INCREMENTAL ANALYSIS

TRUE-FALSE STATEMENTS
1. An important step in management's decision-making process is to determine and evaluate
possible courses of action.
2. In making decisions, management ordinarily considers both financial and nonfinancial
information.
3. In incremental analysis, total variable costs ill alays change under alternative courses
of action, and total fi!ed costs ill alays remain constant.
". Accountants are mainly involved in developing nonfinancial information for management's
consideration in choosing among alternatives.
#. $ecision-making involves choosing among alternative courses of action.
%. &inancial 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.
'. A special one-time order should never be accepted if the unit sales price is less than the
unit variable cost.
(. If a company has e!cess capacity and present markets ill not be affected, it ould 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.
). A company should never accept an order for its product at less than its regular sales price.
1*. A decision hether to continue to make a product or buy it e!ternally, depends on the
e!ternal price and the amount of variable and fi!ed costs that can be eliminated assuming
no alternative uses of resources.
11. An opportunity cost is the potential benefit obtained by using resources in an alternative
course of action.
12. If an incremental make or buy analysis indicates that it is cheaper to buy rather than make
an item, management should alays make the decision to choose the loest cost
alternative.
13. In a sell or process further decision, management should process further as long as the
incremental revenues from additional processing e!ceed the incremental variable costs.
1". It is alays better to sell no rather than process further because of the time value of
money.
1#. In a decision concerning replacing old e+uipment ith ne e+uipment, the book value of
the old e+uipment can be considered a sunk cost.
Test Bank for Managerial Accounting, Secon Eition
1%. In a decision to retain or replace old e+uipment, the salvage value of the old e+uipment is
relevant in incremental analysis.
1'. It is better not to replace old e+uipment if it is not fully depreciated.
1(. &rom a +uantitative standpoint, a segment should be eliminated if its contribution margin
is less than the fi!ed costs that can be eliminated.
1). ,he elimination of an unprofitable product line may adversely affect the remaining product
lines.
2*. -ales mi! is the relative combination in hich a company.s products are sold.
21. /reak-even sales can be computed for a mi! of to or more products by determining the
total contribution margin of all the products.
22. 0et income ill be greater if more high contribution margin units are sold than lo
contribution margin units at any given level of units sold.
23. 1hen a company has limited resources to manufacture products, it should manufacture
those products hich have the highest contribution margin per unit of limited resource.
2". If a company has only a certain number of machine hours available for production, it is
generally more profitable to produce and sell the product ith the highest unit contribution
margin.
2#. 2ontribution margin per unit of limited resource is usually the same as contribution margin
per unit.
Ans!ers to True-False State"ents
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1. , #. , ). & 13. & 1'. & 21. & 2#. &
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& (. & 12. & 1%. , 2*. , 2". &
$-%
Incremental Analysis $-&
MULTI'LE C()ICE *UESTI)NS
2%. A ma3or 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 pro3ect.
d. decide hich actions that management should consider.
2'. 1hich of the folloing stages of the management decision-making process is improperly
se+uenced4
a. 5valuate possible courses of action 6ake decision.
b. Assign responsibility for decision Identify the problem.
c. Identify the problem $etermine possible courses of action.
d. Assign responsibility for decision $etermine possible courses of action.
2(. Internal reports that revie the actual impact of decisions are prepared by
a. department heads.
b. the controller.
c. management accountants.
d. factory orkers.
2). 1hich of the folloing steps in the management decision-making process does not
generally involve the managerial accountant4
a. $etermine possible courses of action.
b. 6ake the appropriate decision based on relevant data.
c. 7repare internal reports that revie results of decisions.
d. 0one of these
3*. ,he 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.
31. 0onfinancial information that management might evaluate in making a decision ould not
include
a. employee turnover.
b. contribution margin.
c. the environment.
d. the corporate profile in the community.
32. Incremental analysis is synonymous ith
a. difficult analysis.
b. differential analysis.
c. gross profit analysis.
d. derivative analysis.
Test Bank for Managerial Accounting, Secon Eition
33. In incremental analysis,
a. only costs are analy8ed.
b. only revenues are analy8ed.
c. both costs and revenues may be analy8ed.
d. both costs and revenues that stay the same beteen alternate courses of action ill
be analy8ed.
3". Incremental analysis is most useful
a. in developing relevant information for management decisions.
b. in choosing beteen the net present value method and the internal rate of return
method.
c. in evaluating the master budget.
d. as a replacement techni+ue for variance analysis.
3#. ,he source of data to serve as inputs in incremental analysis is generated by
a. market analysts.
b. engineers.
c. accountants.
d. all of these.
3%. 1hich of the folloing is not a true statement4
a. Incremental analysis might also be referred to as differential analysis.
b. Incremental analysis is the same as 297 analysis.
c. Incremental analysis is useful in making decisions.
d. Incremental analysis focuses on decisions that involve a choice among alternative
courses of action.
3'. Incremental analysis ould 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.
3(. Incremental analysis ould be appropriate for
a. acceptance of an order at a special price.
b. retain or replace e+uipment.
c. sell or process further.
d. all of these.
3). 1hich of the folloing is a true statement about cost behaviors in incremental analysis4
1. &i!ed costs ill not change beteen alternatives.
2. &i!ed costs may change beteen alternatives.
3. 9ariable costs ill alays change beteen alternatives.
a. 1
b. 2
c. 3
d. 2 and 3
$-+
Incremental Analysis $-,
"*. A company is considering the folloing alternatives:
Alternative 1 Alternative 2
;evenues <12*,*** <12*,***
9ariable costs %*,*** '*,***
&i!ed costs 3#,*** 3#,***
1hich of the folloing are relevant in choosing beteen the alternatives4
a. 9ariable costs
b. ;evenues
c. &i!ed costs
d. 9ariable costs and fi!ed costs
"1. Adler 2ompany manufactures a product ith a unit variable cost of <#* and a unit sales
price of <((. &i!ed manufacturing costs ere <2"*,*** hen 1*,*** units ere produced
and sold. ,he company has a one-time opportunity to sell an additional 3,*** units at <'*
each in a foreign market hich ould not affect its present sales. If the company has
sufficient capacity to produce the additional units, acceptance of the special order ould
affect net income as follos:
a. Income ould decrease by <12,***.
b. Income ould increase by <12,***.
c. Income ould increase by <21*,***.
d. Income ould increase by <%*,***.
"2. In incremental analysis,
a. costs are not relevant if they change beteen alternatives.
b. all costs are relevant if they change beteen alternatives.
c. only fi!ed costs are relevant.
d. only variable costs are relevant.
"3. If a plant is operating at full capacity and receives a one-time opportunity to accept an
order at a special price belo its usual price, then
a. only variable costs are relevant.
b. fi!ed costs are not relevant.
c. the order ill likely be accepted.
d. the order ill likely be re3ected.
"". If a company must e!pand capacity to accept a special order, it is likely that there ill be
a. an increase in unit variable costs.
b. no increase in fi!ed costs.
c. an increase in variable and fi!ed costs per unit.
d. an increase in fi!ed costs.
"#. 1hich of the folloing is true if a company can accept a special order ithout affecting its
regular sales and is ithin plant capacity4
a. 0et income ill not be affected.
b. 0et income ill increase if the special sales price per unit e!ceeds the unit variable
costs.
c. 0et income ill decrease.
d. Additional fi!ed costs ill probably be incurred.
Test Bank for Managerial Accounting, Secon Eition
"%. If a company anticipates that other sales ill 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 ill only be accepted if the plant is belo capacity.
"'. An opportunity cost
a. should be initially recorded as an asset.
b. is the cost of a ne product proposal.
c. is the potential benefit that may be obtained by folloing an alternative course of
action.
d. is classified as manufacturing overhead.
"(. =pportunity cost must be considered in decisions involving
a. budgeting.
b. financial accounting.
c. 297 analysis.
d. resources that have alternative uses.
"). ,he opportunity cost of an alternate course of action that is relevant to a make or buy
decision is
a. subtracted from the >6ake> costs.
b. added to the >6ake> costs.
c. added to the >/uy> costs.
d. none of these.
#*. =pportunity cost is usually
a. a standard cost.
b. a potential benefit.
c. a sunk cost.
d. included as part of cost of goods sold.
?se the folloing information for +uestions #1@#2.
-am's 6anufacturing 2ompany can make 1** units of a necessary component part ith the
folloing costs:
$irect 6aterials <(*,***
$irect Aabor 13,***
9ariable =verhead "*,***
&i!ed =verhead 2',***
#1. If -am's 6anufacturing 2ompany purchases the component e!ternally, <2*,*** of the
fi!ed costs can be avoided. At hat e!ternal price for the 1** units is the company
indifferent beteen making or buying4
a. <1%*,***.
b. <113,***.
c. <1#3,***.
d. <133,***.
$--
Incremental Analysis $-.
#2. If -am's 6anufacturing 2ompany can purchase the component e!ternally for <1"#,***
and only <",*** of the fi!ed costs can be avoided, hat is the correct Bmake or buyC
decision4
a. 6ake and save <(,***
b. /uy and save <(,***
c. 6ake and save <2*,***
d. /uy and save <2*,***
#3. 2ole's -hop can make 1,*** units of a necessary component ith the folloing costs:
$irect 6aterials <%",***
$irect Aabor 1%,***
9ariable =verhead (,***
&i!ed =verhead 4
,he company can purchase the 1,*** units e!ternally for <1*",***. ,he unavoidable
fi!ed costs are <#,*** if the units are purchased e!ternally. An analysis shos that at this
e!ternal price, the company is indifferent beteen making or buying the part. 1hat are the
fi!ed overhead costs of making the component4
a. <21,***.
b. <1%,***.
c. <11,***.
d. 2annot be determined.
?se the folloing information for +uestions #"@##.
6ay 2ompany produces 1,*** units of a necessary component ith the folloing costs:
$irect 6aterials <"(,***
$irect Aabor 32,***
9ariable =verhead (,***
&i!ed =verhead 1",***
#". 6ay 2ompany could avoid <%,*** in fi!ed overhead costs if it ac+uires the components
e!ternally. If cost minimi8ation is the ma3or consideration and the company ould prefer
to buy the components, hat is the ma!imum e!ternal price that 6ay 2ompany ould
accept to ac+uire the 1,*** units e!ternally4
a. <1*2,***.
b. <)",***.
c. <)%,***.
d. <((,***.
##. 0one of 6ay 2ompany's fi!ed overhead costs can be reduced, but another product could
be made that ould increase profit contribution by <1%,*** if the components ere
ac+uired e!ternally. If cost minimi8ation is the ma3or consideration and the company ould
prefer to buy the components, hat is the ma!imum e!ternal price that 6ay 2ompany
ould be illing to accept to ac+uire the 1,*** units e!ternally4
a. <(%,***.
b. <11*,***.
c. <)%,***.
d. <1*",***.
Test Bank for Managerial Accounting, Secon Eition
#%. A company has a process that results in ),*** pounds of 7roduct A that can be sold for <(
per pound. An alternative ould be to process 7roduct A further at a cost of <%*,*** and
then sell it for <1" per pound. -hould management sell 7roduct A no or should 7roduct
A be processed further and then sold4 1hat is the effect of the action4
a. 7rocess further, the company ill be better off by <%,***.
b. -ell no, the company ill be better off by <%,***.
c. 7rocess further, the company ill be better off by <#",***.
d. -ell no, the company ill be better off by <%*,***.
#'. ,he decision rule on hether to sell or process further
a. varies from situation to situation.
b. is process further as long as total revenue e!ceeds present revenues.
c. is process further if incremental revenue from such processing e!ceeds incremental
fi!ed costs.
d. is process further if incremental revenue from such processing e!ceeds the
incremental processing costs.
#(. /eal 2ompany is starting business and is unsure of hether to sell its product assembled
or unassembled. ,he unit cost of the unassembled product is <"* and /eal 2ompany
ould sell it for <)*. ,he cost to assemble the product is estimated at <1( per unit and
/eal 2ompany believes the market ould support a price of <11% on the assembled unit.
1hat is the correct decision using the sell or process further decision rule4
a. -ell before assembly, the company ill be better off by <1( per unit.
b. -ell before assembly, the company ill be better off by <2% per unit.
c. 7rocess further, the company ill be better off by <2% per unit.
d. 7rocess further, the company ill be better off by <( per unit.
#). ,he 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.
%*. Dimble 2ompany gathered the folloing data about the three products that it produces:
7resent 5stimated Additional 5stimated -ales
7roduct -ales 9alue 7rocessing 2osts if 7rocessed &urther
A < ),*** < %,*** < 1%,***
/ 1#,*** #,*** 1(,***
2 11,*** 3,*** 1%,***
1hich of the products should not be processed further4
a. 7roduct A
b. 7roduct /
c. 7roduct 2
d. 7roducts A and 2
%1. All costs incurred prior to the split-off point are called
a. relevant costs.
b. split-off costs.
c. opportunity costs.
d. 3oint costs.
$-/
Incremental Analysis $-$
%2. 5ach of the folloing statements about the amount of 3oint costs allocated to multiple
products is correct e!cept that it is
a. a sunk cost.
b. irrelevant in deciding hether to sell or process further.
c. allocated to the individual products based on their relative sales value.
d. 5ach of the options is correct.
%3. 5nd-products produced from a single ra material and a common production process are
referred to as
a. final products.
b. 3oint products.
c. split-off products.
d. common products.
%". A company is considering replacing old e+uipment ith ne e+uipment. 1hich of the
folloing is a relevant cost for incremental analysis4
a. Annual depreciation charge on the old e+uipment
b. /ook value of the old e+uipment
c. 5stimated annual depreciation of the ne e+uipment
d. 2ost of the ne e+uipment
%#. In a retain or replace e+uipment decision, trade-in alloance available on old e+uipment
a. increases the cost of the ne e+uipment.
b. is relevant because it ill not be reali8ed if the old e+uipment is retained.
c. is not relevant to the decision.
d. reduces the cost of the old e+uipment.
%%. 1hich of the folloing is not relevant information in a decision hether old e+uipment
presently being used should be replaced by ne e+uipment4
a. ,he cash price of the ne e+uipment
b. ,he salvage value of the old e+uipment
c. ,he book value of the old e+uipment
d. ,he cost savings if the ne e+uipment is purchased
%'. /ook value of old e+uipment 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.
%(. A company is deciding on hether to replace some old e+uipment ith ne e+uipment.
1hich of the folloing is not a relevant cost for incremental analysis4
a. Annual operating cost of the ne e+uipment
b. Annual operating cost of the old e+uipment
c. 0et cost of the ne e+uipment
d. Accumulated depreciation on the old e+uipment
%). 1hich of the folloing is a sunk cost in a retain or replace e+uipment decision4
a. 2ost of the ne e+uipment
b. 2ost savings from the purchase of the ne e+uipment
c. -alvage value of the old e+uipment
Test Bank for Managerial Accounting, Secon Eition
d. 2ost of the old e+uipment
'*. A company has three product lines, one of hich reflects the folloing results:
-ales <1'*,***
9ariable e!penses 1**,***
2ontribution margin '*,***
&i!ed e!penses 11*,***
0et loss <E"*,***F
If this product line is eliminated, %*G of the fi!ed e!penses can be eliminated and the
other "*G ill be allocated to other product lines. If management decides to eliminate this
product line, the company's net income ill
a. increase by <"*,***.
b. decrease by <'*,***.
c. decrease by <",***.
d. increase by <",***.
'1. A company is considering eliminating a product line. ,he fi!ed costs currently allocated to
the product line ill be allocated to other product lines upon discontinuance. If the product
line is discontinued,
a. total net income ill increase by the amount of the product line's fi!ed costs.
b. total net income ill decrease by the amount of the product line's fi!ed costs.
c. the contribution margin of the product line ill indicate the net income increase or
decrease.
d. the company's total fi!ed costs ill decrease.
'2. In deciding hether to eliminate an unprofitable business segment, the key is to focus on
a. fi!ed costs.
b. opportunity costs.
c. relevant costs.
d. sunk costs.
'3. In deciding on the future of an unprofitable segment, management should compare the
lost contribution margin to the segment.s
a. variable costs.
b. fi!ed costs.
c. sunk costs.
d. opportunity costs.
'". A segment has the folloing data:
-ales <"2*,***
9ariable e!penses 1(*,***
&i!ed e!penses 33*,***
1hat ill be the incremental effect on net income if this segment is eliminated, assuming
the fi!ed e!penses ill be allocated to profitable segments4
a. <2"*,*** increase
b. <2"*,*** decrease
c. <33*,*** decrease
d. 2annot be determined from the data provided.
$-01
Incremental Analysis $-00
'#. /arkley 2ompany sells to products ith the folloing per unit data:
-tandard $elu!e
-elling priceHunit <'# <12*
9ariable costsHunit "# %*
2ontribution marginHunit <3* < %*
-ales mi! 3 2
If fi!ed costs are <%3*,***, the number of standard and delu!e units that /arkley must
sell to break even is
a. 1,(** standard and 1,2** delu!e.
b. 3,%** standard and 2,"** delu!e.
c. ),*** standard and %,*** delu!e.
d. 21,*** standard and 1",*** delu!e.
'%. Aogan 2ompany sells to products, A and /. ,heir contribution margins per unit are <%*
and <12* respectively, and their sales mi! is 3:1. 1hat is Aogan.s eighted average unit
contribution margin4
a. <3**
b. <1#*
c. <)*
d. <'#
''. ,otal contribution margin divided by the number of units in the sales mi! is the
a. contribution margin per unit.
b. contribution margin ratio.
c. eighted average unit contribution margin.
d. eighted average contribution margin ratio.
'(. ,he break-even point in units for multiple products is computed by dividing fi!ed costs by
the
a. contribution margin per unit.
b. contribution margin ratio.
c. eighted average unit contribution margin.
d. eighted average contribution margin ratio.
'). 1hich one of the folloing is correct4
a. 297 analysis cannot be used if there is more than one product.
b. A shift from lo margin sales to high margin sales ill increase net income only if
sales volume increases.
c. A shift from high to lo margin sales may result in a decrease in net income even if
total sales volume increases.
d. ,he eighted average contribution margin is greater than the individual contribution
margins of each product in the sales mi!.
(*. Dlesko 2ompany developed the folloing information for the year ended $ecember 31,
2**2:
7roduct A 7roduct / ,otal
?nits -old ",*** %,*** 1*,***
-ales <12,*** <2',*** <3),***
9ariable costs %,*** 1#,*** 21,***
2ontribution margin < %,*** <12,*** 1(,***
&i!ed costs 12,%**
Test Bank for Managerial Accounting, Secon Eition
0et income < #,"**
(*. Econt.F
If the sales mi! changes in 2**3 to #,*** units of 7roduct A and #,*** units of 7roduct /,
the effect on the company.s break-even point ould be
a. to increase it by 2** units.
b. to decrease it by 2** units.
c. to increase it by 1,2** units.
d. no change.
(1. A company can sell all the units it can produce of either 7roduct A or 7roduct / but not both.
7roduct A has a unit contribution margin of <3% and takes to machine hours to make and
7roduct / has a unit contribution margin of <"# and takes three machine hours to make. If
there are 1,*** machine hours available to manufacture a product, income ill be
a. <3,*** more if 7roduct A is made.
b. <3,*** less if 7roduct / is made.
c. <3,*** less if 7roduct A is made.
d. the same if either product is made.
(2. If a company has limited resources, the key factor in performing incremental analysis is
a. contribution margin.
b. limited resources re+uired.
c. contribution margin per unit of limited resource.
d. none of these.
(3. Aimited resources for a manufacturing company include all of the folloing e!cept
a. direct labor hours.
b. floor space.
c. machine capacity.
d. ra materials.
(". A company can produce and sell only one of the folloing to products:
6achine 2ontribution
Iours ;e+uired 6argin 7er ?nit
7roduct 1 3 <3*
7roduct 2 2 <2#
If the company has machine capacity of ",*** hours, hat is the total contribution margin
of the product it should produce to ma!imi8e net income4
a. <"*,***.
b. <"(,***.
c. <#*,***.
d. <32,***.
(#. 1hen a company has limited resources, management must decide hich products to sell
in order to ma!imi8e
a. contribution margin per unit.
b. contribution margin ratio.
c. net income.
d. eighted average unit contribution margin.
$-0%
Incremental Analysis $-0&
Ans!ers to Multi2le C3oice *uestions
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2%. b 3#. d "". d #3. a %2. d '1. c (*. a
3".
a "3. d #2. a %1. d '*. c '). c
E4ERCISES
E5# /-
Alder 2ompany produced and sold 3*,*** units of product and is operating at (*G of plant
capacity. ?nit information about its product is as follos:
-ales 7rice <'*
9ariable manufacturing cost <"#
&i!ed manufacturing cost E<3**,*** J 3*,***F 1* ##
7rofit per unit <1#
,he company received a proposal from a foreign company to buy %,*** units of Alder 2ompany's
product for <#* per unit. ,his is a one-time only order and acceptance of this proposal ill not
affect the company's regular sales. ,he president of Alder 2ompany is reluctant to accept the
proposal because he is concerned that the company ill lose money on the special order.
Instructions
7repare a schedule reflecting an incremental analysis of this proposal and indicate the effect the
acceptance of this order might have on the company's income.
Solution /- E)@13 min.F
AA$5; 2=67A0K
Incremental Analysis
7roposal to buy %,*** units at <#*
Test Bank for Managerial Accounting, Secon Eition
0et Income
;e3ect =rder Accept =rder Increase E$ecreaseF
;evenues E%,*** L <#*F < -*- <3**,*** <3**,***
2osts E%,*** L <"#F -*- E2'*,***F E2'*,***F
0et Income < -*- < 3*,*** < 3*,***
Alder 2ompany ould increase its income by <3*,*** in accepting the special order.
E5# /.
$i!on 2ompany manufactures cappuccino makers. &or the first eight months of 2**2 the
company reported the folloing operating results hile operating at (*G of plant capacity:
-ales E#**,*** unitsF <)*,***,***
2ost of goods sold #",***,***
Mross profit 3%,***,***
=perating e!penses 2",***,***
0et income <12,***,***
An analysis of costs and e!penses reveals that variable cost of goods sold is <)# per unit and
variable operating e!penses are <3# per unit.
In -eptember, $i!on 2ompany receives a special order for "*,*** machines at <1"# each from a
ma3or coffee shop franchise. Acceptance of the order ould result in <1*,*** of shipping costs
but no increase in fi!ed e!penses.
Instructions
EaF 7repare an incremental analysis for the special order.
EbF -hould $i!on 2ompany accept the special order4 Nustify your anser.
Solution /. E12@1' min.F
EaF 0et Income
;e3ect =rder Accept =rder Increase E$ecreaseF
;evenues < -*- <#,(**,*** <#,(**,***
2ost of Moods -old -*- 3,(**,***OE3,(**,***F
=perating 5!pense -*- 1,"1*,***OO E1,"1*,***F
0et Income < -*- < #)*,*** < #)*,***
O9ariable cost of goods sold P "*,*** L <)# P <3,(**,***.
OO9ariable operating e!penses P "*,*** L <3# P <1,"**,*** Q <1*,*** P <1,"1*,***.
EbF ,he incremental analysis shos $i!on 2ompany should accept the special order because
incremental revenues e!ceed incremental costs. ,his recommendation assumes that
acceptance of the special order ill not affect relations ith e!isting customers.
$-0+
Incremental Analysis $-0,
E5# //
9incent 2ompany supplies schools ith floor mattresses to use in physical education classes.
9incent has received a special order from a large school district to buy "** mats at <"# each.
Acceptance of the special order ill not affect fi!ed costs but ill result in <1,2** of shipping
costs.
&or the first % months of 2**2, the company reported the folloing operating results hile
operating at '*G capacity:
E5# // Econt.F
-ales E1**,*** unitsF <',***,***
2ost of goods sold ",2**,***
Mross profit 2,(**,***
=perating e!penses 2,***,***
0et income < (**,***
2ost of goods sold as (*G variable and 2*G fi!edR operating e!penses ere '#G variable and
2#G fi!ed.
Instructions
EaF7repare an incremental analysis for the special order.
EbF-hould 9incent 2ompany accept the special order4 Nustify your anser.
Solution // E13@1( min.F
EaF 0et Income
;e3ect =rderAccept =rder Increase E$ecreaseF
;evenues < -*- <1(,*** <1(,***
2ost of Moods -old -*- 13,""* E13,""*F
=perating 5!pense -*- ',2** E',2**F
0et Income < -*- <E2,%"*F <E2,%"*F
9ariable costs of goods sold P <",2**,*** L (*G P <3,3%*,***.
9ariable cost of goods sold per unit sold P <3,3%*,*** J 1**,*** P <33.%*.
9ariable cost of goods sold for the special order P "** L <33.%* P <13,""*.
9ariable operating e!penses P <2,***,*** L '#G P <1,#**,***
9ariable operating e!penses per unit P <1,#**,*** J 1**,*** P <1#.**
9ariable operating e!penses for the special order P "** L <1#.** P <%,*** Q <1,2**
P <',2**
EbF ,he incremental analysis shos 9incent 2ompany should not accept the special order
because incremental costs e!ceed incremental revenues.
Test Bank for Managerial Accounting, Secon Eition
E5# /$
2arlsen 2ompany manufactured %,*** units of a component part that is used in its product and
incurred the folloing costs:
$irect materials < '*,***
$irect labor 3*,***
9ariable manufacturing overhead 2*,***
&i!ed manufacturing overhead "*,***
<1%*,***
Another company has offered to sell the same component part to the company for <2".** per
unit. ,he fi!ed manufacturing overhead consists mainly of depreciation on the e+uipment used to
manufacture the part and ould not be reduced if the component part as purchased from the
outside firm. If the component part is purchased from the outside firm, 2arlsen 2ompany has the
opportunity to use the factory e+uipment to produce another product hich is estimated to have a
contribution margin of <3*,***.
E5# /$ Econt.F
Instructions
7repare an incremental analysis report for 2arlsen 2ompany hich can serve as informational
input into this make or buy decision.
Solution /$ E13@1( min.F
6ake /uy Increase E$ecreaseF
$irect materials < '*,***< -*- < '*,***
$irect labor 3*,***-*- 3*,***
9ariable manufacturing overhead 2*,***-*- 2*,***
&i!ed manufacturing overhead "*,***"*,*** -*-
7urchase price E%,*** L <2".**F -*-
1"",*** E1"",***F
,otal annual cost 1%*,***1(",*** E2",***F
=pportunity cost 3*,*** -*- 3*,***
,otal cost <1)*,***<1(",*** < %,***
Income is e!pected to increase by <%,*** if the component part is purchased from the outside
firm and the ne product is manufactured.
E5# $1
Duhn /icycle 2ompany has been manufacturing its on seats for its bicycles. ,he company is
currently operating at 1**G capacity, and variable manufacturing overhead is charged to
production at the rate of %*G of direct labor cost. ,he direct materials and direct labor cost per
unit to make the bicycle seats are <#.** and <%.**, respectively. 0ormal production is #*,***
bicycles per year.
A supplier offers to make the bicycle seats at a price of <13 each. If the bicycle company accepts
this offer, all variable manufacturing costs ill be eliminated, but the <2*,*** of fi!ed manufactur-
$-0-
Incremental Analysis $-0.
ing overhead currently being charged to the bicycle seats ill have to be absorbed by other
products.
Instructions
EaF 7repare the incremental analysis for the decision to make or buy the bicycle seats.
EbF -hould Duhn /icycle 2ompany buy the seats from the outside supplier4 Nustify your anser.
Solution $1 E1#@2* min.F
EaF 0et Income
6ake /uy Increase E$ecreaseF
$irect 6aterials E#*,*** L <#F <2#*,***< -*- <2#*,***
$irect Aabor E#*,*** L <%F 3**,*** -*- 3**,***
9ariable 6anufacturing 2osts
E<3**,*** L %*GF 1(*,*** -*- 1(*,***
&i!ed 6anufacturing 2osts 2*,***2*,*** -*-
7urchase 7rice E#*,*** L <13F -*- %#*,*** E%#*,***F
,otal annual cost <'#*,*** <%'*,***< (*,***
Solution $1 Econt.F
EbF ,he seats should be purchased from the outside supplier. As indicated, the company's net
income ould increase <(*,*** by purchasing the seats.
E5# $0
?nited 2hemical 2orporation produces an oil-based chemical product hich it sells to paint
manufacturers. In 2**2, the company incurred <"3*,*** of costs to produce "*,*** gallons of
the chemical. ,he selling price of the chemical is <1".** per gallon. ,he costs per unit to
manufacture a gallon of the chemical are presented belo:
$irect materials < '.#*
$irect labor 1.#*
9ariable manufacturing overhead 1.**
&i!ed manufacturing overhead .'#
,otal manufacturing costs <1*.'#
,he company is considering manufacturing the paint itself. If the company processes the
chemical further and manufactures the paint itself, the folloing additional costs per gallon ill be
incurred: $irect materials <2.1*, $irect labor <.'#, 9ariable manufacturing overhead <.%*. 0o
increase in fi!ed manufacturing overhead is e!pected. ,he company can sell the paint at <1).**
per gallon.
Instructions
$etermine the incremental per gallon increase in net income and the total increase in net income
if the company manufactures the paint.
Test Bank for Managerial Accounting, Secon Eition
Solution $0 E1#@2* min.F
0et Income
-ell 2hemical 7rocess &urther Increase E$ecreaseF
-ales price per unit <1".** <1).**<#.**
2ost per unit:
$irect materials EAF '.#* ).%* E2.1*F
$irect labor E/F 1.#* 2.2# E.'#F
9ariable manufacturing overhead E2F 1.**1.%* E.%*F
&i!ed manufacturing overhead .'# .'# S
,otal 1*.'# 1".2* E3."#F
0et income per unit < 3.2# < ".(*<1.##
EAF <'.#* Q <2.1*
E/F <1.#* Q .'#
E2F <1.** Q .%*
Assuming the company sells all "*,*** gallons that it produces, the incremental net income
ould be <%2,*** E"*,*** gallons L <1.##F.
E5# $%
&ranke ,imber 2orporation uses a machine hich removes the bark from its cut timber. ,he
machine is unreliable and results in a significant amount of dontime and e!cessive labor costs.
,he management is considering replacing the machine ith a more efficient one hich ill
minimi8e dontime and e!cessive labor costs. $ata are presented belo for the to machines:
=ld 6achine 0e 6achine
=riginal purchase cost <"1*,*** <#2*,***
Accumulated depreciation 2(*,*** S
5stimated life # years # years
It is estimated that the ne machine ill produce annual cost savings of <11#,***. ,he old
machine can be sold to a scrap dealer for <1*,***. /oth machines ill have a salvage value of
8ero if operated for the remainder of their useful lives.
Instructions
$etermine hether the company should purchase the ne machine.
Solution $% E11@1% min.F
;etain ;eplace 0et Income
5+uipment 5+uipment IncreaseHE$ecreaseF
2ost savings< -*- <#'#,*** EAF <#'#,***
$-0/
Incremental Analysis $-0$
0e machine cost -*- E#2*,***F E#2*,***F
7roceeds from sale of old machine < -*- 1*,*** E1*,***F
0et incremental net income < -*- < %#,*** < %#,***
EAF <11#,*** L # P <#'#,***.
,he company should purchase the ne machine because there ill be an increase in net income
of <%#,***.
E5# $&
6unroe 5nterprises relies heavily on a copier machine to process its paperork. ;ecently the
copy clerk has not been able to process all the necessary copies ithin the regular ork eek.
6anagement is considering updating the copier machine ith a faster model.
2urrent 2opier 0e 6odel
=riginal purchase cost <(,*** <1#,***
Accumulated depreciation %,*** S
5stimated operating costs EannualF %,#** 3,***
?seful life # years # years
If sold no, the current copier ould have a salvage value of <1,***. If operated for the
remainder of its useful life, the current machine ould have 8ero salvage value. ,he ne machine
is e!pected to have 8ero salvage value after five years.
Instructions
7repare an analysis to sho hether the company should retain or replace the machine.
Solution $& E12@1% min.F
0et Income
;etain 6achine ;eplace 6achineIncrease E$ecreaseF
=perating costs <32,#** <1#,*** <1',#**
0e machine cost -*- 1#,*** E1#,***F
-alvage value -*- E1,***F 1,***
,otals <32,#** <2),*** < 3,#**
,he current copier should be replaced. ,he incremental analysis shos that net income for the
five-year period ill be <3,#** higher by replacing the current copier.
E5# $+
-am 1ashington, manager of the Aaundry $epartment at -t. Anthony.s Iospital, is considering
the purchase of an automated dryer that turns off immediately hen laundry is dry. ,he ne dryer
ill replace the dryer currently in operation, hich must be monitored to determine hen laundry
is dry. -elected information on the to machines is given belo:
Automatic
Test Bank for Managerial Accounting, Secon Eition
-tandard $ryer
,urn-off $ryer
=riginal cost ne <12,*** <1",#**
Accumulated depreciation to date ","** -*-
2urrent salvage value 3,%** -*-
5stimated cost per year to operate%,#** 3,#**
;emaining years of useful life # years # years
Instructions
7repare a computation covering the five-year period that ill sho the net advantage or
disadvantage of purchasing the automatic dryer. Ignore income ta!es, and use only relevant
costs in your analysis.
Solution $+ E%-( min.F
2ost of ne dryer <E1",#**F
-alvage value of old dryer 3,%**
5stimated cost savings to operate TE<%,#** @ <3,#**F L #FU 1#,***
2ost savings associated ith buying the ne dryer < ",1**
E5# $,
-imon &orest 2orporation operates to divisions, the ,imber $ivision and the 2onsumer $ivision.
,he ,imber $ivision manufactures and sells logs to paper manufacturers. ,he 2onsumer $ivision
operates retail lumber mills hich sell a variety of products in the do-it-yourself homeoner
market. ,he company is considering disposing of the 2onsumer $ivision since it has been
consistently unprofitable for a number of years. ,he income statements for the to divisions for
the year ended $ecember 31, 2**2 are presented belo:
$-%1
Incremental Analysis $-%0
E5# $, Econt.F
,imber $ivision 2onsumer $ivision ,otal
-ales <1,#**,*** <#**,*** <2,***,***
2ost of goods sold )**,*** 3#*,*** 1,2#*,***
Mross profit %**,*** 1#*,*** '#*,***
-elling V administrative e!penses 2#*,*** 1(*,*** "3*,***
0et income < 3#*,*** <E3*,***F < 32*,***
In the 2onsumer $ivision, '*G of the cost of goods sold are variable costs and 3*G of selling
and administrative e!penses are variable costs. ,he management of the company feels it can
save <%*,*** of fi!ed cost of goods sold and <#*,*** of fi!ed selling e!penses if it discontinues
operation of the 2onsumer $ivision.
Instructions
EaF $etermine hether the company should discontinue operating the 2onsumer $ivision.
EbF If the company had discontinued the division for 2**2, determine hat net income ould
have been.
Solution $, E2*@2# min.F
EaF 2=0-?65; $I9I-I=0
0et Income
2ontinue 5liminate Increase E$ecreaseF
-ales <#**,*** < -*- <E#**,***F
9ariable e!penses:
2ost of goods sold 2"#,*** EAF -*- 2"#,***
-elling and admin. e!p. #",*** E/F -*- #",***
2ontribution margin 2*1,*** -*- E2*1,***F
&i!ed e!penses:
2ost of goods sold 1*#,*** E2F "#,*** %*,***
-elling and admin. e!p. 12%,*** E$F '%,*** #*,***
0et income < E3*,***F <E121,***F < E)1,***F
EAF <3#*,*** L '*G P <2"#,*** E2F <3#*,*** @ <2"#,*** P <1*#,***
E/F <1(*,*** L 3*G P <#",*** E$F <1(*,*** @ <#",*** P <12%,***
,he company should continue the 2onsumer $ivision because contribution margin, <2*1,***, is
greater than the avoidable fi!ed costs, <11*,***.
EbF 0et income for the total company ould have been <2#),***:
,imber $ivision Q $ecrease in 0et Income
<3#*,*** Q <E)1,***F P <2#),***
Test Bank for Managerial Accounting, Secon Eition $-%%
Incremental Analysis $-%&
E5# $-
A recent accounting graduate from 6issouri -tate ?niversity evaluated the operating perform-
ance of /osell 2ompany's four divisions. ,he folloing presentation as made to /osell's
/oard of $irectors. $uring the presentation, the accountant made the recommendation to
eliminate the -outhern $ivision stating that total net income ould increase by <"*,***. E-ee
analysis belo.F
=ther ,hree $ivisions -outhern $ivision ,otal
-ales <2,***,*** <"(*,*** <2,"(*,***
2ost of Moods -old )#*,*** "**,*** 1,3#*,***
Mross 7rofit 1,*#*,*** (*,*** 1,13*,***
=perating 5!penses (**,*** 12*,*** )2*,***
0et Income < 2#*,*** < E"*,***F < 21*,***
&or the other divisions, cost of goods sold is (*G variable and operating e!penses are '*G
variable. ,he cost of goods sold for the -outhern $ivision is 2#G fi!ed, and its operating
e!penses are '#G fi!ed. If the division is eliminated, only <",*** of the fi!ed operating costs ill
be eliminated.
Instructions
$o you concur ith the ne accountant's recommendation4 7resent a schedule to support your
anser.
Solution $- E2*@2# min.F
0et Income
2ontinue 5liminate Increase E$ecreaseF
-ales <"(*,*** < -*- <E"(*,***F
9ariable 5!penses
2ost of goods sold 3**,*** -*- 3**,***
=perating e!penses 3*,*** -*- 3*,***
,otal 9ariable 33*,*** -*- 33*,***
2ontribution 6argin 1#*,*** -*- E1#*,***F
&i!ed 5!penses
2ost of goods sold 1**,*** 1**,*** -*-
=perating e!penses )*,*** (%,*** ",***
0et Income EAossF <E"*,***F <E1(%,***F <E1"%,***F
,he accountant is not correct. If the -outhern $ivision is eliminated, the net income ill be
<1"%,*** less, not <"*,*** greater.
,he reduction in income is the result of the loss of the contribution margin less the avoidable fi!ed
costs of <",***.
Test Bank for Managerial Accounting, Secon Eition
E5# $.
-nooty &o! operates three upscale bouti+ues in three fashionable areas of the city. ,he folloing
information is available for the three bouti+ues for the past year:
Andover Ieartland /eaumont ,otal
;evenue<12#,*** <1%*,*** <1'#,*** <"%*,***
9ariable costs %#,*** '*,*** %#,*** 2**,***
2ontribution margin %*,*** )*,*** 11*,*** 2%*,***
&i!ed costs (#,*** "*,*** %*,*** 1(#,***
0et income ElossF <E2#,***F < #*,*** < #*,*** < '#,***
Instructions
Anser each of the folloing independently.
EaF &i!ed costs are all allocated and unavoidable. 1hat ill happen to profit if -nooty &o!
discontinues operations at /eaumont4
EbF -uppose no that <2#,*** of the fi!ed costs shon for the bouti+ue in Andover are
avoidable. 1hat ill happen to profits if -nooty &o! discontinues operations at Andover4
EcF 5!plain the general rule for deciding hether to eliminate an unprofitable division.
Solution $. E11-13 minF
EaF If -nooty &o! discontinues operations at /eaumont, profits for the company as a hole ill
decrease by the contribution marginSor by <11*,***. ;emember, all fi!ed costs are
allocated and unavoidable.
EbF If the <2#,*** of fi!ed costs are avoidable and -nooty &o! discontinues operations at
Andover, net income for the company as a hole ill increase by <2#,***.
EcF In deciding hether to eliminate an unprofitable division, a company must compare the
division.s contribution margin to its avoidable fi!ed costs. An unprofitable division should be
eliminated only hen its avoidable fi!ed costs are greater than its contribution margin.
E5# $/
/arker 2ompany sells three models of dishashing machines. -elling price and variable costs for
the three models are as follos:
5conomy -tandard$elu!e
?nit selling price <%** <'** <(**
?nit variable costs <33* <"2* <"#*
5!pected sales volume in units 1,*** %** "**
Instructions
EaF 2ompute the break-even point in units, assuming fi!ed costs are <2(),***.
$-%+
Incremental Analysis $-%,
EbF Indicate the units of each product that should be sold at the break-even point and prove the
correctness of your anser.
Solution $/ E2*@2# min.F
EaF 5conomy -tandard$elu!e
$etermine the unit contribution margin
?nit selling price <%** <'** <(**
?nit variable costs <33* <"2* <"#*
2ontribution margin EaF <2'* <2(* <3#*
$etermine eighted contribution margin
5!pected sales volume in units 1,*** %** "**
-ales mi! ratio EbF 1* % "
1eighted contribution margin EaF L EbF <2,'** <1,%(* <1,"**
$etermine the eighted average contribution margin
<2,'** Q <1,%(* Q <1,"**
SSSSSSSSSSSS P <2()
2*
<2(),***
/reak-even sales in units P SSSS P 1,*** units
<2()
EbF 7roduct ?nit -ales L ?nit 26,otal 26
5conomy E#*G L 1,***F #** <2'* <13#,***
-tandard E3*G L 1,***F 3** 2(* (",***
$elu!e E2*G L 1,***F 2** 3#* '*,***
1,*** <2(),***
E5# $$
0eagle 2ompany has %,*** machine hours available to use to produce either 7roduct A or
7roduct /. ,he cost accounting department developed the folloing unit information for each of
the products:
7roduct A 7roduct /
-ales price <#" <%#
$irect materials 22 21
$irect labor 1# 1(
9ariable manufacturing overhead ( 12
&i!ed manufacturing overhead " (
6achine hours re+uired .% 1.*
6anagement desires to make a decision regarding hich product to produce in order to ma!imi8e
the company's income.
Instructions
Test Bank for Managerial Accounting, Secon Eition
,aking into consideration the constraint under hich the company operates, prepare a report to
sho hich product should be produced and sold.
$-%-
Incremental Analysis $-%.
Solution $$ E2*@2# min.F
05AMA5 2=67A0K
2ontribution 6argin per ?nit Aimited ;esource
2ontribution margin per unit: 7roduct A 7roduct /
-ales price <#" <%#
9ariable costs
$irect material <22 <21
$irect labor 1# 1(
9ariable overhead ( "# 12 #1
2ontribution margin < ) <1"
6achine hours re+uired: .% hrs. 1.* hrs.
2ontribution margin per unit of limited resource
E<) J .%F < 1#
E<1" J 1.*F < 1"
6achine hours available %,*** %,***
2ontribution margin <)*,*** <(",***
,he company should produce and sell 7roduct A.
E5# 011
$annon 2ompany manufactures and sells to products. ;elevant per unit data concerning each
product are given belo:
7roduct
-tandard $elu!e
-elling price <"2 <"(
9ariable costs <1% <1(
6achine hours " #
Instructions
EaF 2ompute the contribution margin per unit of the limited resource for each product.
EbF If 1,*** additional machine hours are available, hich product should be manufactured4
EcF 7repare an analysis shoing the total contribution margin if the additional hours are
E1F $ivided e+ually among the products.
E2F Allocated entirely to the product identified in EbF above.
Solution 011 E2#@3* min.F
EaF 7roduct
-tandard $elu!e
2ontribution margin per unit EaF <2% <3*
6achine hours re+uired EbF " #
Test Bank for Managerial Accounting, Secon Eition
2ontribution margin per unit of limited resource EaF J EbF <%.#* <%.**
$-%/
Incremental Analysis $-%$
Solution 011 Econt.F
EbF ,he -tandard product should be manufactured because it results in the highest contribution
margin per machine hour.
EcF 7roduct
-tandard $elu!e
6achine hours 1,*** J 2 EaF #** #**
6achine hours per unit EbF " #
?nits produced EaF J EbF 12# 1**
2ontribution margin per unit <2% <3*
,otal contribution margin<3,2#* <3,***
7roduct
-tandard
6achine hours EaF 1,***
6achine hours per unit EbF "
?nits produced EaF J EbF 2#*
2ontribution margin per unit <2%
,otal contribution margin<%,#**
Test Bank for Managerial Accounting, Secon Eition
C)M'LETI)N STATEMENTS
1*1. An important purpose of management accounting is to provide management ith
WWWWWWWWWWWWWWWWWWWWWW for decision making.
1*2. ,he process used to identify the financial data that change under alternative courses of
action is called WWWWWWWWWWWWWWWWWW analysis.
1*3. In a decision on hether an order should be accepted at a special price hen there is
plant capacity available, a ma3or consideration is hether the special price e!ceeds
WWWWWWWWWWWWWWWWWW.
1*". ,he potential benefit that may be obtained by folloing an alternative course of action is
called an WWWWWWWWWWWWWWWWW cost.
1*#. A decision hether to sell a product no or to process it further, depends on hether the
incremental WWWWWWWWWWWWW from processing further are greater than the incremental
processing WWWWWWWWWWWWWW.
1*%. ,he WWWWWWWWWWWWWW value of old e+uipment is irrelevant in a decision to replace that
e+uipment and is often referred to as a WWWWWWWWWWWWW cost.
1*'. ,otal net income may decrease if an unprofitable segment is eliminated because the
WWWWWWWWWWWWWW allocated to that segment ill have to be absorbed by the other
segments.
1*(. /reak-even sales can be computed for a mi! of to or more products by determining the
WWWWWWWWWWWWWW unit contribution margin of all the products.
1*). In an environment here there are limited resources, the products ith the highest
contribution per unit of WWWWWWWWWWWWWW should identify the products to be produced.
Ans!ers to Co"2letion State"ents
1*1. relevant information
1*2. incremental
1*3. variable costs Eincremental costsF
1*". opportunity
1*#. revenues, costs
1*%. book, sunk
1*'. fi!ed e!penses
1*(. eighted average
1*). limited resource

$-&1
Incremental Analysis $-&0
MATC(IN6
11*. 6atch the items belo by entering the appropriate code letter in the space provided.
A. Incremental analysis 5. ;elevant cost
/. /ook value of old asset &. -ales mi!
2. =pportunity cost M. -unk cost
$. 1eighted average unit I. &inancial information
contribution margin
WWWW 1. ,he potential benefit that may be obtained from folloing an alternative course of
action.
WWWW 2. ,he relative combination in hich a company.s products are sold.
WWWW 3. $ata related to revenues and costs and their effect on the company.s overall
profitability.
WWWW ". ,he process of identifying the financial data that change under alternative courses of
action.
WWWW #. A cost that cannot be changed by any present or future decision.
WWWW %. A sunk cost that is not relevant in incremental analysis.
WWWW '. ?sed to compute the break-even point for a mi! of to or more products.
WWWW (. ,hose costs and revenues that differ across alternatives.
Ans!ers to Matc3ing
1. 2 #. M
2. & %. /
3. I '. $
". A (. 5
Test Bank for Managerial Accounting, Secon Eition
S()RT-ANS7ER ESSAY *UESTI)NS
S-A E 000
6anagement is often faced ith the alternative of continuing to make a product or component
internally, or go to an e!ternal source and purchase the product or component. In gathering
relevant information for these to alternatives, briefly identify the +uantitative factors that should
be considered. Are there any +ualitative factors that should also be considered4
Solution 000
,he +uantitative factors to be considered in a make or buy decision include the incremental costs
to make the product, the incremental costs of buying the product, and the opportunity cost
Epotential benefit foregoneF if the product is made. Menerally, all variable production costs are
relevant in a make or buy decision, but only some fi!ed costs, or no fi!ed costs, are relevant
because many fi!ed costs ill be incurred regardless of hether the decision is to make or buy.
Xualitative factors include the possible adverse effect on employees and the stability of the
supplier's price and +uality.
S-A E 00%
A number of different types of decisions involve incremental analysis. ,o of the more common
types of decisions are hether to E1F accept an order at a special price and E2F sell products or
process them further. Identify the relevant costsHdata to be considered in making these types of
decisions.
Solution 00%
,he relevant data in accepting an order at a special price is the difference beteen the variable
manufacturing costs to produce the special order and the e!pected revenues. If the special order
units can be produced ithin e!isting plant capacity, the special order ill not increase fi!ed
costs.
,he relevant data in deciding hether to sell or process products further is the difference beteen
the incremental revenue from processing and the incremental processing costs. ,he products
should be processed further as long as the incremental revenue e!ceeds the incremental costs.
$-&%