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CHAPTER 6 INCREMENTAL ANALYSIS SUMMARY OF QUESTIONS BY OBJECTIVES AND BLOOM’S TAXONOMY Item

SO

BT

Item

SO

BT

Item

SO

BT

Item

SO

BT

Item

8 2 3 5 7 4 2

K K C K C K C

29. 30. 31. 32.

84. 85. 86. 87. 88. 89. 90. 91. 92. 93. 94. 95. 96.

6 7 7 7 8 8 8 3 4 7 8 4 4

C AN AP AN AN C AN AP C AN AP K AP

97. 98. 99. 100. 101. 102. 103. 104. 105. 106. 107.

120. 121. 122. 123.

7 4 5 7

AN AN AN AN

SO

BT

7 2 4 6

C K K K

True-False Statements 1. 2. 3. 4. 5. 6. 7.

2 1 2 2 1 2 3

K K C K K C C

8. 9. 10. 11. 12. 13. 14.

3 3 4 4 4 5 5

45. 46. 47. 48. 49. 50. 51. 52. 53. 54. 55. 56. 57.

1 1 1 1 2 1 2 2 2 2 2 2 2

K K K K K C K C C K K C C

58. 59. 60. 61. 62. 63. 64. 65. 66. 67. 68. 69. 70.

2 2 3 2 3 3 3 3 4 4 4 4 4

C C C K C C C

15. 16. 17. 18. 19. 20. 21.

6 6 6 7 7 8 8

C C C C C C C

22. 23. 24. 25. 26. 27. 28.

Multiple Choice Questions C C AP C C C C C K C C AP AN

71. 72. 73. 74. 75. 76. 77. 78. 79. 80. 81. 82. 83.

4 3 3 4 5 4 5 5 5 6 6 6 6

AN AN AN AN AN C AN C AN C C C C

3 4 4 5 5 5 4 3 5 6 4

C C AN AP AN AN K K AN C AN

Brief Exercises 108. 109. 110. 111.

4 4 4 7

AP AP AP AP

112. 113. 114. 115.

7 8 4 6

AP AP AP AN

116. 117. 118. 119.

124. 125. 126.

7 7 3,4

AN AP AN

127. 128. 129.

6 3 3

AN AN E

130. 131. 132.

2 8 3 4

AP AN AP AP

Exercises 4 4 4

E AN E

133. 134. 135.

6 6 7

AN E E

1

K

Completion Statements 139. 140.

2 2

K K

146.

1-4

K

141. 142.

4 5

K K

143. 144.

6 8

K K

145.

Matching Short Answer Essay Questions 147.

4

AN

148.

6

E

136. 137. 138.

7 8 8

E E E

6-2

Test Bank for Managerial Accounting, Third Edition

SUMMARY OF STUDY OBJECTIVES BY QUESTION TYPE Item

Type

Item

Type

Item

Type

Item

Type

Item

Type

Item

Type

Item

Type

MC MC BE C

140. 146.

C Ma

MC MC BE

126. 128. 129.

Ex Ex Ex

146.

Ma

BE BE BE BE BE

121. 126. 130. 131. 132.

BE Ex Ex Ex Ex

141. 146. 147.

C Ma Es

MC MC

105. 122.

MC BE

142.

C

Ex Ex Ex

148.

Es

Ex Ex Ex

136.

Ex

BE Ex

138. 144.

Ex C

Study Objective 1 2. 5.

TF TF

45. 46.

MC MC

47. 48.

MC MC

1. 3. 4. 6.

TF TF TF TF

23. 28. 30. 49.

TF TF TF MC

51. 52. 53. 54.

MC MC MC MC

50. 145.

MC C

146.

Ma

Study Objective 2 55. 56. 57. 58.

MC MC MC MC

59. 61. 116. 139.

Study Objective 3 7. 8. 9.

TF TF TF

24. 60. 62.

TF MC MC

63. 64. 65.

MC MC MC

72. 73. 91.

MC MC MC

97. 104. 118.

Study Objective 4 10. 11. 12. 27. 31.

TF TF TF TF TF

66. 67. 68. 69. 70.

MC MC MC MC MC

71. 74. 76. 92. 95.

MC MC MC MC MC

96. 98. 99. 103. 107.

MC MC MC MC MC

108. 109. 110. 115. 119.

Study Objective 5 13. 14.

TF TF

25. 75.

TF MC

77. 78.

MC MC

79. 100.

MC MC

101. 102.

Study Objective 6 15. 16. 17.

TF TF TF

32. 80. 81.

TF MC MC

82. 83. 84.

MC MC MC

18. 19. 26.

TF TF TF

29. 85. 86.

TF MC MC

87. 93. 111.

MC MC BE

TF TF

22. 88.

TF MC

89. 90.

MC MC

106. 115. 127.

MC BE Ex

133. 134. 143.

Study Objective 7 112. 120. 123.

BE BE BE

124. 125. 135.

Study Objective 8 20. 21. Note:

TF = True-False MC = Multiple Choice

94. 113.

MC BE

C = Completion BE = Brief Exercise

.

117. 137.

Ex = Exercise Ma = Matching

Es = Essay

Incremental Analysis

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CHAPTER STUDY OBJECTIVES 1. Identify the steps in management's decision-making process. Management's decisionmaking process consists of (a) identifying the problem or opportunity, (b) assigning responsibility for the decision, (c) determining possible courses of action, (d) developing data relevant to each course of action, (e) making the decision, and (f) reviewing the results of the decision. 2. Describe the concept of incremental analysis. Incremental analysis is the process used to identify 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 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 information is the contribution margin, if any, produced by the segment and the disposition of the segment's fixed expenses. 8. Determine sales mix when a company has limited resources. When a company has limited resources, it is necessary to find the contribution margin per unit of limited resource. This amount is then multiplied by the units of limited resource to determine which product maximizes net income.

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Test Bank for Managerial Accounting, Third Edition

TRUE-FALSE STATEMENTS 1.

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

2.

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

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.

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

6.

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

7.

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

8.

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 item. Max should accept the special order if demand on other products is unaffected.

9.

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

10.

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

11.

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

12.

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

13.

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.

14.

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

15.

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

16.

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

17.

Equipment which is not fully depreciated should always be replaced.

Incremental Analysis

6-5

18.

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

19.

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

20.

When a company has limited resources to manufacture products, it should manufacture those products which have the highest contribution margin per unit.

21.

If a company has limited machine hours available for production, it is generally more profitable to produce and sell the product with the highest contribution margin per machine hour.

22.

One incremental analysis decision is the allocation of limited resources.

23.

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

24.

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.

25.

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.

26.

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

27.

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

28

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

29.

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

30.

Incremental costs are always relevant.

31.

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

32.

The book value of old equipment is an opportunity cost.

Answers to True-False Statements Item 1. 2. 3. 4. 5.

Ans. T F F T T

Item 6. 7. 8. 9. 10.

Ans. T T F T F

Item 11. 12. 13. 14. 15.

Ans. T F T F F

Item 16. 17. 18. 19. 20.

Ans. F F F F F

Item 21. 22. 23. 24. 25.

Ans. T T T T T

Item 26. 27. 28. 29. 30.

Ans. F F F F T

Item 31. 32.

Ans. T F

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Test Bank for Managerial Accounting, Third Edition

MULTIPLE CHOICE QUESTIONS 33.

The cost to produce Part A was $10 per unit in 2005. During 2006, it has increased to $11 per unit. In 2006, Supplier Company has offered to supply Part A for $9 per unit. For the make-or-buy decision, a. incremental revenues are $2 per unit. b. incremental costs are $1 per unit. c. net relevant costs are $1 per unit. d. differential costs are $2 per unit.

34.

Max Company uses 10,000 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. $10,000. c. $70,000. d. $80,000

35.

Truckel, Inc. currently manufactures a wicket as its main product. The costs per unit are as follows: Direct materials and direct labor $11.00 Variable overhead 5.00 Fixed overhead 8.00 Total $24.00 The fixed overhead is an allocated common cost. How much is the relevant cost of the wicket? a. $24.00 b. $16.00 c. $11.00 d. $19.00

36.

Seran Company has contacted Truckel Inc. with an offer to sell it 5,000 of the wickets for $18.00 each. If Truckel makes the wickets, variable costs are $11 per unit. Fixed costs are $12 per unit however $5 per unit is avoidable. Should Truckel make or buy the wickets? a. Buy; savings = $25,000 b. Buy; savings = $10,000 c. Make; savings = $20,000 d. Make; savings = $10,000

37.

Galley Industries can produce 100 units of a necessary component part with the following costs: Direct Materials $30,000 Direct Labor 13,000 Variable Overhead 32,000 Fixed Overhead 12,000 If Galley Industries purchases the component externally, $3,000 of the fixed costs can be avoided. Below what external price for the 100 units would Galley choose to buy instead of make? a. $75,000 b. $84,000 c. $66,000 d. $78,000

Incremental Analysis

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38.

Corn Crunchers has three product lines. It’s only unprofitable line is Corn Nuts, the results of which appear below for 2006: Sales $350,000 Variable expenses 230,000 Fixed expenses 150,000 Net loss $(30,000) 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. $45,000 b. $380,000 c. $335,000 d. $275,000

39.

North Division has the following information Sales $600,000 Variable expenses 320,000 Fixed expenses 310,000 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. $30,000 increase b. $310,000 decrease c. $280,000 decrease d. $290,000 increase

40.

Peters, Inc. produces chocolate chip cookies. Costs for producing one batch appear below: Direct materials Direct labor Variable overhead Fixed overhead

$ 8.00 3.00 1.00 4.00

An outside supplier has offered to produce the cookies for $14 per batch. If Peters decides to buy instead of make the cookies, what is the maximum price it would may? a. $16.00 b. $12.00 c. $13.60 d. $14.40 41.

42.

Walton, Inc. is unsure of whether to sell its product assembled or unassembled. The unit cost of the unassembled product is $16, while the cost of assembling each unit is estimated at $17. Unassembled units can be sold for $55, while assembled units could be sold for $71 per unit. What decision should Walton make? a. Sell before assembly, the company will save $1 per unit. b. Sell before assembly, the company will save $15 per unit. c. Process further, the company will save $1 per unit. d. Process further, the company will save $16 per unit. Ace Company sells office chairs with a selling price of $25 and a contribution margin per unit of $15. It takes 3 machine hours to produce one chair. How much is the contribution margin per unit of limited resource? a. $5 b. $3.33 c. $45 d. $10

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Test Bank for Managerial Accounting, Third Edition

43.

Rosen, Inc. has 10,000 obsolete calculators, which are carried in inventory at a cost of $20,000. If the calculators are scrapped, they can be sold for $1.10 each (for parts). If they are repackaged, at a cost of $15,000, they could be sold to toy stores for $2.50 per unit. What alternative should be chosen, and why? a. Scrap; profit is $1,000 greater. b. Repackage; revenue is $5,000 greater than cost. c. Scrap; incremental loss is $9,000. d. Repackage; receive profit of $10,000.

44.

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 is Mexico offers to purchase 2,000 units at $18 each. Lannon has excess capacity and can handle the additional production. What effect will acceptance of the offer have on net income? a. decrease $4,000 b. increase $4,000 c. increase $36,000 d. increase $8,000

45.

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.

46.

Which one of the following stages of the management decision-making process is properly sequenced? a. Evaluate possible courses of action, Make 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

47.

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

48.

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

49.

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

Incremental Analysis

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50.

Which one of the following is nonfinancial information that management might evaluat...