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Exam 7: Incremental Analysis

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Question 1

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

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Question 2

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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.

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Question 3

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

Crigui Music produces 60,000 CDs on which to record music. The CDs have the following costs: $\begin{array} { l r } \text { Direct Materials } & \$ 13,000 \\\text { Direct Labor } & 15,000 \\\text { Variable Overhead } & 3,000 \\\text { Fixed Overhead } & 7,000\end{array}$ Crigui could avoid $4,000 in fixed overhead costs if it acquires the CDs externally. If cost minimization is the major consideration and the company would prefer to buy the 60,000 units externally, what is the maximum external price that Crigui would expect to pay for the units?

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

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

Use the following information for questions Hi-Tech Inc. has several outdated computers that cost a total of $17,800 and could be sold as scrap for $4,600.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

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

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

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

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

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

Which of the following will always be a relevant cost?

Incremental analysis would be appropriate for

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

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

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

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

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.

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