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Exam 7: Incremental Analysis for Short-Term Decision Making

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Question 1

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

A) $65.00
B) $84.50
C) $91.00
D) $58.50

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

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Question 2

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

A) It has idle capacity.
B) Opportunity costs are now relevant.
C) It has no relevant costs.
D) It has excess capacity.

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

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Question 3

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Which of the following is not another term for relevant costs?

Moss,Inc.currently processes payroll in its accounting department,which costs the following per month: Moss could use a payroll processing firm instead,which would cost $1,350 per month,but the firm would provide all supplies.If Moss used the outside firm,the accountants who currently process payroll would be reassigned to other accounting tasks.How much would monthly costs be affected if Moss switched to the payroll processing firm?

Shirley Inc.has three divisions,King,West and Gold.All fixed costs are unavoidable.Following is the income statement for the previous year: a.What would Shirley's profit margin be if the West division were dropped? b.What would Shirley's profit margin be if the Gold division were dropped?

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

Franklin,Inc.has two divisions,Seward and Charles.Following is the income statement for the previous year: Of the total fixed costs,$300,000 are common fixed costs that are allocated equally between the divisions.What would Franklin's profit margin be if Charles were dropped?

What are the decision alternatives in a special-order decision?

The final step in the decision making process is to:

Which of the following types of decisions involves deciding whether to perform a particular activity in-house or purchase it from an outside supplier?

Franklin,Inc.has two divisions,Seward and Charles.Following is the income statement for the previous year: Of the total fixed costs,$300,000 are common fixed costs that are allocated equally between the divisions.How much did the Charles division incur in direct fixed costs?

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

Hanson Corp.produces three products,and is currently facing a labor shortage - only 3,000 hours are available this month.The selling price,costs,and labor requirements of the three products are as follows: a.What is the contribution margin per unit for each product? b.What is the contribution margin per direct labor hour for each product? c.Assume Hanson has unlimited demand for each product.Which product should Hanson focus on producing?

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

Pinter Corp.produces three products,and is currently short on machine hours since one of its two machines is down - only 360 hours are available this month.The selling price,costs,labor requirements,and demand of the three products are as follows: How many of each product should be sold while the machine is down to maximize profit?

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

A sunk cost is never a relevant cost.

An opportunity cost is the foregone benefit of choosing to do one thing instead of another.

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

You wish to take an Excel course.You may enroll at one within your school or you may take a community class at the local library.You've gathered the following information to aid in your decision-making process. Which of the following is not relevant to the decision?