CHAPTER 26INCREMENTAL ANALYSIS AND CAPITAL BUDGETING SUMMARY OF QUESTIONS BY STUDY OBJECTIVES AND BLOOM’S TAXONOMY Ite SO BT Ite SO BT Ite SO BT Ite SO BT Item SO BT True-False Statements 1. 2. 3. 4. 5. 6. 7. 8. 38. 39. 40. 41. 42. 43. 44. 45. 46. 47. 48. 49. 50. 51. 52. 53. 54. 55. 56. 57. 58. 59. 60. 61. 62. 63. 166. 167. 168. 1 2 2 2 2 2 3 3 1 1 1 1 2 2 2 2 2 2 2 2 2 2 2 3 3 3 3 3 3 3 3 3 3 4 2 3 4 K K C K K C C C K K K K K C K C C K K C C C C AN AN C C C C C C AP AP K AP AP AP 9. 10. 11. 12. 13. 14. 15. 16. 64. 65. 66. 67. 68. 69. 70. 71. 72. 73. 74. 75. 76. 77. 78. 79. 80. 81. 82. 83. 84. 85. 86. 87. 88. 89. 169. 170. 171. 3 4 4 4 5 5 6 6 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 5 5 5 5 5 5 5 5 5 5 5 4 5 6 C C K C C C C C K C C C C AN AN AN AN AN AN AN AN AN AP AN AN AN AN AP AN C AN AP C AN AP AN AN 17. 18. 19. 20. 21. 22. 23. 24. 90. 91. 92. 93. 94. 95. 96. 97. 98. 99. 100. 101. 102. 103. 104. 105. 106. 107. 108. 109. 110. 111. 112. 113. 114. 115. 172. 173. 174. 6 7 7 8 8 9 9 9 6 6 6 6 6 6 6 6 6 7 7 7 7 7 7 8 8 8 8 8 9 9 9 8 9 9 7 8 9 C C C C C C K K C C C C C C C AP AP AN AN C AN C AN AN AN C AN AN AP AP AP K K C AP AN AP 25. 9 26. 9 27. 9 28. 10 29. 10 30. 10 sg 31. 1 sg 32. 2 116. 117. 118. 119. 120. 121. 122. 123. 124. 125. 126. 127. 128. 129. 130. 131. 132. 133. 134. 135. 136. 137. 138. 139. 140. 141. 175. 176. 177. 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 10 9 9 10 10 10 10 10 10 10 9 10 10 K C C C C K K K AP C AP K K K C K AP K C AP C K AP AP AP AP AP AP AP AP AP AP AP AP AP AP AP sg sg 33. 3 34. 5 sg 35. 7 sg 36. 9 sg 37. 10 C K C K K Multiple Choice Questions 142. 143. 144. 145. 146. 147. 148. 149. 150. 151. 152. st 153. sg 154. st 155. sg 156. sg 157. sg 158. st 159. st 160. st 161. sg 162. sg 163. st 164. sg 165. 10 10 10 10 10 10 10 10 10 10 10 1 3 4 4 6 7 7 8 9 9 9 10 10 AP K C AN AN AP AP AP AP C C K AN K C K C K AP K K K K K Brief Exercises 26 - 2 sg st Test Bank for Accounting Principles, Ninth Edition This question also appears in the Study Guide. This question also appears in a self-test at the student companion website. SUMMARY OF QUESTIONS BY STUDY OBJECTIVES AND BLOOM’S TAXONOMY Exercises 178. 179. 180. 181. 182. 183. 206. 207. 208. 221. 222. 223. 3 3 3 3 3,4 4 1 2 3 6 4 10 AN AN E E AP E K K K K K K 224. 225. 4 9 K K 184. 185. 186. 187. 188. 189. 209. 210. 211. 4 4 5 5 5 6 4 5 6 AP AN E AP E AN K K K 190. 191. 192. 193. 194. 195. 212. 213. 214. 6 7 7 7 7 8 8 9 9 E AP E AP E E K K K 196. 8 197. 9 198. 9 199. 9 200. 9,10 201. 9,10 215. 216. 217. 9 9 10 AP AP AP AP E AP K K K 202. 203. 204. 205. 10 10 10 10 AP E E AP Completion Statements 218. 219. 220. 10 10 10 K K K Matching Short-Answer Essay 226. 227. 9 6 K K SUMMARY OF STUDY OBJECTIVES BY QUESTION TYPE Ite Typ Ite Typ Ite Typ Ite Typ Ite Typ Ite Typ Ite Typ 1. 31. 2. 3. 4. 7. 8. 9. 33. 10. 11. 12. 63. 64. 13. 14. 34. TF TF TF TF TF TF TF TF TF TF TF TF MC MC TF TF TF 38. 39. 5. 6. 32. 53. 54. 55. 56. 65. 66. 67. 68. 69. 79. 80. 81. MC MC TF TF TF MC MC MC MC MC MC MC MC MC MC MC MC 40. 41. 42. 43. 44. 57. 58. 59. 60. 70. 71. 72. 73. 74. 82. 83. 84. Study Objective 1 MC 153. MC MC 206. C Study Objective 2 MC 45. MC 48. MC 46. MC 49. MC 47. MC 50. Study Objective 3 MC 61. MC 178. MC 62. MC 179. MC 154. MC 180. MC 167. BE 181. Study Objective 4 MC 75. MC 156. MC 76. MC 168. MC 77. MC 169. MC 78. MC 182. MC 155. MC 183. Study Objective 5 MC 85. MC 88. MC 86. MC 89. MC 87. MC 170. MC MC MC Ex Ex Ex Ex MC BE BE Ex Ex MC MC BE 51. 52. 166. 182. 208. MC MC BE Ex C 207. C 184. 185. 209. 222. 224. 186. 187. 188. Ex Ex C SA SA Ex Ex Ex 210. C Incremental Analysis and Capital Budgeting 26 - 3 15. 16. 17. 18. 19. 35. 20. 21. 22. 23. 24. 25. 26. 27. 36. 28. 29. 30. 37. 132. 135. TF TF TF TF TF TF TF TF TF TF TF TF TF TF TF TF TF TF TF MC MC 90. 91. 92. 99. 100. 101. 105. 106. 110. 111. 112. 113. 114. 115. 116. 136. 137. 138. 139. 140. 141. MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC 93. 94. 95. 102. 103. 104. 107. 108. 117. 118. 119. 120. 121. 122. 123. 142. 143. 144. 145. 146. 147. Study Objective 6 MC 96. MC 157. MC 97. MC 171. MC 98. MC 189. Study Objective 7 MC 158. MC 191. MC 159. MC 192. MC 172. BE 193. Study Objective 8 MC 109. MC 173. MC 160. MC 195. Study Objective 9 MC 124. MC 131. MC 125. MC 133. MC 126. MC 134. MC 127. MC 161. MC 128. MC 162. MC 129. MC 163. MC 130. MC 174. Study Objective 10 MC 148. MC 165. MC 149. MC 176. MC 150. MC 177. MC 151. MC 200. MC 152. MC 201. MC 164. MC 202. BE = Brief Exercise Ex = Exercise MC BE Ex Ex Ex Ex BE Ex MC MC MC MC MC MC BE MC BE BE Ex EX Ex 190. 211. 221. 194. Ex C MA Ex 227. SA 196. 212. 175. 197. 198. 199. 200. 201. 213. 203. 204. 205. 217. 218. 219. Ex C BE Ex Ex Ex Ex Ex C Ex Ex Ex C C C 214. 215. 216. 225. 226. C C C SA SA 220. 223. C SA Note: TF = True-False MC = Multiple Choice MA = Matching C = Completion SA = Short-Answer CHAPTER STUDY OBJECTIVES 1. Identify the steps in management's decision-making process. Management's decisionmaking process consists of (a) identifying the problem or opportunity, (b) assigning responsibility for the decision, (c) determining possible courses of action, (d) developing data relevant to each course of action, (e) making the decision, and (f) reviewing the results of the decision. 2. Describe the concept of incremental analysis. Incremental analysis identifies financial data that change under alternative courses of action. These data are relevant to the decision because they will vary in the future among the possible alternatives. 3. Identify the relevant costs in accepting an order at a special price. The relevant information in accepting an order at a special price is the difference between the variable manufacturing costs to produce the special order and expected revenues. 8. The cash payback technique identifies the time period to recover the cost of the investment. and (c) opportunity costs.4 Test Bank for Accounting Principles. The IRR decision rule is: Accept the project when the internal rate of return is equal to or greater than the required rate of return. AACSB: None. Bloom: K. 6. 9. the relevant costs are (a) the variable manufacturing costs that will be saved. Determine which products to make and sell when resources are limited. Also. The decision rule for whether to sell or process materials further is: Process further as long as the incremental revenue from processing exceeds the incremental processing costs. The shorter the payback period. Under the internal rate of return method. find the interest yield of the potential investment. 10. When a company has limited resources. if any. IMA: Strategic Planning . (b) the purchase price. The factors to consider in determining whether equipment should be retained or replaced are the effects on variable costs and the cost of the new equipment. AICPA PC: Problem Solving. AACSB: None. In a make-or-buy decision. compare the present value of future net cash flows with the capital investment to determine net present value. Distinguish between the net present value and internal rate of return methods. In making decisions. management ordinarily considers both financial and nonfinancial information. Identify the relevant costs in a make-or-buy decision. Bloom: K. The annual rate of return is obtained by dividing expected annual net income by the average investment.26 . The formula is: Cost of capital expenditure divided by estimated net annual cash flows equals cash payback period. Difficulty: Easy. Min: 1. AICPA FN: Decision Modeling. An important step in management's decision-making process is to determine and evaluate possible courses of action. The higher the rate of return. the more attractive the investment. Reject the project when the internal rate of return is less than the required rate. any disposal value of the existing asset must be considered. produced by the segment and the disposition of the segment's fixed expenses. Under the net present value method. Ans: T. TRUE-FALSE STATEMENTS 1. Identify the factors to consider in retaining or replacing equipment. 5. AICPA BB: Strategic/Critical Thinking. Reject the investment if net present value is negative. determine the contribution margin. Explain the relevant factors in whether to eliminate an unprofitable segment. AICPA PC: Problem Solving. Then multiply this amount by the units of limited resource to determine which product maximizes net income. Ninth Edition 4. the more attractive the investment. SO: 2. Difficulty: Easy. The NPV decision rule is: Accept the project if net present value is zero or positive. 7. SO: 1. In deciding whether to eliminate an unprofitable segment. AICPA BB: Strategic/Critical Thinking. Contrast annual rate of return and cash payback in capital budgeting. find the contribution margin per unit of limited resource. Min: 1. IMA: Strategic Planning 2. Ans: T. AICPA FN: Decision Modeling. Give the decision rule for whether to sell or process materials further. SO: 3. AICPA BB: Strategic/Critical Thinking. SO: 2. AICPA PC: Problem Solving. Bloom: K. SO: 4. AICPA FN: Decision Modeling. AICPA BB: Strategic/Critical Thinking. Ans: F. AICPA PC: Problem Solving. AACSB: None. SO: 2. AICPA FN: Decision Modeling. An opportunity cost is the potential benefit obtained by using resources in an alternative course of action. AICPA FN: Measurement. AACSB: None. 26 .Incremental Analysis and Capital Budgeting 3. Bloom: K. AICPA FN: Measurement. AICPA BB: Strategic/Critical Thinking. AICPA BB: Industry/Sector Perspective. A decision whether to continue to make a product or buy it externally. Bloom: C. management should process further as long as the incremental revenues from additional processing exceed the incremental variable costs. Ans: T. In a sell or process further decision. Ans: F. A special one-time order should never be accepted if the unit sales price is less than the unit variable cost. AICPA PC: Problem Solving. Difficulty: Easy. AICPA BB: Strategic/Critical Thinking. AICPA BB: Strategic/Critical Thinking. IMA: Business Economics 12. it would 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. total variable costs will always change under alternative courses of action. AICPA PC: Problem Solving. SO: 4. Ans: T. IMA: Business Economics 9. Min: 1. IMA: Business Economics 13. AACSB: None. AICPA BB: Strategic/Critical Thinking. management should always make the decision to choose the lowest cost alternative. Difficulty: Easy. Min: 1. Min: 1. SO: 4. AICPA PC: Problem Solving. Difficulty: Easy. AICPA FN: Decision Modeling. Difficulty: Easy. Bloom: C. and total fixed costs will always remain constant. SO: 3. IMA: Decision Analysis 5. If an incremental make or buy analysis indicates that it is cheaper to buy rather than make an item. IMA: Business Economics 8. AACSB: None. Min: 1. AICPA PC: Problem Solving. Difficulty: Easy. AICPA PC: Interaction. Difficulty: Easy. Bloom: C. Min: 1. AACSB: None. Bloom: C. AICPA PC: Problem Solving. Min: 1. AACSB: None. AICPA FN: Decision Modeling. AICPA BB: Strategic/Critical Thinking. AICPA PC: Problem Solving. Difficulty: Easy. Ans: F. Accountants are mainly involved in developing nonfinancial information for management's consideration in choosing among alternatives. Difficulty: Easy. AICPA BB: Strategic/Critical Thinking. Difficulty: Easy. A company should never accept an order for its product at less than its regular sales price. SO: 3. Ans: F. AICPA PC: Problem Solving. AICPA BB: Strategic/Critical Thinking. Ans: F. AICPA FN: Measurement. Ans: T. If a company has excess capacity and present markets will not be affected. AICPA FN: Decision Modeling. AACSB: Analytic. Bloom: K. Bloom: C. SO: 2. Bloom: C. AICPA FN: Measurement. Min: 1. IMA: Decision Analysis 6.5 In incremental analysis. AACSB: None. SO: 5. Decision-making involves choosing among alternative courses of action. Difficulty: Easy. AICPA FN: Decision Modeling. Min: 1. Financial 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. IMA: Quantitative Methods 11. AICPA BB: Strategic/Critical Thinking. Ans: T. IMA: Decision Analysis 7. SO: 2. Difficulty: Easy. AACSB: None. Ans: F. Min: 1. IMA: Quantitative Methods 4. IMA: Business Economics . AACSB: None. Min: 1. AACSB: None. Bloom: C. Ans: F. depends on the external price and the amount of variable and fixed costs that can be eliminated assuming no alternative uses of resources. Bloom: C. AICPA PC: Problem Solving. IMA: Business Economics 10. Min: 1. AICPA FN: Decision Modeling. SO: 9. AACSB: None. IMA: Business Economics 20. Bloom: K. AICPA BB: Strategic/Critical Thinking. AICPA PC: Problem Solving. Min: 1. SO: 9. AICPA BB: Strategic/Critical Thinking. AICPA PC: Problem Solving. Capital budgeting decisions usually involve large investments and can have a significant impact on a company's future profitability. Difficulty: Easy. AICPA FN: Risk Analysis. Bloom: C. AICPA FN: Decision Modeling. Bloom: K. Bloom: C. IMA: Business Economics 19. Ans: T. A hurdle rate is the rate of return set by applying ideal standards. AICPA BB: Strategic/Critical Thinking. Min: 1. the book value of the old equipment can be considered a sunk cost. AICPA FN: Decision Modeling. AICPA PC: Problem Solving. AICPA FN: Risk Analysis. Min: 1. the salvage value of the old equipment is relevant in incremental analysis. AICPA FN: Risk Analysis. Bloom: C. IMA: Business Economics 21. AICPA PC: Problem Solving. AICPA FN: Measurement. AICPA FN: Decision Modeling. AICPA PC: Problem Solving. IMA: Business Economics 18. The annual rate of return technique requires dividing a project's annual cash inflows by the economic life of the project. Min: 1. SO: 8. In a decision concerning replacing old equipment with new equipment. AACSB: None. Difficulty: Easy. Min: 1. SO: 7. AACSB: None. AICPA FN: Risk Analysis. Min: 1. Ans: T. SO: 6. Ans: F. Difficulty: Easy. AICPA PC: Problem Solving. Difficulty: Easy. Bloom: C. Bloom: C. AICPA FN: Risk Analysis. Ans: T. it is generally more profitable to produce and sell the product with the highest unit contribution margin. Difficulty: Easy. Difficulty: Easy. Ans: F. In a decision to retain or replace old equipment. Ans: F. It is better not to replace old equipment if it is not fully depreciated. AACSB: None. The elimination of an unprofitable product line may adversely affect the remaining product lines. Difficulty: Easy. AICPA PC: Problem Solving. Ans: T. AACSB: None. SO: 7.6 14. Min: 1. IMA: Business Economics . IMA: Business Economics 16. Ans: T. AACSB: None. AICPA PC: Problem Solving. SO: 6. AICPA BB: Strategic/Critical Thinking. IMA: Business Economics 24. Bloom: C. Difficulty: Easy. Ans: T. AICPA BB: Resource Management. AICPA PC: Problem Solving. Test Bank for Accounting Principles. Min: 1. SO: 5. AACSB: None. Min: 1. Bloom: C. Ans: F. AICPA BB: Resource Management. Ans: F.26 . Min: 1. AICPA BB: Strategic/Critical Thinking. If a company has only a certain number of machine hours available for production. Ninth Edition It is always better to sell now rather than process further because of the time value of money. AICPA FN: Measurement. From a quantitative standpoint. AICPA BB: Strategic/Critical Thinking. Bloom: C. Difficulty: Easy. AACSB: None. AACSB: None. it should manufacture those products which have the highest contribution margin per unit of limited resource. AICPA FN: Measurement. Min: 1. When a company has limited resources to manufacture products. Bloom: C. SO: 6. AICPA BB: Strategic/Critical Thinking. AICPA BB: Strategic/Critical Thinking. IMA: Investment Decisions 23. AICPA PC: Problem Solving. SO: 9. AICPA PC: Problem Solving. AACSB: None. Difficulty: Easy. AACSB: None. Difficulty: Easy. IMA: Business Economics 17. SO: 8. IMA: Business Economics 22. AICPA BB: Strategic/Critical Thinking. a segment should be eliminated if its contribution margin is less than the fixed costs that can be eliminated. IMA: Business Economics 15. AICPA BB: Resource Management. SO: 9. Bloom: C. SO: 10. AACSB: None. IMA: Investment Decisions 31. AICPA FN: Risk Analysis. IMA: Business Economics 29. AICPA BB: Resource Management. AICPA BB: Resource Management. Ans: F. Difficulty: Easy. AICPA BB: Resource Management. Difficulty: Easy. SO: 3. AICPA PC: Problem Solving. Ans: F. Difficulty: Easy. a net present value of zero indicates that the project would be acceptable. AACSB: None. Ans: T. AICPA FN: Risk Analysis. AICPA FN: Decision Modeling. SO: 9. AACSB: None. AICPA PC: Problem Solving. AICPA BB: Strategic/Critical Thinking. Min: 1. IMA: Business Economics 26. AICPA BB: Resource Management. Difficulty: Easy. IMA: Business Economics 35. Difficulty: Easy. Bloom: K. management should recognize that net income could decrease by eliminating the unprofitable segment. Bloom: C. AACSB: None. AICPA BB: Resource Management. Min: 1. AICPA FN: Risk Analysis. SO: 7. AICPA FN: Decision Modeling. IMA: Decision Analysis 32. The cash payback capital budgeting technique is a quick way to calculate a project's net present value. Min: 1. AICPA FN: Risk Analysis. Ans: F. AICPA FN: Risk Analysis. Min: 1. Ans: T. Ans: T. Using the net present value method. IMA: Business Economics . SO: 9. Min: 1. Bloom: K. In deciding on the future status of an unprofitable segment. Bloom: K. Bloom: C. the incremental costs of a special order will likely include fixed manufacturing costs. AICPA PC: Problem Solving. Difficulty: Easy. AICPA PC: Problem Solving. Difficulty: Easy. If a company is operating at full capacity. AACSB: None. AICPA PC: Problem Solving. Min: 1. SO: 5. IMA: Business Economics 30. AICPA BB: Strategic/Critical Thinking. Ans: T. The interest rate yielded by a project is a rate that will cause the present value of the proposed capital expenditure to equal the present value of the expected annual cash inflows. IMA: Business Economics 27. SO: 10. Difficulty: Easy. AICPA PC: Problem Solving. Ans: T. The cash payback method is frequently used as a screening tool but it does not take into consideration the profitability of a project. Min: 1. Min: 1. Accounting contributes to management's decision-making process through internal reports that review the actual impact of the decision. Difficulty: Easy. AICPA PC: Problem Solving. The basic decision rule in a sell or process further decision is: sell without further processing as long as the incremental revenue from processing exceeds the incremental processing costs. AACSB: None. AICPA PC: Problem Solving. AICPA PC: Problem Solving. IMA: Decision Analysis 33. Ans: F. AICPA FN: Risk Analysis. SO: 2. SO: 1. Bloom: K. AICPA PC: Problem Solving. Bloom: C. Min: 1. The process used to identify the financial data that change under alternative courses of action is called allocation of limited resources. AICPA BB: Resource Management. IMA: Business Economics 34. AACSB: None. Min: 1. Bloom: K. Difficulty: Easy. AACSB: None. Ans: F.Incremental Analysis and Capital Budgeting 25. Min: 1. Ans: T. AICPA BB: Resource Management. AICPA FN: Risk Analysis. AICPA FN: Decision Modeling. The net present value method can only be used in capital budgeting if the expected cash flows from a project are an equal amount each year. AICPA FN: Risk Analysis. AICPA BB: Resource Management. AACSB: None. IMA: Business Economics 28. Bloom: C. Bloom: C. SO: 10. AICPA PC: Problem Solving. Difficulty: Easy. AACSB: None.7 A major advantage of the annual rate of return technique is that it considers the time value of money. 26 . AACSB: None. 21. Bloom: K. 28. factory workers. 33. assign responsibility for the decision. F MULTIPLE CHOICE QUESTIONS 38. IMA: Decision Analysis 40.8 36. AICPA FN: Decision Modeling. department heads. 32. Evaluate possible courses of action Make decision. T T F F T F 7. 27. Difficulty: Easy. Bloom: K. 6. Ans: B. AICPA BB: Industry/Sector Perspective. SO: 1. AACSB: None. 20. Min: 1. SO: 9. SO: 10. AICPA PC: Problem Solving. 10. T F T F T T 37. F F T T F T 19. 9. 11. d. AICPA FN: Risk Analysis. 29. Difficulty: Easy. Identify the problem Determine possible courses of action. Assign responsibility for the decision Identify the problem. AICPA BB: Resource Management. decide which actions that management should consider. Ans: B.26 . AACSB: None. T F F T T F 13. 18. 24. c. Item Ans. AICPA BB: Strategic/Critical Thinking. 35. AICPA BB: Industry/Sector Perspective. IMA: Decision Analysis 37. Internal reports that review the actual impact of decisions are prepared by a. Difficulty: Easy. Item Ans. 26. 4. AACSB: None. c. the controller. Item Ans. Min: 1. Difficulty: Easy. Item Ans. d. AICPA BB: Resource Management. The discounted cash flow technique considers estimated total cash inflows from the investment but not the time value of money. Bloom: K. Min: 1. Difficulty: Easy. AACSB: None. c. AICPA FN: Reporting. AICPA FN: Decision Modeling. 3. b. Ans: F. SO: 1. IMA: Decision Analysis 39. 2. 36. IMA: Performance Measurement . T T F T F F 25. 14. 15. Min: 1. management accountants. 17. b. AICPA PC: Problem Solving. d. Assign responsibility for decision Determine possible courses of action. Which of the following stages of the management decision-making process is improperly sequenced? a. Ans: T. b. Ans: C. determine the amount of money that should be spent on a project. Bloom: K. SO: 1. Min: 1. 8. AICPA PC: Problem Solving. AICPA FN: Risk Analysis. IMA: Decision Analysis Answers to True-False Statements Item Ans. Item Ans. 12. provide relevant revenue and cost data about each course of action. 34. AICPA PC: Problem Solving. 5. 1. Bloom: K. F F T T F T 31. 30. 22. Ninth Edition The annual rate of return is computed by dividing expected annual net income by average investment. AICPA PC: Problem Solving. A major accounting contribution to the managerial decision-making process in evaluating possible courses of action is to a. 23. Test Bank for Accounting Principles. AACSB: None. 16. Item Ans. AICPA FN: Decision Modeling. Difficulty: Easy. The process of evaluating financial data that change under alternative courses of action is called a. double entry analysis. Ans: B. Min: 1. c. d. c. both costs and revenues may be analyzed. Difficulty: Easy. AICPA PC: Problem Solving. AICPA FN: Risk Analysis. IMA: Decision Analysis .9 Which of the following steps in the management decision-making process does not generally involve the managerial accountant? a. AICPA FN: Decision Modeling. Bloom: C. c. AICPA BB: Resource Management. the corporate profile in the community. Determine possible courses of action b. SO: 2. IMA: Decision Analysis 43. Bloom: K. IMA: Decision Analysis 45. Nonfinancial information that management might evaluate in making a decision would not include a. derivative analysis. Min: 1. Ans: A. b. b. AACSB: None. contribution margin analysis. Ans: C. None of these Ans: B. Min: 1. AICPA BB: Industry/Sector Perspective. d. b. gross profit analysis. both costs and revenues that stay the same between alternate courses of action will be analyzed. AICPA BB: Industry/Sector Perspective. SO: 2. b. SO: 2. IMA: Business Economics 44.Incremental Analysis and Capital Budgeting 41. b. d. AICPA PC: Problem Solving. Difficulty: Easy. Difficulty: Easy. only costs are analyzed. contribution margin. Bloom: K. AICPA PC: Problem Solving. d. AICPA PC: Problem Solving. differential analysis. Difficulty: Easy. SO: 2. AACSB: None. AICPA PC: Problem Solving. 26 . AICPA FN: Decision Modeling. Bloom: C. AICPA PC: Problem Solving. AACSB: None. a. Ans: C. d. Min: 1. AICPA FN: Decision Modeling. the environment. IMA: Decision Analysis 42. AICPA FN: Decision Modeling. Bloom: C. Ans: B. Incremental analysis is synonymous with a. Min: 1. cost-benefit analysis. AICPA BB: Resource Management. Difficulty: Easy. AACSB: None. AACSB: None. Prepare internal reports that review the impact of decisions d. only revenues are analyzed. IMA: Decision Analysis 46. AICPA BB: Industry/Sector Perspective. Min: 1. Make the appropriate decision based on relevant data c. AICPA BB: Resource Management. difficult analysis. Incremental analysis is most useful a. AACSB: None. In incremental analysis. as a replacement technique for variance analysis. SO: 1. c. c. employee turnover. SO: 2. incremental analysis. in evaluating the master budget. in choosing between the net present value method and the internal rate of return method. in developing relevant information for management decisions. Bloom: K. 2 c. 3. b. analysis of manufacturing variances. Min: 1. Incremental analysis would be appropriate for a. all of these. market analysts. 1 b. engineers. Variable costs will always change between alternatives. AICPA FN: Decision Modeling. Min: 1. d. AICPA FN: Decision Modeling. AICPA FN: Decision Modeling. AICPA FN: Decision Modeling. 2. AACSB: None. Difficulty: Easy. Bloom: K.10 Test Bank for Accounting Principles. SO: 2. a make or buy decision. IMA: Information Management 48. Ans: D. Which of the following is a true statement about cost behaviors in incremental analysis? 1. AICPA PC: Problem Solving. SO: 2. an allocation of limited resource decision. Difficulty: Easy. Bloom: C. elimination of an unprofitable segment. c. Incremental analysis is the same as CVP analysis. AICPA BB: Resource Management. 3 d. Incremental analysis is useful in making decisions. Bloom: C. Fixed costs will not change between alternatives. SO: 2. AICPA FN: Decision Modeling. AICPA BB: Resource Management. a sell or process further decision. a. IMA: Decision Analysis 50. IMA: Decision Analysis . d. Min: 1. SO: 2. Ans: D. Incremental analysis focuses on decisions that involve a choice among alternative courses of action. AICPA BB: Resource Management. b. Ninth Edition 47. AACSB: None. AICPA PC: Problem Solving. c.26 . Difficulty: Easy. 2 and 3 Ans: B. Which of the following is not a true statement? a. SO: 2. Fixed costs may change between alternatives. Incremental analysis might also be referred to as differential analysis. Bloom: C. AACSB: None. IMA: Decision Analysis 49. AICPA BB: Resource Management. AICPA PC: Problem Solving. Difficulty: Easy. d. AACSB: None. c. Incremental analysis would not be appropriate for a. Ans: D. b. AICPA PC: Problem Solving. accountants. b. Difficulty: Easy. acceptance of an order at a special price. AICPA BB: Resource Management. all of these. Bloom: K. AICPA PC: Problem Solving. c. Min: 1. Min: 1. The source of data to serve as inputs in incremental analysis is generated by a. IMA: Decision Analysis 51. d. a retain or replace equipment decision. Ans: B. AACSB: None. Incremental Analysis and Capital Budgeting 52.000 increase Ans: A. the order will likely be rejected. Fixed manufacturing costs were $240. c. the order will likely be accepted.000 increase b. In incremental analysis.000 $120. Revenues c. costs are not relevant if they change between alternatives. d. Garner would incur special shipping costs of $1 per scale if the order were accepted.000.000 Which of the following are relevant in choosing between the alternatives? a. only fixed costs are relevant.11 Ans: A. a. The company has a one-time opportunity to sell an additional 1. IMA: Decision Analysis 54.000. A company is considering the following alternatives: Alternative 1 Alternative 2 Revenues $120.000 units at $70 each in a foreign market which would not affect its present sales. AICPA FN: Decision Modeling. Min: 1. b. IMA: Business Economics . AICPA BB: Resource Management. b. IMA: Decision Analysis 56.000. Baden Company manufactures a product with a unit variable cost of $50 and a unit sales price of $88. If the special order is accepted.000 when 10. c.000 35. AICPA BB: Resource Management.000 scales. Difficulty: Easy. all costs are relevant if they change between alternatives. $30. Bloom: C. Min: 1.000 70. c. Variable costs and fixed costs 26 . AACSB: Analytic. d. $6. AICPA PC: Problem Solving. IMA: Decision Analysis 55. Bloom: C. $4.000 Fixed costs 35. Bloom: AN. SO: 3. Income would increase by $4. AICPA PC: Problem Solving. Ans: D. AICPA FN: Decision Modeling. AACSB: None. b.000 decrease c. AICPA FN: Decision Modeling. SO: 3. AACSB: None. Min: 1. Min: 5. Income would increase by $70. AICPA BB: Resource Management. Difficulty: Medium. Bloom: AN. IMA: Decision Analysis 53. Difficulty: Easy. AACSB: Analytic. AACSB: None. AICPA BB: Resource Management. fixed costs are not relevant. If a plant is operating at full capacity and receives a one-time opportunity to accept an order at a special price below its usual price. Difficulty: Easy. SO: 2. AICPA FN: Decision Modeling.000 Variable costs 60. SO: 3. AICPA FN: Decision Modeling.000. d.000 decrease d. Income would decrease by $4. Ans: D. only variable costs are relevant. then a.000 units were produced and sold. Income would increase by $20. Fixed costs d. SO: 3. If the company has sufficient capacity to produce the additional units. A foreign wholesaler offers to purchase 2.000 scales at $15 each. Bloom: C. what will be the effect on net income? a. Garner has sufficient unused capacity to produce the 2. Min: 5. It costs Garner Company $12 of variable and $5 of fixed costs to produce one bathroom scale which normally sells for $35. AICPA PC: Problem Solving. Difficulty: Medium. Variable costs b. Ans: B. only variable costs are relevant. acceptance of the special order would affect net income as follows: a. AICPA PC: Problem Solving. $4. AICPA PC: Problem Solving. AICPA BB: Resource Management. Difficulty: Easy. $3. an increase in fixed costs. Difficulty: Easy. Ans: D. Ninth Edition 57. d. Under what situations should the company accept a special order for less than the current selling price? a. AICPA BB: Resource Management. AICPA FN: Decision Modeling. AICPA BB: Resource Management. has excess capacity. Martin Company incurred the following costs for 50. SO: 3. b. SO: 3. c. Ans: A. Min: 1. c. AICPA FN: Decision Modeling. AICPA BB: Resource Management. d. Net income will not be affected. Difficulty: Easy. Bloom: C. Which of the following is true if a company can accept a special order without affecting its regular sales and is within plant capacity? a. Net income will increase if the special sales price per unit exceeds the unit variable costs. AICPA PC: Problem Solving.12 Test Bank for Accounting Principles.10 b. There is sufficient capacity to fill the order without jeopardizing regular sales. lost sales should be considered in the incremental analysis.000 units: Variable costs $180.40 Ans: B.000 Martin has received a special order from a foreign company for 5. Filling the order will require spending an additional $8. AICPA PC: Problem Solving. Inc. no increase in fixed costs. When additional fixed costs must be incurred to accommodate the order c.30 c. the order will only be accepted if the plant is below capacity. an increase in variable and fixed costs per unit. If a company must expand capacity to accept a special order. IMA: Business Economics 61. IMA: Business Economics 58.26 . When incremental revenues exceed incremental costs Ans: D. Min: 1. Net income will decrease. AICPA BB: Resource Management. SO: 3. it is likely that there will be a. AACSB: None. b.000 Fixed costs 240. Bloom: C. Bloom: C. b. Ans: B. an increase in unit variable costs. When the company thinks it can use the cheaper materials without the customer's knowledge d. Min: 1. Min: 1. AACSB: None. If a company anticipates that other sales will be affected by the acceptance of a special order.60 d. $5. d. SO: 3. Difficulty: Medium. AICPA FN: Decision Modeling. Additional fixed costs will probably be incurred. what should the unit sales price be? a. $8. IMA: Business Economics . Never b. AICPA PC: Problem Solving. Difficulty: Easy. Min: 5. SO: 3. If Martin wants to break even on the order. the order should not be accepted.500 for shipping. AICPA PC: Problem Solving. AICPA FN: Decision Modeling. IMA: Business Economics 60. AICPA FN: Decision Modeling. AACSB: Analytic. AACSB: None. IMA: Business Economics 59. AICPA PC: Problem Solving.000 units. Bloom: AP. lost sales should not be considered in the incremental analysis. $10. then a. Miley. c. Bloom: C. AICPA BB: Resource Management. AACSB: None. 000 26 .70 c. d. Bloom: C. SO: 3. budgeting. Make or buy decision b. Filling the order will require spending an additional $8. Bloom: C. $3. Drop a product line c. Ans: D. AACSB: None. Min: 1. AICPA BB: Resource Management. b.90 Ans: D. none of these. The opportunity cost of an alternate course of action that is relevant to a make-or-buy decision is a. Martin Company incurred the following costs for 50. is the potential benefit that may be obtained by following an alternative course of action. Accept a special order d. AICPA PC: Problem Solving. AACSB: None. Min: 5. added to the "Buy" costs. $11. Min: 1. Min: 1. AICPA FN: Decision Modeling. If Martin wants to earn $8. SO: 4. c. Bloom: AP. Difficulty: Easy. AICPA FN: Decision Modeling.000 Fixed costs 240. AICPA PC: Problem Solving. is the cost of a new product proposal. AACSB: Analytic. Additional processing decision Ans: A. added to the "Make" costs. Ans: C.Incremental Analysis and Capital Budgeting 62. Difficulty: Easy.20 d. Opportunity cost must be considered in decisions involving a. AICPA BB: Resource Management. d. Ans: B. SO: 4. Difficulty: Easy. SO: 4. resources that have alternative uses. c. is classified as manufacturing overhead. AACSB: None. An opportunity cost a.000 units: Variable costs $180. AICPA BB: Resource Management. Bloom: K. financial accounting. IMA: Business Economics 64. AICPA PC: Problem Solving.500 for shipping.000 units. IMA: Business Economics . IMA: Business Economics 66. CVP analysis. Bloom: K. AICPA BB: Resource Management.000 on the order. AICPA PC: Problem Solving. b. $5.30 b. d. Difficulty: Easy. should be initially recorded as an asset.13 Martin has received a special order from a foreign company for 5. c. IMA: Business Economics 65. b. There is sufficient capacity to fill the order without jeopardizing regular sales. $6. subtracted from the "Make" costs. Which decision will involve no incremental revenues? a. AACSB: None. Min: 1. what should the unit price be? a. IMA: Business Economics 63. Difficulty: Medium. AICPA PC: Problem Solving. AICPA FN: Decision Modeling. AICPA FN: Decision Modeling. SO: 4. AICPA FN: Decision Modeling. AICPA BB: Resource Management. 000 c. SO: 4. AICPA BB: Resource Management. d. b. Tex's Manufacturing Company can make 100 units of a necessary component part with the following costs: Direct Materials Direct Labor Variable Overhead Fixed Overhead $60. Min: 5. At what external price for the 100 units is the company indifferent between making or buying? a. Buy and save $5. Bloom: C. Min: 1. Buy and save $15. a potential benefit.000 c. Tex's Manufacturing Company can make 100 units of a necessary component part with the following costs: Direct Materials Direct Labor Variable Overhead Fixed Overhead $60. a standard cost. IMA: Business Economics 68. quality control specifications may not be met. AICPA BB: Resource Management. SO: 4. $115. Difficulty: Medium. Difficulty: Easy. Opportunity cost is usually a. IMA: Business Economics 69.000 d.000 10. AICPA FN: Decision Modeling. AICPA PC: Problem Solving.000 20. Make and save $5. AICPA FN: Decision Modeling. Bloom: AN. a sunk cost. Difficulty: Easy.000 10. $100. $15. Ninth Edition 67. IMA: Cost Management . AICPA BB: Resource Management. Ans: B.000 and only $5. what is the correct make-or-buy decision? a. Difficulty: Medium. AACSB: None.000 Ans: C. Bloom: C. Bloom: AN. c.000 If Tex's Manufacturing Company purchases the component externally. AICPA FN: Decision Modeling. Min: 1. d. Make and save $15. Ans: C. $120. Min: 5. AICPA PC: Problem Solving. AICPA PC: Problem Solving.000 Ans: A.000 of the fixed costs can be avoided. profitable product lines may be dropped. $85. AACSB: None. SO: 4. AICPA BB: Resource Management.000 If Tex's Manufacturing Company can purchase the component externally for $110. AICPA PC: Problem Solving. Each of the following is a disadvantage of buying rather than making a component of a company's product except that a. AICPA FN: Decision Modeling. the outside supplier could increase prices significantly in the future.000 of the fixed costs can be avoided.000 30.000 b.000 20. b.000 30. included as part of cost of goods sold. IMA: Cost Management 70. SO: 4. the supplier may not deliver on time.000 d.14 Test Bank for Accounting Principles. AACSB: Analytic. AACSB: Analytic. c.000 b.26 . 000 d.000 units of a necessary component with the following costs: Direct Materials Direct Labor Variable Overhead Fixed Overhead $72. An analysis shows that at this external price. $51.000 None of Ruth Company's fixed overhead costs can be reduced. AACSB: Analytic. 26 .Incremental Analysis and Capital Budgeting 71. If cost minimization is the major consideration and the company would prefer to buy the components. AICPA FN: Decision Modeling.000 units externally for $117. AICPA BB: Resource Management.000 16. AICPA PC: Problem Solving. $18. Bloom: AN. AICPA PC: Problem Solving. AACSB: Analytic.000 ? The company can purchase the 1.000 units externally? a. AICPA BB: Resource Management.000 d. AICPA FN: Decision Modeling. $44. Cannot be determined.000 b.000 Ruth Company could avoid $3. SO: 4.000 Ans: B.000 b. but another product could be made that would increase profit contribution by $8. What are the fixed overhead costs of making the component? a. Min: 5.000 if the units are purchased externally. Ruth Company produces 1.15 Bell's Shop can make 1.000 units externally? a. $52.000 16.000 c.000 Ans: D.000.000 7. AICPA PC: Problem Solving. Difficulty: Medium. IMA: Cost Management . The avoidable fixed costs are $6.000 7.000 units of a necessary component with the following costs: Direct Materials Direct Labor Variable Overhead Fixed Overhead $24. Difficulty: Medium. IMA: Cost Management 72. Ans: A. SO: 4.000 c.000 b. Ruth Company produces 1.000 18. Min: 5. Min: 5.000 if the components were acquired externally.000 c. $12.000 units of a necessary component with the following costs: Direct Materials Direct Labor Variable Overhead Fixed Overhead $24. IMA: Cost Management 73. AICPA FN: Decision Modeling. AICPA BB: Resource Management.000 d. If cost minimization is the major consideration and the company would prefer to buy the components. what is the maximum external price that Ruth Company would accept to acquire the 1. $24. $48. Bloom: AN.000 in fixed overhead costs if it acquires the components externally.000 4. what is the maximum external price that Ruth Company would be willing to accept to acquire the 1. $47. $55. Bloom: AN.000 4. the company is indifferent between making or buying the part. SO: 4. $43. $48. Difficulty: Medium. AACSB: Analytic.000 9. 000 Ans: D.000.000 Fixed Overhead 22. If cost minimization is the major consideration and the company would prefer to buy the 60.000 Ans: C.000 If Fornelli. An increase of $17. The CDs have the following costs: Direct Materials $11.000 c. Min: 3. AICPA FN: Decision Modeling. AICPA BB: Resource Management.000 d. Fornelli. Inc. Inc. what is the correct make-or-buy decision? a. AICPA FN: Decision Modeling. AACSB: Analytic.000 Direct Labor 13. $32. $36. can produce 100 units of a component part with the following costs: Direct Materials $30.000 c. An increase of $5.000 Fixed Overhead 7. Bloom: AN. AICPA BB: Resource Management. AICPA PC: Problem Solving. Difficulty: Medium. can purchase the units externally for $80. Make and save $5. AACSB: Analytic.000 b.26 . Inc.000 Variable Overhead 3.000 Fixed Overhead 22.000 Direct Labor 15. Buy and save $13.000 c.000 units externally. can purchase the component part externally for $88.000 and only $8. Bloom: AN. $29. Difficulty: Medium.000 b.000 b. AICPA PC: Problem Solving.000 CDs on which to record music. IMA: Cost Management 76. Min: 5. IMA: Cost Management .16 Test Bank for Accounting Principles. SO: 4. Crigui Music produces 60.000 Variable Overhead 32. IMA: Cost Management 75.000 d.000 If Fornelli. Inc.000 Crigui could avoid $4. Bloom: AN. Ninth Edition 74. AACSB: Analytic. Fornelli. Min: 5. $33. SO: 4. SO: 4. A decrease of $22.000 of the fixed costs can be avoided. Buy and save $1. by what amount will its total costs change? a. AICPA FN: Decision Modeling.000 in fixed overhead costs if it acquires the CDs externally. can produce 100 units of a component part with the following costs: Direct Materials $30.000 Variable Overhead 32. An increase of $80. Difficulty: Medium. Make and save $1. AICPA BB: Resource Management.000 Direct Labor 13.000 d.000 Ans: B. what is the maximum external price that Crigui would expect to pay for the units? a. AICPA PC: Problem Solving. Min: 5. Min: 5.000 Direct Labor 15. c. AICPA FN: Decision Modeling.00 13.00 per batch d. Difficulty: Medium. $31.00 per batch Ans: B. Process further. Tasty Bites produces corn chips. AICPA PC: Problem Solving. AACSB: Analytic. AICPA FN: Decision Modeling. The CDs have the following costs: Direct Materials $11.000.500.Incremental Analysis and Capital Budgeting 77. and $7.000.500 and then be sold for $7.00 per batch c. AICPA PC: Problem Solving. the company will be better off by $1 per unit. $4.000 c. Ans: A. Min: 5. and $7. IMA: Cost Management 78. Difficulty: Medium. Sell before assembly. SO: 5. SO: 5.500. AACSB: Analytic.000 CDs on which to record music. $2. $17.000 b. b. or processed further incurring additional costs of $1. AICPA PC: Problem Solving.000.00 14. $6. The cost to assemble the product is estimated at $21 per unit and the company believes the market would support a price of $85 on the assembled unit. Process further. SO: 4.500 and $7.000 d. the company will be better off by $14 per unit. Difficulty: Medium.000 d.000. What decision should NF Toy make? a.000 to produce Product 89.000. $1. $4. $1. NF Toy Company is unsure of whether to sell its product assembled or unassembled. AICPA PC: Problem Solving. Min: 5. IMA: Cost Management . the company will be better off by $29 per unit. The cost of one batch is below: Direct materials Direct labor Variable overhead Fixed overhead $18. Which amounts are relevant to the decision about Product 89? a. $40. The unit cost of the unassembled product is $30 and NF Toy would sell it for $65. AICPA BB: Resource Management. $5. d.00 per batch b. Bloom: AN.000 None of Crigui’s fixed overhead costs can be reduced. $5. $5. 26 .000 b. If cost minimization is the major consideration and the company would prefer to buy the CDs. $33. AACSB: Analytic. what is the maximum external price that Crigui would be willing to accept to acquire the 60. $1.000 Ans: C. $36. SO: 4.00 An outside supplier has offered to produce the corn chips for $25 per batch. $4. the company will be better off by $20 per unit. Difficulty: Medium. How much will Tasty Bites save if it accepts the offer? a.000 if the CDs were acquired externally.000 Variable Overhead 3. AACSB: Analytic. IMA: Cost Management 79. AICPA FN: Decision Modeling. AICPA FN: Decision Modeling. Sell before assembly. and $7. AICPA BB: Resource Management.00 11.17 Crigui Music produces 60. AICPA BB: Resource Management.000 units externally? a. Moreland Clean Company spent $4. Bloom: AP. AICPA BB: Resource Management. IMA: Cost Management 80.000.000.000 Ans: B. but another product could be made that would increase profit contribution by $4.000. Bloom: AN.000 c. which can be sold as is for $5.000 Fixed Overhead 7. Bloom: AN. $32. 26 - 18 Test Bank for Accounting Principles, Ninth Edition 81. Pratt Company has old inventory on hand that cost $12,000. Its scrap value is $16,000. The inventory could be sold for $40,000 if manufactured further at an additional cost of $12,000. What should Pratt do? a. Sell the inventory for $16,000 scrap value b. Dispose of the inventory to avoid any further decline in value c. Hold the inventory at its $12,000 cost d. Manufacture further and sell it for $40,000 Ans: D, SO: 5, Bloom: AN, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Cost Management 82. New Age Makeup produces face cream. Each bottle of face cream costs $10 to produce and can be sold for $13. The bottles can be sold as is, or processed further into sunscreen at a cost of $14 each. New Age Makeup could sell the sunscreen bottles for $23 each. a. Face cream must be processed further because its profit is $9 each. b. Face cream must not be processed further because costs increase more than revenue. c. Face cream must not be processed further because it decreases profit by $1 each. d. Face cream must be processed further because it increases profit by $3 each. Ans: B, SO: 5, Bloom: AN, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Cost Management 83. Janssen Company has old inventory on hand that cost $18,000. Its scrap value is $24,000. The inventory could be sold for $60,000 if manufactured further at an additional cost of $18,000. What should Janssen do? a. Sell the inventory for $24,000 scrap value b. Dispose of the inventory to avoid any further decline in value c. Hold the inventory at its $18,000 cost d. Manufacture further and sell it for $60,000. Ans: D, SO: 5, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Cost Management 84. A company has a process that results in 15,000 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 $100,000 and then sell it for $14 per pound. Should management sell Product A now or should Product A be processed further and then sold? What is the effect of the action? a. Process further, the company will be better off by $10,000. b. Sell now, the company will be better off by $10,000. c. Process further, the company will be better off by $90,000. d. Sell now, the company will be better off by $100,000. Ans: B, SO: 5, Bloom: AN, Difficulty: Hard, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Cost Management 85. The decision rule on whether to sell or process further a. 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 incremental fixed costs. d. is process further if incremental revenue from such processing exceeds the incremental processing costs. Ans: D, SO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Strategic/Critical Thinking, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Cost Management Incremental Analysis and Capital Budgeting 86. 26 - 19 Eddy Company is starting business and is unsure of whether to sell its product assembled or unassembled. The unit cost of the unassembled product is $80 and Eddy Company would sell it for $180. The cost to assemble the product is estimated at $36 per unit and Eddy Company believes the market would support a price of $232 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 $36 per unit. b. Sell before assembly, the company will be better off by $52 per unit. c. Process further, the company will be better off by $52 per unit. d. Process further, the company will be better off by $16 per unit. Ans: D, SO: 5, Bloom: AN, Difficulty: Hard, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Cost Management 87. Mallory Company manufactures widgets. Bowden Company has approached Mallory with a proposal to sell the company widgets at a price of $80,000 for 100,000 units. Mallory is currently making these components in its own factory. The following costs are associated with this part of the process when 100,000 units are produced: Direct material $ 31,000 Direct labor 29,000 Manufacturing overhead 40,000 Total $100,000 The manufacturing overhead consists of $16,000 of costs that will be eliminated if the components are no longer produced by Mallory. From Mallory's point of view, how much is the incremental cost or savings if the widgets are bought instead of made? a. $20,000 incremental savings b. $4,000 incremental cost c. $4,000 incremental savings d. $20,000 incremental cost Ans: B, SO: 5, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Cost Management 88. The 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. Ans: C, SO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Strategic/Critical Thinking, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics 89. Marcus Company gathered the following data about the three products that it produces: Product A B C Present Sales Value $12,000 14,000 11,000 Estimated Additional Processing Costs $8,000 5,000 3,000 Estimated Sales if Processed Further $21,000 18,000 16,000 Which of the products should not be processed further? a. Product A b. Product B c. Product C d. Products A and C Ans: B, SO: 5, Bloom: AN, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Cost Management 26 - 20 Test Bank for Accounting Principles, Ninth Edition 90. A company decided to replace an old machine with a new machine. Which of the following is considered a relevant cost? a. The book value of the old equipment b. Depreciation expense on the old equipment c. The loss on the disposal of the old equipment d. The current disposal price of the old equipment Ans: D, SO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Strategic/Critical Thinking, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics 91. Which of the following is not relevant information in a decision whether old equipment presently being used should be replaced by new equipment? a. The cash price of the new equipment b. The salvage value of the old equipment c. The book value of the old equipment d. The cost savings if the new equipment is purchased Ans: C, SO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Strategic/Critical Thinking, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics 92. Book value of old equipment 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. Ans: C, SO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Strategic/Critical Thinking, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics 93. 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 equipment b. Annual operating cost of the old equipment c. Net cost of the new equipment d. Accumulated depreciation on the old equipment Ans: D, SO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Strategic/Critical Thinking, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics 94. A company is considering replacing old equipment with new equipment. Which of the following is a relevant cost for incremental analysis? a. Annual depreciation charge on the old equipment b. Book value of the old equipment c. Estimated annual depreciation of the new equipment d. Cost of the new equipment Ans: D, SO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Strategic/Critical Thinking, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics 95. In a retain or replace equipment decision, trade-in allowance available on old equipment a. 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. Ans: B, SO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Strategic/Critical Thinking, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics 000 New Machine $500.000 Remaining useful life 10 years Useful life -0Annual operating costs $200. Min: 3. $250. $150. The following information has been gathered: Old Machine Price $250. AICPA BB: Resource Management. AICPA BB: Resource Management. Sala Co.Incremental Analysis and Capital Budgeting 96. is contemplating the replacement of an old machine with a new one.000 b. Which of the following amounts is relevant to the replacement decision? a. AACSB: Analytic. SO: 6.000 b.000 Remaining useful life 10 years Useful life -0Annual operating costs $200. AICPA PC: Problem Solving.000 New Machine $500. $175. IMA: Cost Management 97.000 -0-010 years $150. Difficulty: Medium. Min: 3. AICPA FN: Decision Modeling.000 -0-010 years $150. Bloom: AP.21 Sala Co.000. IMA: Cost Management . $200.000 Accumulated Depreciation 75. The following information has been gathered: Old Machine Price $250.000 Ans: D.000 d.000 Accumulated Depreciation 75.500 c.500 If the old machine is replaced. AICPA FN: Decision Modeling. $0 Ans: C. is contemplating the replacement of an old machine with a new one.000 c. AACSB: Analytic. AICPA PC: Problem Solving. Bloom: C. it can be sold for $20.500 If the old machine is replaced.500 d. $175. Which of the following amounts is a sunk cost? a. $49.000. Difficulty: Medium. SO: 6. 26 . $500. it can be sold for $20. Ninth Edition 98.000 d.26 .000 $(15.000 7. What will be total net income if the line is dropped? a. Difficulty: Medium.000 Ans: B. A condensed segmented income statement for a recent period follows: Wood $500.000 $100. IMA: Cost Management 99.000 60. $103.000 Accumulated Depreciation 75. $(5.000 Aluminum $200.000 $110. Min: 5. $125. AACSB: Analytic. Bloom: AN.000 c. and hard rubber. AACSB: Analytic. The following information has been gathered: Old Machine Price $250. is contemplating the replacement of an old machine with a new one. The net advantage (disadvantage) of replacing the old machine is a. AICPA FN: Decision Modeling. Difficulty: Medium.000 Sales Variable expenses Contribution margin Fixed expenses Net income (loss) Assume none of the fixed expenses for the hard rubber line are avoidable.000 -0-010 years $150.000 c.000 140. AICPA PC: Problem Solving. $(50.000 Hard Rubber $65. SO: 7. aluminum. $20.500 If the old machine is replaced. AICPA BB: Resource Management. AICPA PC: Problem Solving.000 325.000) Total $765. AICPA BB: Resource Management.000 75.000 242.000 58.000 175. Sala Co. IMA: Cost Management .000 $ 25. Bloom: AP. $140.000) d.000 523.000 22.000 b. $15.000 New Machine $500. it can be sold for $20.000 132.000 35.000. $105.000) Ans: A. AICPA FN: Decision Modeling.000 b.000 Remaining useful life 10 years Useful life -0Annual operating costs $200. Abel Company produces three versions of baseball bats: wood. SO: 6. Min: 5.22 Test Bank for Accounting Principles. Difficulty: Easy.000 175. b.000 90. AICPA FN: Decision Modeling.000 242.000 Sales Variable expenses Contribution margin Fixed expenses Net income (loss) Assume all of the fixed expenses for the hard rubber line are avoidable.000 125. A condensed segmented income statement for a recent period follows: Wood $500. $105. AICPA BB: Resource Management. the company's net income will a.000 325. All expenses of the eliminated segment will be eliminated.000 $(15.000 $110. d. AACSB: None. A company has three product lines.000 35.000 d. c. Difficulty: Medium.000 $100. and hard rubber.000. IMA: Cost Management 102. AICPA BB: Resource Management. Bloom: AN.000 58.000 132. SO: 7. AICPA BB: Resource Management. Ans: C.000 Aluminum $200. $140. $125.000 523. 26 . aluminum.000 75.000) If this product line is eliminated.23 Abel Company produces three versions of baseball bats: wood.Incremental Analysis and Capital Budgeting 100. AICPA FN: Decision Modeling. Bloom: AN. Ans: B. increase by $6. c.000) Total $765. $103. one of which reflects the following results: Sales Variable expenses Contribution margin Fixed expenses Net loss $215.000 7.000 b. IMA: Cost Management .000.000 Ans: A. increase by $50. b. 60% of the fixed expenses can be eliminated and the other 40% will be allocated to other product lines. What will be total net income if the line is dropped? a. Min: 5. AICPA PC: Problem Solving. decrease by $6. Net income will decrease.000 $ 25. Net income will increase. AACSB: Analytic.000. AACSB: Analytic. AICPA FN: Decision Modeling.000 $ (50. IMA: Cost Management 101. AICPA PC: Problem Solving. Bloom: C.000 60.000 140.000. What will most likely occur if a company eliminates an unprofitable segment when a portion of fixed costs are unavoidable? a. Min: 1. Difficulty: Medium. SO: 7. d. Min: 5. AICPA PC: Problem Solving. If management decides to eliminate this product line. decrease by $90. SO: 7.000 22.000 140. The company's variable costs will increase.000 Hard Rubber $65.000 c. Talbot expects the asset will earn 16 times as much profit as its cost. none of these. b. c. c. Min: 3. b. b. AICPA PC: Problem Solving. b. AICPA FN: Reporting. a. AACSB: Analytic. Product A has a unit contribution margin of $16 and takes two machine hours to make and Product B has a unit contribution margin of $30 and takes three machine hours to make. If there are 1. Bloom: AN. Difficulty: Medium. contribution margin. the company's total fixed costs will decrease.000 more if Product A is made. AICPA BB: Resource Management. Ans: B. Difficulty: Medium. $2. IMA: Cost Management 106. d. $2. Difficulty: Medium. A company is considering eliminating a product line. SO: 7. assuming the fixed expenses will be allocated to profitable segments? a. The fixed costs currently allocated to the product line will be allocated to other product lines upon discontinuance. AICPA PC: Problem Solving. c. SO: 8.000 What will be the incremental effect on net income if this segment is eliminated. $275. Min: 3.000. d.000 per year over the life of an investment that will cost $25. Cannot be determined from the data provided. If a company has limited resources. SO: 8. d. Bloom: C. Difficulty: Easy. A company can sell all the units it can produce of either Product A or Product B but not both. AACSB: None. d. Talbot Company expects income of $2. Ans: B. AICPA BB: Resource Management. the key factor in performing incremental analysis is a. Talbot expects to earn 16% of its investment annually. the same if either product is made.26 . Ans: C. Bloom: AN. AICPA PC: Problem Solving. AICPA PC: Problem Solving.000 increase b. limited resources required. SO: 8. c.000 less if Product B is made. Ans: C. $2. Talbot expects to earn 16% of $2. AICPA BB: Resource Management. Talbot expects to earn 16% of its cash outlay back over the life of the asset. Ninth Edition 103.000 less if Product A is made. Bloom: AN.000 decrease d.000 decrease c. income will be a. AICPA FN: Decision Modeling. The calculation of the accounting rate of return is . contribution margin per unit of limited resource. AICPA PC: Problem Solving. AACSB: Analytic. IMA: Cost Management . Min: 5. IMA: Cost Management 105. The rate of return indicates that a.000 275. the contribution margin of the product line will indicate the net income increase or decrease. $200. AICPA FN: Decision Modeling. IMA: Cost Management 104.24 Test Bank for Accounting Principles.000 machine hours available to manufacture a product. Difficulty: Easy. AACSB: Analytic. AACSB: None. Min: 1. SO: 7. Ans: C. A segment has the following data: Sales Variable expenses Fixed expenses $350. AICPA FN: Decision Modeling. Min: 1.000 150.000 as profit each year the asset is used. Bloom: C. $200. total net income will decrease by the amount of the product line's fixed costs. AICPA FN: Decision Modeling. IMA: Reporting 107.16. total net income will increase by the amount of the product line's fixed costs. AICPA BB: Resource Management. If the product line is discontinued. AICPA BB: Resource Management. 13. Min: 5. Min: 5.0 years. Difficulty: Medium. SO: 8. Difficulty: Medium. IMA: Investment Decisions .000 and is estimated to have no salvage value at the end of its 8-year useful life. IMA: Cost Management 110.000 b. AICPA BB: Resource Management. 6. annual revenues are expected to be $90.000 and annual operating expenses exclusive of depreciation expense are expected to be $38. IMA: Cost Management 111. $20. SO: 9.1 years. 3. b. 16. A company is considering purchasing factory equipment that costs $320.000 d.000 c. 3.00 $1. A company can produce and sell only one of the following two products: Machine Hours Required 3 2 Contribution Margin Per Unit $30 $25 26 . AICPA FN: Decision Modeling. Ruiz Company’s contribution margin is $4 per unit for Product A and $5 for Product B. d. annual revenues are expected to be $90. AICPA PC: Problem Solving.25 $2.3 years. $24. AICPA FN: Decision Modeling. AACSB: Analytic.3%. 7. Bloom: AP. 32. $16. b. Bloom: AN. AICPA BB: Resource Management.00 $1. AACSB: Analytic.00 $2. Ans: C.000 and annual operating expenses exclusive of depreciation expense are expected to be $38. Bloom: AP. AICPA BB: Resource Management. If the equipment is purchased.000.Incremental Analysis and Capital Budgeting 108.000 hours. A company is considering purchasing factory equipment that costs $320.5%. AICPA PC: Problem Solving. Difficulty: Medium. A $4. what is the total contribution margin of the product it should produce to maximize net income? a. c. The cash payback period on the equipment is a.5%. If the equipment is purchased. AICPA BB: Resource Management. Product A requires 2 machine hours and Product B requires 4 machine hours. AICPA FN: Decision Modeling.50 B $5.000 and is estimated to have no salvage value at the end of its 8-year useful life. 8.00 $1.25 $2. AACSB: Analytic. d.25 Product 1 Product 2 If the company has machine capacity of 2. Ans: C. c. $25. The straight-line method of depreciation would be used. AICPA FN: Decision Modeling.000. d. If the equipment is purchased. Min: 5. SO: 8. c. b. The straight-line method of depreciation would be used. AICPA PC: Problem Solving.000 Ans: C.2 years. AACSB: Analytic. Min: 3. SO: 9.00 Ans: B. How much is the contribution margin per unit of limited resource for each product? a. the annual rate of return expected on this equipment is a.8%. Bloom: AN. AICPA PC: Problem Solving. Difficulty: Medium. IMA: Cost Management 109. c. AICPA BB: Resource Management. 7 years. AICPA FN: Decision Modeling. SO: 9. c. b. AICPA FN: Decision Modeling. 5. AICPA PC: Problem Solving. Min: 5.000 and is expected to have a $30. Difficulty: Easy. Bloom: C. Difficulty: Easy. 8 years. rate of return earned on total assets. entire initial investment will never be recovered. AACSB: None. c. project will always be profitable. AACSB: None. AICPA PC: Problem Solving. The following are all quantitative capital budgeting techniques except a. Min: 5. b. AACSB: Analytic. Difficulty: Medium. Aaron Co. d.000/year. is considering purchasing a new machine which will cost $200. the cash payback period is a. project would only be acceptable if the company's cost of capital was low. c. b.000. Min: 1. Ans: C. AICPA BB: Resource Management. 5 years. project's return will always exceed the company's cost of capital. b. Depreciation is added back to net income because it is an inflow of cash. but which will decrease costs each year by $40. the a. Ans: A. cash payback technique. Difficulty: Easy. The useful life of the machine is 10 years. AACSB: None. IMA: Investment Decisions . IMA: Investment Decisions 113. AICPA PC: Problem Solving. b. 10. 4. Min: 1. and generates annual net cash inflows of $30. d. SO: 9. AICPA BB: Resource Management. If the payback period for a project is greater than its economic life. Depreciation is subtracted from net income because it is an expense.000 salvage value at the end of its ten-year life. Ans: B. 6 years. rate management expects to pay on all borrowed and equity funds. SO: 9. AICPA PC: Problem Solving. Ans: B. Bloom: AP. annual rate of return technique.0 years. c. IMA: Cost Management 116. AICPA BB: Resource Management. AICPA FN: Decision Modeling.000. AICPA FN: Decision Modeling. AICPA BB: Resource Management. d.0 years. How is annual cash inflow determined? a. Bloom: K. total cost of a capital project. Difficulty: Medium. c. The cash payback period is a. d. A company's cost of capital refers to the a.26 Test Bank for Accounting Principles. The machine would be depreciated straight-line with no residual value over its useful life at the rate of $20.5 years. AICPA FN: Decision Modeling.0 years. AACSB: Analytic. Bloom: C. Bloom: K. AICPA FN: Decision Modeling. If an asset cost $210. AACSB: None. Ninth Edition 112. Min: 1. d. SO: 8. IMA: Cost Management 115. Difficulty: Easy. b. Depreciation is added back to net income because it is not an outflow of cash. d. IMA: Investment Decisions 117. SO: 9. Ans: B. AICPA PC: Problem Solving. cost of printing and registering common stock shares.26 . discounted cash flow technique. Depreciation is subtracted from net income because it is an outflow of cash. cost-volume-profit technique. Ans: B. AICPA BB: Resource Management. Min: 1. SO: 9. 4. Bloom: AP. IMA: Budget Preparation 114.000 each year. AICPA PC: Problem Solving. AICPA PC: Problem Solving. 27. AACSB: None.000 and is estimated to have no salvage value at the end of its 8-year useful life. The rate that management expects to pay on borrowed or equity funds is known as a. If the equipment is purchased. the hurdle rate.2%. AICPA BB: Resource Management. d. Ans: A. the cutoff rate. d. IMA: Investment Decisions 122. 26 . SO: 9. Difficulty: Medium. accounting data. d. b. Difficulty: Easy. c. market values. 14. SO: 9. d. Capital budgeting is the process a. d. AACSB: None. Difficulty: Easy. AICPA FN: Decision Modeling. AACSB: None. b. SO: 9. time value of money data. AICPA PC: Problem Solving. AACSB: None. Difficulty: Easy. If the equipment is purchased. c. AICPA PC: Problem Solving. Bloom: K. AICPA FN: Decision Modeling.1%. of making capital expenditure decisions. The straight-line method of depreciation would be used. Bloom: K. Which of the following is not a common method of capital budgeting? a. Min: 1. AICPA FN: Decision Modeling. the cost of capital. Min: 1. higher the hurdle rate.000. of eliminating unprofitable product lines. AICPA FN: Decision Modeling. IMA: Investment Decisions . AICPA PC: Problem Solving. the annual rate of return expected on this project is a. Min: 1. Ans: C. the a. IMA: Budget Preparation 121. Bloom: K.6%. c. Difficulty: Easy. c. AICPA BB: Resource Management. b. The higher the rate of return for a given risk. c.Incremental Analysis and Capital Budgeting 118. AACSB: None. Ans: B.27 A company is considering purchasing factory equipment which costs $480. SO: 9. AACSB: Analytic. SO: 9. of determining how much capital stock to issue. IMA: Investment Decisions 123. more attractive the investment. Min: 1. b. AICPA BB: Resource Management. AICPA BB: Resource Management. b.000 and annual operating expenses exclusive of depreciation expense are expected to be $95. AICPA BB: Resource Management. Payback method c. Ans: C. all of these. less attractive the investment. Gross profit method b. The annual rate of return method is based on a. Ans: A. AICPA FN: Decision Modeling. replacement values. SO: 9. higher the cost of capital. AICPA PC: Problem Solving. used in sell or process further decisions. Bloom: K. IMA: Budget Preparation 120. AICPA BB: Resource Management. annual revenues are expected to be $225. AICPA FN: Decision Modeling. 54. Bloom: C. Bloom: AP. IMA: Investment Decisions 119. Discounted cash flow method d. AICPA PC: Problem Solving. Min: 1. 29. Annual rate of return method Ans: A.2%. Min: 5. Difficulty: Easy. 000. Nance Company is considering buying a machine for $90. b.000.000. b.000 with a useful life of five years and an estimated salvage value of $12. Difficulty: Medium. c. $240. AICPA BB: Resource Management.000 in new equipment. b. The equipment has a five-year life and an estimated salvage value of $300. Difficulty: Easy.26 . b. c. AICPA FN: Decision Modeling.000 each year.000. A company projects an increase in net income of $225. If annual expected income is $21. AACSB: Analytic. Garza Company is considering buying equipment for $240. c. AICPA FN: Decision Modeling. the denominator in computing the annual rate of return is a. Difficulty: Medium. $120. AACSB: None. Min: 1. The machine is expected to generate net income of $6. ignores obsolescence factors. Difficulty: Medium. Min: 3. Bloom: AP.000. d. AICPA BB: Resource Management. AICPA PC: Problem Solving. SO: 9. Ans: D. What is the annual rate of return on this investment? a. SO: 9. ignores the time value of money. Ans: C. Ans: C. SO: 9. $252. 57.0% d.000 each year for the next five years if it invests $900. Ninth Edition 124. AICPA FN: Decision Modeling. Min: 1. IMA: Investment Decisions 128.5% Ans: B. AACSB: None. 25. IMA: Investment Decisions 125. SO: 9. IMA: Investment Decisions 126. The cash payback on this investment is a. AICPA BB: Resource Management. 3 years. d. a discount factor. AICPA PC: Problem Solving.5% c. d. AACSB: Analytic. IMA: Investment Decisions 127. AICPA PC: Problem Solving. Bloom: C. dollars. payback is expressed in terms of a. ignores the cost of an investment. Bloom: C. Bloom: K. 37. The payback method is criticized on the grounds that it a. c. is complicated to use. SO: 9. Min: 3. AICPA PC: Problem Solving.000.0% b. AICPA FN: Decision Modeling. d. AACSB: Analytic. 10 years. Bloom: AP. The straight-line method of depreciation will be used. AICPA BB: Resource Management. AICPA PC: Problem Solving. 6 years.000 with an estimated life of ten years and no salvage value. 15 years.000. Difficulty: Easy. Ans: C. a percent. AICPA FN: Decision Modeling. When using the payback method. Min: 5. time. AICPA BB: Resource Management. 50. IMA: Investment Decisions . $126.28 Test Bank for Accounting Principles. 30 years. AICPA BB: Resource Management. If depreciation expense is $3.402 Ans: A. c. IMA: Investment Decisions 131. but with the use of the new computer.000 and had a salvage value at the end of its useful life of zero. annual rate of return approach. Bloom: K.29 A capital budgeting technique which takes into consideration the time value of money is the a.8%.000 for year 1. Present Value of 1 at 12% . AACSB: None. and $3. the annual rate of return is: a. c. Ans: C. c.239. $9. AICPA BB: Resource Management.000. AICPA PC: Problem Solving. d.5%. Difficulty: Medium. The amount of the initial investment was Year 1 2 3 a. net present value method. AICPA PC: Problem Solving.797 . IMA: Investment Decisions 130. 26 .8%.158.000 for year 3. $9. b. Difficulty: Hard.339.712 PV of an Annuity of 1 at 12% . and the net present value of the project was $(450). b. SO: 9. IMA: Investment Decisions . Bloom: AP.5 years. payback approach. AICPA PC: Problem Solving.690 2. c. purchased some equipment 3 years ago. b. 9. AACSB: None.058. Min: 3. Bloom: AP.000. Ans: D. d. d. return on stockholders' equity approach. $10. AICPA FN: Decision Modeling. Benaflek Co. Difficulty: Easy.893 1. AICPA BB: Resource Management. 20 years. Min: 1. net income will increase by $5. $10. Giraldi Company has identified that the cost of a new computer will be $60. Difficulty: Medium. the cash payback period is: a. Mussina Company had an investment which cost $260. SO: 9. 7. 12 years. Ans: D. IMA: Investment Decisions 132.000 for year 2. SO: 9. 5.000 a year. AACSB: Analytic. 11. AICPA FN: Decision Modeling.893 . Min: 3. AICPA FN: Decision Modeling. b. If Mussina's expected annual net income is $15. Min: 5. SO: 10. AICPA FN: Decision Modeling.Incremental Analysis and Capital Budgeting 129. 15%. d. AICPA BB: Resource Management. $4. AACSB: None. AICPA PC: Problem Solving. Annual cost savings were: $5. The company's required rate of return is 12%. Bloom: AP.000 a year. 000 42. Difficulty: Hard. IMA: Investment Decisions . 50%. 20 years.000 Net annual cash inflow 100. Bloom: AP. AICPA FN: Decision Modeling.000 142. c. Fehr Company is considering two capital investment proposals.26 .355 4.231 4.000 Annual net income 20.890 3. 4 years.486 4.791 3.890 3. Min: 7. Ans: B.000 Estimated useful life 5 years 6 years Salvage value 0 0 The company requires a 10% rate of return on all new investments.000 $600. AACSB: None.696 3.605 4. 5%. Estimates regarding each project are provided below: Project Blue Project Gray Initial investment $400.111 The cash payback period for Project Blue is a. Estimates regarding each project are provided below: Project Blue Project Gray Initial investment $400.000 42. 10%.000 Estimated useful life 5 years 6 years Salvage value 0 0 The company requires a 10% rate of return on all new investments. Periods 5 6 Present Value of an Annuity of 1 9% 10% 11% 12% 3.605 4. IMA: Investment Decisions 134. AICPA PC: Problem Solving. Periods 5 6 Present Value of an Annuity of 1 9% 10% 11% 12% 3. AICPA PC: Problem Solving.30 Test Bank for Accounting Principles. SO: 9.696 3.231 4.000 Annual net income 20. SO: 9. Fehr Company is considering two capital investment proposals. Min: 7.355 4.000 142. AICPA FN: Decision Modeling. b. d. AICPA BB: Resource Management. b. c. Ans: D. AACSB: None.111 The annual rate of return for Project Blue is a. 25%.791 3. d. 10 years. Bloom: AP.000 $600. AICPA BB: Resource Management.486 4. 5 years. Difficulty: Hard.000 Net annual cash inflow 100. Ninth Edition 133. Fehr Company is considering two capital investment proposals.355 4. b.000 $600. c. Difficulty: Hard. $182.000 142. Bloom: AP.000 Estimated useful life 5 years 6 years Salvage value 0 0 The company requires a 10% rate of return on all new investments. d. SO: 10.605 6 4.000 Annual net income 20. Bloom: AP.486 4.410.696 3.231 4. AICPA BB: Resource Management. 10%. AACSB: None.000 Net annual cash inflow 100. Estimates regarding each project are provided below: Project Blue Project Gray Initial investment $400. SO: 10.696 3.410. AICPA FN: Decision Modeling.912.890 3.890 3. Ans: D. Ans: B. AICPA BB: Resource Management.791 3.791 3.000 Estimated useful life 5 years 6 years Salvage value 0 0 The company requires a 10% rate of return on all new investments.000 $600. 12%. 9%. Present Value of an Annuity of 1 Periods 9% 10% 11% 12% 5 3. IMA: Investment Decisions 136. Estimates regarding each project are provided below: Project Blue Project Gray Initial investment $400.000 142. c. AACSB: None. $18. d.000 42. 11%.000 Net annual cash inflow 100. Min: 7.31 Fehr Company is considering two capital investment proposals.111 The internal rate of return for Project Gray is approximately a.605 6 4. Min: 7.000 42. b.486 4.000.231 4. $618. Present Value of an Annuity of 1 Periods 9% 10% 11% 12% 5 3. Difficulty: Hard. IMA: Investment Decisions . AICPA PC: Problem Solving.355 4. AICPA FN: Decision Modeling.Incremental Analysis and Capital Budgeting 135.000 Annual net income 20. $100. 26 . AICPA PC: Problem Solving.111 The net present value for Project Gray is a. 926 . Present Value of an Annuity of 1 Period 8% 9% 10% 1 . c.487 A company has a minimum required rate of return of 8% and is considering investing in a project that costs $68.917 . SO: 10. Min: 5. AICPA FN: Decision Modeling. AACSB: None. IMA: Investment Decisions 139.783 1. d. SO: 10. b. Min: 5.718.736 3 2.577 2.170.454.531 2. 10%. $114.917 . IMA: Investment Decisions 138.337 and is expected to generate cash inflows of $27. $6. Ans: D. Use the following table.759 1.759 1. Bloom: AP. c. Bloom: AP.26 .000 and is expected to generate cash inflows of $42.32 Test Bank for Accounting Principles.000 at the end of each year for three years.783 1. Ninth Edition 137.000.487 A company has a minimum required rate of return of 10% and is considering investing in a project that requires an investment of $98.736 3 2.577 2. AICPA PC: Problem Solving. Present Value of an Annuity of 1 Period 8% 9% 10% 1 . Difficulty: Hard. less than the required 8%.454.909 2 1. AICPA BB: Resource Management. Ans: B. IMA: Investment Decisions . AICPA PC: Problem Solving.759 1. AICPA FN: Decision Modeling.000 and is expected to generate cash inflows of $70. b.000.736 3 2. c.926 .170. Bloom: AP.531 2. Difficulty: Hard. AICPA BB: Resource Management. Difficulty: Hard. $2.487 A company has a minimum required rate of return of 9% and is considering investing in a project that costs $175. The net present value of this project is a.909 2 1. $104.531 2.917 . AACSB: None.000 each year for three years. Min: 5. The approximate internal rate of return on this project is a.898. Ans: B. AACSB: None.577 2. $17. AICPA PC: Problem Solving. d. Present Value of an Annuity of 1 Period 8% 9% 10% 1 . AICPA BB: Resource Management. 8%. $98.926 .909 2 1. AICPA FN: Decision Modeling. $35. $177. 9%. d.000 at the end of each year for three years. Use the following table. b. Use the following table. The present value of future cash inflows for this project is a. SO: 10.783 1. 77 3 . 26 . b. IMA: Investment Decisions 141.623 Present Value of an Annuity of 1 9% 10% 11% 12% 4.748 Ans: B. is considering purchasing equipment costing $30. Bloom: AP. Period 6 8% 4.111 15% 3. Humphrey.486 4.784 What is the approximate internal rate of return for this investment? a. AICPA FN: Decision Modeling.111 15% 3. Woods has a 14% cost of capital. AICPA BB: Resource Management.000 with a 6-year useful life. SO: 10.355 4. The equipment will provide cost savings of $7. $29. IMA: Investment Decisions 142.623 Present Value of an Annuity of 1 9% 10% 11% 12% 4. 12% Ans: D.486 4. $886 d. Period 6 8% 4. $1. AACSB: None. AICPA BB: Resource Management. Humphrey. 11% d. c.355 4. $13. Difficulty: Hard. requires a 10% rate of return. AICPA PC: Problem Solving. SO: 10.231 4.400 $31. The equipment will provide cost savings of $7.750 Ans: C.000 in year 3. Difficulty: Hard. Min: 5. d.450 $34. which is expected to produce cash inflows of $15.33 Woods Company wants to purchase an asset with a 3-year useful life. and $10. AICPA BB: Resource Management. 10% c. What is the present value of these future cash flows? Present Value of 1 Period 14% 1 . and uses the following factors. requires a 10% rate of return. Min: 5. AICPA FN: Decision Modeling. Inc.Incremental Analysis and Capital Budgeting 140. IMA: Investment Decisions . Humphrey. SO: 10.792 c. is considering purchasing equipment costing $30.000 with a 6-year useful life. AICPA PC: Problem Solving.88 2 . AICPA FN: Decision Modeling. AACSB: None. 9% b.67 a. Humphrey.000 each year for two years.800 b. AICPA PC: Problem Solving. $2. Min: 5. Difficulty: Hard. Inc.784 What is the approximate net present value of this investment? a. Bloom: AP.300 and will be depreciated straight-line over its useful life with no salvage value.800 $30. AACSB: None. Bloom: AP.300 and will be depreciated straight-line over its useful life with no salvage value. Inc. Inc.231 4. Accrual income is used to calculate the net present value. AACSB: Analytic. Difficulty: Easy. AICPA FN: Decision Modeling. IMA: Investment Decisions . AICPA PC: Problem Solving. AICPA BB: Resource Management. If Project A and Project B both require an initial investment of $30. If a company's required minimum rate of return is 10%. the project that should be accepted is a. project's rate of return exceeds 10%. AACSB: None. d.000. IMA: Investment Decisions 147. Min: 1. d. Ans: D. b. AICPA FN: Decision Modeling. AICPA FN: Decision Modeling. project earns a rate of return of 0%. Min: 3. AICPA BB: Resource Management. The initial investment in the project must have been a. The project's cash inflows will equal its cash outflows. Ninth Edition 143. Bloom: K. AICPA PC: Problem Solving. Ans: C. Bloom: AP. AICPA FN: Decision Modeling. SO: 10.000. Ans: B. AACSB: None.000 and have the same economic life.000. Project B. Cash flows are used to calculate the internal rate of return. d. SO: 10. Min: 1. AACSB: Analytic. project earns a rate of return of 10%.000 and the total present value of cash inflows of Project B is $36. SO: 10. this indicates that the a. Cash flows are used to calculate the annual rate of return. What does this tell management about the project? a.0 and the equal annual cash inflows were $40. Bloom: C. the internal rate of return factor was 4. project's rate of return is less than the minimum rate required. Which one of the following is correct? a. c. AACSB: None. Min: 2.000. Hale Plumbing used the net present value method and determined that project 34 had a zero net present value. b. Difficulty: Medium. Using the net present value method. Bloom: AN. d. AICPA BB: Resource Management. Ans: A. b. The project guarantees company profitability. The project earns the company's desired minimum rate of return. b. SO: 10. c. c. In using the internal rate of return method. The return from this project is equal to the cost of capital. not capable of being calculated.34 Test Bank for Accounting Principles. AICPA PC: Problem Solving. AICPA PC: Problem Solving. AICPA BB: Resource Management. b.26 . IMA: Investment Decisions 144. neither. c. $40. AICPA PC: Problem Solving.000. SO: 10. a project's net present value is zero. d. the total present value of cash inflows for Project A is $30. Bloom: AN. Difficulty: Medium. Project A. AICPA BB: Resource Management. Ans: C. AICPA FN: Decision Modeling. an amount which cannot be determined. IMA: Investment Decisions 146. $10. $160. they are both the same. IMA: Investment Decisions 145. c. Difficulty: Easy. and in using the net present value method. Accrual income is used to calculate the payback period. Difficulty: Medium. Min: 3. 909 2 1.577 2. SO: 10. Difficulty: Medium.759 1.790 and is expected to generate cash inflows of $90.000 and is expected to generate cash inflows of $168.926 . AICPA FN: Decision Modeling. Min: 5. It is considering investing in a project that requires an investment of $210.531 2.208. SO: 10. Bloom: AP. 8%.000.000 at the end of each year for three years. b. d. $223. IMA: Investment Decisions 149. AICPA PC: Problem Solving.909 2 1.Incremental Analysis and Capital Budgeting 148.000. IMA: Investment Decisions .783 1. Bloom: AP. AICPA PC: Problem Solving. 10%. The approximate internal rate of return on this project is a.000 each year for three years.917 . Use the following table. b.487 26 . Use the following table.926 .000 and is expected to generate cash inflows of $90.487 A company has a minimum required rate of return of 8%. d. c. $246. b. AICPA BB: Resource Management. Difficulty: Medium.736 3 2.783 1.516. It is considering investing in a project that costs $227.759 1. c. Min: 5.736 3 2.830. Ans: B. $5. Present value of an Annuity of 1 Period 8% 9% 10% 1 . The present value of future cash inflows for this project is a. $13. AACSB: Analytic. AACSB: Analytic.210.35 A company has a minimum required rate of return of 9%. The IRR on this project cannot be approximated. c.783 1. AICPA FN: Decision Modeling. AICPA BB: Resource Management. Present value of an Annuity of 1 Period 8% 9% 10% 1 . AACSB: Analytic. AICPA PC: Problem Solving.759 1. Bloom: AP. Difficulty: Medium.736 3 2.577 2. Use the following table. Ans: B. Present value of an Annuity of 1 Period 8% 9% 10% 1 . $425.487 A company has a minimum required rate of return of 10%.830. $210. SO: 10. Min: 5.208.917 . AICPA FN: Decision Modeling. Ans: D.926 .917 .531 2.000 at the end of each year for three years. $252.909 2 1.577 2. AICPA BB: Resource Management. It is considering investing in a project which costs $420. IMA: Investment Decisions 150. The net present value of this project is a. d. $42. 9%.531 2. 000 increase c. Difficulty: Easy. In a make-or-buy decision. Difficulty: Easy. AICPA FN: Decision Modeling. AICPA PC: Problem Solving. opportunity costs are a. AICPA PC: Problem Solving. Direct labor c. Bloom: C. c. ignored. Difficulty: Easy. IMA: Investment Decisions 156. c. Dryer has sufficient unused capacity to produce the 3. IMA: Investment Decisions 153. Ninth Edition 151. IMA: Investment Decisions 152. AACSB: None. AACSB: None. b. Ans: A. The conceptually superior approach to capital budgeting is a. c. IMA: Investment Decisions 155. added to the buy total cost. d. deducted from the make total cost. Bloom: C. Difficulty: Medium. Min: 1. Difficulty: Easy. Min: 1. SO: 10. c. d. It costs Dryer Company $26 per unit ($18 variable and $8 fixed) to produce its product. Min: 5. Accounting's contribution to the decision-making process occurs in all of the following steps except to a.000 increase Ans: B. b. $3. A foreign wholesaler offers to purchase 3. $9. SO: 4. AICPA BB: Resource Management. make a decision. Ans: A.000 units. If the special order is accepted. AICPA FN: Decision Modeling. AICPA BB: Resource Management. AICPA FN: Decision Modeling. future value of annuity table. Bloom: K.36 Test Bank for Accounting Principles.26 . identify the problem and assign responsibility.000 decrease b. AICPA BB: Resource Management. AICPA FN: Decision Modeling. none of these. what will be the effect on net income? a. b. $54. AICPA PC: Problem Solving. SO: 1. Ans: A. review results of the decision. AACSB: None. Bloom: C. AICPA FN: Decision Modeling. determine possible courses of action. AICPA BB: Resource Management. Bloom: K. IMA: Investment Decisions . present value of 1 table.000 increase d. the annual rate of return method. Difficulty: Easy. Bloom: AN. Selling expenses b. present value of annuity table. SO: 10.000 units at $21 each. SO: 3. $3. added to the make total cost. which normally sells for $38 per unit. AICPA PC: Problem Solving. AICPA BB: Resource Management. Variable manufacturing costs d. a discounted cash flow method. AICPA PC: Problem Solving. Min: 1. future value of 1 table. Ans: C. IMA: Investment Decisions 154. AICPA PC: Problem Solving. Min: 1. Dryer would incur special shipping costs of $2 per unit if the order were accepted. AACSB: Analytic. AACSB: None. the payback method. AACSB: None. The appropriate table to use when an investment promises to return unequal cash flows is the a. Which of the following would generally not affect a make-or-buy decision? a. Opportunity cost Ans: A. d. b. Min: 1. d. AICPA FN: Decision Modeling. SO: 4. AICPA BB: Resource Management. Bloom: K. d. minimum rate. c. IMA: Business Economics 158. AICPA BB: Resource Management. $5. Ans: C. AICPA PC: Problem Solving. AICPA FN: Decision Modeling. Average investment ÷ Net income.50 d. Difficulty: Easy.00 $1. AICPA PC: Problem Solving. AACSB: None. Bloom: K. sunk cost. Bloom: AP. AICPA FN: Decision Modeling. AICPA PC: Problem Solving. Min: 1. Average investment ÷ Annual cash inflow. $5. AACSB: None. All of the following are relevant in deciding whether to eliminate an unprofitable segment except the segment's a. b. Ans: B. fixed expenses allocated to the eliminated segment will be eliminated. A cost that cannot be changed by any present or future decision is a(n) a. SO: 7.00 c. it is impossible for net income to decrease. AICPA PC: Problem Solving. AICPA BB: Resource Management. c. cutoff rate. b opportunity cost. AACSB: None.50 $1. IMA: Business Economics 159. Cost of capital investment ÷ Net income. AICPA BB: Resource Management. The cash payback formula is a. cost of capital. IMA: Investment Decisions 162. Min: 1. 26 . Min: 1. incremental cost. AICPA BB: Resource Management. $3. Difficulty: Medium. Min: 1. d.00 $3. Bloom: K. c. Product X requires 4 machine hours and Product Y requires 8 machine hours. $2. SO: 9. AICPA BB: Resource Management. Difficulty: Easy. variable expenses of the eliminated segment will be eliminated. AICPA FN: Decision Modeling. hurdle rate. AICPA FN: Decision Modeling. Ans: A. d. AICPA PC: Problem Solving. fixed expenses. it is impossible for net income to increase. What is the contribution margin per unit of limited resource for each product? X Y a. AICPA BB: Resource Management. SO: 8. If an unprofitable segment is eliminated a. AICPA PC: Problem Solving.00 $2. Min: 1. The rate of return that management expects to pay on all borrowed and equity funds is the a. c. variable expenses. SO: 9. AACSB: None. variable cost. c. SO: 6. Min: 3. Cost of capital investment ÷ Annual cash inflow. AICPA FN: Decision Modeling. In the Rossetto Company. Difficulty: Easy. SO: 7. IMA: Business Economics 160. b. b. Bloom: C.50 b. AACSB: None. AACSB: Analytic. contribution margin. IMA: Business Economics 161. Bloom: K. sales. Ans: D. contribution margin per unit is $12 for Product X and $20 for Product Y. d. IMA: Investment Decisions . d.37 Ans: C. Difficulty: Easy.50 Ans: A. AICPA FN: Decision Modeling. b. Difficulty: Easy.Incremental Analysis and Capital Budgeting 157. Min: 1. 99. a b b b c c a b a a b c d c c d c d a 133. present value of future net income and the capital investment. Difficulty: Easy. Difficulty: Easy.38 Test Bank for Accounting Principles. 94. 86. 116. 148. 127. 160. 163. Net present value is the difference between the a. 45. 119. Bloom: K. 131. 100. 113. 136. c a b a a c c d a a b d c b . project's rate of return exceeds the required rate of return. 156. 165. 65. project is acceptable. 151. AACSB: None. future cash inflows and the present value of the capital investment. 69. 145. 141. 146. d. 78. 70. 139. 54. 42. 74. b. 142. Ans: C. 58. 112. AICPA FN: Decision Modeling. present value of future cash inflows and the capital investment. b d c a b a b c c b b c c c b c c c b 114. 150. SO: 10. 103. 80. 75. future cash inflows and the capital investment. 66. SO: 10. 108. 64. 107. 120. AICPA FN: Decision Modeling. 121. 83. 52. d. subtracted from net income because it is an outflow of cash. 39. project's rate of return is less than the required rate of return. 125. 137. AICPA BB: Resource Management. 97. 123. 161. 104. 82. c. 62. Item Ans. 84. b. 90. SO: 9. Item Ans. c. Difficulty: Easy. 53. 153. IMA: Investment Decisions 164. 117. added back to net income because it is not an outflow of cash. 56. Bloom: K. AICPA PC: Problem Solving. 143. 122. 59. 111. 91. 51. 73. 40. 129. 38. 41. 93. 79. AICPA BB: Resource Management. 43. 61. 132. 98. Item Ans. 47. AICPA FN: Decision Modeling. 87. 88. 49. 144. AICPA PC: Problem Solving. 118. Item Ans. 109. depreciation is a. 147. d b b a c d b d b d d b c b d c c d d 95. b. AICPA BB: Resource Management. 155. AICPA PC: Problem Solving. 72. 48. added back to net income because it is an inflow of cash. 158. 68. 46. 50. 92. c. Bloom: K. Ans: B. 157. 81. Min: 1. 67. d d b a b d a c d b b c c a a b d b c 76. Item Ans. 128. Ninth Edition 163. 124. 110. 162. d b d b b d b c b d a c b d c d b b a 152. 140. Ans: D. subtracted from net income because it is an expense. 149. b b c b c b b c a d b d d b a a d b d 57. 96. AACSB: None. A negative net present value means that the a. 44. 55. project's rate of return equals the required rate of return. 71. 63. 105. 102. d. 126. IMA: Investment Decisions 165. 159. 134. 154. Item Ans. 138. 164. 101. AACSB: None. 77. 60. 85. To determine annual cash inflow. 89. IMA: Investment Decisions Answers to Multiple Choice Questions Item Ans. 106. 130. 135. 115.26 . Min: 1. AICPA BB: Resource Management. Difficulty: Medium. IMA: Investment Decisions Solution 166 (3 min. AICPA BB: Resource Management. IMA: Business Economics .000) Incremental increase in profit if Plan 1 is selected BE 167 Pederson Enterprises produces giant stuffed bears. AICPA FN: Decision Modeling.000 and costs of $15. SO: 2. An outside supplier has offered to produce the commercial clocks for Notson for $420 each. AACSB: Analytic.000 and costs of $14. is considering Plan 1 which is estimated to have sales of $40. AICPA FN: Decision Modeling. AACSB: Analytic. Min: 5. Notson has provided the following unit costs for its commercial clocks: Direct materials Direct labor Variable overhead Fixed overhead (40% avoidable) $100 120 80 150 Instructions Prepare an incremental analysis which shows the effect of the make-or-buy decision.000) $ 6.000 – $38.000 units at $14 each. Pederson will incur extra shipping costs of $1. Bloom: AP.000 (1. Instructions Compare plans using incremental analysis. AICPA FN: Decision Modeling.000) $1.000 – $14. Min: 3. Notson needs 1. AICPA PC: Problem Solving. The company currently has sales of $38. Ans: N/A.Incremental Analysis and Capital Budgeting 26 . of which Pederson has the capacity to produce. Ans: N/A.000) Incremental costs ($15.000) Incremental profit if special order accepted BE 168 Notson.000 Incremental revenue (8. AICPA PC: Problem Solving.000.39 BRIEF EXERCISES BE 166 Sedgwick Inc.25 per bear. Bloom: AP.000) (10. Min: 5.000 (96.200 clocks annually. AICPA BB: Resource Management. A wholesaler offers to buy 8. IMA: Investment Decisions Solution 167 (5 min. Bloom: AP. produces several models of clocks. Each bear consists of $12 of variable costs and $9 of fixed costs and sells for $45.000.000 Incremental revenue ($40. SO: 4. Ans: N/A. SO: 3.25 × 8. Difficulty: Medium.) $112. AICPA PC: Problem Solving.000 × $14) Incremental variable costs ($12 × 8. Difficulty: Medium.000) Incremental shipping costs ($1. Instructions Determine the incremental income or loss that Pederson Enterprises would realize by accepting the special order. Inc. AACSB: Analytic.) $2. 000 staplers annually for its main product. Min: 5. AICPA PC: Problem Solving.000 Savings of VOH $80 × 1.000) Incremental cost to buy Incremental savings on direct materials Incremental savings on direct labor Incremental savings on variable MOH Incremental savings on fixed MOH Incremental net cost to buy BE 170 Paola Farms.000.) $(54. AACSB: Analytic.000 staplers for $18. It costs $55. SO: 4.000 Total cost savings Incremental net cost to buy BE 169 + 432. The costs per stapler are as follows: Direct materials Direct labor Variable overhead Fixed overhead Total $ 3. AICPA BB: Resource Management.000 + 6. AICPA BB: Resource Management.000 chickens which can be sold for $1 each to a slaughtering company. Inc.000) Parks Corporation currently manufactures 3. IMA: Business Economics Solution 169 (5 min.00 8. Bloom: AN.00 $22. IMA: Business Economics . Ans: N/A.000 + 12.00 4. or the chickens can be slaughtered in house and then sold for $2. SO: 5.200 = 96. AACSB: Analytic. Difficulty: Medium. AICPA PC: Problem Solving.000 Savings of DL $120 × 1.26 . AICPA FN: Decision Modeling.000 + 24. Instructions Prepare an incremental analysis for the make-or-buy decision.00 7.200 = 72. Instructions If Paola Farms slaughters the chickens.200 = $120.200 = 144.000) Incremental Analysis Cost to buy (1. determine how much incremental profit or loss it would report.25 each.200 × $420) Cost savings: Savings of DM $100 × 1.000 $ (3. Difficulty: Medium.40 Test Bank for Accounting Principles. Min: 4.) Incremental Effect $(504. AICPA FN: Decision Modeling. produces a crop of chickens at a total cost of $66. The production generates 60.00 Gallup Company has contacted Parks with an offer to sell it 3. Bloom: AP.000 Savings of FOH 40% × $150 × 1.000) + 9.000 $ (72. $5 of the fixed overhead per unit is unavoidable. Ninth Edition Solution 168 (5 min.00 each.000 more to turn the annual chicken crop into chicken meat. What should Paola Farms do? Ans: N/A. Ans: N/A.000) Ice Cream 500 $20. more efficient machine is available at a cost of $225.000 Net income (loss) $ (1.000 = $20.000 x . ice cream. yogurt. SO: 7. A new.000 Net Income Change $270.) Retain Equipment $1.100 $60.) $(10.000 2.000 $ (2. AICPA PC: Problem Solving.000 $ 8. 40% of the fixed costs are direct.000 Fixed costs 5. Min: 4. AICPA FN: Decision Modeling.25 – $1. Min: 4.000) + 6. IMA: Business Economics Solution 172 (4 min. Demand of individual products is not affected by changes in other product lines.000 Variable departmental costs 6.000 13.200 Total 3.000) $ 45. Results of June follow: Sour Cream Units sold 2.000* (225. AICPA BB: Resource Management. and the other 60% are allocated.000 Revenue $10.800 7. BE 171 Elmdale Company has a machine that affixes labels to bottles.000 $ 5.000 Incremental costs: given as $55.000 chickens = $75. IMA: Investment Decisions Solution 171 (4 min.000 profit Paola Farms should slaughter. The allocated fixed costs are based on units sold and are unavoidable.000 4.000 Instructions Prepare an incremental analysis of the effect of dropping the sour cream product line. AICPA BB: Resource Management. has 4 product lines: sour cream. The machine has a book value of $60. AACSB: Analytic. The new machine will lower annual variable production costs from $400. SO: 6.200. AICPA FN: Decision Modeling. AICPA PC: Problem Solving.000 + 2.Incremental Analysis and Capital Budgeting Solution 170 (4 min.000 28. Difficulty: Medium. Bloom: AP.000 $ 2.000 Incremental profits: $75.000 that will have a 5-year useful life with no salvage value. and butter.41 Incremental revenues: ($2.000 4.000 Replace Equipment $930.000 – $55. Bloom: AN.000 Yogurt 400 $10.200 3.) 26 .000 and a remaining useful life of 3 years and no salvage value.000 Variable manufacturing costs New machine cost Net savings over 3 years *For 3 years of remaining life BE 172 Keith Inc. AACSB: Analytic.000 17.000 to $310.00) × 60.40) Incremental decrease in profits if dropped . Ans: N/A.000.000 $15. Difficulty: Medium. Instructions Prepare an analysis showing whether the old machine should be retained or replaced.800 Butter 200 $20.000) Incremental revenue Incremental variable cost savings Incremental fixed cost savings ($5. 000 salvage value at the end of its 20-year useful life. but will also increase annual expenses by $160. AICPA FN: Decision Modeling. AICPA PC: Problem Solving. Min: 3. AICPA BB: Resource Management. AICPA FN: Decision Modeling.) $900. BE 174 Lightle Co. Bloom: AP.000 ÷ ($30.5 hours 1. Depreciation expense. Difficulty: Medium. AICPA PC: Problem Solving. IMA: Investment Decisions .000. sales personnel should push Product 43. AACSB: Analytic.000 with a 10-year useful life. AICPA PC: Problem Solving. SO: 8. Bloom: AP. AACSB: Analytic. Which product should Meierhoff tell its sales personnel to ‘push’ to customers? Ans: N/A. The facility will cost $980. Min: 4. Difficulty: Medium.5 years BE 175 Holt Co. AICPA BB: Resource Management. The new equipment is expected to produce annual net income of $30. IMA: Business Economics Solution 173 (4 min.000) = 7. SO: 9. Min: 4.000 over its useful life. IMA: Investment Decisions Solution 174 (3 min.000 + $90.000. AICPA FN: Decision Modeling. Instructions Calculate the annual rate of return on this facility. Difficulty: Medium. is $90.000 per year. Bloom: AN. using the straight-line rate.26 .000 to build.5 hours Instructions Compute the contribution margin per unit of limited resource for each product. The facility will increase revenues by $240. Ans: N/A. AACSB: Analytic. but will have a $20. Ninth Edition BE 173 Meierhoff Company provided the following information concerning two products: Contribution margin per unit—Product 12 Contribution margin per unit—Product 43 Machine hours required for one unit—Product 12 Machine hours required for one unit—Product 43 $23 $15 2. AICPA BB: Resource Management. is considering investing in a new facility to extract and produce salt.) Product 12: $23 ÷ 2. Ans: N/A.42 Test Bank for Accounting Principles.5 hours = $10 Therefore. Instructions Compute the cash payback period. SO: 9.20 Product 43: $15 ÷ 1.5 hours = $9. is considering investing in new equipment that will cost $900. AICPA PC: Problem Solving. BE 177 An investment costing $90. its annual rate of return is: $80.000.65. Min: 3.000 = $80. Ans: N/A.00 Net present value The investment should be made because the net present value is positive.000 Its average investment is: $980. and then locating this discount factor on the present value of an annuity table. Bloom: AP.000 is being contemplated by Linn Co. Thus.250 (140. The appropriate present value factor for 10 periods is 5. IMA: Investment Decisions Solution 176 (4 min. we see that the discount factor for 10% is 5. . Difficulty: Medium. the internal rate of return can be approximated by dividing the capital investment by the net annual cash inflows to determine the discount factor.33493. SO: 10.65 Cash outflow—investment $140. The investment will have a life of 8 years with no salvage value and will produce annual cash flows of $16. Instructions Compute the approximate internal rate of return for this investment.33 By tracing across on the 8-year row. Difficulty: Medium. The company’s expected annual income is: $240.) Present Value $141. AICPA FN: Decision Modeling.Incremental Analysis and Capital Budgeting Solution 175 (4 min. AICPA BB: Resource Management.000 ÷ $16.000 × 5.000 ) $ 1. AICPA PC: Problem Solving.000 – $160.000 2 Therefore.250 Cash inflows—$25. AACSB: Analytic.) 26 .000 to purchase a machine that will provide annual cash flows of $25.) When net annual cash inflows are expected to be equal. Bloom: AP.000 × 1. and indicate whether the investment should be made by Puckett Company.000 ————————— = $500.000 ÷ $500. IMA: Investment Decisions Solution 177 (3 min. the internal rate of return on this project is approximately 10%. AICPA BB: Resource Management. $90.870.000 = 16% BE 176 Puckett Company is proposing to spend $140. Instructions Compute the proposed investment’s net present value. SO: 10. Min: 4. AICPA FN: Decision Modeling.000 + $20. (Table C-2 is needed) Ans: N/A.870 = 5.43 The annual rate of return is calculated by dividing expected annual income by the average investment. AACSB: Analytic. 000.000.26 . AACSB: Analytic. .000 ÷ 50. SO: 3.000 units of product and is operating at 70% of plant capacity.000 (675. Ex.000 units of Felter Company's product for $50 per unit.000 units) Cost of goods sold Gross profit Operating expenses Net income $90.000) Profit per unit $70 $45 10 55 $15 The company received a proposal from a foreign company to buy 15.000 in accepting the special order. The president of Felter Company is reluctant to accept the proposal because he is concerned that the company will lose money on the special order.000. Ans: N/A. the company reported the following operating results while operating at 80% of plant capacity: Sales (500.000) $ 75. IMA: Business Economics Solution 178 (9–13 min. Instructions Prepare 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.000 × $45) Net Income Felter Company would increase its income by $75.000 Net Income Increase (Decrease) $750. This is a one-time only order and acceptance of this proposal will not affect the company's regular sales. AICPA PC: Problem Solving. Min: 9.000. Difficulty: Hard.000 × $50) Costs (15. AICPA BB: Resource Management.000 36.000 24. AICPA FN: Decision Modeling. For the first eight months of 2010.000 An analysis of costs and expenses reveals that variable cost of goods sold is $95 per unit and variable operating expenses are $35 per unit.44 Test Bank for Accounting Principles.000) $ 75.000 $12. 179 Carney Company manufactures cappuccino makers.000 units at $50 Reject Order $ -0-0$ -0Accept Order $750.000 54. Ninth Edition EXERCISES Ex. Unit information about its product is as follows: Sales Price Variable manufacturing cost Fixed manufacturing cost ($500. 178 Felter Company produced and sold 50.000 Revenues (15.) FELTER COMPANY Incremental Analysis Proposal to buy 15.000 (675. Bloom: AN.000. 050. Acceptance of the special order will not affect fixed costs but will result in $1.850. AICPA PC: Problem Solving. 179 (Cont. SO: 3.000 $ 800. Ans: N/A.000 4.000 units) Cost of goods sold Gross profit Operating expenses Net income $7.000 × $95 = $2. **Variable operating expenses = 30.000 2. Acceptance of the order would result in $10.) 26 . For the first 6 months of 2010. Min: 12.000 2.) Reject Order $ -0-0-0$ -0Accept Order $4.000** $ 140.800. This recommendation assumes that acceptance of the special order will not affect relations with existing customers. Bloom: E.200 of shipping costs.000 Revenues Cost of Goods Sold Operating Expense Net Income *Variable cost of goods sold = 30. Carney Company receives a special order for 30.000 × $35 = $1. AACSB: Analytic. Bloom: AN. Gregg has received a special order from a large school district to buy 600 mats at $45 each.000 (2.000 = $1.000 machines at $135 each from a major coffee shop franchise.000 Net Income Increase (Decrease) $4. AACSB: Analytic. Difficulty: Medium. operating expenses were 75% variable and 25% fixed.000.000 of shipping costs but no increase in fixed expenses. Instructions (a) Prepare an incremental analysis for the special order.060. (b) Should Gregg Company accept the special order? Justify your answer. SO: 3. AICPA BB: Resource Management.45 In September.000. Ans: N/A. (b) The incremental analysis shows Carney Company should accept the special order because incremental revenues exceed incremental costs. IMA: Business Economics .000. AICPA BB: Resource Management.060. AICPA FN: Decision Modeling.050. Difficulty: Medium. IMA: Business Economics Solution 179 (a) (12–17 min.850. AICPA FN: Decision Modeling. (b) Should Carney Company accept the special order? Justify your answer. AICPA PC: Problem Solving.200.000) $ 140. the company reported the following operating results while operating at 80% capacity: Sales (100.Incremental Analysis and Capital Budgeting Ex.000 2. Min: 13.050.000. 180 Gregg Company supplies schools with floor mattresses to use in physical education classes. Instructions (a) Prepare an incremental analysis for the special order.000 Cost of goods sold was 70% variable and 30% fixed.060.000) (1.000 + $10.000* 1.850. Ex. 000) (5. Variable cost of goods sold for the special order = 600 × $29.000. its fixed overhead will increase from $50.000 $100. IMA: Business Economics Solution 181 (a) (12 min.80) Fixed overhead Sales commissions Net income .30) on each disc sold.25 per disc for 5.200 $ (840) (13–18 min.500.000 = $29.) Reject Order $ -0-0-0-0-0-0$ -0Accept Order $21.640 10.26 .000 to $55.000) (5. Rudd Corporation offers Innova $4.000 × 75% = $1. Ex.000) (6.000. Instructions (a) Prepare an incremental analysis for the special order. If Larkin accepts the offer.250 Revenues Materials ($0.000) (6. Difficulty: Hard. (b) Should Innova accept the special order? Why or why not? Ans: N/A.200 = $10.000 discs. The cost of manufacturing 25. Variable cost of goods sold per unit = $2.40. Ninth Edition Solution 180 (a) Revenues Cost of Goods Sold Operating Expense Net Income Reject Order $ -0-0-0$ -0Accept Order $27.000 Variable operating expenses per unit = $1.000 30.46 Test Bank for Accounting Principles.20) Variable overhead ($0.000 (17.000 × 70% = $2. Rudd would sell the discs under its own brand name in foreign markets not yet served by Larkin. SO: 3.250 (2.640.000 20.000) (4.500. AICPA PC: Problem Solving.000 17.640) (10.000 ÷ 100. Variable operating expenses = $2.40 = $17.940.000 40. AICPA BB: Resource Management. AACSB: Analytic.) Net Income Increase (Decrease) $27. 181 Larkin Company produces golf discs which it normally sells to retailers for $6 each.000) (4.40) Labor ($1.000) -0$ 4.000 golf discs is: Materials Labor Variable overhead Fixed overhead Total $ 10.000 due to the purchase of a new imprinting machine. Min: 12.000) -0$ 4.000 = $15 Variable operating expenses for the special order = 600 × $15 = $9. No sales commission will result from the special order.000 ÷ 100.000 + $1. AICPA FN: Decision Modeling.940.250 Net Income Effect $21.250 (2.000 Innova also incurs 5% sales commission ($0.200) $ (840) Variable cost of goods sold = $4.200.200 (b) The incremental analysis shows Gregg Company should not accept the special order because incremental costs exceed incremental revenues. Bloom: E. 000 if it buys instead of makes.) $43 40 $ 3 1.000 units. 182 Kasten.000 $450.000 50. Incremental revenue per widget Incremental cost per widget: $7 + ($15 × 2) + $3 = Incremental profit per unit Total incremental profit = $3 × 1.000 300. AICPA FN: Decision Modeling. Kasten has capacity to produce 12.000 units from a new customer in a country in which Kasten has never done business. The following estimated costs were provided: Direct material ($7/unit) Direct labor ($15/hr. Min: 10. SO: 3.4. Should Kasten accept the order? 2.000. Difficulty: Medium. Bloom: AP.000 widgets and focus only on distribution? Ans: N/A. AICPA BB: Resource Management. AICPA PC: Problem Solving.000 = $10. Fixed factory overhead is allocated to production. This customer has offered $43 per widget. IMA: Business Economics Solution 182 (10–12 min.) 26 .000 widgets for production during 2010. Inc.Incremental Analysis and Capital Budgeting Ex. Yes.000 30.000 . 181 (b) (Cont.000 Instructions Answer each of the following independent questions: 1. Cost to buy per widget Cost to make per widget: $7 + ($15 × 2) + $3 = Incremental savings per widget if purchased $39 40 $ 1 Total incremental savings if purchased = $1 × 10. Kasten will save $10.000 2. Kasten can make an extra $3. Kasten received an offer from another company to manufacture the same quality widgets for $39.250. budgeted 10. Should Kasten let someone else manufacture all 10. Ex. × 2 hrs.47 As shown in the incremental analysis. Larkin should accept the special order because incremental revenue exceeds incremental expenses by $4. Yes. AACSB: Analytic./unit) Variable manufacturing overhead ($3/unit) Fixed factory overhead costs ($5/unit) Total Cost per unit = $45 $ 70.000 = $3. Kasten received an order for 1. Ans: N/A. AACSB: Analytic.000 units of a component part that is used in its product and incurred the following costs: Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead $35.000 72.000 Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead Purchase price (6.000 × $12) Total annual cost Opportunity cost Total cost Income is expected to increase by $2.000 20.000 15. Coyle Company has the opportunity to use the factory equipment to produce another product which is estimated to have a contribution margin of $14.000) (12.000 -080. Ninth Edition Ex.000 Buy $ -0-0-020. Bloom: E.000. Difficulty: Medium. IMA: Business Economics Solution 183 (13–18 min. AICPA BB: Resource Management. Ex.000 10. AICPA PC: Problem Solving. AICPA FN: Decision Modeling.000 -0(72.000) 14.000 if the component part is purchased from the outside firm and the new product is manufactured.26 . If Agler makes the subassemblies.000 10. . $3 of the fixed overhead per unit will be allocated to other products.000 Increase (Decrease) $ 35.000 15.) Make $35.000 92.000 20. If the component part is purchased from the outside firm.000 -0$92.000 Another company has offered to sell the same component part to the company for $12 per unit.000 of the subassemblies for $18 each. 183 Coyle Company manufactured 6. SO: 4.000 15.48 Test Bank for Accounting Principles. Min: 13.000 $ 2. Instructions Prepare an incremental analysis report for Coyle Company which can serve as informational input into this make or buy decision.000 $94.000 $80. 184 Agler Corporation currently manufactures a subassembly for its main product. The fixed manufacturing overhead consists mainly of depreciation on the equipment used to manufacture the part and would not be reduced if the component part was purchased from the outside firm.000 10.000 14. The costs per unit are as follows: Direct materials Direct labor Variable overhead Fixed overhead Total $ 1 10 5 8 $24 Funkhouser Company has contacted Agler with an offer to sell it 5. AICPA BB: Resource Management.000 -0$1. Min: 6. If the bicycle company accepts this offer.000 units = $5. Min: 15.000 × $8) Direct Labor (50. Bloom: AN.000.000 bicycles per year. but the $30.000 by purchasing the seats. Ex. The company is currently operating at 100% capacity. AICPA FN: Decision Modeling. IMA: Cost Management Solution 184 (6 min. 185 Kuhn Bicycle Company has been manufacturing its own seats for its bicycles.000 of fixed manufacturing overhead currently being charged to the bicycle seats will have to be absorbed by other products.000 -0(1.000 × $9) Variable Manufacturing Costs ($450.030. respectively.000. Difficulty: Medium. and variable manufacturing overhead is charged to production at the rate of 60% of direct labor cost.00.000 $1.000 × 60%) Fixed Manufacturing Costs Purchase Price (50.000 1. 184 (Cont. Difficulty: Medium. Bloom: AP. Instructions (a) Prepare the incremental analysis for the decision to make or buy the bicycle seats. all variable manufacturing costs will be eliminated.000 Direct Materials (50.000 Dryer should buy to save $1 per unit. The direct materials and direct labor cost per unit to make the bicycle seats are $8. SO: 4. AACSB: Analytic. the company's net income would increase $120. SO: 4.) 26 . Normal production is 50.cost to buy = incremental cost ($24 – $5) – $18 = $1 Incremental cost to make = $1 × 5.) Make $ 400. AICPA FN: Decision Modeling.000 Net Income Increase (Decrease) $ 400.000 Buy $ -0-0-030. AICPA PC: Problem Solving. A supplier offers to make the bicycle seats at a price of $20 each. (b) Should Kuhn Bicycle Company buy the seats from the outside supplier? Justify your answer. . Ans: N/A.49 Instructions Should Agler make or buy the subassemblies? Explain your answer.) Cost to make .000 270. IMA: Cost Management Solution 185 (a) (15–20 min.000 450. AICPA BB: Resource Management.150.00 and $9. As indicated. Ans: N/A. AICPA PC: Problem Solving. AACSB: Analytic.000) $ 120.000 450.000 270.Incremental Analysis and Capital Budgeting Ex.000 30.000 × $20) Total annual cost (b) The seats should be purchased from the outside supplier. 70 1. In 2010.000 gallons that it produces.00 6.50 per gallon.60 The company is considering manufacturing the paint itself. It costs $75.60. The costs per unit to manufacture a gallon of the chemical are presented below: Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead Total manufacturing costs $6.000 (40.00 (1.70 (B) $1.40 $ 3. Variable manufacturing overhead $.60 11. Bloom: E.60) (.20 + $.60 8.000 more to turn the annual milk supply into ice cream. If the company processes the chemical further and manufactures the paint itself. AICPA PC: Problem Solving. 187 Ecker.00 per gallon.60 $ 2.30 .50 Test Bank for Accounting Principles. IMA: Business Economics Solution 186 (15–20 min. the following additional costs per gallon will be incurred: Direct materials $1.00 per gallon.50) — (2. SO: 5. the incremental net income would be $48.70) (. AICPA FN: Decision Modeling. 186 Spencer Chemical Corporation produces an oil-based chemical product which it sells to paint manufacturers.80 .70.000 gallons of milk which can be sold for $1 per gallon to a pasteurization company.20 .50 Assuming the company sells all 40. Difficulty: Medium. Instructions Determine the incremental per gallon increase in net income and the total increase in net income if the company manufactures the paint.00 1. produces milk at a total cost of $66.00 7. Ex.60 (C) $.80) $1. The production generates 60.000 gallons of the chemical.) Sell Chemical $11.00 + $1.80 + $. or the milk can be processed further into ice cream and then sold for $2.000. Min: 15.60 $8.20). AICPA BB: Resource Management. Inc. The selling price of the chemical is $11. Ninth Edition Ex.000 gallons × $1.80 1.60 Net Income Increase (Decrease) $4. the company incurred $344. Ans: N/A.26 .20 Sales price per unit Cost per unit: Direct materials (A) Direct labor (B) Variable manufacturing overhead (C) Fixed manufacturing overhead Total Net income per unit (A) $6.40 Process Further $15. No increase in fixed manufacturing overhead is expected.50. . The company can sell the paint at $15. Direct labor $. AACSB: Analytic.80 .20 .000 of costs to produce 40.00 1. 50 – $1.00) × 60. Difficulty: Medium.000 = $15. AICPA FN: Decision Modeling.) Process Further $440 155 80 56 21 312 $128 Net Income Increase (Decrease) $ 40 (5) (10) (7) -0(22) $ 18 Sales per unit Costs per unit Materials Labor Variable overhead (70%) Fixed overhead Total Net income per unit Sell $400 150 70 49 21 $290 $110 .000 profit Ecker should process into ice cream. Min: 12. Additional variable overhead will be incurred at the normal rates. AICPA PC: Problem Solving. management has concluded that some of this capacity can be used to assemble the bikes and sell them at $440 each. Min: 6. 188 Speedy Bikes could sell its bicycles to retailers either assembled or unassembled. AICPA BB: Resource Management.Incremental Analysis and Capital Budgeting Ex. AICPA BB: Resource Management. and direct labor by $10 per bike. Instructions (a) Prepare an incremental analysis for the sell-or-process-further decision. 187 (Cont. The cost of an unassembled bike is as follows. Direct materials Direct labor Variable overhead (70% of direct labor) Fixed overhead (30% of direct labor) Manufacturing cost per unit The unassembled bikes are sold to retailers at $400 each. IMA: Business Economics $150 70 49 21 $290 Solution 188 (a) (12 min.000 – $75. Difficulty: Medium. SO: 5. (b) Should Speedy sell or process further? Why or why not? Ans: N/A. AACSB: Analytic. how much is the incremental profit or loss? Should Ecker process the milk into ice cream or sell it as is? Ans: N/A. SO: 5. Bloom: AP. Bloom: E. Ex. Assembling the bikes will increase direct materials by $5 per bike.000 Incremental profits: $90.000 Incremental costs: given as $75.) 26 . AICPA FN: Decision Modeling.000 gallons = $90.) Incremental revenues: ($2.51 Instructions If Ecker processes the milk into ice cream. Speedy currently has unused productive capacity that is expected to continue indefinitely. AICPA PC: Problem Solving. AACSB: Analytic. but there will be no additional fixed overhead as a result of assembling the bikes. IMA: Business Economics Solution 187 (6 min. 000 8.000) 8.000 × 5 = $475. Recently the copy clerk has not been able to process all the necessary copies within the regular work week. Min: 11. The old machine can be sold to a scrap dealer for $8. AACSB: Analytic.000.000 9. Speedy Bikes should process further (rather than sell unassembled) because incremental revenue exceeds incremental expenses by $18 per unit. Ex. .000 $ 53.000 230.52 Test Bank for Accounting Principles. Ans: N/A.26 . AICPA PC: Problem Solving. The machine is unreliable and results in a significant amount of downtime and excessive labor costs.000 $ 53.000 — 5 years It is estimated that the new machine will produce annual cost savings of $95. Difficulty: Medium. The new machine is expected to have zero salvage value after five years. 188 (Cont. the current machine would have zero salvage value.000 Cost savings New machine cost Proceeds from sale of old machine Net incremental net income (A) $95.) Retain Equipment $ -0-0$ -0$ -0Replace Net Income Equipment Increase/(Decrease) $475. Both machines will have a salvage value of zero if operated for the remainder of their useful lives. Ninth Edition Ex. Ex. 189 Harris Timber Corporation uses a machine that removes the bark from cut timber. AICPA BB: Resource Management.000 (A) $475. IMA: Investment Decisions Solution 189 (11–16 min. Original purchase cost Accumulated depreciation Estimated operating costs (annual) Useful life Current Copier $10.200 5 years If sold now.000 (430. Data are presented below for the two machines: Original purchase cost Accumulated depreciation Estimated life Old Machine $340. AICPA FN: Decision Modeling.000. 190 Kinder Enterprises relies heavily on a copier machine to process its paperwork.000.000) (430. Bloom: AN. the current copier would have a salvage value of $1.000 — 4.000 5 years New Machine $430. The management is considering replacing the machine with a more efficient one which will minimize downtime and excessive labor costs. SO: 6.000 8. If operated for the remainder of its useful life.000. Management is considering updating the copier machine with a faster model.000 5 years New Model $20. Instructions Determine whether the company should purchase the new machine.000.) (b) As shown in the incremental analysis. The company should purchase the new machine because there will be an increase in net income of $53. 000 Operating costs New machine cost Salvage value Totals The current copier should be replaced.000 Net income $18. 190 (Cont.000 51.000 Less allocated fixed costs 6.000 16. AACSB: Analytic. AICPA FN: Decision Modeling. Min: 12. AICPA PC: Problem Solving.453 $15.000 16.000 45.) 26 .000 Net Income Increase (Decrease) $24. Bloom: E. 191 Milwaukee.000 35.) Bud $77.000 $ 5. has three divisions: Bud.000) 1. AICPA PC: Problem Solving.Incremental Analysis and Capital Budgeting Ex.000 Replace Machine $21.000 12.000 -0-0$45. (b) Should Milwaukee close the Wise division? Briefly indicate why or why not. Milwaukee feels that it should be discontinued.000 7. Difficulty: Medium.347 Er $40.800 Revenue Less variable costs Less direct fixed costs Less allocated fixed costs Net income . IMA: Investment Decisions Solution 190 (12–16 min.200 26. SO: 6. IMA: Investment Decisions Solution 191 (a) (10–12 min. Bloom: AP. Min: 10.000 $ (5.000) $ 8. Ans: N/A.000 10. Wise. that sales at the Bud division will increase by 10%. The incremental analysis shows that net income for the five-year period will be $5. AACSB: Analytic.000 12. AICPA FN: Decision Modeling.000 (20.547 $ 4. and that sales at the Er division will stay the same. Bud Wise Er Total Units sold 3.000 20.) Retain Machine $45.000 20.453 Total $117.53 Instructions Prepare an analysis to show whether the company should retain or replace the machine.000 $160.000 All of the allocated costs will continue even if a division is discontinued.000 19. 2010 are presented below. The results of May.000) $40.000 26.200 14.000 $50.000 Less variable costs 32. AICPA BB: Resource Management.000 (1. SO: 7. and Er.000 74.000 20.000 $ 19. Milwaukee feels if the division is closed. Ex. Instructions (a) Prepare an analysis showing the effect of discontinuing the Wise division.000 12.000 4.000 2.000 5.000 $ 21. Milwaukee allocates indirect fixed costs based on the number of units to be sold.000 higher by replacing the current copier. Ans: N/A. Difficulty: Medium.000 Revenue $70.000 Less direct fixed costs 14. Since the Wise division has a net loss.000 $40. AICPA BB: Resource Management.000 10. Inc. 000 = $7.000 of fixed selling expenses if it discontinues operation of the Consumer Division. (b) If the company had discontinued the division for 2010. Ans: N/A. AICPA FN: Decision Modeling. The company is considering disposing of the Consumer Division since it has been consistently unprofitable for a number of years.000 430.000 × 110% = $35.000 $ 320.453 To Er: [2.800) when the division is eliminated. AICPA PC: Problem Solving.000 – $19. IMA: Investment Decisions .300 + 2. Difficulty: Medium.300 + 2. Bloom: E. The increase in sales by 10% of the Bud division was not enough to offset the loss of the Wise division.54 Test Bank for Accounting Principles.000 = $12. The Timber Division manufactures and sells logs to paper manufacturers.000. AICPA BB: Resource Management. The income statements for the two divisions for the year ended December 31.000 150.000 350. the Timber Division and the Consumer Division.000)] × $20.500.000) Total $2.000 Variable costs = $32. Ex.000 Sales Cost of goods sold Gross profit Selling & administrative expenses Net income In the Consumer Division.000 $ 350. AACSB: Analytic. The profit decreases by $1.200 Allocation of total allocated fixed costs of $20.300 ÷ (3.000 Consumer Division $500.000 ÷ (3.000 × 110% = $77. The management of the company feels it can save $45.000)] × $20. Instructions (a) Determine whether the company should discontinue operating the Consumer Division.547 (b) No.000 600.000 $ (30. The Consumer Division operates retail lumber mills which sell a variety of products in the do-ityourself homeowner market.) Calculations: Revenue = $70.000 900. Ninth Edition Solution 191 (Cont. 70% of the cost of goods sold are variable costs and 25% of selling and administrative expenses are variable costs.000 250. 2010 are presented below: Timber Division $1. SO: 7.000 1.000 of fixed cost of goods sold and $60. 192 Trump Forest Corporation operates two divisions.26 .000: To Bud: [3. Min: 20. determine what net income would have been.000 750.250.200 ($21.000 180. 000 $350.000 7.000) = $245. SO: 7. Bloom: AP.000 (B) 210.000 7.000 + $(105.000 $ 7.000 22.000 The company should continue the Consumer Division because contribution margin. is greater than the avoidable fixed costs.000) 245.000 51. AICPA BB: Resource Management.000 $85.000 $ 8.000 + 1. $105.000 $ 2. Difficulty: Medium.000) + 17. exp.000 105.000 $23. $210.000 = $105.000 = $135.000 Ex.000 1. videos.55 Net Income Increase (Decrease) $(500.000 245.000 $(105. Net income (A) (B) (20–25 min.000 7. Results of the fourth quarter are presented below: Units sold Revenue Variable departmental costs Direct fixed costs Allocated fixed costs Net income (loss) Books 1. (b) Net income for the total company would have been $245. Demand of individual products are not affected by changes in other product lines.000 $180.000 (D) $ (30.000 (C) 135.000 $22.000.000 12.000 17.000 3.000) (C) (D) Eliminate $ -0-0-0-060.000) Incremental revenue Incremental costs: Variable costs savings Direct fixed costs savings Decrease in profits if discontinued .000: Timber Division + Decrease in Net Income $350.) CONSUMER DIVISION Continue $500. IMA: Investment Decisions Solution 193 (6 min.) $(22.000 75. Instructions What will happen to profits if Mercer discontinues the Books product line? Ans: N/A. Min: 6.000 Total 5. exp.000 (A) 45. AICPA PC: Problem Solving. AICPA FN: Decision Modeling.000 $40.000 × 70% = $245. 193 Mercer has three product lines in its retail stores: books.000 $(135.000 45.000 × 25% = $45.000) Music 2.000.000) 26 . and music.000 – $45.000 $180.Incremental Analysis and Capital Budgeting Solution 192 (a) Sales Variable expenses: Cost of goods sold Selling and admin.000 $ (4.000 (210.000 60.000 Videos 2. Contribution margin Fixed expenses: Cost of goods sold Selling and admin.000) $350.000 21.000 – $245.000 6. AACSB: Analytic.000 $ (3.000 The allocated fixed costs are unavoidable.000) 45.000 2. 26 . and its operating expenses are 75% fixed. If the Southern Division is eliminated. AICPA PC: Problem Solving.000 1.000 950.000 800.000 greater. The reduction in income is the result of the loss of the contribution margin less the avoidable fixed costs of $10.000 940.000.130.000 $(235.000) 260.000 $ (60.000 1. IMA: Investment Decisions Solution 194 (20–25 min. not $60.000 (185. The cost of goods sold for the Southern Division is 35% fixed.000 295.000 400.) Continue $480.000 1. Ans: N/A.000) Sales Variable Expenses Cost of goods sold Operating expenses Total Variable Contribution Margin Fixed Expenses Cost of goods sold Operating expenses Net Income (Loss) The accountant is not correct.000 Southern Division $480.) Sales Cost of Goods Sold Gross Profit Operating Expenses Net Income Other Three Divisions $2.000 140. cost of goods sold is 80% variable and operating expenses are 70% variable. Ninth Edition Ex.000 $ (60. AACSB: Analytic.000 95.000. SO: 7.000 $ 190.000 260.000) Total $2. AICPA FN: Decision Modeling. The following presentation was made to Fanning's Board of Directors. AICPA BB: Resource Management. only $10.000 185.000 140.56 Test Bank for Accounting Principles.000 of the fixed operating costs will be eliminated.000 $ 250. Difficulty: Medium.000) -010. Instructions Do you concur with the new accountant's recommendation? Present a schedule to support your answer. the net income will be $175.000) Net Income Increase (Decrease) $(480.000 $(175.000 80.000 For the other divisions.000 35.000.480. the accountant made the recommendation to eliminate the Southern Division stating that total net income would increase by $60.050. Min: 20.000 35.000 less. .000) Eliminate $ -0-0-0-0-0140.000 105. 194 A recent accounting graduate from Marvel State University evaluated the operating perform-ance of Fanning Company's four divisions. During the presentation. (See analysis below.000 295.350. If the division is eliminated. Bloom: E. 195 26 . AICPA PC: Problem Solving. Min: 20.000 $200. IMA: Business Economics Solution 195 (20–25 min. AICPA FN: Decision Modeling. $ 25 47 $24 1. Ans: N/A.6 hrs. prepare a report to show which product should be produced and sold.57 Ridley Company has 8. Bloom: E. AACSB: Analytic. The cost accounting department developed the following unit information for each of the products: Product A Product B Sales price $57 $71 Direct materials 19 21 Direct labor 15 14 Variable manufacturing overhead 8 12 Fixed manufacturing overhead 3 6 Machine hours required . Difficulty: Medium.) RIDLEY COMPANY Contribution Margin per Unit Limited Resource Contribution margin per unit: Sales price Variable costs Direct material Direct labor Variable overhead Contribution margin Machine hours required: Product A $57 $19 15 8 $21 14 12 Product B $71 42 $15 . SO: 8.2) Machine hours available Contribution margin The company should produce and sell Product A.000 20 8.000 $ Hughes Company manufactures and sells two products.6 1.2 hrs. AICPA BB: Resource Management.2 Management desires to make a decision regarding which product to produce in order to maximize the company's income.Incremental Analysis and Capital Budgeting Ex. Ex.000 $160. Relevant per unit data concerning each product are given below: Product Standard Deluxe Selling price $28 $32 Variable costs $10 $12 Machine hours 4 5 . Contribution margin per unit of limited resource ($15 ÷ . Instructions Taking into consideration the constraint under which the company operates.6) ($24 ÷ 1. 196 8.000 machine hours available to use to produce either Product A or Product B. 000 Product Standard 1.000 20. AICPA PC: Problem Solving.000 60. Min: 25. Ans: N/A. (c) (1) Machine hours 1.000 $32. (b) If 1.250 Product Deluxe 500 5 100 $20 $2.58 Test Bank for Accounting Principles. Ninth Edition Ex. Bloom: AP.000 .000 additional machine hours are available. AICPA FN: Decision Modeling.500 Standard 500 4 125 $18 $2. 197 Finney Company estimates the following cash flows and depreciation on a project that will cost $200.00 Contribution margin per unit (a) Machine hours required (b) Contribution margin per unit of limited resource (a) ÷ (b) (b) The Standard product should be manufactured because it results in the highest contribution margin per machine hour. 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. 196 (Cont.000 4 250 $18 $4.26 . (2) Allocated entirely to the product identified in (b) above.000 $10. SO: 8.000 ÷ 2 (a) Machine hours per unit (b) Units produced (a) ÷ (b) Contribution margin per unit Total contribution margin (2) Machine hours (a) Machine hours per unit (b) Units produced (a) ÷ (b) Contribution margin per unit Total contribution margin Ex.) Product Standard Deluxe $18 $20 4 5 $4.000 8. Difficulty: Medium.) Instructions (a) Compute the contribution margin per unit of the limited resource for each product.50 $4. AACSB: Analytic.000 and will last 10 years with no salvage value: Revenues Sales Operating expenses Salary expense Depreciation expense Miscellaneous expenses Net Income $70. IMA: Business Economics Solution 196 (a) (25–30 min. AICPA BB: Resource Management. 135. AICPA BB: Resource Management. 198 Wesley Medical Center is considering purchasing an ultrasound machine for $1. AICPA PC: Problem Solving. IMA: Investment Decisions Solution 198 (16–22 min. Instructions (a) Compute the payback period for the new ultrasound machine.200 + $800 = $1. (b) Calculate the cash payback on this project showing calculations to support your answer.000 ÷ $30. $200.) (a) Annual rate of return is 10%.000 Annual Cash Flow: Number of procedures: 52 × 5 = 260 Contribution margin per procedure: $850 – $10 – $40 = $800 Total annual cash flow: 260 × $800 = $208. (b) Compute the annual rate of return for the new machine.000 Annual rate of return = ———— = 10% $100.000 . Ans: N/A.000 Annual cash inflow ($10.200 and $800. AACSB: Analytic.000 Cash payback = $200. SO: 9.) 26 .Incremental Analysis and Capital Budgeting Ex. Bloom: AP. There are $10 in medical supplies and $40 of technician costs for each procedure performed using the machine. Installation costs and freight charges will be $24. Difficulty: Medium. IMA: Investment Decisions Solution 197 (9–14 min. AICPA BB: Resource Management.59 Instructions (a) Calculate the expected annual rate of return on this project showing calculations to support your answer.000 + $20.) (a) Cost of the ultrasound machine: $1.000 2 $10.160. AICPA FN: Decision Modeling. respectively. Difficulty: Medium.000 Average investment = ———— = $100. The Center uses straight-line depreci-ation. SO: 9.135. AICPA PC: Problem Solving. AACSB: Analytic.000 + $24. Min: 16. Bloom: AP.000. The medical center estimates that the machine will be used five times a week with the average charge to the patient for ultrasound of $850. Ans: N/A. 197 (Cont.000 (b) Cash payback period is 6. Min: 9. The machine has a 10-year life and an estimated salvage value of $40. Investment $200.000 = 6. AICPA FN: Decision Modeling.000.67 years.67 years Ex.000) $30. 6 years $208. and freight charges were $740. 199 Laramie Service Center just purchased an automobile hoist for $13. and the labor cost to install a muffler is $10.160. Installation costs were $2.000 + $40.000 Cash payback: ————— = 5.900 + $740 = $18. Min: 10.720 – $960) ÷ 5 = $3.160. Laramie estimates that the new hoist will enable his mechanics to replace four extra mufflers per week.720. Laramie uses straight-line depreciation.) $1. (a) (b) 208 $ 20 $4. IMA: Investment Decisions Solution 199 (10 min. . Bloom: AP.000 Average Annual Rate of Return: ———— = 16% $600.000 Average Investment: —————————— = $600. Difficulty: Medium. (Round to one decimal.000 = $96. (b) Compute the annual rate of return for the new hoist.000 Annual Depreciation: —————————— = $112. AICPA PC: Problem Solving. AICPA FN: Decision Modeling.000 $96. Average annual rate of return = $632 ÷ $9. The new hoist will be used to replace mufflers and tires on automobiles. The hoist has a 5-year life and an estimated salvage value of $960.900.) Ans: N/A.60 Test Bank for Accounting Principles.000. Instructions (a) Compute the payback period for the new hoist. SO: 9. Ninth Edition Solition 198 (Cont. AICPA BB: Resource Management.528. Net annual cash flow: Number of extra mufflers: 4 × 52 weeks Contribution margin per muffler ($65 – $35 – $10) Total net annual cash flow: (a) × (b) Cash payback = $18.000 (b) $1.900 = 6.160 = 4.000 + $2.900. AACSB: Analytic. Annual net income: $4.160 (b) Average investment: ($18.000 – $112.4% (rounded). Each muffler sells for $65 installed.720 + $960) ÷ 2 = $9.000 Ex.160 – $3.000 2 $1.) (a) Cost of hoist: $13.000 – $40.26 .160.000 10 years Annual Net Income: $208. Annual depreciation: ($18. The cost of a muffler is $35.5 years.528 = $632.720 ÷ $4. 000 = .000 $11. AICPA BB: Resource Management.11 years CC Year 1 2 3 $11. SO: 9.000 = $9.000 9.27 BB 20. AICPA FN: Decision Modeling.000 31.000 $9.000.000 9. Difficulty: Medium.000 Cumulative Net Cash Flow $ 7. Bloom: E.000 BB $ 9.000 $31. Cepeda uses straight-line depreciation. Cepeda's minimum required rate of return is 12%.500 9.000 15. Year 1 2 3 Total AA $ 7.500 9.000 = . Cepeda will not accept any project with a payback period over 2 years.9 . Min: 25.000 $4.000 15.500 CC $11.000 – $16.) (b) Compute the net present value of each project.000 10.000 ÷ (28.000 9.500 $28. each requiring an equipment investment of $20.000 = $4.000 The equipment's salvage value is zero. IMA: Investment Decisions Solution 200 (a) Year 1 2 3 (25 min.000 21. AICPA PC: Problem Solving.000 ÷ $10.) Ans: N/A. indicating the most desirable project and the least desirable project using this method.000 – 11.000 Cash payback 2.27 years $20.61 Cepeda Manufacturing Company is considering three new projects.000 30.500 ÷ 3) = 2. 200 26 . AACSB: Analytic.Incremental Analysis and Capital Budgeting Ex. (Round to two decimals. Does your evaluation change? (Round to nearest dollar. Each project will last for 3 years and produce the following cash inflows.000 10.) AA Annual Net Cash Flow $ 7.000 Cash payback 1.000 ÷ $15.9 years $20.000 16.000 9.10. Instructions (a) Compute each project's payback period.000 $30. 500 9. SO: 9. Instructions (Round to two decimals. Ans: N/A.000 = 3.) (a) Compute (1) the annual rate of return and (2) the cash payback period on the proposed capital expenditure.077 200. all of the projects are acceptable. As indicated. Bloom: AP.13 years. The least desirable project is AA because it has the longest payback period. Also.677 24.79719 3 .000 + $0) ÷ 2] = 18% Cash payback: $200.) The most desirable project is CC because it has the shortest payback period.000 $ 4.00000 Present Value $209. AICPA FN: Decision Modeling. (b) AA Net Annual Cash Flow $ 7. IMA: Investment Decisions Solution 201 (a) (1) (2) (b) (16 min. only CC is acceptable because its cash payback is 1. which is the minimum acceptable rate of return on the investment. respectively.9 years.250 7. Difficulty: Medium. Min: 16.102 20.762 9.821 7. AICPA BB: Resource Management.000 9.000 6.406 24.40183 = $22.000 $ 9.500 CC Present Net Cash Value Flow $ 8. Amount $ 58.199 20.62 Test Bank for Accounting Principles.10.817. AACSB: Analytic. Ex.000 22. Depreciation is by the straight-line method.000 ÷ [(200.175 10.000 in additional productive facilities.000 and $58.500 × 2. Ninth Edition Solution 200 (Cont. on the basis of net present values.60478 1.000.000 BB Present Value $ 6.482 $11.102 Net Annual Cash Flow $9.199 Discount Year Factor 1 .26 .000 7. Project BB is the least desirable. compute the net present value.000 ÷ $58.573 10.000 $ 4.) Annual rate of return: $18.000 $200.71178 Total present value Investment Net present value (1) This total may also be obtained from Table 2: $9. 201 Gantner Company is considering a capital investment of $200. Project CC is still the most desirable project. Gantner has a 12% cost of capital rate. AICPA PC: Problem Solving.000 15.500 9. annual net income and cash inflows are expected to be $18.077 Item Net annual cash flows Capital investment Positive net present value . The new machinery is expected to have a useful life of 5 years with no salvage value.817(1) 20.972 6. (b) Using the discounted cash flow technique.89286 2 .817 Present Value $ 9.000 $ 2.000 Years 1-5 Now PV Factor 3. During the life of the investment. 000 ÷ $250.000. AICPA PC: Problem Solving.712 $101.000 $27.147 *Net income plus annual depreciation of $24.056 $80. Year 1 2 3 TIP $ 6.000 = 3. . The new machine is expected to have zero salvage value at the end of the five-year period.000 .000 9.36. Min: 22.000 TOP $ 9. AACSB: Analytic.000 9.000.893 33. Present value data are as follows: Present Value of 1 Period 12% 1 . This factor is found in the PVA table at n = 5 periods.797 38.000 .000 in annual cash flows for a period of five years. 202 26 . The required rate of return is 12%. Min: 4. 203 Sargent Company is considering two new projects.690 3 2. Difficulty: Medium.000 14. IRR = 15% Ex. Bloom: E.893 2 .797 3 . each requiring an equipment investment of $72. AICPA PC: Problem Solving. (b) Which project should be selected? Why? Ans: N/A. AACSB: Analytic. The investment is expected to generate $250.790 26.301 27.893 2 1.000 $29.) IRR = Capital investment ÷ Annual cash inflows = Factor $840. AICPA FN: Decision Modeling. Each project will last for three years and produce the following annual net income.) Project TIP Annual Cash Inflows* Present Value of 1 $ 30.63 Ace Corporation recently purchased a new machine for its factory operations at a cost of $840.000 9. AICPA FN: Decision Modeling.Incremental Analysis and Capital Budgeting Ex. Sargent requires a minimum rate of return of 12%. Bloom: AP. AICPA BB: Resource Management. (Table 2 from Appendix C is needed.402 Instructions (a) Compute the net present value of each project. SO: 10. IMA: Investment Decisions Solution 203 (a) Year 1 2 3 (22–27 min. Sargent Company uses straight-line depreciation.000 Present Value $26. IMA: Investment Decisions Solution 202 (4 min.000. AICPA BB: Resource Management.) Ans: N/A.000 . Instructions Calculate the internal rate of return.000 The equipment will have no salvage value at the end of its three-year life.712 Present Value of an Annuity of 1 Period 12% 1 . SO: 10. Difficulty: Medium. 000 28.212 8% 3.000 $28.147 Present value of future cash inflows Capital investment Positive net present value Project TOP Present value of future cash inflows ($33. this project has an approximate interest yield of 12%.000 = 3.60 Since the calculated internal rate of return factor of 3.000 $ 7.605 15% 3. Ans: N/A.147 72. Difficulty: Medium.60 is very near the factor 3.000 28. Bloom: E. Ex. Min: 6. 205 Martinez Company has money available for investment and is considering two projects each costing $70. Each project has a useful life of 3 years and no salvage value. SO: 10.993 10% 3. AACSB: Analytic.000 × 2. AICPA BB: Resource Management.402) Capital investment Positive net present value $79.000.266 72. determine if this project is acceptable by calculating an approximate interest yield for the project. 204 Yanik Company is considering investing in a project that will cost $162.64 Test Bank for Accounting Principles. Project TIP is the preferred project because its positive net present value is greater than project TOP's net present value.000 . The company has a hurdle or cutoff rate of return of 8% and uses the following compound interest table: Present Value of an Annuity of 1 Period 5 6% 4. AICPA PC: Problem Solving.000 $ 8.266 (b) Both projects are acceptable because both show a positive net present value.000 ————$45. It is estimated that the project will generate annual cash inflows of $45.000 each year. The investment cash flows follow: Project A Project B Year 1 $ 8.000 and have no salvage value at the end of its 5-year life.26 .605 for five periods and 12% interest. AICPA FN: Decision Modeling.) Capital Investment ————————— = Internal Rate of Return Factor Annual Cash Inflows $162. Ex.791 12% 3. and is therefore acceptable because it is greater than the company's cutoff rate of 8%.000 Year 2 24.352 Instructions Using the internal rate of return method. Ninth Edition Solution 203 (Cont. IMA: Investment Decisions Solution 204 (6–11 min.) $80.000 Year 3 52. 996 22. Bloom: AP. Project A earns less than an 8% return. Difficulty: Easy. AICPA BB: Industry/Sector Perspective. Bloom: K. Project A Year 1 $8.156 COMPLETION STATEMENTS 206.156 (70.) 26 . AICPA BB: Industry/Sector Perspective. Difficulty: Medium. Bloom: K. AICPA FN: Measurement.264 (70. AICPA PC: Problem Solving.000 × . Min: 1. IMA: Business Economics 209.794 = Present value of cash inflows Cash purchase price Net present value of project A Project B Year 1 $28. AICPA BB: Resource Management. Difficulty: Easy.794 = Present value of cash inflows Cash purchase price Net present value of project B $ 7.Incremental Analysis and Capital Budgeting Ex. AICPA FN: Measurement.000 × .000 × . The potential benefit that may be obtained by following an alternative course of action is called an _________________ cost. IMA: Business Economics 207. Ans: N/A.) Project B is acceptable since its net present value is positive. AACSB: None. Ans: N/A. AACSB: None.000 × .) Ans: N/A.000 × . AACSB: None. IMA: Business Economics . AICPA PC: Interaction. SO: 4. The process used to identify the financial data that change under alternative courses of action is called __________________ analysis.857 = Year 3 $52.000) $ (736) $25. which project should be selected? Justify your response. Ans: N/A. IMA: Investment Decisions Solution 205 (12 min. AACSB: None. SO: 3. Bloom: K. AICPA BB: Resource Management. a major consideration is whether the special price exceeds __________________. AICPA PC: Problem Solving. SO: 1. SO: 10. Difficulty: Easy. Ans: N/A. AICPA FN: Decision Modeling.000 × . An important purpose of management accounting is to provide _____________________ for decision making.288 69. Min: 12. Min: 1.926 = Year 2 $28.65 Instructions If 8% is an acceptable earnings rate. AICPA BB: Resource Management. 205 (Cont. In a decision on whether an order should be accepted at a special price when there is plant capacity available. (Table 1 from Appendix C is needed.857 = Year 3 $28.000) $ 2. Min: 1. AICPA FN: Decision Modeling. AACSB: Analytic.232 72. AICPA PC: Problem Solving. AICPA FN: Decision Modeling. SO: 2. This indicates that project B provides a return greater than the company's minimum expected return of 8%. Min: 1.926 = Year 2 $24. Difficulty: Easy. Bloom: K.408 20. IMA: Business Economics 208.928 23. AICPA PC: Problem Solving.568 41. Ans: N/A. AACSB: None. the products with the highest contribution per unit of ______________ should identify the products to be produced. AACSB: None. Difficulty: Easy. AICPA PC: Problem Solving. A decision whether to sell a product now or to process it further. Min: 1. Ans: N/A. and (3) ___________________. Ans: N/A. Min: 1. AICPA BB: Resource Management. Min: 1. AICPA BB: Resource Management. Bloom: K. Min: 1. Min: 1. Min: 1. depends on whether the incremental _____________ from processing further are greater than the incremental processing ______________. IMA: Business Economics 213. Difficulty: Easy. AICPA BB: Resource Management. AICPA PC: Problem Solving. IMA: Investment Decisions 217. Difficulty: Easy. SO: 10. AICPA BB: Resource Management. AICPA BB: Resource Management. IMA: Investment Decisions 216. AICPA PC: Problem Solving. IMA: Business Economics 211. AICPA PC: Problem Solving. AICPA FN: Decision Modeling. AICPA PC: Problem Solving. Bloom: K. Ninth Edition 210. AICPA PC: Problem Solving. AICPA BB: Resource Management.26 . Bloom: K. Bloom: K. SO: 9. Min: 1. Min: 1. A major limitation of the annual rate of return approach is that it does not consider the _______________ of money. IMA: Investment Decisions 215. IMA: Investment Decisions 219. Difficulty: Easy. Bloom: K. SO: 5. Bloom: K. AICPA BB: Industry/Sector Perspective. SO: 8. AACSB: None. a project is acceptable if the project's net present value is ____________ or _______________. IMA: Business Economics 212. IMA: Investment Decisions 220. AICPA FN: Decision Modeling. AACSB: None. SO: 10. AACSB: None. SO: 9. IMA: Investment Decisions . Bloom: K. Three quantitative techniques which are frequently used in capital budgeting decisions are (1) _________________. SO: 9. AICPA PC: Problem Solving. Bloom: K. Bloom: K. The two discounted cash flow techniques used in capital budgeting are (1) the _______________________ method and (2) the ______________________ method. The ______________ value of old equipment is irrelevant in a decision to replace that equipment and is often referred to as a _____________ cost. AICPA FN: Decision Modeling. SO: 6. Difficulty: Easy. Ans: N/A. The technique which identifies the time period required to recover the cost of the investment is called the ________________ method. In using the net present value approach. Difficulty: Easy. Ans: N/A. IMA: Investment Decisions 214. AACSB: None. AICPA FN: Decision Modeling. Ans: N/A. AACSB: None. Ans: N/A. The process of making capital expenditure decisions in business is called ___________. In an environment where there are limited resources. AACSB: None. Difficulty: Easy. AICPA PC: Problem Solving. Bloom: K. Difficulty: Easy. (2) _________________. AICPA PC: Problem Solving. AICPA FN: Decision Modeling. Min: 1. Knowledge of the ______________________ is necessary when discounting future cash flows under the net present value approach. AICPA BB: Industry/Sector Perspective.66 Test Bank for Accounting Principles. The internal rate of return method differs from the net present value method in that it results in finding the ___________________ of the potential investment. Bloom: K. Difficulty: Easy. AICPA FN: Decision Modeling. Ans: N/A. AICPA BB: Resource Management. AICPA FN: Measurement. AICPA FN: Decision Modeling. AICPA FN: Decision Modeling. AICPA PC: Problem Solving. AACSB: None. AICPA BB: Resource Management. AACSB: None. SO: 9. AACSB: None. Ans: N/A. Min: 1. Ans: N/A. SO: 10. Min: 1. AICPA PC: Problem Solving. Difficulty: Easy. Difficulty: Easy. AICPA FN: Decision Modeling. AICPA BB: Resource Management. Ans: N/A. AICPA FN: Decision Modeling. SO: 10. IMA: Investment Decisions 218. The potential benefit that may be lost from following an alternative course of action.67 Answers to Completion Statements 206. The determination of the profitability of a capital expenditure by dividing expected annual net income by the average investment. J. zero. 211. ____ ____ ____ ____ ____ ____ ____ 10. time value 216. The process of identifying the financial data that change under alternative courses of action. net present value. H. A method used in capital budgeting in which cash inflows are discounted to their present value and then compared to the capital outlay required by the capital investment. Ans: N/A. A method used in capital budgeting that results in finding the interest yield of the potential investment. 6. discounted cash flow 215. The process of making capital expenditure decisions in business. 213. AICPA FN: Decision Modeling. 207. cash payback. 2. cash payback 217. AICPA BB: Industry/Sector Perspective. 3. required rate of return 219. IMA: Investment Decisions . A. E. B. internal rate of return 218. 208. 212. ____ ____ ____ Incremental analysis Opportunity cost Discounted cash flow technique Capital budgeting Annual rate of return technique F. I. 8. The minimum rate of return management requires on an investment. SO: 6. 5. positive 220. annual rate of return. sunk limited resource capital budgeting 214. A capital budgeting technique that identifies the time period required to recover the cost of a capital investment from the annual cash inflow produced by the investment. AICPA PC: Problem Solving. Bloom: K. 4. 209. AACSB: None. Cash payback technique Hurdle or cutoff rate Net present value method Sunk cost Internal rate of return method 1. interest yield MATCHING 221. Difficulty: Easy.Incremental Analysis and Capital Budgeting 26 . 7. A capital budgeting technique that considers both the estimated total cash inflows from the investment and the time value of money. G. C. 9. Min: 5. costs book. Match the items below by entering the appropriate code letter in the space provided. D. A cost that cannot be changed by any present or future decision. relevant information incremental (differential) variable costs (incremental costs) opportunity revenues. 210. briefly identify the quantitative factors that should be considered. G E B D F SHORT-ANSWER ESSAY QUESTIONS S-A E 222 Management is often faced with the alternative of continuing to make a product or component internally. SO: 4. 5. and briefly explain what features these approaches have that make them more desirable than other approaches. the discounted cash flow methods (net present value and internal rate of return) are considered more desirable because they consider both the estimated cash flows and the time value of money. and the opportunity cost (potential benefit foregone) if the product is made. 4. I C H A J 6. Ninth Edition Answers to Matching 1. The time value of money is critical because of the long-term impact of capital budgeting decisions. 9. Capital budgeting approaches which do not consider the time value of money include annual rate of return and cash payback. but only some fixed costs. Are there any qualitative factors that should also be considered? Ans: N/A. 3. . or going to an external source and purchasing the product or component. Difficulty: Easy. AICPA BB: Resource Management. Min: 5. AICPA BB: Resource Management.26 . 7. or no fixed costs. Difficulty: Easy. Also identify the least desirable approach and explain its major weaknesses. AICPA FN: Decision Modeling. IMA: Investment Decisions Solution 223 From a conceptual standpoint. AACSB: None. AICPA FN: Decision Modeling. Generally. are relevant because many fixed costs will be incurred regardless of whether the decision is to make or buy. the incremental costs of buying the product. SO: 10. In gathering relevant information for these two alternatives. Bloom: K. Min: 5. AICPA PC: Problem Solving. AICPA PC: Problem Solving. 10. 2. AACSB: None.68 Test Bank for Accounting Principles. Identify those approaches that are more desirable from a conceptual standpoint. S-A E 223 Management uses several capital budgeting approaches in evaluating projects for possible investment. all variable production costs are relevant in a make or buy decision. Ans: N/A. Qualitative factors include the possible adverse effect on employees and the stability of the supplier's price and quality. 8. IMA: Business Economics Solution 222 The quantitative factors to be considered in a make or buy decision include the incremental costs to make the product. The cash payback method is the least desirable because it also ignores the expected profitability of the project. Bloom: K. though I probably should. "Anyway. and the project is unacceptable when the rate of return is less than the minimum rate of return. informally. that a cost is only 50% likely to be that low. Best of all. I haven't sent it on yet. S-A E 226 (Ethics) Tom Mullins is on the capital budgeting committee for his company. Bloom: K. AICPA BB: Resource Management. Is it ethical to adjust the figures to compensate for risk? Explain. "I really hoped that the cost projections wouldn't pan out. then double it. AICPA FN: Decision Modeling. for instance. SO: 4. AACSB: None. IMA: Investment Decisions Solution 225 Cost of capital is the rate of return that management expects to pay on all borrowed and equity funds. Min: 5." he tells his friend. AICPA PC: Problem Solving. Min: 5. Bloom: K. He'll just think someone else's project was even better than his. IMA: Investment Decisions Solution 224 Opportunity cost may be defined as the potential benefit that may be obtained by following an alternative course of action. Difficulty: Easy. Who are the stakeholders in this situation? 2. 3. you can probably get it shot out of the water pretty easily. IMA: Business Economics Solution 226 1. Opportunity cost is relevant in a make-or-buy decision when the facilities used to make the part can be used to generate additional income. the rank and file don't get to come to those sessions. AICPA FN: Decision Modeling. Just fix the numbers. "The technology used in this is pie in the sky kind of stuff. AICPA FN: Decision Modeling. Is it ethical to change the proposal before submitting it? Explain. Difficulty: Easy. AICPA PC: Problem Solving. Bloom: K.Incremental Analysis and Capital Budgeting S-A E 224 26 . If you figure. . Colgan Tile. Your engineering genius need never know. We do it all the time." How may this cost be relevant in a make-or-buy decision? Ans: N/A." "You can keep it if it's really that bad. and not have the guy who submitted it mad at you for not turning it in. But the figures are very convincing. The stakeholders include: Ken Scales Colgan Tile the engineer who submitted the proposal." Required: 1.69 Define the term "opportunity cost. Ans: N/A. Ans: N/A. AACSB: Communications. The decision rule is: A project is acceptable if its rate of return is greater than or equal to management's minimum rate of return (which often is its cost of capital). AICPA PC: Problem Solving. Difficulty: Easy. Ken expresses his disappointment to Tom that a project that was given to him to review before submission looks extremely good on paper. Ken Scales is an engineer for the firm. and indicate its relevance to the decision rule under the annual rate of return technique. SO: 9. AICPA BB: Resource Management." assures Tom. SO: 9." Define the term. Min: 5. There are a hundred things that could go wrong. AICPA BB: Resource Management. S-A E 225 Manny Perez is trying to understand the term "cost of capital. AACSB: Ethics. the entire selection process is undermined. and should have the right to review those changes. The memory of each individual work station would be enhanced. Two options have emerged. The company wishes to invest in more up-to-date software and to improve its printing capabilities. more efficient printer would be used. Better telecommunications equipment would allow for the electronic transmission of some documents as well. Option #2 appears to be too risky. and a larger.70 Test Bank for Accounting Principles. the company is not well known. Option #1 is for the company to keep its existing computer system. . Secondly. the changes will be easier to implement because the equipment is similar to that which we already use. and it becomes entirely subjective. Bloom: K.000 90.000 10.26 . However. the company will have less money invested in the project.) 2. In the first place.000) 90. which decreases our risk of loss should the project fail.000 0 Required: Prepare a brief report for management in which you make a recommendation for one system or the other. 3. It is ethical. SO: 6.000 90. to purchase upgrades to our present system and to buy a more efficient printer. AACSB: Communications. Ninth Edition Solution 226 (Cont. to adjust projections to compensate for risk. S-A E 227 (Communication) You are the general accountant for Word Systems. Min: 5. a typing service based in Los Angeles.000) 55. using the information given. AICPA FN: Decision Modeling. The net present value information for these options follows: Initial Investment Returns Year 1 Year 2 Year 3 Net Present Value Option #1 $(95. certainly not in the way described. Inc. Otherwise. and upgrade its word processing program. California. IMA: Investment Decisions Solution 227 I recommend that the company accept Option #1.000 30. and it comes with individual laser printers. It currently has a widely used version of a word processing program. and the software does not connect well with well-known software.000 0 Option #2 $(270. The company has decided to upgrade its equipment. in general. AICPA PC: Problem Solving. Difficulty: Easy. It is probably not ethical to modify a proposal at all. Ans: N/A.. However. it should be clearly stated that the projections have been adjusted for risk. and the method used should be available for review. The software for this system is extremely impressive. The engineer submitting the proposal should have the right to know about any changes that were made. AICPA BB: Resource Management. Option #2 would be for the company to invest in an entirely different computer system.