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Exam 20: Incremental Analysis

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Question 71

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Crigui Music produces 60,000 CDs on which to record music. The CDs have the following costs: 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

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Question 72

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

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Question 73

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Fornelli, Inc. can produce 100 units of a component part with the following costs: If Fornelli, Inc. can purchase the units externally for $40,000, by what amount will its total costs change?

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

Incremental analysis would be appropriate for

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?

What will most likely occur if a company eliminates an unprofitable segment when a portion of fixed costs are unavoidable?

Crigui Music produces 60,000 CDs on which to record music. The CDs have the following costs: 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?

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

Alvarez Company is considering the following alternatives: What is the incremental profit?

Use the following information for questions . Chung Inc. is considering the replacement of a piece of equipment with a newer model. The following data has been collected: 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 company is considering replacing old equipment with new equipment. Which of the following is a relevant cost for incremental analysis?

Carney Company manufactures cappuccino makers. For the first eight months of 2013, the company reported the following operating results while operating at 80% of plant capacity: An analysis of costs and expenses reveals that variable cost of goods sold is $95 per unit and variable operating expenses are $35 per unit. In September, Carney Company receives a special order for 40,000 machines at $135 each from a major coffee shop franchise. Acceptance of the order would result in $10,000 of shipping costs but no increase in fixed expenses. Instructions (a) Prepare an incremental analysis for the special order. (b) Should Carney Company accept the special order? Justify your answer.

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

Opportunity cost is usually

The opportunity cost of an alternate course of action that is relevant to a make-or-buy decision is

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?

In an equipment replacement decision, the cost of the old equipment is a(n)

A recent accounting graduate from Marvel State University evaluated the operating performance of Fanning Company's four divisions. The following presentation was made to Fanning's Board of Directors. During the presentation, the accountant made the recommendation to eliminate the Southern Division stating that total net income would increase by $60,000. (See analysis below.) For the other divisions, cost of goods sold is 80% variable and operating expenses are 70% variable. The cost of goods sold for the Southern Division is 30% fixed, and its operating expenses are 75% fixed. If the division is eliminated, only $15,000 of the fixed operating costs will be eliminated. Instructions Do you concur with the new accountant's recommendation? Present a schedule to support your answer.

Which decision will involve no incremental revenues?