CHAPTER 26

INCREMENTAL 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
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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.

Determine which products to make and sell when resources are limited. In deciding whether to eliminate an unprofitable segment. find the contribution margin per unit of limited resource. Give the decision rule for whether to sell or process materials further. compare the present value of future net cash flows with the capital investment to determine net present value. Then multiply this amount by the units of limited resource to determine which product maximizes net income. the more attractive the investment. the more attractive the investment. determine the contribution margin. The shorter the payback period. Difficulty: Easy. Also. The formula is: Cost of capital expenditure divided by estimated net annual cash flows equals cash payback period. In making decisions. Reject the investment if net present value is negative. Min: 1. The higher the rate of return. Min: 1.26 . (b) the purchase price. 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. 5. management ordinarily considers both financial and nonfinancial information. AICPA FN: Decision Modeling. Ans: T. When a company has limited resources. the relevant costs are (a) the variable manufacturing costs that will be saved. find the interest yield of the potential investment. TRUE-FALSE STATEMENTS 1. The annual rate of return is obtained by dividing expected annual net income by the average investment. AICPA BB: Strategic/Critical Thinking. In a make-or-buy decision. Identify the factors to consider in retaining or replacing equipment. SO: 2. Bloom: K. Distinguish between the net present value and internal rate of return methods. The cash payback technique identifies the time period to recover the cost of the investment. Under the internal rate of return method. The NPV decision rule is: Accept the project if net present value is zero or positive.4 Test Bank for Accounting Principles. Bloom: K. and (c) opportunity costs. AICPA PC: Problem Solving. 6. Under the net present value method. 9. if any. Ninth Edition 4. AICPA PC: Problem Solving. produced by the segment and the disposition of the segment's fixed expenses. Difficulty: Easy. AICPA FN: Decision Modeling. An important step in management's decision-making process is to determine and evaluate possible courses of action. AICPA BB: Strategic/Critical Thinking. Contrast annual rate of return and cash payback in capital budgeting. 10. IMA: Strategic Planning 2. Reject the project when the internal rate of return is less than the required rate. Identify the relevant costs in a make-or-buy decision. Explain the relevant factors in whether to eliminate an unprofitable segment. Ans: T. SO: 1. IMA: Strategic Planning . AACSB: None. 8. AACSB: None. 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. 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. any disposal value of the existing asset must be considered. 7.

AICPA BB: Strategic/Critical Thinking. AACSB: Analytic. Difficulty: Easy. Difficulty: Easy. AICPA FN: Decision Modeling. AICPA BB: Strategic/Critical Thinking. SO: 2. If an incremental make or buy analysis indicates that it is cheaper to buy rather than make an item. AICPA PC: Interaction. AACSB: None. AACSB: None. AICPA PC: Problem Solving. IMA: Business Economics 9. Difficulty: Easy. AICPA FN: Decision Modeling. SO: 3. AACSB: None. SO: 4. IMA: Business Economics 13. An opportunity cost is the potential benefit obtained by using resources in an alternative course of action. Min: 1. Bloom: C. If a company has excess capacity and present markets will not be affected. AICPA BB: Industry/Sector Perspective. Bloom: C. Min: 1. SO: 4. Decision-making involves choosing among alternative courses of action. Bloom: C. AICPA PC: Problem Solving. AICPA PC: Problem Solving. Min: 1. Ans: T. AICPA BB: Strategic/Critical Thinking. AICPA FN: Decision Modeling. Accountants are mainly involved in developing nonfinancial information for management's consideration in choosing among alternatives. IMA: Business Economics . AACSB: None. Ans: T. Ans: F. Ans: F. and total fixed costs will always remain constant. AICPA PC: Problem Solving. Ans: F. Difficulty: Easy. Bloom: C. A special one-time order should never be accepted if the unit sales price is less than the unit variable cost. IMA: Decision Analysis 5. AICPA FN: Measurement. Min: 1. Bloom: C. Bloom: C.Incremental Analysis and Capital Budgeting 3. Difficulty: Easy. SO: 3. AICPA FN: Decision Modeling. AACSB: None. Min: 1. IMA: Quantitative Methods 11. AICPA PC: Problem Solving. IMA: Business Economics 8. AACSB: None. IMA: Decision Analysis 7. IMA: Decision Analysis 6. SO: 2. management should always make the decision to choose the lowest cost alternative. SO: 2. AICPA BB: Strategic/Critical Thinking. AICPA FN: Decision Modeling. AICPA PC: Problem Solving. IMA: Quantitative Methods 4. Ans: F. Min: 1. Bloom: K. AICPA FN: Decision Modeling. Difficulty: Easy. AICPA FN: Measurement. A decision whether to continue to make a product or buy it externally. AICPA FN: Decision Modeling. Min: 1. SO: 3. Bloom: C.5 In incremental analysis. IMA: Business Economics 10. AICPA BB: Strategic/Critical Thinking. AICPA BB: Strategic/Critical Thinking. Ans: T. AICPA PC: Problem Solving. AICPA PC: Problem Solving. SO: 2. AACSB: None. SO: 4. AACSB: None. Bloom: C. Difficulty: Easy. Min: 1. AICPA PC: Problem Solving. Ans: F. In a sell or process further decision. AICPA BB: Strategic/Critical Thinking. Min: 1. Bloom: K. SO: 5. Min: 1. Difficulty: Easy. Difficulty: Easy. Bloom: K. Ans: F. AICPA BB: Strategic/Critical Thinking. AICPA FN: Measurement. 26 . AACSB: None. Ans: T. 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. management should process further as long as the incremental revenues from additional processing exceed the incremental variable costs. AICPA BB: Strategic/Critical Thinking. Ans: F. IMA: Business Economics 12. total variable costs will always change under alternative courses of action. AACSB: None. depends on the external price and the amount of variable and fixed costs that can be eliminated assuming no alternative uses of resources. Difficulty: Easy. AICPA FN: Measurement. AICPA PC: Problem Solving. AICPA BB: Strategic/Critical Thinking. A company should never accept an order for its product at less than its regular sales price. Difficulty: Easy. 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.

AICPA PC: Problem Solving. Difficulty: Easy. Bloom: C. The elimination of an unprofitable product line may adversely affect the remaining product lines. In a decision to retain or replace old equipment. AICPA BB: Strategic/Critical Thinking. Min: 1. AACSB: None. Bloom: C. AACSB: None. AICPA BB: Resource Management. Bloom: C. IMA: Business Economics . Difficulty: Easy. Ans: T. the book value of the old equipment can be considered a sunk cost. it is generally more profitable to produce and sell the product with the highest unit contribution margin. Difficulty: Easy. Min: 1. Difficulty: Easy. AICPA BB: Strategic/Critical Thinking. AICPA PC: Problem Solving. When a company has limited resources to manufacture products. AICPA FN: Risk Analysis. AICPA FN: Risk Analysis. AICPA FN: Measurement. AICPA FN: Measurement. SO: 6. SO: 8. Difficulty: Easy. Ans: F. SO: 7. Min: 1. Min: 1. AICPA BB: Strategic/Critical Thinking. SO: 7. Difficulty: Easy. AACSB: None. AICPA FN: Risk Analysis. In a decision concerning replacing old equipment with new equipment. IMA: Business Economics 15. Bloom: C. The annual rate of return technique requires dividing a project's annual cash inflows by the economic life of the project. IMA: Investment Decisions 23. it should manufacture those products which have the highest contribution margin per unit of limited resource. Bloom: C. IMA: Business Economics 24. IMA: Business Economics 19. If a company has only a certain number of machine hours available for production. Ans: T. AACSB: None. AACSB: None. Test Bank for Accounting Principles. SO: 9. Min: 1. AACSB: None. AICPA PC: Problem Solving. AICPA BB: Strategic/Critical Thinking. AICPA FN: Decision Modeling. a segment should be eliminated if its contribution margin is less than the fixed costs that can be eliminated. It is better not to replace old equipment if it is not fully depreciated. Min: 1. SO: 9.6 14. AACSB: None. Difficulty: Easy. Ans: T. SO: 6. AACSB: None. Bloom: C. AICPA PC: Problem Solving. Min: 1. Ans: F. SO: 6. AICPA PC: Problem Solving. SO: 8. IMA: Business Economics 21. Ans: F. AICPA PC: Problem Solving. AICPA PC: Problem Solving.26 . AICPA BB: Resource Management. Ans: T. AICPA FN: Risk Analysis. Bloom: K. the salvage value of the old equipment is relevant in incremental analysis. Difficulty: Easy. IMA: Business Economics 22. Bloom: K. IMA: Business Economics 17. AICPA FN: Measurement. AICPA BB: Strategic/Critical Thinking. Ans: F. Ans: F. Min: 1. AICPA FN: Decision Modeling. Difficulty: Easy. AACSB: None. AICPA PC: Problem Solving. IMA: Business Economics 16. Bloom: C. IMA: Business Economics 18. AACSB: None. Ans: T. AICPA PC: Problem Solving. AICPA BB: Strategic/Critical Thinking. Bloom: C. Ninth Edition It is always better to sell now rather than process further because of the time value of money. AICPA PC: Problem Solving. Min: 1. A hurdle rate is the rate of return set by applying ideal standards. AICPA BB: Strategic/Critical Thinking. Ans: T. Capital budgeting decisions usually involve large investments and can have a significant impact on a company's future profitability. From a quantitative standpoint. AICPA PC: Problem Solving. AICPA FN: Decision Modeling. Bloom: C. SO: 9. IMA: Business Economics 20. AICPA BB: Strategic/Critical Thinking. SO: 5. AACSB: None. Difficulty: Easy. AICPA BB: Strategic/Critical Thinking. Min: 1. Min: 1. AICPA FN: Risk Analysis. Difficulty: Easy.

Ans: T. Accounting contributes to management's decision-making process through internal reports that review the actual impact of the decision. IMA: Investment Decisions 31. Ans: F. 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. The cash payback method is frequently used as a screening tool but it does not take into consideration the profitability of a project. AICPA PC: Problem Solving. AICPA PC: Problem Solving. AICPA FN: Risk Analysis. Bloom: K. Min: 1. Ans: T. Bloom: C. Min: 1. Min: 1. SO: 5. Min: 1. AICPA BB: Resource Management. AICPA PC: Problem Solving. IMA: Business Economics 29. SO: 9. Difficulty: Easy. AACSB: None. Ans: F. AACSB: None. Difficulty: Easy. Difficulty: Easy. AICPA PC: Problem Solving. AACSB: None. AICPA BB: Resource Management. IMA: Business Economics . AICPA FN: Decision Modeling. Bloom: K. AICPA FN: Risk Analysis. Bloom: C.Incremental Analysis and Capital Budgeting 25. IMA: Business Economics 28. SO: 7. the incremental costs of a special order will likely include fixed manufacturing costs. Difficulty: Easy. Difficulty: Easy. Ans: T. Bloom: K. AICPA BB: Resource Management. SO: 2. AACSB: None. AICPA FN: Risk Analysis. Min: 1. If a company is operating at full capacity. Min: 1. Ans: F. AICPA PC: Problem Solving. Bloom: C. IMA: Business Economics 26. AACSB: None. Difficulty: Easy. AICPA BB: Resource Management. AICPA BB: Resource Management. AICPA BB: Strategic/Critical Thinking.7 A major advantage of the annual rate of return technique is that it considers the time value of money. Ans: F. 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. SO: 9. AICPA FN: Risk Analysis. 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. IMA: Decision Analysis 33. SO: 9. AICPA BB: Resource Management. AICPA PC: Problem Solving. Min: 1. AICPA FN: Risk Analysis. Bloom: K. IMA: Business Economics 34. Difficulty: Easy. management should recognize that net income could decrease by eliminating the unprofitable segment. 26 . AICPA FN: Risk Analysis. Min: 1. a net present value of zero indicates that the project would be acceptable. IMA: Business Economics 30. The cash payback capital budgeting technique is a quick way to calculate a project's net present value. Ans: T. AACSB: None. In deciding on the future status of an unprofitable segment. Difficulty: Easy. Bloom: C. AACSB: None. SO: 3. AACSB: None. The process used to identify the financial data that change under alternative courses of action is called allocation of limited resources. AICPA FN: Risk Analysis. AICPA FN: Decision Modeling. Min: 1. IMA: Business Economics 27. SO: 10. Min: 1. Difficulty: Easy. AICPA BB: Resource Management. Difficulty: Easy. AICPA PC: Problem Solving. Ans: T. AICPA PC: Problem Solving. Bloom: C. SO: 10. SO: 1. IMA: Decision Analysis 32. Ans: F. AICPA PC: Problem Solving. AACSB: None. AICPA PC: Problem Solving. Bloom: K. Min: 1. IMA: Business Economics 35. AICPA FN: Risk Analysis. AICPA BB: Resource Management. Bloom: C. AICPA PC: Problem Solving. AACSB: None. AICPA BB: Strategic/Critical Thinking. AACSB: None. SO: 10. Difficulty: Easy. Ans: T. Using the net present value method. AICPA FN: Decision Modeling. AICPA BB: Resource Management.

T F T F T T 37.26 . Item Ans. SO: 10. management accountants. AICPA FN: Decision Modeling. c. b. 9. Item Ans. Item Ans. IMA: Decision Analysis 39. 5. 14. Bloom: K. assign responsibility for the decision. AACSB: None. Difficulty: Easy. The discounted cash flow technique considers estimated total cash inflows from the investment but not the time value of money. 32. determine the amount of money that should be spent on a project. Min: 1. Ans: C. Which of the following stages of the management decision-making process is improperly sequenced? a. c. AACSB: None. 3. Difficulty: Easy. Assign responsibility for the decision  Identify the problem. Bloom: K. T T F F T F 7. Bloom: K. provide relevant revenue and cost data about each course of action. AICPA BB: Industry/Sector Perspective. 11. Difficulty: Easy. AACSB: None. d. AICPA FN: Risk Analysis. 16. 24. IMA: Decision Analysis 37. Evaluate possible courses of action  Make decision. Test Bank for Accounting Principles. Difficulty: Easy. decide which actions that management should consider. c. Min: 1. IMA: Performance Measurement . Item Ans. 36. IMA: Decision Analysis 40. 18. 28. Min: 1. b. Assign responsibility for decision  Determine possible courses of action. Ans: F. 34. 29. 10. 21. 8. 20. AICPA FN: Reporting. 4. 27. T F F T T F 13. 22. Min: 1. AICPA BB: Resource Management. A major accounting contribution to the managerial decision-making process in evaluating possible courses of action is to a.8 36. 17. 33. Bloom: K. AICPA PC: Problem Solving. factory workers. AACSB: None. the controller. 2. department heads. Item Ans. AICPA PC: Problem Solving. AICPA PC: Problem Solving. AICPA BB: Industry/Sector Perspective. Ans: B. d. F F T T F T 19. Min: 1. Internal reports that review the actual impact of decisions are prepared by a. AICPA PC: Problem Solving. Item Ans. F MULTIPLE CHOICE QUESTIONS 38. AICPA PC: Problem Solving. AICPA FN: Decision Modeling. SO: 1. AICPA BB: Strategic/Critical Thinking. 30. d. IMA: Decision Analysis Answers to True-False Statements Item Ans. SO: 1. Difficulty: Easy. SO: 9. 23. AACSB: None. Identify the problem  Determine possible courses of action. AICPA BB: Resource Management. b. 12. Bloom: K. Ans: B. SO: 1. F F T T F T 31. Ans: T. AICPA FN: Risk Analysis. 1. 35. 15. T T F T F F 25. 6. 26. Ninth Edition The annual rate of return is computed by dividing expected annual net income by average investment.

Ans: B. c. AICPA PC: Problem Solving. AICPA BB: Industry/Sector Perspective. Ans: C. in choosing between the net present value method and the internal rate of return method. 26 . incremental analysis. c. AICPA FN: Decision Modeling. SO: 2. d. difficult analysis. AICPA BB: Industry/Sector Perspective. gross profit analysis. AICPA BB: Resource Management. Incremental analysis is synonymous with a. AACSB: None. IMA: Business Economics 44. SO: 2. The process of evaluating financial data that change under alternative courses of action is called a. Min: 1. Difficulty: Easy. b. SO: 2. SO: 1. in developing relevant information for management decisions. the environment. AICPA FN: Risk Analysis. AACSB: None. SO: 2. d. AACSB: None. double entry analysis. Bloom: C. b. In incremental analysis. Min: 1. in evaluating the master budget. AICPA FN: Decision Modeling. Difficulty: Easy. as a replacement technique for variance analysis. IMA: Decision Analysis 45. Difficulty: Easy. AICPA PC: Problem Solving. employee turnover. Difficulty: Easy. Bloom: K.Incremental Analysis and Capital Budgeting 41. Nonfinancial information that management might evaluate in making a decision would not include a. both costs and revenues that stay the same between alternate courses of action will be analyzed. Ans: A. Incremental analysis is most useful a. derivative analysis. b. Min: 1. d. AICPA PC: Problem Solving. Bloom: C. Difficulty: Easy. IMA: Decision Analysis 46. a. Min: 1. Min: 1. None of these Ans: B. AICPA FN: Decision Modeling. IMA: Decision Analysis 43. contribution margin. AACSB: None. IMA: Decision Analysis 42. Min: 1. Ans: C.9 Which of the following steps in the management decision-making process does not generally involve the managerial accountant? a. AICPA FN: Decision Modeling. b. SO: 2. c. AICPA PC: Problem Solving. AICPA BB: Industry/Sector Perspective. AACSB: None. d. cost-benefit analysis. c. AICPA PC: Problem Solving. both costs and revenues may be analyzed. the corporate profile in the community. Bloom: K. Bloom: K. AICPA PC: Problem Solving. AICPA FN: Decision Modeling. IMA: Decision Analysis . differential analysis. contribution margin analysis. AICPA BB: Resource Management. only costs are analyzed. Bloom: C. AACSB: None. only revenues are analyzed. Ans: B. d. Make the appropriate decision based on relevant data c. AICPA BB: Resource Management. Difficulty: Easy. Determine possible courses of action b. c. b. Prepare internal reports that review the impact of decisions d.

a. 2 c. Fixed costs may change between alternatives. IMA: Decision Analysis 49. IMA: Decision Analysis . Fixed costs will not change between alternatives. Ans: D. a sell or process further decision. AICPA FN: Decision Modeling. Difficulty: Easy. accountants. Difficulty: Easy. AICPA FN: Decision Modeling. analysis of manufacturing variances. AICPA FN: Decision Modeling. 3 d. engineers. Which of the following is not a true statement? a. Bloom: K. d. Bloom: K. IMA: Decision Analysis 51. 1 b. IMA: Information Management 48. AICPA BB: Resource Management. AICPA PC: Problem Solving. b. d. IMA: Decision Analysis 50. Min: 1. Min: 1. an allocation of limited resource decision. all of these. AICPA PC: Problem Solving. Difficulty: Easy. d. a make or buy decision. AICPA PC: Problem Solving. Incremental analysis would not be appropriate for a. a retain or replace equipment decision. SO: 2. Ans: D. c. 3. Incremental analysis is the same as CVP analysis. acceptance of an order at a special price. AICPA BB: Resource Management. The source of data to serve as inputs in incremental analysis is generated by a. AACSB: None. c. Ninth Edition 47. Min: 1. Incremental analysis would be appropriate for a. c. market analysts. Bloom: C. AACSB: None. b. AICPA BB: Resource Management. d. SO: 2. Ans: D. AACSB: None. Incremental analysis might also be referred to as differential analysis. Difficulty: Easy. Min: 1. AICPA BB: Resource Management. Difficulty: Easy. Ans: B.26 . b. AICPA PC: Problem Solving. AACSB: None. AICPA FN: Decision Modeling. SO: 2. all of these.10 Test Bank for Accounting Principles. Which of the following is a true statement about cost behaviors in incremental analysis? 1. Variable costs will always change between alternatives. Incremental analysis is useful in making decisions. Incremental analysis focuses on decisions that involve a choice among alternative courses of action. elimination of an unprofitable segment. 2. c. Min: 1. AICPA BB: Resource Management. 2 and 3 Ans: B. AACSB: None. Bloom: C. AICPA FN: Decision Modeling. Bloom: C. SO: 2. b. AICPA PC: Problem Solving. SO: 2.

d. AICPA PC: Problem Solving. AICPA FN: Decision Modeling. AICPA FN: Decision Modeling. Difficulty: Medium. If the company has sufficient capacity to produce the additional units. IMA: Decision Analysis 55. AICPA FN: Decision Modeling. the order will likely be rejected. only variable costs are relevant. SO: 3. Bloom: AN. the order will likely be accepted.000 $120. then a.000 when 10. Variable costs and fixed costs 26 . a. Garner has sufficient unused capacity to produce the 2. Ans: D. acceptance of the special order would affect net income as follows: a. Bloom: C. only fixed costs are relevant. The company has a one-time opportunity to sell an additional 1. Min: 1.000. what will be the effect on net income? a. Income would decrease by $4. AICPA BB: Resource Management. Ans: B. $30. If the special order is accepted. Revenues c. AICPA BB: Resource Management. SO: 3.000 35.000 Fixed costs 35. Difficulty: Easy. Difficulty: Medium. A company is considering the following alternatives: Alternative 1 Alternative 2 Revenues $120. AACSB: None.11 Ans: A. d. only variable costs are relevant.000 increase Ans: A. Min: 5. A foreign wholesaler offers to purchase 2. c. SO: 3. Min: 1.000. AICPA BB: Resource Management. AICPA PC: Problem Solving. AICPA FN: Decision Modeling. AICPA BB: Resource Management. c.000 units at $70 each in a foreign market which would not affect its present sales. b.000 Variable costs 60. b. AACSB: None. Min: 5. Fixed manufacturing costs were $240. IMA: Decision Analysis 56. d. AICPA PC: Problem Solving. SO: 2. Baden Company manufactures a product with a unit variable cost of $50 and a unit sales price of $88.000 units were produced and sold. IMA: Decision Analysis 53. Garner would incur special shipping costs of $1 per scale if the order were accepted. Bloom: C. AICPA PC: Problem Solving.000 decrease d. Income would increase by $4. Bloom: AN. fixed costs are not relevant. It costs Garner Company $12 of variable and $5 of fixed costs to produce one bathroom scale which normally sells for $35. Fixed costs d. 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. Variable costs b. $4. b. AICPA BB: Resource Management.000 increase b. $6.000. Income would increase by $70. In incremental analysis. Income would increase by $20.000 decrease c. Difficulty: Easy.Incremental Analysis and Capital Budgeting 52. Bloom: C. costs are not relevant if they change between alternatives. Difficulty: Easy. $4.000. SO: 3. AICPA PC: Problem Solving.000 scales.000 Which of the following are relevant in choosing between the alternatives? a. IMA: Decision Analysis 54. AACSB: None. Ans: D.000 70.000 scales at $15 each. IMA: Business Economics . Min: 1. AACSB: Analytic. all costs are relevant if they change between alternatives. c. AACSB: Analytic. AICPA FN: Decision Modeling.

no increase in fixed costs.000 Martin has received a special order from a foreign company for 5. AICPA FN: Decision Modeling. AICPA PC: Problem Solving.000 units. b. AICPA BB: Resource Management. Net income will not be affected. Ninth Edition 57. AICPA PC: Problem Solving. d. When incremental revenues exceed incremental costs Ans: D. Bloom: C.30 c. AACSB: None. Martin Company incurred the following costs for 50. IMA: Business Economics 58. $8. $10. has excess capacity. d. Ans: D. AICPA PC: Problem Solving. Min: 5.12 Test Bank for Accounting Principles. AICPA FN: Decision Modeling. Difficulty: Easy. Ans: A.10 b. AICPA FN: Decision Modeling. AACSB: None. Difficulty: Easy. If Martin wants to break even on the order. the order should not be accepted. AICPA BB: Resource Management. When additional fixed costs must be incurred to accommodate the order c. Bloom: C. Difficulty: Medium. c.000 Fixed costs 240. Inc. Filling the order will require spending an additional $8. Min: 1. Difficulty: Easy. AICPA BB: Resource Management. $5. IMA: Business Economics . the order will only be accepted if the plant is below capacity. SO: 3. SO: 3.40 Ans: B.26 . AACSB: Analytic. c. If a company must expand capacity to accept a special order. Miley. If a company anticipates that other sales will be affected by the acceptance of a special order. Never b. Bloom: C. an increase in fixed costs. an increase in variable and fixed costs per unit. what should the unit sales price be? a. When the company thinks it can use the cheaper materials without the customer's knowledge d. lost sales should not be considered in the incremental analysis. lost sales should be considered in the incremental analysis. AICPA BB: Resource Management. Min: 1. 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. AACSB: None. Min: 1. $3. IMA: Business Economics 60. Bloom: C. SO: 3. Min: 1. d. then a. IMA: Business Economics 61. Bloom: AP. AICPA PC: Problem Solving. c. Net income will decrease. Under what situations should the company accept a special order for less than the current selling price? a. AACSB: None. IMA: Business Economics 59.000 units: Variable costs $180.500 for shipping. Difficulty: Easy. AICPA FN: Decision Modeling. SO: 3. AICPA PC: Problem Solving. AICPA FN: Decision Modeling.60 d. AICPA BB: Resource Management. an increase in unit variable costs. b. SO: 3. There is sufficient capacity to fill the order without jeopardizing regular sales. b. Net income will increase if the special sales price per unit exceeds the unit variable costs. Ans: B. Additional fixed costs will probably be incurred. it is likely that there will be a.

AICPA BB: Resource Management. d. Ans: B. CVP analysis.30 b. budgeting.000 units. AICPA PC: Problem Solving.Incremental Analysis and Capital Budgeting 62. AICPA BB: Resource Management. The opportunity cost of an alternate course of action that is relevant to a make-or-buy decision is a. IMA: Business Economics 63. AACSB: None. If Martin wants to earn $8. SO: 4.000 on the order. Difficulty: Easy. Additional processing decision Ans: A. $5. Difficulty: Easy. Min: 5. IMA: Business Economics 66.13 Martin has received a special order from a foreign company for 5. AICPA PC: Problem Solving.500 for shipping. SO: 4. Min: 1. is the potential benefit that may be obtained by following an alternative course of action. $6. AICPA BB: Resource Management. AICPA FN: Decision Modeling. Difficulty: Medium. AACSB: Analytic.90 Ans: D. AICPA PC: Problem Solving. is the cost of a new product proposal. Min: 1. Difficulty: Easy.20 d. added to the "Buy" costs. Which decision will involve no incremental revenues? a. SO: 4. b. Drop a product line c. b. AICPA BB: Resource Management. AACSB: None. Bloom: AP. b. is classified as manufacturing overhead. c. d. $11. what should the unit price be? a. Min: 1. Min: 1.000 Fixed costs 240.000 units: Variable costs $180. Difficulty: Easy. Ans: C. An opportunity cost a. AICPA BB: Resource Management. Ans: D. none of these. financial accounting. Opportunity cost must be considered in decisions involving a. Filling the order will require spending an additional $8. IMA: Business Economics 65. added to the "Make" costs. AICPA FN: Decision Modeling. Bloom: K. SO: 4. c.70 c.000 26 . AICPA FN: Decision Modeling. d. IMA: Business Economics . SO: 3. Martin Company incurred the following costs for 50. $3. AICPA PC: Problem Solving. c. AACSB: None. resources that have alternative uses. IMA: Business Economics 64. Bloom: K. subtracted from the "Make" costs. Bloom: C. Make or buy decision b. should be initially recorded as an asset. AICPA PC: Problem Solving. AICPA FN: Decision Modeling. Bloom: C. There is sufficient capacity to fill the order without jeopardizing regular sales. Accept a special order d. AICPA FN: Decision Modeling. AACSB: None.

26 .000 of the fixed costs can be avoided. $15.000 20. a standard cost. Buy and save $15. IMA: Business Economics 69.000 c. Difficulty: Easy. AICPA FN: Decision Modeling. Opportunity cost is usually a. AICPA PC: Problem Solving. $100. the supplier may not deliver on time. Ans: C. b. c. c. SO: 4. AICPA FN: Decision Modeling. 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. AACSB: None. AICPA BB: Resource Management. profitable product lines may be dropped.000 Ans: A. AICPA BB: Resource Management. AICPA PC: Problem Solving. Difficulty: Easy. AACSB: None. Bloom: AN.000 30. Each of the following is a disadvantage of buying rather than making a component of a company's product except that a. 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. AICPA BB: Resource Management. included as part of cost of goods sold. $115. AACSB: Analytic.000 and only $5.000 d. SO: 4. AACSB: Analytic. a potential benefit.000 20. SO: 4. $120. Bloom: AN. Difficulty: Medium. a sunk cost.000 b.000 c. Min: 1. d. $85. AICPA PC: Problem Solving. Min: 5. SO: 4. Make and save $5. Make and save $15.14 Test Bank for Accounting Principles. Bloom: C. Min: 5.000 b. Ninth Edition 67. AICPA BB: Resource Management. At what external price for the 100 units is the company indifferent between making or buying? a.000 30.000 If Tex's Manufacturing Company purchases the component externally. quality control specifications may not be met. Min: 1. IMA: Cost Management . Ans: B. IMA: Cost Management 70. the outside supplier could increase prices significantly in the future.000 10.000 d. Bloom: C. IMA: Business Economics 68. what is the correct make-or-buy decision? a. AICPA FN: Decision Modeling.000 If Tex's Manufacturing Company can purchase the component externally for $110. Buy and save $5. b. AICPA PC: Problem Solving. d. AICPA FN: Decision Modeling.000 of the fixed costs can be avoided. Difficulty: Medium.000 10.000 Ans: C.

000 units of a necessary component with the following costs: Direct Materials Direct Labor Variable Overhead Fixed Overhead $24.000 9. Difficulty: Medium. SO: 4. AICPA FN: Decision Modeling.000 units of a necessary component with the following costs: Direct Materials Direct Labor Variable Overhead Fixed Overhead $24. Ruth Company produces 1.000 c.000 units of a necessary component with the following costs: Direct Materials Direct Labor Variable Overhead Fixed Overhead $72.000 d.15 Bell's Shop can make 1. An analysis shows that at this external price. SO: 4. Min: 5.000 in fixed overhead costs if it acquires the components externally.000 Ans: D. $48. the company is indifferent between making or buying the part.000. Bloom: AN.000 units externally for $117. AICPA PC: Problem Solving. If cost minimization is the major consideration and the company would prefer to buy the components.000 4. The avoidable fixed costs are $6. AICPA BB: Resource Management. 26 .000 c.000 None of Ruth Company's fixed overhead costs can be reduced. Min: 5. $12. $48. what is the maximum external price that Ruth Company would accept to acquire the 1. AACSB: Analytic.000 c. IMA: Cost Management . AICPA FN: Decision Modeling. AICPA FN: Decision Modeling. $18. AACSB: Analytic. Min: 5.000 16.000 b.000 if the units are purchased externally.000 ? The company can purchase the 1.000 7.000 units externally? a.000 if the components were acquired externally. $55. Cannot be determined. What are the fixed overhead costs of making the component? a. AICPA BB: Resource Management.000 Ruth Company could avoid $3. $52. IMA: Cost Management 73. Difficulty: Medium. but another product could be made that would increase profit contribution by $8. Ans: A. $47. $44.000 b. Difficulty: Medium. $51.000 16. SO: 4.000 d. Bloom: AN. AICPA PC: Problem Solving.000 units externally? a. what is the maximum external price that Ruth Company would be willing to accept to acquire the 1.000 4. AICPA PC: Problem Solving.000 b.000 7. AACSB: Analytic. Bloom: AN. AICPA BB: Resource Management. $43. $24.000 d. Ruth Company produces 1. IMA: Cost Management 72.000 Ans: B. If cost minimization is the major consideration and the company would prefer to buy the components.000 18.Incremental Analysis and Capital Budgeting 71.

Make and save $1. Bloom: AN.000.000 Direct Labor 13.000 Ans: B. IMA: Cost Management . Buy and save $1.000 Variable Overhead 32.000 Crigui could avoid $4.000 in fixed overhead costs if it acquires the CDs externally. what is the maximum external price that Crigui would expect to pay for the units? a.16 Test Bank for Accounting Principles. Inc. what is the correct make-or-buy decision? a. Make and save $5. Ninth Edition 74. Min: 3. IMA: Cost Management 76. SO: 4. SO: 4. Inc.000 Variable Overhead 32.000 of the fixed costs can be avoided. Bloom: AN.000 Direct Labor 13.000 units externally.000 c. An increase of $80.000 Direct Labor 15. Bloom: AN.000 c. Min: 5.000 If Fornelli. $33. Crigui Music produces 60. $29.000 Ans: C. If cost minimization is the major consideration and the company would prefer to buy the 60. AICPA PC: Problem Solving. Inc. Difficulty: Medium. AICPA FN: Decision Modeling.000 Fixed Overhead 22.000 If Fornelli.000 d. can purchase the units externally for $80. SO: 4. An increase of $17. $36. AICPA BB: Resource Management. $32.000 d.000 b. The CDs have the following costs: Direct Materials $11. can produce 100 units of a component part with the following costs: Direct Materials $30.000 Fixed Overhead 7. AICPA BB: Resource Management. AICPA BB: Resource Management.000 d.000 c. Fornelli. A decrease of $22.000 Fixed Overhead 22. AACSB: Analytic. can produce 100 units of a component part with the following costs: Direct Materials $30. by what amount will its total costs change? a. AICPA PC: Problem Solving.000 b. IMA: Cost Management 75. Buy and save $13.000 b.000 Variable Overhead 3. AICPA PC: Problem Solving. Difficulty: Medium. Fornelli. Min: 5. AACSB: Analytic. AICPA FN: Decision Modeling. can purchase the component part externally for $88. AICPA FN: Decision Modeling.000 CDs on which to record music.26 . Difficulty: Medium. Inc. An increase of $5.000 Ans: D. AACSB: Analytic.000 and only $8.

00 per batch Ans: B. $40. $31.000. the company will be better off by $29 per unit. $5. The unit cost of the unassembled product is $30 and NF Toy would sell it for $65.000 units externally? a. Sell before assembly. IMA: Cost Management 78. $5. $33.000 Fixed Overhead 7. AICPA FN: Decision Modeling. IMA: Cost Management . If cost minimization is the major consideration and the company would prefer to buy the CDs. or processed further incurring additional costs of $1.000 Ans: B. AICPA PC: Problem Solving. $5.000. what is the maximum external price that Crigui would be willing to accept to acquire the 60. AICPA BB: Resource Management. $2. 26 . which can be sold as is for $5.000 None of Crigui’s fixed overhead costs can be reduced. Difficulty: Medium. the company will be better off by $20 per unit. AACSB: Analytic.000 c. and $7. IMA: Cost Management 80. Min: 5. Moreland Clean Company spent $4. The CDs have the following costs: Direct Materials $11. but another product could be made that would increase profit contribution by $4.00 11. Difficulty: Medium.000 to produce Product 89.17 Crigui Music produces 60. the company will be better off by $14 per unit. AICPA BB: Resource Management. Difficulty: Medium. SO: 4. $4. The cost of one batch is below: Direct materials Direct labor Variable overhead Fixed overhead $18.000.000. AICPA BB: Resource Management.500.000 d. the company will be better off by $1 per unit.500. $4. Tasty Bites produces corn chips.500 and then be sold for $7. Bloom: AP.000 Variable Overhead 3.00 per batch d. Bloom: AN. IMA: Cost Management 79.500 and $7. What decision should NF Toy make? a. SO: 4. $4. NF Toy Company is unsure of whether to sell its product assembled or unassembled. Ans: A. AICPA FN: Decision Modeling. Process further. AACSB: Analytic. AICPA PC: Problem Solving.000 Direct Labor 15. AICPA FN: Decision Modeling. Process further. AICPA FN: Decision Modeling. and $7.000.00 per batch c. $36.00 13. SO: 5. and $7.000 if the CDs were acquired externally. $1.000. c. $32.Incremental Analysis and Capital Budgeting 77.000 c. Difficulty: Medium.000. Bloom: AN. $17. AICPA PC: Problem Solving.000 b. Sell before assembly. Min: 5. $6. $1. How much will Tasty Bites save if it accepts the offer? a. Which amounts are relevant to the decision about Product 89? a. $1.00 per batch b.00 An outside supplier has offered to produce the corn chips for $25 per batch. Bloom: AN. AACSB: Analytic. AICPA BB: Resource Management.000 CDs on which to record music. b. AICPA PC: Problem Solving. Min: 5.000 d. SO: 5. Min: 5. d.000 b. 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.00 14.000. AACSB: Analytic.000 Ans: C.

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

The following information has been gathered: Old Machine Price $250. SO: 6.000 Remaining useful life 10 years Useful life -0Annual operating costs $200. AICPA FN: Decision Modeling.000.500 c.000 Remaining useful life 10 years Useful life -0Annual operating costs $200. it can be sold for $20.500 d. SO: 6. $49.000 -0-010 years $150. Difficulty: Medium.000 New Machine $500. AICPA FN: Decision Modeling. Difficulty: Medium.000 b. Min: 3. IMA: Cost Management . $250. it can be sold for $20. AACSB: Analytic. Which of the following amounts is a sunk cost? a.000 Accumulated Depreciation 75. AICPA BB: Resource Management. Min: 3.000 New Machine $500.000 c. is contemplating the replacement of an old machine with a new one. AICPA PC: Problem Solving. $150. AICPA PC: Problem Solving.21 Sala Co. $0 Ans: C.000 b. Sala Co. The following information has been gathered: Old Machine Price $250.000 Accumulated Depreciation 75. Which of the following amounts is relevant to the replacement decision? a.000. is contemplating the replacement of an old machine with a new one. AACSB: Analytic.500 If the old machine is replaced. $175.Incremental Analysis and Capital Budgeting 96. AICPA BB: Resource Management. 26 .500 If the old machine is replaced. Bloom: C.000 d. $200. $175.000 Ans: D. IMA: Cost Management 97.000 -0-010 years $150. Bloom: AP. $500.

$15.000 Remaining useful life 10 years Useful life -0Annual operating costs $200.000 60.000 d. it can be sold for $20.000. Difficulty: Medium.000 242.000) d. IMA: Cost Management 99. and hard rubber. What will be total net income if the line is dropped? a. Min: 5.26 .000 325.000) Ans: A. Bloom: AN. $103. $105.000 Hard Rubber $65.000 140. The net advantage (disadvantage) of replacing the old machine is a.000 22. Ninth Edition 98. A condensed segmented income statement for a recent period follows: Wood $500. AICPA BB: Resource Management. AICPA PC: Problem Solving. $(5. SO: 7.000 New Machine $500.000 175.000 c. AACSB: Analytic. Abel Company produces three versions of baseball bats: wood.000 Sales Variable expenses Contribution margin Fixed expenses Net income (loss) Assume none of the fixed expenses for the hard rubber line are avoidable. AICPA FN: Decision Modeling. Bloom: AP.000 Aluminum $200. The following information has been gathered: Old Machine Price $250.000 58. AICPA BB: Resource Management.000 b. aluminum.000 523. Sala Co. $(50. Difficulty: Medium. AACSB: Analytic. IMA: Cost Management .000 $ 25. is contemplating the replacement of an old machine with a new one.500 If the old machine is replaced.000) Total $765.000 $110.000 75.22 Test Bank for Accounting Principles.000 132.000 b.000 c. SO: 6.000 Accumulated Depreciation 75.000 Ans: B.000 7.000 $(15. $125.000 35. Min: 5.000 $100. $20. $140.000 -0-010 years $150. AICPA PC: Problem Solving. AICPA FN: Decision Modeling.

26 . Bloom: C. AICPA FN: Decision Modeling.000 Hard Rubber $65.000 140. d. 60% of the fixed expenses can be eliminated and the other 40% will be allocated to other product lines.000 242.000 c. AICPA PC: Problem Solving.000 35. $125.000 $ 25.000 22. IMA: Cost Management 102. Difficulty: Medium.000.000. What will be total net income if the line is dropped? a.000 325. Min: 5. AICPA FN: Decision Modeling.000 $100. IMA: Cost Management 101. Difficulty: Easy. increase by $50. The company's variable costs will increase.000 $ (50.000 90. AACSB: Analytic.000) If this product line is eliminated. Min: 5. d.000 175.000 $(15.23 Abel Company produces three versions of baseball bats: wood.000 Ans: A. IMA: Cost Management .000 140. A condensed segmented income statement for a recent period follows: Wood $500.000 Aluminum $200. Bloom: AN. A company has three product lines. decrease by $90. increase by $6.000 523. If management decides to eliminate this product line.000 b. AICPA BB: Resource Management. $105.000 125. Difficulty: Medium. SO: 7. and hard rubber. one of which reflects the following results: Sales Variable expenses Contribution margin Fixed expenses Net loss $215. Ans: C. decrease by $6. Ans: B. AICPA PC: Problem Solving. SO: 7. AICPA BB: Resource Management. Net income will decrease.000 7. b. Bloom: AN. AACSB: None. SO: 7. c.000 75.000 132.000 60.000 d.000.000) Total $765.000.000 $110. What will most likely occur if a company eliminates an unprofitable segment when a portion of fixed costs are unavoidable? a. AICPA PC: Problem Solving. $140. Net income will increase. aluminum.Incremental Analysis and Capital Budgeting 100.000 Sales Variable expenses Contribution margin Fixed expenses Net income (loss) Assume all of the fixed expenses for the hard rubber line are avoidable. c.000 58. AICPA FN: Decision Modeling. AACSB: Analytic. b. AICPA BB: Resource Management. $103. All expenses of the eliminated segment will be eliminated. the company's net income will a. Min: 1.

Difficulty: Medium. $2. Talbot expects to earn 16% of its investment annually. b. the company's total fixed costs will decrease. Difficulty: Easy. Cannot be determined from the data provided. $2. AACSB: None. Ninth Edition 103. Difficulty: Medium. total net income will increase by the amount of the product line's fixed costs. AICPA PC: Problem Solving. The calculation of the accounting rate of return is . IMA: Cost Management 105. AICPA BB: Resource Management. AICPA BB: Resource Management. c. The rate of return indicates that a. Min: 1. AICPA BB: Resource Management. If the product line is discontinued. Ans: C.000 machine hours available to manufacture a product. $2. Min: 3.000 more if Product A is made. AICPA BB: Resource Management. 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. b.000 decrease d. the contribution margin of the product line will indicate the net income increase or decrease. Min: 5. Talbot expects to earn 16% of its cash outlay back over the life of the asset. IMA: Cost Management 106. SO: 7. Min: 1. AACSB: None. d. A segment has the following data: Sales Variable expenses Fixed expenses $350. c. AACSB: Analytic. Ans: B. Bloom: AN. Difficulty: Medium. AICPA PC: Problem Solving. Talbot expects to earn 16% of $2. AICPA PC: Problem Solving. $200. Talbot Company expects income of $2. AACSB: Analytic. AICPA BB: Resource Management.000 per year over the life of an investment that will cost $25.000 150. IMA: Cost Management .000 increase b. A company is considering eliminating a product line. Bloom: AN. AICPA FN: Decision Modeling. the same if either product is made. AICPA PC: Problem Solving. If there are 1.000 decrease c. assuming the fixed expenses will be allocated to profitable segments? a.000. c. The fixed costs currently allocated to the product line will be allocated to other product lines upon discontinuance. SO: 8.000 less if Product B is made. b. SO: 8. Ans: B. IMA: Cost Management 104. the key factor in performing incremental analysis is a.000 What will be the incremental effect on net income if this segment is eliminated. AICPA FN: Decision Modeling. A company can sell all the units it can produce of either Product A or Product B but not both. Ans: C. IMA: Reporting 107. Difficulty: Easy. d. Ans: C.000 less if Product A is made. Bloom: AN. none of these. total net income will decrease by the amount of the product line's fixed costs. b. Min: 3. Talbot expects the asset will earn 16 times as much profit as its cost.000 275. contribution margin per unit of limited resource. income will be a. AACSB: Analytic. AICPA PC: Problem Solving. Bloom: C. a. SO: 7. $275. If a company has limited resources.24 Test Bank for Accounting Principles. AICPA FN: Decision Modeling. AICPA FN: Reporting.26 . c. d. Bloom: C. d. $200. limited resources required. AICPA FN: Decision Modeling.16. SO: 8. contribution margin.000 as profit each year the asset is used.

IMA: Investment Decisions .000 b. 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 .8%.000 and annual operating expenses exclusive of depreciation expense are expected to be $38. AICPA FN: Decision Modeling. Bloom: AN. AICPA PC: Problem Solving. AICPA PC: Problem Solving. SO: 9. b.1 years. 6. Difficulty: Medium. Min: 3. what is the total contribution margin of the product it should produce to maximize net income? a. A company is considering purchasing factory equipment that costs $320. AACSB: Analytic.25 Product 1 Product 2 If the company has machine capacity of 2. annual revenues are expected to be $90.0 years. b. How much is the contribution margin per unit of limited resource for each product? a. Ans: C. Min: 5. Difficulty: Medium.000 hours. AICPA PC: Problem Solving. IMA: Cost Management 110. Difficulty: Medium. Bloom: AN. If the equipment is purchased.3 years. $16. The cash payback period on the equipment is a. SO: 8. AICPA BB: Resource Management. $24. The straight-line method of depreciation would be used. A company is considering purchasing factory equipment that costs $320. 16.2 years.000 c.00 $1. 3. AICPA BB: Resource Management. AICPA PC: Problem Solving. AACSB: Analytic. Bloom: AP. Difficulty: Medium. AICPA FN: Decision Modeling. AACSB: Analytic.00 $1. c.000 and is estimated to have no salvage value at the end of its 8-year useful life.5%. 3.000 and is estimated to have no salvage value at the end of its 8-year useful life. AICPA FN: Decision Modeling. IMA: Cost Management 109.00 $2. the annual rate of return expected on this equipment is a. $20.50 B $5.000 and annual operating expenses exclusive of depreciation expense are expected to be $38.25 $2. AICPA FN: Decision Modeling.000 d.3%. d. b. SO: 8. 7. AICPA BB: Resource Management.25 $2. A $4. If the equipment is purchased.5%. AICPA BB: Resource Management. IMA: Cost Management 111. Min: 5. The straight-line method of depreciation would be used. Ans: C.00 Ans: B. 13. 32. Ruiz Company’s contribution margin is $4 per unit for Product A and $5 for Product B. AACSB: Analytic. Min: 5. c. d. SO: 9. d. Bloom: AP. annual revenues are expected to be $90. Product A requires 2 machine hours and Product B requires 4 machine hours.000.000 Ans: C. 8.00 $1. $25. c.000. If the equipment is purchased.Incremental Analysis and Capital Budgeting 108.

AICPA FN: Decision Modeling. d. If the payback period for a project is greater than its economic life. AICPA PC: Problem Solving. AACSB: Analytic. 4. Depreciation is subtracted from net income because it is an outflow of cash. AACSB: Analytic. project would only be acceptable if the company's cost of capital was low. Difficulty: Easy. b.5 years. b. The machine would be depreciated straight-line with no residual value over its useful life at the rate of $20. the cash payback period is a. SO: 9. Difficulty: Medium. 6 years. d. Difficulty: Easy. and generates annual net cash inflows of $30. 5 years. IMA: Investment Decisions 113. Min: 1. b. The cash payback period is a. AICPA BB: Resource Management. rate management expects to pay on all borrowed and equity funds. The following are all quantitative capital budgeting techniques except a. Depreciation is added back to net income because it is an inflow of cash. A company's cost of capital refers to the a.000/year. IMA: Budget Preparation 114. AACSB: None. 10. IMA: Cost Management 116.0 years. is considering purchasing a new machine which will cost $200. AICPA BB: Resource Management. SO: 9. AICPA FN: Decision Modeling. AICPA FN: Decision Modeling. Min: 1. cost of printing and registering common stock shares. Depreciation is added back to net income because it is not an outflow of cash. AICPA BB: Resource Management. Bloom: K. SO: 9. b. AICPA PC: Problem Solving. d. b. project's return will always exceed the company's cost of capital. AICPA PC: Problem Solving. Min: 1. Min: 5. Bloom: AP. AICPA BB: Resource Management.000 and is expected to have a $30. d. cost-volume-profit technique. Aaron Co. SO: 9. Min: 5. AICPA FN: Decision Modeling. Ans: B. Ans: A. AICPA BB: Resource Management. c. Ans: C. Ans: B. AACSB: None. SO: 9. IMA: Investment Decisions 117. Ans: B. AACSB: None. Difficulty: Easy. Difficulty: Medium. entire initial investment will never be recovered. 7 years. AICPA PC: Problem Solving. c.26 Test Bank for Accounting Principles. Difficulty: Easy. b.000. IMA: Investment Decisions . Bloom: C. AICPA PC: Problem Solving. rate of return earned on total assets.000. AICPA FN: Decision Modeling. Ninth Edition 112. The useful life of the machine is 10 years. Min: 1. How is annual cash inflow determined? a. Depreciation is subtracted from net income because it is an expense.0 years. cash payback technique. Bloom: C. If an asset cost $210. Bloom: K.000 each year. c. annual rate of return technique. AICPA PC: Problem Solving. discounted cash flow technique. 4. AACSB: None. c. c. 8 years. AICPA BB: Resource Management. the a. 5. d. Ans: B. SO: 8. d.0 years. AICPA FN: Decision Modeling. Bloom: AP. project will always be profitable. but which will decrease costs each year by $40.000 salvage value at the end of its ten-year life. IMA: Cost Management 115. total cost of a capital project.26 . c.

replacement values. used in sell or process further decisions.Incremental Analysis and Capital Budgeting 118. Bloom: K. IMA: Investment Decisions . Which of the following is not a common method of capital budgeting? a. Annual rate of return method Ans: A.27 A company is considering purchasing factory equipment which costs $480. IMA: Investment Decisions 119. Difficulty: Easy. Difficulty: Easy.2%. of making capital expenditure decisions. AICPA BB: Resource Management. c. Min: 1.000 and annual operating expenses exclusive of depreciation expense are expected to be $95. AICPA FN: Decision Modeling. AICPA BB: Resource Management. annual revenues are expected to be $225. more attractive the investment. all of these. SO: 9. d. c. of eliminating unprofitable product lines. Min: 1. 27. d. Ans: C. Min: 1. IMA: Investment Decisions 122. d. AICPA FN: Decision Modeling. Ans: C.000 and is estimated to have no salvage value at the end of its 8-year useful life. Bloom: K. Bloom: C.6%. SO: 9. d. Bloom: K. Difficulty: Easy. time value of money data. AICPA FN: Decision Modeling. If the equipment is purchased. the annual rate of return expected on this project is a. AICPA BB: Resource Management. AICPA BB: Resource Management. higher the hurdle rate. b. AICPA PC: Problem Solving. Min: 1. AACSB: None. Gross profit method b. Ans: B. IMA: Budget Preparation 121. 29. c. the a. AACSB: None. Difficulty: Easy. b. market values. d. AACSB: Analytic. AICPA PC: Problem Solving. SO: 9. AICPA PC: Problem Solving. Min: 1. c. AACSB: None. AICPA FN: Decision Modeling. AICPA BB: Resource Management. The straight-line method of depreciation would be used. AICPA PC: Problem Solving. Bloom: AP. AICPA BB: Resource Management. IMA: Budget Preparation 120. Ans: A. higher the cost of capital. less attractive the investment. the cost of capital. AACSB: None. b.2%.000. SO: 9. 26 . AACSB: None. Capital budgeting is the process a. b. the cutoff rate. The higher the rate of return for a given risk. If the equipment is purchased. AICPA FN: Decision Modeling. Bloom: K. AICPA FN: Decision Modeling. Payback method c. Difficulty: Easy.1%. The annual rate of return method is based on a. AICPA PC: Problem Solving. accounting data. 54. of determining how much capital stock to issue. Difficulty: Medium. Discounted cash flow method d. c. SO: 9. Min: 5. the hurdle rate. b. IMA: Investment Decisions 123. 14. SO: 9. AICPA PC: Problem Solving. The rate that management expects to pay on borrowed or equity funds is known as a. Ans: A.

AICPA FN: Decision Modeling. Ans: C.000 in new equipment. AICPA FN: Decision Modeling. When using the payback method. ignores the cost of an investment. AICPA FN: Decision Modeling. If annual expected income is $21. Min: 3. AICPA BB: Resource Management. time.000.0% b. Bloom: C.0% d. AICPA PC: Problem Solving. Difficulty: Easy. b. 50. IMA: Investment Decisions 128. The machine is expected to generate net income of $6. AICPA BB: Resource Management. b. Ninth Edition 124. SO: 9. 37. 15 years. $126. Bloom: C. Ans: D. c. AACSB: Analytic. a discount factor. SO: 9. 25. Bloom: K. AACSB: Analytic. Ans: C. The straight-line method of depreciation will be used. SO: 9. Bloom: AP.28 Test Bank for Accounting Principles. Difficulty: Medium. $252. What is the annual rate of return on this investment? a. b. $240.000 each year. Garza Company is considering buying equipment for $240.000. AICPA BB: Resource Management. IMA: Investment Decisions . $120. AACSB: Analytic. b. AICPA PC: Problem Solving. Nance Company is considering buying a machine for $90.000 each year for the next five years if it invests $900. d. c. The cash payback on this investment is a.5% c. ignores obsolescence factors. AACSB: None. The equipment has a five-year life and an estimated salvage value of $300. Difficulty: Medium. AICPA PC: Problem Solving. AICPA PC: Problem Solving.5% Ans: B. SO: 9.000. IMA: Investment Decisions 126. Min: 3. AICPA PC: Problem Solving. 3 years.000. AICPA FN: Decision Modeling. A company projects an increase in net income of $225. IMA: Investment Decisions 125. is complicated to use. a percent.26 . d. Difficulty: Easy. d. ignores the time value of money. Min: 5.000 with a useful life of five years and an estimated salvage value of $12. 6 years.000 with an estimated life of ten years and no salvage value.000. payback is expressed in terms of a. c.000. the denominator in computing the annual rate of return is a. IMA: Investment Decisions 127. AICPA BB: Resource Management. AICPA BB: Resource Management. dollars. d. Ans: C. 10 years.000. c. SO: 9. Min: 1. Difficulty: Medium. Bloom: AP. The payback method is criticized on the grounds that it a. AICPA FN: Decision Modeling. AACSB: None. 57. Min: 1.

return on stockholders' equity approach. The company's required rate of return is 12%. net income will increase by $5. $10. AICPA FN: Decision Modeling.000.893 .239. AACSB: None.29 A capital budgeting technique which takes into consideration the time value of money is the a. Bloom: K. If Mussina's expected annual net income is $15. c.797 . 11.893 1. 12 years.000 and had a salvage value at the end of its useful life of zero. Ans: D. AICPA BB: Resource Management. Difficulty: Medium.000 for year 2. SO: 9. d.339. IMA: Investment Decisions .058. b. $10. c. d. $9. SO: 9. Benaflek Co. 5. IMA: Investment Decisions 131.000 for year 1. Present Value of 1 at 12% . Mussina Company had an investment which cost $260. Ans: C. AACSB: None. d.000 a year. net present value method. The amount of the initial investment was Year 1 2 3 a. AACSB: Analytic. 7. Min: 5. b. 20 years. d.000 for year 3. Difficulty: Easy. but with the use of the new computer.8%. 26 .690 2. Annual cost savings were: $5.158.000. and $3. 15%. 30 years.402 Ans: A. b. the cash payback period is: a. IMA: Investment Decisions 132. c.712 PV of an Annuity of 1 at 12% . Ans: D.5%. AICPA FN: Decision Modeling. Difficulty: Medium. annual rate of return approach. If depreciation expense is $3. Giraldi Company has identified that the cost of a new computer will be $60. IMA: Investment Decisions 130. AICPA PC: Problem Solving. SO: 9. and the net present value of the project was $(450). AACSB: None. c.000 a year. b. Bloom: AP. AICPA BB: Resource Management. Min: 3. the annual rate of return is: a. Bloom: AP. payback approach.8%. AICPA PC: Problem Solving. AICPA FN: Decision Modeling. 9. AICPA FN: Decision Modeling. $9. $4.Incremental Analysis and Capital Budgeting 129. SO: 10. AICPA BB: Resource Management. AICPA PC: Problem Solving.5 years. Difficulty: Hard. Bloom: AP. purchased some equipment 3 years ago. AICPA PC: Problem Solving. AICPA BB: Resource Management. Min: 3. Min: 1.

000 $600.000 Net annual cash inflow 100. AICPA PC: Problem Solving.605 4. SO: 9. c.000 Annual net income 20. IMA: Investment Decisions . Min: 7.890 3.355 4. Difficulty: Hard. Ans: B.791 3. Ninth Edition 133.30 Test Bank for Accounting Principles. d. Estimates regarding each project are provided below: Project Blue Project Gray Initial investment $400.000 $600.26 . AACSB: None. Estimates regarding each project are provided below: Project Blue Project Gray Initial investment $400. d. Min: 7. b.000 142. 4 years. 5%. IMA: Investment Decisions 134.605 4.000 Estimated useful life 5 years 6 years Salvage value 0 0 The company requires a 10% rate of return on all new investments. 10%.696 3. 20 years.000 Annual net income 20. Bloom: AP.231 4. 5 years. 10 years.231 4.000 Estimated useful life 5 years 6 years Salvage value 0 0 The company requires a 10% rate of return on all new investments. AACSB: None. c. Ans: D.000 42. AICPA PC: Problem Solving. Bloom: AP. Periods 5 6 Present Value of an Annuity of 1 9% 10% 11% 12% 3.890 3.486 4. Fehr Company is considering two capital investment proposals. AICPA BB: Resource Management.000 Net annual cash inflow 100. 25%. b.000 142.696 3. Periods 5 6 Present Value of an Annuity of 1 9% 10% 11% 12% 3. Difficulty: Hard. 50%. SO: 9.111 The annual rate of return for Project Blue is a.791 3. AICPA FN: Decision Modeling.355 4.000 42. AICPA FN: Decision Modeling. Fehr Company is considering two capital investment proposals.486 4. AICPA BB: Resource Management.111 The cash payback period for Project Blue is a.

$618.696 3. 12%.000 Estimated useful life 5 years 6 years Salvage value 0 0 The company requires a 10% rate of return on all new investments.111 The internal rate of return for Project Gray is approximately a. Present Value of an Annuity of 1 Periods 9% 10% 11% 12% 5 3.231 4. Present Value of an Annuity of 1 Periods 9% 10% 11% 12% 5 3. Estimates regarding each project are provided below: Project Blue Project Gray Initial investment $400.000 142. AACSB: None. Difficulty: Hard. SO: 10.000 42.Incremental Analysis and Capital Budgeting 135.486 4.111 The net present value for Project Gray is a.31 Fehr Company is considering two capital investment proposals. Estimates regarding each project are provided below: Project Blue Project Gray Initial investment $400. Bloom: AP.410. c. Ans: D. SO: 10.696 3. AACSB: None. AICPA PC: Problem Solving. IMA: Investment Decisions 136.890 3.355 4. AICPA PC: Problem Solving. Min: 7.000 Estimated useful life 5 years 6 years Salvage value 0 0 The company requires a 10% rate of return on all new investments. d. d.000 Annual net income 20.000 $600.410. AICPA BB: Resource Management. $18.000 Net annual cash inflow 100. b. $100.000 42. b. $182.000 Net annual cash inflow 100. 9%. Bloom: AP.231 4. Difficulty: Hard.000. c.355 4.791 3. Fehr Company is considering two capital investment proposals.000 Annual net income 20. 26 . Min: 7. Ans: B.000 142. AICPA FN: Decision Modeling. AICPA FN: Decision Modeling.890 3.605 6 4.000 $600. 11%. 10%.791 3. AICPA BB: Resource Management.912. IMA: Investment Decisions .605 6 4.486 4.

IMA: Investment Decisions . Present Value of an Annuity of 1 Period 8% 9% 10% 1 . AICPA FN: Decision Modeling. b.000 at the end of each year for three years.000 each year for three years. d. Min: 5. Present Value of an Annuity of 1 Period 8% 9% 10% 1 . The approximate internal rate of return on this project is a.783 1. Present Value of an Annuity of 1 Period 8% 9% 10% 1 . d. AICPA PC: Problem Solving.487 A company has a minimum required rate of return of 8% and is considering investing in a project that costs $68.000. Ans: B. AICPA PC: Problem Solving. $98.909 2 1.759 1. The present value of future cash inflows for this project is a.000.170. Use the following table. $177. 9%.917 .917 . Min: 5.000 at the end of each year for three years.759 1. Difficulty: Hard.170.926 . Ninth Edition 137. Difficulty: Hard. Bloom: AP.909 2 1. Ans: B. Bloom: AP.736 3 2. SO: 10. AACSB: None. b. b. SO: 10.337 and is expected to generate cash inflows of $27.487 A company has a minimum required rate of return of 9% and is considering investing in a project that costs $175. less than the required 8%.32 Test Bank for Accounting Principles. $2. 8%. AICPA BB: Resource Management. AICPA FN: Decision Modeling. c. Use the following table.531 2.487 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. $17. 10%. AACSB: None. Min: 5. The net present value of this project is a.454. IMA: Investment Decisions 139.577 2.000 and is expected to generate cash inflows of $70.531 2.000 and is expected to generate cash inflows of $42.759 1.454. IMA: Investment Decisions 138.898. Bloom: AP.909 2 1. Ans: D.718.577 2. c. AACSB: None.783 1.26 . $6. $114. AICPA BB: Resource Management.783 1. $104. Difficulty: Hard.917 . AICPA PC: Problem Solving. $35. d. AICPA BB: Resource Management. Use the following table.926 . SO: 10. c.736 3 2. AICPA FN: Decision Modeling.531 2.926 .

AICPA PC: Problem Solving. Difficulty: Hard.300 and will be depreciated straight-line over its useful life with no salvage value. What is the present value of these future cash flows? Present Value of 1 Period 14% 1 .33 Woods Company wants to purchase an asset with a 3-year useful life. $1. AICPA PC: Problem Solving. Difficulty: Hard.355 4.231 4.750 Ans: C.77 3 .000 with a 6-year useful life.800 b. Inc. Period 6 8% 4.623 Present Value of an Annuity of 1 9% 10% 11% 12% 4. Min: 5. and $10. AICPA BB: Resource Management. AACSB: None. $2. Bloom: AP. Humphrey.450 $34. $886 d.400 $31. The equipment will provide cost savings of $7. Humphrey.000 in year 3.231 4.784 What is the approximate internal rate of return for this investment? a. The equipment will provide cost savings of $7. Inc. 10% c.Incremental Analysis and Capital Budgeting 140.784 What is the approximate net present value of this investment? a. AICPA FN: Decision Modeling. Bloom: AP.111 15% 3. Inc. IMA: Investment Decisions . Woods has a 14% cost of capital.000 with a 6-year useful life. is considering purchasing equipment costing $30. $13. SO: 10. $29.300 and will be depreciated straight-line over its useful life with no salvage value. Min: 5. is considering purchasing equipment costing $30.486 4. Humphrey. AICPA BB: Resource Management. AICPA BB: Resource Management. 9% b. and uses the following factors. Min: 5. SO: 10. requires a 10% rate of return. 11% d. AICPA FN: Decision Modeling. b. AICPA PC: Problem Solving. Bloom: AP. Period 6 8% 4. Difficulty: Hard.000 each year for two years. SO: 10. requires a 10% rate of return.355 4.111 15% 3. Humphrey. c.88 2 . which is expected to produce cash inflows of $15. AICPA FN: Decision Modeling.486 4.800 $30. AACSB: None.67 a.623 Present Value of an Annuity of 1 9% 10% 11% 12% 4. Inc. AACSB: None. 12% Ans: D. IMA: Investment Decisions 141. IMA: Investment Decisions 142. 26 . d.748 Ans: B.792 c.

Min: 3. The project guarantees company profitability. Which one of the following is correct? a.000 and the total present value of cash inflows of Project B is $36. d. If a company's required minimum rate of return is 10%. AICPA PC: Problem Solving. AICPA BB: Resource Management. Ans: C. d. IMA: Investment Decisions 147. Project B. Accrual income is used to calculate the net present value. project earns a rate of return of 10%. the project that should be accepted is a. SO: 10. d.34 Test Bank for Accounting Principles. Difficulty: Medium. neither. Cash flows are used to calculate the internal rate of return. Min: 3. c. not capable of being calculated.26 . Difficulty: Medium. Bloom: AP. b. project's rate of return exceeds 10%. AICPA BB: Resource Management. The project earns the company's desired minimum rate of return. SO: 10. Difficulty: Easy.000. Ninth Edition 143. project's rate of return is less than the minimum rate required. SO: 10. In using the internal rate of return method. The initial investment in the project must have been a. Hale Plumbing used the net present value method and determined that project 34 had a zero net present value.000. What does this tell management about the project? a.000. d. AICPA FN: Decision Modeling. $10.000 and have the same economic life. Min: 1. AACSB: Analytic. AICPA BB: Resource Management. b. c. IMA: Investment Decisions 144.0 and the equal annual cash inflows were $40. The return from this project is equal to the cost of capital. AICPA BB: Resource Management. this indicates that the a. b. the internal rate of return factor was 4. Ans: A. AACSB: None. Bloom: AN. Min: 1. Bloom: C. AICPA PC: Problem Solving. Cash flows are used to calculate the annual rate of return. $160. AICPA PC: Problem Solving. AICPA PC: Problem Solving. IMA: Investment Decisions . IMA: Investment Decisions 145. AACSB: None. Difficulty: Medium. project earns a rate of return of 0%. AICPA BB: Resource Management. Bloom: AN.000. SO: 10. Accrual income is used to calculate the payback period. d. SO: 10. AICPA FN: Decision Modeling. a project's net present value is zero. If Project A and Project B both require an initial investment of $30. c. Ans: B. Min: 2. IMA: Investment Decisions 146. AICPA FN: Decision Modeling. Difficulty: Easy. they are both the same. Bloom: K. AACSB: Analytic. Ans: C. Using the net present value method. The project's cash inflows will equal its cash outflows. AICPA FN: Decision Modeling. AACSB: None. the total present value of cash inflows for Project A is $30. AICPA PC: Problem Solving. b. c. Ans: D. an amount which cannot be determined. c. $40. b.000. AICPA FN: Decision Modeling. and in using the net present value method. Project A.

IMA: Investment Decisions 149. IMA: Investment Decisions 150. 10%.Incremental Analysis and Capital Budgeting 148. Bloom: AP. Min: 5. The approximate internal rate of return on this project is a. Min: 5.909 2 1.000.783 1. SO: 10. AICPA PC: Problem Solving.000 each year for three years.487 A company has a minimum required rate of return of 10%. $246. c. d.759 1. $252.783 1.909 2 1.000 and is expected to generate cash inflows of $90.531 2. Use the following table. Difficulty: Medium. AICPA BB: Resource Management. 9%. Ans: D. $42.577 2. Bloom: AP. Ans: B. c. Min: 5. Bloom: AP. AICPA BB: Resource Management. b. It is considering investing in a project that costs $227.000 and is expected to generate cash inflows of $168. IMA: Investment Decisions .736 3 2.790 and is expected to generate cash inflows of $90. Difficulty: Medium.909 2 1. AACSB: Analytic.487 26 .577 2. It is considering investing in a project which costs $420.830. $425. b.736 3 2.210. Use the following table. AICPA PC: Problem Solving. d.000 at the end of each year for three years. AICPA FN: Decision Modeling.926 .531 2.926 .000 at the end of each year for three years.35 A company has a minimum required rate of return of 9%.487 A company has a minimum required rate of return of 8%.736 3 2. It is considering investing in a project that requires an investment of $210. AICPA PC: Problem Solving. Difficulty: Medium.208. The net present value of this project is a.917 . AICPA BB: Resource Management. The present value of future cash inflows for this project is a. Ans: B.531 2.577 2. AICPA FN: Decision Modeling. c.917 . SO: 10. AACSB: Analytic. $210. $5.926 .208. AICPA FN: Decision Modeling.830. b. Present value of an Annuity of 1 Period 8% 9% 10% 1 . Present value of an Annuity of 1 Period 8% 9% 10% 1 . Present value of an Annuity of 1 Period 8% 9% 10% 1 . SO: 10.783 1.917 . Use the following table. The IRR on this project cannot be approximated.759 1. $223. d.000. AACSB: Analytic. 8%.759 1. $13.516.

deducted from the make total cost. AACSB: None. what will be the effect on net income? a. Bloom: K. AICPA PC: Problem Solving. Bloom: C.000 decrease b. Min: 1. IMA: Investment Decisions 156. SO: 4. review results of the decision. SO: 10. Difficulty: Easy. Ans: A. The appropriate table to use when an investment promises to return unequal cash flows is the a. present value of annuity table. Opportunity cost Ans: A. IMA: Investment Decisions 154. $3. It costs Dryer Company $26 per unit ($18 variable and $8 fixed) to produce its product. IMA: Investment Decisions 153. $9. Selling expenses b. Difficulty: Easy. AICPA FN: Decision Modeling. Min: 5. Bloom: K. Difficulty: Easy. Bloom: C. Dryer has sufficient unused capacity to produce the 3. IMA: Investment Decisions . d. Min: 1. Ans: A. Difficulty: Easy. the annual rate of return method. Direct labor c. SO: 4. make a decision. ignored. AICPA BB: Resource Management. d. a discounted cash flow method. added to the make total cost. added to the buy total cost.000 units. In a make-or-buy decision. present value of 1 table.000 increase c. Ninth Edition 151. AICPA FN: Decision Modeling. AACSB: None. Bloom: C. Variable manufacturing costs d.000 units at $21 each. The conceptually superior approach to capital budgeting is a. SO: 3. IMA: Investment Decisions 152. Min: 1. Min: 1. b. future value of annuity table. d. none of these. determine possible courses of action. AICPA FN: Decision Modeling. Ans: C. If the special order is accepted. identify the problem and assign responsibility. SO: 1. AICPA BB: Resource Management. AICPA FN: Decision Modeling. A foreign wholesaler offers to purchase 3. AICPA PC: Problem Solving. AACSB: None. $3. AACSB: None. opportunity costs are a. AICPA BB: Resource Management. Bloom: AN. Dryer would incur special shipping costs of $2 per unit if the order were accepted. the payback method. c. AACSB: None. d. AICPA PC: Problem Solving. b. AICPA FN: Decision Modeling.36 Test Bank for Accounting Principles. b. c. Which of the following would generally not affect a make-or-buy decision? a. AICPA PC: Problem Solving. SO: 10. Min: 1. $54.26 . Ans: A. future value of 1 table. b. c. AACSB: Analytic. Accounting's contribution to the decision-making process occurs in all of the following steps except to a. AICPA PC: Problem Solving. which normally sells for $38 per unit. Difficulty: Easy. AICPA BB: Resource Management.000 increase Ans: B. AICPA BB: Resource Management.000 increase d. AICPA BB: Resource Management. AICPA FN: Decision Modeling. Difficulty: Medium. c. IMA: Investment Decisions 155. AICPA PC: Problem Solving.

c.50 $1. variable cost.50 d. Min: 1. Bloom: C. b opportunity cost. d. IMA: Business Economics 161. AICPA FN: Decision Modeling. SO: 9. All of the following are relevant in deciding whether to eliminate an unprofitable segment except the segment's a.00 $2. AICPA FN: Decision Modeling. sales. Bloom: K. d. AICPA FN: Decision Modeling. Ans: D. A cost that cannot be changed by any present or future decision is a(n) a. Bloom: K. Ans: A. sunk cost. AICPA FN: Decision Modeling. AICPA BB: Resource Management. variable expenses. it is impossible for net income to decrease. cost of capital. AICPA BB: Resource Management. Difficulty: Easy. cutoff rate. minimum rate. contribution margin. $2. Cost of capital investment ÷ Annual cash inflow. SO: 8. IMA: Business Economics 158. Min: 1. IMA: Investment Decisions . AICPA BB: Resource Management. IMA: Business Economics 160. AICPA BB: Resource Management. b. AICPA PC: Problem Solving. fixed expenses. What is the contribution margin per unit of limited resource for each product? X Y a.50 Ans: A. AACSB: None. $5. incremental cost. Difficulty: Medium. Difficulty: Easy. variable expenses of the eliminated segment will be eliminated. it is impossible for net income to increase. Min: 1. d. IMA: Business Economics 159. SO: 7. AICPA PC: Problem Solving. c. c.00 $3. AACSB: None. AACSB: None. AICPA PC: Problem Solving. fixed expenses allocated to the eliminated segment will be eliminated. Difficulty: Easy. AACSB: None. AACSB: Analytic. Difficulty: Easy. AICPA FN: Decision Modeling. Product X requires 4 machine hours and Product Y requires 8 machine hours. AICPA PC: Problem Solving. IMA: Investment Decisions 162. d. SO: 9. c. 26 . AICPA FN: Decision Modeling. Difficulty: Easy. Ans: C.00 $1.Incremental Analysis and Capital Budgeting 157. Bloom: AP. Average investment ÷ Annual cash inflow. hurdle rate. SO: 7. Min: 1. AICPA BB: Resource Management.50 b.00 c. c.37 Ans: C. If an unprofitable segment is eliminated a. AICPA BB: Resource Management. contribution margin per unit is $12 for Product X and $20 for Product Y. Cost of capital investment ÷ Net income. AICPA PC: Problem Solving. Min: 3. AACSB: None. AICPA PC: Problem Solving. b. b. Bloom: K. The rate of return that management expects to pay on all borrowed and equity funds is the a. Ans: B. Min: 1. The cash payback formula is a. Bloom: K. $3. d. $5. In the Rossetto Company. b. SO: 6. Average investment ÷ Net income.

144. 143. 42. 151. 91. 73. 92. Ninth Edition 163. future cash inflows and the capital investment. AICPA FN: Decision Modeling. AACSB: None. Item Ans. Difficulty: Easy. 89. b. 68. 110. 130. Item Ans. c. 60. 59. 83. 137. 145. 40. b d c a b a b c c b b c c c b c c c b 114. 88. 156.38 Test Bank for Accounting Principles. 43. 119. 50. AICPA BB: Resource Management. 160. AACSB: None. 55. SO: 9. AICPA FN: Decision Modeling. Item Ans. 146. 101. Difficulty: Easy. 123. 117. Min: 1. present value of future cash inflows and the capital investment. 98. 128. 97. d b b a c d b d b d d b c b d c c d d 95. SO: 10. 106. depreciation is a. b. 108. Item Ans. 116. 69. 155. added back to net income because it is an inflow of cash. 65. 82. AICPA PC: Problem Solving. Item Ans. Bloom: K. 125. added back to net income because it is not an outflow of cash. A negative net present value means that the a. 142. project's rate of return equals the required rate of return. 162. 105. 46. 111. 61. 67. 72. 131. 86. 45. subtracted from net income because it is an outflow of cash. IMA: Investment Decisions Answers to Multiple Choice Questions Item Ans. b. b b c b c b b c a d b d d b a a d b d 57. 85. IMA: Investment Decisions 165. 135. 63. 157. project's rate of return is less than the required rate of return. 141. Bloom: K. c. AACSB: None. 104. 62. 81. 79. 84. SO: 10. 39. 126. 38. 120. 163. 99. present value of future net income and the capital investment. 164. 64. 149. 136. 134. 94. project's rate of return exceeds the required rate of return. 158. 124. 129. c a b a a c c d a a b d c b . 90. 147. 71. 66. 100. 115. 41. 150. 165. 87. 48. d. 127. d b d b b d b c b d a c b d c d b b a 152. d. 74. 77. 139. 113. 58. 51. c. 140. Ans: C. 47. 44. AICPA PC: Problem Solving. Item Ans. 56. 80. 153. 109. 103. AICPA PC: Problem Solving. 138. To determine annual cash inflow. Ans: D. 53. 132. Min: 1. 102. AICPA FN: Decision Modeling. 93. 75. IMA: Investment Decisions 164. Net present value is the difference between the a. 96. a b b b c c a b a a b c d c c d c d a 133. 49. 161. project is acceptable. 121. d. 154. 52. 122. 78. 118. 159. d d b a b d a c d b b c c a a b d b c 76. 107. future cash inflows and the present value of the capital investment.26 . 148. Difficulty: Easy. Ans: B. 112. AICPA BB: Resource Management. 54. Bloom: K. subtracted from net income because it is an expense. 70. Min: 1. AICPA BB: Resource Management.

000 and costs of $15. SO: 3. Min: 5. AACSB: Analytic.) $2. AICPA FN: Decision Modeling. AACSB: Analytic.000. produces several models of clocks. AICPA PC: Problem Solving. IMA: Business Economics . An outside supplier has offered to produce the commercial clocks for Notson for $420 each. Bloom: AP.000 Incremental revenue ($40.000 – $38. Notson needs 1. AICPA FN: Decision Modeling.25 per bear.000. is considering Plan 1 which is estimated to have sales of $40.Incremental Analysis and Capital Budgeting 26 .) $112. Each bear consists of $12 of variable costs and $9 of fixed costs and sells for $45. Difficulty: Medium. Instructions Compare plans using incremental analysis.000) (10. Min: 3. SO: 2. Ans: N/A. AICPA FN: Decision Modeling.39 BRIEF EXERCISES BE 166 Sedgwick Inc. AICPA PC: Problem Solving. AICPA BB: Resource Management. Ans: N/A. AACSB: Analytic. Difficulty: Medium. of which Pederson has the capacity to produce.000 units at $14 each. A wholesaler offers to buy 8.000 Incremental revenue (8. 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. Bloom: AP.000) $ 6. Difficulty: Medium. IMA: Investment Decisions Solution 166 (3 min.000) $1. AICPA PC: Problem Solving. Bloom: AP. Instructions Determine the incremental income or loss that Pederson Enterprises would realize by accepting the special order.000) Incremental increase in profit if Plan 1 is selected BE 167 Pederson Enterprises produces giant stuffed bears.000 and costs of $14. Inc.25 × 8.000) Incremental costs ($15. AICPA BB: Resource Management.000 (96. Ans: N/A.200 clocks annually.000) Incremental profit if special order accepted BE 168 Notson.000 × $14) Incremental variable costs ($12 × 8. AICPA BB: Resource Management. The company currently has sales of $38. Pederson will incur extra shipping costs of $1.000 (1. Min: 5.000) Incremental shipping costs ($1. SO: 4.000 – $14. IMA: Investment Decisions Solution 167 (5 min.

25 each. What should Paola Farms do? Ans: N/A.000 $ (3. The costs per stapler are as follows: Direct materials Direct labor Variable overhead Fixed overhead Total $ 3.000 staplers for $18. The production generates 60. AACSB: Analytic. produces a crop of chickens at a total cost of $66.200 × $420) Cost savings: Savings of DM $100 × 1.00 each. IMA: Business Economics Solution 169 (5 min. It costs $55. IMA: Business Economics .00 Gallup Company has contacted Parks with an offer to sell it 3.40 Test Bank for Accounting Principles.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) Parks Corporation currently manufactures 3. AICPA PC: Problem Solving.000 staplers annually for its main product. Difficulty: Medium.00 8.000 Savings of FOH 40% × $150 × 1. or the chickens can be slaughtered in house and then sold for $2.200 = 96.200 = 144.) $(54.000 Total cost savings Incremental net cost to buy BE 169 + 432. AICPA BB: Resource Management.000 Savings of VOH $80 × 1. AACSB: Analytic.000) + 9.) Incremental Effect $(504.000 + 24.00 7. $5 of the fixed overhead per unit is unavoidable. Min: 5.000 more to turn the annual chicken crop into chicken meat. AICPA PC: Problem Solving.26 . Ans: N/A. Inc. determine how much incremental profit or loss it would report.00 $22. SO: 4.000 $ (72.000. Difficulty: Medium. AICPA FN: Decision Modeling.000 + 12. Bloom: AN. Instructions Prepare an incremental analysis for the make-or-buy decision. AICPA FN: Decision Modeling. Bloom: AP.200 = $120. AICPA BB: Resource Management.200 = 72. SO: 5.00 4.000 chickens which can be sold for $1 each to a slaughtering company. Ninth Edition Solution 168 (5 min. Instructions If Paola Farms slaughters the chickens.000 + 6. Min: 4.000) Incremental Analysis Cost to buy (1.000 Savings of DL $120 × 1.

A new.) $(10. Bloom: AP.000 17.000 $ 2. AICPA FN: Decision Modeling.000 $ 8.000) $ 45.200 3. Ans: N/A.800 7.000) Ice Cream 500 $20.000 13.000 profit Paola Farms should slaughter.Incremental Analysis and Capital Budgeting Solution 170 (4 min. BE 171 Elmdale Company has a machine that affixes labels to bottles.000* (225. Demand of individual products is not affected by changes in other product lines.000 Fixed costs 5.40) Incremental decrease in profits if dropped .000 2.000 – $55. IMA: Investment Decisions Solution 171 (4 min.000 Instructions Prepare an incremental analysis of the effect of dropping the sour cream product line. IMA: Business Economics Solution 172 (4 min.000 chickens = $75.000 Yogurt 400 $10.000 x .000 Incremental costs: given as $55.00) × 60.000 28. AICPA FN: Decision Modeling. Min: 4. The new machine will lower annual variable production costs from $400. AICPA PC: Problem Solving.000 Net Income Change $270.25 – $1. AICPA BB: Resource Management. Min: 4. SO: 7. more efficient machine is available at a cost of $225. Instructions Prepare an analysis showing whether the old machine should be retained or replaced.000 Incremental profits: $75.000 = $20.000 Replace Equipment $930.000 to $310.) Retain Equipment $1.800 Butter 200 $20.000 $ 5.000 Revenue $10.000 Variable departmental costs 6.41 Incremental revenues: ($2.000 Net income (loss) $ (1. and the other 60% are allocated.100 $60. 40% of the fixed costs are direct.000 $ (2. ice cream.000 4.) 26 .000 that will have a 5-year useful life with no salvage value.000) + 6.000.000 $15. The machine has a book value of $60.200. and butter. AACSB: Analytic.000 4. AACSB: Analytic. The allocated fixed costs are based on units sold and are unavoidable. Bloom: AN.000 Variable manufacturing costs New machine cost Net savings over 3 years *For 3 years of remaining life BE 172 Keith Inc. Results of June follow: Sour Cream Units sold 2.000 and a remaining useful life of 3 years and no salvage value. AICPA PC: Problem Solving. AICPA BB: Resource Management. Difficulty: Medium. yogurt.000 + 2.200 Total 3. SO: 6. Difficulty: Medium.000) Incremental revenue Incremental variable cost savings Incremental fixed cost savings ($5. Ans: N/A. has 4 product lines: sour cream.

Difficulty: Medium.42 Test Bank for Accounting Principles. Instructions Compute the cash payback period. Depreciation expense. is $90.26 . The facility will cost $980.000 to build.000 salvage value at the end of its 20-year useful life.) $900. IMA: Investment Decisions Solution 174 (3 min.000. but will also increase annual expenses by $160. AICPA BB: Resource Management. AICPA FN: Decision Modeling. AACSB: Analytic.000 + $90. SO: 8.5 hours = $9. The new equipment is expected to produce annual net income of $30.20 Product 43: $15 ÷ 1. Bloom: AN. AICPA FN: Decision Modeling. Min: 3. AACSB: Analytic.5 years BE 175 Holt Co. Difficulty: Medium. but will have a $20.000 per year. AICPA PC: Problem Solving. Which product should Meierhoff tell its sales personnel to ‘push’ to customers? Ans: N/A. Instructions Calculate the annual rate of return on this facility. Difficulty: Medium.5 hours Instructions Compute the contribution margin per unit of limited resource for each product. AACSB: Analytic. Min: 4. AICPA PC: Problem Solving. is considering investing in new equipment that will cost $900.) Product 12: $23 ÷ 2. AICPA BB: Resource Management. AICPA BB: Resource Management.000) = 7.5 hours = $10 Therefore. Ans: N/A.000 over its useful life. Min: 4. Bloom: AP. IMA: Business Economics Solution 173 (4 min. The facility will increase revenues by $240. AICPA PC: Problem Solving. Ans: N/A. is considering investing in a new facility to extract and produce salt. AICPA FN: Decision Modeling.000 ÷ ($30. BE 174 Lightle Co. using the straight-line rate. Bloom: AP. IMA: Investment Decisions . 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. sales personnel should push Product 43. SO: 9.000. SO: 9.5 hours 1.000 with a 10-year useful life.

870. and then locating this discount factor on the present value of an annuity table. Bloom: AP.65. The investment will have a life of 8 years with no salvage value and will produce annual cash flows of $16. SO: 10.000 + $20. The company’s expected annual income is: $240. AICPA FN: Decision Modeling. SO: 10.000 is being contemplated by Linn Co. AICPA PC: Problem Solving.000 Its average investment is: $980. Bloom: AP. IMA: Investment Decisions Solution 176 (4 min. Thus.000 ÷ $500.000 = $80. BE 177 An investment costing $90. AICPA BB: Resource Management. the internal rate of return can be approximated by dividing the capital investment by the net annual cash inflows to determine the discount factor. Instructions Compute the approximate internal rate of return for this investment.870 = 5. Instructions Compute the proposed investment’s net present value. .) 26 .000 × 1. Difficulty: Medium. Min: 3.250 Cash inflows—$25.000 – $160. AICPA PC: Problem Solving. AACSB: Analytic.000 × 5.250 (140. and indicate whether the investment should be made by Puckett Company. $90.Incremental Analysis and Capital Budgeting Solution 175 (4 min.000 = 16% BE 176 Puckett Company is proposing to spend $140. Ans: N/A.000 ————————— = $500.000 2 Therefore.000 ÷ $16. The appropriate present value factor for 10 periods is 5. IMA: Investment Decisions Solution 177 (3 min.43 The annual rate of return is calculated by dividing expected annual income by the average investment.33 By tracing across on the 8-year row.000 to purchase a machine that will provide annual cash flows of $25.000 ) $ 1.33493. (Table C-2 is needed) Ans: N/A. Difficulty: Medium. AICPA FN: Decision Modeling. AACSB: Analytic. the internal rate of return on this project is approximately 10%.65 Cash outflow—investment $140. AICPA BB: Resource Management. its annual rate of return is: $80.00 Net present value The investment should be made because the net present value is positive.) Present Value $141.000. Min: 4.) When net annual cash inflows are expected to be equal. we see that the discount factor for 10% is 5.

000) $ 75. Ans: N/A.000 units at $50 Reject Order $ -0-0$ -0Accept Order $750.) FELTER COMPANY Incremental Analysis Proposal to buy 15.000 36. Unit information about its product is as follows: Sales Price Variable manufacturing cost Fixed manufacturing cost ($500. This is a one-time only order and acceptance of this proposal will not affect the company's regular sales. AICPA PC: Problem Solving.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. For the first eight months of 2010.000 × $45) Net Income Felter Company would increase its income by $75.000 units) Cost of goods sold Gross profit Operating expenses Net income $90. SO: 3. 179 Carney Company manufactures cappuccino makers. Bloom: AN.000 $12.000 × $50) Costs (15.000. Ex.000 54. AICPA BB: Resource Management.000 units of product and is operating at 70% of plant capacity.000) $ 75.000. 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. Min: 9.000) Profit per unit $70 $45 10 55 $15 The company received a proposal from a foreign company to buy 15. Difficulty: Hard. AICPA FN: Decision Modeling.000. .000 24.26 .000 in accepting the special order.000 (675.000 Net Income Increase (Decrease) $750. Ninth Edition EXERCISES Ex. IMA: Business Economics Solution 178 (9–13 min. 178 Felter Company produced and sold 50.000 ÷ 50. AACSB: Analytic.000 (675. the company reported the following operating results while operating at 80% of plant capacity: Sales (500.000 units of Felter Company's product for $50 per unit.000.000.000 Revenues (15.44 Test Bank for Accounting Principles. 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.

850. AACSB: Analytic. For the first 6 months of 2010.050.000 × $95 = $2.050. Instructions (a) Prepare an incremental analysis for the special order.000 machines at $135 each from a major coffee shop franchise. Instructions (a) Prepare an incremental analysis for the special order.000. (b) Should Gregg Company accept the special order? Justify your answer.000. Ex.050.000 2. This recommendation assumes that acceptance of the special order will not affect relations with existing customers. 179 (Cont.000 + $10. Min: 12.000 × $35 = $1.200 of shipping costs. **Variable operating expenses = 30. AICPA BB: Resource Management.850. (b) The incremental analysis shows Carney Company should accept the special order because incremental revenues exceed incremental costs. AICPA BB: Resource Management. AICPA FN: Decision Modeling. Acceptance of the special order will not affect fixed costs but will result in $1.000.) 26 .000** $ 140.000) $ 140.060.060. Carney Company receives a special order for 30.000 Cost of goods sold was 70% variable and 30% fixed. Difficulty: Medium. AACSB: Analytic.850. Min: 13. SO: 3.060.Incremental Analysis and Capital Budgeting Ex. Gregg has received a special order from a large school district to buy 600 mats at $45 each.000 4. Ans: N/A.000 units) Cost of goods sold Gross profit Operating expenses Net income $7.000 2. (b) Should Carney Company accept the special order? Justify your answer.000 2.000 Net Income Increase (Decrease) $4. operating expenses were 75% variable and 25% fixed.000 $ 800. Bloom: AN.000.000 = $1.000) (1. SO: 3.000* 1.800.200.000 of shipping costs but no increase in fixed expenses. IMA: Business Economics . the company reported the following operating results while operating at 80% capacity: Sales (100.) Reject Order $ -0-0-0$ -0Accept Order $4. AICPA FN: Decision Modeling. AICPA PC: Problem Solving. Acceptance of the order would result in $10.000 (2. AICPA PC: Problem Solving. Ans: N/A. IMA: Business Economics Solution 179 (a) (12–17 min. Difficulty: Medium. Bloom: E.45 In September. 180 Gregg Company supplies schools with floor mattresses to use in physical education classes.000 Revenues Cost of Goods Sold Operating Expense Net Income *Variable cost of goods sold = 30.

(b) Should Innova accept the special order? Why or why not? Ans: N/A. Variable cost of goods sold for the special order = 600 × $29.000 40.000) -0$ 4.200 (b) The incremental analysis shows Gregg Company should not accept the special order because incremental costs exceed incremental revenues.250 Revenues Materials ($0.000) (4. Instructions (a) Prepare an incremental analysis for the special order. Ex. IMA: Business Economics Solution 181 (a) (12 min.000) (6.200 $ (840) (13–18 min.000 × 70% = $2.000. No sales commission will result from the special order.250 (2. AACSB: Analytic.000 discs.25 per disc for 5.80) Fixed overhead Sales commissions Net income .000 $100.) Net Income Increase (Decrease) $27.200) $ (840) Variable cost of goods sold = $4.000) (4.640) (10. The cost of manufacturing 25.640 10.26 .640. 181 Larkin Company produces golf discs which it normally sells to retailers for $6 each.000 = $15 Variable operating expenses for the special order = 600 × $15 = $9.40 = $17.000.20) Variable overhead ($0.000 ÷ 100. Variable cost of goods sold per unit = $2.) Reject Order $ -0-0-0-0-0-0$ -0Accept Order $21. Rudd Corporation offers Innova $4.250 (2. Variable operating expenses = $2.940. Difficulty: Hard.500.000) -0$ 4. AICPA PC: Problem Solving.940.000 due to the purchase of a new imprinting machine.000) (5. If Larkin accepts the offer.200. Rudd would sell the discs under its own brand name in foreign markets not yet served by Larkin.000) (6.000) (5.500.000 golf discs is: Materials Labor Variable overhead Fixed overhead Total $ 10.40.40) Labor ($1.000 Innova also incurs 5% sales commission ($0. AICPA FN: Decision Modeling. SO: 3.000 (17.200 = $10.000 30.000 × 75% = $1. AICPA BB: Resource Management.000 + $1.000 20.250 Net Income Effect $21.46 Test Bank for Accounting Principles.000 Variable operating expenses per unit = $1. Min: 12.000 to $55. its fixed overhead will increase from $50. Bloom: E. Ninth Edition Solution 180 (a) Revenues Cost of Goods Sold Operating Expense Net Income Reject Order $ -0-0-0$ -0Accept Order $27.30) on each disc sold.000 17.000 = $29.000 ÷ 100.

000 50. Yes. Fixed factory overhead is allocated to production. AACSB: Analytic./unit) Variable manufacturing overhead ($3/unit) Fixed factory overhead costs ($5/unit) Total Cost per unit = $45 $ 70. Should Kasten accept the order? 2. Should Kasten let someone else manufacture all 10.000 = $3. AICPA BB: Resource Management.000 300. SO: 3.000 units. Kasten received an offer from another company to manufacture the same quality widgets for $39. Larkin should accept the special order because incremental revenue exceeds incremental expenses by $4.000 .000 2. Kasten will save $10.47 As shown in the incremental analysis.000 widgets for production during 2010. The following estimated costs were provided: Direct material ($7/unit) Direct labor ($15/hr. Kasten has capacity to produce 12.000 $450.000.000 units from a new customer in a country in which Kasten has never done business. AICPA FN: Decision Modeling. × 2 hrs. 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. 181 (b) (Cont. AICPA PC: Problem Solving. Kasten can make an extra $3.000 widgets and focus only on distribution? Ans: N/A.) 26 . budgeted 10.000 = $10. This customer has offered $43 per widget.000 Instructions Answer each of the following independent questions: 1. Bloom: AP.250. Inc. IMA: Business Economics Solution 182 (10–12 min. Difficulty: Medium. Min: 10. Yes. 182 Kasten.Incremental Analysis and Capital Budgeting Ex. Ex.000 30. Incremental revenue per widget Incremental cost per widget: $7 + ($15 × 2) + $3 = Incremental profit per unit Total incremental profit = $3 × 1.) $43 40 $ 3 1.4. Kasten received an order for 1.000 if it buys instead of makes.

Ans: N/A.000 -0$92. 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. 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 5.000 if the component part is purchased from the outside firm and the new product is manufactured.000 15.000) 14. If Agler makes the subassemblies.26 .000 -080.000 10.000 $80. Ninth Edition Ex. AICPA BB: Resource Management.000 15. $3 of the fixed overhead per unit will be allocated to other products. Min: 13.000 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.) Make $35.000 20.000 Increase (Decrease) $ 35. IMA: Business Economics Solution 183 (13–18 min.000 Another company has offered to sell the same component part to the company for $12 per unit. 183 Coyle Company manufactured 6.000 15. Difficulty: Medium.000. Bloom: E. AICPA FN: Decision Modeling. Ex. .48 Test Bank for Accounting Principles.000 20.000 $94. Instructions Prepare an incremental analysis report for Coyle Company which can serve as informational input into this make or buy decision.000 $ 2.000 -0(72. SO: 4. Coyle Company has the opportunity to use the factory equipment to produce another product which is estimated to have a contribution margin of $14. AACSB: Analytic. 184 Agler Corporation currently manufactures a subassembly for its main product.000 Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead Purchase price (6. AICPA PC: Problem Solving.000 72.000 × $12) Total annual cost Opportunity cost Total cost Income is expected to increase by $2. If the component part is purchased from the outside firm.000 14.000 92.000 of the subassemblies for $18 each.000 Buy $ -0-0-020.000) (12.000 10.

000 -0$1.000 Net Income Increase (Decrease) $ 400.000 bicycles per year.000 1. the company's net income would increase $120.150. The direct materials and direct labor cost per unit to make the bicycle seats are $8. AACSB: Analytic. The company is currently operating at 100% capacity.000 × $9) Variable Manufacturing Costs ($450.00. (b) Should Kuhn Bicycle Company buy the seats from the outside supplier? Justify your answer.000 × $20) Total annual cost (b) The seats should be purchased from the outside supplier. Min: 6. AICPA PC: Problem Solving.030.000 Direct Materials (50. all variable manufacturing costs will be eliminated. IMA: Cost Management Solution 185 (a) (15–20 min. AICPA FN: Decision Modeling.cost to buy = incremental cost ($24 – $5) – $18 = $1 Incremental cost to make = $1 × 5.000 -0(1. Bloom: AN.000) $ 120.000 30.000 450. Ans: N/A. Ans: N/A. AICPA FN: Decision Modeling.000 270.) Make $ 400. SO: 4.Incremental Analysis and Capital Budgeting Ex. AICPA PC: Problem Solving.000 units = $5. . A supplier offers to make the bicycle seats at a price of $20 each. IMA: Cost Management Solution 184 (6 min.000 × $8) Direct Labor (50. As indicated. 184 (Cont.) 26 . AACSB: Analytic. Ex.000 270. AICPA BB: Resource Management. SO: 4. Min: 15.00 and $9.000 $1.000 Dryer should buy to save $1 per unit.000.000 of fixed manufacturing overhead currently being charged to the bicycle seats will have to be absorbed by other products. and variable manufacturing overhead is charged to production at the rate of 60% of direct labor cost. Normal production is 50. If the bicycle company accepts this offer. Instructions (a) Prepare the incremental analysis for the decision to make or buy the bicycle seats.) Cost to make . AICPA BB: Resource Management. respectively. Difficulty: Medium.000 450.000 by purchasing the seats. Difficulty: Medium. 185 Kuhn Bicycle Company has been manufacturing its own seats for its bicycles.000.000 Buy $ -0-0-030. but the $30. Bloom: AP.49 Instructions Should Agler make or buy the subassemblies? Explain your answer.000 × 60%) Fixed Manufacturing Costs Purchase Price (50.

20).000.00 (1.000 gallons that it produces.70) (.) Sell Chemical $11. SO: 5. Bloom: E. Ans: N/A. the company incurred $344. AICPA BB: Resource Management.20 . Ninth Edition Ex.30 .000 gallons of the chemical.60) (.000 gallons of milk which can be sold for $1 per gallon to a pasteurization company. The production generates 60.00 per gallon.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) $6.50 Test Bank for Accounting Principles. Instructions Determine the incremental per gallon increase in net income and the total increase in net income if the company manufactures the paint.60 The company is considering manufacturing the paint itself. produces milk at a total cost of $66.00 + $1.40 $ 3.50 per gallon.50 Assuming the company sells all 40. If the company processes the chemical further and manufactures the paint itself.50. IMA: Business Economics Solution 186 (15–20 min.00 1.000 (40. 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 $6.80 1.20 . 187 Ecker.60 Net Income Increase (Decrease) $4. Inc. The company can sell the paint at $15. AACSB: Analytic. Min: 15.00 6.60 (C) $.60 8.000 of costs to produce 40. Ex.60 $8.00 per gallon. . or the milk can be processed further into ice cream and then sold for $2.70 (B) $1.80) $1.70. Direct labor $. No increase in fixed manufacturing overhead is expected. In 2010.80 + $. 186 Spencer Chemical Corporation produces an oil-based chemical product which it sells to paint manufacturers.60 11.80 .60 $ 2.60. The selling price of the chemical is $11.000 gallons × $1. the following additional costs per gallon will be incurred: Direct materials $1. It costs $75.40 Process Further $15.20 + $.70 1. AICPA FN: Decision Modeling. the incremental net income would be $48.50) — (2. Difficulty: Medium.00 1. AICPA PC: Problem Solving.00 7.000 more to turn the annual milk supply into ice cream.26 . Variable manufacturing overhead $.80 .

AICPA BB: Resource Management.000 Incremental costs: given as $75. (b) Should Speedy sell or process further? Why or why not? Ans: N/A. Min: 6. Ex. management has concluded that some of this capacity can be used to assemble the bikes and sell them at $440 each. 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. SO: 5. AACSB: Analytic. Bloom: AP.00) × 60. Bloom: E. SO: 5. Speedy currently has unused productive capacity that is expected to continue indefinitely. AICPA BB: Resource Management.000 = $15. AACSB: Analytic.) Incremental revenues: ($2. Difficulty: Medium. Assembling the bikes will increase direct materials by $5 per bike.Incremental Analysis and Capital Budgeting Ex. 187 (Cont.000 profit Ecker should process into ice cream. IMA: Business Economics Solution 187 (6 min. AICPA FN: Decision Modeling. and direct labor by $10 per bike.000 – $75.) 26 . AICPA FN: Decision Modeling.000 Incremental profits: $90. AICPA PC: Problem Solving. but there will be no additional fixed overhead as a result of assembling the bikes.) 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 . AICPA PC: Problem Solving. how much is the incremental profit or loss? Should Ecker process the milk into ice cream or sell it as is? Ans: N/A.000 gallons = $90.50 – $1. Instructions (a) Prepare an incremental analysis for the sell-or-process-further decision. Min: 12. 188 Speedy Bikes could sell its bicycles to retailers either assembled or unassembled. The cost of an unassembled bike is as follows. IMA: Business Economics $150 70 49 21 $290 Solution 188 (a) (12 min. Difficulty: Medium. Additional variable overhead will be incurred at the normal rates.51 Instructions If Ecker processes the milk into ice cream.

the current machine would have zero salvage value. 190 Kinder Enterprises relies heavily on a copier machine to process its paperwork. Min: 11. Instructions Determine whether the company should purchase the new machine.000.200 5 years If sold now. The company should purchase the new machine because there will be an increase in net income of $53. Recently the copy clerk has not been able to process all the necessary copies within the regular work week. The new machine is expected to have zero salvage value after five years. Both machines will have a salvage value of zero if operated for the remainder of their useful lives. The management is considering replacing the machine with a more efficient one which will minimize downtime and excessive labor costs.000. AICPA PC: Problem Solving.26 . Ex.000 $ 53.000. If operated for the remainder of its useful life. 188 (Cont. AACSB: Analytic.000 (A) $475.000 (430. Management is considering updating the copier machine with a faster model. IMA: Investment Decisions Solution 189 (11–16 min.000 × 5 = $475. The machine is unreliable and results in a significant amount of downtime and excessive labor costs. Difficulty: Medium.000) (430.000 8. Bloom: AN.000. the current copier would have a salvage value of $1.000 — 4. Speedy Bikes should process further (rather than sell unassembled) because incremental revenue exceeds incremental expenses by $18 per unit. SO: 6.) Retain Equipment $ -0-0$ -0$ -0Replace Net Income Equipment Increase/(Decrease) $475. Ninth Edition Ex. Ex.000.000 $ 53.) (b) As shown in the incremental analysis.000 5 years New Machine $430. AICPA FN: Decision Modeling.000 5 years New Model $20.000 230. Original purchase cost Accumulated depreciation Estimated operating costs (annual) Useful life Current Copier $10.000) 8. 189 Harris Timber Corporation uses a machine that removes the bark from cut timber. The old machine can be sold to a scrap dealer for $8.000 9. AICPA BB: Resource Management.000 8.000 Cost savings New machine cost Proceeds from sale of old machine Net incremental net income (A) $95.52 Test Bank for Accounting Principles.000 — 5 years It is estimated that the new machine will produce annual cost savings of $95. . Data are presented below for the two machines: Original purchase cost Accumulated depreciation Estimated life Old Machine $340. Ans: N/A.

2010 are presented below.000 26.000 $ 21. that sales at the Bud division will increase by 10%.547 $ 4. AACSB: Analytic. Min: 12.53 Instructions Prepare an analysis to show whether the company should retain or replace the machine.000 $ (5.000 45. AACSB: Analytic.200 26.000 Replace Machine $21.000 $50. AICPA PC: Problem Solving.000 10. IMA: Investment Decisions Solution 191 (a) (10–12 min.000 20. Instructions (a) Prepare an analysis showing the effect of discontinuing the Wise division. Milwaukee allocates indirect fixed costs based on the number of units to be sold.000 Less direct fixed costs 14.000 higher by replacing the current copier. SO: 7.000 $ 5. AICPA FN: Decision Modeling. AICPA FN: Decision Modeling. AICPA BB: Resource Management.000 20.000) $ 8. 190 (Cont. Wise.000 16. Bloom: E.000 12. SO: 6.000 4.000 (1. Bud Wise Er Total Units sold 3.000 $160.000 5.) Bud $77. and Er.000 19. Since the Wise division has a net loss.000 Net Income Increase (Decrease) $24.800 Revenue Less variable costs Less direct fixed costs Less allocated fixed costs Net income .) 26 . The results of May.000 $40. Ans: N/A.453 $15.000 Net income $18.000) 1.000 2. The incremental analysis shows that net income for the five-year period will be $5.Incremental Analysis and Capital Budgeting Ex.000 20. (b) Should Milwaukee close the Wise division? Briefly indicate why or why not. AICPA BB: Resource Management. Ans: N/A.000 35.347 Er $40. Milwaukee feels that it should be discontinued.000 7. Difficulty: Medium. Inc. IMA: Investment Decisions Solution 190 (12–16 min.000 Less allocated fixed costs 6.000 12. has three divisions: Bud. Bloom: AP.200 14.000) $40.000 Operating costs New machine cost Salvage value Totals The current copier should be replaced.000 10.000 16.000 Revenue $70. 191 Milwaukee. Milwaukee feels if the division is closed. Min: 10.000 51.453 Total $117.000 12.000 74. Difficulty: Medium.000 Less variable costs 32.000 (20.) Retain Machine $45. Ex. AICPA PC: Problem Solving.000 All of the allocated costs will continue even if a division is discontinued. and that sales at the Er division will stay the same.000 -0-0$45.000 $ 19.

2010 are presented below: Timber Division $1.300 + 2. The Timber Division manufactures and sells logs to paper manufacturers.500.000.000 $ 350. The Consumer Division operates retail lumber mills which sell a variety of products in the do-ityourself homeowner market. determine what net income would have been. IMA: Investment Decisions .547 (b) No.000 150. 70% of the cost of goods sold are variable costs and 25% of selling and administrative expenses are variable costs.000 = $12. AICPA BB: Resource Management. Ans: N/A.000 350.000: To Bud: [3.000 900.000) Total $2. Min: 20.000 $ (30.000 Consumer Division $500. Difficulty: Medium.000 $ 320.000 1.300 ÷ (3.000 750. Ex.26 .200 Allocation of total allocated fixed costs of $20.000 × 110% = $77. AICPA PC: Problem Solving. Bloom: E.000 180. The profit decreases by $1.000)] × $20.000)] × $20. (b) If the company had discontinued the division for 2010.) Calculations: Revenue = $70. The income statements for the two divisions for the year ended December 31. SO: 7. The increase in sales by 10% of the Bud division was not enough to offset the loss of the Wise division. 192 Trump Forest Corporation operates two divisions.000 of fixed cost of goods sold and $60. AACSB: Analytic. The company is considering disposing of the Consumer Division since it has been consistently unprofitable for a number of years. Instructions (a) Determine whether the company should discontinue operating the Consumer Division.250.300 + 2.200 ($21. the Timber Division and the Consumer Division. AICPA FN: Decision Modeling.54 Test Bank for Accounting Principles.000 – $19.453 To Er: [2.000 600.000 Variable costs = $32.000 250.800) when the division is eliminated. The management of the company feels it can save $45. Ninth Edition Solution 191 (Cont.000 Sales Cost of goods sold Gross profit Selling & administrative expenses Net income In the Consumer Division.000 = $7.000 of fixed selling expenses if it discontinues operation of the Consumer Division.000 × 110% = $35.000 ÷ (3.000 430.

000 $180.000 $ 2. Difficulty: Medium. Demand of individual products are not affected by changes in other product lines.000 1.000) 45.000 $(135.000 12.000 + 1.000) (C) (D) Eliminate $ -0-0-0-060. $105.000 $ (4.000 51.000 7. and music.000) + 17.000) 26 .000 45.000 7.000 (B) 210.000.000 2.000.000 $85. 193 Mercer has three product lines in its retail stores: books.) $(22.000 – $245.000 22.000 $ 7.000 245.000 6. Min: 6. videos.000 Ex.000 The company should continue the Consumer Division because contribution margin.000 (C) 135. exp.000 × 25% = $45. $210.000 $40.000 $350.000 3.000: Timber Division + Decrease in Net Income $350.000) 245. Bloom: AP.000 = $105. exp.000 60.000 × 70% = $245.000 (210. is greater than the avoidable fixed costs. AICPA FN: Decision Modeling.000 Total 5. AICPA BB: Resource Management.Incremental Analysis and Capital Budgeting Solution 192 (a) Sales Variable expenses: Cost of goods sold Selling and admin. Instructions What will happen to profits if Mercer discontinues the Books product line? Ans: N/A.000 (A) 45.000 21.000) Music 2.000 – $45. SO: 7.000 $23.000) = $245. Contribution margin Fixed expenses: Cost of goods sold Selling and admin.000 = $135.000 105.000 $ 8.000 (D) $ (30.000 $ (3.000 The allocated fixed costs are unavoidable.) CONSUMER DIVISION Continue $500.000 $180.55 Net Income Increase (Decrease) $(500.000) Incremental revenue Incremental costs: Variable costs savings Direct fixed costs savings Decrease in profits if discontinued .000 + $(105. AICPA PC: Problem Solving.000) $350.000 $(105. AACSB: Analytic.000 7. Net income (A) (B) (20–25 min. (b) Net income for the total company would have been $245.000 $22. Results of the fourth quarter are presented below: Units sold Revenue Variable departmental costs Direct fixed costs Allocated fixed costs Net income (loss) Books 1.000 75.000 17.000 Videos 2. IMA: Investment Decisions Solution 193 (6 min.

.000 140.000 400.480.000 140. Difficulty: Medium.130.) Continue $480.000 95. (See analysis below.000 less. not $60. the accountant made the recommendation to eliminate the Southern Division stating that total net income would increase by $60.000 greater.000.000 $ (60.000 105.000 Southern Division $480. and its operating expenses are 75% fixed.000 $ 250.000) -010.000 950. only $10.000) 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 1. Bloom: E.000 of the fixed operating costs will be eliminated.000 260.000 $(235.000 35.350. SO: 7. Min: 20. The following presentation was made to Fanning's Board of Directors.000 800.) Sales Cost of Goods Sold Gross Profit Operating Expenses Net Income Other Three Divisions $2. During the presentation.000 1.000 $ (60. If the Southern Division is eliminated. If the division is eliminated. cost of goods sold is 80% variable and operating expenses are 70% variable. AACSB: Analytic. AICPA PC: Problem Solving.000 80.26 .000 35.000.000) Net Income Increase (Decrease) $(480. AICPA BB: Resource Management.000 $(175.000. Instructions Do you concur with the new accountant's recommendation? Present a schedule to support your answer. Ninth Edition Ex.050. Ans: N/A. the net income will be $175. AICPA FN: Decision Modeling.000 185.000 (185.000) Total $2. 194 A recent accounting graduate from Marvel State University evaluated the operating perform-ance of Fanning Company's four divisions.000 295.000 295. The cost of goods sold for the Southern Division is 35% fixed. IMA: Investment Decisions Solution 194 (20–25 min.000) 260.56 Test Bank for Accounting Principles.000 1.000 $ 190. The reduction in income is the result of the loss of the contribution margin less the avoidable fixed costs of $10.000) Eliminate $ -0-0-0-0-0140.000 940.000 For the other divisions.

6) ($24 ÷ 1.57 Ridley Company has 8.000 $200. $ 25 47 $24 1. AICPA PC: Problem Solving.000 $160. Difficulty: Medium.000 $ Hughes Company manufactures and sells two products. Ans: N/A. 196 8.Incremental Analysis and Capital Budgeting Ex. 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 . prepare a report to show which product should be produced and sold. IMA: Business Economics Solution 195 (20–25 min. Ex. 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 . Instructions Taking into consideration the constraint under which the company operates. SO: 8. Min: 20. Bloom: E. AACSB: Analytic. Contribution margin per unit of limited resource ($15 ÷ .6 hrs.000 20 8.2 Management desires to make a decision regarding which product to produce in order to maximize the company's income.6 1.2 hrs. AICPA BB: Resource Management.) 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 . AICPA FN: Decision Modeling.000 machine hours available to use to produce either Product A or Product B. 195 26 .2) Machine hours available Contribution margin The company should produce and sell Product A.

000 4 250 $18 $4. Difficulty: Medium. 197 Finney Company estimates the following cash flows and depreciation on a project that will cost $200. Bloom: AP.250 Product Deluxe 500 5 100 $20 $2.50 $4.) Product Standard Deluxe $18 $20 4 5 $4.000 Product Standard 1.000 additional machine hours are available. SO: 8.26 . AICPA PC: Problem Solving. Min: 25. AICPA BB: Resource Management. Ans: N/A.000 and will last 10 years with no salvage value: Revenues Sales Operating expenses Salary expense Depreciation expense Miscellaneous expenses Net Income $70. (c) (1) Machine hours 1.000 8.000 $10.) Instructions (a) Compute the contribution margin per unit of the limited resource for each product. 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.000 .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.500 Standard 500 4 125 $18 $2. (2) Allocated entirely to the product identified in (b) above.000 $32. AICPA FN: Decision Modeling.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. (b) If 1. 196 (Cont. IMA: Business Economics Solution 196 (a) (25–30 min. AACSB: Analytic.000 60.000 20. Ninth Edition Ex.58 Test Bank for Accounting Principles.

000 . 197 (Cont. Ans: N/A.000 + $20.000 Cash payback = $200. Bloom: AP. Installation costs and freight charges will be $24.000 Average investment = ———— = $100.000 Annual cash inflow ($10. $200. respectively. AICPA FN: Decision Modeling.000 Annual rate of return = ———— = 10% $100. AICPA BB: Resource Management. 198 Wesley Medical Center is considering purchasing an ultrasound machine for $1. AICPA PC: Problem Solving.000. AICPA PC: Problem Solving.67 years.135. Min: 16.160. AACSB: Analytic. AACSB: Analytic. SO: 9. Difficulty: Medium.135.200 and $800. The Center uses straight-line depreci-ation.59 Instructions (a) Calculate the expected annual rate of return on this project showing calculations to support your answer. There are $10 in medical supplies and $40 of technician costs for each procedure performed using the machine.000 (b) Cash payback period is 6.000 Annual Cash Flow: Number of procedures: 52 × 5 = 260 Contribution margin per procedure: $850 – $10 – $40 = $800 Total annual cash flow: 260 × $800 = $208. The machine has a 10-year life and an estimated salvage value of $40. (b) Calculate the cash payback on this project showing calculations to support your answer. The medical center estimates that the machine will be used five times a week with the average charge to the patient for ultrasound of $850.200 + $800 = $1. Instructions (a) Compute the payback period for the new ultrasound machine.000 ÷ $30.000.000 + $24. SO: 9. AICPA FN: Decision Modeling.000 = 6. Min: 9.67 years Ex. Difficulty: Medium. Investment $200.) 26 .) (a) Cost of the ultrasound machine: $1. IMA: Investment Decisions Solution 197 (9–14 min. IMA: Investment Decisions Solution 198 (16–22 min.000 2 $10. Ans: N/A.) (a) Annual rate of return is 10%.Incremental Analysis and Capital Budgeting Ex.000) $30. Bloom: AP. (b) Compute the annual rate of return for the new machine. AICPA BB: Resource Management.

900.528. Ninth Edition Solition 198 (Cont. . IMA: Investment Decisions Solution 199 (10 min. Min: 10.720 – $960) ÷ 5 = $3.160.5 years. Each muffler sells for $65 installed. Annual depreciation: ($18. and freight charges were $740.000 Average Annual Rate of Return: ———— = 16% $600.26 .900 = 6.000 Cash payback: ————— = 5. The new hoist will be used to replace mufflers and tires on automobiles. AICPA FN: Decision Modeling. 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 = $18.720 + $960) ÷ 2 = $9.160 = 4.160 (b) Average investment: ($18.000 2 $1. AICPA BB: Resource Management.160 – $3. Average annual rate of return = $632 ÷ $9.000 = $96.) Ans: N/A.) (a) Cost of hoist: $13.900. Difficulty: Medium. 199 Laramie Service Center just purchased an automobile hoist for $13.000 Annual Depreciation: —————————— = $112. AICPA PC: Problem Solving. (b) Compute the annual rate of return for the new hoist. Installation costs were $2. Laramie estimates that the new hoist will enable his mechanics to replace four extra mufflers per week.000 + $40.720 ÷ $4.60 Test Bank for Accounting Principles.000 10 years Annual Net Income: $208.4% (rounded).000 + $2. Bloom: AP.720.000 Ex.000 Average Investment: —————————— = $600. Laramie uses straight-line depreciation.000 (b) $1. SO: 9.) $1. Instructions (a) Compute the payback period for the new hoist. AACSB: Analytic. (a) (b) 208 $ 20 $4.6 years $208.000.160.000 – $40. and the labor cost to install a muffler is $10. Annual net income: $4. (Round to one decimal.000 $96.528 = $632.000 – $112. The cost of a muffler is $35. The hoist has a 5-year life and an estimated salvage value of $960.900 + $740 = $18.160.

AICPA FN: Decision Modeling.) AA Annual Net Cash Flow $ 7.000 = $9.000 $4.000 30.000 Cumulative Net Cash Flow $ 7.27 BB 20.Incremental Analysis and Capital Budgeting Ex.000 Cash payback 1.000 10. IMA: Investment Decisions Solution 200 (a) Year 1 2 3 (25 min.000 15. each requiring an equipment investment of $20.61 Cepeda Manufacturing Company is considering three new projects.000 9. Difficulty: Medium. SO: 9.) Ans: N/A.000 $31.000 21.000 $30. Min: 25.000 – 11. (Round to two decimals.000. Cepeda's minimum required rate of return is 12%. Each project will last for 3 years and produce the following cash inflows.9 years $20. 200 26 .9 .500 9.000 ÷ $15.11 years CC Year 1 2 3 $11. AICPA PC: Problem Solving.000 – $16. indicating the most desirable project and the least desirable project using this method.000 $9.000 9. Cepeda will not accept any project with a payback period over 2 years.000 The equipment's salvage value is zero. Instructions (a) Compute each project's payback period.500 $28.000 16.500 ÷ 3) = 2. AACSB: Analytic. Cepeda uses straight-line depreciation. Does your evaluation change? (Round to nearest dollar.500 9.000 15.000 $11.500 CC $11.10.) (b) Compute the net present value of each project.27 years $20.000 = .000 ÷ (28.000 9.000 10.000 ÷ $10.000 = . Year 1 2 3 Total AA $ 7.000 9. Bloom: E.000 Cash payback 2. AICPA BB: Resource Management.000 = $4.000 BB $ 9.000 31.

573 10. which is the minimum acceptable rate of return on the investment.817(1) 20. Ninth Edition Solution 200 (Cont.13 years.000 $ 2.40183 = $22.) Annual rate of return: $18.000 22. (b) Using the discounted cash flow technique.817 Present Value $ 9.500 9. SO: 9. Also.406 24.000 7.000 9.79719 3 .000 $ 4.000 Years 1-5 Now PV Factor 3.89286 2 .9 years. annual net income and cash inflows are expected to be $18.000 ÷ $58.199 Discount Year Factor 1 .000 and $58.102 Net Annual Cash Flow $9.000 15.077 Item Net annual cash flows Capital investment Positive net present value . 201 Gantner Company is considering a capital investment of $200. The least desirable project is AA because it has the longest payback period. Min: 16. AACSB: Analytic.000 $200. Ex.60478 1.500 × 2. AICPA FN: Decision Modeling.500 CC Present Net Cash Value Flow $ 8.175 10.000 ÷ [(200.) The most desirable project is CC because it has the shortest payback period.10. Gantner has a 12% cost of capital rate.077 200.000 + $0) ÷ 2] = 18% Cash payback: $200. The new machinery is expected to have a useful life of 5 years with no salvage value. only CC is acceptable because its cash payback is 1. Bloom: AP. all of the projects are acceptable. Depreciation is by the straight-line method.821 7.000 6.000. Amount $ 58. on the basis of net present values. As indicated.199 20. Project BB is the least desirable.26 .00000 Present Value $209.972 6. Project CC is still the most desirable project.71178 Total present value Investment Net present value (1) This total may also be obtained from Table 2: $9. (b) AA Net Annual Cash Flow $ 7.) (a) Compute (1) the annual rate of return and (2) the cash payback period on the proposed capital expenditure. Ans: N/A. IMA: Investment Decisions Solution 201 (a) (1) (2) (b) (16 min. respectively.762 9. AICPA PC: Problem Solving.000 $ 4.500 9.000 BB Present Value $ 6. AICPA BB: Resource Management. During the life of the investment.000 $ 9.000 = 3. compute the net present value.000 in additional productive facilities.677 24. Difficulty: Medium. Instructions (Round to two decimals.102 20.62 Test Bank for Accounting Principles.817.250 7.482 $11.

AICPA BB: Resource Management. AICPA PC: Problem Solving. IRR = 15% Ex. each requiring an equipment investment of $72.797 3 . (Table 2 from Appendix C is needed.000 9. Sargent requires a minimum rate of return of 12%. SO: 10. Instructions Calculate the internal rate of return.000 14.000. (b) Which project should be selected? Why? Ans: N/A.301 27. AICPA PC: Problem Solving.000 = 3.) Project TIP Annual Cash Inflows* Present Value of 1 $ 30. Bloom: AP.000 TOP $ 9.402 Instructions (a) Compute the net present value of each project. Sargent Company uses straight-line depreciation.000 The equipment will have no salvage value at the end of its three-year life. The new machine is expected to have zero salvage value at the end of the five-year period.893 33.36. AICPA FN: Decision Modeling.000 ÷ $250.056 $80. SO: 10. AICPA FN: Decision Modeling. Min: 4.690 3 2.000 9. Bloom: E. AACSB: Analytic.712 Present Value of an Annuity of 1 Period 12% 1 . Present value data are as follows: Present Value of 1 Period 12% 1 . AACSB: Analytic. The investment is expected to generate $250.790 26.712 $101.63 Ace Corporation recently purchased a new machine for its factory operations at a cost of $840. 202 26 . Difficulty: Medium. This factor is found in the PVA table at n = 5 periods.000 in annual cash flows for a period of five years. Difficulty: Medium.000 $27.) Ans: N/A.000 . 203 Sargent Company is considering two new projects. Min: 22. The required rate of return is 12%. IMA: Investment Decisions Solution 203 (a) Year 1 2 3 (22–27 min. Each project will last for three years and produce the following annual net income.000 .000 .Incremental Analysis and Capital Budgeting Ex.147 *Net income plus annual depreciation of $24.000. IMA: Investment Decisions Solution 202 (4 min.) IRR = Capital investment ÷ Annual cash inflows = Factor $840.893 2 1.000 Present Value $26. AICPA BB: Resource Management.000 $29.000. . Year 1 2 3 TIP $ 6.893 2 .797 38.000 9.

Ex. Bloom: E.000 and have no salvage value at the end of its 5-year life.266 72. 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% 4.60 Since the calculated internal rate of return factor of 3. and is therefore acceptable because it is greater than the company's cutoff rate of 8%.605 for five periods and 12% interest.352 Instructions Using the internal rate of return method.402) Capital investment Positive net present value $79.000 $ 7. IMA: Investment Decisions Solution 204 (6–11 min. The investment cash flows follow: Project A Project B Year 1 $ 8. 204 Yanik Company is considering investing in a project that will cost $162. AACSB: Analytic. 205 Martinez Company has money available for investment and is considering two projects each costing $70.000 $28.000.60 is very near the factor 3.000 × 2.212 8% 3.791 12% 3. Ninth Edition Solution 203 (Cont. Each project has a useful life of 3 years and no salvage value. SO: 10. Difficulty: Medium. Project TIP is the preferred project because its positive net present value is greater than project TOP's net present value.000 = 3. Ans: N/A.147 Present value of future cash inflows Capital investment Positive net present value Project TOP Present value of future cash inflows ($33.266 (b) Both projects are acceptable because both show a positive net present value.000 each year.000 28.993 10% 3. It is estimated that the project will generate annual cash inflows of $45. this project has an approximate interest yield of 12%.000 .26 . determine if this project is acceptable by calculating an approximate interest yield for the project.64 Test Bank for Accounting Principles.000 28. AICPA PC: Problem Solving. AICPA FN: Decision Modeling.000 ————$45.) $80.605 15% 3. Min: 6. Ex. AICPA BB: Resource Management.) Capital Investment ————————— = Internal Rate of Return Factor Annual Cash Inflows $162.000 $ 8.147 72.000 Year 2 24.000 Year 3 52.

000) $ (736) $25. SO: 4. IMA: Business Economics 209.926 = Year 2 $24. AICPA FN: Decision Modeling.156 COMPLETION STATEMENTS 206. Min: 1. Min: 1. IMA: Business Economics 208. AACSB: None. SO: 10. AACSB: None.000 × . Project A Year 1 $8. Ans: N/A. AICPA PC: Problem Solving. SO: 2.) 26 . Min: 12. Difficulty: Easy. which project should be selected? Justify your response. IMA: Business Economics . AICPA PC: Problem Solving.264 (70. The potential benefit that may be obtained by following an alternative course of action is called an _________________ cost.794 = Present value of cash inflows Cash purchase price Net present value of project A Project B Year 1 $28.000 × . AICPA FN: Measurement. AICPA BB: Industry/Sector Perspective. AICPA BB: Industry/Sector Perspective.288 69.794 = Present value of cash inflows Cash purchase price Net present value of project B $ 7. Ans: N/A. AICPA BB: Resource Management. Difficulty: Easy.996 22. SO: 1.408 20. Difficulty: Easy. Ans: N/A. In a decision on whether an order should be accepted at a special price when there is plant capacity available.857 = Year 3 $28.000 × . AICPA PC: Interaction. Project A earns less than an 8% return. Bloom: AP.568 41. AACSB: None. Difficulty: Medium.857 = Year 3 $52. Bloom: K. AICPA BB: Resource Management. a major consideration is whether the special price exceeds __________________.000) $ 2. AACSB: None.000 × . Difficulty: Easy. 205 (Cont. Bloom: K.Incremental Analysis and Capital Budgeting Ex. AICPA PC: Problem Solving.) Project B is acceptable since its net present value is positive. AICPA FN: Decision Modeling. AICPA BB: Resource Management. The process used to identify the financial data that change under alternative courses of action is called __________________ analysis. Min: 1. An important purpose of management accounting is to provide _____________________ for decision making. AACSB: Analytic.156 (70.000 × .928 23. AICPA FN: Measurement. AICPA FN: Decision Modeling. (Table 1 from Appendix C is needed.) Ans: N/A. This indicates that project B provides a return greater than the company's minimum expected return of 8%. IMA: Business Economics 207. Bloom: K.000 × . Min: 1. IMA: Investment Decisions Solution 205 (12 min.65 Instructions If 8% is an acceptable earnings rate. Bloom: K.926 = Year 2 $28. AICPA PC: Problem Solving.232 72. SO: 3. Ans: N/A.

AICPA PC: Problem Solving. AACSB: None. AICPA PC: Problem Solving. a project is acceptable if the project's net present value is ____________ or _______________. SO: 10. Min: 1. AICPA PC: Problem Solving. AICPA FN: Decision Modeling. Bloom: K. AICPA FN: Decision Modeling. Ans: N/A. The internal rate of return method differs from the net present value method in that it results in finding the ___________________ of the potential investment. Difficulty: Easy. IMA: Investment Decisions 216. Difficulty: Easy. AICPA BB: Resource Management. AICPA PC: Problem Solving. AICPA FN: Decision Modeling. Difficulty: Easy. Min: 1. the products with the highest contribution per unit of ______________ should identify the products to be produced. AACSB: None. AICPA PC: Problem Solving. Min: 1. In an environment where there are limited resources. SO: 9. Ans: N/A. AICPA PC: Problem Solving. SO: 10. Min: 1. SO: 8. IMA: Investment Decisions 215. AICPA BB: Resource Management. Ans: N/A. SO: 9. SO: 10.26 . Difficulty: Easy. SO: 9. Difficulty: Easy. The technique which identifies the time period required to recover the cost of the investment is called the ________________ method. AICPA BB: Resource Management. IMA: Investment Decisions 218. Bloom: K. Difficulty: Easy. AICPA BB: Industry/Sector Perspective. depends on whether the incremental _____________ from processing further are greater than the incremental processing ______________. and (3) ___________________. AICPA BB: Resource Management. (2) _________________. Bloom: K. A decision whether to sell a product now or to process it further. AACSB: None. Bloom: K. IMA: Business Economics 212. Bloom: K. AICPA FN: Decision Modeling. Ans: N/A. Min: 1. IMA: Investment Decisions 214. AICPA BB: Resource Management. The two discounted cash flow techniques used in capital budgeting are (1) the _______________________ method and (2) the ______________________ method. Ans: N/A. SO: 6. SO: 9. AACSB: None. Difficulty: Easy. Bloom: K. In using the net present value approach. Min: 1. IMA: Business Economics 211. AICPA FN: Decision Modeling. Difficulty: Easy. SO: 10. Min: 1. Min: 1. Difficulty: Easy. AACSB: None. AICPA FN: Decision Modeling. Ans: N/A. Min: 1. AACSB: None. Knowledge of the ______________________ is necessary when discounting future cash flows under the net present value approach. AICPA FN: Measurement. IMA: Investment Decisions 220. AICPA PC: Problem Solving. AICPA FN: Decision Modeling. Bloom: K.66 Test Bank for Accounting Principles. AICPA PC: Problem Solving. Ans: N/A. IMA: Investment Decisions 217. Ninth Edition 210. Three quantitative techniques which are frequently used in capital budgeting decisions are (1) _________________. AICPA BB: Resource Management. Bloom: K. IMA: Investment Decisions 219. The ______________ value of old equipment is irrelevant in a decision to replace that equipment and is often referred to as a _____________ cost. AACSB: None. The process of making capital expenditure decisions in business is called ___________. AICPA PC: Problem Solving. AICPA BB: Resource Management. AICPA BB: Resource Management. A major limitation of the annual rate of return approach is that it does not consider the _______________ of money. SO: 5. Ans: N/A. AICPA FN: Decision Modeling. Bloom: K. Difficulty: Easy. Ans: N/A. Ans: N/A. AICPA FN: Decision Modeling. AACSB: None. AACSB: None. Min: 1. AACSB: None. IMA: Business Economics 213. Bloom: K. AICPA PC: Problem Solving. AICPA BB: Industry/Sector Perspective. Ans: N/A. AACSB: None. AICPA BB: Resource Management. AICPA PC: Problem Solving. AICPA FN: Decision Modeling. IMA: Investment Decisions . Difficulty: Easy. Bloom: K. Min: 1.

4. 207. relevant information incremental (differential) variable costs (incremental costs) opportunity revenues. 208. ____ ____ ____ ____ ____ ____ ____ 10. 210. time value 216. The determination of the profitability of a capital expenditure by dividing expected annual net income by the average investment. A capital budgeting technique that considers both the estimated total cash inflows from the investment and the time value of money. AICPA FN: Decision Modeling. costs book. C. Min: 5. annual rate of return. zero. sunk limited resource capital budgeting 214. A method used in capital budgeting that results in finding the interest yield of the potential investment. G. IMA: Investment Decisions . ____ ____ ____ Incremental analysis Opportunity cost Discounted cash flow technique Capital budgeting Annual rate of return technique F. SO: 6. The potential benefit that may be lost from following an alternative course of action. A cost that cannot be changed by any present or future decision. net present value. E. H. required rate of return 219. J. 6. AACSB: None. AICPA PC: Problem Solving. 211. 7. AICPA BB: Industry/Sector Perspective. 9. B. 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. Bloom: K. D. 5. The process of identifying the financial data that change under alternative courses of action. 212. interest yield MATCHING 221. internal rate of return 218. discounted cash flow 215. 213. positive 220. The process of making capital expenditure decisions in business. 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. 8. 3. cash payback. Match the items below by entering the appropriate code letter in the space provided. A.Incremental Analysis and Capital Budgeting 26 . Difficulty: Easy. Cash payback technique Hurdle or cutoff rate Net present value method Sunk cost Internal rate of return method 1. cash payback 217. The minimum rate of return management requires on an investment.67 Answers to Completion Statements 206. I. Ans: N/A. 209. 2.

or going to an external source and purchasing the product or component. Min: 5. and briefly explain what features these approaches have that make them more desirable than other approaches. or no fixed costs. The time value of money is critical because of the long-term impact of capital budgeting decisions. 8. Bloom: K. SO: 10. Bloom: K. 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. AICPA FN: Decision Modeling. Capital budgeting approaches which do not consider the time value of money include annual rate of return and cash payback.68 Test Bank for Accounting Principles. 5. 9. but only some fixed costs. The cash payback method is the least desirable because it also ignores the expected profitability of the project. AICPA PC: Problem Solving. Also identify the least desirable approach and explain its major weaknesses. the incremental costs of buying the product. Qualitative factors include the possible adverse effect on employees and the stability of the supplier's price and quality. Are there any qualitative factors that should also be considered? Ans: N/A. AACSB: None. SO: 4. AICPA BB: Resource Management. S-A E 223 Management uses several capital budgeting approaches in evaluating projects for possible investment. AICPA BB: Resource Management. 2. IMA: Investment Decisions Solution 223 From a conceptual standpoint. 4. Ans: N/A. Identify those approaches that are more desirable from a conceptual standpoint. and the opportunity cost (potential benefit foregone) if the product is made. are relevant because many fixed costs will be incurred regardless of whether the decision is to make or buy. Min: 5. Difficulty: Easy. 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. briefly identify the quantitative factors that should be considered. 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. .26 . 10. all variable production costs are relevant in a make or buy decision. AACSB: None. Difficulty: Easy. Generally. Ninth Edition Answers to Matching 1. AICPA PC: Problem Solving. 7. 3. AICPA FN: Decision Modeling. In gathering relevant information for these two alternatives. I C H A J 6.

Bloom: K. AICPA BB: Resource Management. that a cost is only 50% likely to be that low. AICPA PC: Problem Solving. Who are the stakeholders in this situation? 2. Difficulty: Easy. AICPA BB: Resource Management. AICPA FN: Decision Modeling. Is it ethical to change the proposal before submitting it? Explain.Incremental Analysis and Capital Budgeting S-A E 224 26 . Ans: N/A. S-A E 225 Manny Perez is trying to understand the term "cost of capital." How may this cost be relevant in a make-or-buy decision? Ans: N/A.69 Define the term "opportunity cost. SO: 9. I haven't sent it on yet. Ans: N/A. 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. IMA: Investment Decisions Solution 225 Cost of capital is the rate of return that management expects to pay on all borrowed and equity funds. you can probably get it shot out of the water pretty easily. AICPA BB: Resource Management. "I really hoped that the cost projections wouldn't pan out." "You can keep it if it's really that bad. 3. and the project is unacceptable when the rate of return is less than the minimum rate of return. AICPA FN: Decision Modeling. The stakeholders include: Ken Scales Colgan Tile the engineer who submitted the proposal. Bloom: K. Is it ethical to adjust the figures to compensate for risk? Explain. But the figures are very convincing. 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). SO: 4. IMA: Business Economics Solution 226 1. He'll just think someone else's project was even better than his. AICPA FN: Decision Modeling. AACSB: None. Difficulty: Easy. Colgan Tile. We do it all the time. informally. for instance. S-A E 226 (Ethics) Tom Mullins is on the capital budgeting committee for his company. "The technology used in this is pie in the sky kind of stuff." he tells his friend. AACSB: Ethics. Min: 5. Bloom: K. AACSB: Communications. the rank and file don't get to come to those sessions. If you figure." Define the term. . 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. and not have the guy who submitted it mad at you for not turning it in. 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. There are a hundred things that could go wrong. though I probably should. SO: 9. then double it. AICPA PC: Problem Solving." Required: 1. Just fix the numbers. and indicate its relevance to the decision rule under the annual rate of return technique. Min: 5. Your engineering genius need never know. Best of all. Min: 5." assures Tom. Ken Scales is an engineer for the firm. AICPA PC: Problem Solving. "Anyway.

Otherwise. Difficulty: Easy.000 30. 3. the company is not well known. S-A E 227 (Communication) You are the general accountant for Word Systems.000) 90. Two options have emerged. IMA: Investment Decisions Solution 227 I recommend that the company accept Option #1. to purchase upgrades to our present system and to buy a more efficient printer. a typing service based in Los Angeles. Min: 5. it should be clearly stated that the projections have been adjusted for risk. Inc. and it becomes entirely subjective. SO: 6. Bloom: K. and upgrade its word processing program. However. to adjust projections to compensate for risk. . AICPA FN: Decision Modeling. and a larger. The company wishes to invest in more up-to-date software and to improve its printing capabilities. AICPA PC: Problem Solving. Secondly. AACSB: Communications. It currently has a widely used version of a word processing program. The engineer submitting the proposal should have the right to know about any changes that were made. AICPA BB: Resource Management. However.000) 55.. California.70 Test Bank for Accounting Principles. The company has decided to upgrade its equipment.000 0 Required: Prepare a brief report for management in which you make a recommendation for one system or the other. certainly not in the way described. which decreases our risk of loss should the project fail.000 0 Option #2 $(270. Option #2 would be for the company to invest in an entirely different computer system. Ninth Edition Solution 226 (Cont.) 2. more efficient printer would be used.26 . It is ethical. Better telecommunications equipment would allow for the electronic transmission of some documents as well. and should have the right to review those changes. the entire selection process is undermined. It is probably not ethical to modify a proposal at all. Option #2 appears to be too risky. and the software does not connect well with well-known software.000 90. The memory of each individual work station would be enhanced.000 10. the changes will be easier to implement because the equipment is similar to that which we already use. and it comes with individual laser printers. using the information given. In the first place. Option #1 is for the company to keep its existing computer system. the company will have less money invested in the project. in general. and the method used should be available for review. Ans: N/A. The net present value information for these options follows: Initial Investment Returns Year 1 Year 2 Year 3 Net Present Value Option #1 $(95. The software for this system is extremely impressive.000 90.

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