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Chapter 21 Incremental Analysis Answer Key
True / False Questions
1.
Identifying information relevant to a particular business decision requires an understanding
of both quantitative and qualitative considerations.
2.
All incremental revenue or incremental costs are relevant.
3.
Even though costs, revenues, and other factors do not vary among possible courses of
action, they may be relevant to a decision.
4.
In making a decision, management will look thoroughly at both relevant and irrelevant
data.
5.
In order to be consistent with IASB Standards, U.S. GAAP now requires that borrowing
costs on assets that require a substantial period to bring them to a marketable condition be
expensed immediately.
6.
Differential costs are those that are the same among alternatives.
7.
Nonfinancial considerations are relevant in decision making.
8.
Incremental revenue is relevant in decision making.
9.
The term "out-of-pocket cost" is often used to describe costs which have not yet been
incurred and which may vary among alternative courses of action.
10.
Opportunity costs are irrelevant in decision making.
11.
A sunk cost is the benefit that could have been obtained by pursuing an alternate course of
action.
12.
Sunk costs may be defined as unavoidable future costs resulting from past decisions.
13.
Sunk costs are relevant to decisions about replacing plant assets.
14.
Opportunity costs are recorded in the accounting records.
15.
A sunk cost is an expenditure that has proven to be nonproductive.
16.
Sunk costs have already been incurred and cannot be changed by future actions.
17.
An opportunity cost is a relevant cost when making a business decision.
18.
Incremental analysis rarely requires the decision maker to exercise judgment.
19.
The relevant costs and revenues to consider in a special order decision include variable
costs, fixed costs, and incremental revenues.
20.
Joint products are similar products that serve the same exact function.
21.
Joint costs are the middle costs of a product.
22.
Maple syrup and pancakes are examples of joint products.
23.
In determining whether to scrap or to rebuild defective units of product, the cost already
incurred in producing the defective units is not relevant.
24.
Products resulting from a shared manufacturing process are referred to as complimentary
products.
25.
When sales of one product contribute to the sales of another product they are called
contribution products.
26.
The split-off point is the point at which joint products can be separated into two or more
products.
27.
The most common method to allocate joint costs is in proportion to the relative sales value
of the products.
28.
A decision to discontinue a given product on the basis of contribution margin data should
include consideration of the probable impact of the discontinuance on the sales of other
products.
29.
Assuming that the MR Corporation has an inventory of 200 defective motors costing
$450,000 to produce and $150,000 to repair, the repaired units can be sold for $425,000.
The company receives an offer to purchase these motors for $325,000 before repairing
them. The company's decision should be to sell the motors at the offered price.
30.
Assuming that the MR Corporation has an inventory of 200 defective motors costing
$450,000 to produce and $150,000 to repair, the repaired units can be sold for $275,000.
The company receives an offer to purchase these motors for $100,000 before repairing
them. The company's decision should be to sell the motors at the offered price.
31.
Direct material costs are always considered relevant costs in a make or buy decision.
32.
Sunk costs are relevant costs when considering a special order.
Multiple Choice Questions
33.
Perfect Plumbing Corporation currently manufactures a valve for use in water pumps that it
produces for sale. The company is considering purchasing the valves from an outside
supplier rather than manufacturing them. Which of the following costs is
not
relevant to the
decision?
34.
Incremental revenues:
35.
Which of the following types of cost are always relevant to a decision?
36.
Mell Co. manufactured 100 personal computers at a cost of $30,000. It can sell them as is
for $65,000, or install hard disks in them for $25,000 and sell them for $105,000. The
$30,000 original manufacturing cost is:
37.
Which cost is not relevant in making financial decisions?
38.
Incremental costs can be defined as:
39.
A cost that has already been incurred and cannot be changed is called a(n):
40.
Costs that have not yet been incurred and that may vary among different courses of action
are called:
41.
By choosing to go into business for himself, Jim Lazar foregoes the possibility of getting a
highly paid job with a large company. This is called a(n):
42.
Which of the following would be an example of a sunk cost?
43.
Sunk costs:
44.
Which factor is
not
relevant in deciding whether or not to accept a special order?
45.
Accepting a special order is profitable whenever the revenue from the special order
exceeds:
46.
In deciding whether or not to accept a special order, what is the opportunity cost of using
machinery for which the firm has sufficient excess capacity to accept the order?
Burns Industries currently manufactures and sells 20,000 power saws per month, although
it has the capacity to produce 35,000 units per month. At the 20,000-unit-per-month level
of production, the per-unit cost is $65, consisting of $40 in variable costs and $25 in fixed
costs. Burns sells its saws to retail stores for $80 each. Allen Distributors has offered to
purchase 5,000 saws per month at a reduced price. Burns can manufacture these
additional units with no change in its present level of fixed manufacturing costs.
47.
Refer to the information above. Which of the following is
not
a relevant factor in Burns'
decision concerning whether to accept the special order from Allen?
48.
Refer to the information above. Assume that Allen Distributors offers to purchase the
additional 5,000 saws at a price of $47 per unit. If Burns accepts this price, Burns' monthly
gross profit on sales of power saws will:
49.
Refer to the information above. Using an incremental analysis approach, Burns should
consider accepting this special order only if the price per unit offered by Allen is at least:
