INCREMENTAL ANALYSISTRUE-FALSE STATEMENTS1. 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 will always change under alternative coursesof action, and total fixed costs will always remain constant.4. Accountants are mainly involved in developing nonfinancial information for management'sconsideration in choosing among alternatives.5. Decision-making involves choosing among alternative courses of action.6. Financial 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.7. A special one-time order should never be accepted if the unit sales price is less than theunit variable cost.8. If a company has excess capacity and present markets will not be affected, it would beprofitable to accept an order at a special unit price even though the price is less than theunit variable cost to manufacture the item.9. A company should never accept an order for its product at less than its regular salesprice.10. A decision whether to continue to make a product or buy it externally, depends on theexternal price and the amount of variable and fixed 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 always make the decision to choose the lowest costalternative.13. In a sell or process further decision, management should process further as long as theincremental revenues from additional processing exceed the incremental variable costs.14. It is always better to sell now rather than process further because of the time value ofmoney.15. In a decision concerning replacing old equipment with new equipment, the book value ofthe old equipment can be considered a sunk cost.Test Bank for Managerial Accounting, Second Edition16. In a decision to retain or replace old equipment, the salvage value of the old equipment isrelevant in incremental analysis.17. It is better not to replace old equipment if it is not fully depreciated.18. From a quantitative standpoint, a segment should be eliminated if its contribution marginis less than the fixed costs that can be eliminated.19. The elimination of an unprofitable product line may adversely affect the remaining productlines.20. Sales mix is the relative combination in which a companys products are sold.21. Break-even sales can be computed for a mix of two or more products by determining thetotal contribution margin of all the products.22. Net income will be greater if more high contribution margin units are sold than lowcontribution margin units at any given level of units sold.23. When a company has limited resources to manufacture products, it should manufacturethose products which have the highest contribution margin per unit of limited resource.24. If a company has only a certain number of machine hours available for production, it isgenerally more profitable to produce and sell the product with the highest unit contributionmargin.25. Contribution margin per unit of limited resource is usually the same as contribution marginper unit.Answers to True-False StatementsItem Ans. Item Ans. Item Ans. Item Ans. Item Ans. Item Ans. Item Ans.1. T 5. T 9. F 13. F 17. F 21. F 25. F2. T 6. F 10. T 14. F 18. T 22. T3. F 7. T 11. T 15. T 19. T 23. T4. F 8. F 12. F 16. T 20. T 24. F9-2Incremental Analysis 9-3MULTIPLE CHOICE QUESTIONS26. A major accounting contribution to the managerial decision-making process in evaluatingpossible 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 project.d. decide which actions that management should consider.27. Which of the following stages of the management decision-making process is improperlysequenced?a. Evaluate possible courses of action Make decision.b. Assign responsibility for decision Identify the problem.c. Identify the problem Determine possible courses of action.d. Assign responsibility for decision Determine possible courses of action.28. Internal reports that review the actual impact of decisions are prepared bya. department heads.b. the controller.c. management accountants.d. factory workers.29. Which of the following steps in the management decision-making process does notgenerally involve the managerial accountant?a. Determine possible courses of action.b. Make the appropriate decision based on relevant data.c. Prepare internal reports that review results of decisions.d. None of these30. The 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. Nonfinancial information that management might evaluate in making a decision would notincludea. employee turnover.b. contribution margin.c. the environment.d. the corporate profile in the community.32. Incremental analysis is synonymous witha. difficult analysis.b. differential analysis.c. gross profit analysis.d. derivative analysis.Test Bank for Managerial Accounting, Second Edition33. In incremental analysis,a. only costs are analyzed.b. only revenues are analyzed.c. both costs and revenues may be analyzed.d. both costs and revenues that stay the same between alternate courses of action willbe analyzed.34. Incremental analysis is most usefula. in developing relevant information for management decisions.b. in choosing between the net present value method and the internal rate of returnmethod.c. in evaluating the master budget.d. as a replacement technique for variance analysis.35. The source of data to serve as inputs in incremental analysis is generated bya. market analysts.b. engineers.c. accountants.d. all of these.36. Which of the following is not a true statement?a. Incremental analysis might also be referred to as differential analysis.b. Incremental analysis is the same as CVP analysis.c. Incremental analysis is useful in making decisions.d. Incremental analysis focuses on decisions that involve a choice among alternativecourses of action.37. Incremental analysis would not be appropriate fora. a make or buy decision.b. an allocation of limited resource decision.c. elimination of an unprofitable segment.d. analysis of manufacturing variances.38. Incremental analysis would be appropriate fora. acceptance of an order at a special price.b. retain or replace equipment.c. sell or process further.d. all of these.39. Which of the following is a true statement about cost behaviors in incremental analysis?1. Fixed costs will not change between alternatives.2. Fixed costs may change between alternatives.3. Variable costs will always change between alternatives.a. 1b. 2c. 3d. 2 and 39-4Incremental Analysis 9-540. A company is considering the following alternatives:Alternative 1 Alternative 2Revenues $120,000 $120,000Variable costs 60,000 70,000Fixed costs 35,000 35,000Which of the following are relevant in choosing between the alternatives?a. Variable costsb. Revenuesc. Fixed costsd. Variable costs and fixed costs41. Adler Company manufactures a product with a unit variable cost of $50 and a unit salesprice of $88. Fixed manufacturing costs were $240,000 when 10,000 units were producedand sold. The company has a one-time opportunity to sell an additional 3,000 units at $70each in a foreign market which would not affect its present sales. If the company hassufficient capacity to produce the additional units, acceptance of the special order wouldaffect net income as follows:a. Income would decrease by $12,000.b. Income would increase by $12,000.c. Income would increase by $210,000.d. Income would increase by $60,000.42. In incremental analysis,a. costs are not relevant if they change between alternatives.b. all costs are relevant if they change between alternatives.c. only fixed costs are relevant.d. only variable costs are relevant.43. If a plant is operating at full capacity and receives a one-time opportunity to accept anorder at a special price below its usual price, thena. only variable costs are relevant.b. fixed costs are not relevant.c. the order will likely be accepted.d. the order will likely be rejected.44. If a company must expand capacity to accept a special order, it is likely that there will bea. an increase in unit variable costs.b. no increase in fixed costs.c. an increase in variable and fixed costs per unit.d. an increase in fixed costs.45. Which of the following is true if a company can accept a special order without affecting itsregular sales and is within plant capacity?a. Net income will not be affected.b. Net income will increase if the special sales price per unit exceeds the unit variablecosts.c. Net income will decrease.d. Additional fixed costs will probably be incurred.46. If a company anticipates that other sales will be affected by the acceptance of a specialTest Bank for Managerial Accounting, Second Editionorder, thena. 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 will only be accepted if the plant is below capacity.47. An opportunity costa. should be initially recorded as an asset.b. is the cost of a new product proposal.c. is the potential benefit that may be obtained by following an alternative course ofaction.d. is classified as manufacturing overhead.48. Opportunity cost must be considered in decisions involvinga. budgeting.b. financial accounting.c. CVP analysis.d. resources that have alternative uses.49. The opportunity cost of an alternate course of action that is relevant to a make or buydecision isa. subtracted from the "Make" costs.b. added to the "Make" costs.c. added to the "Buy" costs.d. none of these.50. Opportunity cost is usuallya. a standard cost.b. a potential benefit.c. a sunk cost.d. included as part of cost of goods sold.Use the following information for questions 5152.Sam's Manufacturing Company can make 100 units of a necessary component part with thefollowing costs:Direct Materials $80,000Direct Labor 13,000Variable Overhead 40,000Fixed Overhead 27,00051. If Sam's Manufacturing Company purchases the component externally, $20,000 of thefixed costs can be avoided. At what external price for the 100 units is the companyindifferent between making or buying?a. $160,000.b. $113,000.c. $153,000.d. $133,000.52. If Sam's Manufacturing Company can purchase the component externally for $145,000and only $4,000 of the fixed costs can be avoided, what is the correct make or buydecision?9-6Incremental Analysis 9-7a. Make and save $8,000b. Buy and save $8,000c. Make and save $20,000d. Buy and save $20,00053. Cole's Shop can make 1,000 units of a necessary component with the following costs:Direct Materials $64,000Direct Labor 16,000Variable Overhead 8,000Fixed Overhead ?The company can purchase the 1,000 units externally for $104,000. The unavoidablefixed costs are $5,000 if the units are purchased externally. An analysis shows that at thisexternal price, the company is indifferent between making or buying the part. What are thefixed overhead costs of making the component?a. $21,000.b. $16,000.c. $11,000.d. Cannot be determined.Use the following information for questions 5455.May Company produces 1,000 units of a necessary component with the following costs:Direct Materials $48,000Direct Labor 32,000Variable Overhead 8,000Fixed Overhead 14,00054. May Company could avoid $6,000 in fixed overhead costs if it acquires the componentsexternally. If cost minimization is the major consideration and the company would preferto buy the components, what is the maximum external price that May Company wouldaccept to acquire the 1,000 units externally?a. $102,000.b. $94,000.c. $96,000.d. $88,000.55. None of May Company's fixed overhead costs can be reduced, but another product couldbe made that would increase profit contribution by $16,000 if the components wereacquired externally. If cost minimization is the major consideration and the companywould prefer to buy the components, what is the maximum external price that MayCompany would be willing to accept to acquire the 1,000 units externally?a. $86,000.b. $110,000.c. $96,000.d. $104,000.56. A company has a process that results in 9,000 pounds of Product A that can be sold for$8 per pound. An alternative would be to process Product A further at a cost of $60,000and then sell it for $14 per pound. Should management sell Product A now or shouldProduct A be processed further and then sold? What is the effect of the action?Test Bank for Managerial Accounting, Second Editiona. Process further, the company will be better off by $6,000.b. Sell now, the company will be better off by $6,000.c. Process further, the company will be better off by $54,000.d. Sell now, the company will be better off by $60,000.57. The decision rule on whether to sell or process furthera. varies from situation to situation.b. is process further as long as total revenue exceeds present revenues.c. is process further if incremental revenue from such processing exceeds incrementalfixed costs.d. is process further if incremental revenue from such processing exceeds theincremental processing costs.58. Beal Company is starting business and is unsure of whether to sell its product assembledor unassembled. The unit cost of the unassembled product is $40 and Beal Companywould sell it for $90. The cost to assemble the product is estimated at $18 per unit andBeal Company believes the market would support a price of $116 on the assembled unit.What is the correct decision using the sell or process further decision rule?a. Sell before assembly, the company will be better off by $18 per unit.b. Sell before assembly, the company will be better off by $26 per unit.c. Process further, the company will be better off by $26 per unit.d. Process further, the company will be better off by $8 per unit.59. The focus of a sell or process further decision isa. incremental revenue.b. incremental cost.c. both incremental revenue and incremental cost.d. neither incremental revenue nor incremental cost.60. Kimble Company gathered the following data about the three products that it produces:Present Estimated Additional Estimated SalesProduct Sales Value Processing Costs if Processed FurtherA $ 9,000 $ 6,000 $ 16,000B 15,000 5,000 18,000C 11,000 3,000 16,000Which of the products should not be processed further?a. Product Ab. Product Bc. Product Cd. Products A and C61. All costs incurred prior to the split-off point are calleda. relevant costs.b. split-off costs.c. opportunity costs.d. joint costs.62. Each of the following statements about the amount of joint costs allocated to multipleproducts is correct except that it isa. a sunk cost.b. irrelevant in deciding whether to sell or process further.9-8Incremental Analysis 9-9c. allocated to the individual products based on their relative sales value.d. Each of the options is correct.63. End-products produced from a single raw material and a common production process arereferred to asa. final products.b. joint products.c. split-off products.d. common products.64. A company is considering replacing old equipment with new equipment. Which of thefollowing is a relevant cost for incremental analysis?a. Annual depreciation charge on the old equipmentb. Book value of the old equipmentc. Estimated annual depreciation of the new equipmentd. Cost of the new equipment65. In a retain or replace equipment decision, trade-in allowance available on old equipmenta. increases the cost of the new equipment.b. is relevant because it will not be realized if the old equipment is retained.c. is not relevant to the decision.d. reduces the cost of the old equipment.66. Which of the following is not relevant information in a decision whether old equipmentpresently being used should be replaced by new equipment?a. The cash price of the new equipmentb. The salvage value of the old equipmentc. The book value of the old equipmentd. The cost savings if the new equipment is purchased67. Book value of old equipment 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.68. A company is deciding on whether to replace some old equipment with new equipment.Which of the following is not a relevant cost for incremental analysis?a. Annual operating cost of the new equipmentb. Annual operating cost of the old equipmentc. Net cost of the new equipmentd. Accumulated depreciation on the old equipment69. Which of the following is a sunk cost in a retain or replace equipment decision?a. Cost of the new equipmentb. Cost savings from the purchase of the new equipmentc. Salvage value of the old equipmentd. Cost of the old equipment70. A company has three product lines, one of which reflects the following results:Sales $170,000Variable expenses 100,000Contribution margin 70,000Test Bank for Managerial Accounting, Second EditionFixed expenses 110,000Net loss $(40,000)If this product line is eliminated, 60% of the fixed expenses can be eliminated and theother 40% will be allocated to other product lines. If management decides to eliminate thisproduct line, the company's net income willa. increase by $40,000.b. decrease by $70,000.c. decrease by $4,000.d. increase by $4,000.71. A company is considering eliminating a product line. The fixed costs currently allocated tothe product line will be allocated to other product lines upon discontinuance. If the productline is discontinued,a. total net income will increase by the amount of the product line's fixed costs.b. total net income will decrease by the amount of the product line's fixed costs.c. the contribution margin of the product line will indicate the net income increase ordecrease.d. the company's total fixed costs will decrease.72. In deciding whether to eliminate an unprofitable business segment, the key is to focus ona. fixed costs.b. opportunity costs.c. relevant costs.d. sunk costs.73. In deciding on the future of an unprofitable segment, management should compare thelost contribution margin to the segmentsa. variable costs.b. fixed costs.c. sunk costs.d. opportunity costs.74. A segment has the following data:Sales $420,000Variable expenses 180,000Fixed expenses 330,000What will be the incremental effect on net income if this segment is eliminated, assumingthe fixed expenses will be allocated to profitable segments?a. $240,000 increaseb. $240,000 decreasec. $330,000 decreased. Cannot be determined from the data provided.9-10Incremental Analysis 9-1175. Barkley Company sells two products with the following per unit data:Standard DeluxeSelling price/unit $75 $120Variable costs/unit 45 60Contribution margin/unit $30 $ 60Sales mix 3 2If fixed costs are $630,000, the number of standard and deluxe units that Barkley mustsell to break even isa. 1,800 standard and 1,200 deluxe.b. 3,600 standard and 2,400 deluxe.c. 9,000 standard and 6,000 deluxe.d. 21,000 standard and 14,000 deluxe.76. Logan Company sells two products, A and B. Their contribution margins per unit are $60and $120 respectively, and their sales mix is 3:1. What is Logans weighted average unitcontribution margin?a. $300b. $150c. $90d. $7577. Total contribution margin divided by the number of units in the sales mix is thea. contribution margin per unit.b. contribution margin ratio.c. weighted average unit contribution margin.d. weighted average contribution margin ratio.78. The break-even point in units for multiple products is computed by dividing fixed costs bythea. contribution margin per unit.b. contribution margin ratio.c. weighted average unit contribution margin.d. weighted average contribution margin ratio.79. Which one of the following is correct?a. CVP analysis cannot be used if there is more than one product.b. A shift from low margin sales to high margin sales will increase net income only ifsales volume increases.c. A shift from high to low margin sales may result in a decrease in net income even iftotal sales volume increases.d. The weighted average contribution margin is greater than the individual contributionmargins of each product in the sales mix.80. Klesko Company developed the following information for the year ended December 31,2002:Product A Product B Tota lUnits Sold 4,000 6,000 10,000Sales $12,000 $27,000 $39,000Variable costs 6,000 15,000 21,000Contribution margin $ 6,000 $12,000 18,000Fixed costs 12,600Net income $ 5,400Test Bank for Managerial Accounting, Second Edition80. (cont.)If the sales mix changes in 2003 to 5,000 units of Product A and 5,000 units of Product B,the effect on the companys break-even point would bea. to increase it by 200 units.b. to decrease it by 200 units.c. to increase it by 1,200 units.d. no change.81. A company can sell all the units it can produce of either Product A or Product B but notboth. Product A has a unit contribution margin of $36 and takes two machine hours to makeand Product B has a unit contribution margin of $45 and takes three machine hours tomake. If there are 1,000 machine hours available to manufacture a product, income will bea. $3,000 more if Product A is made.b. $3,000 less if Product B is made.c. $3,000 less if Product A is made.d. the same if either product is made.82. If a company has limited resources, the key factor in performing incremental analysis isa. contribution margin.b. limited resources required.c. contribution margin per unit of limited resource.d. none of these.83. Limited resources for a manufacturing company include all of the following excepta. direct labor hours.b. floor space.c. machine capacity.d. raw materials.84. A company can produce and sell only one of the following two products:Machine ContributionHours Required Margin Per UnitProduct 1 3 $30Product 2 2 $25If the company has machine capacity of 4,000 hours, what is the total contribution marginof the product it should produce to maximize net income?a. $40,000.b. $48,000.c. $50,000.d. $32,000.85. When a company has limited resources, management must decide which products to sellin order to maximizea. contribution margin per unit.b. contribution margin ratio.c. net income.d. weighted average unit contribution margin.9-12Incremental Analysis 9-13Answers to Multiple Choice QuestionsItem Ans. Item Ans. Item Ans. Item Ans. Item Ans. Item Ans. Item Ans.26. b 35. d 44. d 53. a 62. d 71. c 80. a27. b 36. b 45. b 54. b 63. b 72. c 81. a28. c 37. d 46. a 55. d 64. d 73. b 82. c29. b 38. d 47. c 56. b 65. b 74. b 83. b30. c 39. b 48. d 57. d 66. c 75. c 84. c31. b 40. a 49. b 58. d 67. c 76. d 85. c32. b 41. d 50. b 59. c 68. d 77. c33. c 42. b 51. c 60. b 69. d 78. c34. a 43. d 52. a 61. d 70. c 79. cEXERCISESEx. 86Alder Company produced and sold 30,000 units of product and is operating at 80% of plantcapacity. Unit information about its product is as follows:Sales Price $70Variable manufacturing cost $45Fixed manufacturing cost ($300,000 30,000) 10 55Profit per unit $15The company received a proposal from a foreign company to buy 6,000 units of Alder Company'sproduct for $50 per unit. This is a one-time only order and acceptance of this proposal will notaffect the company's regular sales. The president of Alder Company is reluctant to accept theproposal because he is concerned that the company will lose money on the special order.InstructionsPrepare a schedule reflecting an incremental analysis of this proposal and indicate the effect theacceptance of this order might have on the company's income.Solution 86 (913 min.)ALDER COMPANYIncremental AnalysisProposal to buy 6,000 units at $50Net IncomeReject Order Accept Order Increase (Decrease)Revenues (6,000 $50) $ -0- $300,000 $300,000Costs (6,000 $45) -0- (270,000) (270,000)Net Income $ -0- $ 30,000 $ 30,000Alder Company would increase its income by $30,000 in accepting the special order.Test Bank for Managerial Accounting, Second EditionEx. 87Dixon Company manufactures cappuccino makers. For the first eight months of 2002 thecompany reported the following operating results while operating at 80% of plant capacity:Sales (500,000 units) $90,000,000Cost of goods sold 54,000,000Gross profit 36,000,000Operating expenses 24,000,000Net income $12,000,000An analysis of costs and expenses reveals that variable cost of goods sold is $95 per unit andvariable operating expenses are $35 per unit.In September, Dixon Company receives a special order for 40,000 machines at $145 each from amajor coffee shop franchise. Acceptance of the order would result in $10,000 of shipping costsbut no increase in fixed expenses.Instructions(a) Prepare an incremental analysis for the special order.(b) Should Dixon Company accept the special order? Justify your answer.Solution 87 (1217 min.)(a) Net IncomeReject Order Accept Order Increase (Decrease)Revenues $ -0- $5,800,000 $5,800,000Cost of Goods Sold -0- 3,800,000* (3,800,000)Operating Expense -0- 1,410,000** (1,410,000)Net Income $ -0- $ 590,000 $ 590,000*Variable cost of goods sold = 40,000 $95 = $3,800,000.**Variable operating expenses = 40,000 $35 = $1,400,000 + $10,000 = $1,410,000.(b) The incremental analysis shows Dixon Company should accept the special order becauseincremental revenues exceed incremental costs. This recommendation assumes thatacceptance of the special order will not affect relations with existing customers.Ex. 88Vincent Company supplies schools with floor mattresses to use in physical education classes.Vincent has received a special order from a large school district to buy 400 mats at $45 each.Acceptance of the special order will not affect fixed costs but will result in $1,200 of shippingcosts.For the first 6 months of 2002, the company reported the following operating results whileoperating at 70% capacity:9-14Incremental Analysis 9-15Ex. 88 (cont.)Sales (100,000 units) $7,000,000Cost of goods sold 4,200,000Gross profit 2,800,000Operating expenses 2,000,000Net income $ 800,000Cost of goods sold was 80% variable and 20% fixed; operating expenses were 75% variable and25% fixed.Instructions(a) Prepare an incremental analysis for the special order.(b) Should Vincent Company accept the special order? Justify your answer.Solution 88 (1318 min.)(a) Net IncomeReject Order Accept Order Increase (Decrease)Revenues $ -0- $18,000 $18,000Cost of Goods Sold -0- 13,440 (13,440)Operating Expense -0- 7,200 (7,200)Net Income $ -0- $(2,640) $(2,640)Variable costs of goods sold = $4,200,000 80% = $3,360,000.Variable cost of goods sold per unit sold = $3,360,000 100,000 = $33.60.Variable cost of goods sold for the special order = 400 $33.60 = $13,440.Variable operating expenses = $2,000,000 75% = $1,500,000Variable operating expenses per unit = $1,500,000 100,000 = $15.00Variable operating expenses for the special order = 400 $15.00 = $6,000 + $1,200= $7,200(b) The incremental analysis shows Vincent Company should not accept the special orderbecause incremental costs exceed incremental revenues.Ex. 89Carlsen Company manufactured 6,000 units of a component part that is used in its product andincurred the following costs:Direct materials $ 70,000Direct labor 30,000Variable manufacturing overhead 20,000Fixed manufacturing overhead 40,000$160,000Another company has offered to sell the same component part to the company for $24.00 perunit. The fixed manufacturing overhead consists mainly of depreciation on the equipment used tomanufacture the part and would not be reduced if the component part was purchased from theoutside firm. If the component part is purchased from the outside firm, Carlsen Company has theopportunity to use the factory equipment to produce another product which is estimated to have acontribution margin of $30,000.Test Bank for Managerial Accounting, Second EditionEx. 89 (cont.)InstructionsPrepare an incremental analysis report for Carlsen Company which can serve as informationalinput into this make or buy decision.Solution 89 (1318 min.)Make Buy Increase (Decrease)Direct materials $ 70,000 $ -0- $ 70,000Direct labor 30,000 -0- 30,000Variable manufacturing overhead 20,000 -0- 20,000Fixed manufacturing overhead 40,000 40,000 -0-Purchase price (6,000 $24.00) -0- 144,000 (144,000)Total annual cost 160,000 184,000 (24,000)Opportunity cost 30,000 -0- 30,000Total cost $190,000 $184,000 $ 6,000Income is expected to increase by $6,000 if the component part is purchased from the outsidefirm and the new product is manufactured.Ex. 90Kuhn Bicycle Company has been manufacturing its own seats for its bicycles. The company iscurrently operating at 100% capacity, and variable manufacturing overhead is charged toproduction at the rate of 60% of direct labor cost. The direct materials and direct labor cost perunit to make the bicycle seats are $5.00 and $6.00, respectively. Normal production is 50,000bicycles per year.A supplier offers to make the bicycle seats at a price of $13 each. If the bicycle company acceptsthis offer, all variable manufacturing costs will be eliminated, but the $20,000 of fixed manufacturingoverhead currently being charged to the bicycle seats will have to be absorbed by otherproducts.Instructions(a) Prepare the incremental analysis for the decision to make or buy the bicycle seats.(b) Should Kuhn Bicycle Company buy the seats from the outside supplier? Justify your answer.Solution 90 (1520 min.)(a) Net IncomeMake Buy Increase (Decrease)Direct Materials (50,000 $5) $250,000 $ -0- $250,000Direct Labor (50,000 $6) 300,000 -0- 300,000Variable Manufacturing Costs($300,000 60%) 180,000 -0- 180,000Fixed Manufacturing Costs 20,000 20,000 -0-Purchase Price (50,000 $13) -0- 650,000 (650,000)Total annual cost $750,000 $670,000 $ 80,0009-16Incremental Analysis 9-17Solution 90 (cont.)(b) The seats should be purchased from the outside supplier. As indicated, the company's netincome would increase $80,000 by purchasing the seats.Ex. 91United Chemical Corporation produces an oil-based chemical product which it sells to paintmanufacturers. In 2002, the company incurred $430,000 of costs to produce 40,000 gallons of thechemical. The selling price of the chemical is $14.00 per gallon. The costs per unit tomanufacture a gallon of the chemical are presented below:Direct materials $ 7.50Direct labor 1.50Variable manufacturing overhead 1.00Fixed manufacturing overhead .75Total manufacturing costs $10.75The company is considering manufacturing the paint itself. If the company processes thechemical further and manufactures the paint itself, the following additional costs per gallon will beincurred: Direct materials $2.10, Direct labor $.75, Variable manufacturing overhead $.60. Noincrease in fixed manufacturing overhead is expected. The company can sell the paint at $19.00per gallon.InstructionsDetermine the incremental per gallon increase in net income and the total increase in net incomeif the company manufactures the paint.Solution 91 (1520 min.)Net IncomeSell Chemical Process Further Increase (Decrease)Sales price per unit $14.00 $19.00 $5.00Cost per unit:Direct materials (A) 7.50 9.60 (2.10)Direct labor (B) 1.50 2.25 (.75)Variable manufacturing overhead (C) 1.00 1.60 (.60)Fixed manufacturing overhead .75 .75 Total 10.75 14.20 (3.45)Net income per unit $ 3.25 $ 4.80 $1.55(A) $7.50 + $2.10(B) $1.50 + .75(C) $1.00 + .60Assuming the company sells all 40,000 gallons that it produces, the incremental net incomewould be $62,000 (40,000 gallons $1.55).Test Bank for Managerial Accounting, Second EditionEx. 92Franke Timber Corporation uses a machine which removes the bark from its cut timber. Themachine is unreliable and results in a significant amount of downtime and excessive labor costs.The management is considering replacing the machine with a more efficient one which willminimize downtime and excessive labor costs. Data are presented below for the two machines:Old Machine New MachineOriginal purchase cost $410,000 $520,000Accumulated depreciation 280,000 Estimated life 5 years 5 yearsIt is estimated that the new machine will produce annual cost savings of $115,000. The oldmachine can be sold to a scrap dealer for $10,000. Both machines will have a salvage value ofzero if operated for the remainder of their useful lives.InstructionsDetermine whether the company should purchase the new machine.Solution 92 (1116 min.)Retain Replace Net IncomeEquipment Equipment Increase/(Decrease)Cost savings $ -0- $575,000 (A) $575,000New machine cost -0- (520,000) (520,000)Proceeds from sale of old machine $ -0- 10,000 (10,000)Net incremental net income $ -0- $ 65,000 $ 65,000(A) $115,000 5 = $575,000.The company should purchase the new machine because there will be an increase in net incomeof $65,000.Ex. 93Munroe Enterprises relies heavily on a copier machine to process its paperwork. Recently thecopy clerk has not been able to process all the necessary copies within the regular work week.Management is considering updating the copier machine with a faster model.Current Copier New ModelOriginal purchase cost $8,000 $15,000Accumulated depreciation 6,000 Estimated operating costs (annual) 6,500 3,000Useful life 5 years 5 yearsIf sold now, the current copier would have a salvage value of $1,000. If operated for theremainder of its useful life, the current machine would have zero salvage value. The new machineis expected to have zero salvage value after five years.InstructionsPrepare an analysis to show whether the company should retain or replace the machine.9-18Incremental Analysis 9-19Solution 93 (1216 min.)Net IncomeRetain Machine Replace Machine Increase (Decrease)Operating costs $32,500 $15,000 $17,500New machine cost -0- 15,000 (15,000)Salvage value -0- (1,000) 1,000Totals $32,500 $29,000 $ 3,500The current copier should be replaced. The incremental analysis shows that net income for thefive-year period will be $3,500 higher by replacing the current copier.Ex. 94Sam Washington, manager of the Laundry Department at St. Anthonys Hospital, is consideringthe purchase of an automated dryer that turns off immediately when laundry is dry. The new dryerwill replace the dryer currently in operation, which must be monitored to determine when laundryis dry. Selected information on the two machines is given below:AutomaticStandard Dryer Turn-off DryerOriginal cost new $12,000 $14,500Accumulated depreciation to date 4,400 -0-Current salvage value 3,600 -0-Estimated cost per year to operate 6,500 3,500Remaining years of useful life 5 years 5 yearsInstructionsPrepare a computation covering the five-year period that will show the net advantage ordisadvantage of purchasing the automatic dryer. Ignore income taxes, and use only relevantcosts in your analysis.Solution 94 (6-8 min.)Cost of new dryer $(14,500)Salvage value of old dryer 3,600Estimated cost savings to operate [($6,500 $3,500) 5)] 15,000Cost savings associated with buying the new dryer $ 4,100Ex. 95Simon Forest Corporation operates two divisions, the Timber Division and the ConsumerDivision. The Timber Division manufactures and sells logs to paper manufacturers. TheConsumer Division operates retail lumber mills which sell a variety of products in the do-ityourselfhomeowner market. The company is considering disposing of the Consumer Divisionsince it has been consistently unprofitable for a number of years. The income statements for thetwo divisions for the year ended December 31, 2002 are presented below:Test Bank for Managerial Accounting, Second EditionEx. 95 (cont.)Timber Division Consumer Division Tota lSales $1,500,000 $500,000 $2,000,000Cost of goods sold 900,000 350,000 1,250,000Gross profit 600,000 150,000 750,000Selling & administrative expenses 250,000 180,000 430,000Net income $ 350,000 $(30,000) $ 320,000In the Consumer Division, 70% of the cost of goods sold are variable costs and 30% of sellingand administrative expenses are variable costs. The management of the company feels it cansave $60,000 of fixed cost of goods sold and $50,000 of fixed selling expenses if it discontinuesoperation of the Consumer Division.Instructions(a) Determine whether the company should discontinue operating the Consumer Division.(b) If the company had discontinued the division for 2002, determine what net income wouldhave been.Solution 95 (2025 min.)(a) CONSUMER DIVISIONNet IncomeContinue Eliminate Increase (Decrease)Sales $500,000 $ -0- $(500,000)Variable expenses:Cost of goods sold 245,000 (A) -0- 245,000Selling and admin. exp. 54,000 (B) -0- 54,000Contribution margin 201,000 -0- (201,000)Fixed expenses:Cost of goods sold 105,000 (C) 45,000 60,000Selling and admin. exp. 126,000 (D) 76,000 50,000Net income $ (30,000) $(121,000) $ (91,000)(A) $350,000 70% = $245,000 (C) $350,000 $245,000 = $105,000(B) $180,000 30% = $54,000 (D) $180,000 $54,000 = $126,000The company should continue the Consumer Division because contribution margin, $201,000, isgreater than the avoidable fixed costs, $110,000.(b) Net income for the total company would have been $259,000:Timber Division + Decrease in Net Income$350,000 + $(91,000) = $259,0009-20Incremental Analysis 9-21Ex. 96A recent accounting graduate from Missouri State University evaluated the operating performanceof Boswell Company's four divisions. The following presentation was made to Boswell'sBoard of Directors. During the presentation, the accountant made the recommendation toeliminate the Southern Division stating that total net income would increase by $40,000. (Seeanalysis below.)Other Three Divisions Southern Division Tota lSales $2,000,000 $480,000 $2,480,000Cost of Goods Sold 950,000 400,000 1,350,000Gross Profit 1,050,000 80,000 1,130,000Operating Expenses 800,000 120,000 920,000Net Income $ 250,000 $ (40,000) $ 210,000For 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 25% fixed, and its operatingexpenses are 75% fixed. If the division is eliminated, only $4,000 of the fixed operating costs willbe eliminated.InstructionsDo you concur with the new accountant's recommendation? Present a schedule to support youranswer.Solution 96 (2025 min.)Net IncomeContinue Eliminate Increase (Decrease)Sales $480,000 $ -0- $(480,000)Variable ExpensesCost of goods sold 300,000 -0- 300,000Operating expenses 30,000 -0- 30,000Total Variable 330,000 -0- 330,000Contribution Margin 150,000 -0- (150,000)Fixed ExpensesCost of goods sold 100,000 100,000 -0-Operating expenses 90,000 86,000 4,000Net Income (Loss) $(40,000) $(186,000) $(146,000)The accountant is not correct. If the Southern Division is eliminated, the net income will be$146,000 less, not $40,000 greater.The reduction in income is the result of the loss of the contribution margin less the avoidable fixedcosts of $4,000.Test Bank for Managerial Accounting, Second EditionEx. 97Snooty Fox operates three upscale boutiques in three fashionable areas of the city. The followinginformation is available for the three boutiques for the past year:Andover Heartland Beaumont Tota lRevenue $125,000 $160,000 $175,000 $460,000Variable costs 65,000 70,000 65,000 200,000Contribution margin 60,000 90,000 110,000 260,000Fixed costs 85,000 40,000 60,000 185,000Net income (loss) $(25,000) $ 50,000 $ 50,000 $ 75,000InstructionsAnswer each of the following independently.(a) Fixed costs are all allocated and unavoidable. What will happen to profit if Snooty Foxdiscontinues operations at Beaumont?(b) Suppose now that $25,000 of the fixed costs shown for the boutique in Andover areavoidable. What will happen to profits if Snooty Fox discontinues operations at Andover?(c) Explain the general rule for deciding whether to eliminate an unprofitable division.Solution 97 (11-13 min)(a) If Snooty Fox discontinues operations at Beaumont, profits for the company as a whole willdecrease by the contribution marginor by $110,000. Remember, all fixed costs areallocated and unavoidable.(b) If the $25,000 of fixed costs are avoidable and Snooty Fox discontinues operations atAndover, net income for the company as a whole will increase by $25,000.(c) In deciding whether to eliminate an unprofitable division, a company must compare thedivisions contribution margin to its avoidable fixed costs. An unprofitable division should beeliminated only when its avoidable fixed costs are greater than its contribution margin.Ex. 98Barker Company sells three models of dishwashing machines. Selling price and variable costs forthe three models are as follows:Economy Standard DeluxeUnit selling price $600 $700 $800Unit variable costs $330 $420 $450Expected sales volume in units 1,000 600 400Instructions(a) Compute the break-even point in units, assuming fixed costs are $289,000.(b) Indicate the units of each product that should be sold at the break-even point and prove thecorrectness of your answer.9-22Incremental Analysis 9-23Solution 98 (2025 min.)(a) Economy Standard DeluxeDetermine the unit contribution marginUnit selling price $600 $700 $800Unit variable costs $330 $420 $450Contribution margin (a) $270 $280 $350Determine weighted contribution marginExpected sales volume in units 1,000 600 400Sales mix ratio (b) 10 6 4Weighted contribution margin (a) (b) $2,700 $1,680 $1,400Determine the weighted average contribution margin$2,700 + $1,680 + $1,400 = $28920$289,000Break-even sales in units = = 1,000 units$289(b) Product Unit Sales Unit CM Total CMEconomy (50% 1,000) 500 $270 $135,000Standard (30% 1,000) 300 280 84,000Deluxe (20% 1,000) 200 350 70,0001,000 $289,000Ex. 99Neagle Company has 6,000 machine hours available to use to produce either Product A orProduct B. The cost accounting department developed the following unit information for each ofthe products:Product A Product BSales price $54 $65Direct materials 22 21Direct labor 15 18Variable manufacturing overhead 8 12Fixed manufacturing overhead 4 8Machine hours required .6 1.0Management desires to make a decision regarding which product to produce in order to maximizethe company's income.InstructionsTaking into consideration the constraint under which the company operates, prepare a report toshow which product should be produced and sold.Test Bank for Managerial Accounting, Second EditionSolution 99 (2025 min.)NEAGLE COMPANYContribution Margin per Unit Limited ResourceContribution margin per unit: Product A Product BSales price $54 $65Variable costsDirect material $22 $21Direct labor 15 18Variable overhead 8 45 12 51Contribution margin $ 9 $14Machine hours required: .6 hrs. 1.0 hrs.Contribution margin per unit of limited resource($9 .6) $ 15($14 1.0) $ 14Machine hours available 6,000 6,000Contribution margin $90,000 $84,000The company should produce and sell Product A.Ex. 100Dannon Company manufactures and sells two products. Relevant per unit data concerning eachproduct are given below:Produc tStandard DeluxeSelling price $42 $48Variable costs $16 $18Machine hours 4 5Instructions(a) Compute the contribution margin per unit of the limited resource for each product.(b) If 1,000 additional machine hours are available, which product should be manufactured?(c) Prepare an analysis showing the total contribution margin if the additional hours are(1) Divided equally among the products.(2) Allocated entirely to the product identified in (b) above.Solution 100 (2530 min.)(a) Produc tStandard DeluxeContribution margin per unit (a) $26 $30Machine hours required (b) 4 5Contribution margin per unit of limited resource (a) (b) $6.50 $6.009-24Incremental Analysis 9-25Solution 100 (cont.)(b) The Standard product should be manufactured because it results in the highest contributionmargin per machine hour.(c) Produc tStandard DeluxeMachine hours 1,000 2 (a) 500 500Machine hours per unit (b) 4 5Units produced (a) (b) 125 100Contribution margin per unit $26 $30Total contribution margin $3,250 $3,000ProductStandardMachine hours (a) 1,000Machine hours per unit (b) 4Units produced (a) (b) 250Contribution margin per unit $26Total contribution margin $6,500Test Bank for Managerial Accounting, Second EditionCOMPLETION STATEMENTS101. An important purpose of management accounting is to provide management with______________________ for decision making.102. The process used to identify the financial data that change under alternative courses ofaction is called __________________ analysis.103. In a decision on whether an order should be accepted at a special price when there isplant capacity available, a major consideration is whether the special price exceeds__________________.104. The potential benefit that may be obtained by following an alternative course of action iscalled an _________________ cost.105. A decision whether to sell a product now or to process it further, depends on whether theincremental _____________ from processing further are greater than the incrementalprocessing ______________.106. The ______________ value of old equipment is irrelevant in a decision to replace thatequipment and is often referred to as a _____________ cost.107. Total net income may decrease if an unprofitable segment is eliminated because the______________ allocated to that segment will have to be absorbed by the othersegments.108. Break-even sales can be computed for a mix of two or more products by determining the______________ unit contribution margin of all the products.109. In an environment where there are limited resources, the products with the highestcontribution per unit of ______________ should identify the products to be produced.Answers to Completion Statements101. relevant information102. incremental103. variable costs (incremental costs)104. opportunity105. revenues, costs106. book, sunk107. fixed expenses108. weighted average109. limited resource9-26Incremental Analysis 9-27MATCHING110. Match the items below by entering the appropriate code letter in the space provided.A. Incremental analysis E. Relevant costB. Book value of old asset F. Sales mixC. Opportunity cost G. Sunk costD. Weighted average unit H. Financial informationcontribution margin____ 1. The potential benefit that may be obtained from following an alternative course ofaction.____ 2. The relative combination in which a companys products are sold.____ 3. Data related to revenues and costs and their effect on the companys overallprofitability.____ 4. The process of identifying the financial data that change under alternative courses ofaction.____ 5. A cost that cannot be changed by any present or future decision.____ 6. A sunk cost that is not relevant in incremental analysis.____ 7. Used to compute the break-even point for a mix of two or more products.____ 8. Those costs and revenues that differ across alternatives.Answers to Matching1. C 5. G2. F 6. B3. H 7. D4. A 8. ETest Bank for Managerial Accounting, Second EditionSHORT-ANSWER ESSAY QUESTIONSS-A E 111Management is often faced with the alternative of continuing to make a product or componentinternally, or go to an external source and purchase the product or component. In gatheringrelevant information for these two alternatives, briefly identify the quantitative factors that shouldbe considered. Are there any qualitative factors that should also be considered?Solution 111The quantitative 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 cost(potential benefit foregone) if the product is made. Generally, all variable production costs arerelevant in a make or buy decision, but only some fixed costs, or no fixed costs, are relevantbecause many fixed costs will be incurred regardless of whether the decision is to make or buy.Qualitative factors include the possible adverse effect on employees and the stability of thesupplier's price and quality.S-A E 112A number of different types of decisions involve incremental analysis. Two of the more commontypes of decisions are whether to (1) accept an order at a special price and (2) sell products orprocess them further. Identify the relevant costs/data to be considered in making these types ofdecisions.Solution 112The relevant data in accepting an order at a special price is the difference between the variablemanufacturing costs to produce the special order and the expected revenues. If the special orderunits can be produced within existing plant capacity, the special order will not increase fixedcosts.The relevant data in deciding whether to sell or process products further is the difference betweenthe incremental revenue from processing and the incremental processing costs. The productsshould be processed further as long as the incremental revenue exceeds the incremental costs.