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Exam 7: Incremental Analysis for Short-Term Decision Making

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Question 31

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A make-or-buy decision is the same as:

A) an outsourcing decision.
B) an opportunity cost.
C) a keep-or-drop decision.
D) a sunk cost.

E) C) and D)
F) All of the above

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Question 32

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Which of the following is irrelevant to the decision to eliminate an unprofitable segment?

A) The segment margin
B) Direct fixed costs
C) Common fixed costs
D) Segment revenue

E) None of the above
F) A) and D)

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Question 33

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Maple Inc. manufactures a product that costs $45 per unit plus $50,000 in fixed costs each month. Maple currently sells 5,000 of these units per month for $60 each. If Maple leased a machine for $30,000 a month, it could add features to the product that would allow it to sell for $75 each. It would cost an additional $10 per unit to add these features. How much would Maple's profit be affected if it leased the machine and added features to its product?

Which of the following is true of a firm that has reached the limit on its resources?

Underwood, Inc. manufactures two products. It currently has 2,000 hours of direct labor and 1,000 hours of machine time available per month. The table below lists the contribution margin, labor and machine time requirements, and demand for each product. What is the contribution margin per machine hour for Product B?

Which of the following steps in the managerial decision-making process involves differential analysis?

Which of the following costs is not relevant in a special-order decision?

Cotton Corp. currently makes 10,000 subcomponents a year in one of its factories. The unit costs to produce are: An outside supplier has offered to provide Cotton Corp with the 10,000 subcomponents at a $84.50 per unit price. Fixed overhead is not avoidable. What is the maximum price Cotton Corp should pay the outside supplier?

A relevant cost is:

___________ is/are excluded from the incremental analysis because they will be incurred regardless of whether or not the company accepts the special order.

Underwood, Inc. manufactures two products. It currently has 2,000 hours of direct labor and 1,000 hours of machine time available per month. The table below lists the contribution margin, labor and machine time requirements, and demand for each product. How much of each product should Underwood manufacture per month?

Olive Corp. currently makes 20,000 subcomponents a year in one of its factories. The unit costs to produce are: An outside supplier has offered to provide Olive Corp with the 20,000 subcomponents at a $36 per unit price. Fixed overhead is not avoidable. If Olive Corp rejects the outside offer, what will be the effect on short-term profits?

The accounting firm of Pie and Lowell is examining its client base to determine how profitable its regular clients are. Its analysis indicates that Chico, Inc. paid $116,000 in fees last year, but cost the firm $124,000 ($106,000 in billable labor, supplies, and copying, and $18,000 in allocated common fixed costs) . If Pie and Lowell dropped Chico, Inc. as a client, and all fixed costs are unavoidable, how would profit be affected?

Which of the following is an example of how a service firm might turn unused capacity into revenue using incremental analysis?

Center Company currently produces three products from a joint process. The joint process has total costs of $500,000 per month. All three products, A, B & C, are immediately saleable as they come out of the joint process. Alternatively, any of the products could continue on with additional processing and be sold as a more complete product. The following information is available: a. Should Product A be sold immediately or sold after processing further? How much will the decision affect profit? b. Should Product B be sold immediately or sold after processing further? How much will the decision affect profit? c. Should Product C be sold immediately or sold after processing further? How much will the decision affect profit?

Which of the following types of decisions involves deciding whether to accept or reject an order that is outside the scope of normal sales?

Which of the following is not a step in the managerial decision-making process?

Cotton Corp. currently makes 10,000 subcomponents a year in one of its factories. The unit costs to produce are: An outside supplier has offered to provide Cotton Corp with the 10,000 subcomponents at a $84.50 per unit price. Fixed overhead is not avoidable. If Cotton Corp accepts the outside offer, what will be the effect on short-term profits?

Crystal has received a special order for 2,000 units of its product. The product normally sells for $200 and has the following manufacturing costs: Crystal is currently operating at full capacity and cannot fill the order without harming normal production and sales. What minimum price should Crystal charge to earn an incremental profit of $50,000?

Managerial decision makers must often consider non-economic factors as well. For example, when considering whether to outsource to another country, in addition to considering the cost of that decision, managerial accountants with an emphasis on sustainability should consider the human capital impact as well. This represents sustainability within a: