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Exam 20: Incremental Analysis

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Question 41

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

A) True
B) False

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Question 42

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The cost to produce Part A was $20 per unit in 2016. During 2017, it has increased to $23 per unit. In 2017, 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.

E) A) and D)
F) A) and C)

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Question 43

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A company manufactures three products using the same production process. The costs incurred up to the split-off point are $200,000. These costs are allocated to the products on the basis of their sales value at the split-off point. The number of units produced, the selling prices per unit of the three products at the split-off point and after further processing, and the additional processing costs are as follow: Instructions (a) Which product(s) should be processed further and which should be sold at the split-off point? (b) Would your decision be different if the company was using the quantity of output to allocate joint costs? Explain.

A company contemplating the acceptance of a special order has the following unit cost behavior, based on 10,000 units: 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

Which of the following is not a true statement?

Tex's Manufacturing Company can make 100 units of a necessary component part with the following costs: 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?

What of the following would not be relevant in a make-or-buy decision?

Pederson Enterprises produces giant stuffed bears. Each bear consists of $12 of variable costs and $9 of fixed costs and sells for $45. A wholesaler offers to buy 8,000 units at $14 each, of which Pederson has the capacity to produce. Pederson will incur extra shipping costs of $1 per bear. Instructions Determine the incremental income or loss that Pederson Enterprises would realize by accepting the special order.

It is always better to sell now rather than process further because of the time value of money.

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

Use the following information for questions . Ortiz Co. produces 5,000 units of part A12E. The following costs were incurred for that level of production: 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?

In incremental analysis, total fixed costs will always remain constant under alternative courses of action.

Paola Farms, Inc. produces a crop of chickens at a total cost of $66,000. The production generates 60,000 chickens which can be sold for $1 each to a slaughtering company, or the chickens can be slaughtered in house and then sold for $2.75 each. It costs $65,000 more to turn the annual chicken crop into chicken meat. Instructions If Paola Farms slaughters the chickens, determine how much incremental profit or loss it would report. What should Paola Farms do?

Which of the following will always be a relevant cost?

North Division has the following information: 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?

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.

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

Use the following information for questions . 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: -What is the increase in profit if the appropriate products are processed further?

Which statement is true concerning the decision rule on whether to make or buy?

In incremental analysis, total variable costs will always change under alternative courses of action, and total fixed costs will always remain constant.