CHAPTER 20
INCREMENTAL ANALYSIS
SUMMARY OF QUESTIONS BY LEARNING OBJECTIVES AND BLOOM’S TAXONOMY
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True-False Statements
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19.
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25.
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sg30.
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Multiple Choice Questions
31.
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59.
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115.
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143.
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32.
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145.
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35.
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64.
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148.
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94.
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67.
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95.
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123.
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40.
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68.
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96.
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125.
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42.
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99.
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127.
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72.
3
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100.
4
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128.
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156.
7
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45.
2
C
73.
3
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101.
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157.
7
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2
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74.
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102.
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158.
7
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47.
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103.
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159.
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st160.
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sg161.
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55.
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111.
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113.
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141.
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58.
3
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86.
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Brief Exercises
167.
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170.
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173.
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176.
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172.
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7
AP
sg This question also appears in the Study Guide.
st This question also appears in a self-test at the student companion website.
Test Bank for Accounting, Tools for Business Decision Making Fifth Edition
20 – 2
SUMMARY OF QUESTIONS BY LEARNING OBJECTIVES AND BLOOM’S TAXONOMY
Exercises
180.
2, 7
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Completion Statements
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Matching
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Short-Answer Essay
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SUMMARY OF LEARNING OBJECTIVES BY QUESTION TYPE
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Learning Objective 1
1.
TF
31.
MC
33.
MC
35.
MC
200.
C
26.
TF
32.
MC
34.
MC
160.
MC
Learning Objective 2
2.
TF
6.
TF
37.
MC
41.
MC
45.
MC
49.
MC
167.
BE
3.
TF
7.
TF
38.
MC
42.
MC
46.
MC
50.
MC
180.
Ex
4.
TF
27.
TF
39.
MC
43.
MC
47.
MC
51.
MC
201.
C
5.
TF
36.
MC
40.
MC
44.
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48.
MC
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MC
Learning Objective 3
8.
TF
53.
MC
58.
MC
63.
MC
68.
MC
73.
MC
183.
Ex
9.
TF
54.
MC
59.
MC
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MC
69.
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161.
MC
184.
Ex
10.
TF
55.
MC
60.
MC
65.
MC
70.
MC
168.
BE
185.
Ex
11.
TF
56.
MC
61.
MC
66.
MC
71.
MC
181.
Ex
202.
C
28.
TF
57.
MC
62.
MC
67.
MC
72.
MC
182.
Ex
Learning Objective 4
12.
TF
78.
MC
86.
MC
94.
MC
102.
MC
163.
MC
187.
Ex
13.
TF
79.
MC
87.
MC
95.
MC
103.
MC
169.
BE
188.
Ex
14.
TF
80.
MC
88.
MC
96.
MC
104.
MC
170.
BE
189.
Ex
15.
TF
81.
MC
89.
MC
97.
MC
105.
MC
171.
BE
203.
C
74.
MC
82.
MC
90.
MC
98.
MC
106.
MC
172.
BE
207.
SA
75.
MC
83.
MC
91.
MC
99.
MC
107.
MC
173.
BE
208.
SA
76.
MC
84.
MC
92.
MC
100.
MC
108.
MC
185.
Ex
77.
MC
85.
MC
93.
MC
101.
MC
162.
MC
186.
Ex
Learning Objective 5
16.
TF
110.
MC
115.
MC
120.
MC
125.
MC
130.
MC
192.
Ex
17.
TF
111.
MC
116.
MC
121.
MC
126.
MC
131.
MC
193.
Ex
18.
TF
112.
MC
117.
MC
122.
MC
127.
MC
174.
BE
204.
C
29.
TF
113.
MC
118.
MC
123.
MC
128.
MC
190.
Ex
109.
MC
114.
MC
119.
MC
124.
MC
129.
MC
191.
Ex
Incremental Analysis
20 – 3
Learning Objective 6
19.
TF
133.
MC
138.
MC
143.
MC
148.
MC
195.
Ex
20.
TF
134.
MC
139.
MC
144.
MC
149.
MC
205.
C
21.
TF
135.
MC
140.
MC
145.
MC
164.
MC
206.
MA
22.
TF
136.
MC
141.
MC
146.
MC
175.
BE
209.
SA
132.
MC
137.
MC
142.
MC
147.
MC
194.
Ex
Learning Objective 7
23.
TF
150.
MC
154.
MC
158.
MC
176.
BE
196.
Ex
24.
TF
151.
MC
155.
MC
159.
MC
177.
BE
197.
Ex
25.
TF
152.
MC
156.
MC
165.
MC
178.
BE
198.
Ex
30.
TF
153.
MC
157.
MC
166.
MC
179.
BE
199.
Ex
Note: TF = True-False BE = Brief Exercise C = Completion
MC = Multiple Choice Ex = Exercise SA = Short-Answer
MA = Matching
CHAPTER LEARNING OBJECTIVES
1. Identify the steps in management’s decision-making process. Management’s decision-
making 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. 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. Any changes in fixed costs, opportunity costs, or other
incremental costs or savings (such as additional shipping) should be considered.
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 as well as changes
to fixed manufacturing costs, (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 repairing, 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. Explain the relevant factors in whether to eliminate an unprofitable segment or
product. In deciding whether to eliminate an unprofitable segment or product, the relevant
costs are the variable costs that drive the contribution margin, if any, produced by the
segment or product. Disposition of the segment’s or product’s fixed expenses and
opportunity costs must also be considered.
Test Bank for Accounting, Tools for Business Decision Making Fifth Edition
20 – 4
TRUE-FALSE STATEMENTS
1. An important step in management’s decision-making process is to determine and evaluate
possible courses of action.
2. In making decisions, management ordinarily considers both financial and nonfinancial
information.
3. In incremental analysis, total variable costs will always change under alternative courses
of action, and total fixed costs will always remain constant.
4. Accountants are mainly involved in developing nonfinancial information for management’s
consideration in choosing among alternatives.
5. Decision-making involves choosing among alternative courses of action.
6. Financial data are developed for a course of action under an incremental basis and then it
is compared to data developed under a differential basis before a decision is made.
7. In incremental analysis, total fixed costs will always remain constant under alternative
courses of action.
8. A special one-time order should never be accepted if the unit sales price is less than the
unit variable cost.
9. If a company has excess capacity and present markets will not be affected, it would be
profitable to accept an order at a special unit price even though the price is less than the
unit variable cost to manufacture the item.
10. A company should never accept an order for its product at less than its regular sales price.
11. 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.
Incremental Analysis
20 – 5
12. An incremental make-or-buy decision depends solely on which alternative is the lowest
cost alternative.
13. A decision whether to continue to make a product or buy it externally depends on the
external price and the amount of variable and fixed costs that can be eliminated assuming
no alternative uses of resources.
14. An opportunity cost is the potential benefit obtained by using resources in an alternative
course of action.
15. If an incremental make or buy analysis indicates that it is cheaper to buy rather than make
an item, management should always make the decision to choose the lowest cost
alternative.
16. In a sell or process further decision, management should process further as long as the
incremental revenues from additional processing exceed the incremental variable costs.
17. It is always better to sell now rather than process further because of the time value of
money.
18. 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.
19. In a decision concerning replacing old equipment with new equipment, the book value of
the old equipment can be considered an opportunity cost.
20. In a decision concerning replacing old equipment with new equipment, the book value of
the old equipment can be considered a sunk cost.
21. In a decision to retain or replace old equipment, the salvage value of the old equipment is
relevant in incremental analysis.
22. It is better not to replace old equipment if it is not fully depreciated.
Test Bank for Accounting, Tools for Business Decision Making Fifth Edition
20 – 6
23. From a quantitative standpoint, a segment should be eliminated if its contribution margin
is less than the fixed costs that can be eliminated.
24. The elimination of an unprofitable product line may adversely affect the remaining product
lines.
25. Many of the decisions involving incremental analysis have qualitative features, but since
they are not easily measured they should be ignored.
26. Accounting contributes to management’s decision-making process through internal
reports that review the actual impact of the decision.
27. The process used to identify the financial data that change under alternative courses of
action is called allocation of limited resources.
28. If a company is operating at full capacity, the incremental costs of a special order will likely
include fixed manufacturing costs.
29. The basic decision rule in a sell or process further decision is: sell without further
processing as long as the incremental revenue from processing exceeds the incremental
processing costs.
30. In deciding on the future status of an unprofitable segment, management should
recognize that net income could decrease by eliminating the unprofitable segment.
Incremental Analysis
20 – 7
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.
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.
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.
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.
36. Which of the following will always be a relevant cost?
a. Sunk cost
b. Fixed cost
c. Variable cost
d. Opportunity cost
Test Bank for Accounting, Tools for Business Decision Making Fifth Edition
20 – 8
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
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.
Incremental Analysis
20 – 9
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.
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.
44. Incremental analysis is synonymous with
a. difficult analysis.
b. differential analysis.
c. gross profit analysis.
d. derivative 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.
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.
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.
Test Bank for Accounting, Tools for Business Decision Making Fifth Edition
20 – 10
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.
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.
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.
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
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
Incremental Analysis
20 – 11
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 3,000 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 3,000 scales. If the
special order is accepted, what will be the effect on net income?
a. $6,000 increase
b. $6,000 decrease
c. $9,000 decrease
d. $45,000 increase
54. Baden Company manufactures a product with a unit variable cost of $100 and a unit sales
price of $176. Fixed manufacturing costs were $480,000 when 10,000 units were
produced and sold. The company has a one-time opportunity to sell an additional 1,000
units at $140 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 $8,000.
b. Income would increase by $8,000.
c. Income would increase by $140,000.
d. Income would increase by $40,000.
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.
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.
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
Test Bank for Accounting, Tools for Business Decision Making Fifth Edition
20 – 12
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.
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.
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.
61. Martin Company incurred the following costs for 70,000 units:
Variable costs $420,000
Fixed costs 392,000
Martin has received a special order from a foreign company for 3,000 units. There is
sufficient capacity to fill the order without jeopardizing regular sales. Filling the order will
require spending an additional $6,300 for shipping.
If Martin wants to break even on the order, what should the unit sales price be?
a. $6.00
b. $8.10
c. $11.60
d. $13.70
62. Martin Company incurred the following costs for 70,000 units:
Variable costs $420,000
Fixed costs 392,000
Martin has received a special order from a foreign company for 3,000 units. There is
sufficient capacity to fill the order without jeopardizing regular sales. Filling the order will
require spending an additional $6,300 for shipping.
Incremental Analysis
20 – 13
MC. 62 (cont.)
If Martin wants to earn $6,000 on the order, what should the unit price be?
a. $9.70
b. $15.70
c. $8.00
d. $10.10
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.
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.
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.
66. It costs Lannon Fields $28 of variable costs and $12 of allocated fixed costs to produce an
industrial trash can that sells for $60. A buyer in Mexico offers to purchase 3,000 units at
$36 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 $12,000
b. Increase $12,000
c. Increase $108,000
d. Increase $24,000
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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 $ 4
Direct labor 10
Variable overhead 8
Fixed overhead 6
A foreign company wants to purchase 2,000 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 $4,000 in order to stamp the foreign company’s name on the product. The
incremental income (loss) from accepting the order is
a. $6,000.
b. $2,000.
c. $(6,000).
d. $(2,000).
Incremental Analysis
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70. A company’s unit costs based on 100,000 units are:
Variable costs $75
Fixed costs 30
The normal unit sales price per unit is $165. A special order from a foreign company has
been received for 5,000 units at $135 a unit. In order to fulfill the order, 3,000 units of
regular sales would have to be foregone.
The opportunity cost associated with this order is
a. $225,000.
b. $495,000.
c. $270,000.
d. $405,000.
71. A company’s unit costs based on 100,000 units are:
Variable costs $75
Fixed costs 30
The normal unit sales price per unit is $165. A special order from a foreign company has
been received for 5,000 units at $135 a unit. In order to fulfill the order, 3,000 units of
regular sales would have to be foregone.
The incremental profit (loss) from accepting the order would be
a. $30,000.
b. $(150,000).
c. $180,000.
d. $(90,000).
72. Able Company’s unit manufacturing cost is:
Variable Costs $50
Fixed Costs 25
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
a. $(46,000).
b. $6,000.
c. $(40,000).
d. $10,000.
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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
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
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
76. Clemente Inc. incurs the following costs to produce 10,000 units of a subcomponent:
Direct materials $8,400
Direct labor 11,250
Variable overhead 12,600
Fixed overhead 16,200
An outside supplier has offered to sell Clemente the subcomponent for $2.85 a unit.
If Clemente accepts the offer, by how much will net income increase (decrease)?
a. $3,750
b. $19,950
c. $(8,850)
d. $(2,850)
Incremental Analysis
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77. Clemente Inc. incurs the following costs to produce 10,000 units of a subcomponent:
Direct materials $8,400
Direct labor 11,250
Variable overhead 12,600
Fixed overhead 16,200
An outside supplier has offered to sell Clemente the subcomponent for $2.85 a unit.
If Clemente could avoid $3,000 of fixed overhead by accepting the offer, net income would
increase (decrease) by
a. $750.
b. $(5,850).
c. $(3,150).
d. $6,750.
78. Clemente Inc. incurs the following costs to produce 10,000 units of a subcomponent:
Direct materials $8,400
Direct labor 11,250
Variable overhead 12,600
Fixed overhead 16,200
An outside supplier has offered to sell Clemente the subcomponent for $2.85 a unit.
If Clemente accepts the offer, it could use the production capacity to produce another
product that would generate additional income of $3,600. The increase (decrease) in net
income from accepting the offer would be
a. $150.
b. $7,350.
c. $(150).
d. $(3,600).
79. Ortiz Co. produces 5,000 units of part A12E. The following costs were incurred for that
level of production:
Direct materials $ 55,000
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.
What is the relevant cost per unit of part A12E?
a. $58
b. $85
c. $93
d. $66
Test Bank for Accounting, Tools for Business Decision Making Fifth Edition
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80. Ortiz Co. produces 5,000 units of part A12E. The following costs were incurred for that level
of production:
Direct materials $ 55,000
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.
If the outside supplier offers a unit price of $68, net income will increase (decrease) by
a. $(10,000).
b. $125,000.
c. $(50,000).
d. $85,000.
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
82. Billings Company has the following costs when producing 100,000 units:
Variable costs $600,000
Fixed costs 900,000
An outside supplier has offered to make the item at $4.50 a unit. If the decision is made to
purchase the item outside, current production facilities could be leased to another
company for $165,000. The net increase (decrease) in the net income of accepting the
supplier’s offer is
a. $285,000.
b. $315,000.
c. $(15,000).
d. $840,000.
Incremental Analysis
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83. Sanders Inc. has the following costs when producing 100,000 units:
Variable costs $600,000
Fixed costs 900,000
An outside supplier is interested in producing the item for Sanders. If the item is produced
outside, Sanders could use the released production facilities to make another item that
would generate $150,000 of net income. At what unit price would Sanders accept the
outside supplier’s offer if Sanders wanted to increase net income by $120,000?
a. $8.70
b. $6.30
c. $7.50
d. $5.70
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.
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
86. During 2012, it cost Westa, Inc. $18 per unit to produce part T5. During 2013, it has
increased to $21 per unit. In 2013, Southside Company has offered to provide Part T5 for
$16 per unit to Westa. As it pertains to the make-or-buy decision, which statement is true?
a. Differential costs are $5 per unit.
b. Incremental costs are $2 per unit.
c. Net relevant costs are $2 per unit.
d. Incremental revenues are $3 per unit.
87. Chapman Company manufactures widgets. Embree Company has approached Chapman
with a proposal to sell the company widgets at a price of $125,000 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
Test Bank for Accounting, Tools for Business Decision Making Fifth Edition
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MC. 87 (cont.)
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. $25,000 incremental savings
b. $11,000 incremental cost
c. $11,000 incremental savings
d. $25,000 incremental cost
88. The cost to produce Part A was $20 per unit in 2012. During 2013, it has increased to $23
per unit. In 2013, Supplier Company has offered to supply Part A for $18 per unit. For the
make-or-buy decision,
a. incremental revenues are $5 per unit.
b. incremental costs are $3 per unit.
c. net relevant costs are $3 per unit.
d. differential costs are $5 per unit.
89. Max Company uses 20,000 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. $20,000.
c. $140,000.
d. $160,000.
90. Truckel, Inc. currently manufactures a wicket as its main product. The costs per unit are as
follows:
Direct materials and direct labor $11
Variable overhead 5
Fixed overhead 8
Total $24
The fixed overhead is an allocated common cost. How much is the relevant cost of the
wicket?
a. $36
b. $24
c. $19
d. $16