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
sg sg

33. 3 34. 5 sg 35. 7 sg 36. 9 sg 37. 10

C K C K K

Multiple Choice Questions
142. 143. 144. 145. 146. 147. 148. 149. 150. 151. 152. st 153. sg 154. st 155. sg 156. sg 157. sg 158. st 159. st 160. st 161. sg 162. sg 163. st 164. sg 165. 10 10 10 10 10 10 10 10 10 10 10 1 3 4 4 6 7 7 8 9 9 9 10 10 AP K C AN AN AP AP AP AP C C K AN K C K C K AP K K K K K

Brief Exercises

26 - 2
sg st

Test Bank for Accounting Principles, Ninth Edition

This question also appears in the Study Guide. This question also appears in a self-test at the student companion website.

SUMMARY OF QUESTIONS BY STUDY OBJECTIVES AND BLOOM’S TAXONOMY Exercises
178. 179. 180. 181. 182. 183. 206. 207. 208. 221. 222. 223. 3 3 3 3 3,4 4 1 2 3 6 4 10 AN AN E E AP E K K K K K K 224. 225. 4 9 K K 184. 185. 186. 187. 188. 189. 209. 210. 211. 4 4 5 5 5 6 4 5 6 AP AN E AP E AN K K K 190. 191. 192. 193. 194. 195. 212. 213. 214. 6 7 7 7 7 8 8 9 9 E AP E AP E E K K K 196. 8 197. 9 198. 9 199. 9 200. 9,10 201. 9,10 215. 216. 217. 9 9 10 AP AP AP AP E AP K K K 202. 203. 204. 205. 10 10 10 10 AP E E AP

Completion Statements
218. 219. 220. 10 10 10 K K K

Matching Short-Answer Essay
226. 227. 9 6 K K

SUMMARY OF STUDY OBJECTIVES BY QUESTION TYPE
Ite Typ Ite Typ Ite Typ Ite Typ Ite Typ Ite Typ Ite Typ

1. 31. 2. 3. 4. 7. 8. 9. 33. 10. 11. 12. 63. 64. 13. 14. 34.

TF TF TF TF TF TF TF TF TF TF TF TF MC MC TF TF TF

38. 39. 5. 6. 32. 53. 54. 55. 56. 65. 66. 67. 68. 69. 79. 80. 81.

MC MC TF TF TF MC MC MC MC MC MC MC MC MC MC MC MC

40. 41. 42. 43. 44. 57. 58. 59. 60. 70. 71. 72. 73. 74. 82. 83. 84.

Study Objective 1 MC 153. MC MC 206. C Study Objective 2 MC 45. MC 48. MC 46. MC 49. MC 47. MC 50. Study Objective 3 MC 61. MC 178. MC 62. MC 179. MC 154. MC 180. MC 167. BE 181. Study Objective 4 MC 75. MC 156. MC 76. MC 168. MC 77. MC 169. MC 78. MC 182. MC 155. MC 183. Study Objective 5 MC 85. MC 88. MC 86. MC 89. MC 87. MC 170.

MC MC MC Ex Ex Ex Ex MC BE BE Ex Ex MC MC BE

51. 52. 166. 182. 208.

MC MC BE Ex C

207.

C

184. 185. 209. 222. 224. 186. 187. 188.

Ex Ex C SA SA Ex Ex Ex 210. C

Incremental Analysis and Capital Budgeting

26 - 3

15. 16. 17. 18. 19. 35. 20. 21. 22. 23. 24. 25. 26. 27. 36. 28. 29. 30. 37. 132. 135.

TF TF TF TF TF TF TF TF TF TF TF TF TF TF TF TF TF TF TF MC MC

90. 91. 92. 99. 100. 101. 105. 106. 110. 111. 112. 113. 114. 115. 116. 136. 137. 138. 139. 140. 141.

MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC

93. 94. 95. 102. 103. 104. 107. 108. 117. 118. 119. 120. 121. 122. 123. 142. 143. 144. 145. 146. 147.

Study Objective 6 MC 96. MC 157. MC 97. MC 171. MC 98. MC 189. Study Objective 7 MC 158. MC 191. MC 159. MC 192. MC 172. BE 193. Study Objective 8 MC 109. MC 173. MC 160. MC 195. Study Objective 9 MC 124. MC 131. MC 125. MC 133. MC 126. MC 134. MC 127. MC 161. MC 128. MC 162. MC 129. MC 163. MC 130. MC 174. Study Objective 10 MC 148. MC 165. MC 149. MC 176. MC 150. MC 177. MC 151. MC 200. MC 152. MC 201. MC 164. MC 202. BE = Brief Exercise Ex = Exercise

MC BE Ex Ex Ex Ex BE Ex MC MC MC MC MC MC BE MC BE BE Ex EX Ex

190. 211. 221. 194.

Ex C MA Ex

227.

SA

196. 212. 175. 197. 198. 199. 200. 201. 213. 203. 204. 205. 217. 218. 219.

Ex C BE Ex Ex Ex Ex Ex C Ex Ex Ex C C C 214. 215. 216. 225. 226. C C C SA SA

220. 223.

C SA

Note: TF = True-False MC = Multiple Choice MA = Matching

C = Completion SA = Short-Answer

CHAPTER STUDY OBJECTIVES
1. Identify the steps in management's decision-making process. Management's decisionmaking process consists of (a) identifying the problem or opportunity, (b) assigning responsibility for the decision, (c) determining possible courses of action, (d) developing data relevant to each course of action, (e) making the decision, and (f) reviewing the results of the decision. 2. Describe the concept of incremental analysis. Incremental analysis identifies financial data that change under alternative courses of action. These data are relevant to the decision because they will vary in the future among the possible alternatives. 3. Identify the relevant costs in accepting an order at a special price. The relevant information in accepting an order at a special price is the difference between the variable manufacturing costs to produce the special order and expected revenues.

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

Bloom: K. AICPA FN: Decision Modeling. AICPA BB: Strategic/Critical Thinking. AICPA PC: Problem Solving. AACSB: None. total variable costs will always change under alternative courses of action. Ans: T. AICPA PC: Problem Solving. IMA: Decision Analysis 6. Difficulty: Easy. Bloom: C. AICPA PC: Problem Solving. AICPA BB: Strategic/Critical Thinking. IMA: Business Economics 8. AICPA PC: Problem Solving. AACSB: None. IMA: Business Economics 9. Ans: T. IMA: Decision Analysis 5. 26 . Min: 1. Bloom: C. Bloom: K. Bloom: C. AICPA FN: Decision Modeling. AICPA FN: Measurement. IMA: Business Economics 13. Ans: F. SO: 3. Difficulty: Easy. Bloom: C. AICPA FN: Decision Modeling. and total fixed costs will always remain constant. If an incremental make or buy analysis indicates that it is cheaper to buy rather than make an item. Min: 1. Bloom: C. management should process further as long as the incremental revenues from additional processing exceed the incremental variable costs. Ans: T. AICPA PC: Problem Solving. IMA: Business Economics . AACSB: None. management should always make the decision to choose the lowest cost alternative. Ans: T. Min: 1. AICPA BB: Strategic/Critical Thinking. Bloom: C. AICPA BB: Strategic/Critical Thinking. SO: 4. AACSB: None. AICPA FN: Measurement. AACSB: None. Difficulty: Easy. Ans: F. 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. Min: 1. An opportunity cost is the potential benefit obtained by using resources in an alternative course of action. A special one-time order should never be accepted if the unit sales price is less than the unit variable cost. A company should never accept an order for its product at less than its regular sales price. If a company has excess capacity and present markets will not be affected. SO: 2. AICPA PC: Problem Solving. AICPA BB: Strategic/Critical Thinking. AICPA PC: Problem Solving. Min: 1. A decision whether to continue to make a product or buy it externally. AACSB: None. SO: 2. AICPA FN: Decision Modeling. AICPA FN: Decision Modeling.Incremental Analysis and Capital Budgeting 3. IMA: Quantitative Methods 11. AICPA FN: Decision Modeling. AACSB: None. AICPA BB: Strategic/Critical Thinking. IMA: Business Economics 10. AACSB: None. Min: 1. Difficulty: Easy. Difficulty: Easy. SO: 5.5 In incremental analysis. SO: 3. Ans: F. AICPA FN: Measurement. Difficulty: Easy. Ans: F. AICPA PC: Problem Solving. AICPA PC: Problem Solving. Bloom: C. Ans: F. Difficulty: Easy. SO: 4. Ans: F. Bloom: C. AACSB: None. SO: 4. AACSB: None. AICPA BB: Strategic/Critical Thinking. In a sell or process further decision. AACSB: Analytic. Difficulty: Easy. AICPA BB: Strategic/Critical Thinking. Min: 1. depends on the external price and the amount of variable and fixed costs that can be eliminated assuming no alternative uses of resources. IMA: Business Economics 12. Bloom: K. AICPA BB: Industry/Sector Perspective. Difficulty: Easy. SO: 2. Min: 1. AICPA PC: Interaction. Ans: F. Min: 1. AICPA PC: Problem Solving. AICPA FN: Decision Modeling. IMA: Decision Analysis 7. SO: 2. AICPA BB: Strategic/Critical Thinking. Difficulty: Easy. Min: 1. Min: 1. Accountants are mainly involved in developing nonfinancial information for management's consideration in choosing among alternatives. AICPA BB: Strategic/Critical Thinking. IMA: Quantitative Methods 4. it would be profitable to accept an order at a special unit price even though the price is less than the unit variable cost to manufacture the item. AICPA FN: Measurement. SO: 3. Decision-making involves choosing among alternative courses of action. Difficulty: Easy.

AICPA PC: Problem Solving. Ans: F. Ans: T. Ninth Edition It is always better to sell now rather than process further because of the time value of money. SO: 7.6 14. it should manufacture those products which have the highest contribution margin per unit of limited resource. it is generally more profitable to produce and sell the product with the highest unit contribution margin. Difficulty: Easy. Ans: T. AACSB: None. AACSB: None. Bloom: C. Min: 1. Min: 1. AICPA BB: Resource Management. Bloom: C. AACSB: None. In a decision concerning replacing old equipment with new equipment. A hurdle rate is the rate of return set by applying ideal standards. AICPA PC: Problem Solving. Ans: T. SO: 7. The annual rate of return technique requires dividing a project's annual cash inflows by the economic life of the project. AICPA FN: Measurement. AICPA BB: Strategic/Critical Thinking. IMA: Business Economics . AICPA FN: Decision Modeling. IMA: Business Economics 21. AICPA BB: Strategic/Critical Thinking. IMA: Business Economics 18. AICPA FN: Decision Modeling. the salvage value of the old equipment is relevant in incremental analysis. AACSB: None. AICPA BB: Strategic/Critical Thinking. Difficulty: Easy. AICPA BB: Strategic/Critical Thinking. SO: 8. Ans: F. SO: 6. Difficulty: Easy. AICPA BB: Strategic/Critical Thinking. Min: 1. Difficulty: Easy. Difficulty: Easy. Ans: T. Difficulty: Easy. AICPA FN: Decision Modeling. SO: 9. AICPA FN: Risk Analysis. Ans: T. AICPA FN: Risk Analysis. Min: 1. SO: 6. Difficulty: Easy. AICPA FN: Risk Analysis. IMA: Investment Decisions 23. IMA: Business Economics 24. AICPA PC: Problem Solving. Bloom: C. SO: 9. IMA: Business Economics 19. AICPA PC: Problem Solving. Test Bank for Accounting Principles. AICPA FN: Measurement. Bloom: C. If a company has only a certain number of machine hours available for production. Bloom: C. AACSB: None.26 . SO: 5. AICPA BB: Strategic/Critical Thinking. AICPA BB: Strategic/Critical Thinking. Bloom: C. Min: 1. Min: 1. AICPA PC: Problem Solving. Min: 1. Difficulty: Easy. AACSB: None. Capital budgeting decisions usually involve large investments and can have a significant impact on a company's future profitability. AICPA FN: Measurement. AICPA PC: Problem Solving. Bloom: K. AACSB: None. IMA: Business Economics 22. It is better not to replace old equipment if it is not fully depreciated. AICPA PC: Problem Solving. In a decision to retain or replace old equipment. Min: 1. IMA: Business Economics 20. Ans: T. AICPA BB: Strategic/Critical Thinking. Bloom: K. Bloom: C. Difficulty: Easy. AICPA PC: Problem Solving. AICPA BB: Resource Management. SO: 9. IMA: Business Economics 17. AACSB: None. Bloom: C. Ans: F. AICPA PC: Problem Solving. AACSB: None. IMA: Business Economics 15. SO: 6. AICPA PC: Problem Solving. AICPA FN: Risk Analysis. AICPA BB: Strategic/Critical Thinking. Min: 1. Difficulty: Easy. a segment should be eliminated if its contribution margin is less than the fixed costs that can be eliminated. Difficulty: Easy. Min: 1. SO: 8. Ans: F. AACSB: None. AICPA PC: Problem Solving. IMA: Business Economics 16. AICPA FN: Risk Analysis. When a company has limited resources to manufacture products. The elimination of an unprofitable product line may adversely affect the remaining product lines. Min: 1. AACSB: None. Bloom: C. Ans: F. the book value of the old equipment can be considered a sunk cost. From a quantitative standpoint.

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

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

Ans: C. AICPA FN: Decision Modeling. Min: 1. AICPA BB: Industry/Sector Perspective. contribution margin analysis. a. d. Prepare internal reports that review the impact of decisions d. Bloom: C. c. AICPA PC: Problem Solving. b. AICPA BB: Resource Management. differential analysis. Difficulty: Easy.Incremental Analysis and Capital Budgeting 41. derivative analysis. only costs are analyzed. d. Min: 1. incremental analysis. SO: 2. AICPA FN: Decision Modeling. double entry analysis. IMA: Business Economics 44. IMA: Decision Analysis 43. AICPA PC: Problem Solving. In incremental analysis. AICPA FN: Decision Modeling. AACSB: None. only revenues are analyzed. as a replacement technique for variance analysis. b. AICPA PC: Problem Solving. AICPA PC: Problem Solving. AICPA PC: Problem Solving. Incremental analysis is most useful a. difficult analysis. in developing relevant information for management decisions. c. in evaluating the master budget. contribution margin. AACSB: None. Difficulty: Easy. Ans: B. AICPA FN: Risk Analysis. AICPA BB: Resource Management. AICPA BB: Resource Management. None of these Ans: B. IMA: Decision Analysis 42. SO: 2. AACSB: None. Bloom: K. Ans: A. c. Min: 1. The process of evaluating financial data that change under alternative courses of action is called a. AICPA BB: Industry/Sector Perspective. b. AICPA BB: Industry/Sector Perspective. Bloom: K. d. b. AACSB: None. Difficulty: Easy. SO: 2.9 Which of the following steps in the management decision-making process does not generally involve the managerial accountant? a. SO: 1. AICPA FN: Decision Modeling. employee turnover. Difficulty: Easy. in choosing between the net present value method and the internal rate of return method. SO: 2. Nonfinancial information that management might evaluate in making a decision would not include a. d. Determine possible courses of action b. IMA: Decision Analysis . Incremental analysis is synonymous with a. Bloom: C. Min: 1. b. d. IMA: Decision Analysis 46. cost-benefit analysis. Make the appropriate decision based on relevant data c. Difficulty: Easy. both costs and revenues may be analyzed. Min: 1. AICPA FN: Decision Modeling. 26 . IMA: Decision Analysis 45. AACSB: None. Ans: C. both costs and revenues that stay the same between alternate courses of action will be analyzed. Min: 1. gross profit analysis. the corporate profile in the community. Ans: B. c. AICPA PC: Problem Solving. Bloom: K. c. Bloom: C. Difficulty: Easy. SO: 2. the environment. AACSB: None.

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

AICPA BB: Resource Management. AACSB: Analytic. Bloom: C. Bloom: C. A foreign wholesaler offers to purchase 2. Ans: D. Ans: B. In incremental analysis. Difficulty: Medium. Difficulty: Easy. Income would increase by $70. Min: 1. Ans: D. only variable costs are relevant. A company is considering the following alternatives: Alternative 1 Alternative 2 Revenues $120. c. $4. AACSB: None. acceptance of the special order would affect net income as follows: a. AICPA PC: Problem Solving. AICPA PC: Problem Solving. $4. SO: 2. AACSB: None.000 scales at $15 each. IMA: Decision Analysis 55. Bloom: C. Min: 5. $6.000 units at $70 each in a foreign market which would not affect its present sales. Difficulty: Easy. c. b.000 increase Ans: A. Garner has sufficient unused capacity to produce the 2. AACSB: None.000 when 10. Baden Company manufactures a product with a unit variable cost of $50 and a unit sales price of $88.000 decrease c. AICPA BB: Resource Management. b. AICPA FN: Decision Modeling. AICPA PC: Problem Solving.000 units were produced and sold. AICPA FN: Decision Modeling.000 decrease d. AACSB: Analytic. Revenues c.000 $120. the order will likely be accepted. fixed costs are not relevant.000 increase b. AICPA BB: Resource Management. d. AICPA FN: Decision Modeling. Fixed costs d. SO: 3. the order will likely be rejected. d.000. AICPA BB: Resource Management. Variable costs and fixed costs 26 . all costs are relevant if they change between alternatives. AICPA BB: Resource Management. AICPA FN: Decision Modeling. c.Incremental Analysis and Capital Budgeting 52. Min: 1. Bloom: AN.000.000 scales. a.000 35. Min: 5.000 Which of the following are relevant in choosing between the alternatives? a. Difficulty: Medium.000 70. SO: 3. If the company has sufficient capacity to produce the additional units. IMA: Decision Analysis 54.000. Fixed manufacturing costs were $240.000. Income would decrease by $4. IMA: Decision Analysis 53. SO: 3. Difficulty: Easy. SO: 3. d. If a plant is operating at full capacity and receives a one-time opportunity to accept an order at a special price below its usual price.000 Variable costs 60. AICPA PC: Problem Solving. Garner would incur special shipping costs of $1 per scale if the order were accepted. Income would increase by $20. If the special order is accepted.000 Fixed costs 35. Bloom: AN.11 Ans: A. AICPA FN: Decision Modeling. The company has a one-time opportunity to sell an additional 1. Income would increase by $4. only fixed costs are relevant. Variable costs b. costs are not relevant if they change between alternatives. what will be the effect on net income? a. IMA: Business Economics . only variable costs are relevant. IMA: Decision Analysis 56. It costs Garner Company $12 of variable and $5 of fixed costs to produce one bathroom scale which normally sells for $35. $30. AICPA PC: Problem Solving. then a. b. Min: 1.

AICPA BB: Resource Management. AICPA PC: Problem Solving. c. d.000 Martin has received a special order from a foreign company for 5. AICPA BB: Resource Management. Min: 1. Net income will decrease. Min: 1. d. an increase in unit variable costs. Never b. lost sales should not be considered in the incremental analysis. d. Min: 5.000 units. Under what situations should the company accept a special order for less than the current selling price? a. AICPA PC: Problem Solving. AACSB: None. AICPA BB: Resource Management. AICPA FN: Decision Modeling. When incremental revenues exceed incremental costs Ans: D. IMA: Business Economics 60. AICPA PC: Problem Solving. AICPA FN: Decision Modeling. c. If a company must expand capacity to accept a special order. Min: 1. SO: 3. Bloom: C. Additional fixed costs will probably be incurred. Inc. SO: 3. Ninth Edition 57. has excess capacity. it is likely that there will be a. $10. AACSB: Analytic.10 b. AICPA PC: Problem Solving. $8. an increase in fixed costs. AACSB: None.60 d. lost sales should be considered in the incremental analysis.26 .000 units: Variable costs $180. Difficulty: Medium. c. Martin Company incurred the following costs for 50. SO: 3. b. When the company thinks it can use the cheaper materials without the customer's knowledge d. the order should not be accepted. Bloom: C. SO: 3. then a. IMA: Business Economics 58. Difficulty: Easy. Filling the order will require spending an additional $8. Miley. $5.12 Test Bank for Accounting Principles. AICPA FN: Decision Modeling. the order will only be accepted if the plant is below capacity. Net income will not be affected. If Martin wants to break even on the order. Difficulty: Easy. Ans: D. IMA: Business Economics 59. If a company anticipates that other sales will be affected by the acceptance of a special order.500 for shipping. $3. Difficulty: Easy. Min: 1. When additional fixed costs must be incurred to accommodate the order c. AICPA FN: Decision Modeling. AICPA PC: Problem Solving. Ans: A. Ans: B. 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. AICPA FN: Decision Modeling.000 Fixed costs 240. IMA: Business Economics . Net income will increase if the special sales price per unit exceeds the unit variable costs. AICPA BB: Resource Management. There is sufficient capacity to fill the order without jeopardizing regular sales. Bloom: AP. b. SO: 3. IMA: Business Economics 61.30 c. Bloom: C. Difficulty: Easy. no increase in fixed costs. what should the unit sales price be? a. Bloom: C. AACSB: None. b. AICPA BB: Resource Management.40 Ans: B. an increase in variable and fixed costs per unit. AACSB: None.

Difficulty: Medium.500 for shipping. is the potential benefit that may be obtained by following an alternative course of action. SO: 4. Min: 1. $6. AICPA FN: Decision Modeling. SO: 4.30 b. c. 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. Additional processing decision Ans: A. AACSB: Analytic. Min: 1. Which decision will involve no incremental revenues? a. Difficulty: Easy. AICPA PC: Problem Solving. AICPA PC: Problem Solving. AICPA FN: Decision Modeling. should be initially recorded as an asset. Make or buy decision b. $5. AICPA FN: Decision Modeling. Min: 1. Bloom: K. IMA: Business Economics . Accept a special order d. budgeting. AICPA BB: Resource Management. added to the "Make" costs.Incremental Analysis and Capital Budgeting 62. AICPA PC: Problem Solving. An opportunity cost a. resources that have alternative uses. IMA: Business Economics 63. If Martin wants to earn $8. AACSB: None. AICPA FN: Decision Modeling. CVP analysis. AICPA BB: Resource Management. Ans: C. AICPA PC: Problem Solving.90 Ans: D. Bloom: AP. Difficulty: Easy.70 c. $11. AACSB: None. SO: 4. none of these.20 d. d.000 units. is classified as manufacturing overhead. AACSB: None. subtracted from the "Make" costs. Bloom: C. IMA: Business Economics 64. AICPA PC: Problem Solving. added to the "Buy" costs. d. Ans: D.13 Martin has received a special order from a foreign company for 5. b. IMA: Business Economics 66. AICPA BB: Resource Management. $3. Min: 1. financial accounting. Ans: B.000 26 . AICPA BB: Resource Management. is the cost of a new product proposal. Bloom: C. Filling the order will require spending an additional $8. b.000 Fixed costs 240. Drop a product line c. what should the unit price be? a. There is sufficient capacity to fill the order without jeopardizing regular sales. b. c. Difficulty: Easy. AICPA FN: Decision Modeling.000 on the order. IMA: Business Economics 65. Min: 5.000 units: Variable costs $180. SO: 3. Bloom: K. d. SO: 4. Difficulty: Easy. AICPA BB: Resource Management. Martin Company incurred the following costs for 50. AACSB: None.

AICPA FN: Decision Modeling. c.000 20. what is the correct make-or-buy decision? a. AICPA FN: Decision Modeling. AICPA BB: Resource Management. d. Ninth Edition 67. AICPA FN: Decision Modeling.000 and only $5. included as part of cost of goods sold. AACSB: None. Difficulty: Easy. b. Tex's Manufacturing Company can make 100 units of a necessary component part with the following costs: Direct Materials Direct Labor Variable Overhead Fixed Overhead $60. AICPA PC: Problem Solving.000 b. AICPA BB: Resource Management. Difficulty: Medium. AICPA PC: Problem Solving. b. the outside supplier could increase prices significantly in the future. AICPA PC: Problem Solving.000 30.26 .000 d.000 of the fixed costs can be avoided.000 of the fixed costs can be avoided. Bloom: C. Buy and save $5.000 If Tex's Manufacturing Company purchases the component externally.000 d. Bloom: C. $115.000 Ans: A. At what external price for the 100 units is the company indifferent between making or buying? a. Ans: B. $85.000 If Tex's Manufacturing Company can purchase the component externally for $110. Min: 1. profitable product lines may be dropped. Make and save $15. $100. Min: 1. Bloom: AN. AACSB: Analytic.000 c. Min: 5.000 10. Bloom: AN. 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. $15.000 c. IMA: Cost Management . c. IMA: Cost Management 70. AACSB: None. Ans: C. the supplier may not deliver on time. Difficulty: Medium. SO: 4. a standard cost.000 b. IMA: Business Economics 69. Difficulty: Easy. SO: 4.000 20. SO: 4.000 30. AICPA FN: Decision Modeling. IMA: Business Economics 68. Buy and save $15. SO: 4. d. AICPA BB: Resource Management. AICPA PC: Problem Solving. Opportunity cost is usually a.000 10. AACSB: Analytic. a potential benefit.000 Ans: C. $120. Min: 5. Each of the following is a disadvantage of buying rather than making a component of a company's product except that a. AICPA BB: Resource Management. quality control specifications may not be met. Make and save $5. a sunk cost.14 Test Bank for Accounting Principles.

000 7. AICPA PC: Problem Solving. AICPA FN: Decision Modeling.000 d. SO: 4. AICPA BB: Resource Management.000 b. The avoidable fixed costs are $6. but another product could be made that would increase profit contribution by $8.000 4.15 Bell's Shop can make 1. $43.000 Ans: D. Difficulty: Medium. $18. Bloom: AN.000 units externally? a. Difficulty: Medium.000 units of a necessary component with the following costs: Direct Materials Direct Labor Variable Overhead Fixed Overhead $24. What are the fixed overhead costs of making the component? a. what is the maximum external price that Ruth Company would accept to acquire the 1. SO: 4. Difficulty: Medium. $52. IMA: Cost Management 73.Incremental Analysis and Capital Budgeting 71. SO: 4.000 units externally? a.000 16.000 c. AICPA FN: Decision Modeling. 26 .000 Ans: B.000 c.000 ? The company can purchase the 1. $48. Bloom: AN. $12. $44. If cost minimization is the major consideration and the company would prefer to buy the components. $55. $47.000 4.000 units of a necessary component with the following costs: Direct Materials Direct Labor Variable Overhead Fixed Overhead $24. $51.000 c. Min: 5. AICPA FN: Decision Modeling. AICPA BB: Resource Management. Ans: A.000 b. $24.000 units externally for $117. $48.000 d.000 d.000 9. IMA: Cost Management . Cannot be determined. An analysis shows that at this external price. the company is indifferent between making or buying the part.000 if the units are purchased externally. IMA: Cost Management 72. AICPA BB: Resource Management.000 16.000 7. Min: 5. AACSB: Analytic.000 in fixed overhead costs if it acquires the components externally. If cost minimization is the major consideration and the company would prefer to buy the components.000. what is the maximum external price that Ruth Company would be willing to accept to acquire the 1. AICPA PC: Problem Solving.000 units of a necessary component with the following costs: Direct Materials Direct Labor Variable Overhead Fixed Overhead $72.000 18. Min: 5. Ruth Company produces 1. Ruth Company produces 1. AACSB: Analytic.000 None of Ruth Company's fixed overhead costs can be reduced. AICPA PC: Problem Solving.000 Ruth Company could avoid $3. Bloom: AN. AACSB: Analytic.000 b.000 if the components were acquired externally.

can produce 100 units of a component part with the following costs: Direct Materials $30. AICPA PC: Problem Solving. Inc. Ninth Edition 74.000.000 in fixed overhead costs if it acquires the CDs externally.000 d.000 If Fornelli. SO: 4.000 c. Difficulty: Medium.000 Ans: D.000 Fixed Overhead 7.000 b.000 Direct Labor 13. AICPA FN: Decision Modeling.000 If Fornelli. $32. AICPA FN: Decision Modeling.000 d.16 Test Bank for Accounting Principles.000 c. Fornelli. $36. AICPA FN: Decision Modeling. An increase of $5. can produce 100 units of a component part with the following costs: Direct Materials $30. The CDs have the following costs: Direct Materials $11.000 Fixed Overhead 22.000 units externally. what is the maximum external price that Crigui would expect to pay for the units? a. An increase of $17. Make and save $1. Difficulty: Medium. AACSB: Analytic. Inc.000 Ans: C. Buy and save $13. Fornelli. AACSB: Analytic. Buy and save $1. SO: 4.000 Variable Overhead 32. SO: 4. Inc.000 b.000 Variable Overhead 32. AICPA PC: Problem Solving. Crigui Music produces 60. IMA: Cost Management 75.000 Fixed Overhead 22. IMA: Cost Management . what is the correct make-or-buy decision? a. AICPA BB: Resource Management. Bloom: AN. Min: 5.000 Direct Labor 13.26 . $29. $33. Inc. by what amount will its total costs change? a.000 Crigui could avoid $4. IMA: Cost Management 76.000 d. can purchase the units externally for $80. Make and save $5. AICPA PC: Problem Solving.000 Direct Labor 15. AICPA BB: Resource Management. An increase of $80. AACSB: Analytic. Min: 5. Bloom: AN. A decrease of $22. Bloom: AN. can purchase the component part externally for $88. If cost minimization is the major consideration and the company would prefer to buy the 60.000 CDs on which to record music. Difficulty: Medium.000 Ans: B.000 of the fixed costs can be avoided. Min: 3.000 and only $8.000 b.000 Variable Overhead 3.000 c. AICPA BB: Resource Management.

the company will be better off by $1 per unit.500 and $7. Min: 5. $32.000. Moreland Clean Company spent $4.000 c. AICPA BB: Resource Management.000 Variable Overhead 3. Which amounts are relevant to the decision about Product 89? a. $40. c.000 to produce Product 89. IMA: Cost Management 80. AACSB: Analytic.000 Ans: B. IMA: Cost Management 79. SO: 4. Bloom: AN. Bloom: AN. Min: 5. AICPA PC: Problem Solving. $36. what is the maximum external price that Crigui would be willing to accept to acquire the 60. $1.000 Direct Labor 15. Difficulty: Medium. How much will Tasty Bites save if it accepts the offer? a. AICPA PC: Problem Solving. but another product could be made that would increase profit contribution by $4. and $7.000.500.000. Process further. SO: 5. AACSB: Analytic. 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. AICPA BB: Resource Management. AICPA BB: Resource Management.00 11.000 d.500 and then be sold for $7. The CDs have the following costs: Direct Materials $11. SO: 5.000 c. the company will be better off by $29 per unit. Bloom: AP. the company will be better off by $14 per unit. SO: 4.500. Tasty Bites produces corn chips. IMA: Cost Management . AICPA FN: Decision Modeling. What decision should NF Toy make? a. the company will be better off by $20 per unit. The cost of one batch is below: Direct materials Direct labor Variable overhead Fixed overhead $18. $31. Min: 5. Min: 5.000. $4. $4. and $7.000 b. AACSB: Analytic. $1. or processed further incurring additional costs of $1. AICPA FN: Decision Modeling.00 13. $2. Sell before assembly. $6.00 An outside supplier has offered to produce the corn chips for $25 per batch.000 None of Crigui’s fixed overhead costs can be reduced.000. NF Toy Company is unsure of whether to sell its product assembled or unassembled. AICPA FN: Decision Modeling.000 Ans: C.000 Fixed Overhead 7. Difficulty: Medium. IMA: Cost Management 78. AICPA BB: Resource Management. Sell before assembly. d. $33.000 CDs on which to record music.00 per batch b.00 14. Difficulty: Medium. $1. $5. and $7.Incremental Analysis and Capital Budgeting 77. b. which can be sold as is for $5.000. AICPA PC: Problem Solving.00 per batch d.00 per batch c.000 if the CDs were acquired externally.000 units externally? a. Difficulty: Medium. 26 . Ans: A.000 b. If cost minimization is the major consideration and the company would prefer to buy the CDs. $5. Bloom: AN. AICPA FN: Decision Modeling. $17.000.000 d. $5. AACSB: Analytic. The unit cost of the unassembled product is $30 and NF Toy would sell it for $65.000. Process further.17 Crigui Music produces 60. AICPA PC: Problem Solving. $4.00 per batch Ans: B.

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

$175. AICPA BB: Resource Management. Which of the following amounts is a sunk cost? a.000 Remaining useful life 10 years Useful life -0Annual operating costs $200. is contemplating the replacement of an old machine with a new one.000 -0-010 years $150. AICPA BB: Resource Management. $500.000. Difficulty: Medium. Bloom: AP.000 New Machine $500.000 -0-010 years $150. Difficulty: Medium. Min: 3. $175.Incremental Analysis and Capital Budgeting 96.500 c.21 Sala Co. $250.000 d. SO: 6. Bloom: C. Sala Co. AICPA PC: Problem Solving. The following information has been gathered: Old Machine Price $250. $49.000.000 Accumulated Depreciation 75. AICPA FN: Decision Modeling.000 b.500 d. IMA: Cost Management . IMA: Cost Management 97. AICPA FN: Decision Modeling. AICPA PC: Problem Solving.000 Accumulated Depreciation 75. Min: 3. it can be sold for $20.500 If the old machine is replaced. Which of the following amounts is relevant to the replacement decision? a. AACSB: Analytic. The following information has been gathered: Old Machine Price $250.000 Ans: D. SO: 6.000 New Machine $500.000 b. 26 . $200. AACSB: Analytic. $0 Ans: C. $150.000 Remaining useful life 10 years Useful life -0Annual operating costs $200.500 If the old machine is replaced.000 c. is contemplating the replacement of an old machine with a new one. it can be sold for $20.

500 If the old machine is replaced.000 325. Bloom: AP. Min: 5.000 22.000 d.000 Sales Variable expenses Contribution margin Fixed expenses Net income (loss) Assume none of the fixed expenses for the hard rubber line are avoidable. A condensed segmented income statement for a recent period follows: Wood $500.000 Remaining useful life 10 years Useful life -0Annual operating costs $200.000) d. AICPA BB: Resource Management. $103.000 Aluminum $200. $20.000) Ans: A. Ninth Edition 98. The net advantage (disadvantage) of replacing the old machine is a. Sala Co.000. Min: 5.000 b.000 60.000 Ans: B.000 Hard Rubber $65.000 175. What will be total net income if the line is dropped? a.000 Accumulated Depreciation 75. AICPA FN: Decision Modeling.000 242. AACSB: Analytic. Difficulty: Medium. $105.26 .000 75. $140.000 $100.000 $110.000 58.000 523. AICPA FN: Decision Modeling. and hard rubber.22 Test Bank for Accounting Principles. Bloom: AN. AICPA PC: Problem Solving.000 35.000 -0-010 years $150. IMA: Cost Management 99. $15. $(5.000 7.000 132.000 b. aluminum. AICPA PC: Problem Solving. $(50. Difficulty: Medium.000 c. it can be sold for $20. AICPA BB: Resource Management.000) Total $765.000 $(15. SO: 7. $125.000 140.000 New Machine $500. The following information has been gathered: Old Machine Price $250.000 $ 25.000 c. is contemplating the replacement of an old machine with a new one. AACSB: Analytic. Abel Company produces three versions of baseball bats: wood. IMA: Cost Management . SO: 6.

000 c. increase by $6. AICPA FN: Decision Modeling. increase by $50. AACSB: Analytic. AICPA FN: Decision Modeling. c. Difficulty: Medium.000 60.000 Ans: A. A condensed segmented income statement for a recent period follows: Wood $500.000.000 Aluminum $200. $140. d.000 325. AICPA FN: Decision Modeling. Ans: C. $125.000 $(15. Min: 5.000 140. and hard rubber. IMA: Cost Management 101. What will be total net income if the line is dropped? a. IMA: Cost Management 102.000 $ (50. If management decides to eliminate this product line.Incremental Analysis and Capital Budgeting 100. Net income will decrease. Difficulty: Medium. IMA: Cost Management . SO: 7. Min: 1. Difficulty: Easy.000 75.000.000 Sales Variable expenses Contribution margin Fixed expenses Net income (loss) Assume all of the fixed expenses for the hard rubber line are avoidable.000. A company has three product lines. The company's variable costs will increase. AICPA PC: Problem Solving. Ans: B. $103. AACSB: Analytic.000 125. SO: 7. AICPA BB: Resource Management. AACSB: None. one of which reflects the following results: Sales Variable expenses Contribution margin Fixed expenses Net loss $215. Bloom: AN. Min: 5. All expenses of the eliminated segment will be eliminated.000 140.000 22.000 132. Bloom: AN. AICPA PC: Problem Solving. $105.23 Abel Company produces three versions of baseball bats: wood.000 $ 25.000 90. SO: 7. What will most likely occur if a company eliminates an unprofitable segment when a portion of fixed costs are unavoidable? a. AICPA BB: Resource Management.000 523.000 b.000 Hard Rubber $65. decrease by $90.000 d.000) Total $765. b.000) If this product line is eliminated. b. 60% of the fixed expenses can be eliminated and the other 40% will be allocated to other product lines. Bloom: C.000. AICPA PC: Problem Solving. 26 . AICPA BB: Resource Management. d.000 $100.000 7. c.000 175. aluminum. Net income will increase.000 $110.000 35. decrease by $6. the company's net income will a.000 58.000 242.

Talbot Company expects income of $2. c. Min: 1. SO: 8. Bloom: AN. Talbot expects to earn 16% of $2. IMA: Cost Management 105. Min: 5.26 . income will be a. If a company has limited resources. IMA: Cost Management 106. IMA: Reporting 107. The rate of return indicates that a. 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.000 machine hours available to manufacture a product. $200. $275. d. If there are 1. AICPA PC: Problem Solving. Ninth Edition 103. AICPA PC: Problem Solving. b. Ans: C. $2. A segment has the following data: Sales Variable expenses Fixed expenses $350. Talbot expects to earn 16% of its cash outlay back over the life of the asset. AICPA FN: Decision Modeling. AACSB: Analytic. c. AICPA PC: Problem Solving. Difficulty: Easy. AICPA BB: Resource Management.000 What will be the incremental effect on net income if this segment is eliminated. total net income will increase by the amount of the product line's fixed costs. AACSB: None. IMA: Cost Management 104. SO: 7. The calculation of the accounting rate of return is . IMA: Cost Management . total net income will decrease by the amount of the product line's fixed costs. contribution margin. b. AICPA FN: Decision Modeling. Bloom: C. Difficulty: Medium. Min: 1.000 275. assuming the fixed expenses will be allocated to profitable segments? a. A company can sell all the units it can produce of either Product A or Product B but not both. d. If the product line is discontinued. Ans: B. Difficulty: Medium. contribution margin per unit of limited resource. AACSB: Analytic. SO: 7.000 decrease c. Difficulty: Easy. the key factor in performing incremental analysis is a. Min: 3. $2. AICPA FN: Decision Modeling. The fixed costs currently allocated to the product line will be allocated to other product lines upon discontinuance. the company's total fixed costs will decrease. b. the contribution margin of the product line will indicate the net income increase or decrease. the same if either product is made. d.000 150. AICPA BB: Resource Management. AICPA PC: Problem Solving. SO: 8. a. Bloom: AN.000 per year over the life of an investment that will cost $25. AACSB: None. none of these. AICPA BB: Resource Management. SO: 8. $200. c. Difficulty: Medium.000.000 as profit each year the asset is used.16. Ans: C. AACSB: Analytic. Ans: B.24 Test Bank for Accounting Principles. AICPA FN: Reporting. AICPA BB: Resource Management.000 increase b. Talbot expects to earn 16% of its investment annually. AICPA FN: Decision Modeling. AICPA BB: Resource Management. Ans: C.000 less if Product A is made. d. AICPA PC: Problem Solving.000 less if Product B is made. Bloom: C. Talbot expects the asset will earn 16 times as much profit as its cost. A company is considering eliminating a product line.000 more if Product A is made. c. $2.000 decrease d. limited resources required. b. Min: 3. Cannot be determined from the data provided. Bloom: AN.

8%.Incremental Analysis and Capital Budgeting 108. 6. IMA: Cost Management 110. $20. Difficulty: Medium.25 Product 1 Product 2 If the company has machine capacity of 2. 16. Product A requires 2 machine hours and Product B requires 4 machine hours. AICPA BB: Resource Management. How much is the contribution margin per unit of limited resource for each product? a. AICPA FN: Decision Modeling. AICPA PC: Problem Solving.3%.25 $2. IMA: Cost Management 111. AACSB: Analytic. AACSB: Analytic. Bloom: AP. AICPA BB: Resource Management. annual revenues are expected to be $90. 13. b. IMA: Cost Management 109. Min: 5. 7. IMA: Investment Decisions . Bloom: AN.000 and is estimated to have no salvage value at the end of its 8-year useful life. Difficulty: Medium. AICPA PC: Problem Solving.00 $2.000. c.000 and annual operating expenses exclusive of depreciation expense are expected to be $38.5%. b. SO: 9. c. Bloom: AN. AICPA PC: Problem Solving. c. Min: 5. SO: 8. AICPA BB: Resource Management.000. A $4.000 c. AICPA FN: Decision Modeling. b. A company is considering purchasing factory equipment that costs $320.25 $2. 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 . what is the total contribution margin of the product it should produce to maximize net income? a. SO: 9.000 and annual operating expenses exclusive of depreciation expense are expected to be $38. 3.50 B $5.3 years. Ruiz Company’s contribution margin is $4 per unit for Product A and $5 for Product B. AICPA FN: Decision Modeling.000 b.00 Ans: B.000 and is estimated to have no salvage value at the end of its 8-year useful life. Bloom: AP. If the equipment is purchased. AACSB: Analytic. AICPA FN: Decision Modeling. If the equipment is purchased. AICPA BB: Resource Management. 32. $16. Ans: C.5%. AICPA PC: Problem Solving. Difficulty: Medium. Difficulty: Medium.00 $1. A company is considering purchasing factory equipment that costs $320.1 years. The straight-line method of depreciation would be used. AACSB: Analytic. Min: 3. $25. The cash payback period on the equipment is a.2 years.000 Ans: C. the annual rate of return expected on this equipment is a. 3. SO: 8. Ans: C. d. annual revenues are expected to be $90.000 d. 8. $24. Min: 5. The straight-line method of depreciation would be used.00 $1. If the equipment is purchased.000 hours.00 $1. d. d.0 years.

10. total cost of a capital project.5 years. AICPA PC: Problem Solving. The machine would be depreciated straight-line with no residual value over its useful life at the rate of $20. How is annual cash inflow determined? a. Min: 1. c. project would only be acceptable if the company's cost of capital was low. AACSB: None. AICPA BB: Resource Management. Bloom: AP. Difficulty: Easy. Ans: B. entire initial investment will never be recovered. rate of return earned on total assets. c. AICPA FN: Decision Modeling. SO: 9. d. d. Bloom: C. Min: 1.0 years. 5 years. IMA: Investment Decisions 117. b. Bloom: K. c. b. Depreciation is added back to net income because it is not an outflow of cash. IMA: Cost Management 116. SO: 9. AICPA BB: Resource Management. If an asset cost $210. IMA: Budget Preparation 114. Ans: A. Difficulty: Easy.000. The cash payback period is a. If the payback period for a project is greater than its economic life. d. Depreciation is added back to net income because it is an inflow of cash. Min: 5. AICPA PC: Problem Solving. Difficulty: Easy. AICPA FN: Decision Modeling. Min: 5. AICPA BB: Resource Management. A company's cost of capital refers to the a. AICPA BB: Resource Management. and generates annual net cash inflows of $30. AACSB: None. AACSB: Analytic. d. AICPA BB: Resource Management. Depreciation is subtracted from net income because it is an outflow of cash. c. but which will decrease costs each year by $40. AICPA PC: Problem Solving. Min: 1. b.0 years. d. b. discounted cash flow technique. Bloom: AP. Difficulty: Easy. is considering purchasing a new machine which will cost $200. b. Aaron Co. the a. 8 years. project's return will always exceed the company's cost of capital. AACSB: None. Bloom: C.26 . AICPA PC: Problem Solving.000 salvage value at the end of its ten-year life. c. The following are all quantitative capital budgeting techniques except a.26 Test Bank for Accounting Principles. cost-volume-profit technique.0 years.000 and is expected to have a $30. rate management expects to pay on all borrowed and equity funds. c. 7 years. AICPA BB: Resource Management. Min: 1. the cash payback period is a. Ninth Edition 112. AICPA FN: Decision Modeling. Ans: C. IMA: Investment Decisions 113. AICPA PC: Problem Solving. d.000 each year. SO: 9. Ans: B. Ans: B. 5. cash payback technique. cost of printing and registering common stock shares. project will always be profitable. Depreciation is subtracted from net income because it is an expense. IMA: Investment Decisions . Bloom: K. 6 years. IMA: Cost Management 115. b. Difficulty: Medium.000/year. annual rate of return technique. AICPA FN: Decision Modeling. AACSB: None. 4. Difficulty: Medium. SO: 9. SO: 9. Ans: B. AICPA FN: Decision Modeling. 4. The useful life of the machine is 10 years. AACSB: Analytic. AICPA PC: Problem Solving. SO: 8. AICPA FN: Decision Modeling.000.

SO: 9. d. Bloom: K. b. Annual rate of return method Ans: A. c. Difficulty: Easy. Ans: A. AACSB: None. If the equipment is purchased. Min: 1. The higher the rate of return for a given risk. 29. b. Min: 5. b. AICPA FN: Decision Modeling. SO: 9. AICPA BB: Resource Management. AICPA FN: Decision Modeling. Min: 1. Difficulty: Easy. IMA: Investment Decisions 122. c. AICPA PC: Problem Solving. higher the hurdle rate. Difficulty: Easy. IMA: Budget Preparation 121.1%. of determining how much capital stock to issue. Ans: B. Gross profit method b. Bloom: K. of eliminating unprofitable product lines. SO: 9. AICPA FN: Decision Modeling. Bloom: AP. SO: 9. AICPA PC: Problem Solving. Min: 1. AACSB: None. Payback method c. AICPA FN: Decision Modeling. SO: 9. AICPA PC: Problem Solving. Min: 1. b. 54. used in sell or process further decisions. AICPA BB: Resource Management. AACSB: Analytic. AACSB: None. Ans: C. AICPA PC: Problem Solving. IMA: Investment Decisions 119. d. 26 . The annual rate of return method is based on a. Bloom: K. IMA: Investment Decisions . higher the cost of capital. of making capital expenditure decisions. AICPA PC: Problem Solving. Capital budgeting is the process a. Min: 1. the cost of capital. AICPA FN: Decision Modeling.Incremental Analysis and Capital Budgeting 118. If the equipment is purchased. IMA: Budget Preparation 120. Bloom: C. Difficulty: Medium. Difficulty: Easy.6%. AICPA BB: Resource Management. market values. Difficulty: Easy. Ans: C. the cutoff rate. AICPA BB: Resource Management. c. b. 14.27 A company is considering purchasing factory equipment which costs $480.000 and annual operating expenses exclusive of depreciation expense are expected to be $95. AACSB: None. Which of the following is not a common method of capital budgeting? a. SO: 9. the hurdle rate. Bloom: K. The straight-line method of depreciation would be used. the annual rate of return expected on this project is a. d. AACSB: None. AICPA BB: Resource Management. The rate that management expects to pay on borrowed or equity funds is known as a. less attractive the investment. time value of money data. c. AICPA FN: Decision Modeling. c. AICPA BB: Resource Management. annual revenues are expected to be $225. d. more attractive the investment. the a. accounting data. replacement values.2%.000 and is estimated to have no salvage value at the end of its 8-year useful life. 27.000.2%. AICPA PC: Problem Solving. all of these. d. Discounted cash flow method d. Ans: A. IMA: Investment Decisions 123.

000 with a useful life of five years and an estimated salvage value of $12. Min: 1. If annual expected income is $21. 37. Bloom: AP. AICPA FN: Decision Modeling. b. Ans: D. b. AICPA PC: Problem Solving. SO: 9.0% b. AICPA BB: Resource Management. SO: 9. 15 years.26 . Difficulty: Easy. AACSB: Analytic. AICPA BB: Resource Management. AICPA BB: Resource Management. AICPA PC: Problem Solving. d.000. 50. Min: 1. $126.5% Ans: B.000. Ans: C. ignores obsolescence factors. 25. Difficulty: Medium. Bloom: C. SO: 9.000.000. Bloom: AP.000 in new equipment. AICPA FN: Decision Modeling. The payback method is criticized on the grounds that it a. IMA: Investment Decisions 127. d. AICPA BB: Resource Management. AICPA PC: Problem Solving.5% c. AICPA FN: Decision Modeling. IMA: Investment Decisions .000 each year for the next five years if it invests $900.28 Test Bank for Accounting Principles. The cash payback on this investment is a. Garza Company is considering buying equipment for $240. Ans: C. SO: 9. AICPA PC: Problem Solving. The machine is expected to generate net income of $6. a discount factor. The straight-line method of depreciation will be used. Difficulty: Medium. AACSB: Analytic. $120. c. the denominator in computing the annual rate of return is a. Nance Company is considering buying a machine for $90. 10 years.000. c. Min: 3. Min: 3.000. Ninth Edition 124. 6 years. AICPA FN: Decision Modeling. Min: 5. 57. SO: 9. ignores the time value of money. dollars. AACSB: None. Difficulty: Easy. d. Ans: C. IMA: Investment Decisions 128. $252.000 each year. IMA: Investment Decisions 126.000 with an estimated life of ten years and no salvage value. AACSB: None. When using the payback method. Bloom: K. time. a percent. c. ignores the cost of an investment. c. is complicated to use. AICPA FN: Decision Modeling.0% d.000. 3 years. AICPA PC: Problem Solving. AACSB: Analytic. $240. d. IMA: Investment Decisions 125. Bloom: C. The equipment has a five-year life and an estimated salvage value of $300. A company projects an increase in net income of $225. payback is expressed in terms of a. What is the annual rate of return on this investment? a. b. AICPA BB: Resource Management. b. Difficulty: Medium.

AICPA BB: Resource Management. Difficulty: Easy. Benaflek Co.000 for year 3. Ans: D. b.797 . Annual cost savings were: $5. $4. Min: 3. Bloom: AP.000 and had a salvage value at the end of its useful life of zero. Giraldi Company has identified that the cost of a new computer will be $60. The amount of the initial investment was Year 1 2 3 a. AICPA PC: Problem Solving. 15%. Difficulty: Medium. Bloom: AP. Difficulty: Medium. IMA: Investment Decisions 131.158. SO: 9. Present Value of 1 at 12% . AICPA FN: Decision Modeling. b. The company's required rate of return is 12%. payback approach. c. Mussina Company had an investment which cost $260. but with the use of the new computer. 11. Ans: D. d. IMA: Investment Decisions 132.000.690 2.000 for year 2. AICPA BB: Resource Management. AICPA PC: Problem Solving.Incremental Analysis and Capital Budgeting 129. d.5 years. If depreciation expense is $3. AICPA FN: Decision Modeling. d.000 for year 1. SO: 10. b. SO: 9.000 a year. annual rate of return approach. AACSB: None. 5. and the net present value of the project was $(450). AACSB: None. $9.8%. net income will increase by $5. IMA: Investment Decisions .402 Ans: A. Difficulty: Hard. net present value method. Bloom: AP. $10. c.000 a year. c. 30 years. 7. Min: 1. c. AICPA FN: Decision Modeling. AICPA BB: Resource Management. Min: 5. return on stockholders' equity approach. d. 12 years. AICPA FN: Decision Modeling. AICPA PC: Problem Solving. Ans: C. AACSB: Analytic.29 A capital budgeting technique which takes into consideration the time value of money is the a.000. Min: 3.893 1. 9. AICPA PC: Problem Solving. $10. SO: 9.712 PV of an Annuity of 1 at 12% . If Mussina's expected annual net income is $15. the annual rate of return is: a. and $3.893 . AACSB: None. the cash payback period is: a.058. purchased some equipment 3 years ago. IMA: Investment Decisions 130.339.239. Bloom: K. AICPA BB: Resource Management.8%. b.5%. 26 . 20 years. $9.

111 The cash payback period for Project Blue is a.26 .30 Test Bank for Accounting Principles. d. Ans: B. AICPA FN: Decision Modeling. AACSB: None. 4 years. Fehr Company is considering two capital investment proposals. c. SO: 9.605 4. Ans: D. 20 years. Bloom: AP.231 4. b.000 $600.000 Annual net income 20. 25%. SO: 9. Fehr Company is considering two capital investment proposals.000 $600.355 4. 10 years.000 Estimated useful life 5 years 6 years Salvage value 0 0 The company requires a 10% rate of return on all new investments. Periods 5 6 Present Value of an Annuity of 1 9% 10% 11% 12% 3. c. 5 years.605 4. AICPA BB: Resource Management. IMA: Investment Decisions . AICPA BB: Resource Management.111 The annual rate of return for Project Blue is a. Periods 5 6 Present Value of an Annuity of 1 9% 10% 11% 12% 3.000 Net annual cash inflow 100.791 3.696 3. Min: 7.000 Annual net income 20.231 4. AICPA FN: Decision Modeling. Ninth Edition 133.000 142.000 42.000 42. 50%. Estimates regarding each project are provided below: Project Blue Project Gray Initial investment $400. Difficulty: Hard. d.486 4.791 3. 5%.000 142.355 4. IMA: Investment Decisions 134. Difficulty: Hard. AACSB: None. Min: 7.696 3. Bloom: AP. Estimates regarding each project are provided below: Project Blue Project Gray Initial investment $400. AICPA PC: Problem Solving.000 Estimated useful life 5 years 6 years Salvage value 0 0 The company requires a 10% rate of return on all new investments.486 4.890 3. AICPA PC: Problem Solving. b.890 3.000 Net annual cash inflow 100. 10%.

605 6 4. 12%.890 3.696 3. b.000 142.355 4.111 The net present value for Project Gray is a. Fehr Company is considering two capital investment proposals. $18. Estimates regarding each project are provided below: Project Blue Project Gray Initial investment $400.231 4. Min: 7. Bloom: AP.355 4.000.000 42.000 $600. $182. c.111 The internal rate of return for Project Gray is approximately a.486 4.486 4.890 3. c. AICPA PC: Problem Solving. Ans: B. 26 . Present Value of an Annuity of 1 Periods 9% 10% 11% 12% 5 3.000 Estimated useful life 5 years 6 years Salvage value 0 0 The company requires a 10% rate of return on all new investments.000 142. Bloom: AP. 11%.000 $600. d. AICPA BB: Resource Management.000 Annual net income 20. AACSB: None. Difficulty: Hard. AICPA BB: Resource Management.912.000 Estimated useful life 5 years 6 years Salvage value 0 0 The company requires a 10% rate of return on all new investments.231 4. IMA: Investment Decisions 136. AACSB: None. Estimates regarding each project are provided below: Project Blue Project Gray Initial investment $400.605 6 4. $618.410.791 3.Incremental Analysis and Capital Budgeting 135.410.000 Net annual cash inflow 100. SO: 10. AICPA PC: Problem Solving. b.000 Annual net income 20.696 3. d. IMA: Investment Decisions . $100.791 3. Present Value of an Annuity of 1 Periods 9% 10% 11% 12% 5 3.000 42. AICPA FN: Decision Modeling. AICPA FN: Decision Modeling. SO: 10. Difficulty: Hard. Ans: D.000 Net annual cash inflow 100. 9%. Min: 7.31 Fehr Company is considering two capital investment proposals. 10%.

AACSB: None. 8%. $35.170.487 A company has a minimum required rate of return of 10% and is considering investing in a project that requires an investment of $98. AICPA BB: Resource Management. $6. The approximate internal rate of return on this project is a.736 3 2.759 1. c. IMA: Investment Decisions . AICPA PC: Problem Solving. Present Value of an Annuity of 1 Period 8% 9% 10% 1 . SO: 10.577 2.487 A company has a minimum required rate of return of 9% and is considering investing in a project that costs $175. AACSB: None. The net present value of this project is a.917 . AACSB: None.000 at the end of each year for three years.454. Bloom: AP. Ans: B.917 .926 . Present Value of an Annuity of 1 Period 8% 9% 10% 1 . IMA: Investment Decisions 138. b. IMA: Investment Decisions 139. Ans: D. $114. Use the following table. $177. c. Difficulty: Hard. less than the required 8%.909 2 1. $17. The present value of future cash inflows for this project is a. b. AICPA FN: Decision Modeling.000.531 2.000 at the end of each year for three years.926 .26 . Bloom: AP. Ans: B. Bloom: AP. AICPA BB: Resource Management.759 1.898. Present Value of an Annuity of 1 Period 8% 9% 10% 1 . Min: 5. $104. AICPA PC: Problem Solving.718. SO: 10. AICPA FN: Decision Modeling.783 1.917 .454.926 .000 each year for three years. Use the following table.000.531 2.736 3 2.32 Test Bank for Accounting Principles. SO: 10. Ninth Edition 137.531 2. $98. 10%. AICPA FN: Decision Modeling. AICPA BB: Resource Management.577 2. 9%. d. Difficulty: Hard. $2. d.783 1. Difficulty: Hard. Use the following table.000 and is expected to generate cash inflows of $42. c. d.736 3 2.337 and is expected to generate cash inflows of $27. Min: 5.783 1.487 A company has a minimum required rate of return of 8% and is considering investing in a project that costs $68.759 1.909 2 1.000 and is expected to generate cash inflows of $70. Min: 5. b. AICPA PC: Problem Solving.170.909 2 1.577 2.

800 b.486 4. 10% c. is considering purchasing equipment costing $30.748 Ans: B.300 and will be depreciated straight-line over its useful life with no salvage value. SO: 10.750 Ans: C. Inc.486 4. Bloom: AP.000 with a 6-year useful life. Period 6 8% 4. Humphrey. and $10.355 4. AICPA BB: Resource Management. Humphrey. $886 d. Woods has a 14% cost of capital. requires a 10% rate of return. AICPA BB: Resource Management. AICPA PC: Problem Solving.231 4.623 Present Value of an Annuity of 1 9% 10% 11% 12% 4. AICPA FN: Decision Modeling.400 $31.67 a. Min: 5.800 $30. AICPA PC: Problem Solving. Difficulty: Hard. b. IMA: Investment Decisions 142. Difficulty: Hard.111 15% 3. and uses the following factors. Humphrey. Min: 5. d. $29.792 c. AICPA BB: Resource Management.300 and will be depreciated straight-line over its useful life with no salvage value. AACSB: None. which is expected to produce cash inflows of $15.88 2 . SO: 10.355 4.784 What is the approximate internal rate of return for this investment? a. IMA: Investment Decisions . 11% d. Difficulty: Hard. Bloom: AP. The equipment will provide cost savings of $7. What is the present value of these future cash flows? Present Value of 1 Period 14% 1 .784 What is the approximate net present value of this investment? a. Period 6 8% 4. 12% Ans: D.33 Woods Company wants to purchase an asset with a 3-year useful life.450 $34. $1. Bloom: AP. Humphrey.623 Present Value of an Annuity of 1 9% 10% 11% 12% 4.000 with a 6-year useful life. 9% b. Inc. 26 . AICPA FN: Decision Modeling. Inc.Incremental Analysis and Capital Budgeting 140. The equipment will provide cost savings of $7. Inc. Min: 5. AACSB: None. c. AICPA FN: Decision Modeling. $13. AICPA PC: Problem Solving. SO: 10.231 4. requires a 10% rate of return. is considering purchasing equipment costing $30. AACSB: None.000 in year 3. $2.111 15% 3. IMA: Investment Decisions 141.77 3 .000 each year for two years.

project earns a rate of return of 10%. b. a project's net present value is zero. Bloom: AN. The project's cash inflows will equal its cash outflows.26 . SO: 10.000. c. AACSB: None. The initial investment in the project must have been a. AICPA FN: Decision Modeling. Which one of the following is correct? a. AICPA BB: Resource Management. $160.000. Bloom: K. AACSB: Analytic. $40. Min: 1. AICPA FN: Decision Modeling. AICPA PC: Problem Solving.34 Test Bank for Accounting Principles. d. If a company's required minimum rate of return is 10%. project's rate of return exceeds 10%. b. Project B. d. In using the internal rate of return method. What does this tell management about the project? a. Difficulty: Medium. Difficulty: Easy. project's rate of return is less than the minimum rate required. Hale Plumbing used the net present value method and determined that project 34 had a zero net present value. The project guarantees company profitability. IMA: Investment Decisions 144.0 and the equal annual cash inflows were $40. IMA: Investment Decisions 145. project earns a rate of return of 0%. SO: 10.000. AICPA BB: Resource Management. AACSB: None. b. The project earns the company's desired minimum rate of return. AICPA FN: Decision Modeling. Accrual income is used to calculate the net present value. Ans: D. the project that should be accepted is a. AICPA PC: Problem Solving. The return from this project is equal to the cost of capital. Difficulty: Medium. they are both the same.000 and have the same economic life. Bloom: AP. Ans: C. Min: 2. c. Min: 3. AICPA PC: Problem Solving. Min: 3. not capable of being calculated. Ans: A. AACSB: None. AICPA FN: Decision Modeling. c.000 and the total present value of cash inflows of Project B is $36. neither. the internal rate of return factor was 4. AICPA BB: Resource Management. b. AICPA BB: Resource Management. Accrual income is used to calculate the payback period. IMA: Investment Decisions . Ninth Edition 143. Bloom: AN. an amount which cannot be determined.000. d. Ans: B. Using the net present value method. AICPA PC: Problem Solving. SO: 10. d. AACSB: Analytic. c. $10. and in using the net present value method. IMA: Investment Decisions 147. IMA: Investment Decisions 146. the total present value of cash inflows for Project A is $30. this indicates that the a. AICPA BB: Resource Management. Cash flows are used to calculate the internal rate of return. d. Cash flows are used to calculate the annual rate of return. Bloom: C. c. SO: 10.000. If Project A and Project B both require an initial investment of $30. Difficulty: Medium. AICPA FN: Decision Modeling. Min: 1. Project A. AICPA PC: Problem Solving. Ans: C. Difficulty: Easy. SO: 10. b.

Use the following table.531 2. Difficulty: Medium. c.000 at the end of each year for three years. d.917 . b.759 1. Use the following table. 8%. AICPA BB: Resource Management. Bloom: AP.759 1.210. SO: 10. AICPA BB: Resource Management.487 A company has a minimum required rate of return of 10%. It is considering investing in a project that costs $227. Use the following table.487 26 . SO: 10. IMA: Investment Decisions . c. c. 10%. AACSB: Analytic. Present value of an Annuity of 1 Period 8% 9% 10% 1 . Min: 5.208.926 . Bloom: AP.783 1. $246.926 . $5. d.783 1.909 2 1. SO: 10.759 1. d.736 3 2.783 1.000 and is expected to generate cash inflows of $168. AACSB: Analytic. AACSB: Analytic. $210.790 and is expected to generate cash inflows of $90.577 2.531 2. Ans: B. $425.577 2. 9%. $223.35 A company has a minimum required rate of return of 9%.926 .000 each year for three years. The approximate internal rate of return on this project is a.Incremental Analysis and Capital Budgeting 148. AICPA PC: Problem Solving.000 at the end of each year for three years.909 2 1. AICPA FN: Decision Modeling. IMA: Investment Decisions 149.736 3 2. Difficulty: Medium.736 3 2.830. AICPA FN: Decision Modeling.909 2 1. The IRR on this project cannot be approximated. b.487 A company has a minimum required rate of return of 8%.531 2. The net present value of this project is a. Min: 5. b. Bloom: AP. Present value of an Annuity of 1 Period 8% 9% 10% 1 . The present value of future cash inflows for this project is a. Difficulty: Medium.208. AICPA PC: Problem Solving.000. Present value of an Annuity of 1 Period 8% 9% 10% 1 . Min: 5. AICPA FN: Decision Modeling. AICPA PC: Problem Solving. It is considering investing in a project which costs $420.516. $42.577 2. AICPA BB: Resource Management. Ans: D. Ans: B. $13.000 and is expected to generate cash inflows of $90.917 . $252. IMA: Investment Decisions 150. It is considering investing in a project that requires an investment of $210.000.917 .830.

d. AICPA BB: Resource Management. AICPA BB: Resource Management. SO: 1. Ans: A. d. the payback method. AICPA FN: Decision Modeling. Dryer would incur special shipping costs of $2 per unit if the order were accepted. b.000 increase d. Difficulty: Easy. Which of the following would generally not affect a make-or-buy decision? a. c. AICPA PC: Problem Solving. $3. AICPA FN: Decision Modeling. AACSB: None. SO: 3.26 . c. IMA: Investment Decisions 153. Bloom: C. IMA: Investment Decisions 155.000 increase c. d. Bloom: K. c. $9. IMA: Investment Decisions 156. AICPA BB: Resource Management. what will be the effect on net income? a. AICPA PC: Problem Solving. SO: 4. Min: 1. Bloom: C. SO: 10. added to the buy total cost. AICPA BB: Resource Management. deducted from the make total cost. Accounting's contribution to the decision-making process occurs in all of the following steps except to a. Difficulty: Easy. Ninth Edition 151. In a make-or-buy decision. AICPA BB: Resource Management. The appropriate table to use when an investment promises to return unequal cash flows is the a. Min: 1. Min: 1. $54. SO: 10. AICPA PC: Problem Solving. Difficulty: Easy. SO: 4.000 units. present value of annuity table. Selling expenses b. AACSB: None. Ans: A. AICPA PC: Problem Solving. Variable manufacturing costs d. future value of 1 table. b. Min: 1. ignored. none of these. b. The conceptually superior approach to capital budgeting is a. d. AICPA FN: Decision Modeling. Ans: C. Ans: A. AACSB: None.36 Test Bank for Accounting Principles. Direct labor c. Difficulty: Medium. AICPA PC: Problem Solving. IMA: Investment Decisions 152. Min: 1. future value of annuity table. If the special order is accepted. Opportunity cost Ans: A. $3. AACSB: None. AICPA FN: Decision Modeling. AICPA PC: Problem Solving.000 increase Ans: B. Bloom: K. review results of the decision. c. opportunity costs are a. IMA: Investment Decisions . AICPA FN: Decision Modeling. identify the problem and assign responsibility. make a decision.000 units at $21 each. added to the make total cost. Difficulty: Easy. the annual rate of return method. Bloom: C. Difficulty: Easy. AICPA FN: Decision Modeling. It costs Dryer Company $26 per unit ($18 variable and $8 fixed) to produce its product. a discounted cash flow method. present value of 1 table. Dryer has sufficient unused capacity to produce the 3. which normally sells for $38 per unit. b.000 decrease b. Bloom: AN. AACSB: None. AICPA BB: Resource Management. Min: 5. IMA: Investment Decisions 154. A foreign wholesaler offers to purchase 3. AACSB: Analytic. determine possible courses of action.

Bloom: C. b. Ans: C.00 c. Min: 1. hurdle rate. Bloom: K. SO: 9.00 $1.50 $1. cutoff rate.Incremental Analysis and Capital Budgeting 157. Bloom: AP. contribution margin. AICPA FN: Decision Modeling. The rate of return that management expects to pay on all borrowed and equity funds is the a. AICPA PC: Problem Solving. AICPA BB: Resource Management. All of the following are relevant in deciding whether to eliminate an unprofitable segment except the segment's a. IMA: Business Economics 158. $5. IMA: Business Economics 159. Bloom: K. AICPA FN: Decision Modeling. Ans: B. AICPA PC: Problem Solving. it is impossible for net income to increase. $5. AICPA BB: Resource Management. Ans: D. IMA: Investment Decisions . Min: 1. Average investment ÷ Annual cash inflow. incremental cost. Difficulty: Easy. A cost that cannot be changed by any present or future decision is a(n) a. IMA: Business Economics 161. SO: 7. Difficulty: Medium.37 Ans: C. The cash payback formula is a. c. d. $3. SO: 7. Average investment ÷ Net income. AICPA PC: Problem Solving. $2. minimum rate. What is the contribution margin per unit of limited resource for each product? X Y a. d. SO: 6. Difficulty: Easy. c. AICPA FN: Decision Modeling. Min: 1. Cost of capital investment ÷ Annual cash inflow. AICPA FN: Decision Modeling. sunk cost. fixed expenses allocated to the eliminated segment will be eliminated. cost of capital. b. AICPA BB: Resource Management.50 d. 26 . b. b opportunity cost.50 b.00 $3. SO: 9. d.50 Ans: A. If an unprofitable segment is eliminated a. Difficulty: Easy. Min: 1. AACSB: Analytic. AICPA BB: Resource Management. d. AACSB: None. Difficulty: Easy. Bloom: K. AICPA PC: Problem Solving. d. c. c. contribution margin per unit is $12 for Product X and $20 for Product Y. Bloom: K. it is impossible for net income to decrease. AICPA PC: Problem Solving. Product X requires 4 machine hours and Product Y requires 8 machine hours. SO: 8. AACSB: None. IMA: Investment Decisions 162. AACSB: None. AACSB: None. sales. AICPA BB: Resource Management. AICPA BB: Resource Management.00 $2. c. fixed expenses. b. AICPA PC: Problem Solving. Ans: A. variable cost. Cost of capital investment ÷ Net income. Min: 3. AICPA FN: Decision Modeling. AICPA FN: Decision Modeling. In the Rossetto Company. IMA: Business Economics 160. Difficulty: Easy. AACSB: None. variable expenses of the eliminated segment will be eliminated. variable expenses. Min: 1.

164. 67. 86. 93. b b c b c b b c a d b d d b a a d b d 57. 144. AICPA FN: Decision Modeling. AACSB: None. 127. project's rate of return equals the required rate of return. Item Ans. 135. 60. d d b a b d a c d b b c c a a b d b c 76. c. 99. 159. 129. 56. 83. Ninth Edition 163. 45. d b d b b d b c b d a c b d c d b b a 152. 74. Min: 1. Item Ans. 150. Ans: D. 52. 148. 61. Bloom: K. 142. 154. 141. d.26 . 151. 70. 85. 97. 137. 51. 94. 132. 53. present value of future cash inflows and the capital investment. 82. Difficulty: Easy. 106. 157. 163. 43. b. 66. 68. IMA: Investment Decisions 165. 126. 113.38 Test Bank for Accounting Principles. IMA: Investment Decisions Answers to Multiple Choice Questions Item Ans. SO: 10. 62. 118. 143. present value of future net income and the capital investment. 65. 103. 111. 88. AICPA FN: Decision Modeling. 101. 140. Net present value is the difference between the a. A negative net present value means that the a. 121. c. To determine annual cash inflow. 77. subtracted from net income because it is an outflow of cash. 78. 102. 124. Min: 1. 73. 119. 162. 38. 98. 47. project's rate of return is less than the required rate of return. Item Ans. 156. 145. future cash inflows and the present value of the capital investment. 122. Ans: B. 87. 84. d. depreciation is a. Bloom: K. project's rate of return exceeds the required rate of return. 71. 54. Bloom: K. 58. 131. 50. 41. c. 89. 100. 155. 107. 139. AICPA BB: Resource Management. d. 104. 48. AICPA PC: Problem Solving. AICPA BB: Resource Management. 110. 69. added back to net income because it is not an outflow of cash. 149. 75. 120. Item Ans. 116. b. 79. Item Ans. IMA: Investment Decisions 164. 109. AICPA PC: Problem Solving. 59. AICPA FN: Decision Modeling. 161. c a b a a c c d a a b d c b . 40. 160. SO: 10. 63. 91. 96. 42. 158. 130. 39. AICPA BB: Resource Management. 108. 64. 115. 90. AICPA PC: Problem Solving. 46. 138. added back to net income because it is an inflow of cash. Item Ans. subtracted from net income because it is an expense. 80. b. future cash inflows and the capital investment. 117. Difficulty: Easy. Ans: C. Min: 1. 123. 49. b d c a b a b c c b b c c c b c c c b 114. AACSB: None. 153. 92. 44. Difficulty: Easy. SO: 9. 72. AACSB: None. 128. 147. project is acceptable. 105. 134. 136. 125. 146. 112. 165. 81. 55. d b b a c d b d b d d b c b d c c d d 95. a b b b c c a b a a b c d c c d c d a 133.

produces several models of clocks. IMA: Investment Decisions Solution 166 (3 min.000) Incremental profit if special order accepted BE 168 Notson. is considering Plan 1 which is estimated to have sales of $40. Difficulty: Medium. AICPA FN: Decision Modeling. Notson needs 1. AICPA BB: Resource Management. AACSB: Analytic.000 (1.000.000 Incremental revenue (8.25 per bear. AICPA FN: Decision Modeling. AACSB: Analytic.000) (10.000) Incremental costs ($15.000) Incremental shipping costs ($1. SO: 4.39 BRIEF EXERCISES BE 166 Sedgwick Inc. Each bear consists of $12 of variable costs and $9 of fixed costs and sells for $45.000 Incremental revenue ($40.200 clocks annually. AICPA BB: Resource Management. IMA: Business Economics . AICPA BB: Resource Management. SO: 2. An outside supplier has offered to produce the commercial clocks for Notson for $420 each. Min: 5. Bloom: AP. Min: 3.000 (96. Pederson will incur extra shipping costs of $1. AICPA PC: Problem Solving.000 units at $14 each.000) Incremental increase in profit if Plan 1 is selected BE 167 Pederson Enterprises produces giant stuffed bears. 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.) $2.000 – $14. AICPA PC: Problem Solving.000.000 – $38. Ans: N/A. Ans: N/A. Difficulty: Medium.000) $1. Difficulty: Medium. Instructions Compare plans using incremental analysis. IMA: Investment Decisions Solution 167 (5 min. AACSB: Analytic.25 × 8. Min: 5. A wholesaler offers to buy 8. AICPA PC: Problem Solving.000 × $14) Incremental variable costs ($12 × 8.000 and costs of $15. Bloom: AP. Inc. of which Pederson has the capacity to produce.000) $ 6. Ans: N/A. Instructions Determine the incremental income or loss that Pederson Enterprises would realize by accepting the special order. AICPA FN: Decision Modeling.000 and costs of $14. SO: 3.) $112.Incremental Analysis and Capital Budgeting 26 . The company currently has sales of $38. Bloom: AP.

AICPA FN: Decision Modeling.000 + 12.200 = 144.000 Savings of DL $120 × 1. Inc.200 = 96. Instructions Prepare an incremental analysis for the make-or-buy decision. Ninth Edition Solution 168 (5 min. What should Paola Farms do? Ans: N/A. AICPA BB: Resource Management.25 each. Instructions If Paola Farms slaughters the chickens.40 Test Bank for Accounting Principles.00 7.200 = 72. IMA: Business Economics Solution 169 (5 min. The production generates 60. Min: 4.000 Total cost savings Incremental net cost to buy BE 169 + 432. AICPA PC: Problem Solving. determine how much incremental profit or loss it would report. AICPA BB: Resource Management.000 chickens which can be sold for $1 each to a slaughtering company.000 + 6. The costs per stapler are as follows: Direct materials Direct labor Variable overhead Fixed overhead Total $ 3.000 staplers annually for its main product.00 8.000 $ (3. AICPA PC: Problem Solving.000) Incremental Analysis Cost to buy (1. It costs $55.000 Savings of VOH $80 × 1.) Incremental Effect $(504.000) Parks Corporation currently manufactures 3.000. Min: 5.00 $22. IMA: Business Economics . AACSB: Analytic.000 Savings of FOH 40% × $150 × 1. Difficulty: Medium.00 4.00 Gallup Company has contacted Parks with an offer to sell it 3.26 . or the chickens can be slaughtered in house and then sold for $2. AACSB: Analytic.000 + 24. Bloom: AP.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. $5 of the fixed overhead per unit is unavoidable. AICPA FN: Decision Modeling.000) + 9. SO: 4.200 × $420) Cost savings: Savings of DM $100 × 1.00 each.000 staplers for $18.200 = $120.) $(54. produces a crop of chickens at a total cost of $66. Ans: N/A. Bloom: AN. SO: 5.000 $ (72. Difficulty: Medium.000 more to turn the annual chicken crop into chicken meat.

000 that will have a 5-year useful life with no salvage value. AACSB: Analytic. AICPA BB: Resource Management. and butter. Bloom: AP. Bloom: AN.000 Variable departmental costs 6. A new. Min: 4. Instructions Prepare an analysis showing whether the old machine should be retained or replaced. Ans: N/A. Ans: N/A. SO: 6. The machine has a book value of $60.000 Net income (loss) $ (1. yogurt.000) + 6. has 4 product lines: sour cream.000 4. SO: 7. Difficulty: Medium.25 – $1. IMA: Business Economics Solution 172 (4 min.000 Instructions Prepare an incremental analysis of the effect of dropping the sour cream product line.000 Replace Equipment $930.000 and a remaining useful life of 3 years and no salvage value.800 Butter 200 $20.000 $15.000 17.800 7.000 2.000) $ 45.000 chickens = $75. Results of June follow: Sour Cream Units sold 2.000 Incremental costs: given as $55.000.000 + 2.000 $ 2. more efficient machine is available at a cost of $225.000 x .200 3.000 to $310. Difficulty: Medium. The new machine will lower annual variable production costs from $400. BE 171 Elmdale Company has a machine that affixes labels to bottles.000 13.000 Net Income Change $270.41 Incremental revenues: ($2.000 profit Paola Farms should slaughter.000 28.000) Ice Cream 500 $20. AICPA BB: Resource Management.000 – $55. AICPA PC: Problem Solving.40) Incremental decrease in profits if dropped . AICPA FN: Decision Modeling. AICPA FN: Decision Modeling.000 $ (2.000* (225. and the other 60% are allocated.) Retain Equipment $1. AICPA PC: Problem Solving.000 Fixed costs 5.) 26 .Incremental Analysis and Capital Budgeting Solution 170 (4 min. IMA: Investment Decisions Solution 171 (4 min. 40% of the fixed costs are direct.000 Variable manufacturing costs New machine cost Net savings over 3 years *For 3 years of remaining life BE 172 Keith Inc.000 Incremental profits: $75.) $(10.000 $ 8.000 Revenue $10. Min: 4.000 $ 5.000 Yogurt 400 $10.200. ice cream.00) × 60.000 = $20. The allocated fixed costs are based on units sold and are unavoidable.000) Incremental revenue Incremental variable cost savings Incremental fixed cost savings ($5. Demand of individual products is not affected by changes in other product lines. AACSB: Analytic.200 Total 3.100 $60.000 4.

AICPA FN: Decision Modeling. Min: 4. BE 174 Lightle Co. is considering investing in a new facility to extract and produce salt. AICPA PC: Problem Solving. The facility will cost $980.000 per year. AACSB: Analytic. Instructions Compute the cash payback period. is considering investing in new equipment that will cost $900. Instructions Calculate the annual rate of return on this facility.000 salvage value at the end of its 20-year useful life. Which product should Meierhoff tell its sales personnel to ‘push’ to customers? Ans: N/A. Difficulty: Medium.000 + $90. sales personnel should push Product 43. using the straight-line rate.42 Test Bank for Accounting Principles. The new equipment is expected to produce annual net income of $30.) Product 12: $23 ÷ 2. is $90.5 hours Instructions Compute the contribution margin per unit of limited resource for each product.000. AACSB: Analytic.26 . SO: 9. Bloom: AP.) $900. SO: 9. AICPA FN: Decision Modeling. Ans: N/A. but will have a $20. IMA: Investment Decisions Solution 174 (3 min.5 hours = $10 Therefore.5 hours = $9.000 ÷ ($30. AICPA BB: Resource Management.000. IMA: Business Economics Solution 173 (4 min. AICPA BB: Resource Management. AACSB: Analytic. Bloom: AP. but will also increase annual expenses by $160. SO: 8. AICPA PC: Problem Solving.000) = 7.000 with a 10-year useful life. AICPA FN: Decision Modeling. Difficulty: Medium.000 to build.20 Product 43: $15 ÷ 1. Ninth Edition BE 173 Meierhoff Company provided the following information concerning two products: Contribution margin per unit—Product 12 Contribution margin per unit—Product 43 Machine hours required for one unit—Product 12 Machine hours required for one unit—Product 43 $23 $15 2. AICPA BB: Resource Management. Bloom: AN. Min: 3. Difficulty: Medium. Min: 4. Depreciation expense. AICPA PC: Problem Solving.000 over its useful life. The facility will increase revenues by $240.5 years BE 175 Holt Co. Ans: N/A. IMA: Investment Decisions .5 hours 1.

and indicate whether the investment should be made by Puckett Company.870 = 5. The appropriate present value factor for 10 periods is 5. Min: 4. AICPA BB: Resource Management.000 × 1. Bloom: AP.000 Its average investment is: $980. $90.000 ————————— = $500. Instructions Compute the approximate internal rate of return for this investment.000 + $20.000 to purchase a machine that will provide annual cash flows of $25.000 is being contemplated by Linn Co.000 – $160. we see that the discount factor for 10% is 5. SO: 10. AICPA PC: Problem Solving. Ans: N/A. IMA: Investment Decisions Solution 177 (3 min.65 Cash outflow—investment $140. its annual rate of return is: $80.00 Net present value The investment should be made because the net present value is positive. AICPA FN: Decision Modeling. Difficulty: Medium. .33493. AACSB: Analytic.33 By tracing across on the 8-year row. AICPA PC: Problem Solving.000 ) $ 1. (Table C-2 is needed) Ans: N/A.Incremental Analysis and Capital Budgeting Solution 175 (4 min.250 Cash inflows—$25. AICPA FN: Decision Modeling. the internal rate of return can be approximated by dividing the capital investment by the net annual cash inflows to determine the discount factor. AACSB: Analytic.) 26 . SO: 10.000 2 Therefore.65.000 = $80.000 ÷ $16.000 × 5.) Present Value $141. Instructions Compute the proposed investment’s net present value. Thus.000 ÷ $500.) When net annual cash inflows are expected to be equal. Difficulty: Medium. Bloom: AP.000. and then locating this discount factor on the present value of an annuity table. AICPA BB: Resource Management. IMA: Investment Decisions Solution 176 (4 min. Min: 3. BE 177 An investment costing $90. The investment will have a life of 8 years with no salvage value and will produce annual cash flows of $16.43 The annual rate of return is calculated by dividing expected annual income by the average investment.250 (140. The company’s expected annual income is: $240. the internal rate of return on this project is approximately 10%.000 = 16% BE 176 Puckett Company is proposing to spend $140.870.

Bloom: AN. Ex.000) Profit per unit $70 $45 10 55 $15 The company received a proposal from a foreign company to buy 15. Ans: N/A.000 units at $50 Reject Order $ -0-0$ -0Accept Order $750.000 ÷ 50. the company reported the following operating results while operating at 80% of plant capacity: Sales (500. SO: 3.000 units of Felter Company's product for $50 per unit.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. AICPA BB: Resource Management. IMA: Business Economics Solution 178 (9–13 min.44 Test Bank for Accounting Principles.000.000 units of product and is operating at 70% of plant capacity. Ninth Edition EXERCISES Ex. 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 Net Income Increase (Decrease) $750.000.000 (675.000 $12.000) $ 75.000 54.000 24. AICPA PC: Problem Solving. . AICPA FN: Decision Modeling. For the first eight months of 2010.) FELTER COMPANY Incremental Analysis Proposal to buy 15.000 × $45) Net Income Felter Company would increase its income by $75.000 Revenues (15.000 in accepting the special order.000. 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. 179 Carney Company manufactures cappuccino makers.26 . Min: 9. AACSB: Analytic.000 (675.000. This is a one-time only order and acceptance of this proposal will not affect the company's regular sales.000. Unit information about its product is as follows: Sales Price Variable manufacturing cost Fixed manufacturing cost ($500. 178 Felter Company produced and sold 50.000) $ 75. Difficulty: Hard.000 × $50) Costs (15.000 36.000 units) Cost of goods sold Gross profit Operating expenses Net income $90.

Instructions (a) Prepare an incremental analysis for the special order.850.000 = $1. IMA: Business Economics .000 4.060. AICPA PC: Problem Solving. Ex. AICPA BB: Resource Management.000 × $95 = $2.800. AACSB: Analytic.200.Incremental Analysis and Capital Budgeting Ex. operating expenses were 75% variable and 25% fixed.000) (1. Carney Company receives a special order for 30. Ans: N/A.000. Ans: N/A.000 2. Min: 13.000 of shipping costs but no increase in fixed expenses.000 2.) Reject Order $ -0-0-0$ -0Accept Order $4.000 Cost of goods sold was 70% variable and 30% fixed. Acceptance of the special order will not affect fixed costs but will result in $1.050.45 In September. AICPA BB: Resource Management.050. AICPA FN: Decision Modeling.000 × $35 = $1. IMA: Business Economics Solution 179 (a) (12–17 min. Min: 12. **Variable operating expenses = 30.000.000 Revenues Cost of Goods Sold Operating Expense Net Income *Variable cost of goods sold = 30. Difficulty: Medium.000 $ 800. SO: 3. 180 Gregg Company supplies schools with floor mattresses to use in physical education classes. For the first 6 months of 2010. (b) Should Gregg Company accept the special order? Justify your answer.) 26 . Difficulty: Medium.000 units) Cost of goods sold Gross profit Operating expenses Net income $7.000) $ 140. AICPA PC: Problem Solving.000* 1. Instructions (a) Prepare an incremental analysis for the special order.000 machines at $135 each from a major coffee shop franchise. Gregg has received a special order from a large school district to buy 600 mats at $45 each.000 (2.050. (b) Should Carney Company accept the special order? Justify your answer.000 2.000.850. AICPA FN: Decision Modeling.000.000 + $10. Acceptance of the order would result in $10. 179 (Cont. SO: 3.000** $ 140. (b) The incremental analysis shows Carney Company should accept the special order because incremental revenues exceed incremental costs.850. the company reported the following operating results while operating at 80% capacity: Sales (100.000 Net Income Increase (Decrease) $4.060. Bloom: AN. This recommendation assumes that acceptance of the special order will not affect relations with existing customers. Bloom: E.060.200 of shipping costs. AACSB: Analytic.

) Net Income Increase (Decrease) $27. Ex.000.000 × 75% = $1.46 Test Bank for Accounting Principles. Variable cost of goods sold for the special order = 600 × $29. Difficulty: Hard.000) -0$ 4.25 per disc for 5.500.200 = $10.200 (b) The incremental analysis shows Gregg Company should not accept the special order because incremental costs exceed incremental revenues.200. (b) Should Innova accept the special order? Why or why not? Ans: N/A.000 + $1.30) on each disc sold. SO: 3.940.000 discs.000 (17. The cost of manufacturing 25.500. Rudd would sell the discs under its own brand name in foreign markets not yet served by Larkin.000 ÷ 100.250 Revenues Materials ($0.640) (10. If Larkin accepts the offer. AICPA PC: Problem Solving.) Reject Order $ -0-0-0-0-0-0$ -0Accept Order $21.940.000. Bloom: E.40) Labor ($1. AACSB: Analytic.000 17.000 20.000) (5.40 = $17.000 = $15 Variable operating expenses for the special order = 600 × $15 = $9.000 ÷ 100.000 to $55. IMA: Business Economics Solution 181 (a) (12 min. No sales commission will result from the special order.250 (2.640 10.000) (4.200 $ (840) (13–18 min.000 × 70% = $2. Variable operating expenses = $2.250 Net Income Effect $21.000 Variable operating expenses per unit = $1. AICPA FN: Decision Modeling.000) (4.000 Innova also incurs 5% sales commission ($0.000) (6. its fixed overhead will increase from $50. Min: 12.000) (5.000) -0$ 4.26 .000) (6.80) Fixed overhead Sales commissions Net income . Instructions (a) Prepare an incremental analysis for the special order.000 = $29. Variable cost of goods sold per unit = $2.000 $100.000 due to the purchase of a new imprinting machine.000 30.40.200) $ (840) Variable cost of goods sold = $4.640.250 (2. Ninth Edition Solution 180 (a) Revenues Cost of Goods Sold Operating Expense Net Income Reject Order $ -0-0-0$ -0Accept Order $27. AICPA BB: Resource Management. Rudd Corporation offers Innova $4. 181 Larkin Company produces golf discs which it normally sells to retailers for $6 each.000 golf discs is: Materials Labor Variable overhead Fixed overhead Total $ 10.20) Variable overhead ($0.000 40.

AACSB: Analytic.000 widgets for production during 2010.000 50. Kasten received an offer from another company to manufacture the same quality widgets for $39.000 widgets and focus only on distribution? Ans: N/A. Bloom: AP.000 Instructions Answer each of the following independent questions: 1. Difficulty: Medium.000 if it buys instead of makes. 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. AICPA BB: Resource Management. SO: 3. Should Kasten accept the order? 2. Ex. Kasten can make an extra $3.47 As shown in the incremental analysis. Kasten has capacity to produce 12.000 units. 182 Kasten. Fixed factory overhead is allocated to production.4. budgeted 10.) $43 40 $ 3 1. IMA: Business Economics Solution 182 (10–12 min. Incremental revenue per widget Incremental cost per widget: $7 + ($15 × 2) + $3 = Incremental profit per unit Total incremental profit = $3 × 1. This customer has offered $43 per widget. Yes.000 30.000 $450. Kasten will save $10. Larkin should accept the special order because incremental revenue exceeds incremental expenses by $4. Yes.000 = $10. AICPA FN: Decision Modeling. Min: 10. × 2 hrs. AICPA PC: Problem Solving.000 units from a new customer in a country in which Kasten has never done business.000 300.000 2./unit) Variable manufacturing overhead ($3/unit) Fixed factory overhead costs ($5/unit) Total Cost per unit = $45 $ 70.000 = $3. Inc. Should Kasten let someone else manufacture all 10.000.250. 181 (b) (Cont.Incremental Analysis and Capital Budgeting Ex. The following estimated costs were provided: Direct material ($7/unit) Direct labor ($15/hr.000 .) 26 . Kasten received an order for 1.

Min: 13. AICPA PC: Problem Solving.26 . 184 Agler Corporation currently manufactures a subassembly for its main product. If the component part is purchased from the outside firm.000 10.000 20.000 if the component part is purchased from the outside firm and the new product is manufactured. Difficulty: Medium.000 units of a component part that is used in its product and incurred the following costs: Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead $35.000 10. The fixed manufacturing overhead consists mainly of depreciation on the equipment used to manufacture the part and would not be reduced if the component part was purchased from the outside firm.000 15.000 92.000 Increase (Decrease) $ 35.000 15.000 10.000 $80.000 -0(72. . Coyle Company has the opportunity to use the factory equipment to produce another product which is estimated to have a contribution margin of $14.000 Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead Purchase price (6. AACSB: Analytic. Instructions Prepare an incremental analysis report for Coyle Company which can serve as informational input into this make or buy decision.000 72.000 15. $3 of the fixed overhead per unit will be allocated to other products. 183 Coyle Company manufactured 6.000 Another company has offered to sell the same component part to the company for $12 per unit. Ninth Edition Ex.48 Test Bank for Accounting Principles.000 -080.000 $94.000 Buy $ -0-0-020.000) 14. Bloom: E.000 × $12) Total annual cost Opportunity cost Total cost Income is expected to increase by $2.000 -0$92. AICPA FN: Decision Modeling. Ex. 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. SO: 4.000.000 $ 2.) Make $35. If Agler makes the subassemblies.000 of the subassemblies for $18 each. AICPA BB: Resource Management.000 14.000 20. Ans: N/A.000) (12. IMA: Business Economics Solution 183 (13–18 min.

000 $1. respectively.) Cost to make .000) $ 120. 184 (Cont.000 × $9) Variable Manufacturing Costs ($450.000 bicycles per year.000 270. Ex.000. IMA: Cost Management Solution 184 (6 min. Difficulty: Medium. the company's net income would increase $120.000 Net Income Increase (Decrease) $ 400.000 30.000 Buy $ -0-0-030. SO: 4. As indicated. AICPA PC: Problem Solving. Ans: N/A. AICPA BB: Resource Management.000 × $20) Total annual cost (b) The seats should be purchased from the outside supplier. Normal production is 50.000 270.000 450. Difficulty: Medium. A supplier offers to make the bicycle seats at a price of $20 each. Instructions (a) Prepare the incremental analysis for the decision to make or buy the bicycle seats. Bloom: AN.000 of fixed manufacturing overhead currently being charged to the bicycle seats will have to be absorbed by other products.000 1.030.000 by purchasing the seats. all variable manufacturing costs will be eliminated. Bloom: AP. The company is currently operating at 100% capacity.000 × 60%) Fixed Manufacturing Costs Purchase Price (50. 185 Kuhn Bicycle Company has been manufacturing its own seats for its bicycles. Min: 15. . AICPA FN: Decision Modeling. Min: 6. AICPA FN: Decision Modeling.00 and $9.000 Dryer should buy to save $1 per unit. The direct materials and direct labor cost per unit to make the bicycle seats are $8.000 units = $5. but the $30.000. Ans: N/A.cost to buy = incremental cost ($24 – $5) – $18 = $1 Incremental cost to make = $1 × 5.Incremental Analysis and Capital Budgeting Ex. (b) Should Kuhn Bicycle Company buy the seats from the outside supplier? Justify your answer. IMA: Cost Management Solution 185 (a) (15–20 min. AACSB: Analytic.000 450.000 -0$1.000 Direct Materials (50. SO: 4. AICPA BB: Resource Management. and variable manufacturing overhead is charged to production at the rate of 60% of direct labor cost.000 × $8) Direct Labor (50.49 Instructions Should Agler make or buy the subassemblies? Explain your answer.00.) 26 . AACSB: Analytic. If the bicycle company accepts this offer.150.) Make $ 400.000 -0(1. AICPA PC: Problem Solving.

60 Net Income Increase (Decrease) $4.000 of costs to produce 40.60 (C) $.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) $6.000 gallons of milk which can be sold for $1 per gallon to a pasteurization company.60 $ 2. 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. The production generates 60.20 .20).000 gallons of the chemical. If the company processes the chemical further and manufactures the paint itself.50 Assuming the company sells all 40.20 .000 gallons × $1.00 (1. The company can sell the paint at $15. IMA: Business Economics Solution 186 (15–20 min. or the milk can be processed further into ice cream and then sold for $2.40 $ 3.000 gallons that it produces.80 .000 more to turn the annual milk supply into ice cream.60 8. the following additional costs per gallon will be incurred: Direct materials $1.40 Process Further $15.80 . Ninth Edition Ex.30 .60 $8. the incremental net income would be $48. Inc. AACSB: Analytic. Ex.50 per gallon. The selling price of the chemical is $11.000 (40. AICPA PC: Problem Solving. Direct labor $.60.80 1. Instructions Determine the incremental per gallon increase in net income and the total increase in net income if the company manufactures the paint.80 + $.60) (.00 + $1.60 The company is considering manufacturing the paint itself. Difficulty: Medium. 187 Ecker.70 1. Min: 15.000. . AICPA FN: Decision Modeling.00 6. SO: 5.00 per gallon. the company incurred $344.80) $1.00 per gallon. No increase in fixed manufacturing overhead is expected. AICPA BB: Resource Management.60 11.00 7. produces milk at a total cost of $66. Bloom: E.70. 186 Spencer Chemical Corporation produces an oil-based chemical product which it sells to paint manufacturers.70 (B) $1.00 1.70) (.) Sell Chemical $11.00 1. Ans: N/A.50) — (2. It costs $75.50 Test Bank for Accounting Principles. Variable manufacturing overhead $.26 .50.20 + $. In 2010.

) 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 .50 – $1. Assembling the bikes will increase direct materials by $5 per bike. AACSB: Analytic. IMA: Business Economics $150 70 49 21 $290 Solution 188 (a) (12 min. Additional variable overhead will be incurred at the normal rates. AICPA FN: Decision Modeling. AICPA BB: Resource Management. management has concluded that some of this capacity can be used to assemble the bikes and sell them at $440 each.000 Incremental profits: $90. SO: 5. Difficulty: Medium. Min: 12.000 = $15. 187 (Cont. Min: 6. Instructions (a) Prepare an incremental analysis for the sell-or-process-further decision.000 – $75. AICPA PC: Problem Solving. and direct labor by $10 per bike. 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. 188 Speedy Bikes could sell its bicycles to retailers either assembled or unassembled. Ex.) Incremental revenues: ($2. The cost of an unassembled bike is as follows. SO: 5.000 Incremental costs: given as $75.000 profit Ecker should process into ice cream.51 Instructions If Ecker processes the milk into ice cream.000 gallons = $90. Bloom: AP. AACSB: Analytic.00) × 60. (b) Should Speedy sell or process further? Why or why not? Ans: N/A.Incremental Analysis and Capital Budgeting Ex. IMA: Business Economics Solution 187 (6 min. 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. AICPA PC: Problem Solving. Bloom: E. AICPA BB: Resource Management. Speedy currently has unused productive capacity that is expected to continue indefinitely.) 26 . Difficulty: Medium. AICPA FN: Decision Modeling.

The machine is unreliable and results in a significant amount of downtime and excessive labor costs. The new machine is expected to have zero salvage value after five years.000) (430. AACSB: Analytic. Data are presented below for the two machines: Original purchase cost Accumulated depreciation Estimated life Old Machine $340. AICPA PC: Problem Solving. Ans: N/A.000 Cost savings New machine cost Proceeds from sale of old machine Net incremental net income (A) $95. Ninth Edition Ex. AICPA BB: Resource Management.000 — 5 years It is estimated that the new machine will produce annual cost savings of $95. Original purchase cost Accumulated depreciation Estimated operating costs (annual) Useful life Current Copier $10. Bloom: AN. Recently the copy clerk has not been able to process all the necessary copies within the regular work week. 188 (Cont. The management is considering replacing the machine with a more efficient one which will minimize downtime and excessive labor costs. The company should purchase the new machine because there will be an increase in net income of $53.000 (430.000 5 years New Machine $430. Both machines will have a salvage value of zero if operated for the remainder of their useful lives.000.) (b) As shown in the incremental analysis.000. Speedy Bikes should process further (rather than sell unassembled) because incremental revenue exceeds incremental expenses by $18 per unit.000. Ex.52 Test Bank for Accounting Principles. Instructions Determine whether the company should purchase the new machine. If operated for the remainder of its useful life.000 230.000 (A) $475.26 . AICPA FN: Decision Modeling. 189 Harris Timber Corporation uses a machine that removes the bark from cut timber.000 $ 53. Min: 11. the current machine would have zero salvage value.000 8.200 5 years If sold now.000.000. 190 Kinder Enterprises relies heavily on a copier machine to process its paperwork. Management is considering updating the copier machine with a faster model. SO: 6. Ex.000 9. Difficulty: Medium.000 8.000 $ 53. The old machine can be sold to a scrap dealer for $8. IMA: Investment Decisions Solution 189 (11–16 min.000) 8.000 — 4.000 5 years New Model $20. the current copier would have a salvage value of $1.) Retain Equipment $ -0-0$ -0$ -0Replace Net Income Equipment Increase/(Decrease) $475.000 × 5 = $475. .

Milwaukee allocates indirect fixed costs based on the number of units to be sold.453 Total $117.000) 1.000 Net Income Increase (Decrease) $24.000 $ 5.000 Replace Machine $21.000 10.200 14. IMA: Investment Decisions Solution 191 (a) (10–12 min. (b) Should Milwaukee close the Wise division? Briefly indicate why or why not.000 All of the allocated costs will continue even if a division is discontinued.000 (20.000 51.000 16. Min: 12.000 $ (5.000 Less variable costs 32.000 35.000 12. AACSB: Analytic. AICPA PC: Problem Solving. The results of May. Wise. Difficulty: Medium. Difficulty: Medium.000 Revenue $70. and Er.200 26.000 Less direct fixed costs 14.000 16.547 $ 4. Min: 10. IMA: Investment Decisions Solution 190 (12–16 min.000 $50.) 26 . Ex. Inc.000 -0-0$45.000 4.000 $ 21. AACSB: Analytic. Since the Wise division has a net loss.000 $160.000 Less allocated fixed costs 6. Ans: N/A. AICPA FN: Decision Modeling. Instructions (a) Prepare an analysis showing the effect of discontinuing the Wise division. AICPA BB: Resource Management.000 7. AICPA FN: Decision Modeling. has three divisions: Bud. Bloom: E.000 26.000 45. Bud Wise Er Total Units sold 3. AICPA BB: Resource Management.000 19. Milwaukee feels if the division is closed. 190 (Cont.000 20.53 Instructions Prepare an analysis to show whether the company should retain or replace the machine. 2010 are presented below.800 Revenue Less variable costs Less direct fixed costs Less allocated fixed costs Net income .000 Net income $18.) Retain Machine $45. Milwaukee feels that it should be discontinued. Bloom: AP.000 5.000 20.000 $40.453 $15.000 higher by replacing the current copier.000 Operating costs New machine cost Salvage value Totals The current copier should be replaced.000) $ 8. that sales at the Bud division will increase by 10%.000 2.000 74.000 12. The incremental analysis shows that net income for the five-year period will be $5.000 $ 19.347 Er $40. Ans: N/A. AICPA PC: Problem Solving. SO: 6.000 10.000 12. SO: 7. and that sales at the Er division will stay the same.000 20. 191 Milwaukee.Incremental Analysis and Capital Budgeting Ex.000) $40.) Bud $77.000 (1.

The increase in sales by 10% of the Bud division was not enough to offset the loss of the Wise division.250. AICPA PC: Problem Solving. Min: 20. Ans: N/A.200 Allocation of total allocated fixed costs of $20.000 430.000 of fixed selling expenses if it discontinues operation of the Consumer Division.200 ($21.000)] × $20.000) Total $2.) Calculations: Revenue = $70. 192 Trump Forest Corporation operates two divisions. The Consumer Division operates retail lumber mills which sell a variety of products in the do-ityourself homeowner market.000 $ 350.000 250.000 180. IMA: Investment Decisions .000 Variable costs = $32.000 = $7.453 To Er: [2. AICPA FN: Decision Modeling.300 ÷ (3. Ninth Edition Solution 191 (Cont. Bloom: E. Difficulty: Medium. (b) If the company had discontinued the division for 2010.000 900.300 + 2.000 750.54 Test Bank for Accounting Principles. SO: 7. The company is considering disposing of the Consumer Division since it has been consistently unprofitable for a number of years. determine what net income would have been.000 600. The management of the company feels it can save $45.800) when the division is eliminated.000 $ (30.000 350. AACSB: Analytic. Ex.000 Sales Cost of goods sold Gross profit Selling & administrative expenses Net income In the Consumer Division.000 × 110% = $77.000 $ 320.000 – $19.000 of fixed cost of goods sold and $60.000 × 110% = $35.000 ÷ (3.26 .000: To Bud: [3. AICPA BB: Resource Management. 70% of the cost of goods sold are variable costs and 25% of selling and administrative expenses are variable costs.000 150. The profit decreases by $1.000 1.500.300 + 2.000)] × $20. The Timber Division manufactures and sells logs to paper manufacturers.547 (b) No.000.000 = $12.000 Consumer Division $500. Instructions (a) Determine whether the company should discontinue operating the Consumer Division. the Timber Division and the Consumer Division. The income statements for the two divisions for the year ended December 31. 2010 are presented below: Timber Division $1.

000.000 $ (4.000 $180.000 45. Difficulty: Medium. AICPA FN: Decision Modeling. Demand of individual products are not affected by changes in other product lines. Instructions What will happen to profits if Mercer discontinues the Books product line? Ans: N/A.000 + $(105.000 The allocated fixed costs are unavoidable.000) 45.000 21. $210. 193 Mercer has three product lines in its retail stores: books.000 × 25% = $45.000) (C) (D) Eliminate $ -0-0-0-060.000 51. Min: 6.000 $22.000 $(105. IMA: Investment Decisions Solution 193 (6 min. videos.000 245.000 Videos 2.000 (B) 210. AACSB: Analytic.000 (A) 45.000) 26 .000.000 Total 5.000 + 1.000 $(135.000 = $135. AICPA PC: Problem Solving. Results of the fourth quarter are presented below: Units sold Revenue Variable departmental costs Direct fixed costs Allocated fixed costs Net income (loss) Books 1.000) 245.000 7. exp. Contribution margin Fixed expenses: Cost of goods sold Selling and admin.000 The company should continue the Consumer Division because contribution margin.000 $85.000 7.000 $40.000 6.000 (C) 135.000 = $105.000 $ (3.000 75.000 $23. Net income (A) (B) (20–25 min.000 60.000 7.55 Net Income Increase (Decrease) $(500.000 2.000) = $245.000 Ex.) CONSUMER DIVISION Continue $500. AICPA BB: Resource Management.000 – $245. is greater than the avoidable fixed costs.000: Timber Division + Decrease in Net Income $350.000) $350.000 × 70% = $245.000 (D) $ (30.000) Music 2.000 $ 2.000 – $45.000 22.000 105. SO: 7.000 $350. and music.000 $180.000 $ 7.) $(22.Incremental Analysis and Capital Budgeting Solution 192 (a) Sales Variable expenses: Cost of goods sold Selling and admin. $105. exp. (b) Net income for the total company would have been $245.000 3.000 (210.000 12.000) + 17.000 17.000) Incremental revenue Incremental costs: Variable costs savings Direct fixed costs savings Decrease in profits if discontinued .000 1. Bloom: AP.000 $ 8.

000 800.000.) Sales Cost of Goods Sold Gross Profit Operating Expenses Net Income Other Three Divisions $2. cost of goods sold is 80% variable and operating expenses are 70% variable.000) Sales Variable Expenses Cost of goods sold Operating expenses Total Variable Contribution Margin Fixed Expenses Cost of goods sold Operating expenses Net Income (Loss) The accountant is not correct.000) Total $2. AICPA BB: Resource Management.000 of the fixed operating costs will be eliminated.000 $ (60.000 940.000 295. The cost of goods sold for the Southern Division is 35% fixed.000 260.000 140.000 295. Instructions Do you concur with the new accountant's recommendation? Present a schedule to support your answer. AICPA PC: Problem Solving.000 95. Difficulty: Medium. AACSB: Analytic. The reduction in income is the result of the loss of the contribution margin less the avoidable fixed costs of $10.000 35. Ninth Edition Ex.000 $(235.000 $(175. (See analysis below.000) 260.000 For the other divisions.000 $ 250.000 950.000 185. Min: 20.000 1.350.000.000) Eliminate $ -0-0-0-0-0140. 194 A recent accounting graduate from Marvel State University evaluated the operating perform-ance of Fanning Company's four divisions.000 $ (60. only $10. If the Southern Division is eliminated. During the presentation.000 80.050. The following presentation was made to Fanning's Board of Directors. IMA: Investment Decisions Solution 194 (20–25 min.000 140. AICPA FN: Decision Modeling. the net income will be $175.000 35. Ans: N/A. and its operating expenses are 75% fixed.56 Test Bank for Accounting Principles. SO: 7.130.000) Net Income Increase (Decrease) $(480.480.000 $ 190.000) -010.000 1. .000 400.000. If the division is eliminated. Bloom: E.000 1.000 greater. not $60.) Continue $480.000 105.000 (185.000 less.000 Southern Division $480.26 . the accountant made the recommendation to eliminate the Southern Division stating that total net income would increase by $60.

2 Management desires to make a decision regarding which product to produce in order to maximize the company's income. Ex. Ans: N/A.2 hrs. 196 8. 195 26 . Bloom: E.6 1. Difficulty: Medium. AICPA FN: Decision Modeling. Instructions Taking into consideration the constraint under which the company operates. SO: 8. IMA: Business Economics Solution 195 (20–25 min. Min: 20.) 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 .000 $ Hughes Company manufactures and sells two products. 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 . 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 .000 $160. Contribution margin per unit of limited resource ($15 ÷ . $ 25 47 $24 1.6) ($24 ÷ 1. AICPA PC: Problem Solving.2) Machine hours available Contribution margin The company should produce and sell Product A.6 hrs. AACSB: Analytic.57 Ridley Company has 8.000 20 8. AICPA BB: Resource Management.Incremental Analysis and Capital Budgeting Ex.000 $200.000 machine hours available to use to produce either Product A or Product B. prepare a report to show which product should be produced and sold.

) Instructions (a) Compute the contribution margin per unit of the limited resource for each product. AICPA PC: Problem Solving. Ninth Edition Ex.000 20. 197 Finney Company estimates the following cash flows and depreciation on a project that will cost $200. (c) (1) Machine hours 1.000 additional machine hours are available. 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.250 Product Deluxe 500 5 100 $20 $2.50 $4. Min: 25.000 .26 .000 Product Standard 1.000 $10.000 ÷ 2 (a) Machine hours per unit (b) Units produced (a) ÷ (b) Contribution margin per unit Total contribution margin (2) Machine hours (a) Machine hours per unit (b) Units produced (a) ÷ (b) Contribution margin per unit Total contribution margin Ex.) Product Standard Deluxe $18 $20 4 5 $4. AACSB: Analytic. AICPA BB: Resource Management. (2) Allocated entirely to the product identified in (b) above.000 8.000 4 250 $18 $4. Difficulty: Medium. Ans: N/A. Bloom: AP.500 Standard 500 4 125 $18 $2.00 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. AICPA FN: Decision Modeling. 196 (Cont. IMA: Business Economics Solution 196 (a) (25–30 min. SO: 8.000 60.58 Test Bank for Accounting Principles.000 and will last 10 years with no salvage value: Revenues Sales Operating expenses Salary expense Depreciation expense Miscellaneous expenses Net Income $70. (b) If 1.000 $32.

Bloom: AP. Bloom: AP. AICPA PC: Problem Solving.000 + $20. Investment $200.000 Annual rate of return = ———— = 10% $100. 198 Wesley Medical Center is considering purchasing an ultrasound machine for $1. Installation costs and freight charges will be $24. The machine has a 10-year life and an estimated salvage value of $40.200 and $800.000. (b) Compute the annual rate of return for the new machine.000) $30. IMA: Investment Decisions Solution 197 (9–14 min.000 Annual cash inflow ($10. Difficulty: Medium. Min: 16.000 .000. AACSB: Analytic. There are $10 in medical supplies and $40 of technician costs for each procedure performed using the machine.59 Instructions (a) Calculate the expected annual rate of return on this project showing calculations to support your answer. AICPA BB: Resource Management. 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. SO: 9.000 + $24.000 Annual Cash Flow: Number of procedures: 52 × 5 = 260 Contribution margin per procedure: $850 – $10 – $40 = $800 Total annual cash flow: 260 × $800 = $208.000 ÷ $30.67 years Ex. SO: 9.67 years. Ans: N/A.000 Average investment = ———— = $100.135. The Center uses straight-line depreci-ation.160.) (a) Cost of the ultrasound machine: $1.200 + $800 = $1. respectively.Incremental Analysis and Capital Budgeting Ex. Instructions (a) Compute the payback period for the new ultrasound machine. AICPA PC: Problem Solving. Ans: N/A.) (a) Annual rate of return is 10%. (b) Calculate the cash payback on this project showing calculations to support your answer. AACSB: Analytic.000 2 $10. AICPA FN: Decision Modeling. AICPA BB: Resource Management. IMA: Investment Decisions Solution 198 (16–22 min.135. $200. 197 (Cont. Min: 9.000 (b) Cash payback period is 6.000 = 6. Difficulty: Medium.) 26 . AICPA FN: Decision Modeling.000 Cash payback = $200.

Annual depreciation: ($18. AICPA BB: Resource Management. Each muffler sells for $65 installed.60 Test Bank for Accounting Principles. (b) Compute the annual rate of return for the new hoist.900 = 6.26 . Average annual rate of return = $632 ÷ $9.000 10 years Annual Net Income: $208.000 Cash payback: ————— = 5.900.000 + $40.6 years $208.160. AICPA FN: Decision Modeling.900. (Round to one decimal. The cost of a muffler is $35.720 ÷ $4.000 $96.720. Min: 10. AACSB: Analytic.000 = $96. SO: 9.720 – $960) ÷ 5 = $3. AICPA PC: Problem Solving.4% (rounded).5 years. Difficulty: Medium.000 – $40. The hoist has a 5-year life and an estimated salvage value of $960.000 Average Annual Rate of Return: ———— = 16% $600. Bloom: AP.160 = 4. and the labor cost to install a muffler is $10. 199 Laramie Service Center just purchased an automobile hoist for $13. and freight charges were $740. Laramie uses straight-line depreciation. . Installation costs were $2.528.000 – $112.160 – $3.) (a) Cost of hoist: $13. The new hoist will be used to replace mufflers and tires on automobiles.000 Annual Depreciation: —————————— = $112. Laramie estimates that the new hoist will enable his mechanics to replace four extra mufflers per week.000 Average Investment: —————————— = $600. Ninth Edition Solition 198 (Cont.000 (b) $1.000 + $2.720 + $960) ÷ 2 = $9.) Ans: N/A. 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. (a) (b) 208 $ 20 $4. Instructions (a) Compute the payback period for the new hoist.900 + $740 = $18. Annual net income: $4.160 (b) Average investment: ($18.160.000 2 $1. IMA: Investment Decisions Solution 199 (10 min.000.) $1.000 Ex.160.528 = $632.

Instructions (a) Compute each project's payback period.000 31.) (b) Compute the net present value of each project.000 ÷ $15.000 Cumulative Net Cash Flow $ 7. Cepeda will not accept any project with a payback period over 2 years. indicating the most desirable project and the least desirable project using this method.000 9.000 21.) AA Annual Net Cash Flow $ 7. AICPA FN: Decision Modeling.000.500 9.11 years CC Year 1 2 3 $11.000 $4.61 Cepeda Manufacturing Company is considering three new projects.000 10.000 15. Bloom: E. SO: 9. AICPA PC: Problem Solving.9 years $20.000 = .000 30.000 ÷ (28.000 = $9.000 = .000 – $16. each requiring an equipment investment of $20. AACSB: Analytic.000 $9. Each project will last for 3 years and produce the following cash inflows. Min: 25. AICPA BB: Resource Management.000 Cash payback 2.000 9.000 10.000 BB $ 9.500 ÷ 3) = 2.000 $30.10.27 BB 20. 200 26 .000 = $4.000 ÷ $10. Difficulty: Medium.000 $31. (Round to two decimals.000 The equipment's salvage value is zero.500 $28. Does your evaluation change? (Round to nearest dollar.000 9. Cepeda uses straight-line depreciation.000 – 11. IMA: Investment Decisions Solution 200 (a) Year 1 2 3 (25 min.000 15.000 $11. Year 1 2 3 Total AA $ 7.000 9. Cepeda's minimum required rate of return is 12%.500 CC $11.000 16.) Ans: N/A.Incremental Analysis and Capital Budgeting Ex.000 Cash payback 1.27 years $20.9 .500 9.

199 20. (b) AA Net Annual Cash Flow $ 7.762 9.000 $ 9.62 Test Bank for Accounting Principles.000.199 Discount Year Factor 1 . which is the minimum acceptable rate of return on the investment.677 24. Bloom: AP. AICPA PC: Problem Solving.077 200. Gantner has a 12% cost of capital rate.) (a) Compute (1) the annual rate of return and (2) the cash payback period on the proposed capital expenditure.972 6.26 . IMA: Investment Decisions Solution 201 (a) (1) (2) (b) (16 min.175 10.000 $ 4.817 Present Value $ 9.000 15. only CC is acceptable because its cash payback is 1.500 CC Present Net Cash Value Flow $ 8.40183 = $22.000 9.250 7.000 $ 2. 201 Gantner Company is considering a capital investment of $200.406 24. annual net income and cash inflows are expected to be $18.500 9.500 × 2.000 $ 4.) The most desirable project is CC because it has the shortest payback period.500 9.79719 3 . Project CC is still the most desirable project.000 in additional productive facilities.60478 1. (b) Using the discounted cash flow technique.000 ÷ [(200. SO: 9.13 years. Min: 16.573 10.000 = 3. Project BB is the least desirable.000 6.077 Item Net annual cash flows Capital investment Positive net present value . As indicated.821 7.9 years. Depreciation is by the straight-line method.000 and $58.000 BB Present Value $ 6.000 + $0) ÷ 2] = 18% Cash payback: $200.000 22. During the life of the investment.817.) Annual rate of return: $18. Also.00000 Present Value $209. AICPA FN: Decision Modeling. AICPA BB: Resource Management.89286 2 . AACSB: Analytic. Ninth Edition Solution 200 (Cont.000 $200. Amount $ 58. The new machinery is expected to have a useful life of 5 years with no salvage value.000 ÷ $58.817(1) 20.482 $11. Ex. respectively. Ans: N/A.10.102 Net Annual Cash Flow $9. all of the projects are acceptable. compute the net present value.71178 Total present value Investment Net present value (1) This total may also be obtained from Table 2: $9.000 7.102 20. on the basis of net present values. The least desirable project is AA because it has the longest payback period. Instructions (Round to two decimals.000 Years 1-5 Now PV Factor 3. Difficulty: Medium.

000 Present Value $26.000 . Each project will last for three years and produce the following annual net income. The required rate of return is 12%.893 2 1. IRR = 15% Ex.893 33. (b) Which project should be selected? Why? Ans: N/A.797 3 .301 27.000 in annual cash flows for a period of five years.690 3 2.000 . The investment is expected to generate $250. AICPA FN: Decision Modeling.Incremental Analysis and Capital Budgeting Ex.) IRR = Capital investment ÷ Annual cash inflows = Factor $840. 203 Sargent Company is considering two new projects. Difficulty: Medium.402 Instructions (a) Compute the net present value of each project.893 2 .000 9.63 Ace Corporation recently purchased a new machine for its factory operations at a cost of $840. AACSB: Analytic. SO: 10. 202 26 . Difficulty: Medium.712 $101.000 TOP $ 9. IMA: Investment Decisions Solution 203 (a) Year 1 2 3 (22–27 min. Instructions Calculate the internal rate of return.797 38.000. AICPA BB: Resource Management.000 .000 $27. AICPA PC: Problem Solving. AICPA PC: Problem Solving. Bloom: E.790 26.000 = 3. Sargent Company uses straight-line depreciation. AICPA BB: Resource Management. each requiring an equipment investment of $72. AACSB: Analytic.147 *Net income plus annual depreciation of $24.) Ans: N/A. Sargent requires a minimum rate of return of 12%.36.) Project TIP Annual Cash Inflows* Present Value of 1 $ 30.000.000. .000 The equipment will have no salvage value at the end of its three-year life. (Table 2 from Appendix C is needed. Min: 22.000 9. Year 1 2 3 TIP $ 6. This factor is found in the PVA table at n = 5 periods. AICPA FN: Decision Modeling. IMA: Investment Decisions Solution 202 (4 min. SO: 10. Present value data are as follows: Present Value of 1 Period 12% 1 .712 Present Value of an Annuity of 1 Period 12% 1 .000 ÷ $250. Min: 4.056 $80. The new machine is expected to have zero salvage value at the end of the five-year period. Bloom: AP.000 14.000 9.000 $29.

Ex. Ex.352 Instructions Using the internal rate of return method. Min: 6. Ans: N/A.000 .000.000 Year 3 52.000 = 3. Bloom: E. Difficulty: Medium.000 28. 205 Martinez Company has money available for investment and is considering two projects each costing $70.000 and have no salvage value at the end of its 5-year life.) $80.000 28.000 Year 2 24.605 15% 3.266 72.000 each year. Project TIP is the preferred project because its positive net present value is greater than project TOP's net present value. and is therefore acceptable because it is greater than the company's cutoff rate of 8%. this project has an approximate interest yield of 12%. determine if this project is acceptable by calculating an approximate interest yield for the project.993 10% 3. AICPA BB: Resource Management.402) Capital investment Positive net present value $79.212 8% 3. AICPA PC: Problem Solving.000 $28.791 12% 3. AACSB: Analytic.000 × 2. Ninth Edition Solution 203 (Cont.60 Since the calculated internal rate of return factor of 3. It is estimated that the project will generate annual cash inflows of $45.60 is very near the factor 3.147 72.000 $ 8.266 (b) Both projects are acceptable because both show a positive net present value. The company has a hurdle or cutoff rate of return of 8% and uses the following compound interest table: Present Value of an Annuity of 1 Period 5 6% 4. AICPA FN: Decision Modeling.000 $ 7. Each project has a useful life of 3 years and no salvage value.000 ————$45.605 for five periods and 12% interest. 204 Yanik Company is considering investing in a project that will cost $162.26 . The investment cash flows follow: Project A Project B Year 1 $ 8.) Capital Investment ————————— = Internal Rate of Return Factor Annual Cash Inflows $162. SO: 10.64 Test Bank for Accounting Principles. IMA: Investment Decisions Solution 204 (6–11 min.147 Present value of future cash inflows Capital investment Positive net present value Project TOP Present value of future cash inflows ($33.

AICPA BB: Industry/Sector Perspective.996 22. Difficulty: Easy. AACSB: None. Ans: N/A. Ans: N/A.857 = Year 3 $52. AICPA FN: Measurement. AICPA PC: Problem Solving. IMA: Investment Decisions Solution 205 (12 min.65 Instructions If 8% is an acceptable earnings rate. Difficulty: Easy. AICPA BB: Resource Management. AICPA FN: Decision Modeling. Bloom: K. AICPA BB: Industry/Sector Perspective. AICPA PC: Problem Solving. Bloom: K. An important purpose of management accounting is to provide _____________________ for decision making.000 × .264 (70.232 72. IMA: Business Economics 207. Ans: N/A.000 × .000 × .000 × . Project A earns less than an 8% return. Min: 12. Project A Year 1 $8. AICPA PC: Problem Solving. Min: 1. SO: 1. AICPA PC: Interaction. a major consideration is whether the special price exceeds __________________. AICPA BB: Resource Management. Bloom: AP. Difficulty: Easy. AACSB: None. In a decision on whether an order should be accepted at a special price when there is plant capacity available. AACSB: None.408 20. Difficulty: Easy.568 41. AICPA BB: Resource Management. Min: 1.) Project B is acceptable since its net present value is positive. AICPA PC: Problem Solving. SO: 10. Difficulty: Medium.857 = Year 3 $28. IMA: Business Economics 208.000) $ 2.000 × . The process used to identify the financial data that change under alternative courses of action is called __________________ analysis. Bloom: K. IMA: Business Economics . AACSB: None. (Table 1 from Appendix C is needed.000) $ (736) $25. SO: 3.Incremental Analysis and Capital Budgeting Ex.794 = Present value of cash inflows Cash purchase price Net present value of project A Project B Year 1 $28. SO: 2.926 = Year 2 $28.794 = Present value of cash inflows Cash purchase price Net present value of project B $ 7.156 COMPLETION STATEMENTS 206. AICPA FN: Measurement. The potential benefit that may be obtained by following an alternative course of action is called an _________________ cost.000 × .156 (70. Min: 1. which project should be selected? Justify your response.) 26 . Min: 1. SO: 4. AICPA FN: Decision Modeling.926 = Year 2 $24.928 23. Bloom: K. Ans: N/A.288 69. AACSB: Analytic. 205 (Cont.) Ans: N/A. AICPA FN: Decision Modeling. IMA: Business Economics 209. This indicates that project B provides a return greater than the company's minimum expected return of 8%.

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

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

Min: 5. SO: 10. AICPA PC: Problem Solving. Difficulty: Easy. AACSB: None. or no fixed costs. and briefly explain what features these approaches have that make them more desirable than other approaches. . The time value of money is critical because of the long-term impact of capital budgeting decisions. the incremental costs of buying the product. Generally. Bloom: K. S-A E 223 Management uses several capital budgeting approaches in evaluating projects for possible investment. 5. In gathering relevant information for these two alternatives. Min: 5. G E B D F SHORT-ANSWER ESSAY QUESTIONS S-A E 222 Management is often faced with the alternative of continuing to make a product or component internally. briefly identify the quantitative factors that should be considered. 10. AICPA BB: Resource Management. AICPA FN: Decision Modeling. Ans: N/A. Difficulty: Easy. are relevant because many fixed costs will be incurred regardless of whether the decision is to make or buy. The cash payback method is the least desirable because it also ignores the expected profitability of the project. 2. AICPA BB: Resource Management.68 Test Bank for Accounting Principles. and the opportunity cost (potential benefit foregone) if the product is made. AICPA PC: Problem Solving. or going to an external source and purchasing the product or component. 9. 3. Capital budgeting approaches which do not consider the time value of money include annual rate of return and cash payback. but only some fixed costs. Qualitative factors include the possible adverse effect on employees and the stability of the supplier's price and quality. 7. 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. all variable production costs are relevant in a make or buy decision. Bloom: K. IMA: Investment Decisions Solution 223 From a conceptual standpoint. AICPA FN: Decision Modeling. Are there any qualitative factors that should also be considered? Ans: N/A. 4. Identify those approaches that are more desirable from a conceptual standpoint. Also identify the least desirable approach and explain its major weaknesses. AACSB: None. IMA: Business Economics Solution 222 The quantitative factors to be considered in a make or buy decision include the incremental costs to make the product.26 . I C H A J 6. Ninth Edition Answers to Matching 1. 8. SO: 4.

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

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

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