?
a. Sell before assembly; the company will save $2 per unit.
b. Sell before assembly; the company will save $30 per unit.
c. Process further; the company will save $2 per unit.
d. Process further; the company will save $32 per unit.

117.

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

118.

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.

119.

Costs incurred before the split-off point are
a. sunk costs.
b. incremental costs.
c. relevant costs.
d. opportunity costs.

Incremental Analysis
120.

7-21

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

Use the following information for questions 121–123.
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:
Product
Green lumber
Rough lumber
Sawdust

Sales Value
at Split-off
$79,800
62,000
51,000

Additional
Variable Costs
$12,000
14,100

9,800

Sales Value after
Further Processing
$89,000
86,800
65,000

121.

The additional profit that would result from processing rough lumber further is
a. $10,700.
b. $24,800.
c. $72,700.
d. $47,900.

122.

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

123.

What is the increase in profit if the appropriate products are processed further?
a. $12,100
b. $14,900
c. $48,000

d. $127,900

124.

Which of the following scenarios would make a manager indifferent about selling a
product at the split-off point or processing it further?
a. When incremental revenues > incremental costs
b. When incremental revenues < incremental costs
c. When incremental revenues = incremental costs
d. When incremental costs = joint costs

125.

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.

126.

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.


7-22
127.

Test Bank for ISV Managerial Accounting, Fourth Edition
Products produced from a common production process and a single raw material are
referred to as
a. separable products.
b. joint products.
c. common products.
d. independent products.

Use the following information for questions 128–129.
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.
128.

At what price were the updated versions sold?
a. $13,400
b. $6,600
c. $6,800
d. $8,000

129.

What amount would be considered sunk costs?
a. $1,200
b. $4,500
c. $8,900
d. $10,100

130.

Which of the following is not relevant when deciding whether or not to replace a piece of
equipment?
a. Price of new equipment
b. Trade in allowance of old equipment
c. Book value of old equipment
d. Salvage value of old equipment

131.

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.

Use the following information for questions 132-134.
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
-0Remaining useful life
10 years
-0Useful life

-010 years
Annual operating costs
$200,000
$150,500
If the old machine is replaced, it can be sold for $20,000.


Incremental Analysis

7-23

132.

Which of the following amounts is a sunk cost?
a. $200,000
b. $150,500
c. $500,000
d. $175,000

133.

Which of the following amounts is relevant to the replacement decision?
a. $175,000
b. $250,000
c. $49,500
d. $0

134.

The net advantage (disadvantage) of replacing the old machine is

a. $15,000.
b. $20,000.
c. $(5,000).
d. $(50,000).

135.

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.

136.

In an equipment replacement decision, the salvage value of the old equipment is relevant
because it is a(n)
a. fixed amount.
b. variable amount.
c. known amount.
d. incremental amount.

Use the following information for questions 137–139.
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
$ 75,000
$125,000

Accumulated depreciation
30,000
-0Annual operating costs
100,000
80,000
If the old equipment is replaced now, it can be sold for $20,000. Both the old equipment’s
remaining useful life and the new equipment’s useful life is 5 years.
137.

Which of the following amounts is irrelevant to the replacement decision?
a. $125,000
b. $45,000
c. $105,000
d. $20,000

138.

What is the net cost of the new equipment?
a. $125,000
b. $105,000
c. $50,000
d. $25,000


7-24

Test Bank for ISV Managerial Accounting, Fourth Edition

139.

The net advantage (disadvantage) of replacing the old equipment with the new equipment
is
a. $20,000
b. $(5,000)
c. $(25,000)
d. $30,000

140.

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

141.

What is the salvage value of old equipment considered to be?
a. A relevant cost
b. A non-incremental cost
c. An opportunity cost
d. A cost that is not differential

142.

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

143.

A company is considering replacing old equipment with new equipment. Which of the
following is a relevant cost for incremental analysis?
a. Total accumulated depreciation of the old equipment
b. Cost of the old equipment
c. Annual operating cost of the new equipment
d. Book value of the old equipment

144.

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.

145.

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

Incremental Analysis
146.

7-25

Diversified Machines has four product lines, one of which reflects the following results:
Sales
Variable expenses
Contribution margin
Fixed expenses
Net loss

$330,000
180,000
150,000
180,000
$(30,000)

If this product line is eliminated, 40% of the fixed expenses can be eliminated and the
other 60% will be allocated to other product lines. If management decides to eliminate this
product line, the company's net income will
a. increase by $30,000.
b. decrease by $78,000.
c. decrease by $48,000.
d. increase by $72,000.
147.

Halliburton Division has the following data:

Sales
Variable expenses
Fixed expenses

$750,000
390,000
420,000

The fixed costs are not avoidable and must be allocated to profitable divisions if the
segment is eliminated. What will be the incremental effect on net income if Halliburton
Division is eliminated?
a. $60,000 increase
b. $360,000 decease
c. $420,000 decrease
d. Cannot be determined from the data provided.
148.

SmartCard is considering eliminating a product line. The fixed costs currently allocated to
the product line will be allocated to other product lines upon discontinuance. What
financial effects occur If the product line is discontinued?
a. Net income will decrease by the amount of the contribution margin of the product line
being discontinued.
b. The company's total fixed costs will increase.
c. Total fixed costs will decrease by the amount of the product line's fixed costs.
d. Net income will decrease by the amount of the product line's fixed costs.

149.

Corn Crunchers has three product lines. Its only unprofitable line is Corn Nuts, the results
of which appear below for 2008:

Sales
Variable expenses
Fixed expenses
Net loss

$700,000
460,000
300,000
$ (60,000)

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. $90,000
b. $760,000
c. $670,000
d. $550,000