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
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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.

9. An important step in management's decision-making process is to determine and evaluate possible courses of action. IMA: Strategic Planning . SO: 1. if any. management ordinarily considers both financial and nonfinancial information. SO: 2.4 Test Bank for Accounting Principles. Contrast annual rate of return and cash payback in capital budgeting. Ans: T. AICPA FN: Decision Modeling. Under the net present value method. AICPA BB: Strategic/Critical Thinking. any disposal value of the existing asset must be considered. The annual rate of return is obtained by dividing expected annual net income by the average investment. 5. The NPV decision rule is: Accept the project if net present value is zero or positive. Under the internal rate of return method. Ans: T. AICPA BB: Strategic/Critical Thinking. IMA: Strategic Planning 2. AICPA PC: Problem Solving. Ninth Edition 4. Determine which products to make and sell when resources are limited. 7. 8. Min: 1. the more attractive the investment. Difficulty: Easy. TRUE-FALSE STATEMENTS 1. The shorter the payback period. The cash payback technique identifies the time period to recover the cost of the investment. produced by the segment and the disposition of the segment's fixed expenses. Bloom: K. AICPA PC: Problem Solving. the more attractive the investment. In a make-or-buy decision. find the contribution margin per unit of limited resource. Min: 1. Distinguish between the net present value and internal rate of return methods.26 . AACSB: None. AACSB: None. 6. Identify the factors to consider in retaining or replacing equipment. In making decisions. Reject the project when the internal rate of return is less than the required rate. Bloom: K. 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. When a company has limited resources. 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. the relevant costs are (a) the variable manufacturing costs that will be saved. compare the present value of future net cash flows with the capital investment to determine net present value. Give the decision rule for whether to sell or process materials further. Difficulty: Easy. and (c) opportunity costs. find the interest yield of the potential investment. 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. AICPA FN: Decision Modeling. Explain the relevant factors in whether to eliminate an unprofitable segment. The higher the rate of return. 10. Then multiply this amount by the units of limited resource to determine which product maximizes net income. Identify the relevant costs in a make-or-buy decision. Also. In deciding whether to eliminate an unprofitable segment. determine the contribution margin. (b) the purchase price. The formula is: Cost of capital expenditure divided by estimated net annual cash flows equals cash payback period. Reject the investment if net present value is negative.

IMA: Business Economics . AICPA FN: Decision Modeling. AICPA FN: Measurement. SO: 5.5 In incremental analysis. Min: 1. AICPA BB: Strategic/Critical Thinking. AICPA PC: Problem Solving. AICPA FN: Decision Modeling. A decision whether to continue to make a product or buy it externally. SO: 3. AICPA PC: Problem Solving. Ans: T. and total fixed costs will always remain constant. Difficulty: Easy. 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. SO: 3. AACSB: None. Min: 1. Ans: T. AICPA PC: Problem Solving. Ans: F. AICPA PC: Problem Solving. IMA: Business Economics 8. AICPA FN: Decision Modeling. AICPA PC: Problem Solving. Bloom: C. AACSB: None. Min: 1. Bloom: C. Difficulty: Easy. AACSB: None. AICPA BB: Strategic/Critical Thinking. SO: 4. management should process further as long as the incremental revenues from additional processing exceed the incremental variable costs. AICPA PC: Problem Solving. AICPA BB: Strategic/Critical Thinking. SO: 2. Bloom: C. In a sell or process further decision. Ans: F. AICPA FN: Measurement. Bloom: C. SO: 2. AICPA FN: Decision Modeling. If an incremental make or buy analysis indicates that it is cheaper to buy rather than make an item. AICPA BB: Industry/Sector Perspective. Ans: F.Incremental Analysis and Capital Budgeting 3. IMA: Decision Analysis 7. AICPA FN: Decision Modeling. IMA: Decision Analysis 6. Bloom: K. Bloom: C. AICPA FN: Measurement. If a company has excess capacity and present markets will not be affected. 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. Bloom: C. Min: 1. Min: 1. IMA: Business Economics 10. AACSB: None. A company should never accept an order for its product at less than its regular sales price. AACSB: Analytic. SO: 2. IMA: Business Economics 9. SO: 3. Bloom: K. Difficulty: Easy. Difficulty: Easy. Difficulty: Easy. Min: 1. Difficulty: Easy. IMA: Quantitative Methods 11. SO: 4. AACSB: None. SO: 4. Ans: F. AICPA BB: Strategic/Critical Thinking. AICPA PC: Problem Solving. Ans: T. Difficulty: Easy. AICPA PC: Problem Solving. Difficulty: Easy. Min: 1. 26 . 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. Ans: F. Min: 1. Ans: F. Bloom: C. Accountants are mainly involved in developing nonfinancial information for management's consideration in choosing among alternatives. SO: 2. IMA: Business Economics 12. Min: 1. Ans: T. AICPA FN: Decision Modeling. AICPA PC: Problem Solving. AACSB: None. AICPA FN: Measurement. management should always make the decision to choose the lowest cost alternative. Difficulty: Easy. An opportunity cost is the potential benefit obtained by using resources in an alternative course of action. AICPA FN: Decision Modeling. IMA: Decision Analysis 5. Min: 1. AICPA PC: Interaction. AICPA PC: Problem Solving. AACSB: None. AICPA BB: Strategic/Critical Thinking. AICPA BB: Strategic/Critical Thinking. Decision-making involves choosing among alternative courses of action. IMA: Business Economics 13. AACSB: None. AICPA BB: Strategic/Critical Thinking. AICPA BB: Strategic/Critical Thinking. AACSB: None. AACSB: None. Bloom: K. AICPA BB: Strategic/Critical Thinking. Ans: F. total variable costs will always change under alternative courses of action. Bloom: C. Min: 1. AICPA BB: Strategic/Critical Thinking. A special one-time order should never be accepted if the unit sales price is less than the unit variable cost. IMA: Quantitative Methods 4.

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

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

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

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

AICPA FN: Decision Modeling. d. 3 d. Min: 1. Incremental analysis might also be referred to as differential analysis. AICPA PC: Problem Solving. all of these. AICPA FN: Decision Modeling. c. 3. Ans: B. Incremental analysis focuses on decisions that involve a choice among alternative courses of action. Ans: D. SO: 2. b. analysis of manufacturing variances. Fixed costs will not change between alternatives. The source of data to serve as inputs in incremental analysis is generated by a. Ans: D.26 . d. Min: 1. Bloom: K. a make or buy decision. AICPA PC: Problem Solving. AACSB: None. AICPA FN: Decision Modeling. 2 and 3 Ans: B. AICPA PC: Problem Solving. Variable costs will always change between alternatives. accountants. SO: 2. market analysts. a retain or replace equipment decision. SO: 2. Difficulty: Easy. Incremental analysis is useful in making decisions. c. Bloom: C. Bloom: K. IMA: Decision Analysis . IMA: Decision Analysis 51. AACSB: None. Bloom: C. acceptance of an order at a special price. elimination of an unprofitable segment. Bloom: C. SO: 2. Min: 1.10 Test Bank for Accounting Principles. AICPA BB: Resource Management. Incremental analysis is the same as CVP analysis. AICPA BB: Resource Management. an allocation of limited resource decision. AICPA PC: Problem Solving. c. Difficulty: Easy. 2 c. 1 b. IMA: Information Management 48. Fixed costs may change between alternatives. Difficulty: Easy. Difficulty: Easy. d. c. IMA: Decision Analysis 50. AACSB: None. AICPA BB: Resource Management. Min: 1. Incremental analysis would be appropriate for a. IMA: Decision Analysis 49. a sell or process further decision. b. Ninth Edition 47. b. all of these. Min: 1. engineers. AICPA FN: Decision Modeling. AACSB: None. AICPA PC: Problem Solving. AICPA BB: Resource Management. Which of the following is a true statement about cost behaviors in incremental analysis? 1. AACSB: None. Difficulty: Easy. d. a. Incremental analysis would not be appropriate for a. SO: 2. Which of the following is not a true statement? a. AICPA FN: Decision Modeling. b. Ans: D. 2. AICPA BB: Resource Management.

c. AICPA PC: Problem Solving. Revenues c. A company is considering the following alternatives: Alternative 1 Alternative 2 Revenues $120. d. Baden Company manufactures a product with a unit variable cost of $50 and a unit sales price of $88. Difficulty: Medium. costs are not relevant if they change between alternatives. AICPA FN: Decision Modeling.11 Ans: A. Difficulty: Easy. SO: 3.000 scales at $15 each. Ans: B. Income would increase by $4. IMA: Decision Analysis 54. Min: 5. If the special order is accepted. AICPA PC: Problem Solving.000. AICPA FN: Decision Modeling. all costs are relevant if they change between alternatives. AICPA BB: Resource Management. Min: 5. It costs Garner Company $12 of variable and $5 of fixed costs to produce one bathroom scale which normally sells for $35.000 Fixed costs 35.Incremental Analysis and Capital Budgeting 52.000 units were produced and sold. Min: 1. IMA: Decision Analysis 56. AACSB: None. A foreign wholesaler offers to purchase 2. IMA: Decision Analysis 53. only variable costs are relevant.000 units at $70 each in a foreign market which would not affect its present sales. SO: 2. Ans: D. Income would decrease by $4.000 scales. Fixed manufacturing costs were $240. Bloom: C.000 increase b. the order will likely be rejected. AICPA FN: Decision Modeling. Bloom: AN. In incremental analysis. AICPA FN: Decision Modeling. AICPA PC: Problem Solving. only variable costs are relevant. Variable costs and fixed costs 26 . $30. SO: 3. AICPA PC: Problem Solving. SO: 3. Bloom: AN. b.000. d. Fixed costs d. Bloom: C. Variable costs b.000 Variable costs 60. c. AACSB: None. only fixed costs are relevant. If the company has sufficient capacity to produce the additional units. Min: 1. SO: 3. Min: 1. AICPA FN: Decision Modeling. a. $4. Garner has sufficient unused capacity to produce the 2. Income would increase by $20. Difficulty: Medium.000 70. AACSB: Analytic. $4. Bloom: C. then a. Garner would incur special shipping costs of $1 per scale if the order were accepted. what will be the effect on net income? a. d. AICPA BB: Resource Management. b. the order will likely be accepted. IMA: Business Economics .000. fixed costs are not relevant. Difficulty: Easy. AICPA BB: Resource Management.000 decrease d.000 Which of the following are relevant in choosing between the alternatives? a. AICPA BB: Resource Management.000 35. AACSB: None. $6.000 when 10.000 decrease c. AICPA PC: Problem Solving. Difficulty: Easy. acceptance of the special order would affect net income as follows: a. AICPA BB: Resource Management. Income would increase by $70. c. AACSB: Analytic.000 increase Ans: A.000. Ans: D. b.000 $120. 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. IMA: Decision Analysis 55. The company has a one-time opportunity to sell an additional 1.

$5. When additional fixed costs must be incurred to accommodate the order c.500 for shipping. AICPA BB: Resource Management. Difficulty: Medium. AICPA FN: Decision Modeling. SO: 3. AACSB: None. AACSB: None. the order will only be accepted if the plant is below capacity. IMA: Business Economics 59. Difficulty: Easy. lost sales should not be considered in the incremental analysis. an increase in unit variable costs. IMA: Business Economics 61. AICPA FN: Decision Modeling. Net income will increase if the special sales price per unit exceeds the unit variable costs. AICPA BB: Resource Management. AICPA BB: Resource Management. AICPA FN: Decision Modeling.000 units. c. b. IMA: Business Economics 58. what should the unit sales price be? a. Never b. Difficulty: Easy. If a company must expand capacity to accept a special order. AICPA FN: Decision Modeling. $8. no increase in fixed costs. Difficulty: Easy. When the company thinks it can use the cheaper materials without the customer's knowledge d. Net income will not be affected. AICPA FN: Decision Modeling. d. Ans: A. SO: 3. c. Which of the following is true if a company can accept a special order without affecting its regular sales and is within plant capacity? a. c. b.30 c. Min: 1. IMA: Business Economics 60. Ans: D. Min: 5. SO: 3. AICPA PC: Problem Solving. Martin Company incurred the following costs for 50. Under what situations should the company accept a special order for less than the current selling price? a. AICPA PC: Problem Solving. Inc.40 Ans: B. AACSB: None. AICPA BB: Resource Management.10 b.26 . Min: 1. the order should not be accepted. Bloom: C. AICPA PC: Problem Solving. Net income will decrease. AACSB: Analytic. IMA: Business Economics . If Martin wants to break even on the order. it is likely that there will be a. an increase in fixed costs. AICPA PC: Problem Solving. Bloom: C. AICPA BB: Resource Management. AICPA PC: Problem Solving. SO: 3. $3. SO: 3. $10. Bloom: AP. Filling the order will require spending an additional $8. Bloom: C. b. Ans: B. Ninth Edition 57. Min: 1. an increase in variable and fixed costs per unit. Additional fixed costs will probably be incurred.12 Test Bank for Accounting Principles.000 units: Variable costs $180. Difficulty: Easy. AACSB: None. d. If a company anticipates that other sales will be affected by the acceptance of a special order. then a.60 d. lost sales should be considered in the incremental analysis.000 Martin has received a special order from a foreign company for 5. d. has excess capacity. When incremental revenues exceed incremental costs Ans: D. Bloom: C. Miley. There is sufficient capacity to fill the order without jeopardizing regular sales.000 Fixed costs 240. Min: 1.

AICPA PC: Problem Solving. CVP analysis.13 Martin has received a special order from a foreign company for 5. Ans: B. added to the "Make" costs. d. AICPA FN: Decision Modeling. AICPA BB: Resource Management. c. IMA: Business Economics .000 on the order. AICPA FN: Decision Modeling. b. AICPA PC: Problem Solving. Bloom: K. Make or buy decision b. SO: 3. Drop a product line c.20 d. $3. Difficulty: Easy. d. SO: 4. An opportunity cost a. Bloom: C. AACSB: None. AICPA PC: Problem Solving. Bloom: C. Opportunity cost must be considered in decisions involving a. The opportunity cost of an alternate course of action that is relevant to a make-or-buy decision is a. AICPA FN: Decision Modeling.70 c.000 26 . c. AACSB: None. Min: 1. d. $11. Bloom: AP. Additional processing decision Ans: A. Accept a special order d. Min: 5. IMA: Business Economics 64. AICPA BB: Resource Management. SO: 4. resources that have alternative uses. is the potential benefit that may be obtained by following an alternative course of action.30 b. There is sufficient capacity to fill the order without jeopardizing regular sales. AACSB: Analytic. is classified as manufacturing overhead. Martin Company incurred the following costs for 50.000 units. c. $6. Difficulty: Easy. Min: 1. is the cost of a new product proposal. AICPA FN: Decision Modeling. $5. AACSB: None. what should the unit price be? a.Incremental Analysis and Capital Budgeting 62. Difficulty: Easy. Min: 1. Ans: D. none of these. financial accounting.90 Ans: D. b. SO: 4. AICPA BB: Resource Management. Which decision will involve no incremental revenues? a. IMA: Business Economics 66. Bloom: K. added to the "Buy" costs. AICPA BB: Resource Management. AICPA BB: Resource Management. AICPA FN: Decision Modeling. subtracted from the "Make" costs. Filling the order will require spending an additional $8. IMA: Business Economics 63.000 units: Variable costs $180. budgeting.500 for shipping. Difficulty: Easy. IMA: Business Economics 65. If Martin wants to earn $8.000 Fixed costs 240. b. AICPA PC: Problem Solving. Min: 1. AACSB: None. Difficulty: Medium. should be initially recorded as an asset. Ans: C. AICPA PC: Problem Solving. SO: 4.

$115. AICPA PC: Problem Solving. IMA: Business Economics 69. SO: 4. AICPA PC: Problem Solving.000 b. $85. Min: 1.000 If Tex's Manufacturing Company purchases the component externally. Difficulty: Easy. Opportunity cost is usually a. Difficulty: Medium. At what external price for the 100 units is the company indifferent between making or buying? a. Make and save $5. SO: 4.000 20.000 of the fixed costs can be avoided. Buy and save $15.000 30.000 If Tex's Manufacturing Company can purchase the component externally for $110. AICPA FN: Decision Modeling. Bloom: C. AICPA PC: Problem Solving. a standard cost. AACSB: Analytic. included as part of cost of goods sold. Tex's Manufacturing Company can make 100 units of a necessary component part with the following costs: Direct Materials Direct Labor Variable Overhead Fixed Overhead $60. Min: 5. $100. Bloom: C. Min: 1.26 .000 Ans: A.000 d. Buy and save $5. SO: 4. the outside supplier could increase prices significantly in the future. SO: 4. 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 PC: Problem Solving.000 c.000 20.000 c. AICPA BB: Resource Management. IMA: Cost Management . AICPA BB: Resource Management. Min: 5. quality control specifications may not be met. Each of the following is a disadvantage of buying rather than making a component of a company's product except that a. AACSB: Analytic. c. the supplier may not deliver on time.000 30. d. AACSB: None. profitable product lines may be dropped.000 Ans: C. b. what is the correct make-or-buy decision? a.14 Test Bank for Accounting Principles. Ans: B. $15. IMA: Cost Management 70. AICPA FN: Decision Modeling. b.000 10. AICPA BB: Resource Management. c. Make and save $15.000 10. Difficulty: Easy.000 d. a potential benefit. Difficulty: Medium.000 b.000 and only $5. AICPA BB: Resource Management. $120. AICPA FN: Decision Modeling. Ninth Edition 67. IMA: Business Economics 68. d. a sunk cost. Bloom: AN. Ans: C. AACSB: None. AICPA FN: Decision Modeling.000 of the fixed costs can be avoided. Bloom: AN.

If cost minimization is the major consideration and the company would prefer to buy the components.000 units externally for $117. $18.000 c.000 Ans: D. but another product could be made that would increase profit contribution by $8. what is the maximum external price that Ruth Company would accept to acquire the 1. AACSB: Analytic. $12. Ruth Company produces 1. the company is indifferent between making or buying the part.000 b.000 c. The avoidable fixed costs are $6. What are the fixed overhead costs of making the component? a. $52. $44. AICPA PC: Problem Solving.000 if the components were acquired externally.000 7. An analysis shows that at this external price.000 b.000 Ruth Company could avoid $3.000 4. AICPA FN: Decision Modeling. AICPA BB: Resource Management.000 9. Cannot be determined.000 units of a necessary component with the following costs: Direct Materials Direct Labor Variable Overhead Fixed Overhead $72.000 4. AICPA FN: Decision Modeling.000 units externally? a.000 18. Bloom: AN. AICPA BB: Resource Management. $47. If cost minimization is the major consideration and the company would prefer to buy the components.000 if the units are purchased externally. SO: 4. AICPA BB: Resource Management. $43.Incremental Analysis and Capital Budgeting 71. $48.000 7. SO: 4. $24. $55. $48. Difficulty: Medium.000 c.000 Ans: B. Difficulty: Medium. Min: 5. Bloom: AN. IMA: Cost Management 73. AICPA FN: Decision Modeling.000 in fixed overhead costs if it acquires the components externally. SO: 4.000 16. Difficulty: Medium.000 16.000 d. IMA: Cost Management .000 d. Bloom: AN.15 Bell's Shop can make 1. Min: 5. AICPA PC: Problem Solving. Ans: A. IMA: Cost Management 72. AICPA PC: Problem Solving. Ruth Company produces 1. what is the maximum external price that Ruth Company would be willing to accept to acquire the 1.000 None of Ruth Company's fixed overhead costs can be reduced.000 ? The company can purchase the 1. AACSB: Analytic.000 units of a necessary component with the following costs: Direct Materials Direct Labor Variable Overhead Fixed Overhead $24.000 units of a necessary component with the following costs: Direct Materials Direct Labor Variable Overhead Fixed Overhead $24. AACSB: Analytic.000 units externally? a.000. $51.000 b. Min: 5.000 d. 26 .

000 units externally. can purchase the units externally for $80.000 and only $8. An increase of $80. IMA: Cost Management 76.000 Fixed Overhead 22.16 Test Bank for Accounting Principles. by what amount will its total costs change? a. Inc. AICPA PC: Problem Solving. SO: 4. The CDs have the following costs: Direct Materials $11. can produce 100 units of a component part with the following costs: Direct Materials $30. AACSB: Analytic. Fornelli. $32. Make and save $1. Buy and save $1.000 CDs on which to record music.000 b.000 c.000 Variable Overhead 32. An increase of $17. Bloom: AN. Inc. $33. SO: 4. Min: 3.000 Fixed Overhead 7. Min: 5.000 Variable Overhead 3.000 c. AACSB: Analytic. what is the maximum external price that Crigui would expect to pay for the units? a. what is the correct make-or-buy decision? a. AICPA FN: Decision Modeling.000 b. Ninth Edition 74. Difficulty: Medium.000 If Fornelli. Make and save $5. AICPA BB: Resource Management. AACSB: Analytic.000 Ans: B.26 .000. SO: 4. Bloom: AN. AICPA FN: Decision Modeling. Difficulty: Medium. A decrease of $22. IMA: Cost Management 75.000 Ans: D.000 in fixed overhead costs if it acquires the CDs externally.000 d. Inc.000 Fixed Overhead 22. An increase of $5.000 If Fornelli.000 Direct Labor 13. AICPA PC: Problem Solving.000 c.000 b.000 Ans: C. AICPA PC: Problem Solving.000 Variable Overhead 32. can purchase the component part externally for $88. AICPA BB: Resource Management. $36. Fornelli. IMA: Cost Management . AICPA FN: Decision Modeling.000 d. Difficulty: Medium. Min: 5. Buy and save $13.000 Direct Labor 15.000 Crigui could avoid $4. Bloom: AN. Inc.000 d. can produce 100 units of a component part with the following costs: Direct Materials $30. $29.000 Direct Labor 13. Crigui Music produces 60. AICPA BB: Resource Management. If cost minimization is the major consideration and the company would prefer to buy the 60.000 of the fixed costs can be avoided.

$2. How much will Tasty Bites save if it accepts the offer? a. Bloom: AN. Process further. which can be sold as is for $5. the company will be better off by $20 per unit. Bloom: AN.000.000.00 An outside supplier has offered to produce the corn chips for $25 per batch.000 d.00 per batch c. AACSB: Analytic.500 and $7. $4. b. IMA: Cost Management 79.000 Direct Labor 15. $32.000. AICPA FN: Decision Modeling.00 11.17 Crigui Music produces 60. and $7. Sell before assembly. and $7. $1.000. AACSB: Analytic. $4. $5. AICPA PC: Problem Solving. Min: 5. Bloom: AN. Min: 5.00 13. $5. c. Difficulty: Medium.00 14. $40. or processed further incurring additional costs of $1. The CDs have the following costs: Direct Materials $11.000. If cost minimization is the major consideration and the company would prefer to buy the CDs. 26 . the company will be better off by $29 per unit. IMA: Cost Management 78.500. SO: 5. AACSB: Analytic. AICPA BB: Resource Management.000.000 CDs on which to record music. Min: 5. d. Ans: A. $1. Bloom: AP.Incremental Analysis and Capital Budgeting 77. AICPA PC: Problem Solving. $33.000 c. The cost of one batch is below: Direct materials Direct labor Variable overhead Fixed overhead $18. NF Toy Company is unsure of whether to sell its product assembled or unassembled.00 per batch d. but another product could be made that would increase profit contribution by $4. SO: 5.000 Fixed Overhead 7. Difficulty: Medium. what is the maximum external price that Crigui would be willing to accept to acquire the 60. the company will be better off by $14 per unit. Difficulty: Medium. Tasty Bites produces corn chips. Difficulty: Medium.500 and then be sold for $7. $6. $36.000 Variable Overhead 3. The unit cost of the unassembled product is $30 and NF Toy would sell it for $65. 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. What decision should NF Toy make? a. $31. AICPA BB: Resource Management. IMA: Cost Management 80. Which amounts are relevant to the decision about Product 89? a. AICPA PC: Problem Solving. Min: 5.000 to produce Product 89. Moreland Clean Company spent $4. AICPA FN: Decision Modeling. $1.000 units externally? a.000 d.000 b.000 b. AICPA BB: Resource Management. AICPA PC: Problem Solving. AICPA FN: Decision Modeling. AACSB: Analytic. $17. AICPA FN: Decision Modeling.00 per batch Ans: B.000 Ans: C. SO: 4.500.000 if the CDs were acquired externally. AICPA BB: Resource Management. Process further.000. $5.000. Sell before assembly. $4.000 c.000 None of Crigui’s fixed overhead costs can be reduced. the company will be better off by $1 per unit.00 per batch b.000 Ans: B. and $7. SO: 4. IMA: Cost Management .

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

AICPA PC: Problem Solving. AICPA PC: Problem Solving. AICPA FN: Decision Modeling.000 Accumulated Depreciation 75. is contemplating the replacement of an old machine with a new one. AACSB: Analytic. $200. Difficulty: Medium. $175.500 d.Incremental Analysis and Capital Budgeting 96. SO: 6.000 b. $250.000 Remaining useful life 10 years Useful life -0Annual operating costs $200.000 Remaining useful life 10 years Useful life -0Annual operating costs $200. $0 Ans: C. Min: 3. is contemplating the replacement of an old machine with a new one. IMA: Cost Management . it can be sold for $20. $150. Sala Co.500 If the old machine is replaced. AICPA BB: Resource Management. Bloom: AP.500 If the old machine is replaced.000 c. 26 . The following information has been gathered: Old Machine Price $250.000 New Machine $500.000 -0-010 years $150. $175.000 d. Which of the following amounts is a sunk cost? a. $49. Bloom: C.000 -0-010 years $150.000. it can be sold for $20. Difficulty: Medium. SO: 6.000 b.000 Ans: D. Min: 3.000 Accumulated Depreciation 75.500 c. Which of the following amounts is relevant to the replacement decision? a. AICPA BB: Resource Management. AACSB: Analytic.000.000 New Machine $500. The following information has been gathered: Old Machine Price $250. AICPA FN: Decision Modeling. $500. IMA: Cost Management 97.21 Sala Co.

000 75.000 $(15.000 Remaining useful life 10 years Useful life -0Annual operating costs $200. AICPA BB: Resource Management.000 b.000 b. AACSB: Analytic.000 60. aluminum.000 523.000 Aluminum $200. Min: 5.000 Accumulated Depreciation 75.000) Total $765. $140. Bloom: AN.000 7. Ninth Edition 98. and hard rubber.000 175.000 242. IMA: Cost Management 99. AICPA BB: Resource Management. $(5. What will be total net income if the line is dropped? a.000 $ 25.000 c. $20.000 Ans: B.000 $100. $125.000 22.000 Hard Rubber $65. Sala Co.000 c. SO: 6.000 35. SO: 7. is contemplating the replacement of an old machine with a new one.22 Test Bank for Accounting Principles.000 325.000 New Machine $500. AICPA FN: Decision Modeling. AACSB: Analytic. AICPA FN: Decision Modeling.000) Ans: A. Difficulty: Medium.000 $110.000 132. Min: 5.500 If the old machine is replaced.000 140. A condensed segmented income statement for a recent period follows: Wood $500.000) d.000 -0-010 years $150. IMA: Cost Management . AICPA PC: Problem Solving.000 58. The net advantage (disadvantage) of replacing the old machine is a. Difficulty: Medium. $(50.000 d. $103. it can be sold for $20.000. Bloom: AP. $105. $15. AICPA PC: Problem Solving. The following information has been gathered: Old Machine Price $250. 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.26 .

A condensed segmented income statement for a recent period follows: Wood $500. $125.000 132. Min: 5. 26 .000) If this product line is eliminated. AICPA FN: Decision Modeling.000 d.000 Aluminum $200.000 $100. b. Bloom: C.000 90.000 7.000. Ans: B. All expenses of the eliminated segment will be eliminated. What will most likely occur if a company eliminates an unprofitable segment when a portion of fixed costs are unavoidable? a. $140. Difficulty: Medium. AACSB: Analytic. AICPA FN: Decision Modeling. 60% of the fixed expenses can be eliminated and the other 40% will be allocated to other product lines. d. aluminum.000 60. d. AICPA PC: Problem Solving. $103. AICPA FN: Decision Modeling. c. the company's net income will a. one of which reflects the following results: Sales Variable expenses Contribution margin Fixed expenses Net loss $215. AICPA PC: Problem Solving. Net income will increase.000 35. AACSB: Analytic. AICPA BB: Resource Management.000 $ 25. AICPA BB: Resource Management. IMA: Cost Management .Incremental Analysis and Capital Budgeting 100. What will be total net income if the line is dropped? a. Ans: C.000. and hard rubber.000 125. increase by $6. decrease by $6. AICPA PC: Problem Solving.000 140. c.000 75.000 325. AACSB: None.000 c.000 Sales Variable expenses Contribution margin Fixed expenses Net income (loss) Assume all of the fixed expenses for the hard rubber line are avoidable. A company has three product lines. Min: 5.000 Hard Rubber $65.000 242.000 140. If management decides to eliminate this product line.000 $110.000 $ (50. Difficulty: Medium.000 58. Min: 1. decrease by $90. The company's variable costs will increase.000 523. SO: 7. IMA: Cost Management 101.000.23 Abel Company produces three versions of baseball bats: wood. SO: 7.000) Total $765. increase by $50. Bloom: AN. Bloom: AN. IMA: Cost Management 102.000 b. $105. b.000. AICPA BB: Resource Management. Difficulty: Easy. Net income will decrease.000 $(15.000 Ans: A. SO: 7.000 22.000 175.

total net income will decrease by the amount of the product line's fixed costs. Talbot expects to earn 16% of its cash outlay back over the life of the asset. contribution margin. Cannot be determined from the data provided. Talbot expects to earn 16% of its investment annually. SO: 8. b. AICPA PC: Problem Solving.000 less if Product A is made. Ans: C.000 more if Product A is made. b. b. Difficulty: Medium.000 per year over the life of an investment that will cost $25. the key factor in performing incremental analysis is a. a. A company is considering eliminating a product line. d. $2.000 machine hours available to manufacture a product. income will be a. Min: 5. d. Min: 3. The calculation of the accounting rate of return is . limited resources required.000 275.26 . SO: 8. Ans: B. $2. $275. the contribution margin of the product line will indicate the net income increase or decrease. AICPA FN: Decision Modeling. SO: 7. Bloom: AN. Ans: C. SO: 7. AICPA PC: Problem Solving. d. Bloom: C. Min: 1. The fixed costs currently allocated to the product line will be allocated to other product lines upon discontinuance. Ans: C. AICPA BB: Resource Management. Difficulty: Easy.000. AICPA BB: Resource Management. Talbot Company expects income of $2. Bloom: C. Difficulty: Medium. AICPA BB: Resource Management. total net income will increase by the amount of the product line's fixed costs. AICPA FN: Decision Modeling. AACSB: None. contribution margin per unit of limited resource. A company can sell all the units it can produce of either Product A or Product B but not both. AICPA BB: Resource Management. AACSB: Analytic.16. IMA: Cost Management 105. d. If there are 1. Talbot expects the asset will earn 16 times as much profit as its cost. If the product line is discontinued. A segment has the following data: Sales Variable expenses Fixed expenses $350.000 decrease c. IMA: Reporting 107. Min: 3. assuming the fixed expenses will be allocated to profitable segments? a. AACSB: Analytic. AICPA BB: Resource Management. AACSB: None. AACSB: Analytic. AICPA FN: Decision Modeling. IMA: Cost Management 104. $200. b. AICPA FN: Decision Modeling. AICPA FN: Reporting. $2. The rate of return indicates that a. Ninth Edition 103. Talbot expects to earn 16% of $2.000 as profit each year the asset is used.000 What will be the incremental effect on net income if this segment is eliminated. If a company has limited resources.000 increase b. none of these. AICPA PC: Problem Solving.000 150. IMA: Cost Management 106. c. AICPA PC: Problem Solving. $200. the same if either product is made. Bloom: AN.000 decrease d. Difficulty: Medium. c. c. AICPA PC: Problem Solving. Difficulty: Easy. c.000 less if Product B is made. SO: 8. Min: 1. IMA: Cost Management .24 Test Bank for Accounting Principles. 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. Bloom: AN. the company's total fixed costs will decrease. Ans: B.

A company is considering purchasing factory equipment that costs $320. Ans: C. The straight-line method of depreciation would be used. $25. b. A $4.50 B $5.Incremental Analysis and Capital Budgeting 108. The straight-line method of depreciation would be used.00 Ans: B. AICPA PC: Problem Solving.00 $1. The cash payback period on the equipment is a. Ruiz Company’s contribution margin is $4 per unit for Product A and $5 for Product B. what is the total contribution margin of the product it should produce to maximize net income? a. 16.000 hours. Min: 5. SO: 9. AICPA PC: Problem Solving. AICPA PC: Problem Solving. Min: 5. 3.00 $1.5%. the annual rate of return expected on this equipment is a. AICPA BB: Resource Management. How much is the contribution margin per unit of limited resource for each product? a.0 years. d. If the equipment is purchased. If the equipment is purchased.3 years. 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 . annual revenues are expected to be $90.000 Ans: C. Difficulty: Medium. AICPA PC: Problem Solving. IMA: Cost Management 111. Difficulty: Medium. AICPA BB: Resource Management. $24. AICPA BB: Resource Management. If the equipment is purchased. AACSB: Analytic. Min: 3. $16. 7.000 and annual operating expenses exclusive of depreciation expense are expected to be $38.3%. 3.000. c. AICPA BB: Resource Management. Difficulty: Medium. AACSB: Analytic.00 $1. AICPA FN: Decision Modeling. d. annual revenues are expected to be $90.000 b. AICPA FN: Decision Modeling. 8.8%. SO: 8. IMA: Cost Management 110. 32.000. Difficulty: Medium. Bloom: AN.25 $2.25 $2. A company is considering purchasing factory equipment that costs $320. c. SO: 9. d. IMA: Investment Decisions . AACSB: Analytic. IMA: Cost Management 109. Bloom: AP. AICPA FN: Decision Modeling. c.25 Product 1 Product 2 If the company has machine capacity of 2. b. $20. 6.000 and annual operating expenses exclusive of depreciation expense are expected to be $38. Ans: C. Min: 5. 13.000 and is estimated to have no salvage value at the end of its 8-year useful life.1 years.5%.000 and is estimated to have no salvage value at the end of its 8-year useful life.2 years.00 $2.000 c. Product A requires 2 machine hours and Product B requires 4 machine hours. SO: 8. b. Bloom: AN.000 d. AACSB: Analytic. Bloom: AP. AICPA FN: Decision Modeling.

Bloom: K. 8 years. Depreciation is subtracted from net income because it is an expense. IMA: Budget Preparation 114. AICPA BB: Resource Management. SO: 8. 5. Ans: C. the cash payback period is a. AICPA PC: Problem Solving. 10. d.000. b. IMA: Investment Decisions . The useful life of the machine is 10 years. Ans: A.5 years. AICPA BB: Resource Management. b. Min: 1. AICPA PC: Problem Solving.0 years. A company's cost of capital refers to the a. c. AICPA FN: Decision Modeling. rate management expects to pay on all borrowed and equity funds. Bloom: C.0 years. project would only be acceptable if the company's cost of capital was low. cost-volume-profit technique. d. If an asset cost $210. cost of printing and registering common stock shares. IMA: Investment Decisions 117. Depreciation is added back to net income because it is an inflow of cash.26 Test Bank for Accounting Principles. How is annual cash inflow determined? a. SO: 9. AICPA PC: Problem Solving. SO: 9. Ninth Edition 112. 5 years. total cost of a capital project. Bloom: AP. AICPA BB: Resource Management. entire initial investment will never be recovered. Bloom: C. b. AICPA FN: Decision Modeling. b. The following are all quantitative capital budgeting techniques except a. AICPA BB: Resource Management. Difficulty: Easy. discounted cash flow technique. Difficulty: Easy.000 and is expected to have a $30. IMA: Investment Decisions 113. Difficulty: Medium. Difficulty: Easy. The cash payback period is a. b.26 . the a. c. c. AACSB: None. Min: 1. AACSB: None. annual rate of return technique. AACSB: None. AICPA PC: Problem Solving. Difficulty: Easy. Difficulty: Medium.000 each year. AICPA FN: Decision Modeling. AICPA PC: Problem Solving. d. SO: 9. AICPA FN: Decision Modeling. is considering purchasing a new machine which will cost $200.000/year. Bloom: AP. The machine would be depreciated straight-line with no residual value over its useful life at the rate of $20. IMA: Cost Management 115. AICPA FN: Decision Modeling. 4. Min: 5. SO: 9. 7 years. b.000. Depreciation is added back to net income because it is not an outflow of cash. c. d. 6 years. AACSB: None. Min: 1. Min: 5. project will always be profitable. If the payback period for a project is greater than its economic life. Ans: B. 4. but which will decrease costs each year by $40. AACSB: Analytic. AICPA BB: Resource Management. Min: 1. Bloom: K. Aaron Co. rate of return earned on total assets.0 years.000 salvage value at the end of its ten-year life. c. SO: 9. cash payback technique. Ans: B. project's return will always exceed the company's cost of capital. Ans: B. Depreciation is subtracted from net income because it is an outflow of cash. and generates annual net cash inflows of $30. Ans: B. AICPA BB: Resource Management. AACSB: Analytic. IMA: Cost Management 116. c. d. d. AICPA FN: Decision Modeling. AICPA PC: Problem Solving.

000 and annual operating expenses exclusive of depreciation expense are expected to be $95. b. c. AICPA PC: Problem Solving. the cost of capital. AICPA FN: Decision Modeling. SO: 9. AICPA PC: Problem Solving. annual revenues are expected to be $225.Incremental Analysis and Capital Budgeting 118. Difficulty: Easy. Min: 1. the cutoff rate. Ans: A. AACSB: None. Gross profit method b. Difficulty: Easy. IMA: Investment Decisions 122. AICPA FN: Decision Modeling. AICPA FN: Decision Modeling. Ans: B. accounting data. the a. b. Bloom: AP. IMA: Investment Decisions 119. of making capital expenditure decisions. Bloom: C. IMA: Investment Decisions . Which of the following is not a common method of capital budgeting? a. replacement values. AICPA PC: Problem Solving. AICPA BB: Resource Management. Ans: C. d.1%. d. Min: 1. AACSB: None. AICPA BB: Resource Management. c. IMA: Investment Decisions 123. SO: 9. AACSB: None. SO: 9. AICPA BB: Resource Management. c. Ans: A. 26 . less attractive the investment. of determining how much capital stock to issue. more attractive the investment. 29. Difficulty: Easy. AICPA FN: Decision Modeling. d. SO: 9.2%.000 and is estimated to have no salvage value at the end of its 8-year useful life. Bloom: K. all of these. d. Bloom: K. AICPA PC: Problem Solving. AICPA BB: Resource Management. b. b. AICPA PC: Problem Solving. The straight-line method of depreciation would be used. Min: 1. AICPA BB: Resource Management. Min: 1. higher the hurdle rate. If the equipment is purchased.000. Annual rate of return method Ans: A. Difficulty: Easy. 14. AICPA FN: Decision Modeling. the annual rate of return expected on this project is a. AACSB: None. c.6%. 27. 54. used in sell or process further decisions. IMA: Budget Preparation 120. The annual rate of return method is based on a. higher the cost of capital. market values. If the equipment is purchased. Min: 5. Difficulty: Easy. Min: 1. AACSB: Analytic. AICPA PC: Problem Solving. Bloom: K.27 A company is considering purchasing factory equipment which costs $480. Capital budgeting is the process a. SO: 9. the hurdle rate.2%. Ans: C. Difficulty: Medium. AACSB: None. The higher the rate of return for a given risk. time value of money data. IMA: Budget Preparation 121. The rate that management expects to pay on borrowed or equity funds is known as a. Discounted cash flow method d. AICPA BB: Resource Management. d. SO: 9. Payback method c. c. Bloom: K. AICPA FN: Decision Modeling. b. of eliminating unprofitable product lines.

IMA: Investment Decisions 127. ignores the cost of an investment. AICPA BB: Resource Management. Min: 1. Ans: C. IMA: Investment Decisions . AICPA PC: Problem Solving. AICPA BB: Resource Management. Difficulty: Medium.28 Test Bank for Accounting Principles. If annual expected income is $21.0% b. is complicated to use.000.000. 6 years. AACSB: None. The cash payback on this investment is a. b. Difficulty: Medium.0% d. the denominator in computing the annual rate of return is a. AICPA PC: Problem Solving. AICPA PC: Problem Solving.000. AICPA FN: Decision Modeling. Garza Company is considering buying equipment for $240. 3 years. 57.000 with an estimated life of ten years and no salvage value.26 . AACSB: Analytic. Ninth Edition 124. dollars. b. Difficulty: Easy. a percent. Nance Company is considering buying a machine for $90. The equipment has a five-year life and an estimated salvage value of $300. Ans: C. c. $240. d. 10 years. c. Min: 5. Difficulty: Medium. 37. d. ignores obsolescence factors. AICPA BB: Resource Management. When using the payback method. SO: 9.000 each year. AICPA FN: Decision Modeling.000. What is the annual rate of return on this investment? a. time. d.000 with a useful life of five years and an estimated salvage value of $12. The machine is expected to generate net income of $6. Min: 3. Ans: D. AICPA PC: Problem Solving. The payback method is criticized on the grounds that it a.5% c.000. c.000. Min: 1. IMA: Investment Decisions 128.5% Ans: B. d. AICPA BB: Resource Management. AACSB: Analytic.000 each year for the next five years if it invests $900.000. $120. AACSB: Analytic. IMA: Investment Decisions 126. ignores the time value of money. $252. Min: 3.000 in new equipment. The straight-line method of depreciation will be used. SO: 9. 15 years. Bloom: AP. a discount factor. Bloom: C. AICPA FN: Decision Modeling. AICPA BB: Resource Management. payback is expressed in terms of a. Difficulty: Easy. AICPA FN: Decision Modeling. b. Ans: C. IMA: Investment Decisions 125. A company projects an increase in net income of $225. $126. AICPA FN: Decision Modeling. SO: 9. AACSB: None. 25. Bloom: AP. Bloom: C. b. Bloom: K. SO: 9. AICPA PC: Problem Solving. SO: 9. c. 50.

and $3. Mussina Company had an investment which cost $260.000 for year 1.000. Min: 5.5 years. c.797 . the annual rate of return is: a. SO: 10. Difficulty: Hard. Difficulty: Easy.000 and had a salvage value at the end of its useful life of zero. 30 years. d. Ans: D. IMA: Investment Decisions 132.000 a year. 5. Bloom: AP. net income will increase by $5. AICPA PC: Problem Solving.5%.000 a year.29 A capital budgeting technique which takes into consideration the time value of money is the a.893 1. b. Present Value of 1 at 12% . $9. SO: 9. AACSB: None. Bloom: K. AICPA BB: Resource Management. Bloom: AP. AICPA FN: Decision Modeling. AICPA PC: Problem Solving. 20 years. c. Bloom: AP. Ans: C. AICPA FN: Decision Modeling. b. AICPA BB: Resource Management.339.158. Difficulty: Medium. the cash payback period is: a. 11. IMA: Investment Decisions .058. Min: 1. but with the use of the new computer. IMA: Investment Decisions 131. $10. 7. AICPA BB: Resource Management.000 for year 2. and the net present value of the project was $(450). SO: 9. IMA: Investment Decisions 130.000 for year 3. Annual cost savings were: $5.690 2. c.239. AACSB: Analytic. AICPA FN: Decision Modeling. AICPA FN: Decision Modeling. payback approach. The amount of the initial investment was Year 1 2 3 a.712 PV of an Annuity of 1 at 12% . $9. AACSB: None. If depreciation expense is $3. net present value method. Difficulty: Medium. 26 . c. 9. AICPA PC: Problem Solving. Benaflek Co. AICPA PC: Problem Solving. Ans: D. b.893 . b. annual rate of return approach. SO: 9. AICPA BB: Resource Management. 12 years. $4.8%. Giraldi Company has identified that the cost of a new computer will be $60. Min: 3. $10.Incremental Analysis and Capital Budgeting 129. d. purchased some equipment 3 years ago. d.000. If Mussina's expected annual net income is $15.402 Ans: A. d. The company's required rate of return is 12%. AACSB: None. Min: 3. return on stockholders' equity approach.8%. 15%.

Ans: B. SO: 9. c.000 142. 5 years.000 142. AACSB: None.000 42. Difficulty: Hard. c. Ninth Edition 133.000 Estimated useful life 5 years 6 years Salvage value 0 0 The company requires a 10% rate of return on all new investments. Difficulty: Hard. AICPA FN: Decision Modeling. 10%. b. AICPA PC: Problem Solving. Min: 7.000 $600. IMA: Investment Decisions . d. 10 years. 4 years. Periods 5 6 Present Value of an Annuity of 1 9% 10% 11% 12% 3. Periods 5 6 Present Value of an Annuity of 1 9% 10% 11% 12% 3.791 3.355 4.000 Annual net income 20.000 $600. AICPA BB: Resource Management.605 4. AICPA BB: Resource Management.231 4.890 3. Bloom: AP. Estimates regarding each project are provided below: Project Blue Project Gray Initial investment $400.000 Net annual cash inflow 100. Fehr Company is considering two capital investment proposals.791 3.111 The cash payback period for Project Blue is a.231 4.486 4.000 Annual net income 20. Bloom: AP.26 . AACSB: None.696 3. Fehr Company is considering two capital investment proposals.696 3. 5%.000 Net annual cash inflow 100. Estimates regarding each project are provided below: Project Blue Project Gray Initial investment $400. d. Min: 7. b.111 The annual rate of return for Project Blue is a. AICPA FN: Decision Modeling. 50%.000 42.000 Estimated useful life 5 years 6 years Salvage value 0 0 The company requires a 10% rate of return on all new investments.890 3. Ans: D.30 Test Bank for Accounting Principles.605 4. AICPA PC: Problem Solving. 25%. SO: 9. IMA: Investment Decisions 134.355 4.486 4. 20 years.

IMA: Investment Decisions 136. Present Value of an Annuity of 1 Periods 9% 10% 11% 12% 5 3.000 142.605 6 4. 26 . Difficulty: Hard.000. Bloom: AP. Ans: B.000 Net annual cash inflow 100. Ans: D. Bloom: AP.355 4. AICPA BB: Resource Management.000 Estimated useful life 5 years 6 years Salvage value 0 0 The company requires a 10% rate of return on all new investments.912. 12%. $618. AICPA FN: Decision Modeling.696 3.486 4.000 Net annual cash inflow 100.605 6 4. 10%.791 3. SO: 10.000 Annual net income 20.231 4.486 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. Min: 7. 11%. $100.31 Fehr Company is considering two capital investment proposals.000 Annual net income 20.Incremental Analysis and Capital Budgeting 135. AICPA FN: Decision Modeling. SO: 10. b. Fehr Company is considering two capital investment proposals.890 3.231 4.355 4. Estimates regarding each project are provided below: Project Blue Project Gray Initial investment $400. AICPA PC: Problem Solving.111 The internal rate of return for Project Gray is approximately a.111 The net present value for Project Gray is a. AICPA PC: Problem Solving.000 $600.410. AACSB: None.000 $600. Min: 7. $18. Difficulty: Hard.791 3.000 42.696 3. IMA: Investment Decisions . 9%.000 142.410. d. b.000 42. Estimates regarding each project are provided below: Project Blue Project Gray Initial investment $400. AICPA BB: Resource Management. c.890 3. $182. c. d. AACSB: None. Present Value of an Annuity of 1 Periods 9% 10% 11% 12% 5 3.

AACSB: None.783 1.454. d. SO: 10.926 . AICPA FN: Decision Modeling. Use the following table.000 at the end of each year for three years. $98. Difficulty: Hard. The approximate internal rate of return on this project is a. AICPA PC: Problem Solving. $2.909 2 1. b.487 A company has a minimum required rate of return of 9% and is considering investing in a project that costs $175. Bloom: AP.898. Difficulty: Hard.454.926 .736 3 2.759 1. 8%. less than the required 8%.487 A company has a minimum required rate of return of 8% and is considering investing in a project that costs $68. Min: 5.000 and is expected to generate cash inflows of $70.909 2 1. AICPA BB: Resource Management. d.909 2 1. AICPA FN: Decision Modeling.718. Use the following table.917 . Ninth Edition 137.783 1.759 1. Ans: B. AICPA BB: Resource Management. Present Value of an Annuity of 1 Period 8% 9% 10% 1 . $104. AACSB: None. $17. SO: 10.32 Test Bank for Accounting Principles.000 each year for three years.577 2. $35.759 1. AICPA PC: Problem Solving. b.000 and is expected to generate cash inflows of $42. AACSB: None.170. The net present value of this project is a. b. Ans: B. d. $114.531 2. $177. Difficulty: Hard. Min: 5. Ans: D. $6. IMA: Investment Decisions .170. AICPA PC: Problem Solving.337 and is expected to generate cash inflows of $27. c. Min: 5.783 1. Bloom: AP. c.531 2. AICPA FN: Decision Modeling.736 3 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. Bloom: AP. Use the following table.917 .926 . 10%.000 at the end of each year for three years. SO: 10.736 3 2.531 2. Present Value of an Annuity of 1 Period 8% 9% 10% 1 . IMA: Investment Decisions 138.917 .000.577 2. AICPA BB: Resource Management.000. The present value of future cash inflows for this project is a. Present Value of an Annuity of 1 Period 8% 9% 10% 1 . 9%.26 . c.577 2. IMA: Investment Decisions 139.

requires a 10% rate of return. Difficulty: Hard. $13. Difficulty: Hard.111 15% 3.Incremental Analysis and Capital Budgeting 140. The equipment will provide cost savings of $7.450 $34. SO: 10. d.231 4.33 Woods Company wants to purchase an asset with a 3-year useful life.792 c. $2. Humphrey. Inc. AACSB: None. requires a 10% rate of return. b. $886 d.800 $30. IMA: Investment Decisions 141. Inc. 12% Ans: D. Humphrey. is considering purchasing equipment costing $30.000 in year 3. Min: 5. 26 . What is the present value of these future cash flows? Present Value of 1 Period 14% 1 .400 $31.000 with a 6-year useful life. AICPA BB: Resource Management. Min: 5.750 Ans: C. Bloom: AP. Humphrey. The equipment will provide cost savings of $7.67 a. $29. AICPA FN: Decision Modeling. AICPA BB: Resource Management.77 3 .000 each year for two years.300 and will be depreciated straight-line over its useful life with no salvage value. Min: 5. AICPA BB: Resource Management. AACSB: None.623 Present Value of an Annuity of 1 9% 10% 11% 12% 4. Humphrey. Inc. and uses the following factors. 9% b. Bloom: AP. IMA: Investment Decisions . AACSB: None. is considering purchasing equipment costing $30. and $10. $1.355 4. Bloom: AP. AICPA FN: Decision Modeling. IMA: Investment Decisions 142. Period 6 8% 4. SO: 10.800 b.784 What is the approximate net present value of this investment? a. SO: 10.000 with a 6-year useful life.486 4.355 4. which is expected to produce cash inflows of $15.88 2 .623 Present Value of an Annuity of 1 9% 10% 11% 12% 4.486 4. Period 6 8% 4.231 4. AICPA PC: Problem Solving. Woods has a 14% cost of capital. AICPA PC: Problem Solving. Difficulty: Hard.111 15% 3.300 and will be depreciated straight-line over its useful life with no salvage value. Inc. AICPA PC: Problem Solving.784 What is the approximate internal rate of return for this investment? a. 11% d. 10% c. c.748 Ans: B. AICPA FN: Decision Modeling.

AACSB: None.000. Cash flows are used to calculate the annual rate of return. AICPA BB: Resource Management. IMA: Investment Decisions 147. Accrual income is used to calculate the net present value. d. Difficulty: Easy. c. d. Which one of the following is correct? a. a project's net present value is zero. this indicates that the a. Project B. AICPA FN: Decision Modeling. AICPA FN: Decision Modeling. AACSB: Analytic. an amount which cannot be determined.000 and have the same economic life. Difficulty: Medium. $40. Cash flows are used to calculate the internal rate of return. Bloom: AN. Ninth Edition 143. What does this tell management about the project? a. SO: 10.26 .000. The return from this project is equal to the cost of capital. Hale Plumbing used the net present value method and determined that project 34 had a zero net present value. b. SO: 10. Accrual income is used to calculate the payback period.34 Test Bank for Accounting Principles.0 and the equal annual cash inflows were $40. Ans: D. SO: 10. and in using the net present value method. In using the internal rate of return method. AICPA PC: Problem Solving. Project A. b. d. b. Difficulty: Medium. AACSB: Analytic. neither. AACSB: None. the project that should be accepted is a. project's rate of return exceeds 10%. The project earns the company's desired minimum rate of return.000. AICPA FN: Decision Modeling. project earns a rate of return of 0%. Ans: B. AICPA FN: Decision Modeling. Bloom: AN. project's rate of return is less than the minimum rate required. AICPA PC: Problem Solving. c. the total present value of cash inflows for Project A is $30. IMA: Investment Decisions 145.000.000. IMA: Investment Decisions . d. AICPA PC: Problem Solving. The project guarantees company profitability. The project's cash inflows will equal its cash outflows. AACSB: None. b. If Project A and Project B both require an initial investment of $30. c. project earns a rate of return of 10%. Ans: C. d. not capable of being calculated. The initial investment in the project must have been a. Ans: C. If a company's required minimum rate of return is 10%. Min: 1. IMA: Investment Decisions 144. AICPA BB: Resource Management. c. Min: 1. Bloom: K. IMA: Investment Decisions 146. AICPA FN: Decision Modeling. AICPA BB: Resource Management. Min: 3. AICPA PC: Problem Solving. Ans: A. Difficulty: Easy. b. AICPA BB: Resource Management. Bloom: C. $160. SO: 10. AICPA BB: Resource Management. Min: 2. Bloom: AP. Difficulty: Medium. c. they are both the same. the internal rate of return factor was 4.000 and the total present value of cash inflows of Project B is $36. AICPA PC: Problem Solving. Using the net present value method. $10. SO: 10. Min: 3.

Ans: B.35 A company has a minimum required rate of return of 9%.917 .Incremental Analysis and Capital Budgeting 148. AICPA BB: Resource Management. Difficulty: Medium. Min: 5. Present value of an Annuity of 1 Period 8% 9% 10% 1 . Difficulty: Medium. Difficulty: Medium.759 1.208.531 2. Min: 5.926 . IMA: Investment Decisions . Bloom: AP.783 1. 10%.531 2. Ans: B. c.487 26 . d. Bloom: AP.909 2 1.926 . AICPA PC: Problem Solving.759 1. $223. It is considering investing in a project that requires an investment of $210. AICPA PC: Problem Solving. Ans: D.577 2.000 and is expected to generate cash inflows of $168. $42. AACSB: Analytic. AICPA BB: Resource Management.516. AACSB: Analytic. AICPA FN: Decision Modeling. c.736 3 2. AICPA FN: Decision Modeling. It is considering investing in a project which costs $420.790 and is expected to generate cash inflows of $90. d. Present value of an Annuity of 1 Period 8% 9% 10% 1 . Use the following table.210.909 2 1.783 1.000 at the end of each year for three years.000 each year for three years.208. SO: 10.000. IMA: Investment Decisions 149. The approximate internal rate of return on this project is a. b.000 at the end of each year for three years. The IRR on this project cannot be approximated. $5. Use the following table.917 . $210.000 and is expected to generate cash inflows of $90. AICPA FN: Decision Modeling.917 .909 2 1. $13.736 3 2. c.577 2. AICPA BB: Resource Management. $252. $246.000. Use the following table. It is considering investing in a project that costs $227.736 3 2. Present value of an Annuity of 1 Period 8% 9% 10% 1 .577 2. Bloom: AP. The present value of future cash inflows for this project is a. d. AACSB: Analytic. SO: 10. SO: 10. b. 9%. 8%.531 2.783 1. The net present value of this project is a. AICPA PC: Problem Solving.487 A company has a minimum required rate of return of 10%. b.926 .487 A company has a minimum required rate of return of 8%.830.830. $425.759 1. Min: 5. IMA: Investment Decisions 150.

Min: 1. AICPA FN: Decision Modeling. Bloom: C. future value of annuity table. make a decision. $3. AACSB: None. Bloom: K. SO: 3. Min: 1. present value of 1 table. Ans: C. IMA: Investment Decisions 156. $54. Opportunity cost Ans: A. AICPA BB: Resource Management. SO: 4. Difficulty: Easy. the annual rate of return method. d. which normally sells for $38 per unit. AICPA PC: Problem Solving. AICPA PC: Problem Solving. Dryer has sufficient unused capacity to produce the 3. determine possible courses of action. Difficulty: Easy. AACSB: None. future value of 1 table. AICPA FN: Decision Modeling. opportunity costs are a. AICPA PC: Problem Solving. AICPA BB: Resource Management. SO: 10.000 units at $21 each. AICPA BB: Resource Management. Difficulty: Easy. AICPA FN: Decision Modeling. added to the make total cost.000 increase c. Difficulty: Easy. none of these. Accounting's contribution to the decision-making process occurs in all of the following steps except to a. Min: 1. review results of the decision.000 increase d. the payback method. AACSB: Analytic. c. SO: 4. Which of the following would generally not affect a make-or-buy decision? a. AACSB: None.000 units. AACSB: None. d. Min: 1. b. identify the problem and assign responsibility. c. Bloom: C. b. IMA: Investment Decisions 152. Bloom: K. AICPA PC: Problem Solving. a discounted cash flow method. what will be the effect on net income? a. If the special order is accepted. Bloom: C. AICPA PC: Problem Solving. AICPA FN: Decision Modeling. b. Ans: A. In a make-or-buy decision. IMA: Investment Decisions 155. d. AICPA FN: Decision Modeling. added to the buy total cost. It costs Dryer Company $26 per unit ($18 variable and $8 fixed) to produce its product. $9. Min: 5. IMA: Investment Decisions . $3. Difficulty: Medium. A foreign wholesaler offers to purchase 3. The appropriate table to use when an investment promises to return unequal cash flows is the a. c. Variable manufacturing costs d. Bloom: AN. ignored. AICPA FN: Decision Modeling. Ninth Edition 151. SO: 10. Difficulty: Easy. Selling expenses b.36 Test Bank for Accounting Principles. SO: 1. Direct labor c. AACSB: None.000 decrease b. deducted from the make total cost. IMA: Investment Decisions 153. Ans: A. AICPA BB: Resource Management. c. AICPA BB: Resource Management. present value of annuity table. AICPA PC: Problem Solving.26 . Ans: A. The conceptually superior approach to capital budgeting is a. AICPA BB: Resource Management. b. Min: 1. d. IMA: Investment Decisions 154.000 increase Ans: B. Dryer would incur special shipping costs of $2 per unit if the order were accepted.

IMA: Investment Decisions . AACSB: None. All of the following are relevant in deciding whether to eliminate an unprofitable segment except the segment's a. AICPA FN: Decision Modeling. Difficulty: Easy. IMA: Business Economics 161. b. d.00 $2. SO: 9. AICPA PC: Problem Solving. Ans: B. c. AICPA BB: Resource Management. it is impossible for net income to decrease. Bloom: K.37 Ans: C. SO: 9. variable cost. AICPA PC: Problem Solving. IMA: Business Economics 159. AICPA PC: Problem Solving. SO: 7. AACSB: None. c. The cash payback formula is a. AACSB: Analytic. Average investment ÷ Annual cash inflow. The rate of return that management expects to pay on all borrowed and equity funds is the a. Min: 1. hurdle rate. Difficulty: Easy. Average investment ÷ Net income. d. c. AICPA FN: Decision Modeling. AACSB: None. minimum rate.00 $3.50 Ans: A. AICPA BB: Resource Management.00 $1. incremental cost. SO: 7. AICPA BB: Resource Management. AICPA BB: Resource Management. Bloom: K. Cost of capital investment ÷ Net income. Product X requires 4 machine hours and Product Y requires 8 machine hours. Min: 1. SO: 6. variable expenses. In the Rossetto Company. cost of capital. If an unprofitable segment is eliminated a. d. Min: 1. Min: 1. contribution margin per unit is $12 for Product X and $20 for Product Y. SO: 8. Ans: A. IMA: Investment Decisions 162.00 c. fixed expenses allocated to the eliminated segment will be eliminated. Cost of capital investment ÷ Annual cash inflow. cutoff rate. Bloom: K. Min: 3. b opportunity cost. AICPA BB: Resource Management. AACSB: None. c. contribution margin. AICPA PC: Problem Solving. Min: 1. Difficulty: Easy. AACSB: None. Difficulty: Medium. AICPA FN: Decision Modeling. b. $5. b. AICPA FN: Decision Modeling. $2. c.50 b. d. Bloom: C. fixed expenses. sunk cost. AICPA FN: Decision Modeling. AICPA FN: Decision Modeling.50 $1. AICPA BB: Resource Management. Ans: C. variable expenses of the eliminated segment will be eliminated. What is the contribution margin per unit of limited resource for each product? X Y a. d. Bloom: AP.Incremental Analysis and Capital Budgeting 157.50 d. AICPA PC: Problem Solving. it is impossible for net income to increase. sales. 26 . IMA: Business Economics 158. IMA: Business Economics 160. Ans: D. b. Bloom: K. Difficulty: Easy. AICPA PC: Problem Solving. Difficulty: Easy. A cost that cannot be changed by any present or future decision is a(n) a. $3. $5.

62. 153. 63. present value of future cash inflows and the capital investment. To determine annual cash inflow. Item Ans. Min: 1. 86. 115. project's rate of return is less than the required rate of return. 128. 66. 50. b b c b c b b c a d b d d b a a d b d 57. 70. Min: 1. 68. 83. 92. 141. b. 134. 85. 40. 109. 39. a b b b c c a b a a b c d c c d c d a 133.26 . 145. b. 51. Ans: B. 78. 67. 119.38 Test Bank for Accounting Principles. 84. 135. 45. Bloom: K. d b d b b d b c b d a c b d c d b b a 152. 147. d. d b b a c d b d b d d b c b d c c d d 95. 157. 59. 108. 112. AICPA FN: Decision Modeling. 101. 88. Ans: C. 54. b. 107. 137. 61. 155. 97. 87. 127. 47. 125. project's rate of return equals the required rate of return. 106. Item Ans. 91. 140. 99. 100. project is acceptable. A negative net present value means that the a. 73. AICPA PC: Problem Solving. subtracted from net income because it is an outflow of cash. 42. Min: 1. 142. 55. added back to net income because it is an inflow of cash. AICPA BB: Resource Management. future cash inflows and the present value of the capital investment. 154. project's rate of return exceeds the required rate of return. SO: 9. 60. 148. 150. 143. 104. AICPA BB: Resource Management. 123. 81. Item Ans. 130. 149. c. AICPA FN: Decision Modeling. c. 90. AICPA PC: Problem Solving. 49. 93. 103. 69. 113. 164. 126. 120. Bloom: K. 146. 111. 129. 52. AACSB: None. Difficulty: Easy. 118. 72. 159. 94. 98. 117. Item Ans. AICPA FN: Decision Modeling. added back to net income because it is not an outflow of cash. 158. 56. AACSB: None. 124. c. 53. Item Ans. 110. SO: 10. 82. 75. 46. 38. 144. IMA: Investment Decisions Answers to Multiple Choice Questions Item Ans. 151. subtracted from net income because it is an expense. 64. 44. 58. 139. SO: 10. 162. 156. Difficulty: Easy. 160. d. AICPA BB: Resource Management. 131. 122. 71. 43. present value of future net income and the capital investment. 165. d. 138. Item Ans. 105. 116. Ans: D. IMA: Investment Decisions 165. 136. IMA: Investment Decisions 164. 41. AACSB: None. d d b a b d a c d b b c c a a b d b c 76. 161. 89. Ninth Edition 163. future cash inflows and the capital investment. Difficulty: Easy. 121. c a b a a c c d a a b d c b . 132. 163. 65. 74. Net present value is the difference between the a. b d c a b a b c c b b c c c b c c c b 114. Bloom: K. 79. AICPA PC: Problem Solving. 102. 48. 96. 80. depreciation is a. 77.

Difficulty: Medium.000. Notson has provided the following unit costs for its commercial clocks: Direct materials Direct labor Variable overhead Fixed overhead (40% avoidable) $100 120 80 150 Instructions Prepare an incremental analysis which shows the effect of the make-or-buy decision.000) $ 6.000) Incremental costs ($15.000 and costs of $14.Incremental Analysis and Capital Budgeting 26 . The company currently has sales of $38. AICPA PC: Problem Solving. Notson needs 1. A wholesaler offers to buy 8. AICPA BB: Resource Management. Difficulty: Medium. AACSB: Analytic.000 Incremental revenue ($40. AICPA PC: Problem Solving.000 – $14. AICPA BB: Resource Management. SO: 4.000 × $14) Incremental variable costs ($12 × 8. IMA: Investment Decisions Solution 166 (3 min. SO: 2. AICPA FN: Decision Modeling.000) (10. Inc.) $2.000) Incremental increase in profit if Plan 1 is selected BE 167 Pederson Enterprises produces giant stuffed bears.000 Incremental revenue (8.000 and costs of $15. Bloom: AP. Min: 5. Bloom: AP. Ans: N/A. Bloom: AP. AACSB: Analytic. Min: 5.25 per bear. Each bear consists of $12 of variable costs and $9 of fixed costs and sells for $45.000 (1.000.000) Incremental profit if special order accepted BE 168 Notson. AICPA FN: Decision Modeling. Ans: N/A. AICPA FN: Decision Modeling. IMA: Investment Decisions Solution 167 (5 min. AICPA BB: Resource Management.25 × 8. IMA: Business Economics .000 units at $14 each. AACSB: Analytic. is considering Plan 1 which is estimated to have sales of $40.000 – $38.) $112.000) $1. Min: 3. Ans: N/A. AICPA PC: Problem Solving. Difficulty: Medium.000) Incremental shipping costs ($1. Instructions Determine the incremental income or loss that Pederson Enterprises would realize by accepting the special order. Pederson will incur extra shipping costs of $1. of which Pederson has the capacity to produce.39 BRIEF EXERCISES BE 166 Sedgwick Inc. Instructions Compare plans using incremental analysis.200 clocks annually.000 (96. produces several models of clocks. An outside supplier has offered to produce the commercial clocks for Notson for $420 each. SO: 3.

200 = $120. Instructions Prepare an incremental analysis for the make-or-buy decision. SO: 5. Ninth Edition Solution 168 (5 min.200 = 96. IMA: Business Economics . Inc. Instructions If Paola Farms slaughters the chickens. AICPA FN: Decision Modeling.000 + 24.00 Gallup Company has contacted Parks with an offer to sell it 3.200 = 72.000) Incremental Analysis Cost to buy (1.00 7. determine how much incremental profit or loss it would report.000 + 6. Bloom: AP.25 each.000 Savings of FOH 40% × $150 × 1. SO: 4.000 more to turn the annual chicken crop into chicken meat.00 $22. AICPA FN: Decision Modeling. Bloom: AN.00 4. It costs $55.000 $ (3.200 × $420) Cost savings: Savings of DM $100 × 1. IMA: Business Economics Solution 169 (5 min.200 = 144.000 $ (72.000 Total cost savings Incremental net cost to buy BE 169 + 432.000 staplers for $18.00 each. Min: 5.) $(54. Difficulty: Medium. The production generates 60. Min: 4.000 staplers annually for its main product. AICPA PC: Problem Solving.000 chickens which can be sold for $1 each to a slaughtering company.40 Test Bank for Accounting Principles.26 .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. Ans: N/A.000. AICPA BB: Resource Management. $5 of the fixed overhead per unit is unavoidable.) Incremental Effect $(504.00 8. or the chickens can be slaughtered in house and then sold for $2.000 + 12. AICPA BB: Resource Management. AACSB: Analytic. The costs per stapler are as follows: Direct materials Direct labor Variable overhead Fixed overhead Total $ 3. Difficulty: Medium.000) + 9.000) Parks Corporation currently manufactures 3. AICPA PC: Problem Solving. AACSB: Analytic. produces a crop of chickens at a total cost of $66. What should Paola Farms do? Ans: N/A.000 Savings of DL $120 × 1.000 Savings of VOH $80 × 1.

000 that will have a 5-year useful life with no salvage value. AICPA BB: Resource Management. The new machine will lower annual variable production costs from $400.25 – $1.000 Yogurt 400 $10. AICPA PC: Problem Solving.40) Incremental decrease in profits if dropped . The machine has a book value of $60.000) $ 45.00) × 60.000 Fixed costs 5.000 x .000 profit Paola Farms should slaughter.200 Total 3. BE 171 Elmdale Company has a machine that affixes labels to bottles. A new. Ans: N/A.000 $15.000 13. AACSB: Analytic.000 + 2.) $(10. Ans: N/A.000. and the other 60% are allocated.200. ice cream. Bloom: AN.000 chickens = $75.000) Ice Cream 500 $20. Difficulty: Medium. SO: 6.000 Instructions Prepare an incremental analysis of the effect of dropping the sour cream product line. The allocated fixed costs are based on units sold and are unavoidable.000 28.000 Replace Equipment $930.000 Incremental profits: $75. Bloom: AP.000 Variable manufacturing costs New machine cost Net savings over 3 years *For 3 years of remaining life BE 172 Keith Inc.200 3.000 Net Income Change $270. AICPA BB: Resource Management. and butter. Results of June follow: Sour Cream Units sold 2. Difficulty: Medium.000 and a remaining useful life of 3 years and no salvage value. Min: 4. SO: 7.000 Revenue $10.000* (225.000 = $20.000 Net income (loss) $ (1.000 $ 5. IMA: Business Economics Solution 172 (4 min.000 4.000) Incremental revenue Incremental variable cost savings Incremental fixed cost savings ($5.000 Incremental costs: given as $55.000 $ (2.000 $ 8.000 to $310. AICPA FN: Decision Modeling.000 17. Instructions Prepare an analysis showing whether the old machine should be retained or replaced. more efficient machine is available at a cost of $225. Demand of individual products is not affected by changes in other product lines. AACSB: Analytic.000 – $55. AICPA FN: Decision Modeling.) Retain Equipment $1. yogurt.000 $ 2.000 4.000) + 6. AICPA PC: Problem Solving.000 2. IMA: Investment Decisions Solution 171 (4 min.) 26 .100 $60.800 Butter 200 $20.Incremental Analysis and Capital Budgeting Solution 170 (4 min. Min: 4.41 Incremental revenues: ($2.000 Variable departmental costs 6.800 7. 40% of the fixed costs are direct. has 4 product lines: sour cream.

Difficulty: Medium.000) = 7. sales personnel should push Product 43. 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 2.000 ÷ ($30. AICPA FN: Decision Modeling. Difficulty: Medium. using the straight-line rate. Difficulty: Medium. SO: 9. AICPA PC: Problem Solving. Bloom: AP. Min: 4. is considering investing in new equipment that will cost $900.000 to build. AACSB: Analytic. Which product should Meierhoff tell its sales personnel to ‘push’ to customers? Ans: N/A. AICPA BB: Resource Management. SO: 8. IMA: Investment Decisions Solution 174 (3 min.000 salvage value at the end of its 20-year useful life. IMA: Business Economics Solution 173 (4 min.5 years BE 175 Holt Co. AICPA PC: Problem Solving. Depreciation expense. Ans: N/A. AICPA FN: Decision Modeling. Bloom: AP.5 hours = $10 Therefore. AICPA BB: Resource Management.000 per year. The facility will increase revenues by $240. AICPA PC: Problem Solving. Instructions Calculate the annual rate of return on this facility.000. AACSB: Analytic. AICPA BB: Resource Management. AACSB: Analytic. but will also increase annual expenses by $160. IMA: Investment Decisions .000 over its useful life. Bloom: AN.) $900. AICPA FN: Decision Modeling. is $90.000 + $90. Min: 4. Instructions Compute the cash payback period. The new equipment is expected to produce annual net income of $30.5 hours = $9.42 Test Bank for Accounting Principles. but will have a $20. SO: 9. Ans: N/A. BE 174 Lightle Co.26 . Min: 3. is considering investing in a new facility to extract and produce salt. The facility will cost $980.20 Product 43: $15 ÷ 1.000.) Product 12: $23 ÷ 2.5 hours 1.5 hours Instructions Compute the contribution margin per unit of limited resource for each product.000 with a 10-year useful life.

000 ) $ 1. AICPA BB: Resource Management. The appropriate present value factor for 10 periods is 5.65 Cash outflow—investment $140. IMA: Investment Decisions Solution 176 (4 min. IMA: Investment Decisions Solution 177 (3 min.000 = $80. the internal rate of return can be approximated by dividing the capital investment by the net annual cash inflows to determine the discount factor. The company’s expected annual income is: $240. the internal rate of return on this project is approximately 10%. (Table C-2 is needed) Ans: N/A.33 By tracing across on the 8-year row.000 Its average investment is: $980.) When net annual cash inflows are expected to be equal. Instructions Compute the approximate internal rate of return for this investment. Difficulty: Medium. Instructions Compute the proposed investment’s net present value. Bloom: AP. AICPA FN: Decision Modeling. AICPA BB: Resource Management.870. AICPA FN: Decision Modeling. Thus. SO: 10.) 26 .000 to purchase a machine that will provide annual cash flows of $25. Min: 3.000 is being contemplated by Linn Co. AICPA PC: Problem Solving. $90.33493.000 = 16% BE 176 Puckett Company is proposing to spend $140.000 – $160.) Present Value $141. Bloom: AP.000 × 1.000 + $20.43 The annual rate of return is calculated by dividing expected annual income by the average investment.000 × 5. The investment will have a life of 8 years with no salvage value and will produce annual cash flows of $16. . BE 177 An investment costing $90.65. and indicate whether the investment should be made by Puckett Company. and then locating this discount factor on the present value of an annuity table.00 Net present value The investment should be made because the net present value is positive.Incremental Analysis and Capital Budgeting Solution 175 (4 min. AACSB: Analytic. we see that the discount factor for 10% is 5.250 Cash inflows—$25.000.000 ÷ $16. Ans: N/A.000 ÷ $500. its annual rate of return is: $80. AACSB: Analytic.870 = 5.000 2 Therefore. SO: 10. Difficulty: Medium. AICPA PC: Problem Solving.000 ————————— = $500.250 (140. Min: 4.

Bloom: AN.000 $12.000 Revenues (15.000 54. The president of Felter Company is reluctant to accept the proposal because he is concerned that the company will lose money on the special order.000 × $45) Net Income Felter Company would increase its income by $75.44 Test Bank for Accounting Principles. This is a one-time only order and acceptance of this proposal will not affect the company's regular sales. 179 Carney Company manufactures cappuccino makers. .000 (675.000 units) Cost of goods sold Gross profit Operating expenses Net income $90. SO: 3.000. Difficulty: Hard. Ninth Edition EXERCISES Ex.000 36. Unit information about its product is as follows: Sales Price Variable manufacturing cost Fixed manufacturing cost ($500.000 in accepting the special order. AICPA FN: Decision Modeling.26 .000) $ 75.000 × $50) Costs (15. Min: 9.000) $ 75. IMA: Business Economics Solution 178 (9–13 min. 178 Felter Company produced and sold 50.000 (675.000. For the first eight months of 2010.) FELTER COMPANY Incremental Analysis Proposal to buy 15.000. the company reported the following operating results while operating at 80% of plant capacity: Sales (500. AACSB: Analytic. Ex.000. Ans: N/A.000 units at $50 Reject Order $ -0-0$ -0Accept Order $750. AICPA PC: Problem Solving. Instructions Prepare a schedule reflecting an incremental analysis of this proposal and indicate the effect the acceptance of this order might have on the company's income.000 24.000 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.000.000 units of Felter Company's product for $50 per unit.000 Net Income Increase (Decrease) $750. AICPA BB: Resource Management.000 units of product and is operating at 70% of plant capacity.000) Profit per unit $70 $45 10 55 $15 The company received a proposal from a foreign company to buy 15.000 ÷ 50.

000 2. Ans: N/A.060.000) $ 140. IMA: Business Economics . Difficulty: Medium.000. (b) The incremental analysis shows Carney Company should accept the special order because incremental revenues exceed incremental costs.000 + $10.000. Gregg has received a special order from a large school district to buy 600 mats at $45 each. 180 Gregg Company supplies schools with floor mattresses to use in physical education classes.45 In September. Ans: N/A.000 × $95 = $2. Bloom: AN.800.) 26 .850. Min: 13.060. Instructions (a) Prepare an incremental analysis for the special order.850. Acceptance of the special order will not affect fixed costs but will result in $1.200 of shipping costs. 179 (Cont. SO: 3. AICPA FN: Decision Modeling. **Variable operating expenses = 30.050.000 4.000 units) Cost of goods sold Gross profit Operating expenses Net income $7. SO: 3. Min: 12.050. IMA: Business Economics Solution 179 (a) (12–17 min. AACSB: Analytic.850.000. the company reported the following operating results while operating at 80% capacity: Sales (100. AICPA BB: Resource Management.000 $ 800.000 (2. Bloom: E.000. For the first 6 months of 2010. (b) Should Carney Company accept the special order? Justify your answer. AICPA PC: Problem Solving. operating expenses were 75% variable and 25% fixed.000 × $35 = $1. Carney Company receives a special order for 30.000** $ 140.000 of shipping costs but no increase in fixed expenses.000 = $1. AICPA BB: Resource Management. Difficulty: Medium.200. AACSB: Analytic. AICPA FN: Decision Modeling.) Reject Order $ -0-0-0$ -0Accept Order $4. Acceptance of the order would result in $10.000 Revenues Cost of Goods Sold Operating Expense Net Income *Variable cost of goods sold = 30.000 machines at $135 each from a major coffee shop franchise.050.060.000 2.Incremental Analysis and Capital Budgeting Ex.000* 1. Ex.000 2. Instructions (a) Prepare an incremental analysis for the special order. (b) Should Gregg Company accept the special order? Justify your answer.000) (1. This recommendation assumes that acceptance of the special order will not affect relations with existing customers.000 Net Income Increase (Decrease) $4. AICPA PC: Problem Solving.000 Cost of goods sold was 70% variable and 30% fixed.

500.000) (4. Ninth Edition Solution 180 (a) Revenues Cost of Goods Sold Operating Expense Net Income Reject Order $ -0-0-0$ -0Accept Order $27.000 Variable operating expenses per unit = $1.250 Revenues Materials ($0. (b) Should Innova accept the special order? Why or why not? Ans: N/A.200 = $10. Instructions (a) Prepare an incremental analysis for the special order.000 × 75% = $1.000 = $15 Variable operating expenses for the special order = 600 × $15 = $9.000 20.200 $ (840) (13–18 min. If Larkin accepts the offer.000 ÷ 100. Rudd Corporation offers Innova $4.200.000) (6. AICPA PC: Problem Solving.250 Net Income Effect $21. IMA: Business Economics Solution 181 (a) (12 min.000) (4. 181 Larkin Company produces golf discs which it normally sells to retailers for $6 each.500. Ex.000) -0$ 4.000 $100.000 × 70% = $2.000 golf discs is: Materials Labor Variable overhead Fixed overhead Total $ 10.000 (17.000) -0$ 4.000) (6. SO: 3.000 17.200) $ (840) Variable cost of goods sold = $4.000 discs. Variable operating expenses = $2. Variable cost of goods sold per unit = $2.000 ÷ 100.250 (2.000) (5.000) (5.250 (2. Min: 12.30) on each disc sold.20) Variable overhead ($0.40.640.80) Fixed overhead Sales commissions Net income . its fixed overhead will increase from $50. Rudd would sell the discs under its own brand name in foreign markets not yet served by Larkin.) Reject Order $ -0-0-0-0-0-0$ -0Accept Order $21. The cost of manufacturing 25.640 10. Difficulty: Hard.000 40.40) Labor ($1.26 .000 to $55.200 (b) The incremental analysis shows Gregg Company should not accept the special order because incremental costs exceed incremental revenues.000. Variable cost of goods sold for the special order = 600 × $29.000 Innova also incurs 5% sales commission ($0. AICPA FN: Decision Modeling.940.46 Test Bank for Accounting Principles.25 per disc for 5.640) (10.940. AACSB: Analytic. Bloom: E.000 = $29.40 = $17.000 30.000.000 + $1. No sales commission will result from the special order.) Net Income Increase (Decrease) $27. AICPA BB: Resource Management.000 due to the purchase of a new imprinting machine.

budgeted 10. Should Kasten accept the order? 2. Kasten has capacity to produce 12.000 300.000 = $10. Inc.000 Instructions Answer each of the following independent questions: 1. Kasten received an offer from another company to manufacture the same quality widgets for $39.000 $450. Yes. Difficulty: Medium. Bloom: AP. Kasten will save $10. Fixed factory overhead is allocated to production./unit) Variable manufacturing overhead ($3/unit) Fixed factory overhead costs ($5/unit) Total Cost per unit = $45 $ 70. Yes.000 units.) $43 40 $ 3 1. 181 (b) (Cont. AICPA PC: Problem Solving. AICPA BB: Resource Management. Cost to buy per widget Cost to make per widget: $7 + ($15 × 2) + $3 = Incremental savings per widget if purchased $39 40 $ 1 Total incremental savings if purchased = $1 × 10. Kasten received an order for 1. The following estimated costs were provided: Direct material ($7/unit) Direct labor ($15/hr. × 2 hrs.000 50.250.Incremental Analysis and Capital Budgeting Ex. Ex.000 = $3. AICPA FN: Decision Modeling.000 widgets for production during 2010. 182 Kasten.4.000 widgets and focus only on distribution? Ans: N/A.000 2.000 .000.) 26 . Larkin should accept the special order because incremental revenue exceeds incremental expenses by $4. This customer has offered $43 per widget.000 units from a new customer in a country in which Kasten has never done business. Kasten can make an extra $3.000 if it buys instead of makes. Incremental revenue per widget Incremental cost per widget: $7 + ($15 × 2) + $3 = Incremental profit per unit Total incremental profit = $3 × 1.000 30. Should Kasten let someone else manufacture all 10. SO: 3. Min: 10.47 As shown in the incremental analysis. AACSB: Analytic. IMA: Business Economics Solution 182 (10–12 min.

000 15. AICPA BB: Resource Management. 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. AACSB: Analytic. Bloom: E.000 -0$92. $3 of the fixed overhead per unit will be allocated to other products. SO: 4. If the component part is purchased from the outside firm. Difficulty: Medium.000 20. 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. IMA: Business Economics Solution 183 (13–18 min. Ex.000.000 if the component part is purchased from the outside firm and the new product is manufactured. Instructions Prepare an incremental analysis report for Coyle Company which can serve as informational input into this make or buy decision. Ans: N/A.000 10.000 Another company has offered to sell the same component part to the company for $12 per unit.000 20. AICPA PC: Problem Solving.000 10. 184 Agler Corporation currently manufactures a subassembly for its main product.000 $94.000 $ 2.000 10.000 15.48 Test Bank for Accounting Principles.000 -080.000 72.000 Increase (Decrease) $ 35.000 15.000) (12.000 Buy $ -0-0-020.000 -0(72. 183 Coyle Company manufactured 6.) Make $35.000 × $12) Total annual cost Opportunity cost Total cost Income is expected to increase by $2.000 $80.000) 14. Min: 13.000 92.26 .000 of the subassemblies for $18 each. Ninth Edition Ex. .000 14. AICPA FN: Decision Modeling. Coyle Company has the opportunity to use the factory equipment to produce another product which is estimated to have a contribution margin of $14. If Agler makes the subassemblies.000 Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead Purchase price (6.000 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.

the company's net income would increase $120.000.000 × $8) Direct Labor (50. respectively.000 × $9) Variable Manufacturing Costs ($450. AICPA FN: Decision Modeling.000 1. 185 Kuhn Bicycle Company has been manufacturing its own seats for its bicycles. Ans: N/A.) 26 . AACSB: Analytic.000 of fixed manufacturing overhead currently being charged to the bicycle seats will have to be absorbed by other products. The direct materials and direct labor cost per unit to make the bicycle seats are $8.000 -0$1.000 × 60%) Fixed Manufacturing Costs Purchase Price (50.Incremental Analysis and Capital Budgeting Ex.000 Direct Materials (50. Difficulty: Medium. Instructions (a) Prepare the incremental analysis for the decision to make or buy the bicycle seats.cost to buy = incremental cost ($24 – $5) – $18 = $1 Incremental cost to make = $1 × 5. Bloom: AP.) Make $ 400. Ex. A supplier offers to make the bicycle seats at a price of $20 each.000 450. Min: 6. Bloom: AN. If the bicycle company accepts this offer. and variable manufacturing overhead is charged to production at the rate of 60% of direct labor cost. Difficulty: Medium. all variable manufacturing costs will be eliminated.000. (b) Should Kuhn Bicycle Company buy the seats from the outside supplier? Justify your answer. AICPA FN: Decision Modeling.49 Instructions Should Agler make or buy the subassemblies? Explain your answer. Min: 15.000 -0(1.030.000) $ 120. IMA: Cost Management Solution 185 (a) (15–20 min. Ans: N/A. but the $30. AICPA PC: Problem Solving.000 270. SO: 4.000 450. 184 (Cont. AICPA PC: Problem Solving.000 30. SO: 4.000 × $20) Total annual cost (b) The seats should be purchased from the outside supplier. The company is currently operating at 100% capacity.000 Buy $ -0-0-030.000 Net Income Increase (Decrease) $ 400.000 270.000 units = $5. As indicated. AACSB: Analytic.000 by purchasing the seats. .000 Dryer should buy to save $1 per unit.00.000 bicycles per year. AICPA BB: Resource Management. AICPA BB: Resource Management. Normal production is 50.000 $1.) Cost to make .00 and $9.150. IMA: Cost Management Solution 184 (6 min.

IMA: Business Economics Solution 186 (15–20 min.00 1.80 1. the company incurred $344. No increase in fixed manufacturing overhead is expected. Ex.30 .60 The company is considering manufacturing the paint itself. AACSB: Analytic.50) — (2. . Direct labor $.60 $8.20).000. 187 Ecker.60 8.70) (.60.000 of costs to produce 40. The company can sell the paint at $15. the following additional costs per gallon will be incurred: Direct materials $1. AICPA BB: Resource Management. Difficulty: Medium. Min: 15. Ans: N/A.50 Assuming the company sells all 40.000 gallons that it produces.70.60 $ 2.60 (C) $.50 per gallon.80 + $.) Sell Chemical $11. AICPA PC: Problem Solving.000 (40. The production generates 60. In 2010. AICPA FN: Decision Modeling. 186 Spencer Chemical Corporation produces an oil-based chemical product which it sells to paint manufacturers.20 .80 . Ninth Edition Ex.20 Sales price per unit Cost per unit: Direct materials (A) Direct labor (B) Variable manufacturing overhead (C) Fixed manufacturing overhead Total Net income per unit (A) $6.40 $ 3.000 gallons × $1.70 (B) $1. If the company processes the chemical further and manufactures the paint itself. The selling price of the chemical is $11. the incremental net income would be $48.80 .40 Process Further $15.26 .00 7. Instructions Determine the incremental per gallon increase in net income and the total increase in net income if the company manufactures the paint.50 Test Bank for Accounting Principles.60 Net Income Increase (Decrease) $4.80) $1. Variable manufacturing overhead $.20 + $.000 gallons of the chemical.00 + $1. SO: 5.60) (.00 (1. Inc.00 1.50.00 6. or the milk can be processed further into ice cream and then sold for $2.000 more to turn the annual milk supply into ice cream.000 gallons of milk which can be sold for $1 per gallon to a pasteurization company. 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 $6.60 11.00 per gallon. It costs $75.70 1. produces milk at a total cost of $66.00 per gallon.20 . Bloom: E.

AICPA PC: Problem Solving. SO: 5.000 – $75. Ex. SO: 5. 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.00) × 60. but there will be no additional fixed overhead as a result of assembling the bikes. how much is the incremental profit or loss? Should Ecker process the milk into ice cream or sell it as is? Ans: N/A. Instructions (a) Prepare an incremental analysis for the sell-or-process-further decision. IMA: Business Economics $150 70 49 21 $290 Solution 188 (a) (12 min. AICPA BB: Resource Management. 187 (Cont. AACSB: Analytic.000 profit Ecker should process into ice cream. AICPA PC: Problem Solving. Speedy currently has unused productive capacity that is expected to continue indefinitely. Assembling the bikes will increase direct materials by $5 per bike. Difficulty: Medium.50 – $1. Additional variable overhead will be incurred at the normal rates.) 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 . and direct labor by $10 per bike. Min: 6.000 Incremental profits: $90. Difficulty: Medium.000 = $15.000 gallons = $90. AICPA FN: Decision Modeling. 188 Speedy Bikes could sell its bicycles to retailers either assembled or unassembled.Incremental Analysis and Capital Budgeting Ex. management has concluded that some of this capacity can be used to assemble the bikes and sell them at $440 each.) Incremental revenues: ($2. AICPA BB: Resource Management. Bloom: E. AICPA FN: Decision Modeling. Bloom: AP. (b) Should Speedy sell or process further? Why or why not? Ans: N/A.51 Instructions If Ecker processes the milk into ice cream. IMA: Business Economics Solution 187 (6 min.) 26 . Min: 12.000 Incremental costs: given as $75. The cost of an unassembled bike is as follows. AACSB: Analytic.

000 $ 53. Bloom: AN. The old machine can be sold to a scrap dealer for $8.26 .000 — 4. The new machine is expected to have zero salvage value after five years.000 8.000. Recently the copy clerk has not been able to process all the necessary copies within the regular work week.000 $ 53. Data are presented below for the two machines: Original purchase cost Accumulated depreciation Estimated life Old Machine $340.200 5 years If sold now. 189 Harris Timber Corporation uses a machine that removes the bark from cut timber.000 (430.000 (A) $475. Ninth Edition Ex. AACSB: Analytic.000 5 years New Model $20. the current copier would have a salvage value of $1.000. AICPA PC: Problem Solving. The company should purchase the new machine because there will be an increase in net income of $53. AICPA BB: Resource Management.) Retain Equipment $ -0-0$ -0$ -0Replace Net Income Equipment Increase/(Decrease) $475. 188 (Cont.000) (430.000 8.52 Test Bank for Accounting Principles. IMA: Investment Decisions Solution 189 (11–16 min.000 230. Ex. . Min: 11.000. SO: 6. Management is considering updating the copier machine with a faster model.000 9. The management is considering replacing the machine with a more efficient one which will minimize downtime and excessive labor costs.000 5 years New Machine $430.) (b) As shown in the incremental analysis.000 × 5 = $475.000 — 5 years It is estimated that the new machine will produce annual cost savings of $95.000. Ans: N/A. Both machines will have a salvage value of zero if operated for the remainder of their useful lives.000) 8. AICPA FN: Decision Modeling. Original purchase cost Accumulated depreciation Estimated operating costs (annual) Useful life Current Copier $10. The machine is unreliable and results in a significant amount of downtime and excessive labor costs. 190 Kinder Enterprises relies heavily on a copier machine to process its paperwork. Difficulty: Medium. Speedy Bikes should process further (rather than sell unassembled) because incremental revenue exceeds incremental expenses by $18 per unit. If operated for the remainder of its useful life. Instructions Determine whether the company should purchase the new machine.000. the current machine would have zero salvage value. Ex.000 Cost savings New machine cost Proceeds from sale of old machine Net incremental net income (A) $95.

000 Replace Machine $21.000 51.) Bud $77.000 4. AICPA FN: Decision Modeling. Min: 10.000 $160.000 $50. and that sales at the Er division will stay the same. has three divisions: Bud. AICPA FN: Decision Modeling. Difficulty: Medium. AICPA BB: Resource Management.000 Less allocated fixed costs 6.000 12.000) $ 8.000 $40. The results of May. SO: 6.000 $ 21.347 Er $40. Ans: N/A.000 2.000 $ 19.000 $ (5. Milwaukee feels that it should be discontinued. Milwaukee allocates indirect fixed costs based on the number of units to be sold. IMA: Investment Decisions Solution 190 (12–16 min. Since the Wise division has a net loss.000 (20. Bloom: E. and Er.000) 1.000 16.000 45.000 5.200 14.) Retain Machine $45.000 Less direct fixed costs 14.000 7.53 Instructions Prepare an analysis to show whether the company should retain or replace the machine. Bud Wise Er Total Units sold 3. Difficulty: Medium.000 Net income $18.000 12.000 -0-0$45.000 Net Income Increase (Decrease) $24. Wise.000 All of the allocated costs will continue even if a division is discontinued.000 10.800 Revenue Less variable costs Less direct fixed costs Less allocated fixed costs Net income . AACSB: Analytic.000 19.453 $15. AACSB: Analytic.000 higher by replacing the current copier.000 Operating costs New machine cost Salvage value Totals The current copier should be replaced.000 20. The incremental analysis shows that net income for the five-year period will be $5. Min: 12. 191 Milwaukee.Incremental Analysis and Capital Budgeting Ex. AICPA PC: Problem Solving. IMA: Investment Decisions Solution 191 (a) (10–12 min.000 20.547 $ 4. AICPA PC: Problem Solving.000) $40. Ex.000 35.000 $ 5. Inc. that sales at the Bud division will increase by 10%.000 Revenue $70.453 Total $117.000 12.000 (1. 2010 are presented below.000 74. AICPA BB: Resource Management.000 16. Instructions (a) Prepare an analysis showing the effect of discontinuing the Wise division. 190 (Cont. (b) Should Milwaukee close the Wise division? Briefly indicate why or why not.000 10. SO: 7. Ans: N/A.000 Less variable costs 32.) 26 . Milwaukee feels if the division is closed.200 26.000 20.000 26. Bloom: AP.

Ans: N/A. 2010 are presented below: Timber Division $1.26 . The management of the company feels it can save $45.000 Sales Cost of goods sold Gross profit Selling & administrative expenses Net income In the Consumer Division.500. 192 Trump Forest Corporation operates two divisions.300 + 2. The Timber Division manufactures and sells logs to paper manufacturers.000 Consumer Division $500.250. AACSB: Analytic.200 Allocation of total allocated fixed costs of $20. 70% of the cost of goods sold are variable costs and 25% of selling and administrative expenses are variable costs. Min: 20.000 $ 320. Ex.000 1.453 To Er: [2. Difficulty: Medium. (b) If the company had discontinued the division for 2010. IMA: Investment Decisions . The company is considering disposing of the Consumer Division since it has been consistently unprofitable for a number of years.000 430.000 900.000) Total $2.000.200 ($21.000 × 110% = $77. AICPA BB: Resource Management.000 Variable costs = $32.000 of fixed selling expenses if it discontinues operation of the Consumer Division. AICPA FN: Decision Modeling.000 350.000 × 110% = $35. The income statements for the two divisions for the year ended December 31. The Consumer Division operates retail lumber mills which sell a variety of products in the do-ityourself homeowner market. AICPA PC: Problem Solving.) Calculations: Revenue = $70.000: To Bud: [3. the Timber Division and the Consumer Division.54 Test Bank for Accounting Principles.000 ÷ (3.000 $ 350.000 750.000 = $7.000 of fixed cost of goods sold and $60.000)] × $20.000 150.000 = $12.000)] × $20.300 + 2. Bloom: E.800) when the division is eliminated.000 250. The increase in sales by 10% of the Bud division was not enough to offset the loss of the Wise division. SO: 7.000 – $19.000 180. Ninth Edition Solution 191 (Cont.000 600. Instructions (a) Determine whether the company should discontinue operating the Consumer Division. The profit decreases by $1.547 (b) No.300 ÷ (3. determine what net income would have been.000 $ (30.

000 60.000 75.000 $180.000) 45.000 $(105.000 245.000) + 17.000 $350. IMA: Investment Decisions Solution 193 (6 min. AICPA BB: Resource Management.000 3.000 $85.000 The allocated fixed costs are unavoidable. AICPA FN: Decision Modeling.000. (b) Net income for the total company would have been $245. Difficulty: Medium.000 6.000) = $245.000 1. Instructions What will happen to profits if Mercer discontinues the Books product line? Ans: N/A.000 7.000 Ex.000 $ 2.000 22.000 21.000 $(135. Net income (A) (B) (20–25 min.000) (C) (D) Eliminate $ -0-0-0-060.000 7.000 $180.000 $22.000) 245.000 105.000 $ 8. Results of the fourth quarter are presented below: Units sold Revenue Variable departmental costs Direct fixed costs Allocated fixed costs Net income (loss) Books 1.55 Net Income Increase (Decrease) $(500.000 45.000) Music 2. and music.000 $ (4. 193 Mercer has three product lines in its retail stores: books.000: Timber Division + Decrease in Net Income $350.000 – $245.000.000) 26 . Contribution margin Fixed expenses: Cost of goods sold Selling and admin.000 (C) 135.000 + 1.000 – $45. $105.000 = $105. AACSB: Analytic. $210.000 2.000 (210.000 = $135.000 (A) 45.000 × 70% = $245.000 (B) 210.) $(22. SO: 7.000 12. exp.000 $ (3. videos. AICPA PC: Problem Solving.000 + $(105.000) $350.Incremental Analysis and Capital Budgeting Solution 192 (a) Sales Variable expenses: Cost of goods sold Selling and admin. Bloom: AP.000) Incremental revenue Incremental costs: Variable costs savings Direct fixed costs savings Decrease in profits if discontinued .000 7.000 × 25% = $45.000 51. exp.000 The company should continue the Consumer Division because contribution margin.000 $40. is greater than the avoidable fixed costs.000 17.000 Videos 2.) CONSUMER DIVISION Continue $500.000 Total 5. Min: 6. Demand of individual products are not affected by changes in other product lines.000 $ 7.000 (D) $ (30.000 $23.

000) -010.26 .000 140.000 $ (60.480.000 400. Instructions Do you concur with the new accountant's recommendation? Present a schedule to support your answer.000.000 $(175.000) Net Income Increase (Decrease) $(480.000 of the fixed operating costs will be eliminated.000 1.000. 194 A recent accounting graduate from Marvel State University evaluated the operating perform-ance of Fanning Company's four divisions.000 950. If the Southern Division is eliminated. .000 less.000) Total $2.000 95.000 1.000 295.000 185.130. not $60.000 $ (60. AICPA FN: Decision Modeling. Ans: N/A.) Continue $480. AICPA PC: Problem Solving.000 For the other divisions.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. The cost of goods sold for the Southern Division is 35% fixed.000) 260.350.000 295.000 140. If the division is eliminated.000 1.) Sales Cost of Goods Sold Gross Profit Operating Expenses Net Income Other Three Divisions $2.000 $ 250.000) Eliminate $ -0-0-0-0-0140.000 Southern Division $480. (See analysis below. AACSB: Analytic. Difficulty: Medium.000. cost of goods sold is 80% variable and operating expenses are 70% variable. The reduction in income is the result of the loss of the contribution margin less the avoidable fixed costs of $10.000 greater. AICPA BB: Resource Management. During the presentation.000 105.050.000 940. IMA: Investment Decisions Solution 194 (20–25 min. the net income will be $175.000 800.000 $(235. Bloom: E. Ninth Edition Ex. Min: 20.56 Test Bank for Accounting Principles. SO: 7.000 35. and its operating expenses are 75% fixed.000 260. the accountant made the recommendation to eliminate the Southern Division stating that total net income would increase by $60.000 80. only $10.000 (185.000 35. The following presentation was made to Fanning's Board of Directors.000 $ 190.

Incremental Analysis and Capital Budgeting Ex.57 Ridley Company has 8. Instructions Taking into consideration the constraint under which the company operates. SO: 8.2) Machine hours available Contribution margin The company should produce and sell Product A. AICPA BB: Resource Management. 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 .6) ($24 ÷ 1. 196 8. AICPA PC: Problem Solving. AACSB: Analytic. Bloom: E.) 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 .2 hrs. AICPA FN: Decision Modeling. Ans: N/A.000 machine hours available to use to produce either Product A or Product B.6 hrs. 195 26 . IMA: Business Economics Solution 195 (20–25 min. Difficulty: Medium.6 1. Contribution margin per unit of limited resource ($15 ÷ .000 $200. prepare a report to show which product should be produced and sold. Ex.2 Management desires to make a decision regarding which product to produce in order to maximize the company's income. $ 25 47 $24 1.000 20 8. 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 . Min: 20.000 $ Hughes Company manufactures and sells two products.000 $160.

26 . AACSB: Analytic.500 Standard 500 4 125 $18 $2. SO: 8.) Instructions (a) Compute the contribution margin per unit of the limited resource for each product.250 Product Deluxe 500 5 100 $20 $2. (2) Allocated entirely to the product identified in (b) above.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. Difficulty: Medium. Min: 25. 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. Ninth Edition Ex.000 additional machine hours are available.50 $4. AICPA PC: Problem Solving.000 4 250 $18 $4.000 8. (c) (1) Machine hours 1. IMA: Business Economics Solution 196 (a) (25–30 min. Ans: N/A. (b) If 1.000 and will last 10 years with no salvage value: Revenues Sales Operating expenses Salary expense Depreciation expense Miscellaneous expenses Net Income $70.000 .000 Product Standard 1.000 60. AICPA FN: Decision Modeling. AICPA BB: Resource Management.58 Test Bank for Accounting Principles.000 $10.) Product Standard Deluxe $18 $20 4 5 $4. 197 Finney Company estimates the following cash flows and depreciation on a project that will cost $200. 196 (Cont.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.000 $32. Bloom: AP.000 20.

AACSB: Analytic. 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. Min: 16.000 (b) Cash payback period is 6.) 26 .160. Bloom: AP.000 Average investment = ———— = $100. Ans: N/A.000. respectively. IMA: Investment Decisions Solution 198 (16–22 min. SO: 9. Min: 9.000 + $20. AICPA BB: Resource Management.000 Annual rate of return = ———— = 10% $100. 197 (Cont.135. AICPA FN: Decision Modeling.200 and $800. AICPA FN: Decision Modeling. IMA: Investment Decisions Solution 197 (9–14 min.000 Cash payback = $200. AICPA PC: Problem Solving.000 + $24. 198 Wesley Medical Center is considering purchasing an ultrasound machine for $1. AICPA BB: Resource Management. Instructions (a) Compute the payback period for the new ultrasound machine. The machine has a 10-year life and an estimated salvage value of $40. $200.000 . SO: 9.135.Incremental Analysis and Capital Budgeting Ex.59 Instructions (a) Calculate the expected annual rate of return on this project showing calculations to support your answer.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. There are $10 in medical supplies and $40 of technician costs for each procedure performed using the machine. Difficulty: Medium. AACSB: Analytic. The Center uses straight-line depreci-ation. AICPA PC: Problem Solving.200 + $800 = $1.000 2 $10. Difficulty: Medium. Installation costs and freight charges will be $24.) (a) Annual rate of return is 10%.000 ÷ $30.) (a) Cost of the ultrasound machine: $1.000 = 6.000 Annual cash inflow ($10. Bloom: AP. Investment $200.67 years.67 years Ex.000) $30. (b) Calculate the cash payback on this project showing calculations to support your answer. Ans: N/A. (b) Compute the annual rate of return for the new machine.000.

900.160 – $3.720. Laramie estimates that the new hoist will enable his mechanics to replace four extra mufflers per week.000 (b) $1. and the labor cost to install a muffler is $10. The new hoist will be used to replace mufflers and tires on automobiles. (b) Compute the annual rate of return for the new hoist.000 2 $1.720 – $960) ÷ 5 = $3.000 Annual Depreciation: —————————— = $112. 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 = $18.4% (rounded). (a) (b) 208 $ 20 $4. Installation costs were $2.000 Ex.160 = 4. Min: 10. Difficulty: Medium. Average annual rate of return = $632 ÷ $9.26 . Annual depreciation: ($18. AICPA BB: Resource Management.528 = $632. 199 Laramie Service Center just purchased an automobile hoist for $13.160.160 (b) Average investment: ($18. Each muffler sells for $65 installed. (Round to one decimal.000 + $40.900 = 6.000 10 years Annual Net Income: $208. and freight charges were $740.) Ans: N/A. Bloom: AP.000 Average Annual Rate of Return: ———— = 16% $600. IMA: Investment Decisions Solution 199 (10 min.900 + $740 = $18. Ninth Edition Solition 198 (Cont.60 Test Bank for Accounting Principles.528.) (a) Cost of hoist: $13. AICPA PC: Problem Solving.160. AACSB: Analytic. Instructions (a) Compute the payback period for the new hoist.160.000 – $112.000 – $40.000 $96. Annual net income: $4. The hoist has a 5-year life and an estimated salvage value of $960.000. The cost of a muffler is $35.) $1. AICPA FN: Decision Modeling. .900.000 + $2.000 Cash payback: ————— = 5.5 years.000 Average Investment: —————————— = $600. SO: 9. Laramie uses straight-line depreciation.000 = $96.720 ÷ $4.6 years $208.720 + $960) ÷ 2 = $9.

000 – 11.000 9. Instructions (a) Compute each project's payback period.000 9. Cepeda's minimum required rate of return is 12%.000 $31. AICPA BB: Resource Management.000 $9. AICPA PC: Problem Solving.000 ÷ $15. AACSB: Analytic.000 $11.) (b) Compute the net present value of each project.000 = $4. each requiring an equipment investment of $20.000 $4. Does your evaluation change? (Round to nearest dollar.61 Cepeda Manufacturing Company is considering three new projects.9 . IMA: Investment Decisions Solution 200 (a) Year 1 2 3 (25 min.000 – $16.000 10.000.000 Cash payback 2.500 9. (Round to two decimals.000 10.000 30.000 ÷ $10. indicating the most desirable project and the least desirable project using this method.000 21.000 15.000 31.27 BB 20.000 ÷ (28.000 9.27 years $20.Incremental Analysis and Capital Budgeting Ex.000 15.000 = .10. SO: 9.000 = . Year 1 2 3 Total AA $ 7.000 16.000 Cumulative Net Cash Flow $ 7. Min: 25. Difficulty: Medium.000 = $9.000 Cash payback 1.11 years CC Year 1 2 3 $11. Cepeda will not accept any project with a payback period over 2 years.) Ans: N/A. 200 26 .9 years $20.500 CC $11. AICPA FN: Decision Modeling.000 $30.500 9.) AA Annual Net Cash Flow $ 7. Cepeda uses straight-line depreciation.000 BB $ 9. Each project will last for 3 years and produce the following cash inflows.500 $28. Bloom: E.500 ÷ 3) = 2.000 The equipment's salvage value is zero.000 9.

677 24.000 Years 1-5 Now PV Factor 3.000 in additional productive facilities.26 . As indicated.000 $ 2.175 10. Also.000 6.000.817(1) 20.573 10. annual net income and cash inflows are expected to be $18.40183 = $22. Min: 16. respectively. on the basis of net present values. (b) Using the discounted cash flow technique.000 + $0) ÷ 2] = 18% Cash payback: $200.077 Item Net annual cash flows Capital investment Positive net present value .71178 Total present value Investment Net present value (1) This total may also be obtained from Table 2: $9.500 9.482 $11.000 ÷ $58. Project CC is still the most desirable project.500 9.) (a) Compute (1) the annual rate of return and (2) the cash payback period on the proposed capital expenditure.79719 3 .077 200. 201 Gantner Company is considering a capital investment of $200.817.199 Discount Year Factor 1 .62 Test Bank for Accounting Principles.500 CC Present Net Cash Value Flow $ 8. During the life of the investment. Ans: N/A.000 22. Depreciation is by the straight-line method.000 $ 4. Ninth Edition Solution 200 (Cont. AICPA BB: Resource Management.) The most desirable project is CC because it has the shortest payback period.000 BB Present Value $ 6.406 24. SO: 9. compute the net present value.500 × 2. IMA: Investment Decisions Solution 201 (a) (1) (2) (b) (16 min.817 Present Value $ 9.) Annual rate of return: $18.89286 2 .199 20.250 7. The new machinery is expected to have a useful life of 5 years with no salvage value. Amount $ 58. only CC is acceptable because its cash payback is 1. The least desirable project is AA because it has the longest payback period.102 20. AACSB: Analytic. (b) AA Net Annual Cash Flow $ 7.13 years.000 = 3.000 $200. Instructions (Round to two decimals.000 and $58. Project BB is the least desirable.102 Net Annual Cash Flow $9.60478 1. Ex.9 years.000 15.000 7.00000 Present Value $209. Difficulty: Medium. which is the minimum acceptable rate of return on the investment.000 $ 4. Bloom: AP.821 7. Gantner has a 12% cost of capital rate. all of the projects are acceptable. AICPA FN: Decision Modeling. AICPA PC: Problem Solving.000 9.000 ÷ [(200.972 6.10.762 9.000 $ 9.

.000.) Project TIP Annual Cash Inflows* Present Value of 1 $ 30.000 TOP $ 9. AICPA PC: Problem Solving. (b) Which project should be selected? Why? Ans: N/A.402 Instructions (a) Compute the net present value of each project.893 2 .690 3 2.000 9. (Table 2 from Appendix C is needed.000 in annual cash flows for a period of five years. Min: 4. Bloom: AP.000 9. 202 26 . Bloom: E.000 .000.000. AICPA BB: Resource Management.000 = 3.000 The equipment will have no salvage value at the end of its three-year life. AICPA FN: Decision Modeling.147 *Net income plus annual depreciation of $24. Each project will last for three years and produce the following annual net income.000 9. AACSB: Analytic. Sargent requires a minimum rate of return of 12%.893 33.Incremental Analysis and Capital Budgeting Ex.893 2 1. each requiring an equipment investment of $72. Min: 22. Present value data are as follows: Present Value of 1 Period 12% 1 . SO: 10. This factor is found in the PVA table at n = 5 periods.000 14. Difficulty: Medium. Year 1 2 3 TIP $ 6. 203 Sargent Company is considering two new projects. Difficulty: Medium. AICPA FN: Decision Modeling.301 27.790 26.63 Ace Corporation recently purchased a new machine for its factory operations at a cost of $840. The investment is expected to generate $250.712 Present Value of an Annuity of 1 Period 12% 1 .000 . Sargent Company uses straight-line depreciation. IMA: Investment Decisions Solution 203 (a) Year 1 2 3 (22–27 min. IMA: Investment Decisions Solution 202 (4 min.000 $29. AACSB: Analytic.000 $27.000 .) IRR = Capital investment ÷ Annual cash inflows = Factor $840.712 $101.) Ans: N/A. IRR = 15% Ex.797 38.797 3 .000 ÷ $250. SO: 10. AICPA PC: Problem Solving. The required rate of return is 12%. The new machine is expected to have zero salvage value at the end of the five-year period. Instructions Calculate the internal rate of return.36.000 Present Value $26.056 $80. AICPA BB: Resource Management.

000 = 3. AACSB: Analytic.000 ————$45. Difficulty: Medium.000 $28. SO: 10. Min: 6.000 $ 8.000 $ 7.60 is very near the factor 3. Ex. Ninth Edition Solution 203 (Cont.266 (b) Both projects are acceptable because both show a positive net present value. It is estimated that the project will generate annual cash inflows of $45.352 Instructions Using the internal rate of return method. Project TIP is the preferred project because its positive net present value is greater than project TOP's net present value.000 Year 2 24.000 Year 3 52.147 Present value of future cash inflows Capital investment Positive net present value Project TOP Present value of future cash inflows ($33.605 15% 3. 205 Martinez Company has money available for investment and is considering two projects each costing $70.64 Test Bank for Accounting Principles. Ans: N/A. IMA: Investment Decisions Solution 204 (6–11 min. AICPA PC: Problem Solving. AICPA FN: Decision Modeling.212 8% 3. Ex. 204 Yanik Company is considering investing in a project that will cost $162.147 72.26 .000 × 2. Bloom: E.60 Since the calculated internal rate of return factor of 3.000 . and is therefore acceptable because it is greater than the company's cutoff rate of 8%.000 28. 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% 4.000 28.605 for five periods and 12% interest. The investment cash flows follow: Project A Project B Year 1 $ 8.000 each year. Each project has a useful life of 3 years and no salvage value.266 72.000.) $80.791 12% 3. this project has an approximate interest yield of 12%.000 and have no salvage value at the end of its 5-year life.) Capital Investment ————————— = Internal Rate of Return Factor Annual Cash Inflows $162.993 10% 3. determine if this project is acceptable by calculating an approximate interest yield for the project.402) Capital investment Positive net present value $79. AICPA BB: Resource Management.

408 20. Min: 1. IMA: Business Economics 208. The potential benefit that may be obtained by following an alternative course of action is called an _________________ cost. An important purpose of management accounting is to provide _____________________ for decision making.568 41. AICPA PC: Problem Solving. Min: 1. AICPA BB: Resource Management. (Table 1 from Appendix C is needed. AACSB: None. SO: 1. AICPA BB: Industry/Sector Perspective. 205 (Cont.65 Instructions If 8% is an acceptable earnings rate.857 = Year 3 $28.000 × . Difficulty: Easy. AICPA FN: Measurement.288 69.000 × .) Project B is acceptable since its net present value is positive. SO: 3.996 22. This indicates that project B provides a return greater than the company's minimum expected return of 8%. Min: 1.000 × . AACSB: None.857 = Year 3 $52. SO: 4. Min: 1. Bloom: K. SO: 2. a major consideration is whether the special price exceeds __________________.156 (70. Bloom: K.926 = Year 2 $28.232 72.Incremental Analysis and Capital Budgeting Ex. Difficulty: Medium.) 26 . AACSB: Analytic. Ans: N/A. The process used to identify the financial data that change under alternative courses of action is called __________________ analysis. Bloom: K. Bloom: K. IMA: Investment Decisions Solution 205 (12 min. Project A Year 1 $8. Difficulty: Easy. AICPA FN: Decision Modeling.156 COMPLETION STATEMENTS 206. Ans: N/A.000 × . Bloom: AP. which project should be selected? Justify your response.) Ans: N/A. IMA: Business Economics 209. Ans: N/A.264 (70. Difficulty: Easy. AICPA FN: Measurement. AICPA PC: Problem Solving.794 = Present value of cash inflows Cash purchase price Net present value of project B $ 7. Project A earns less than an 8% return.000) $ (736) $25. IMA: Business Economics . AICPA BB: Industry/Sector Perspective. AICPA BB: Resource Management. Difficulty: Easy. AICPA PC: Problem Solving.000 × .794 = Present value of cash inflows Cash purchase price Net present value of project A Project B Year 1 $28.928 23. SO: 10.000 × . AICPA FN: Decision Modeling. IMA: Business Economics 207. AACSB: None. AICPA BB: Resource Management. AICPA PC: Problem Solving. AICPA FN: Decision Modeling. AACSB: None.926 = Year 2 $24. Ans: N/A.000) $ 2. In a decision on whether an order should be accepted at a special price when there is plant capacity available. Min: 12. AICPA PC: Interaction.

Ans: N/A. SO: 10. AICPA PC: Problem Solving. Min: 1. Bloom: K. Ans: N/A. SO: 9. AICPA FN: Decision Modeling. AACSB: None. The technique which identifies the time period required to recover the cost of the investment is called the ________________ method. the products with the highest contribution per unit of ______________ should identify the products to be produced. In using the net present value approach. Difficulty: Easy. Ans: N/A. Min: 1. Ans: N/A. AACSB: None. IMA: Investment Decisions 217. Difficulty: Easy. IMA: Investment Decisions 220. AICPA PC: Problem Solving. IMA: Business Economics 211. AICPA FN: Decision Modeling. AICPA FN: Decision Modeling. a project is acceptable if the project's net present value is ____________ or _______________. AICPA FN: Measurement. SO: 6. AACSB: None. IMA: Investment Decisions 219. Bloom: K. Min: 1. and (3) ___________________. A decision whether to sell a product now or to process it further. AICPA FN: Decision Modeling. AICPA PC: Problem Solving. IMA: Investment Decisions 216. In an environment where there are limited resources. AICPA BB: Resource Management. IMA: Investment Decisions 214. AACSB: None. SO: 10. Ans: N/A. Bloom: K. AACSB: None. Ninth Edition 210. AICPA PC: Problem Solving. AICPA PC: Problem Solving. Bloom: K. Ans: N/A. SO: 10. AICPA BB: Resource Management. Difficulty: Easy. AICPA BB: Resource Management. AACSB: None. Min: 1. AICPA PC: Problem Solving. AICPA FN: Decision Modeling. AICPA PC: Problem Solving. AICPA BB: Industry/Sector Perspective. Ans: N/A. AICPA BB: Resource Management. AICPA FN: Decision Modeling. AICPA BB: Resource Management. AICPA PC: Problem Solving.66 Test Bank for Accounting Principles. IMA: Investment Decisions 215. Three quantitative techniques which are frequently used in capital budgeting decisions are (1) _________________. Difficulty: Easy. SO: 9. Bloom: K. SO: 9. AACSB: None. Difficulty: Easy. AICPA PC: Problem Solving. Min: 1. AICPA BB: Resource Management. The ______________ value of old equipment is irrelevant in a decision to replace that equipment and is often referred to as a _____________ cost. AICPA FN: Decision Modeling. AICPA FN: Decision Modeling. Min: 1. depends on whether the incremental _____________ from processing further are greater than the incremental processing ______________. Ans: N/A. Difficulty: Easy. Bloom: K. AACSB: None. Ans: N/A. IMA: Investment Decisions . A major limitation of the annual rate of return approach is that it does not consider the _______________ of money. AICPA FN: Decision Modeling. IMA: Business Economics 212. AACSB: None. SO: 9. Bloom: K. AICPA PC: Problem Solving. AICPA BB: Resource Management. Knowledge of the ______________________ is necessary when discounting future cash flows under the net present value approach. Ans: N/A. Bloom: K. The process of making capital expenditure decisions in business is called ___________. AICPA FN: Decision Modeling. Bloom: K. (2) _________________. Difficulty: Easy. IMA: Business Economics 213. The two discounted cash flow techniques used in capital budgeting are (1) the _______________________ method and (2) the ______________________ method. AICPA BB: Resource Management. SO: 8. SO: 5. Min: 1. Difficulty: Easy. AICPA BB: Industry/Sector Perspective. Min: 1. 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.26 . Ans: N/A. SO: 10. Difficulty: Easy. Bloom: K. Min: 1. Min: 1. IMA: Investment Decisions 218. Min: 1. Difficulty: Easy. Bloom: K. AACSB: None. AACSB: None. AICPA BB: Resource Management. AICPA PC: Problem Solving.

The determination of the profitability of a capital expenditure by dividing expected annual net income by the average investment. AICPA PC: Problem Solving. 6. zero. Ans: N/A. cash payback 217. SO: 6. Cash payback technique Hurdle or cutoff rate Net present value method Sunk cost Internal rate of return method 1. Bloom: K. positive 220. The process of making capital expenditure decisions in business. 8.67 Answers to Completion Statements 206. internal rate of return 218. 212. 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. 208. 5. discounted cash flow 215. AICPA FN: Decision Modeling. AACSB: None. J. Match the items below by entering the appropriate code letter in the space provided. A method used in capital budgeting that results in finding the interest yield of the potential investment. 3. 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. H. C. A cost that cannot be changed by any present or future decision. time value 216. ____ ____ ____ Incremental analysis Opportunity cost Discounted cash flow technique Capital budgeting Annual rate of return technique F. A capital budgeting technique that considers both the estimated total cash inflows from the investment and the time value of money. E.Incremental Analysis and Capital Budgeting 26 . cash payback. A. 211. 2. IMA: Investment Decisions . The potential benefit that may be lost from following an alternative course of action. ____ ____ ____ ____ ____ ____ ____ 10. costs book. 4. relevant information incremental (differential) variable costs (incremental costs) opportunity revenues. I. Difficulty: Easy. D. 210. 207. G. B. annual rate of return. 213. The minimum rate of return management requires on an investment. AICPA BB: Industry/Sector Perspective. 9. interest yield MATCHING 221. required rate of return 219. sunk limited resource capital budgeting 214. 7. The process of identifying the financial data that change under alternative courses of action. 209. net present value. Min: 5.

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

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

It currently has a widely used version of a word processing program. The memory of each individual work station would be enhanced. Better telecommunications equipment would allow for the electronic transmission of some documents as well. Option #2 would be for the company to invest in an entirely different computer system. The company wishes to invest in more up-to-date software and to improve its printing capabilities. Min: 5.) 2. and the method used should be available for review. Difficulty: Easy. Two options have emerged. 3. S-A E 227 (Communication) You are the general accountant for Word Systems. and upgrade its word processing program. Ans: N/A.70 Test Bank for Accounting Principles. Bloom: K. . and the software does not connect well with well-known software. and should have the right to review those changes. In the first place. and a larger. Option #1 is for the company to keep its existing computer system.000 90.000 0 Option #2 $(270. in general. It is ethical. SO: 6. The software for this system is extremely impressive.26 . it should be clearly stated that the projections have been adjusted for risk. Otherwise.000 30. Option #2 appears to be too risky. the changes will be easier to implement because the equipment is similar to that which we already use. certainly not in the way described. to purchase upgrades to our present system and to buy a more efficient printer. Ninth Edition Solution 226 (Cont. which decreases our risk of loss should the project fail. The company has decided to upgrade its equipment. Inc. the company is not well known. The net present value information for these options follows: Initial Investment Returns Year 1 Year 2 Year 3 Net Present Value Option #1 $(95.000) 55. to adjust projections to compensate for risk. It is probably not ethical to modify a proposal at all. a typing service based in Los Angeles. AACSB: Communications.000 90. However. the entire selection process is undermined. and it comes with individual laser printers. AICPA BB: Resource Management. AICPA PC: Problem Solving. IMA: Investment Decisions Solution 227 I recommend that the company accept Option #1. The engineer submitting the proposal should have the right to know about any changes that were made.000 0 Required: Prepare a brief report for management in which you make a recommendation for one system or the other. using the information given. and it becomes entirely subjective.. AICPA FN: Decision Modeling. the company will have less money invested in the project. However. more efficient printer would be used. California.000) 90.000 10. Secondly.

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