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Exam 7: Incremental Analysis

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Question 31

True/False

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

A) True
B) False

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Question 32

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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

E) All of the above
F) A) and B)

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Question 33

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Use the following information for questions Ortiz Co. produces 5,000 units of part A12E. The following costs were incurred for that level of production: $\begin{array} { l r } \text { Direct materials } & \$ 55,000 \\\text { Direct labor } & 160,000 \\\text { Variable overhead } & 75,000 \\\text { Fixed overhead } & 175,000\end{array}$ 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?

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

The source of data to serve as inputs in incremental analysis is generated by

Costs incurred before the split-off point are

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.

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

North Division has the following information: $\begin{array} { l r } \text { Sales } & \$ 1,200,000 \\\text { Variable expenses } & 640,000 \\\text { Fixed expenses } & 620,000\end{array}$ 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?

Chapman Company manufactures widgets. Embree Company has approached Chapman with a proposal to sell the company widgets at a price of $125,000 for 100,000 units. Chapman is currently making these components in its own factory. The following costs are associated with this part of the process when 100,000 units are produced: $\begin{array} { l r } \text { Direct materials } & \$ 46,500 \\\text { Direct labor } & 43,500 \\\text { Manufacturing overhead } & 60,000 \\\text { Total } & \$ 150,000\end{array}$ The manufacturing overhead consists of $24,000 of costs that will be eliminated if the components are no longer produced by Chapman. From Chapman's point of view, how much is the incremental cost or savings if the widgets are bought instead of made?

Relevant costs are always

Ruth Company produces 1,000 units of a necessary component with the following costs: $\begin{array} { l r } \text { Direct Materials } & \$ 27,000 \\\text { Direct Labor } & 16,000 \\\text { Variable Overhead } & 4,000 \\\text { Fixed Overhead } & 7,000\end{array}$ 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?

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

Martin Company incurred the following costs for 70,000 units: Variable costs $\quad\$ 420,000$ Fixed costs $\quad\quad 392,000$ 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 earn $6,000 on the order, what should the unit price be?

Which of the following is not relevant information in a decision whether old equipment presently being used should be replaced by new equipment?

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 cost that cannot be changed by any present or future decision is a(n)

A company is considering the following alternatives: . $\begin{array}{lrr}&\text { Alternative 1 }&\text { Alternative 2 }\\\text { Revenues } & \$ 120,000 & \$ 120,000 \\\text { Variable costs } & 60,000 & 70,000 \\\text { Fixed costs } & 35,000 & 35,000\end{array}$ Which of the following are relevant in choosing between the alternatives?

Galley Industries can produce 100 units of a necessary component part with the following costs: $\begin{array} { l r } \text { Direct Materials } & \$ 20,000 \\\text { Direct Labor } & 9,000 \\\text { Variable Overhead } & 21,000 \\\text { Fixed Overhead } & 8,000\end{array}$ 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?

Financial data are developed for a course of action under an incremental basis and then compared to data developed under a differential basis before a decision is made.