Incremental Analysis
20 – 21
91. Saran Company has contacted Truckel with an offer to sell it 5,000 of the wickets for $18
each. If Truckel makes the wickets, variable costs are $16 per unit. Fixed costs are $8 per
unit; however, $5 per unit is unavoidable. Should Truckel make or buy the wickets?
a. Buy; savings = $15,000
b. Buy; savings = $5,000
c. Make; savings = $10,000
d. Make; savings = $5,000
92. Galley Industries can produce 100 units of a necessary component part with the following
costs:
Direct Materials $20,000
Direct Labor 9,000
Variable Overhead 21,000
Fixed Overhead 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
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
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.
95. Opportunity cost must be considered in decisions involving
a. budgeting.
b. financial accounting.
c. CVP analysis.
d. resources that have alternative uses.
Test Bank for Accounting, Tools for Business Decision Making Fifth Edition
20 – 22
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.
99. Tex’s Manufacturing Company can make 100 units of a necessary component part with
the following costs:
Direct Materials $120,000
Direct Labor 25,000
Variable Overhead 45,000
Fixed Overhead 30,000
If Tex’s Manufacturing Company purchases the component externally, $20,000 of the
fixed costs can be avoided. At what external price for the 100 units is the company
indifferent between making or buying?
a. $190,000
b. $200,000
c. $210,000
d. $220,000
Incremental Analysis
20 – 23
100. Tex’s Manufacturing Company can make 100 units of a necessary component part with
the following costs:
Direct Materials $120,000
Direct Labor 25,000
Variable Overhead 45,000
Fixed Overhead 30,000
If Tex’s Manufacturing Company can purchase the component externally for $190,000
and only $5,000 of the fixed costs can be avoided, what is the correct make-or-buy
decision?
a. Buy and save $5,000
b. Make and save $5,000
c. Make and save $15,000
d. Buy and save $15,000
101. Bell’s Shop can make 1,000 units of a necessary component with the following costs:
Direct Materials $24,000
Direct Labor 6,000
Variable Overhead 3,000
Fixed Overhead ?
The company can purchase the 1,000 units externally for $39,000. The unavoidable fixed
costs are $2,000 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. $8,000
b. $6,000
c. $4,000
d. Cannot be determined.
102. Ruth Company produces 1,000 units of a necessary component with the following costs:
Direct Materials $34,000
Direct Labor 15,000
Variable Overhead 9,000
Fixed Overhead 10,000
Ruth Company could avoid $6,000 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. $58,000
b. $64,000
c. $59,000
d. $62,000
Test Bank for Accounting, Tools for Business Decision Making Fifth Edition
20 – 24
103. Ruth Company produces 1,000 units of a necessary component with the following costs:
Direct Materials $27,000
Direct Labor 16,000
Variable Overhead 4,000
Fixed Overhead 7,000
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. $46,000
b. $58,000
c. $51,000
d. $55,000
104. Fornelli, Inc. can produce 100 units of a component part with the following costs:
Direct Materials $15,000
Direct Labor 6,500
Variable Overhead 16,000
Fixed Overhead 11,000
If Fornelli, Inc. can purchase the units externally for $40,000, by what amount will its total
costs change?
a. An increase of $40,000
b. An increase of $2,500
c. An increase of $8,500
d. A decrease of $11,000
105. Fornelli, Inc. can produce 100 units of a component part with the following costs:
Direct Materials $15,000
Direct Labor 6,500
Variable Overhead 16,000
Fixed Overhead 11,000
If Fornelli, Inc. can purchase the component part externally for $44,000 and only $4,000 of
the fixed costs can be avoided, what is the correct make–or-buy decision?
a. Make and save $500
b. Buy and save $500
c. Make and save $2,500
d. Buy and save $6,500
Incremental Analysis
20 – 25
106. Crigui Music produces 60,000 CDs on which to record music. The CDs have the following
costs:
Direct Materials $13,000
Direct Labor 15,000
Variable Overhead 3,000
Fixed Overhead 7,000
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. $34,000
b. $31,000
c. $38,000
d. $35,000
107. Crigui Music produces 60,000 CDs on which to record music. The CDs have the following
costs:
Direct Materials $13,000
Direct Labor 15,000
Variable Overhead 3,000
Fixed Overhead 7,000
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. $38,000
b. $34,000
c. $35,000
d. $42,000
108. Tasty Bites produces corn chips. The cost of one batch is below:
Direct materials $18
Direct labor 13
Variable overhead 11
Fixed overhead 14
An outside supplier has offered to produce the corn chips for $30 per batch. How much
will Tasty Bites save if it accepts the offer?
a. $15 per batch
b. $12 per batch
c. $26 per batch
d. $1 per batch
Test Bank for Accounting, Tools for Business Decision Making Fifth Edition
20 – 26
109. NF Toy Company is unsure of whether to sell its product assembled or unassembled. The
unit cost of the unassembled product is $24 and NF Toy would sell it for $52. The cost to
assemble the product is estimated at $17 per unit and the company believes the market
would support a price of $68 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 $16 per unit.
c. Process further, the company will be better off by $23 per unit.
d. Process further, the company will be better off by $11 per unit.
110. Moreland 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 be 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
111. Pratt Company has old inventory on hand that cost $15,000. Its scrap value is $20,000.
The inventory could be sold for $50,000 if manufactured further at an additional cost of
$15,000. What should Pratt do?
a. Sell the inventory for $20,000 scrap value
b. Dispose of the inventory to avoid any further decline in value
c. Hold the inventory at its $15,000 cost
d. Manufacture further and sell it for $50,000
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.
Incremental Analysis
20 – 27
113. Janssen Company has old inventory on hand that cost $24,000. Its scrap value is
$32,000. The inventory could be sold for $80,000 if manufactured further at an additional
cost of $24,000. What should Janssen do?
a. Sell the inventory for $32,000 scrap value
b. Dispose of the inventory to avoid any further decline in value
c. Hold the inventory at its $24,000 cost
d. Manufacture further and sell it for $80,000.
114. A company has a process that results in 24,000 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 $160,000
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 $16,000.
b. Sell now, the company will be better off by $16,000.
c. Process further, the company will be better off by $144,000.
d. Sell now, the company will be better off by $160,000.
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.
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 $60 and Eddy Company
would sell it for $135. The cost to assemble the product is estimated at $27 per unit and
Eddy Company believes the market would support a price of $174 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 $27 per unit.
b. Sell before assembly, the company will be better off by $39 per unit.
c. Process further, the company will be better off by $39 per unit.
d. Process further, the company will be better off by $12 per unit.
Test Bank for Accounting, Tools for Business Decision Making Fifth Edition
20 – 28
117. Mallory Company manufactures widgets. Bowden Company has approached Mallory with
a proposal to sell the company widgets at a price of $82,000 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. $18,000 incremental savings
b. $6,000 incremental cost
c. $2,000 incremental savings
d. $18,000 incremental cost
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.
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
Incremental Analysis
20 – 29
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
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
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.
123. Costs incurred before the split-off point are
a. sunk costs.
b. incremental costs.
c. relevant costs.
d. opportunity costs.
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
Test Bank for Accounting, Tools for Business Decision Making Fifth Edition
20 – 30
125.
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
The additional profit that would result from processing rough lumber further is
a. $21,400.
b. $49,600.
c. $145,400.
d. $95,800.
126.
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
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
Incremental Analysis
20 – 31
127.
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
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
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.
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.
130. 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.
At what price were the updated versions sold?
a. $26,800
b. $13,200
c. $13,600
d. $16,000
Test Bank for Accounting, Tools for Business Decision Making Fifth Edition
20 – 32
131. 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?
a. $2,400
b. $9,000
c. $17,800
d. $20,200
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.
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.
134. 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 $225,000 $375,000
Accumulated depreciation 90,000 – 0 –
Annual operating costs 300,000 240,000
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.
Which of the following amounts is irrelevant to the replacement decision?
a. $375,000
b. $135,000
c. $315,000
d. $60,000
Incremental Analysis
20 – 33
135. 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 $225,000 $375,000
Accumulated depreciation 90,000 – 0 –
Annual operating costs 300,000 240,000
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?
a. $375,000
b. $315,000
c. $150,000
d. $75,000
136. 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 $225,000 $375,000
Accumulated depreciation 90,000 – 0 –
Annual operating costs 300,000 240,000
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.
The net advantage (disadvantage) of replacing the old equipment with the new equipment is
a. $60,000
b. $(15,000)
c. $(75,000)
d. $90,000
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
Test Bank for Accounting, Tools for Business Decision Making Fifth Edition
20 – 34
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.
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. The cash disposal value of old equipment is considered to be a (an)
a. irrelevant cost.
b. avoidable cost.
c. sunk cost.
d. relevant cost.
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.
Incremental Analysis
20 – 35
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
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 $300,000 $600,000
Accumulated Depreciation 90,000 -0-
Remaining useful life 10 years -0-
Useful life -0- 10 years
Annual operating costs $240,000 $180,600
If the old machine is replaced, it can be sold for $24,000.
Which of the following amounts is a sunk cost?
a. $240,000
b. $180,600
c. $600,000
d. $210,000
Test Bank for Accounting, Tools for Business Decision Making Fifth Edition
20 – 36
148. 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 $300,000 $600,000
Accumulated Depreciation 90,000 -0-
Remaining useful life 10 years -0-
Useful life -0- 10 years
Annual operating costs $240,000 $180,600
If the old machine is replaced, it can be sold for $24,000.
Which of the following amounts is relevant to the replacement decision?
a. $210,000
b. $300,000
c. $59,400
d. $90,000
149. 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 $300,000 $600,000
Accumulated Depreciation 90,000 -0-
Remaining useful life 10 years -0-
Useful life -0- 10 years
Annual operating costs $240,000 $180,600
If the old machine is replaced, it can be sold for $24,000.
The net advantage (disadvantage) of replacing the old machine is
a. $18,000
b. $24,000
c. $(6,000)
d. $(60,000)
Incremental Analysis
20 – 37
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
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.
Test Bank for Accounting, Tools for Business Decision Making Fifth Edition
20 – 38
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 130,000
Net loss $ (40,000)
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 $40,000.
b. decrease by $90,000.
c. decrease by $12,000.
d. increase by $12,000.
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.
155. A segment has the following data:
Sales $700,000
Variable expenses 300,000
Fixed expenses 550,000
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. $400,000 increase
b. $400,000 decrease
c. $5,000 decrease
d. Cannot be determined from the data provided.
Incremental Analysis
20 – 39
156. Corn Crunchers has three product lines. Its only unprofitable line is Corn Nuts, the results
of which appear below for 2013:
Sales $1,400,000
Variable expenses 920,000
Fixed expenses 600,000
Net loss $ (120,000)
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. $180,000
b. $1,520,000
c. $1,340,000
d. $1,100,000
157. North Division has the following information:
Sales $1,200,000
Variable expenses 640,000
Fixed expenses 620,000
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. $60,000 increase
b. $620,000 decrease
c. $560,000 decrease
d. $580,000 increase
158. The potential effects of the decision to eliminate a line of business on existing employees
and the community are
a. ignored in incremental analysis.
b. quantitative factors.
c. qualitative factors.
d. opportunity costs.
159. When will the elimination of a product line have no effect on the company’s overall profit?
a. When the avoidable fixed costs equal the product line’s contribution margin
b. When the unavoidable fixed costs equal the product line’s contribution margin
c. When there are no fixed costs incurred by the product line
d. When the product line contribution margin is negative
Test Bank for Accounting, Tools for Business Decision Making Fifth Edition
20 – 40
160. Accounting’s contribution to the decision-making process occurs in all of the following
steps except to
a. identify the problem and assign responsibility.
b. determine possible courses of action.
c. review results of the decision.
d. make a decision.
161. It costs Dryer Company $26 per unit ($18 variable and $8 fixed) to produce its product,
which normally sells for $38 per unit. A foreign wholesaler offers to purchase 5,000 units
at $21 each. Dryer would incur special shipping costs of $2 per unit if the order were
accepted. Dryer has sufficient unused capacity to produce the 5,000 units. If the special
order is accepted, what will be the effect on net income?
a. $5,000 decrease
b. $5,000 increase
c. $15,000 increase
d. $90,000 increase
162. In a make-or-buy decision, opportunity costs are
a. added to the make total cost.
b. deducted from the make total cost.
c. added to the buy total cost.
d. ignored.
163. Which of the following would generally not affect a make-or-buy decision?
a. Selling expenses
b. Direct labor
c. Variable manufacturing costs
d. Opportunity cost
164. A cost that cannot be changed by any present or future decision is a(n)
a. incremental cost.
b opportunity cost.
c. sunk cost.
d. variable cost.
165. If an unprofitable segment is eliminated
a. it is impossible for net income to decrease.
b. fixed expenses allocated to the eliminated segment will be eliminated.
c. variable expenses of the eliminated segment will be eliminated.
d. it is impossible for net income to increase.