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Exam 19: Incremental Analysis

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Question 21

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Use the following information for questions A company's unit costs based on 100,000 units are: $\begin{array}{lr}\text { Variable costs } & \$ 75 \\\text { Fixed costs } & 30\end{array}$ 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.

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Question 22

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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.

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Question 23

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If a company must expand capacity to accept a special order, it is likely that there will be

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

A special one-time order should never be accepted if the unit sales price is less than the unit variable cost.

Each of the following is a disadvantage of buying rather than making a component of a company's product except that

Incremental analysis would not be appropriate for

The point in the production process when joint products are readily identifiable is the

A company should never accept an order for its product at less than its regular sales price.

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?

If a company anticipates that other sales will be affected by the acceptance of a special order, then

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

The process of evaluating financial data that change under alternative courses of action is called

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?

Incremental analysis would be appropriate for

Accountants are mainly involved in developing nonfinancial information for management's consideration in choosing among alternatives.

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: $\begin{array} { l r } \text { Direct materials } & \$ 46,500 \\\text { Direct labor } & 43,500 \\\text { Manufacturing overhead } & 60,000 \\\text { Total } & \$ 150,000 \\\hline\end{array}$ 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?

Sala Co. is contemplating the replacement of an old machine with a new one. The following information has been gathered: $\begin{array}{llll}&\text { Old Equipment }&\text { New Equipment }\\\text { Price } & \$ 300,000 & & \$ 600,000 \\\text { Accumulated Depreciation } & 90,000 & & -0- \\\text { Remaining useful life } & 10 \text { years } & & -0 \text { - } \\\text { Useful life } & -0 \text { - } & & 10 \text { years } \\\text { Annual operating costs } & \$ 240,000 & & \$ 180,600\end{array}$ $\text { If the old machine is replaced it can be sold for } \$ 24,000 \text {. }$ The net advantage (disadvantage) of replacing the old machine is

Bell's Shop can make 1,000 units of a necessary component with the following costs: $\begin{array}{lr}\text { Direct Materials } & \$ 24,000 \\\text { Direct Labor } & 6,000 \\\text { Variable Overhead } & 3,000 \\\text { Fixed Overhead } & ?\end{array}$ 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?

Use the following information for questions Truckel, Inc. currently manufactures a wicket as its main product. The costs per unit are as follows: $\begin{array}{lr}\text { Direct materials and direct labor } & \$ 11 \\\text { Variable overhead } & 5 \\\text { Fixed overhead } & 8 \\\quad \text { Total } & \$ 24\end{array}$ -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?