ACC Chapter 20 Preparation

In which steps of the management decision-making process does accounting make its primary contribution?

Evaluating possible courses of action and reviewing the results of the decision.

Accounting's contribution to the decision-making process occurs in all of the following steps except to:

identify the problem and assign responsibility.

Three of the steps in management's decision process are: (1) review results of decision, (2) determine and evaluate possible courses of action, and (3) make the decision. The steps are prepared in the following order.

(2), (3), (1).

The process used to identify the financial data that changes under alternative courses of action is called incremental analysis.

True

Incremental analysis is the process of identifying the financial data that:

change under alternative courses of action.

All of the following types of decisions involve incremental analysis except:

all of these options are involved in incremental analysis.

In incremental analysis, the only costs to be considered are:

relevant costs.

When deciding to accept an order at a special price, variable manufacturing overhead costs are not relevant.

False

Relevant costs in accepting an order at a special price include all of the following except:

fixed manufacturing overhead.

When the units required to fill a special order can be produced within existing plant capacity, which of the following will not increase?

Fixed costs.

It costs Orkid Company $17 of variable costs and $3 of fixed costs to produce its product. The company currently has unused capacity. The product sells for $25. Homer Industries offers to purchase 5,000 units at $19 each. In the deal, Orkid will incur spe

increase $2,500.
The variable cost per unit will be $18.50 ($17 + $1.50); the income per unit is $.50 ($19 - $18.50); and the total increase in net income will be $2,500 ($.50 X 5,000 units).

Which one of the following is an important assumption that is made when considering the decision to accept an order at a special price?

The firm is not currently operating at full capacity.

It costs Bluffton Company $18.20 of variable costs and $7.80 of fixed costs to produce its product that sells for $39. Osborne Company, a foreign buyer, offers to purchase 3,000 units at $23.40 each. If the special offer is accepted and produced with unus

increase $15,600.
The amount of the sales price above variable costs will contribute to covering fixed costs. The firm will have $15,600 [3,000 units X ($23.40 - $18.20)] more than if it does not accept the offer. Thus, net income will increase by $15,600

Opportunity cost is a cost that cannot be changed by any present or future decision.

False

It costs HHI Company $7 of variable costs and $3 of fixed costs to produce its product at full capacity. However, the company currently has unused capacity. The product sells for $15. Burlington Company offers to purchase 3,000 units at $9 each. HHI will

decrease $1,500.

In a make-or-buy decision, relevant costs are:

all of these answer choices are correct.

Another name for the option to buy a component from a supplier is

outsourcing.

Taser Industries must decide whether to make or buy some of its components. The costs of producing 175,000 battery packs for its product are as follows:
Direct Materials $15,000
Direct Labor $5,000
Variable overhead $6,000
Fixed overhead $9,000
The compan

a decrease in net income of $3,500
Cost to buy = ($0.18 x 175,000 units) + $7,000 fixed cost that cannot be eliminated = $38,500 - $35,000 = $3,500 decrease in net income.

Zoomer Company produces Optimist sailboats. The costs of producing 100,000 tiller extensions for use in the boats are as follows:
Direct labor $250,000
Direct materials 300,000
Variable overhead 65,000
Fixed overhead 185,000
An outside supplier has offere

($5,000)
The relevant costs of making are ($250,000 + $300,000 + $65,000 + $100,000) or $715,000 versus the cost of purchasing $720,000, results in a $5,000 disadvantage in purchasing.

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

Incremental revenue.

In a make or buy decision, opportunity costs are:

added to the make total cost.

Incremental costs are the costs that differ between the alternatives being considered.

True

The basic rule in a sell or process further decision is to process further as long as the incremental revenue is

more than the incremental processing costs.

In a sell or process further decision, joint costs are:

sunk costs.

Sunk costs are not relevant in incremental analysis.

True

When a company is deciding to retain or replace equipment, trade-in value of the existing equipment is irrelevant.

False

The cash disposal value of existing equipment is considered a sunk cost and is therefore irrelevant in a decision to retain or replace the equipment.

False

The decision rule in a sell-or-process-further decision is: process further as long as the incremental revenue from processing exceeds:

incremental processing costs.

Costs incurred prior to the split-off are

joint costs.

In a decision to retain or replace equipment, the book value of the old equipment is a(an):

sunk cost.

Bergeron Company is considering replacing equipment with a cost of $30,000, accumulated depreciation of $20,000, and a 2 year remaining useful life. The new equipment has a cost of $42,000 and a useful life of 6 years. The seller has offered a trade-in al

Book value of existing equipment.

In a retain or replace equipment decision, all of the following are considered except the:

book value of the old asset.

If a company decides to eliminate an unprofitable segment, its net income will always increase.

False

The key to making the best decision concerning eliminating an unprofitable segment is to focus on relevant costs.

True

If a company decides to eliminate an unprofitable segment, its net income will increase if the segment's contribution margin is less than the fixed costs which are eliminated.

True

Vegas Company is considering eliminating an unprofitable segment. The segment's fixed costs are avoidable and are less than its contribution margin. Which of the following is a true consequence of eliminating this unprofitable segment?

Overall net income will decrease.

When a firm operates in a multiple-product environment, joint costs should be treated as ________ and ignored in the decision to sell or process further.

sunk costs.

Fido Company has three segments, one of which is unprofitable. The Duchess Doggy Biscuit segment had the following results last period:
Sales $1,040,000
Variable expenses (640,000)
Contribution margin 400,000
Fixed expenses (540,000)
Net loss $(140,000)
I

Decrease by $130,000.
Lost contribution margin is $400,000 and fixed expenses saved are $270,000. Therefore, lost net income is ($400,000 - $270,000) or $130,000.

If an unprofitable segment is eliminated:

fixed expenses allocated to the eliminated segment will have to be absorbed by other segments.

The Alligator segment of Louisiana Specialty Meats is operating at a loss and has the following data:
Sales $600,000
Variable expenses 420,000
Fixed expenses 300,000
If the Alligator segment is eliminated, what will be the effect on the remaining company?

$30,000 decrease.
If the Alligator segment is eliminated, the $180,000 contribution margin ($600,000 - $420,000) will be eliminated but only $150,000 ($300,000 x .50) of the fixed costs will be eliminated resulting in a decrease of $30,000 net income ($15

Qualitative factors should be ignored in incremental analysis decisions.

False

Which of the following would be considered a qualitative factor in a make-or-buy decision?

Cost of lost morale