Mapa Institute of Technology - IE 112

Chapter 21 Incremental Analysis

1)Identifying information relevant to a particular business decision requires an understanding of both quantitative and qualitative considerations.

1. 1. True
   2. False  

2. All incremental revenue or incremental costs are relevant.
   1. True
   2. False  

3. Even though costs, revenues, and other factors do not vary among possible courses of action, they may be relevant to a decision.
   1. True
   2. False  

4. In making a decision, management will look thoroughly at both relevant and irrelevant data.
   1. True
   2. False  

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.

1. 1. True
   2. False  

6. Differential costs are those that are the same among alternatives.
   1. True
   2. False  

7. Nonfinancial considerations are relevant in decision-making.
   1. True
   2. False  

8. Incremental revenue is relevant in decision-making.
   1. True
   2. False  

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.
   1. True
   2. False  

10. Opportunity costs are irrelevant in decision-making.
    1. True
    2. False  

11. A sunk cost is the benefit that could have been obtained by pursuing an alternate course of action.
    1. True
    2. False  

12. Sunk costs may be defined as unavoidable future costs resulting from past decisions.
    1. True
    2. False  

13. Sunk costs are relevant to decisions about replacing plant assets.
    1. True
    2. False  

14. Opportunity costs are recorded in the accounting records.
    1. True
    2. False  

15. A sunk cost is an expenditure that has proven to be nonproductive.
    1. True
    2. False  

16. Sunk costs have already been incurred and cannot be changed by future actions.
    1. True
    2. False  

17. An opportunity cost is a relevant cost when making a business decision.
    1. True
    2. False  

18. Incremental analysis rarely requires the decision maker to exercise judgment.

1. 1. True
   2. False  

19. The relevant costs and revenues to consider in a special order decision include variable costs, fixed costs, and incremental revenues.
    1. True
    2. False  

20. Joint products are similar products that serve the same exact function.
    1. True
    2. False  

21. Joint costs are the middle costs of a product.
    1. True
    2. False  

22. Maple syrup and pancakes are examples of joint products.
    1. True
    2. False  

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.
    1. True
    2. False  

24. Products resulting from a shared manufacturing process are referred to as complimentary products.
    1. True
    2. False  

25. When sales of one product contribute to the sales of another product they are called contribution products.
    1. True
    2. False  

26. The split-off point is the point at which joint products can be separated into two or more products.
    1. True
    2. False   

27. The most common method to allocate joint costs is in proportion to the relative sales value of the products.
    1. True
    2. False  

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.
    1. True
    2. False  

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.
    1. True
    2. False  

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.

1. 1. True
   2. False  

31. Direct material costs are always considered relevant costs in a make or buy decision.
    1. True
    2. False  

32. Sunk costs are relevant costs when considering a special order.
    1. True
    2. False  

33. In addition to quantitative information, many nonfinancial factors must be taken into consideration when making a decision.
    1. True
    2. False  

34. 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?
    1. The cost of direct material required to make the valve.

1. 2. The price charged by the outside supplier for an identical valve.
   3. The cost of the machinery owned by Perfect Plumbing used exclusively to manufacture this valve.
   4. The salvage value of the machinery owned by Perfect Plumbing used exclusively to manufacture this valve.

35. Incremental revenues:

1. Always increase revenue when one course of action is selected over another.
2. Always decrease revenue when one course of action is selected over another.
3. May increase or decrease when one course of action is selected over another.
4. Cause revenues to remain steady.

36. Which of the following types of cost are always relevant to a decision?
    1. Sunk costs B) Average costs

C) Incremental costs D) Fixed costs

37. 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:

1. An out-of-pocket cost because it has already been paid.
2. A sunk cost because it is not relevant to the decision.
3. An incremental cost because it is relevant to the decision.

4. A fixed cost because it will remain the same no matter which action is taken.

38. Which cost is not relevant in making financial decisions?
    1. Sunk costs B) Opportunity costs

C) Incremental costs D) Out-of-pocket costs

39. Incremental costs can be defined as:
    1. Costs that are expected to increase regardless of the course of action chosen.
    2. The differences between costs incurred under alternative courses of action.
    3. Costs incurred in the past.
    4. Costs that are irrelevant in decision making.

40. A cost that has already been incurred and cannot be changed is called a(n):
    1. Opportunity cost. B) Out-of-pocket cost.

C) Joint cost. D) Sunk cost.

41. Costs that have not yet been incurred and that may vary among different courses of action are called:
    1. Opportunity costs. B) Out-of-pocket costs.

C) Joint costs. D) Sunk costs.

42. 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):
    1. Sunk cost. B) Out-of-pocket cost.

C) Opportunity cost. D) Joint cost.

43. Which of the following would be an example of a sunk cost?
    1. The cost of a new oil burner that replaced a destroyed one
    2. The cost of an old inefficient oil burner that will be replaced by a more modern and efficient one
    3. Depreciation expense
    4. Lost revenue from a bad debt

44. Sunk costs:
    1. Have already been incurred as a result of past actions.
    2. Vary among the alternative courses of action being considered.
    3. Are benefits that could have been obtained by following another course of action.
    4. Result from unfavorable cost variances.

45. Which factor is not relevant in deciding whether or not to accept a special order?
    1. Incremental revenue that will be earned
    2. Additional costs that will be incurred
    3. The effect that the order will have on the company's regular sales volume and selling prices
    4. The average cost of production if the special order is accepted

46. Accepting a special order is profitable whenever the revenue from the special order exceeds:
    1. The average unit cost of production multiplied by the number of units in the order.
    2. The incremental cost of producing the order.
    3. The materials and direct labor costs of producing the order.
    4. The fixed manufacturing costs for the period.