Chapter 20 Incremental Analysis

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

• (1), (2), (3).

• (3), (2), (1).

• (2), (1), (3).

• (2), (3), (1).

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

• do not change under alternative courses of action.

• change under alternative courses of action.

• are mixed under alternative courses of action.

• No correct answer is given.

In making business decisions, management ordinarily considers:

• quantitative factors but not qualitative factors.

• financial information only.

• both financial and nonfinancial information.

• relevant costs, opportunity cost, and sunk costs.

A company is considering the following alternatives:

     Alternative A    Alternative B

Revenues    $50,000     $50,000

Variable costs  24,000  24,000

Fixed costs  12,000  15,000

Which of the following are relevant in choosing between these alternatives?

• Revenues, variable costs, and fixed costs.

• Variable costs and fixed costs.

• Variable costs only.

• Fixed costs only.

It costs a company $14 of variable costs and $6 of fixed costs to produce product Z200 that sells for $30. A foreign buyer offers to purchase 3,000 units at $18 each. If the special offer is accepted and produced with unused capacity, net income will:

• decrease $6,000.

• increase $6,000.

• increase $12,000.

• increase $9,000.

It costs a company $14 of variable costs and $6 of fixed costs to produce product Z200. Product Z200 sells for $30. A buyer offers to purchase 3,000 units at $18 each. The seller will incur special shipping costs of $5 per unit. If the special offer is accepted and produced with unused capacity, net income will:

• increase $3,000

• increase $12,000

• decrease $12,000

• decrease $3,000

Jobart Company is currently operating at full capacity. It is considering buying a part from an outside supplier rather than making it in-house. If Jobart purchases the part, it can use the released productive capacity to generate additional income of $30,000 from producing a different product. When conducting incremental analysis in this make-or-buy decision, the company should:

• ignore the $30,000.

• add $30,000 to other costs in the “Make” column.

• add $30,000 to other costs in the “Buy” column.

• subtract $30,000 from the other costs in the “Make” column.

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

• manufacturing costs that will be saved.

• the purchase price of the units.

• the opportunity cost.

• All of the above.

Derek is performing incremental analysis in a make-or-buy decision for Item X. If Derek buys Item X, he can use its released productive capacity to produce Item Z. Derek will sell Item Z for $12,000 and incur production costs of $8,000. Derek's incremental analysis should include an opportunity cost of:

• $12,000

• $8,000

• $4,000

• $0

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

• incremental processing costs.

• variable processing costs.

• fixed processing costs.

• No correct answer is given.