22806998 Incremental Analysis

8/9/2019 22806998 Incremental Analysis

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INCREMENTAL ANALYSIS

TRUE-FALSE STATEMENTS

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

2. In making decisions, management ordinarily considers both financial and nonfinancialinformation.

3. In incremental analysis, total variable costs ill alays change under alternative coursesof action, and total fi!ed costs ill alays remain constant.

". Accountants are mainly involved in developing nonfinancial information for management'sconsideration 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 itis 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 theunit variable cost.

(. If a company has e!cess capacity and present markets ill not be affected, it ould beprofitable to accept an order at a special unit price even though the price is less than theunit 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 thee!ternal price and the amount of variable and fi!ed costs that can be eliminated assumingno alternative uses of resources.

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

12. If an incremental make or buy analysis indicates that it is cheaper to buy rather than makean item, management should alays make the decision to choose the loest costalternative.

13. In a sell or process further decision, management should process further as long as theincremental 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.


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Incremental Analysis 9-2

1%. In a decision to retain or replace old e+uipment, the salvage value of the old e+uipment isrelevant 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 marginis less than the fi!ed costs that can be eliminated.

1). he elimination of an unprofitable product line may adversely affect the remaining productlines.

2*. ales mi! is the relative combination in hich a companys products are sold.

21. /reak-even sales can be computed for a mi! of to or more products by determining thetotal contribution margin of all the products.

22. 0et income ill be greater if more high contribution margin units are sold than locontribution margin units at any given level of units sold.

23. hen a company has limited resources to manufacture products, it should manufacturethose 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 isgenerally more profitable to produce and sell the product ith the highest unit contributionmargin.

2#. ontribution margin per unit of limited resource is usually the same as contribution marginper unit.

Answers to True-False Statements

Item Ans. Item Ans. Item Ans. Item Ans. Item Ans. Item Ans. Item Ans.

1. #. ). & 13. & 1. & 21. & 2#. &2. %. & 1*. 1". & 1(. 22. 3. & . 11. 1#. 1). 23. ". & (. & 12. & 1%. 2*. 2". &


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MULTIPLE CHOICE QUESTIONS2%. A maor accounting contribution to the managerial decision-making process in evaluating

possible courses of action is toa. 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 proect.d. decide hich actions that management should consider.

2. hich of the folloing stages of the management decision-making process is improperlyse+uenced4a. 5valuate possible courses of action è 6ake decision.b. Assign responsibility for decision è Identify the problem.c. Identify the problem è $etermine possible courses of action.d. Assign responsibility for decision è $etermine possible courses of action.

2(. Internal reports that revie the actual impact of decisions are prepared bya. department heads.b. the controller.c. management accountants.d. factory orkers.

2). hich of the folloing steps in the management decision-making process does notgenerally involve the managerial accountant4a. $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 iscalleda. 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 notincludea. employee turnover.b. contribution margin.c. the environment.d. the corporate profile in the community.

32. Incremental analysis is synonymous itha. difficult analysis.b. differential analysis.c. gross profit analysis.d. derivative analysis.


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Test Ban !or Mana"er#al A$$ount#n"% Se$on& Et#on

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 usefula. 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 bya. market analysts.b. engineers.c. accountants.d. all of these.

3%. hich of the folloing is not a true statement4a. Incremental analysis might also be referred to as differential analysis.b. Incremental analysis is the same as 97 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). hich 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. 1b. 2c. 3d. 2 and 3

9-'


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Incremental Analysis 9-(

"*. A company is considering the folloing alternatives:

Alternative 1 Alternative 2;evenues


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Incremental Analysis 9-*

#2. If am's 6anufacturing ompany can purchase the component e!ternally for


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#%. A company has a process that results in ),*** pounds of 7roduct A that can be sold for


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%2. 5ach of the folloing statements about the amount of oint costs allocated to multipleproducts is correct e!cept that it isa. 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 arereferred to asa. final products.b. oint products.c. split-off products.d. common products.

%". A company is considering replacing old e+uipment ith ne e+uipment. hich of thefolloing is a relevant cost for incremental analysis4a. Annual depreciation charge on the old e+uipmentb. /ook value of the old e+uipmentc. 5stimated annual depreciation of the ne e+uipmentd. ost of the ne e+uipment

%#. In a retain or replace e+uipment decision, trade-in alloance available on old e+uipmenta. 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.

%%. hich of the folloing is not relevant information in a decision hether old e+uipmentpresently being used should be replaced by ne e+uipment4a. he cash price of the ne e+uipment

b. he salvage value of the old e+uipmentc. he book value of the old e+uipmentd. he cost savings if the ne e+uipment is purchased

%. /ook value of old e+uipment is considered to be aa. 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.hich of the folloing is not a relevant cost for incremental analysis4

a. Annual operating cost of the ne e+uipmentb. Annual operating cost of the old e+uipmentc. 0et cost of the ne e+uipmentd. Accumulated depreciation on the old e+uipment

%). hich of the folloing is a sunk cost in a retain or replace e+uipment decision4a. ost of the ne e+uipmentb. ost savings from the purchase of the ne e+uipmentc. alvage value of the old e+uipmentd. ost of the old e+uipment


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*. A company has three product lines, one of hich reflects the folloing results:

ales


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Incremental Analysis 9-,,

#. /arkley ompany sells to products ith the folloing per unit data:

tandard $elu!eelling priceHunit


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(*. Econt.FIf the sales mi! changes in 2**3 to #,*** units of 7roduct A and #,*** units of 7roduct /,the effect on the companys break-even point ould bea. 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


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Incremental Analysis 9-,3

Answers to Mult#le C/o#$e 0uest#ons

Item Ans. Item Ans. Item Ans. Item Ans. Item Ans. Item Ans. Item Ans.

2%. b 3#. d "". d #3. a %2. d 1. c (*. a2. b 3%. b "#. b #". b %3. b 2. c (1. a2(. c 3. d "%. a ##. d %". d 3. b (2. c

2). b 3(. d ". c #%. b %#. b ". b (3. b3*. c 3). b "(. d #. d %%. c #. c (". c31. b "*. a "). b #(. d %. c %. d (#. c32. b "1. d #*. b #). c %(. d . c33. c "2. b #1. c %*. b %). d (. c3". a "3. d #2. a %1. d *. c ). c

E1ERCISES

E. +)

Alder ompany produced and sold 3*,*** units of product and is operating at (*G of plantcapacity. ?nit information about its product is as follos:

ales 7rice


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Alder ompany ould increase its income by


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Incremental Analysis 9-,(

&or the first % months of 2**2, the company reported the folloing operating results hileoperating at *G capacity:

E. ++ Econt.F

ales E1**,*** unitsF


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Another company has offered to sell the same component part to the company for


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Incremental Analysis 9-,*

Solut#on 9 E1#@2* min.F

EaF 0et Income 6ake /uy Increase E$ecreaseF

$irect 6aterials E#*,*** L


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$irect labor E/F 1.#* 2.2# E.#F9ariable manufacturing overhead EF 1.** 1.%* E.%*F&i!ed manufacturing overhead .# .# S

otal 1*.# 1".2* E3."#F0et income per unit < 3.2# < ".(*


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Incremental Analysis 9-,9

E. 93

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.

urrent opier 0e 6odel=riginal purchase cost


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Instru$t#ons

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.

Solut#on 9' E%-( min.F

ost of ne dryer


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Incremental Analysis 9-2,

Ex. 95 (cont.)imber $ivision onsumer $ivision otal

ales


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Test Ban !or Mana"er#al A$$ount#n"% Se$on& Et#on9-22


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Ex. 96 A recent accounting graduate from 6issouri tate ?niversity evaluated the operating perform-ance of /osell ompany's four divisions. he folloing presentation as made to /osell's/oard of $irectors. $uring the presentation, the accountant made the recommendation toeliminate the outhern $ivision stating that total net income ould increase by


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Ex. 97nooty &o! operates three upscale bouti+ues in three fashionable areas of the city. he folloinginformation is available for the three bouti+ues for the past year:

Andover eartland /eaumont otal ;evenue


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Incremental Analysis 9-2(

Solut#on 9+ E2*@2# min.F

EaF 5conomy tandard $elu!e$etermine the unit contribution margin

?nit selling price


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Test Ban !or Mana"er#al A$$ount#n"% Se$on& Et#on9-2)


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Incremental Analysis 9-2*

Solution 99 (2025 !in.)05AM5 =67A0K

ontribution 6argin per ?nit imited ;esource

ontribution margin per unit: 7roduct A 7roduct /ales price


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Test Ban !or Mana"er#al A$$ount#n"% Se$on& Et#on9-2+


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Solution "00 (cont.)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**ontribution margin per unit


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COMPLETION ST#TEMENTS

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 maor 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.

Answers to Comlet#on Statements

1*1. relevant information1*2. incremental1*3. variable costs Eincremental costsF1*". opportunity1*#. revenues, costs1*%. book, sunk1*. fi!ed e!penses1*(. eighted average1*). limited resource

9-3


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Incremental Analysis 9-3,

M#TCHIN$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!. =pportunity cost M. unk cost$. eighted average unit . &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 companys products are sold.

WWWW 3. $ata related to revenues and costs and their effect on the companys overallprofitability.

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.

Answers to Mat$/#n"

1. #. M2. & %. /3. . $". A (. 5


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SHO%TNS'E% ESS# QUESTIONS

S-A E ,,,

6anagement is often faced ith the alternative of continuing to make a product or componentinternally, 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 shouldbe considered. Are there any +ualitative factors that should also be considered4

Solut#on ,,,

he +uantitative factors to be considered in a make or buy decision include the incremental coststo make the product, the incremental costs of buying the product, and the opportunity costEpotential benefit foregoneF if the product is made. Menerally, all variable production costs arerelevant in a make or buy decision, but only some fi!ed costs, or no fi!ed costs, are relevantbecause 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 thesupplier's price and +uality.

S-A E ,,2

A number of different types of decisions involve incremental analysis. o of the more commontypes 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.

Solut#on ,,2

he relevant data in accepting an order at a special price is the difference beteen the variablemanufacturing 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!edcosts.

he relevant data in deciding hether to sell or process products further is the difference beteenthe 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.

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22806998 Incremental Analysis

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