Exam 19: Incremental Analysis

A company is contemplating the acceptance of a special order. The order would not affect regular sales and could be filled without exceeding plant capacity. However, a new stamping machine would have to be purchased in order to stamp the customer's name on the product. Which of the following is likely?

Baden Company manufactures a product with a unit variable cost of $100 and a unit sales price of $176. Fixed manufacturing costs were $480,000 when 10,000 units were produced and sold. The company has a one-time opportunity to sell an additional 1,000 units at $140 each in a foreign market which would not affect its present sales. If the company has sufficient capacity to produce the additional units, acceptance of the special order would affect net income as follows:

Marcus Company gathered the following data about the three products that it produces: Which of the products should not be processed further?

Use the following information for questions Hi-Tech Inc. has several outdated computers that cost a total of $17,800 and could be sold as scrap for $4,600. They could be updated for an additional $2,400 and sold. If Hi-Tech updates the computers and sells them, net income will increase by $9,000. -What amount would be considered sunk costs?

Serene Dairy has four product lines: sour cream, ice cream, yogurt, and butter. The total cost of producing the milk base for the products is $45,000, which has been allocated based on the gallons of milk base used by each product. Results for July follow: How much are total joint costs of the products?

Nonfinancial information that management might evaluate in making a decision would not include

Crigui Music produces 60,000 CDs on which to record music. The CDs have the following costs: Direct Materials \ 13,000 Direct Labor 15,000 Variable Overhead 3,000 Fixed Overhead 7,000 Crigui could avoid $4,000 in fixed overhead costs if it acquires the CDs externally. If cost minimization is the major consideration and the company would prefer to buy the 60,000 units externally, what is the maximum external price that Crigui would expect to pay for the units?

When deciding whether or not to replace old equipment with new equipment, the overriding consideration is the

A decision whether to continue to make a product or buy it externally depends on the external price and the amount of variable and fixed costs that can be eliminated assuming no alternative uses of resources.

In a make-or-buy decision, opportunity costs are

Many of the decisions involving incremental analysis have qualitative features, but since they are not easily measured they should be ignored.

North Division has the following information: Sales \ 1,200,000 Variable expenses 640,000 Fixed expenses 620,000 If this division is eliminated, the fixed expenses will be allocated to the company's other divisions. What is the incremental effect on net income if the division is dropped?

Ruth Company produces 1,000 units of a necessary component with the following costs: Direct Materials \ 34,000 Direct Labor 15,000 Variable Overhead 9,000 Fixed Overhead 10,000 Ruth Company could avoid $6,000 in fixed overhead costs if it acquires the components externally. 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 1,000 units externally?

What will most likely occur if a company eliminates an unprofitable segment when a portion of fixed costs are unavoidable?

In a sell or process further decision, management should process further as long as the incremental revenues from additional processing exceed the incremental variable costs.

It is better not to replace old equipment if it is not fully depreciated.

Abel Company produces three versions of baseball bats: wood, aluminum, and hard rubber. A condensed segmented income statement for a recent period follows: Wood Aluminum Hard Rubber Total Sales \ 500,000 \ 200,000 \ 65,000 \ 765,000 Variable expenses 325,000 140,000 58,000 523,000 Contribution margin 175,000 60,000 7,000 242,000 Fixed expenses 75,000 35,000 22,000 132,000 Net income (loss) \1 00,000 \2 5,000 \1 5,000 \1 10,000 Assume none of the fixed expenses for the hard rubber line are avoidable. What will be total net income if the line is dropped?

The process used to identify the financial data that change under alternative courses of action is called allocation of limited resources.

In deciding on the future status of an unprofitable segment, management should recognize that net income could decrease by eliminating the unprofitable segment.

Miley, Inc. has excess capacity. Under what situations should the company accept a special order for less than the current selling price?