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Week 6 Quiz 5: Chapters 7 and 8 Chapter 7 TRUE-FALSE STATEMENTS 1.

An important step in management's decision-making process is to determine and evaluate possible courses of action.

Ans:, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Strategic/Critical Thinking, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Strategic Planning 2.

In making decisions, management ordinarily considers both financial and nonfinancial information. Ans:, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Strategic/Critical Thinking, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Strategic Planning 3.

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

Ans:, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Strategic/Critical Thinking, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Quantitative Methods 4.

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

Ans:, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Decision Modeling, AICPA PC: Interaction, IMA: Decision Analysis 5.

Decision-making involves choosing among alternative courses of action.

Ans:, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Strategic/Critical Thinking, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Decision Analysis 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.


7-2

Incremental Analysis

Ans:, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Strategic/Critical Thinking, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Decision Analysis 7.

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

Ans:, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Strategic/Critical Thinking, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Decision Analysis 8.

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

Ans:, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Strategic/Critical Thinking, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics 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.

Ans:, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Strategic/Critical Thinking, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics 10.

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

Ans:, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Strategic/Critical Thinking, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics 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.

Ans:, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Strategic/Critical Thinking, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics 12.

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

Ans:, LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Strategic/Critical Thinking, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics


7-3

13.

Incremental Analysis

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.

Ans:, LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Strategic/Critical Thinking, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Quantitative Methods 14.

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

Ans:, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Strategic/Critical Thinking, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics 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.

Ans:, LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Strategic/Critical Thinking, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics 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.

Ans:, LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Strategic/Critical Thinking, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics 17.

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

Ans:, LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Strategic/Critical Thinking, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics 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.

Ans:, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Strategic/Critical Thinking, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics 19.

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


7-4

Incremental Analysis

Ans:, LO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Strategic/Critical Thinking, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics 20.

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

Ans:, LO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Strategic/Critical Thinking, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics 21.

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

Ans:, LO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Strategic/Critical Thinking, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics 22.

It is better not to replace old equipment if it is not fully depreciated.

Ans:, LO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Strategic/Critical Thinking, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics 23.

From a quantitative standpoint, a segment should be eliminated if its contribution margin is less than the fixed costs that can be eliminated.

Ans:, LO: 7, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Strategic/Critical Thinking, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics


7-5

24.

Incremental Analysis

The elimination of an unprofitable product line may adversely affect the remaining product lines.

Ans:, LO: 7, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Strategic/Critical Thinking, AICPA FN: Risk Analysis, AICPA PC: Problem Solving, IMA: Business Economics 25.

Many of the decisions involving incremental analysis have qualitative features, but since they are not easily measured they should be ignored.

Ans:, LO: 7, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Strategic/Critical Thinking, AICPA FN: Risk Analysis, AICPA PC: Problem Solving, IMA: Business Economics 26.

Accounting contributes to management's decision-making process through internal reports that review the actual impact of the decision.

Ans:, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Strategic/Critical Thinking, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Decision Analysis 27.

The process used to identify the financial data that change under alternative courses of action is called allocation of limited resources.

Ans:, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Risk Analysis, AICPA PC: Problem Solving, IMA: Decision Analysis 28.

If a company is operating at full capacity, the incremental costs of a special order will likely include fixed manufacturing costs.

Ans:, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Risk Analysis, AICPA PC: Problem Solving, IMA: Business Economics 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.

Ans:, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Strategic/Critical Thinking, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics 30.

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


7-6

Incremental Analysis

Ans:, LO: 7, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics 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.

Ans:, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Decision Analysis 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.

Ans:, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Strategic/Critical Thinking, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Decision Analysis 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.

Ans: LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Performance Measurement 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


Incremental Analysis

7-7

Ans:, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Decision Analysis 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.

Ans: LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Decision Analysis 36.

Which of the following will always be a relevant cost? a. Sunk cost b. Fixed cost c. Variable cost d. Opportunity cost

Ans: LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Decision Analysis


Incremental Analysis

7-8

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.

Ans: LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Decision Analysis 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.

Ans: LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Decision Analysis 39.

Alvarez Company is considering the following alternatives: Revenues Variable costs Fixed costs

Alternative A $50,000 30,000 10,000

Alternative B $60,000 30,000 16,000

What is the incremental profit? a. $10,000 b. $0 c. $6,000 d. $4,000 Ans: LO: 2, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Decision Analysis 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

Ans: LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Decision Analysis 41.

Relevant costs are always


Incremental Analysis

7-9

a. b. c. d.

fixed costs. variable costs. avoidable costs. sunk costs.

Ans: LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Decision Analysis 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.

Ans: LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Risk Analysis, AICPA PC: Problem Solving, IMA: Decision Analysis


Incremental Analysis

7 - 10

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.

Ans:, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics 44.

Incremental analysis is synonymous with a. difficult analysis. b. differential analysis. c. gross profit analysis. d. derivative analysis.

Ans:, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Decision 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.

Ans: LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Decision Analysis 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.

Ans:LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Decision 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.


7 - 11

Incremental Analysis

Ans: LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Information Management 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.

Ans:, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Decision Analysis


Incremental Analysis

7 - 12

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.

Ans: LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Decision Analysis 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.

Ans: LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Decision Analysis 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

Ans:, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Decision Analysis 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

Ans:LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Decision Analysis


7 - 13

53.

Incremental Analysis

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

Ans:LO: 3, Bloom: AN, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Decision Analysis


7 - 14

54.

Incremental Analysis

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.

Ans: LO: 3, Bloom: AN, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Decision Analysis 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.

Ans:, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Decision Analysis 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.

Ans: LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics 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

Ans: LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics


7 - 15

58.

Incremental Analysis

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.

Ans: LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics


7 - 16

59.

Incremental Analysis

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.

Ans:, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics 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.

Ans:LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics 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

Ans:, LO: 3, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics 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.


7 - 17

Incremental Analysis

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 Ans: LO: 3, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics


7 - 18

63.

Incremental Analysis

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.

Ans: LO: 3, Bloom: C, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics 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.

Ans:, LO: 3, Bloom: C, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics 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.

Ans:, LO: 3, Bloom: C, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics 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

Ans: LO: 3, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics


7 - 19

67.

Incremental Analysis

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

Ans:, LO: 3, Bloom: K, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics


Incremental Analysis

7 - 20

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.

Ans: LO: 3, Bloom: C, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics 69.

A company contemplating the acceptance of a special order has the following unit cost behavior, based on 10,000 units: Direct materials Direct labor Variable overhead Fixed overhead

$ 4 10 8 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). Ans:, LO: 3, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics 70.

A company’s unit costs based on 100,000 units are: Variable costs Fixed costs

$75 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.


7 - 21

Incremental Analysis

Ans: LO: 3, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics


Incremental Analysis

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71.

A company’s unit costs based on 100,000 units are: Variable costs Fixed costs

$75 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). Ans:LO: 3, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics 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.

Ans:, LO: 3, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics 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

Ans: LO: 3, Bloom: C, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics 74.

What of the following would not be relevant in a make-or-buy decision? a. Unavoidable variable costs b. Incremental fixed costs


Incremental Analysis

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c. Opportunity costs d. Avoidable fixed cost Ans:LO: 4, Bloom: K, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics 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

Ans: LO: 4, Bloom: C, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics


Incremental Analysis

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76.

Clemente Inc. incurs the following costs to produce 10,000 units of a subcomponent: Direct materials Direct labor Variable overhead Fixed overhead

$8,400 11,250 12,600 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) Ans:LO: 4, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics 77.

Clemente Inc. incurs the following costs to produce 10,000 units of a subcomponent: Direct materials Direct labor Variable overhead Fixed overhead

$8,400 11,250 12,600 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. Ans: LO: 4, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics 78.

Clemente Inc. incurs the following costs to produce 10,000 units of a subcomponent: Direct materials Direct labor Variable overhead Fixed overhead

$8,400 11,250 12,600 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


Incremental Analysis

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a. b. c. d.

$150. $7,350. $(150). $(3,600).

Ans:, LO: 4, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics


Incremental Analysis

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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

Ans: LO: 4, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics 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.

Ans:LO: 4, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics 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

Ans: LO: 4, Bloom: K, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics 82.

Billings Company has the following costs when producing 100,000 units: Variable costs

$600,000


Incremental Analysis

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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. Ans:, LO: 4, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics


Incremental Analysis

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83.

Sandusky Inc. has the following costs when producing 100,000 units: Variable costs Fixed costs

$600,000 900,000

An outside supplier is interested in producing the item for Sandusky. If the item is produced outside, Sandusky could use the released production facilities to make another item that would generate $150,000 of net income. At what unit price would Sandusky accept the outside supplier’s offer if Sandusky wanted to increase net income by $120,000? a. $8.70 b. $6.30 c. $7.50 d. $5.70 Ans:, LO: 4, Bloom: AN, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics 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.

Ans:LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics 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

Ans: LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics 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.

Ans:LO: 4, Bloom: AN, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics


Incremental Analysis

7 - 29

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 Direct labor Manufacturing overhead Total

$ 46,500 43,500 60,000 $150,000

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 Ans:, LO: 4, Bloom: AN, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics 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.

Ans: LO: 4, Bloom: AN, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics 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.

Ans:, LO: 4, Bloom: AN, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics 90.

Truckel, Inc. currently manufactures a wicket as its main product. The costs per unit are as follows: Direct materials and direct labor $11


Incremental Analysis

7 - 30

Variable overhead Fixed overhead Total

5 8 $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 Ans:, LO: 4, Bloom: AN, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics


Incremental Analysis

7 - 31

91.

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 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? a. Buy; savings = $15,000 b. Buy; savings = $5,000 c. Make; savings = $10,000 d. Make; savings = $5,000

Ans:, LO: 4, Bloom: AN, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics 92.

Galley Industries can produce 100 units of a necessary component part with the following costs: Direct Materials Direct Labor Variable Overhead Fixed Overhead

$20,000 9,000 21,000 8,000

If Galley Industries purchases the component externally, $2,000 of the fixed costs can be avoided. Below what external price for the 100 units would Galley choose to buy instead of make? a. $50,000 b. $56,000 c. $44,000 d. $52,000 Ans: LO: 4, Bloom: AN, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics 93.

Which decision will involve no incremental revenues? a. Make or buy decision b. Drop a product line c. Accept a special order d. Additional processing decision

Ans:LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics


7 - 32

94.

Incremental Analysis

An opportunity cost a. should be initially recorded as an asset. b. is the cost of a new product proposal. c. is the potential benefit that may be obtained by following an alternative course of action. d. is classified as manufacturing overhead.

Ans: LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics


Incremental Analysis

7 - 33

95.

Opportunity cost must be considered in decisions involving a. budgeting. b. financial accounting. c. CVP analysis. d. resources that have alternative uses.

Ans: LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics 96.

The opportunity cost of an alternate course of action that is relevant to a make-or-buy decision is a. subtracted from the "Make" costs. b. added to the "Make" costs. c. added to the "Buy" costs. d. none of these.

Ans:, LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics 97.

Opportunity cost is usually a. a standard cost. b. a potential benefit. c. a sunk cost. d. included as part of cost of goods sold.

Ans:, LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics 98.

Each of the following is a disadvantage of buying rather than making a component of a company's product except that a. quality control specifications may not be met. b. the outside supplier could increase prices significantly in the future. c. profitable product lines may be dropped. d. the supplier may not deliver on time.

Ans: LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics 99.

Tex's Manufacturing Company can make 100 units of a necessary component part with the following costs: Direct Materials $120,000 Direct Labor 25,000 Variable Overhead 45,000


Incremental Analysis

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Fixed Overhead

30,000

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? a. $190,000 b. $200,000 c. $210,000 d. $220,000 Ans: LO: 4, Bloom: AN, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Cost Management


Incremental Analysis

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100.

Tex's Manufacturing Company can make 100 units of a necessary component part with the following costs: Direct Materials $120,000 Direct Labor 25,000 Variable Overhead 45,000 Fixed Overhead 30,000 If Tex's Manufacturing Company can purchase the component externally for $190,000 and only $5,000 of the fixed costs can be avoided, what is the correct make-or-buy decision? a. Buy and save $5,000 b. Make and save $5,000 c. Make and save $15,000 d. Buy and save $15,000

Ans:LO: 4, Bloom: AN, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Cost Management 101.

Bell's Shop can make 1,000 units of a necessary component with the following costs: Direct Materials Direct Labor Variable Overhead Fixed Overhead

$24,000 6,000 3,000 ?

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? a. $8,000 b. $6,000 c. $4,000 d. Cannot be determined. Ans:LO: 4, Bloom: AN, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Cost Management 102.

Ruth Company produces 1,000 units of a necessary component with the following costs: Direct Materials Direct Labor Variable Overhead Fixed Overhead

$34,000 15,000 9,000 10,000

Ruth Company could avoid $6,000 in fixed overhead costs if it acquires the components externally. If cost minimization is the major consideration and the company would prefer to buy the components, what is the maximum external price that Ruth Company would accept to acquire the 1,000 units externally?


Incremental Analysis

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a. b. c. d.

$58,000 $64,000 $59,000 $62,000

Ans:, LO: 4, Bloom: AN, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Cost Management


Incremental Analysis

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103.

Ruth Company produces 1,000 units of a necessary component with the following costs: Direct Materials Direct Labor Variable Overhead Fixed Overhead

$27,000 16,000 4,000 7,000

None of Ruth Company's fixed overhead costs can be reduced, but another product could be made that would increase profit contribution by $8,000 if the components were acquired externally. If cost minimization is the major consideration and the company would prefer to buy the components, what is the maximum external price that Ruth Company would be willing to accept to acquire the 1,000 units externally? a. $46,000 b. $58,000 c. $51,000 d. $55,000 Ans: LO: 4, Bloom: AN, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Cost Management 104.

Fornelli, Inc. can produce 100 units of a component part with the following costs: Direct Materials Direct Labor Variable Overhead Fixed Overhead

$15,000 6,500 16,000 11,000

If Fornelli, Inc. can purchase the units externally for $40,000, by what amount will its total costs change? a. An increase of $40,000 b. An increase of $2,500 c. An increase of $8,500 d. A decrease of $11,000 Ans:, LO: 4, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Cost Management 105.

Fornelli, Inc. can produce 100 units of a component part with the following costs: Direct Materials Direct Labor Variable Overhead Fixed Overhead

$15,000 6,500 16,000 11,000

If Fornelli, Inc. can purchase the component part externally for $44,000 and only $4,000 of the fixed costs can be avoided, what is the correct make-or-buy decision?


Incremental Analysis

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a. b. c. d.

Make and save $500 Buy and save $500 Make and save $2,500 Buy and save $6,500

Ans: LO: 4, Bloom: AN, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Cost Management


Incremental Analysis

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106.

Crigui Music produces 60,000 CDs on which to record music. The CDs have the following costs: Direct Materials $13,000 Direct Labor 15,000 Variable Overhead 3,000 Fixed Overhead 7,000 Crigui could avoid $4,000 in fixed overhead costs if it acquires the CDs externally. If cost minimization is the major consideration and the company would prefer to buy the 60,000 units externally, what is the maximum external price that Crigui would expect to pay for the units? a. $34,000 b. $31,000 c. $38,000 d. $35,000

Ans: LO: 4, Bloom: AN, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Cost Management 107.

Crigui Music produces 60,000 CDs on which to record music. The CDs have the following costs: Direct Materials $13,000 Direct Labor 15,000 Variable Overhead 3,000 Fixed Overhead 7,000 None of Crigui’s fixed overhead costs can be reduced, but another product could be made that would increase profit contribution by $4,000 if the CDs were acquired externally. If cost minimization is the major consideration and the company would prefer to buy the CDs, what is the maximum external price that Crigui would be willing to accept to acquire the 60,000 units externally? a. $38,000 b. $34,000 c. $35,000 d. $42,000

Ans: LO: 4, Bloom: AN, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Cost Management 108.

Tasty Bites produces corn chips. The cost of one batch is below: Direct materials Direct labor Variable overhead Fixed overhead

$18 13 11 14


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Incremental Analysis

An outside supplier has offered to produce the corn chips for $30 per batch. How much will Tasty Bites save if it accepts the offer? a. $15 per batch b. $12 per batch c. $26 per batch d. $1 per batch Ans:, LO: 4, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Cost Management


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109.

Incremental Analysis

NF Toy Company is unsure of whether to sell its product assembled or unassembled. The unit cost of the unassembled product is $24 and NF Toy would sell it for $52. The cost to assemble the product is estimated at $17 per unit and the company believes the market would support a price of $68 on the assembled unit. What decision should NF Toy make? a. Sell before assembly, the company will be better off by $1 per unit. b. Sell before assembly, the company will be better off by $16 per unit. c. Process further, the company will be better off by $23 per unit. d. Process further, the company will be better off by $11 per unit.

Ans:LO: 5, Bloom: AN, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Cost Management 110.

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? a. $8,000, $10,000, and $14,000 b. $8,000, $3,000, and $14,000 c. $10,000, $3,000, and $14,000 d. $8,000, $10,000, $3,000 and $14,000

Ans: LO: 5, Bloom: AN, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Cost Management 111.

Pratt Company has old inventory on hand that cost $15,000. Its scrap value is $20,000. The inventory could be sold for $50,000 if manufactured further at an additional cost of $15,000. What should Pratt do? a. Sell the inventory for $20,000 scrap value b. Dispose of the inventory to avoid any further decline in value c. Hold the inventory at its $15,000 cost d. Manufacture further and sell it for $50,000

Ans: LO: 5, Bloom: AN, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Cost Management 112.

New Age Makeup produces face cream. Each bottle of face cream costs $10 to produce and can be sold for $13. The bottles can be sold as is, or processed further into sunscreen at a cost of $14 each. New Age Makeup could sell the sunscreen bottles for $23 each. a. Face cream must be processed further because its profit is $9 each. b. Face cream must not be processed further because costs increase more than revenue. c. Face cream must not be processed further because it decreases profit by $1 each. d. Face cream must be processed further because it increases profit by $3 each.

Ans:, LO: 5, Bloom: AN, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Cost Management


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113.

Incremental Analysis

Janssen Company has old inventory on hand that cost $24,000. Its scrap value is $32,000. The inventory could be sold for $80,000 if manufactured further at an additional cost of $24,000. What should Janssen do? a. Sell the inventory for $32,000 scrap value b. Dispose of the inventory to avoid any further decline in value c. Hold the inventory at its $24,000 cost d. Manufacture further and sell it for $80,000.

Ans: LO: 5, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Cost Management


Incremental Analysis

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114.

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? a. Process further, the company will be better off by $16,000. b. Sell now, the company will be better off by $16,000. c. Process further, the company will be better off by $144,000. d. Sell now, the company will be better off by $160,000.

Ans:, LO: 5, Bloom: AN, Difficulty: Hard, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Cost Management 115.

The decision rule on whether to sell or process further a. varies from situation to situation. b. is process further as long as total revenue exceeds present revenues. c. is process further if incremental revenue from such processing exceeds incremental fixed costs. d. is process further if incremental revenue from such processing exceeds the incremental processing costs.

Ans: LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Strategic/Critical Thinking, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Cost Management 116.

Eddy Company is starting business and is unsure of whether to sell its product assembled or unassembled. The unit cost of the unassembled product is $60 and Eddy Company would sell it for $135. The cost to assemble the product is estimated at $27 per unit and Eddy Company believes the market would support a price of $174 on the assembled unit. What is the correct decision using the sell or process further decision rule? a. Sell before assembly, the company will be better off by $27 per unit. b. Sell before assembly, the company will be better off by $39 per unit. c. Process further, the company will be better off by $39 per unit. d. Process further, the company will be better off by $12 per unit.

Ans: LO: 5, Bloom: AN, Difficulty: Hard, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Cost Management 117.

Mallory Company manufactures widgets. Bowden Company has approached Mallory with a proposal to sell the company widgets at a price of $82,000 for 100,000 units. Mallory 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 material Direct labor Manufacturing overhead Total

$ 31,000 29,000 40,000 $100,000


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Incremental Analysis

The manufacturing overhead consists of $16,000 of costs that will be eliminated if the components are no longer produced by Mallory. From Mallory's point of view, how much is the incremental cost or savings if the widgets are bought instead of made? a. $18,000 incremental savings b. $6,000 incremental cost c. $2,000 incremental savings d. $18,000 incremental cost Ans:, LO: 5, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Cost Management


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118.

The focus of a sell or process further decision is a. incremental revenue. b. incremental cost. c. both incremental revenue and incremental cost. d. neither incremental revenue nor incremental cost.

Ans: LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Strategic/Critical Thinking, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics 119.

Marcus Company gathered the following data about the three products that it produces: Present Estimated Additional Estimated Sales Product Sales Value Processing Costs if Processed Further A $12,000 $8,000 $21,000 B 14,000 5,000 18,000 C 11,000 3,000 16,000 Which of the products should not be processed further? a. Product A b. Product B c. Product C d. Products A and C

Ans:, LO: 5, Bloom: AN, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Cost Management 120.

Serene Dairy has four product lines: sour cream, ice cream, yogurt, and butter. The total cost of producing the milk base for the products is $45,000, which has been allocated based on the gallons of milk base used by each product. Results for July follow: Units sold Revenue Variable departmental costs Fixed costs Net income (loss)

Sour Cream 2,000 $10,000 6,000 5,000 $ (1,000)

Ice Cream 500 $20,000 13,000 2,000 $ 5,000

Yogurt 400 $10,000 4,200 3,000 $ 2,800

Butter 2,000 $20,000 4,800 7,000 $ 8,200

Total 4,900 $60,000 28,000 17,000 $15,000

How much are total joint costs of the products? a. $28,000 b. $17,000 c. $45,000 d. $15,000 Ans: LO: 5, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Cost Management 121.

Which of the following is not involved in the sell or process further decision?


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a. b. c. d.

Revenues Variable costs Opportunity costs Fixed costs

Ans: LO: 5, Bloom: K, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Cost Management 122.

All of the following are relevant to the sell or process further decision except a. costs incurred beyond the split-off point. b. revenues at the split-off point. c. costs incurred before the split-off point. d. revenues beyond the split-off point.

Ans: LO: 5, Bloom: K, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Cost Management


Incremental Analysis

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123.

Costs incurred before the split-off point are a. sunk costs. b. incremental costs. c. relevant costs. d. opportunity costs.

Ans:LO: 5, Bloom: K, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Cost Management 124.

Which of the following terms are synonymous? a. Avoidable costs and irrelevant costs b. Unavoidable costs and incremental costs c. Sunk costs and relevant costs d. Joint costs and sunk costs

Ans: LO: 5, Bloom: K, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Cost Management 125.

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: Sales Value Additional Sales Value after Product at Split-off Variable Costs Further Processing Green lumber $159,600 $24,000 $178,000 Rough lumber 124,000 28,200 173,600 Sawdust 102,000 19,600 130,000 The additional profit that would result from processing rough lumber further is a. $21,400. b. $49,600. c. $145,400. d. $95,800.

Ans:LO: 5, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Cost Management 126.

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: Sales Value Additional Sales Value after Product at Split-off Variable Costs Further Processing Green lumber $159,600 $24,000 $178,000 Rough lumber 124,000 28,200 173,600 Sawdust 102,000 19,600 130,000 Which products should be processed further? a. Green lumber and rough lumber


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b. Green lumber and sawdust c. Rough lumber and sawdust d. All three products Ans: LO: 5, Bloom: K, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Cost Management


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127.

Incremental Analysis

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: Sales Value Additional Sales Value after Product at Split-off Variable Costs Further Processing Green lumber $159,600 $24,000 $178,000 Rough lumber 124,000 28,200 173,600 Sawdust 102,000 19,600 130,000 What is the increase in profit if the appropriate products are processed further? a. $24,200 b. $29,800 c. $96,000 d. $255,800

Ans:, LO: 5, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Cost Management 128.

The point in the production process when joint products are readily identifiable is the a. separation point. b. split-off point. c. common point. d. break-even point.

Ans:, LO: 5, Bloom: K, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Cost Management 129.

The costs incurred prior to the split-off point are referred to as a. separable costs. b. split-off costs. c. joint product costs. d. joint costs.

Ans: LO: 5, Bloom: K, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Cost Management 130.

Hi-Tech Inc. has several outdated computers that cost a total of $17,800 and could be sold as scrap for $4,600. They could be updated for an additional $2,400 and sold. If Hi-Tech updates the computers and sells them, net income will increase by $9,000. At what price were the updated versions sold? a. $26,800 b. $13,200 c. $13,600 d. $16,000


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Incremental Analysis

Ans: LO: 5, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Cost Management 131.

Hi-Tech Inc. has several outdated computers that cost a total of $17,800 and could be sold as scrap for $4,600. They could be updated for an additional $2,400 and sold. If Hi-Tech updates the computers and sells them, net income will increase by $9,000. What amount would be considered sunk costs? a. $2,400 b. $9,000 c. $17,800 d. $20,200

Ans: LO: 5, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Cost Management


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132.

Incremental Analysis

When deciding whether or not to replace old equipment with new equipment, the overriding consideration is the a. book value of the old equipment. b. cost of replacing the old equipment. c. salvage value of the old equipment. d. difference between future cost savings and the new equipment’s costs.

Ans: LO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Strategic/Critical Thinking, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics 133.

In an equipment replacement decision, the cost of the old equipment is a(n) a. incremental cost. b. sunk cost. c. relevant cost. d. opportunity cost.

Ans:, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Strategic/Critical Thinking, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics 134.

Chung Inc. is considering the replacement of a piece of equipment with a newer model. The following data has been collected: Old Equipment New Equipment Purchase price $225,000 $375,000 Accumulated depreciation 90,000 -0Annual operating costs 300,000 240,000 If the old equipment is replaced now, it can be sold for $60,000. Both the old equipment’s remaining useful life and the new equipment’s useful life is 5 years. Which of the following amounts is irrelevant to the replacement decision? a. $375,000 b. $135,000 c. $315,000 d. $60,000

Ans:, LO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Strategic/Critical Thinking, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics 135.

Chung Inc. is considering the replacement of a piece of equipment with a newer model. The following data has been collected: Old Equipment New Equipment Purchase price $225,000 $375,000 Accumulated depreciation 90,000 -0Annual operating costs 300,000 240,000


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If the old equipment is replaced now, it can be sold for $60,000. Both the old equipment’s remaining useful life and the new equipment’s useful life is 5 years. What is the net cost of the new equipment? a. $375,000 b. $315,000 c. $150,000 d. $75,000 Ans:, LO: 6, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Strategic/Critical Thinking, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics


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136.

Incremental Analysis

Chung Inc. is considering the replacement of a piece of equipment with a newer model. The following data has been collected: Old Equipment New Equipment Purchase price $225,000 $375,000 Accumulated depreciation 90,000 -0Annual operating costs 300,000 240,000 If the old equipment is replaced now, it can be sold for $60,000. Both the old equipment’s remaining useful life and the new equipment’s useful life is 5 years. The net advantage (disadvantage) of replacing the old equipment with the new equipment is a. $60,000 b. $(15,000) c. $(75,000) d. $90,000

Ans:, LO: 6, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Strategic/Critical Thinking, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics 137.

Which of the following is relevant information in a decision whether old equipment presently being used should be replaced by new equipment? a. The cost of the old equipment b. The salvage value of the old equipment c. The book value of the old equipment d. The accumulated depreciation of the old equipment

Ans:, LO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Strategic/Critical Thinking, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics 138.

A company is deciding whether or not to replace some old equipment with new equipment. Which of the following is not considered in the incremental analysis? a. Annual operating cost of the new equipment b. Annual operating cost of the old equipment c. Net cost of the new equipment d. Book value of the old equipment

Ans: LO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Strategic/Critical Thinking, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics 139.

What role does a trade-in allowance on old equipment play in a decision to retain or replace equipment? a. It is relevant since it increases the cost of the new equipment. b. It is not relevant since it reduces the cost of the old equipment. c. It is not relevant to the decision since it does not impact the cost of the new equipment. d. It is relevant since it reduces the cost of the new equipment.


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Incremental Analysis

Ans: LO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Strategic/Critical Thinking, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics 140.

A company decided to replace an old machine with a new machine. Which of the following is considered a relevant cost? a. The book value of the old equipment b. Depreciation expense of the old equipment c. The loss on disposal of the old equipment d. The current disposal price of the old equipment

Ans: LO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Strategic/Critical Thinking, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics


Incremental Analysis

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141.

The cash disposal value of old equipment is considered to be a (an) a. irrelevant cost. b. avoidable cost. c. sunk cost. d. relevant cost.

Ans: LO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Strategic/Critical Thinking, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics 142.

Which of the following is not relevant information in a decision whether old equipment presently being used should be replaced by new equipment? a. The cash price of the new equipment b. The salvage value of the old equipment c. The book value of the old equipment d. The cost savings if the new equipment is purchased

Ans: LO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Strategic/Critical Thinking, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics 143.

Book value of old equipment is considered to be a a. relevant cost. b. semi-relevant cost. c. sunk cost. d. cost that can be changed by a present or future decision.

Ans: LO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Strategic/Critical Thinking, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics 144.

A company is deciding on whether to replace some old equipment with new equipment. Which of the following is not a relevant cost for incremental analysis? a. Annual operating cost of the new equipment b. Annual operating cost of the old equipment c. Net cost of the new equipment d. Accumulated depreciation on the old equipment

Ans: LO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Strategic/Critical Thinking, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics 145.

A company is considering replacing old equipment with new equipment. Which of the following is a relevant cost for incremental analysis? a. Annual depreciation charge on the old equipment b. Book value of the old equipment c. Estimated annual depreciation of the new equipment d. Cost of the new equipment


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Incremental Analysis

Ans: LO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Strategic/Critical Thinking, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics 146.

In a retain or replace equipment decision, trade-in allowance available on old equipment a. increases the cost of the new equipment. b. is relevant because it will not be realized if the old equipment is retained. c. is not relevant to the decision. d. reduces the cost of the old equipment.

Ans:, LO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Strategic/Critical Thinking, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics


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147.

Sala Co. is contemplating the replacement of an old machine with a new one. The following information has been gathered: Old Machine Price $300,000 Accumulated Depreciation 90,000 Remaining useful life 10 years Useful life -0Annual operating costs $240,000

New Machine $600,000 -0-010 years $180,600

If the old machine is replaced, it can be sold for $24,000. Which of the following amounts is a sunk cost? a. $240,000 b. $180,600 c. $600,000 d. $210,000 Ans: LO: 6, Bloom: C, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Cost Management 148.

Sala Co. is contemplating the replacement of an old machine with a new one. The following information has been gathered: Old Machine Price $300,000 Accumulated Depreciation 90,000 Remaining useful life 10 years Useful life -0Annual operating costs $240,000

New Machine $600,000 -0-010 years $180,600

If the old machine is replaced, it can be sold for $24,000. Which of the following amounts is relevant to the replacement decision? a. $210,000 b. $300,000 c. $59,400 d. $90,000 Ans: LO: 6, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Cost Management


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149.

Sala Co. is contemplating the replacement of an old machine with a new one. The following information has been gathered: Old Machine Price $300,000 Accumulated Depreciation 90,000 Remaining useful life 10 years Useful life -0Annual operating costs $240,000

New Machine $600,000 -0-010 years $180,600

If the old machine is replaced, it can be sold for $24,000. The net advantage (disadvantage) of replacing the old machine is a. $18,000 b. $24,000 c. $(6,000) d. $(60,000) Ans:LO: 6, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Cost Management 150.

Abel Company produces three versions of baseball bats: wood, aluminum, and hard rubber. A condensed segmented income statement for a recent period follows:

Sales Variable expenses Contribution margin Fixed expenses Net income (loss)

Wood $500,000 325,000 175,000 75,000 $100,000

Aluminum $200,000 140,000 60,000 35,000 $ 25,000

Hard Rubber $65,000 58,000 7,000 22,000 $(15,000)

Total $765,000 523,000 242,000 132,000 $110,000

Assume none of the fixed expenses for the hard rubber line are avoidable. What will be total net income if the line is dropped? a. $125,000 b. $103,000 c. $105,000 d. $140,000 Ans:, LO: 7, Bloom: AN, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Cost Management


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151.

Abel Company produces three versions of baseball bats: wood, aluminum, and hard rubber. A condensed segmented income statement for a recent period follows:

Sales Variable expenses Contribution margin Fixed expenses Net income (loss)

Wood $500,000 325,000 175,000 75,000 $100,000

Aluminum $200,000 140,000 60,000 35,000 $ 25,000

Hard Rubber $65,000 58,000 7,000 22,000 $(15,000)

Total $765,000 523,000 242,000 132,000 $110,000

Assume all of the fixed expenses for the hard rubber line are avoidable. What will be total net income if the line is dropped? a. $125,000 b. $103,000 c. $105,000 d. $140,000 Ans:LO: 7, Bloom: AN, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Cost Management 152.

What will most likely occur if a company eliminates an unprofitable segment when a portion of fixed costs are unavoidable? a. All expenses of the eliminated segment will be eliminated. b. Net income will decrease. c. Net income will increase. d. The company's variable costs will increase.

Ans:, LO: 7, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Cost Management 153.

A company has three product lines, one of which reflects the following results: Sales Variable expenses Contribution margin Fixed expenses Net loss

$215,000 125,000 90,000 130,000 $ (40,000)

If this product line is eliminated, 60% of the fixed expenses can be eliminated and the other 40% will be allocated to other product lines. If management decides to eliminate this product line, the company's net income will a. increase by $40,000. b. decrease by $90,000. c. decrease by $12,000. d. increase by $12,000.


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Incremental Analysis

Ans: LO: 7, Bloom: AN, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Cost Management


Incremental Analysis

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154.

A company is considering eliminating a product line. The fixed costs currently allocated to the product line will be allocated to other product lines upon discontinuance. If the product line is discontinued, a. total net income will increase by the amount of the product line's fixed costs. b. total net income will decrease by the amount of the product line's fixed costs. c. the contribution margin of the product line will indicate the net income increase or decrease. d. the company's total fixed costs will decrease.

Ans: LO: 7, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Cost Management 155.

A segment has the following data: Sales Variable expenses Fixed expenses

$700,000 300,000 550,000

What will be the incremental effect on net income if this segment is eliminated, assuming the fixed expenses will be allocated to profitable segments? a. $400,000 increase b. $400,000 decrease c. $5,000 decrease d. Cannot be determined from the data provided. Ans:, LO: 7, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Cost Management 156.

Corn Crunchers has three product lines. Its only unprofitable line is Corn Nuts, the results of which appear below for 2013: Sales Variable expenses Fixed expenses Net loss

$1,400,000 920,000 600,000 $ (120,000)

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. $180,000 b. $1,520,000 c. $1,340,000 d. $1,100,000 Ans: LO: 7, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Cost Management 157.

North Division has the following information:


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Sales Variable expenses Fixed expenses

$1,200,000 640,000 620,000

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. $60,000 increase b. $620,000 decrease c. $560,000 decrease d. $580,000 increase Ans: LO: 7, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Cost Management


Incremental Analysis

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158.

The potential effects of the decision to eliminate a line of business on existing employees and the community are a. ignored in incremental analysis. b. quantitative factors. c. qualitative factors. d. opportunity costs.

Ans: LO: 7, Bloom: C, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Cost Management 159.

When will the elimination of a product line have no effect on the company’s overall profit? a. When the avoidable fixed costs equal the product line’s contribution margin b. When the unavoidable fixed costs equal the product line’s contribution margin c. When there are no fixed costs incurred by the product line d. When the product line contribution margin is negative

Ans:LO: 7, Bloom: C, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Cost Management 160.

Accounting's contribution to the decision-making process occurs in all of the following steps except to a. identify the problem and assign responsibility. b. determine possible courses of action. c. review results of the decision. d. make a decision.

Ans:LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Investment Decisions 161.

It costs Dryer Company $26 per unit ($18 variable and $8 fixed) to produce its product, which normally sells for $38 per unit. A foreign wholesaler offers to purchase 5,000 units at $21 each. Dryer would incur special shipping costs of $2 per unit if the order were accepted. Dryer has sufficient unused capacity to produce the 5,000 units. If the special order is accepted, what will be the effect on net income? a. $5,000 decrease b. $5,000 increase c. $15,000 increase d. $90,000 increase

Ans:, LO: 3, Bloom: AN, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Investment Decisions 162.

In a make-or-buy decision, opportunity costs are a. added to the make total cost.


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b. deducted from the make total cost. c. added to the buy total cost. d. ignored. Ans:LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Investment Decisions 163.

Which of the following would generally not affect a make-or-buy decision? a. Selling expenses b. Direct labor c. Variable manufacturing costs d. Opportunity cost

Ans:LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Investment Decisions


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164.

A cost that cannot be changed by any present or future decision is a(n) a. incremental cost. b opportunity cost. c. sunk cost. d. variable cost.

Ans: LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics 165.

If an unprofitable segment is eliminated a. it is impossible for net income to decrease. b. fixed expenses allocated to the eliminated segment will be eliminated. c. variable expenses of the eliminated segment will be eliminated. d. it is impossible for net income to increase.

Ans: LO: 7, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics 166.

All of the following are relevant in deciding whether to eliminate an unprofitable segment except the segment's a. sales. b. variable expenses. c. contribution margin. d. fixed expenses.

Chapter 8:

1.

TRUE-FALSE STATEMENTS In most cases, a company sets the price instead of it being set by the competitive market.

Ans: LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Marketing/Client Focus, AICPA FN: Decision Modeling, AICPA PC: Project Management, IMA: Business Economics 2.

In a competitive market, a company is forced to act as a price taker and must emphasize minimizing and controlling costs.

Ans: LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Marketing/Client Focus, AICPA FN: Decision Modeling, AICPA PC: Project Management, IMA: Business Economics 3.

The difference between the target price and the desired profit is the target cost of the


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product. Ans: LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Marketing/Client Focus, AICPA FN: Decision Modeling, AICPA PC: Project Management, IMA: Business Economics 4.

In a competitive environment, the company must set a target cost and a target selling price.

Ans: LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Marketing/Client Focus, AICPA FN: Decision Modeling, AICPA PC: Project Management, IMA: Business Economics 5.

The cost-plus pricing approach establishes a cost base and adds a markup to this base to determine a target selling price.

Ans: LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Marketing/Client Focus, AICPA FN: Decision Modeling, AICPA PC: Project Management, IMA: Cost Management 6.

The cost-plus pricing model gives consideration to the demand side—whether customers will pay the target selling price.

Ans: LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Marketing/Client Focus, AICPA FN: Decision Modeling, AICPA PC: Project Management, IMA: Cost Management 7.

Sales volume plays a large role in determining per unit costs in the cost-plus pricing approach.

Ans: LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Marketing/Client Focus, AICPA FN: Decision Modeling, AICPA PC: Project Management, IMA: Cost Management 8.

In time-and-material pricing, the material charge is based on the cost of direct materials used and a material loading charge for related overhead costs.

Ans: LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Marketing/Client Focus, AICPA FN: Decision Modeling, AICPA PC: Project Management, IMA: Business Economics 9.

The first step for time-and-material pricing is to calculate the material loading charge.

Ans: LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Marketing/Client Focus, AICPA FN: Decision Modeling, AICPA PC: Project Management, IMA: Cost Management 10.

The material loading charge is expressed as a percentage of the total estimated cost of materials for the year.


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Incremental Analysis

Ans: LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Marketing/Client Focus, AICPA FN: Decision Modeling, AICPA PC: Project Management, IMA: Business Economics 11.

Divisions within vertically integrated companies normally sell goods only to other divisions within the same company.

Ans: LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Decision Modeling, AICPA PC: Project Management, IMA: Business Economics


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12.

Incremental Analysis

Using the negotiated transfer pricing approach, a minimum transfer price is established by the selling division.

Ans: LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Decision Modeling, AICPA PC: Project Management, IMA: Business Economics 13.

There are two approaches for determining a transfer price: cost-based and market-based.

Ans: LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Decision Modeling, AICPA PC: Project Management, IMA: Business Economics 14.

If a cost-based transfer price is used, the transfer price must be based on variable cost.

Ans: LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Decision Modeling, AICPA PC: Project Management, IMA: Business Economics 15.

A problem with a cost-based transfer price is that it does not provide adequate incentive for the selling division to control costs.

Ans: LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Decision Modeling, AICPA PC: Project Management, IMA: Business Economics 16.

In the formula for a minimum transfer price, opportunity cost is the contribution margin of goods sold externally.

Ans: LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Decision Modeling, AICPA PC: Project Management, IMA: Business Economics 17.

The market-based transfer price approach produces a higher total contribution margin to the company than the cost-based approach.

Ans: LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Decision Modeling, AICPA PC: Project Management, IMA: Business Economics 18.

A negotiated transfer price should be used when an outside market for the goods does not exist.

Ans: LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Decision Modeling, AICPA PC: Project Management, IMA: Business Economics 19.

The number of transfers between divisions that are located in different countries has


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decreased as companies rely more on outsourcing. Ans: LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Decision Modeling, AICPA PC: Project Management, IMA: Global Business 20.

Differences in tax rates between countries can complicate the determination of the appropriate transfer price.

Ans: LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Decision Modeling, AICPA PC: Project Management, IMA: Global Business a

21.

The absorption-cost approach is consistent with generally accepted accounting principles because it defines the cost base as the manufacturing cost.

Ans: LO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Project Management, IMA: FSA a

22.

The first step in the absorption-cost approach is to compute the markup percentage used in setting the target selling price.

Ans: LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Project Management, IMA: Business Economics a

23.

Because absorption cost data already exists in general ledger accounts, it is cost effective to use it for pricing.

Ans: LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Project Management, IMA: FSA


Incremental Analysis

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24.

The markup percentage in the variable-cost approach is computed by dividing the desired ROI/unit plus fixed costs/unit by the variable costs/unit.

Ans: LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Marketing/Client Focus, AICPA FN: Measurement, AICPA PC: Project Management, IMA: Business Economics a

25.

Under the variable-cost approach, the cost base consists of all of the variable costs associated with a product except variable selling and administrative costs.

Ans: LO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Marketing/Client Focus, AICPA FN: Measurement, AICPA PC: Project Management, IMA: Business Economics

26.

MULTIPLE CHOICE QUESTIONS Factors that can affect pricing decisions include all of the following except a. cost considerations. b. environment. c. pricing objectives. d. All of these are factors.

Ans: LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Marketing/Client Focus, AICPA FN: Decision Modeling, AICPA PC: Project Management, IMA: Business Economics 27.

In most cases, prices are set by the a. customers. b. competitive market. c. largest competitor. d. selling company.

Ans: LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Marketing/Client Focus, AICPA FN: Decision Modeling, AICPA PC: Project Management, IMA: Business Economics 28.

A company must price its product to cover its costs and earn a reasonable profit in a. all cases. b. its early years. c. the long run. d. the short run.

Ans: LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Marketing/Client Focus, AICPA FN: Decision Modeling, AICPA PC: Project Management, IMA: Business Economics


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29.

Incremental Analysis

Prices are set by the competitive market when a. the product is specially made for a customer. b. there are no other producers capable of manufacturing a similar item. c. a company can effectively differentiate its product from others. d. a product is not easily distinguished from competing products.

Ans: LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Marketing/Client Focus, AICPA FN: Decision Modeling, AICPA PC: Project Management, IMA: Business Economics 30.

All of the following are correct statements about the target price except it a. is the price the company believes would place it in the optimal position for its target audience. b. is used to determine a product's target cost. c. is determined after the company has identified its market and does market research. d. is determined after the company sets its desired profit amount.

Ans: LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Marketing/Client Focus, AICPA FN: Decision Modeling, AICPA PC: Project Management, IMA: Business Economics 31.

Companies that sell products whose prices are set by market forces are called a. price givers. b. price leaders. c. price takers. d. price setters.

Ans: LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Marketing/Client Focus, AICPA FN: Decision Modeling, AICPA PC: Project Management, IMA: Business Economics 32.

In which of the following situations would a company not set the prices of its products? a. When the product is not easily differentiated from competing products b. When the product is specially made for a customer c. When there are few or no other producers capable of making a similar product d. When the product can be effectively differentiated from others

Ans: LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Marketing/Client Focus, AICPA FN: Decision Modeling, AICPA PC: Project Management, IMA: Business Economics 33.

The calculation to determine target cost is a. variable manufacturing costs + fixed manufacturing costs. b. sales price – (variable manufacturing costs + fixed manufacturing costs). c. variable manufacturing costs + selling and administrative variable costs. d. sales price – desired profit.


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Incremental Analysis

Ans: LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Marketing/Client Focus, AICPA FN: Measurement, AICPA PC: Project Management, IMA: Cost Management 34.

Target cost is comprised of a. variable and fixed manufacturing costs only. b. variable manufacturing and selling and administrative costs only. c. total manufacturing and selling and administrative costs. d. fixed manufacturing and selling and administrative costs only.

Ans: LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Marketing/Client Focus, AICPA FN: Measurement, AICPA PC: Project Management, IMA: Cost Management


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35.

A company that is a price taker would most likely use which of the following methods? a. Time-and-material pricing b. Target costing c. Cost plus pricing, contribution approach d. Cost plus pricing, absorption approach

Ans: LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Marketing/Client Focus, AICPA FN: Decision Modeling, AICPA PC: Project Management, IMA: Business Economics 36.

Bond Co. is using the target cost approach on a new product. Information gathered so far reveals: Expected annual sales Desired profit per unit Target cost

400,000 units $0.35 $168,000

What is the target selling price per unit? a. $0.42 b. $0.70 c. $0.35 d. $0.77 Ans: LO: 1, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Marketing/Client Focus, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics 37.

Well Water Inc. wants to produce and sell a new flavored water. In order to penetrate the market, the product will have to sell at $2.00 per 12 oz. bottle. The following data has been collected: Annual sales Projected selling and administrative costs Desired profit

50,000 bottles $8,000 $70,000

The target cost per bottle is a. $0.44. b. $0.60. c. $0.16. d. $0.40. Ans: LO: 1, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Marketing/Client Focus, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics 38.

Larry Cable Inc. plans to introduce a new product and is using the target cost approach. Projected sales revenue is $810,000 ($4.05 per unit) and target costs are $730,000. What is the desired profit per unit? a. $0.40 b. $2.03


Incremental Analysis

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c. $3.65 d. None of the above Ans: LO: 1, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Marketing/Client Focus, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics


Incremental Analysis

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39.

Wasson Widget Company is contemplating the production and sale of a new widget. Projected sales are $300,000 (or 75,000 units) and desired profit is $36,000. What is the target cost per unit? a. $4.00 b. $3.52 c. $4.48 d. $4.80

Ans: LO: 1, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Marketing/Client Focus, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Cost Management 40.

Boomer Boombox Inc. wants to produce and sell a new lightweight radio. Desired profit per unit is $1.84. The expected unit sales price is $22 based on 10,000 units. What is the total target cost? a. $201,600 b. $220,000 c. $18,400 d. $238,400

Ans: LO: 1, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Marketing/Client Focus, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Cost Management 41.

In cost-plus pricing, the markup consists of a. manufacturing costs. b. desired ROI. c. selling and administrative costs. d. total cost and desired ROI.

Ans: LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Marketing/Client Focus, AICPA FN: Measurement, AICPA PC: Project Management, IMA: Business Economics 42.

The desired ROI per unit is calculated by a. multiplying the ROI times the investment and dividing by the estimated volume. b. multiplying the unit selling price by the ROI. c. dividing the total cost by the estimated volume and multiplying by the ROI. d. dividing the ROI by the estimated volume and subtracting the result from the unit cost.

Ans: LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Marketing/Client Focus, AICPA FN: Measurement, AICPA PC: Project Management, IMA: Performance Measurement 43.

Bellingham Suit Co. has received a shipment of suits that cost $200 each. If the company uses cost-plus pricing and applies a markup percentage of 60%, what is the sales price per suit? a. $333


Incremental Analysis

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b. $320 c. $280 d. $500 Ans: LO: 2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Marketing/Client Focus, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics


Incremental Analysis

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44.

Custom Shoes Co. has gathered the following information concerning one model of shoe: Variable manufacturing costs Variable selling and administrative costs Fixed manufacturing costs Fixed selling and administrative costs Investment ROI Planned production and sales

$40,000 $20,000 $160,000 $120,000 $1,700,000 30% 5,000 pairs

What is the total cost per pair of shoes? a. $40 b. $68 c. $168 d. $96 Ans: LO: 2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Marketing/Client Focus, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Cost Management 45.

Custom Shoes Co. has gathered the following information concerning one model of shoe: Variable manufacturing costs Variable selling and administrative costs Fixed manufacturing costs Fixed selling and administrative costs Investment ROI Planned production and sales

$40,000 $20,000 $160,000 $120,000 $1,700,000 30% 5,000 pairs

What is the desired ROI per pair of shoes? a. $68 b. $168 c. $102 d. $170 Ans: LO: 2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Marketing/Client Focus, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Performance Measurement 46.

Custom Shoes Co. has gathered the following information concerning one model of shoe: Variable manufacturing costs Variable selling and administrative costs Fixed manufacturing costs Fixed selling and administrative costs Investment ROI Planned production and sales What is the target selling price per pair of shoes?

$40,000 $20,000 $160,000 $120,000 $1,700,000 30% 5,000 pairs


Incremental Analysis

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a. b. c. d.

$142 $170 $114 $158

Ans: LO: 2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Marketing/Client Focus, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics


Incremental Analysis

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47.

Custom Shoes Co. has gathered the following information concerning one model of shoe: Variable manufacturing costs Variable selling and administrative costs Fixed manufacturing costs Fixed selling and administrative costs Investment ROI Planned production and sales

$40,000 $20,000 $160,000 $120,000 $1,700,000 30% 5,000 pairs

What is the markup percentage? a. 150% b. 255% c. 850% d. 182% Ans: LO: 2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Marketing/Client Focus, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics 48.

Lock Inc. has collected the following data concerning one of its products: Unit sales price Total sales Unit cost Total investment

$145 15,000 units $115 $1,800,000

The ROI percentage is a. 20%. b. 25%. c. 30%. d. 35%. Ans: LO: 2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Marketing/Client Focus, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Performance Measurement 49.

Lock Inc. has collected the following data concerning one of its products: Unit sales price Total sales Unit cost Total investment The markup percentage is a. 20.69%. b. 22.59%. c. 25%. d. 26.09%.

$145 15,000 units $115 $1,800,000


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Incremental Analysis

Ans: LO: 2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Marketing/Client Focus, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics 50.

A company using cost-plus pricing has an ROI of 24%, total sales of 20,000 units and a desired ROI per unit of $30. What was the amount of investment? a. $144,000 b. $2,500,000 c. $456,000 d. $789,475

Ans: LO: 2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Marketing/Client Focus, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Performance Measurement


Incremental Analysis

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51.

Brislin Products has a new product going on the market next year. The following data are projections for production and sales: Variable costs Fixed costs ROI Investment Sales

$250,000 $450,000 14% $2,000,000 200,000 units

What is the target selling price per unit? a. $4.90 b. $3.50 c. $2.65 d. $3.65 Ans: LO: 2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Marketing/Client Focus, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics 52.

Brislin Products has a new product going on the market next year. The following data are projections for production and sales: Variable costs Fixed costs ROI Investment Sales

$250,000 $450,000 14% $2,000,000 200,000 units

What is the markup percentage? a. 112% b. 20% c. 62% d. 40% Ans: LO: 2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Marketing/Client Focus, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics 53.

Brislin Products has a new product going on the market next year. The following data are projections for production and sales: Variable costs Fixed costs ROI Investment Sales

$250,000 $450,000 14% $2,000,000 200,000 units

What would the markup percentage be if only 150,000 units were sold and Brislin still wanted to earn the desired ROI? a. 32.95% b. 53.33%


Incremental Analysis

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c. 35.0% d. 44.00% Ans: LO: 2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Marketing/Client Focus, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics


Incremental Analysis

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54.

When using cost-plus pricing, which amount per unit does not change when the expected volume differs from the budgeted volume? a. Variable cost b. Fixed cost c. Desired ROI d. Target selling price

Ans: LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Marketing/Client Focus, AICPA FN: Measurement, AICPA PC: Project Management, IMA: Business Economics 55.

Why does the unit selling price increase when expected volume is lower than budgeted volume? a. Variable costs and fixed costs have to be spread over fewer units. b. Fixed costs and desired ROI have to be spread over fewer units. c. Variable costs and desired ROI have to be spread over fewer units. d. Fixed costs only have to be spread over fewer units.

Ans: LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Marketing/Client Focus, AICPA FN: Measurement, AICPA PC: Project Management, IMA: Business Economics 56.

In cost-plus pricing, the target selling price is computed as a. variable cost per unit + desired ROI per unit. b. fixed cost per unit + desired ROI per unit. c. total unit cost + desired ROI per unit. d. variable cost per unit + fixed manufacturing cost per unit + desired ROI per unit.

Ans: LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Marketing/Client Focus, AICPA FN: Measurement, AICPA PC: Project Management, IMA: Business Economics 57.

In cost-plus pricing, the markup percentage is computed by dividing the desired ROI per unit by the a. fixed cost per unit. b. total cost per unit. c. total manufacturing cost per unit. d. variable cost per unit.

Ans: LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Marketing/Client Focus, AICPA FN: Measurement, AICPA PC: Project Management, IMA: Performance Measurement 58.

The cost-plus pricing approach's major advantage is a. it considers customer demand. b. that sales volume has no effect on per unit costs. c. it is simple to compute. d. it can be used to determine a product’s target cost.


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Incremental Analysis

Ans: LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Marketing/Client Focus, AICPA FN: Measurement, AICPA PC: Project Management, IMA: Business Economics


Incremental Analysis

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59.

The following per unit information is available for a new product of Red Ribbon Company: Desired ROI Fixed cost Variable cost Total cost Selling price

$ 20 40 60 100 120

Red Ribbon Company's markup percentage would be a. 17%. b. 20%. c. 33%. d. 50%. Ans: LO: 2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Marketing/Client Focus, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics 60.

Bryson Company has just developed a new product. The following data is available for this product: Desired ROI per unit Fixed cost per unit Variable cost per unit Total cost per unit

$ 30 50 75 125

The target selling price for this product is a. $155. b. $125. c. $105. d. $80. Ans: LO: 2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Marketing/Client Focus, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics 61.

All of the following are correct statements about the cost-plus pricing approach except that it a. is simple to compute. b. considers customer demand. c. includes only variable costs in the cost base. d. will only work when the company sells the quantity it budgeted.

Ans: LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Marketing/Client Focus, AICPA FN: Decision Modeling, AICPA PC: Project Management, IMA: Business Economics 62.

In the cost-plus pricing approach, the desired ROI per unit is computed by multiplying the ROI percentage by


Incremental Analysis

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a. b. c. d.

fixed costs. total assets. total costs. variable costs.

Ans: LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Marketing/Client Focus, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics


Incremental Analysis

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63.

Red Grass Company produces high definition television sets. The following information is available for this product: Fixed cost per unit $250 Variable cost per unit 750 Total cost per unit 1,000 Desired ROI per unit 300 Red Grass Company's markup percentage would be a. 30%. b. 40%. c. 60%. d. 120%.

Ans: LO: 2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Marketing/Client Focus, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics 64.

Red Grass Company produces high definition television sets. The following information is available for this product: Fixed cost per unit $250 Variable cost per unit 750 Total cost per unit 1,000 Desired ROI per unit 300 The target selling price for this television is a. $550. b. $1,000. c. $1,050. d. $1,300.

Ans: LO: 2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Marketing/Client Focus, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics 65.

In time-and-material pricing, a material loading charge covers all of the following except a. purchasing costs. b. related overhead. c. desired profit margin. d. All of these are covered.

Ans: LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Marketing/Client Focus, AICPA FN: Measurement, AICPA PC: Project Management, IMA: Business Economics 66.

The first step for time-and-material pricing is to calculate the a. charge for obtaining materials. b. charge for holding materials. c. labor charge per hour.


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d. charges for a particular job. Ans: LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Marketing/Client Focus, AICPA FN: Measurement, AICPA PC: Project Management, IMA: Business Economics 67.

The labor charge per hour in time-and-material pricing includes all of the following except a. an allowance for a desired profit. b. charges for labor loading. c. selling and administrative costs. d. overhead costs.

Ans: LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Marketing/Client Focus, AICPA FN: Measurement, AICPA PC: Project Management, IMA: Business Economics


Incremental Analysis

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68.

The last step in determining the material loading charge percentage is to a. estimate annual costs for purchasing, receiving, and storing materials. b. estimate the total cost of parts and materials. c. divide material charges by the total estimated costs of parts and materials. d. add a desired profit margin on the materials themselves.

Ans: LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Marketing/Client Focus, AICPA FN: Measurement, AICPA PC: Project Management, IMA: Business Economics 69.

In time-and-material pricing, the charge for a particular job is the sum of the labor charge and the a. materials charge. b. material loading charge. c. materials charge + desired profit. d. materials charge + the material loading charge.

Ans: LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Marketing/Client Focus, AICPA FN: Measurement, AICPA PC: Project Management, IMA: Business Economics 70.

The following data is available for Wheels ‘N Spokes Repair Shop for 2013: Repair technicians’ wages $360,000 Fringe benefits 80,000 Overhead 60,000 Total $500,000 The desired profit margin is $40 per labor hour. The material loading charge is 40% of invoice cost. It is estimated that 5,000 labor hours will be worked in 2013. Wheels ‘N Spokes’ labor charge in 2013 would be a. $100. b. $112. c. $128. d. $140.

Ans: LO: 3, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Marketing/Client Focus, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Cost Management 71.

The following data is available for Wheels ‘N Spokes Repair Shop for 2013: Repair technicians’ wages $360,000 Fringe benefits 80,000 Overhead 60,000 Total $500,000 The desired profit margin is $40 per labor hour. The material loading charge is 40% of invoice cost. It is estimated that 5,000 labor hours will be worked in 2013.


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Incremental Analysis

In January 2013, Wheels ‘N Spokes repairs a bicycle that uses parts of $180. Its material loading charge on this repair would be a. $72. b. $108. c. $180. d. $252. Ans: LO: 3, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Marketing/Client Focus, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Cost Management


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72.

The following data is available for Wheels ‘N Spokes Repair Shop for 2013: Repair technicians’ wages $360,000 Fringe benefits 80,000 Overhead 60,000 Total $500,000 The desired profit margin is $40 per labor hour. The material loading charge is 40% of invoice cost. It is estimated that 5,000 labor hours will be worked in 2013. In March 2013, Wheels ‘N Spokes repairs a bicycle that takes two hours to repair and uses parts of $240. The bill for this repair would be a. $520. b. $560. c. $592. d. $616.

Ans: LO: 3, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Marketing/Client Focus, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics 73.

Which of the following organizations would most likely not use time-and-material pricing? a. Automobile repair company b. Engineering firm c. Custom furniture manufacturer d. Public accounting firm

Ans: LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Marketing/Client Focus, AICPA FN: Decision Modeling, AICPA PC: Project Management, IMA: Business Economics 74.

Carlos Consulting Inc. provides financial consulting and has collected the following data for the next year’s budgeted activity for a lead consultant. Consultants’ wages Fringe benefits Related overhead Supply clerk’s wages Fringe benefits Related overhead Profit margin per hour Profit margin on materials Total estimated consulting hours Total estimated supply costs The labor rate per hour is a. $42.50. b. $26.00. c. $41.50. d. $46.00.

$90,000 $22,500 $17,500 $18,000 $4,000 $20,000 $20 15% 5,000 $168,000


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Incremental Analysis

Ans: LO: 3, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Marketing/Client Focus, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics


Incremental Analysis

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75.

Carlos Consulting Inc. provides financial consulting and has collected the following data for the next year’s budgeted activity for a lead consultant. Consultants’ wages Fringe benefits Related overhead Supply clerk’s wages Fringe benefits Related overhead Profit margin per hour Profit margin on materials Total estimated consulting hours Total estimated supply costs

$90,000 $22,500 $17,500 $18,000 $4,000 $20,000 $20 15% 5,000 $168,000

The material loading charge is a. 15%. b. 25%. c. 40%. d. 55%. Ans: LO: 3, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Marketing/Client Focus, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics 76.

Carlos Consulting Inc. provides financial consulting and has collected the following data for the next year’s budgeted activity for a lead consultant. Consultants’ wages Fringe benefits Related overhead Supply clerk’s wages Fringe benefits Related overhead Profit margin per hour Profit margin on materials Total estimated consulting hours Total estimated supply costs

$90,000 $22,500 $17,500 $18,000 $4,000 $20,000 $20 15% 5,000 $168,000

A consulting job takes 20 hours of consulting time and $180 of supplies. The client’s bill would be a. $1,172. b. $772. c. $952. d. $1,100. Ans: LO: 3, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Marketing/Client Focus, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics


Incremental Analysis

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77.

Lonely Guy Repair Service recently performed repair services for a customer that totaled $400. Somehow the bill was lost and the company accountant was trying to recreate the bill from memory. This is what was remembered: Total bill Labor profit margin Materials profit margin Total labor charges Cost of materials used Total hourly cost

$600 $10 20% $390 $120 $22.50

What was the material loading charge? a. 37.5% b. 43.8% c. 61.3% d. 75% Ans: LO: 3, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Marketing/Client Focus, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics 78.

Lonely Guy Repair Service recently performed repair services for a customer that totaled $400. Somehow the bill was lost and the company accountant was trying to recreate the bill from memory. This is what was remembered: Total bill Labor profit margin Materials profit margin Total labor charges Cost of materials used Total hourly cost

$600 $10 20% $390 $120 $22.50

How many hours were billed on the job? a. 19.5 b. 18.5 c. 17.3 d. 12.0 Ans: LO: 3, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Marketing/Client Focus, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics 79.

Lawrence Legal Services recently billed a customer $690. Labor hours were 6 and the cost of the materials used was $150. If the company’s hourly labor rate was $75, what material loading charge was used? a. 30% b. 50% c. 60% d. 100%


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Incremental Analysis

Ans: LO: 3, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Marketing/Client Focus, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics


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80.

Dudly Drafting Services uses a 45% material loading charge and a labor rate of $20 per hour. How much will be charged on a job that requires 3.5 hours of work and $40 of materials? a. $128 b. $110 c. $88 d. $133

Ans: LO: 3, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Marketing/Client Focus, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics 81.

The time component under time-and-material pricing includes a a. loading charge. b. charge for receiving, handling, and storing materials. c. portion of the materials clerk’s wages. d. profit margin.

Ans: LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Marketing/Client Focus, AICPA FN: Measurement, AICPA PC: Project Management, IMA: Business Economics 82.

Using time-and-material pricing involves how many steps? a. 4 b. 3 c. 2 d. 1

Ans: LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Marketing/Client Focus, AICPA FN: Measurement, AICPA PC: Project Management, IMA: Business Economics 83.

The last step in calculating the hourly rate to be charged in time-and-material pricing is to a. estimate the total labor costs plus fringe benefits. b. estimate the total labor hours. c. add a profit margin. d. add a charge for overhead costs.

Ans: LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Marketing/Client Focus, AICPA FN: Measurement, AICPA PC: Project Management, IMA: Business Economics 84. Jaycee Auto Repair has the following budgeted costs for the next year: Shop employees’ wages and benefits Parts manager’s salary and benefits Office employee’s salary and benefits

Time Charges $120,000 30,000

Material Charges $ 45,000 15,000


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Other overhead Invoice cost of parts and materials Total budgeted costs

15,000 $165,000

40,000 400,000 $500,000

The labor rate to be used next year assuming 7,500 hours of repair time and a profit margin of $25 per labor hour is a. $22. b. $41. c. $43. d. $47. Ans: LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Marketing/Client Focus, AICPA FN: Reporting, AICPA PC: Problem Solving/Decision Making, IMA: Reporting


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85. Jaycee Auto Repair has the following budgeted costs for the next year: Shop employees’ wages and benefits Parts manager’s salary and benefits Office employee’s salary and benefits Other overhead Invoice cost of parts and materials Total budgeted costs

Time Charges $120,000 30,000 15,000 $165,000

Material Charges $ 45,000 15,000 40,000 400,000 $500,000

The material loading charge to be used next year assuming a 40% markup on material cost is a. 20%. b. 40%. c. 65%. d. 80%. Ans: LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Marketing/Client Focus, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics 86. Jaycee Auto Repair has the following budgeted costs for the next year: Shop employees’ wages and benefits Parts manager’s salary and benefits Office employee’s salary and benefits Other overhead Invoice cost of parts and materials Total budgeted costs

Time Charges $120,000 30,000 15,000 $165,000

Material Charges $ 45,000 15,000 40,000 400,000 $500,000

Jaycee estimates that the repairs to a Cadillac Escalade damaged in an accident will take 45 hours of labor and $3,500 in parts and materials. The total cost of the repairs is a. $5,890. b. $7,890. c. $5,775. d. $7,015. Ans: LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Marketing/Client Focus, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics 87.

The price used to record a sale between divisions within the same vertically integrated company is called the a. sales price. b. integrated price. c. transfer price. d. bargain price.


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Incremental Analysis

Ans: LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Decision Modeling, AICPA PC: Project Management, IMA: Business Economics 88.

The overall objective in the determination of a transfer price is to a. maximize the return of the selling division. b. minimize the cost to the purchasing division. c. minimize the return of the selling division. d. maximize the return to the whole company.

Ans: LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Decision Modeling, AICPA PC: Project Management, IMA: Business Economics


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89.

Incremental Analysis

Which two methods are used most often when establishing a transfer price? a. Negotiated transfer pricing and cost-based transfer pricing b. Cost-based transfer pricing and market-based transfer pricing c. Negotiated transfer pricing and market-based transfer pricing d. Cost-based transfer pricing and standard-based pricing

Ans: LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Decision Modeling, AICPA PC: Project Management, IMA: Business Economics 90.

The Selling Division’s unit sales price is $25 and its unit variable cost is $15. Its capacity is 10,000 units. Fixed costs per unit are $6. Current outside sales are 8,000 units. What is the Selling Division’s opportunity cost per unit from selling 2,000 units to the Purchasing Division? a. $10 b. $25 c. $4 d. $0

Ans: LO: 4, Bloom: C, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics 91.

The Selling Division’s unit sales price is $25 and its unit variable cost is $15. Its capacity is 10,000 units. Fixed costs per unit are $6. Current outside sales are 8,000 units. What is the Selling Division’s opportunity cost per unit from selling 3,000 units to the Purchasing Division? a. $10 b. $25 c. $4 d. $0

Ans: LO: 4, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics 92.

In the minimum transfer price formula, variable cost is defined as the variable cost of a. all units sold, both internally and externally. b. units sold externally. c. units not sold. d. units sold internally.

Ans: LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Marketing/Client Focus, AICPA FN: Measurement, AICPA PC: Project Management, IMA: Business Economics 93.

Under the negotiated transfer pricing approach, the minimum transfer price is established by the


Incremental Analysis

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a. b. c. d.

purchasing division. corporate headquarters management. selling division. corporate negotiator.

Ans: LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Marketing/Client Focus, AICPA FN: Decision Modeling, AICPA PC: Project Management, IMA: Business Economics 94.

Under the negotiated transfer pricing approach, the maximum transfer price is established by the a. purchasing division. b. corporate headquarters management. c. selling division. d. corporate negotiator.

Ans: LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Marketing/Client Focus, AICPA FN: Decision Modeling, AICPA PC: Project Management, IMA: Business Economics


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95.

Assume the Thread Division has excess capacity. The Garment Division wants the Thread Division to furnish them additional spools of thread that could be made using the excess capacity. In a negotiated transfer price, the Thread Division should accept as a minimum any transfer price that exceeds the a. total cost of producing spools for outside sales. b. variable costs of producing the additional spools for the Garment Division. c. contribution margin and outside spool sales. d. foregone contribution margin on outside spool sales.

Ans: LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Marketing/Client Focus, AICPA FN: Decision Modeling, AICPA PC: Project Management, IMA: Business Economics 96.

The most common method used to establish transfer prices is a. negotiated transfer pricing. b. market-based transfer pricing. c. cost-plus transfer pricing. d. cost-based transfer pricing.

Ans: LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Marketing/Client Focus, AICPA FN: Decision Modeling, AICPA PC: Project Management, IMA: Business Economics 97.

When a sale occurs between divisions of the same company, which transfer pricing approach may lead to the buying division overpricing its product? a. Cost based transfer pricing b. Market-based transfer pricing c. Negotiated transfer pricing d. Cost-plus transfer pricing

Ans: LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Marketing/Client Focus, AICPA FN: Decision Modeling, AICPA PC: Project Management, IMA: Business Economics 98.

The Lumber Division of Paul Bunyon Homes Inc. produces and sells lumber that can be sold to outside customers or within the company to the Construction Division. The following data have been gathered for the coming period: Lumber Division: Capacity Price per board foot Variable production cost per bd. ft. Variable selling cost per bd. ft. Construction Division: Board feet needed Outside price paid per bd. ft.

200,000 board feet $2.50 $1.25 $0.50 60,000 $2.00

If the Lumber Division sells to the Construction Division, $0.35 per board foot can be saved in shipping costs.


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Incremental Analysis

If current outside sales are 130,000 board feet, what is the minimum transfer price that the Lumber Division could accept? a. $1.25 b. $1.40 c. $1.75 d. $2.50 Ans: LO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics


Incremental Analysis

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99.

The Lumber Division of Paul Bunyon Homes Inc. produces and sells lumber that can be sold to outside customers or within the company to the Construction Division. The following data have been gathered for the coming period: Lumber Division: Capacity Price per board foot Variable production cost per bd. ft. Variable selling cost per bd. ft. Construction Division: Board feet needed Outside price paid per bd. ft.

200,000 board feet $2.50 $1.25 $0.50 60,000 $2.00

If the Lumber Division sells to the Construction Division, $0.35 per board foot can be saved in shipping costs. If current outside sales are 150,000 board feet, what is the minimum transfer price that the Lumber Division could accept? a. $2.00 b. $1.65 c. $1.40 d. $2.15 Ans: LO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics 100.

The Lumber Division of Paul Bunyon Homes Inc. produces and sells lumber that can be sold to outside customers or within the company to the Construction Division. The following data have been gathered for the coming period: Lumber Division: Capacity Price per board foot Variable production cost per bd. ft. Variable selling cost per bd. ft. Construction Division: Board feet needed Outside price paid per bd. ft.

200,000 board feet $2.50 $1.25 $0.50 60,000 $2.00

If the Lumber Division sells to the Construction Division, $0.35 per board foot can be saved in shipping costs. If the Lumber Division has sufficient excess capacity to fulfill the Construction Division’s needs, what will be the effect on the company’s overall contribution margin? a. Decrease by $30,000 b. Decrease by $24,000 c. Increase by $36,000 d. Increase by $33,500


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Incremental Analysis

Ans: LO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics


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101.

Incremental Analysis

Tuttle Motorcycles Inc. manufactures and sells high-priced motorcycles. The Engine Division produces and sells engines to other motorcycle companies and internally to the Production Division. It has been decided that the Engine Division will sell 20,000 units to the Production Division at $1,050 a unit. The Engine Division, currently operating at capacity, has a unit sales price of $2,550 and unit variable costs and fixed costs of $1,050 and $750, respectively. The Production Division is currently paying $2,400 per unit to an outside supplier. $90 per unit can be saved on internal sales from reduced selling expenses. What is the minimum transfer price that the Engine Division should accept? a. $2,460 b. $2,550 c. $2,400 d. $1,500

Ans: LO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics 102.

Tuttle Motorcycles Inc. manufactures and sells high-priced motorcycles. The Engine Division produces and sells engines to other motorcycle companies and internally to the Production Division. It has been decided that the Engine Division will sell 20,000 units to the Production Division at $1,050 a unit. The Engine Division, currently operating at capacity, has a unit sales price of $2,550 and unit variable costs and fixed costs of $1,050 and $750, respectively. The Production Division is currently paying $2,400 per unit to an outside supplier. $90 per unit can be saved on internal sales from reduced selling expenses. What is the increase/decrease in overall company profits if this transfer takes place? a. Decrease $1,200,000 b. Increase $2,520,000 c. Decrease $3,000,000 d. Increase $27,000,000

Ans: LO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving/Decision Making, IMA: Performance Measurement 103.

The Can Division of Fruit Products Inc. manufactures and sells tin cans externally for $0.60 per can. Its unit variable costs and unit fixed costs are $0.24 and $0.08, respectively. The Packaging Division wants to purchase 50,000 cans at $0.32 a can. Selling internally will save $0.02 a can. Assuming the Can Division has sufficient capacity, what is the minimum transfer price it should accept? a. $0.24 b. $0.32 c. $0.22 d. $0.30

Ans: LO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics


Incremental Analysis

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104.

The Can Division of Fruit Products Inc. manufactures and sells tin cans externally for $0.60 per can. Its unit variable costs and unit fixed costs are $0.24 and $0.08, respectively. The Packaging Division wants to purchase 50,000 cans at $0.32 a can. Selling internally will save $0.02 a can. Assuming the Can Division is already operating at full capacity, what is the minimum transfer price it should accept? a. $0.58 b. $0.66 c. $0.28 d. $0.34

Ans: LO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics 105. The Dairy Division of Famous Foods, Inc. produces and sells milk to outside customers. The operation has the capacity to produce 200,000 gallons of milk a year. Last year’s operating results were as follows: Sales (160,000) gallons Variable costs Contribution margin Fixed costs Net Income

$500,000 312,000 188,000 100,000 $ 88,000

Assume the Yogurt Division wants to purchase 30,000 gallons of milk from the Dairy Division. The minimum price that will increase the Dairy Division’s profit is a. $2.50 per gallon. b. $1.18 per gallon. c. $1.95 per gallon. d. $0.55 per gallon. Ans: LO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics 106.

The Dairy Division of Famous Foods, Inc. produces and sells milk to outside customers. The operation has the capacity to produce 200,000 gallons of milk a year. Last year’s operating results were as follows: Sales (160,000) gallons Variable costs Contribution margin Fixed costs Net Income

$500,000 312,000 188,000 100,000 $ 88,000

Assume the Dairy Division is operating at capacity. If the Yogurt Division wants to purchase 30,000 gallons of milk from the Dairy Division, what is the minimum price that will allow the Dairy Division to maintain its current net income? a. $3.13 per gallon b. $1.18 per gallon


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c. $1.95 per gallon d. $0.55 per gallon Ans: LO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Marketing/Client Focus, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics 107.

Negotiated transfer pricing is not always used because of each of the following reasons except that a. market price information is sometimes not easily obtainable. b. a lack of trust between the negotiating divisions may lead to a breakdown in the negotiations. c. negotiations often lead to different pricing strategies from division to division. d. opportunity cost is sometimes not determinable.

Ans: LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Marketing/Client Focus, AICPA FN: Decision Modeling, AICPA PC: Project Management, IMA: Business Economics 108.

All of the following are approaches for determining a transfer price except the a. cost-based approach. b. market-based approach. c. negotiated approach. d. time-and-material approach.

Ans: LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Marketing/Client Focus, AICPA FN: Decision Modeling, AICPA PC: Project Management, IMA: Business Economics


Incremental Analysis

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109.

When a cost-based transfer price is used, the transfer price may be based on any of the following except a. fixed cost alone. b. full cost. c. variable cost alone. d. All of these may be used.

Ans: LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Marketing/Client Focus, AICPA FN: Decision Modeling, AICPA PC: Project Management, IMA: Business Economics 110.

All of the following are correct statements about the cost-based transfer price approach except that it a. can understate the actual contribution to profit by the selling division. b. can reduce a division manager's control over the division's performance. c. bases the transfer price on standard cost instead of actual cost. d. provides incentive for the selling division to control costs.

Ans: LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Marketing/Client Focus, AICPA FN: Decision Modeling, AICPA PC: Project Management, IMA: Business Economics 111.

The general formula for the minimum transfer price is: minimum transfer price equals a. fixed cost + opportunity cost. b. external purchase price. c. total cost + opportunity cost. d. variable cost + opportunity cost.

Ans: LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Project Management, IMA: Business Economics 112.

Variable costs of units sold internally will always be a. lower than the variable costs of units sold externally. b. higher than the variable costs of units sold externally. c. the same as the variable costs of units sold externally. d. Either higher or lower than for units sold externally.

Ans: LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Project Management, IMA: Business Economics 113.

In the formula for the minimum transfer price, opportunity cost is the __________ of the goods sold externally. a. variable cost b. total cost c. selling price d. contribution margin


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Incremental Analysis

Ans: LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Project Management, IMA: Business Economics 114.

The transfer price approach that conceptually should work the best is the a. cost-based approach. b. market-based approach. c. negotiated price approach. d. time-and-material pricing approach.

Ans: LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Project Management, IMA: Business Economics


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115.

Incremental Analysis

The transfer price approach that is often considered the best approach because it generally provides the proper economic incentives is the a. cost-based approach. b. market-based approach. c. negotiated price approach. d. time-and-material pricing approach.

Ans: LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Project Management, IMA: Business Economics 116.

All of the following are correct statements about the market-based approach except that it a. assumes that the transfer price should be based on the most objective inputs possible. b. provides a fairer allocation of the company's contribution margin to each division. c. produces a higher company contribution margin than the cost-based approach. d. ensures that each division manager is properly motivated and rewarded.

Ans: LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Project Management, IMA: Business Economics 117.

The negotiated transfer price approach should be used when a. the selling division has available capacity and is willing to accept less than the market price. b. an outside market for the goods does not exist. c. no market price is available. d. any of these situations exist.

Ans: LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Decision Modeling, AICPA PC: Project Management, IMA: Business Economics 118.

Assuming the selling division has available capacity, a negotiated transfer price should be within the range of a. fixed cost per unit and the external purchase price. b. total cost per unit and the external purchase price. c. variable cost per unit and the external purchase price. d. variable cost per unit and the opportunity cost.

Ans: LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Decision Modeling, AICPA PC: Project Management, IMA: Business Economics 119.

The transfer price approach that will result in the largest contribution margin to the buying division is the a. cost-based approach. b. market-based approach. c. negotiated price approach.


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d. time-and-material pricing approach. Ans: LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Decision Modeling, AICPA PC: Project Management, IMA: Business Economics 120.

The maximum transfer price from the buying division's standpoint is the a. total cost + opportunity cost. b. variable cost + opportunity cost. c. external purchase price. d. external purchase price + opportunity cost.

Ans: LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Decision Modeling, AICPA PC: Project Management, IMA: Business Economics


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121.

Incremental Analysis

The Wood Division of Fir Products, Inc. manufactures rubber moldings and sells them externally for $55. Its variable cost is $25 per unit, and its fixed cost per unit is $7. Fir's president wants the Wood Division to transfer 5,000 units to another company division at a price of $32. Assuming the Wood Division has available capacity of 5,000 units, the minimum transfer price it should accept is a. $7. b. $25. c. $32. d. $55.

Ans: LO: 4, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics 122.

The Wood Division of Fir Products, Inc. manufactures rubber moldings and sells them externally for $55. Its variable cost is $25 per unit, and its fixed cost per unit is $7. Fir's president wants the Wood Division to transfer 5,000 units to another company division at a price of $32. Assuming the Wood Division does not have any available capacity, the minimum transfer price it should accept is a. $7. b. $25. c. $32. d. $55.

Ans: LO: 4, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics 123.

Management of the Catering Company would like the Food Division to transfer 10,000 cans of its final product to the Restaurant Division for $30. The Food Division sells the product to customers for $70 per unit. The Food Division’s variable cost per unit is $35 and its fixed cost per unit is $10. If the Food Division is currently operating at full capacity, what is the minimum transfer price the Food Division should accept? a. $30 b. $35 c. $45 d. $70

Ans: LO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics 124.

Management of the Catering Company would like the Food Division to transfer 10,000 cans of its final product to the Restaurant Division for $30. The Food Division sells the product to customers for $70 per unit. The Food Division’s variable cost per unit is $35 and its fixed cost per unit is $10. If the Food Division has 10,000 units available capacity, what is the minimum transfer price the Food Division should accept? a. $30


Incremental Analysis

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b. $35 c. $45 d. $70 Ans: LO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics


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125.

Incremental Analysis

All of the following are correct statements about transfers between divisions located in countries with different tax rates except that a. differences in tax rates across countries complicate the determination of the appropriate transfer price. b. many companies prefer to report more income in countries with low tax rates. c. companies must pay income tax in the country where income is generated. d. a decreasing number of transfers are between divisions located in different countries.

Ans: LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Marketing/Client Focus, AICPA FN: Decision Modeling, AICPA PC: Project Management, IMA: Business Economics 126.

Transfers between divisions located in countries with different tax rates a. simplify the determination of the appropriate transfer price. b. are decreasing in number as more companies "localize" operations. c. encourage companies to report more income in countries with low tax rates. d. all of these are correct.

Ans: LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Marketing/Client Focus, AICPA FN: Decision Modeling, AICPA PC: Project Management, IMA: Global Business a

127. Which of the following is consistent with generally accepted accounting principles? a. Absorption-cost approach b. Contribution approach c. Variable-cost approach d. Both absorption-cost and contribution approach

Ans: LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Marketing/Client Focus, AICPA FN: Reporting, AICPA PC: Problem Solving/Decision Making, IMA: Reporting a

128. Under the absorption-cost approach, all of the following are included in the cost base except a. direct materials. b. fixed manufacturing overhead. c. selling and administrative costs. d. variable manufacturing overhead.

Ans: LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Marketing/Client Focus, AICPA FN: Measurement, AICPA PC: Project Management, IMA: FSA a

129. The first step in the absorption-cost approach is to compute the a. desired ROI per unit. b. markup percentage. c. target selling price. d. unit manufacturing cost.


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Incremental Analysis

Ans: LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Marketing/Client Focus, AICPA FN: Measurement, AICPA PC: Project Management, IMA: Business Economics a

130. The markup percentage in the absorption-cost approach is computed by dividing the sum of the desired ROI per unit and a. fixed costs per unit by manufacturing cost per unit. b. fixed costs per unit by variable costs per unit. c. selling and administrative expenses per unit by manufacturing cost per unit. d. selling and administrative expenses per unit by variable costs per unit.

Ans: LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Marketing/Client Focus, AICPA FN: Measurement, AICPA PC: Project Management, IMA: Business Economics


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Incremental Analysis

a

131. In the absorption-cost approach, the markup percentage covers the a. desired ROI only. b. desired ROI and selling and administrative expenses. c. desired ROI and fixed costs. d. selling and administrative expenses only.

Ans: LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Marketing/Client Focus, AICPA FN: Measurement, AICPA PC: Project Management, IMA: Cost Management a

132. The absorption-cost approach is used by most companies for all of the following reasons except that a. absorption cost information is readily provided by a company's cost accounting system. b. absorption cost provides the most defensible bases for justifying prices to interested parties. c. basing prices on only variable costs could encourage managers to set too low a price to boost sales. d. this approach is more consistent with cost-volume-profit analysis.

Ans: LO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Marketing/Client Focus, AICPA FN: Decision Modeling, AICPA PC: Project Management, IMA: Cost Management a

133. Under the variable-cost approach, the cost base includes all of the following except a. variable selling and administrative costs. b. variable manufacturing costs. c. total fixed costs. d. All of the above are included.

Ans: LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Marketing/Client Focus, AICPA FN: Decision Modeling, AICPA PC: Project Management, IMA: Cost Management a

134. In the variable-cost approach, the markup percentage covers the a. desired ROI only. b. desired ROI and fixed costs. c. desired ROI and selling and administrative expenses. d. fixed costs only.

Ans: LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Marketing/Client Focus, AICPA FN: Measurement, AICPA PC: Project Management, IMA: Cost Management a

135. The markup percentage denominator in the variable-cost approach is the a. desired ROI per unit. b. fixed costs per unit. c. manufacturing cost per unit. d. variable costs per unit.


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Incremental Analysis

Ans: LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Marketing/Client Focus, AICPA FN: Measurement, AICPA PC: Project Management, IMA: Business Economics a

136. The reasons for using the variable-cost approach include all of the following except this approach a. avoids arbitrary allocation of common fixed costs to individual product lines. b. is more consistent with cost-volume-profit analysis. c. provides the most defensible bases for justifying prices to all interested parties. d. provides the type of data managers need for pricing special orders.

Ans: LO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Marketing/Client Focus, AICPA FN: Measurement, AICPA PC: Project Management, IMA: Business Economics


Incremental Analysis

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137. Maggie Co. has variable manufacturing costs per unit of $20, and fixed manufacturing cost per unit is $15. Variable selling and administrative costs per unit are $4, while fixed selling and administrative costs per unit are $6. Maggie desires an ROI of $7.50 per unit. If Maggie Co. uses the absorption-cost approach, what is its markup percentage? a. 8.33% b. 16.67% c. 25% d. 50%

Ans: LO: 6, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Marketing/Client Focus, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics a

138. Maggie Co. has variable manufacturing costs per unit of $20, and fixed manufacturing cost per unit is $10. Variable selling and administrative costs per unit are $5, while fixed selling and administrative costs per unit are $2. Maggie desires an ROI of $8 per unit. If Maggie Co. uses the variable-cost approach, what is its markup percentage? a. 30% b. 50% c. 80% d. 100%

Ans: LO: 6, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Marketing/Client Focus, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics a

139. Papillon Co. has determined the following per unit amounts: Direct materials Direct labor Desired ROI Fixed overhead

$30 36 33 45

Fixed selling and administrative $60 Variable overhead 24 Variable selling and administrative 15

The cost base using the absorption-cost approach is a. $90. b. $105. c. $195. d. $135. Ans: LO: 6, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Marketing/Client Focus, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Cost Management a

140. Papillon Co. has determined the following per unit amounts: Direct materials Direct labor Desired ROI Fixed overhead

$30 36 33 45

Fixed selling and administrative $60 Variable overhead 24 Variable selling and administrative 15


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Incremental Analysis

The markup percentage using the absorption-cost approach is a. 131%. b. 102%. c. 90%. d. 80%. Ans: LO: 6, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Marketing/Client Focus, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics


Incremental Analysis

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141. Papillon Co. has determined the following per unit amounts: Direct materials Direct labor Desired ROI Fixed overhead

$30 36 33 45

Fixed selling and administrative $60 Variable overhead 24 Variable selling and administrative 15

The target selling price using the absorption-cost approach is a. $351. b. $243. c. $162. d. $371. Ans: LO: 6, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Marketing/Client Focus, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics a

142. Papillon Co. has determined the following per unit amounts: Direct materials Direct labor Desired ROI Fixed overhead

$30 36 33 45

Fixed selling and administrative $60 Variable overhead 24 Variable selling and administrative 15

The cost base using the variable-cost approach is a. $90. b. $105. c. $195. d. $135. Ans: LO: 6, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Marketing/Client Focus, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics a

143. Papillon Co. has determined the following per unit amounts: Direct materials Direct labor Desired ROI Fixed overhead

$30 36 33 45

Fixed selling and administrative $60 Variable overhead 24 Variable selling and administrative 15

The markup percentage using the variable-cost approach is a. 131%. b. 102%. c. 90%. d. 80%. Ans: LO: 6, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Marketing/Client Focus, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics


Incremental Analysis

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144. Papillon Co. has determined the following per unit amounts: Direct materials Direct labor Desired ROI Fixed overhead

$30 36 33 45

Fixed selling and administrative $60 Variable overhead 24 Variable selling and administrative 15

The target selling price using the variable-cost approach is a. $311.85. b. $207.90. c. $212.10. d. $242.55. Ans: LO: 6, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Marketing/Client Focus, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Business Economics


Incremental Analysis

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145. Alfredo Co. has collected the following per unit data: Direct labor Direct materials Variable overhead

$8 5 4

Variable selling and admin. Fixed overhead Fixed selling and admin.

$3 1 7

The markup percentage is 120%. What is the markup amount under the variable-cost approach? a. b. c. d.

$21.60 $24.00 $20.40 $33.60

Ans: LO: 6, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Marketing/Client Focus, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision Making, IMA: Cost Management


Acc 560 week 6 quiz – strayer new