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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. 1 K 9. 3 C 17. 6 C 25. 9 K sg33. 3 C
2. 2 K 10. 4 C 18. 7 C 26. 9 C sg34. 5 K
3. 2 C 11. 4 K 19. 7 C 27. 9 C sg35. 7 C
4. 2 K 12. 4 C 20. 8 C 28. 10 C sg36. 9 K
5. 2 K 13. 5 C 21. 8 C 29. 10 C sg37. 10 K
6. 2 C 14. 5 C 22. 9 C 30. 10 K
7. 3 C 15. 6 C 23. 9 K sg31. 1 K
8. 3 C 16. 6 C 24. 9 K sg32. 2 K
Multiple Choice Questions
38. 1 K 64. 4 K 90. 6 C 116. 9 AP 142. 10 AP
39. 1 K 65. 4 C 91. 6 C 117. 9 C 143. 10 K
40. 1 K 66. 4 C 92. 6 C 118. 9 AP 144. 10 C
41. 1 K 67. 4 C 93. 6 C 119. 9 K 145. 10 AN
42. 2 K 68. 4 C 94. 6 C 120. 9 K 146. 10 AN
43. 2 C 69. 4 AN 95. 6 C 121. 9 K 147. 10 AP
44. 2 K 70. 4 AN 96. 6 C 122. 9 C 148. 10 AP
45. 2 C 71. 4 AN 97. 6 AP 123. 9 K 149. 10 AP
46. 2 C 72. 4 AN 98. 6 AP 124. 9 AP 150. 10 AP
47. 2 K 73. 4 AN 99. 7 AN 125. 9 K 151. 10 C
48. 2 K 74. 4 AN 100. 7 AN 126. 9 C 152. 10 C
49. 2 C 75. 4 AN 101. 7 C 127. 9 AP st153. 1 K
50. 2 C 76. 4 AN 102. 7 AN 128. 9 C sg154. 3 AN
51. 2 C 77. 4 AN 103. 7 C 129. 9 K st155. 4 K
52. 2 C 78. 4 AP 104. 7 AN 130. 9 AP sg156. 4 C
53. 3 AN 79. 5 AN 105. 8 AN 131. 9 AP sg157. 6 K
54. 3 AN 80. 5 AN 106. 8 AN 132. 10 AP sg158. 7 C
55. 3 C 81. 5 AN 107. 8 C 133. 9 AP st159. 7 K
56. 3 C 82. 5 AN 108. 8 AN 134. 9 AP st160. 8 AP
57. 3 C 83. 5 AP 109. 8 AN 135. 10 AP st161. 9 K
58. 3 C 84. 5 AN 110. 9 AP 136. 10 AP sg162. 9 K
59. 3 C 85. 5 C 111. 9 AP 137. 10 AP sg163. 9 K
60. 3 C 86. 5 AN 112. 9 AP 138. 10 AP st164. 10 K
61. 3 AP 87. 5 AP 113. 8 K 139. 10 AP sg165. 10 K
62. 3 AP 88. 5 C 114. 9 K 140. 10 AP
63. 4 K 89. 5 AN 115. 9 C 141. 10 AP
Brief Exercises
166. 2 AP 169. 4 AP 172. 7 AP 175. 9 AP
167. 3 AP 170. 5 AN 173. 8 AN 176. 10 AP
168. 4 AP 171. 6 AN 174. 9 AP 177. 10 AP

26 - 2 Test Bank for Accounting Principles, Ninth Edition
sg This question also appears in the Study Guide.
st 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. 3 A 184. 4 AP 190. 6 E 196. 8 AP 202. 10 AP
179. 3 N 185. 4 A 191. 7 AP 197. 9 AP 203. 10 E
180. 3 A 186. 5 N 192. 7 E 198. 9 AP 204. 10 E
181. 3 N 187. 5 E 193. 7 AP 199. 9 AP 205. 10 AP
182. 3,4 E 188. 5 AP 194. 7 E 200. 9,10 E
183. 4 E 189. 6 E 195. 8 E 201. 9,10 AP
AP AN
E
Completion Statements
206. 1 K 209. 4 K 212. 8 K 215. 9 K 218. 10 K
207. 2 K 210. 5 K 213. 9 K 216. 9 K 219. 10 K
208. 3 K 211. 6 K 214. 9 K 217. 10 K 220. 10 K
Matching
221. 6 K
Short-Answer Essay
222. 4 K 224. 4 K 226. 9 K
223. 10 K 225. 9 K 227. 6 K

SUMMARY OF STUDY OBJECTIVES BY QUESTION TYPE

Ite Typ Ite Typ Ite Typ Ite Typ Ite Typ Ite Typ Ite Typ

Study Objective 1
1. TF 38. MC 40. MC 153. MC
31. TF 39. MC 41. MC 206. C
Study Objective 2
2. TF 5. TF 42. MC 45. MC 48. MC 51. MC 207. C
3. TF 6. TF 43. MC 46. MC 49. MC 52. MC
4. TF 32. TF 44. MC 47. MC 50. MC 166. BE
Study Objective 3
7. TF 53. MC 57. MC 61. MC 178. Ex 182. Ex
8. TF 54. MC 58. MC 62. MC 179. Ex 208. C
9. TF 55. MC 59. MC 154. MC 180. Ex
33. TF 56. MC 60. MC 167. BE 181. Ex
Study Objective 4
10. TF 65. MC 70. MC 75. MC 156. MC 184. Ex
11. TF 66. MC 71. MC 76. MC 168. BE 185. Ex
12. TF 67. MC 72. MC 77. MC 169. BE 209. C
63. MC 68. MC 73. MC 78. MC 182. Ex 222. SA
64. MC 69. MC 74. MC 155. MC 183. Ex 224. SA
Study Objective 5
13. TF 79. MC 82. MC 85. MC 88. MC 186. Ex 210. C
14. TF 80. MC 83. MC 86. MC 89. MC 187. Ex
34. TF 81. MC 84. MC 87. MC 170. BE 188. Ex

Incremental Analysis and Capital Budgeting 26 - 3

Study Objective 6
15. TF 90. MC 93. MC 96. MC 157. MC 190. Ex 227. SA
16. TF 91. MC 94. MC 97. MC 171. BE 211. C
17. TF 92. MC 95. MC 98. MC 189. Ex 221. MA
Study Objective 7
18. TF 99. MC 102. MC 158. MC 191. Ex 194. Ex
19. TF 100. MC 103. MC 159. MC 192. Ex
35. TF 101. MC 104. MC 172. BE 193. Ex
Study Objective 8
20. TF 105. MC 107. MC 109. MC 173. BE 196. Ex
21. TF 106. MC 108. MC 160. MC 195. Ex 212. C
Study Objective 9
22. TF 110. MC 117. MC 124. MC 131. MC 175. BE 214. C
23. TF 111. MC 118. MC 125. MC 133. MC 197. Ex 215. C
24. TF 112. MC 119. MC 126. MC 134. MC 198. Ex 216. C
25. TF 113. MC 120. MC 127. MC 161. MC 199. Ex 225. SA
26. TF 114. MC 121. MC 128. MC 162. MC 200. Ex 226. SA
27. TF 115. MC 122. MC 129. MC 163. MC 201. Ex
36. TF 116. MC 123. MC 130. MC 174. BE 213. C
Study Objective 10
28. TF 136. MC 142. MC 148. MC 165. MC 203. Ex 220. C
29. TF 137. MC 143. MC 149. MC 176. BE 204. Ex 223. SA
30. TF 138. MC 144. MC 150. MC 177. BE 205. Ex
37. TF 139. MC 145. MC 151. MC 200. Ex 217. C
132. MC 140. MC 146. MC 152. MC 201. EX 218. C
135. MC 141. MC 147. MC 164. MC 202. Ex 219. C

Note: TF = True-False BE = Brief Exercise C = Completion
MC = Multiple Choice Ex = Exercise SA = Short-Answer
MA = Matching

CHAPTER STUDY OBJECTIVES
1. Identify the steps in management's decision-making process. Management's decision- making
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.

26 - 4 Test Bank for Accounting Principles, Ninth Edition

4. Identify the relevant costs in a make-or-buy decision. In a make-or-buy decision, the relevant costs
are (a) the variable manufacturing costs that will be saved, (b) the purchase price, and (c) opportunity
costs.
5. Give the decision rule for whether to sell or process materials further. 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.
6. Identify the factors to consider in retaining or replacing equipment. 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. Also, any disposal value of the existing asset must be considered.
7. Explain the relevant factors in whether to eliminate an unprofitable segment. In deciding whether to
eliminate an unprofitable segment, determine the contribution margin, if any, produced by the segment
and the disposition of the segment's fixed expenses.
8. Determine which products to make and sell when resources are limited. When a company has
limited resources, find the contribution margin per unit of limited resource. Then multiply this amount
by the units of limited resource to determine which product maximizes net income.
9. Contrast annual rate of return and cash payback in capital budgeting. The annual rate of return is
obtained by dividing expected annual net income by the average investment. The higher the rate of
return, the more attractive the investment. The cash payback technique identifies the time period to
recover the cost of the investment. The formula is: Cost of capital expenditure divided by estimated
net annual cash flows equals cash payback period. The shorter the payback period, the more attractive
the investment.
10. Distinguish between the net present value and internal rate of return methods. Under the net present
value method, compare the present value of future net cash flows with the capital investment to
determine net present value. The NPV decision rule is: Accept the project if net present value is zero
or positive. Reject the investment if net present value is negative.
Under the internal rate of return method, find the interest yield of the potential investment. 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. Reject the project when the internal rate of return is less than the required rate.

TRUE-FALSE STATEMENTS
1. An important step in management's decision-making process is to determine and evaluate possible
courses of action.
Ans: T, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Strategic/Critical Thinking,
AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Strategic Planning

2. In making decisions, management ordinarily considers both financial and nonfinancial information.
Ans: T, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Strategic/Critical Thinking,
AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Strategic Planning

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

AICPA PC: Problem Solving. IMA: Business Economics . Ans: F. In a sell or process further decision. management should process further as long as the incremental revenues from additional processing exceed the incremental variable costs. SO: 5. Difficulty: Easy. Min: 1. AACSB: None. AICPA PC: Problem Solving. Bloom: C. IMA: Business Economics 13. AICPA BB: Strategic/Critical Thinking. Ninth Edition AICPA FN: Decision Modeling.26 .6 Test Bank for Accounting Principles. AICPA FN: Decision Modeling.

Bloom: C. Difficulty: Easy. Bloom: C. If a company has only a certain number of machine hours available for production. Min: 1. AICPA BB: Strategic/Critical Thinking. Min: 1. Ans: T. It is always better to sell now rather than process further because of the time value of money. AICPA PC: Problem Solving. SO: 7. From a quantitative standpoint. AICPA FN: Decision Modeling. AACSB: None. The annual rate of return technique requires dividing a project's annual cash inflows by the economic life of the project. AICPA BB: Strategic/Critical Thinking. IMA: Business Economics 16. SO: 6. Ans: T. Difficulty: Easy. AACSB: None. Ans: F. Ans: T. SO: 8. Difficulty: Easy. it is generally more profitable to produce and sell the product with the highest unit contribution margin. the salvage value of the old equipment is relevant in incremental analysis. Ans: F. AICPA PC: Problem Solving. A hurdle rate is the rate of return set by applying ideal standards. Bloom: C. Capital budgeting decisions usually involve large investments and can have a significant impact on a company's future profitability. AICPA FN: Decision Modeling. the book value of the old equipment can be considered a sunk cost. Ans: T. AICPA PC: Problem Solving. AICPA BB: Strategic/Critical Thinking. AICPA FN: Measurement. AACSB: None. IMA: Business Economics 17. Difficulty: Easy. Min: 1. The elimination of an unprofitable product line may adversely affect the remaining product lines. AACSB: None. Min: 1. In a decision concerning replacing old equipment with new equipment. AACSB: None. AICPA FN: Risk Analysis. AICPA BB: Resource Management. Difficulty: Easy. Min: 1. SO: 9. IMA: Business Economics 18. Min: 1. Difficulty: Easy. AICPA PC: Problem Solving. AICPA FN: Risk Analysis. Bloom: C. AICPA FN: Decision Modeling. AACSB: None. AICPA BB: Strategic/Critical Thinking. Bloom: C. Min: 1. AICPA PC: Problem Solving. AICPA BB: Strategic/Critical Thinking. AICPA PC: Problem Solving. IMA: Business Economics 20. SO: 5. Difficulty: Easy. Min: 1. SO: 7. AACSB: None. SO: 6. AICPA PC: Problem Solving. Ans: T. Incremental Analysis and Capital Budgeting 26 . In a decision to retain or replace old equipment. AACSB: None. AICPA FN: Risk Analysis. it should manufacture those products which have the highest contribution margin per unit of limited resource. . AICPA BB: Strategic/Critical Thinking. AICPA FN: Measurement. Difficulty: Easy. IMA: Business Economics 21. Ans: T. a segment should be eliminated if its contribution margin is less than the fixed costs that can be eliminated. AICPA FN: Measurement. Min: 1. SO: 8.7 14. Bloom: K. Min: 1. IMA: Business Economics 24. AICPA FN: Risk Analysis. Difficulty: Easy. Bloom: C. Bloom: C. IMA: Business Economics 19. When a company has limited resources to manufacture products. IMA: Business Economics 22. AICPA BB: Strategic/Critical Thinking. AACSB: None. IMA: Investment Decisions 23. AICPA BB: Strategic/Critical Thinking. It is better not to replace old equipment if it is not fully depreciated. AACSB: None. AICPA PC: Problem Solving. SO: 9. AICPA PC: Problem Solving. AICPA PC: Problem Solving. Bloom: C. Difficulty: Easy. AICPA BB: Strategic/Critical Thinking. SO: 6. Ans: F. IMA: Business Economics 15. Bloom: C. Ans: F.

AICPA BB: Resource Management. SO: 9. AICPA PC: Problem Solving.8 Test Bank for Accounting Principles. IMA: Business Economics . AACSB: None. Min: 1. Ninth Edition Ans: F.26 . AICPA FN: Risk Analysis. Bloom: K. Difficulty: Easy.

Using the net present value method. SO: 10. AICPA PC: Problem Solving. AICPA BB: Strategic/Critical Thinking. The process used to identify the financial data that change under alternative courses of action is called allocation of limited resources. AACSB: None. a net present value of zero indicates that the project would be acceptable. AACSB: None. AACSB: None. AICPA PC: Problem Solving. AICPA BB: Resource Management. Difficulty: Easy. Difficulty: Easy. Difficulty: Easy. Ans: F. IMA: Decision Analysis 33. AICPA FN: Risk Analysis. Ans: F. Bloom: C. AICPA BB: Resource Management. AICPA FN: Decision Modeling. SO: 1. Min: 1. AICPA PC: Problem Solving. Bloom: K. AACSB: None. The net present value method can only be used in capital budgeting if the expected cash flows from a project are an equal amount each year. . AICPA PC: Problem Solving. AICPA BB: Resource Management. Ans: F. AICPA FN: Risk Analysis. AACSB: None. Ans: T. Ans: T. the incremental costs of a special order will likely include fixed manufacturing costs. IMA: Business Economics 30. If a company is operating at full capacity. Min: 1. IMA: Business Economics 28. Ans: F. 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. AICPA BB: Resource Management. Difficulty: Easy. Bloom: C. Min: 1. AICPA BB: Resource Management. AICPA BB: Resource Management. SO: 9. The cash payback capital budgeting technique is a quick way to calculate a project's net present value. AACSB: None. Min: 1. Min: 1. AICPA FN: Risk Analysis. Min: 1. Incremental Analysis and Capital Budgeting 26 . Ans: T. AICPA PC: Problem Solving. Bloom: C. Difficulty: Easy. Ans: T. IMA: Investment Decisions 31. AICPA FN: Risk Analysis. IMA: Business Economics 34. Min: 1. Bloom: K. Min: 1. AICPA FN: Risk Analysis. Min: 1. AICPA BB: Strategic/Critical Thinking. Accounting contributes to management's decision-making process through internal reports that review the actual impact of the decision. AICPA PC: Problem Solving. AICPA PC: Problem Solving. AICPA BB: Resource Management. IMA: Business Economics 26. IMA: Business Economics 27. Difficulty: Easy. AICPA FN: Risk Analysis. AACSB: None. AICPA FN: Risk Analysis. AACSB: None. SO: 10. Bloom: C. Ans: F. SO: 9. 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. AACSB: None. AACSB: None. Ans: T. AICPA BB: Resource Management. Bloom: K. AICPA PC: Problem Solving. The basic decision rule in a sell or process further decision is: sell without further processing as long as the incremental revenue from processing exceeds the incremental processing costs. SO: 5. AICPA FN: Risk Analysis. Difficulty: Easy.9 25. AICPA PC: Problem Solving. IMA: Decision Analysis 32. Difficulty: Easy. Difficulty: Easy. Min: 1. SO: 3. IMA: Business Economics 29. Difficulty: Easy. SO: 2. A major advantage of the annual rate of return technique is that it considers the time value of money. Bloom: K. SO: 9. SO: 10.

management should recognize that net income could decrease by eliminating the unprofitable segment. IMA: Business Economics .26 . AICPA FN: Decision Modeling. AICPA PC: Problem Solving. Test Bank for Accounting Principles. IMA: Business Economics 35. Difficulty: Easy. Min: 1. AICPA PC: Problem Solving. Bloom: C. Ninth Edition 10 AICPA FN: Decision Modeling. AACSB: None. In deciding on the future status of an unprofitable segment. AICPA BB: Resource Management. Ans: T. SO: 7.

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

as a replacement technique for variance analysis. Test Bank for Accounting Principles. Ans: B. IMA: Business Economics 44. d. SO: 2. AICPA BB: Industry/Sector Perspective. . Incremental analysis is most useful a. Min: 1. c. SO: 2. IMA: Decision Analysis 42. b. only revenues are analyzed. b. AICPA PC: Problem Solving. Prepare internal reports that review the impact of decisions d. Incremental analysis is synonymous with a. difficult analysis. AICPA FN: Risk Analysis. Difficulty: Easy. double entry analysis. d. Ans: B. Bloom: C. in developing relevant information for management decisions. AACSB: None. Min: 1. Nonfinancial information that management might evaluate in making a decision would not include a. in evaluating the master budget. Bloom: K. d. Min: 1. None of these Ans: B. both costs and revenues may be analyzed. Bloom: K. SO: 2. cost-benefit analysis. derivative analysis. the corporate profile in the community. Ans: C. Min: 1. AACSB: None. contribution margin analysis. The process of evaluating financial data that change under alternative courses of action is called a. Ninth Edition 12 41. Determine possible courses of action b. IMA: Decision Analysis 43. SO: 1. AACSB: None.26 . Min: 1. AICPA FN: Decision Modeling. AICPA PC: Problem Solving. c. Make the appropriate decision based on relevant data c. Ans: A. contribution margin. AICPA PC: Problem Solving. in choosing between the net present value method and the internal rate of return method. a. Difficulty: Easy. AACSB: None. d. Difficulty: Easy. Difficulty: Easy. In incremental analysis. Bloom: C. SO: 2. differential analysis. Bloom: C. c. employee turnover. IMA: Decision Analysis 45. AICPA FN: Decision Modeling. c. Which of the following steps in the management decision-making process does not generally involve the managerial accountant? a. Ans: C. both costs and revenues that stay the same between alternate courses of action will be analyzed. gross profit analysis. SO: 2. IMA: Decision Analysis 46. AICPA BB: Industry/Sector Perspective. AICPA FN: Decision Modeling. b. AACSB: None. Min: 1. b. only costs are analyzed. AICPA BB: Resource Management. d. Difficulty: Easy. c. AACSB: None. the environment. AICPA PC: Problem Solving. Bloom: K. AICPA BB: Resource Management. b. Difficulty: Easy. incremental analysis. AICPA PC: Problem Solving. AICPA FN: Decision Modeling. AICPA BB: Resource Management. AICPA BB: Industry/Sector Perspective.

AICPA PC: Problem Solving. IMA: Decision Analysis . Incremental Analysis and Capital Budgeting 26 - 13 AICPA FN: Decision Modeling.

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

Income would decrease by $4.000 decrease c.000 Which of the following are relevant in choosing between the alternatives? a. Garner has sufficient unused capacity to produce the 2. Garner would incur special shipping costs of $1 per scale if the order were accepted.000 increase Ans: A. AACSB: None.000. Variable costs b.000.000. Min: 5.000 scales at $15 each.000 decrease d. AICPA FN: Decision Modeling. If the special order is accepted. AICPA BB: Resource Management. Income would increase by $70. AICPA PC: Problem Solving. SO: 3. Difficulty: Easy. Bloom: C. Income would increase by $20. only variable costs are relevant. Min: 1. Min: 1. A company is considering the following alternatives: Alternative 1 Alternative 2 Revenues $120. AACSB: Analytic. $30. Bloom: C. only fixed costs are relevant. In incremental analysis. all costs are relevant if they change between alternatives. $4. Income would increase by $4. Ans: B. 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. d. Revenues c. AICPA FN: Decision Modeling.000 when 10.000. Difficulty: Medium. SO: 3. Difficulty: Easy. SO: 2. b.000 units were produced and sold. AICPA BB: Resource Management. Variable costs and fixed costs Ans: A. b. IMA: Decision Analysis 53. c. AICPA PC: Problem Solving. Bloom: AN. b. $6. Fixed costs d. SO: 3. AICPA FN: Decision Modeling. AICPA BB: Resource Management. It costs Garner Company $12 of variable and $5 of fixed costs to produce one bathroom scale which normally sells for $35. $4. Incremental Analysis and Capital Budgeting 26 .000 Variable costs 60. a.11 52. Baden Company manufactures a product with a unit variable cost of $50 and a unit sales price of $88. c. AICPA BB: Resource Management. The company has a one-time opportunity to sell an additional 1. AICPA FN: Decision Modeling. Min: 5. Difficulty: Medium. c. d. Bloom: AN.000 scales. IMA: Decision Analysis 56. acceptance of the special order would affect net income as follows: a. then a. AICPA PC: Problem Solving. AICPA PC: Problem Solving. A foreign wholesaler offers to purchase 2. Ans: D.000 $120. fixed costs are not relevant. AACSB: None.000 70. the order will likely be accepted. only variable costs are relevant. IMA: Decision Analysis 54.000 35. IMA: Decision Analysis 55. If the company has sufficient capacity to produce the additional units. Fixed manufacturing costs were $240. AACSB: Analytic.000 Fixed costs 35. . what will be the effect on net income? a.000 units at $70 each in a foreign market which would not affect its present sales. costs are not relevant if they change between alternatives.000 increase b.

Ninth Edition d.12 Test Bank for Accounting Principles. IMA: Business Economics .26 . AICPA BB: Resource Management. the order will likely be rejected. Min: 1. Bloom: C. AACSB: None. Difficulty: Easy. Ans: D. AICPA FN: Decision Modeling. SO: 3. AICPA PC: Problem Solving.

AICPA FN: Decision Modeling. Martin Company incurred the following costs for 50. then a. $3. b.30 c.000 units: Variable costs $180.60 d. IMA: Business Economics . When the company thinks it can use the cheaper materials without the customer's knowledge d. Min: 5. Difficulty: Easy. c. Difficulty: Easy.13 57. Difficulty: Medium. Ans: B.000 units. has excess capacity. AICPA BB: Resource Management. AACSB: None. an increase in unit variable costs. $5. IMA: Business Economics 58. b. AICPA FN: Decision Modeling. Inc. no increase in fixed costs. AICPA PC: Problem Solving. Additional fixed costs will probably be incurred. Bloom: C. AICPA FN: Decision Modeling. Difficulty: Easy. When incremental revenues exceed incremental costs Ans: D. what should the unit sales price be? a. AICPA FN: Decision Modeling.000 Martin has received a special order from a foreign company for 5. Min: 1. AICPA BB: Resource Management. Min: 1. lost sales should be considered in the incremental analysis. AICPA BB: Resource Management. $10. Ans: D. AICPA PC: Problem Solving.000 Fixed costs 240. 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. SO: 3.40 Ans: B. Bloom: C. If Martin wants to break even on the order. the order will only be accepted if the plant is below capacity. Miley. SO: 3. SO: 3. d. it is likely that there will be a. b. d. an increase in variable and fixed costs per unit. an increase in fixed costs. AICPA BB: Resource Management.10 b. IMA: Business Economics 59. d. Incremental Analysis and Capital Budgeting 26 . Min: 1. If a company must expand capacity to accept a special order. Ans: A. When additional fixed costs must be incurred to accommodate the order c. Bloom: C. AACSB: None. Difficulty: Easy. $8. SO: 3. Net income will decrease. SO: 3. the order should not be accepted. AACSB: Analytic. AICPA FN: Decision Modeling. AACSB: None. Under what situations should the company accept a special order for less than the current selling price? a. IMA: Business Economics 61. There is sufficient capacity to fill the order without jeopardizing regular sales. Bloom: C. AICPA PC: Problem Solving. Filling the order will require spending an additional $8. lost sales should not be considered in the incremental analysis. Net income will not be affected. Min: 1. Bloom: AP. AICPA BB: Resource Management. Net income will increase if the special sales price per unit exceeds the unit variable costs. c. Never b. AACSB: None.500 for shipping. IMA: Business Economics 60. AICPA PC: Problem Solving. AICPA PC: Problem Solving. If a company anticipates that other sales will be affected by the acceptance of a special order. c.

500 for shipping. Filling the order will require spending an additional $8. b. budgeting. AICPA BB: Resource Management. AICPA PC: Problem Solving. CVP analysis. AICPA PC: Problem Solving. Min: 5. AACSB: None. There is sufficient capacity to fill the order without jeopardizing regular sales.14 Test Bank for Accounting Principles. $6.000 Martin has received a special order from a foreign company for 5. Ans: D. IMA: Business Economics . Difficulty: Easy. added to the "Make" costs. what should the unit price be? a. AICPA BB: Resource Management. Additional processing decision Ans: A.000 units. is the cost of a new product proposal. d. SO: 4. $3. SO: 4. AICPA FN: Decision Modeling. Bloom: C. none of these. Accept a special order d. $11. Difficulty: Easy. financial accounting. AICPA FN: Decision Modeling. b. c. An opportunity cost a. d.000 on the order. Bloom: K. Bloom: K. Drop a product line c. Martin Company incurred the following costs for 50. should be initially recorded as an asset. $5. Min: 1. AACSB: None. IMA: Business Economics 66. AICPA BB: Resource Management. added to the "Buy" costs. AICPA PC: Problem Solving. AICPA PC: Problem Solving. Ninth Edition 62. Make or buy decision b. is classified as manufacturing overhead. d. AICPA FN: Decision Modeling. AICPA BB: Resource Management. AICPA BB: Resource Management. IMA: Business Economics 63.90 Ans: D. Bloom: AP. resources that have alternative uses. c. SO: 4.26 . AACSB: None. 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.000 Fixed costs 240. AICPA FN: Decision Modeling. Difficulty: Easy.70 c. AICPA FN: Decision Modeling. AACSB: None. If Martin wants to earn $8. IMA: Business Economics 65. Min: 1. subtracted from the "Make" costs. Difficulty: Easy.30 b. IMA: Business Economics 64. c. b.20 d. AACSB: Analytic. SO: 3. Ans: C. Difficulty: Medium. Min: 1. Which decision will involve no incremental revenues? a. AICPA PC: Problem Solving. Bloom: C. Ans: B. Min: 1. SO: 4. is the potential benefit that may be obtained by following an alternative course of action.000 units: Variable costs $180.

15 67. AICPA BB: Resource Management. Difficulty: Easy. c. Difficulty: Easy. AICPA FN: Decision Modeling. included as part of cost of goods sold. AICPA FN: Decision Modeling. AICPA PC: Problem Solving. Bloom: AN.000 b. b. the outside supplier could increase prices significantly in the future. Each of the following is a disadvantage of buying rather than making a component of a company's product except that a. $15. Tex's Manufacturing Company can make 100 units of a necessary component part with the following costs: Direct Materials $60. IMA: Business Economics 68. the supplier may not deliver on time.000 Variable Overhead 30. Buy and save $15. $100. AICPA FN: Decision Modeling. IMA: Cost Management 70.000 of the fixed costs can be avoided.000 Direct Labor 10.000 b. AACSB: None.000 d. d. AICPA BB: Resource Management. Ans: C.000 Fixed Overhead 20.000 Fixed Overhead 20. AICPA BB: Resource Management.000 Direct Labor 10. AICPA FN: Decision Modeling. Incremental Analysis and Capital Budgeting 26 . Make and save $15. AICPA PC: Problem Solving. $120. IMA: Cost Management . Min: 5. quality control specifications may not be met.000 Ans: A. AICPA BB: Resource Management. what is the correct make-or-buy decision? a. SO: 4.000 d. Min: 1. Difficulty: Medium. SO: 4. a potential benefit. Ans: B. $115.000 c. Opportunity cost is usually a. Min: 5.000 If Tex's Manufacturing Company purchases the component externally. AACSB: None. Make and save $5.000 of the fixed costs can be avoided. AICPA PC: Problem Solving. AACSB: Analytic. Difficulty: Medium.000 c. Bloom: C. At what external price for the 100 units is the company indifferent between making or buying? a. IMA: Business Economics 69. profitable product lines may be dropped.000 If Tex's Manufacturing Company can purchase the component externally for $110. AICPA PC: Problem Solving. Buy and save $5.000 and only $5. Bloom: C. d. AACSB: Analytic. c.000 Ans: C. SO: 4. Min: 1.000 Variable Overhead 30. Tex's Manufacturing Company can make 100 units of a necessary component part with the following costs: Direct Materials $60. a sunk cost. $85. Bloom: AN. a standard cost. b. SO: 4.

000 units externally? a. $52.000 if the units are purchased externally. Difficulty: Medium. SO: 4. $24. $48. Min: 5. Ruth Company produces 1. Difficulty: Medium.000 d.000 b. Ninth Edition 71. An analysis shows that at this external price.000 Direct Labor 16. $43. The avoidable fixed costs are $6.000 Variable Overhead 4. Cannot be determined. Ans: A.000 in fixed overhead costs if it acquires the components externally.000 c.000 c. AICPA FN: Decision Modeling. Bloom: AN. but another product could be made that would increase profit contribution by $8. $51. Bell's Shop can make 1.000 None of Ruth Company's fixed overhead costs can be reduced.000 units externally for $117.000 Fixed Overhead 7.000 units of a necessary component with the following costs: Direct Materials $24.000 Direct Labor 16. $48.26 .000 Variable Overhead 4. SO: 4. IMA: Cost Management 72.000 c. Bloom: AN. what is the maximum external price that Ruth Company would be willing to accept to acquire the 1. $12.000 b. AICPA BB: Resource Management. $55. AICPA BB: Resource Management.16 Test Bank for Accounting Principles. $47. If cost minimization is the major consideration and the company would prefer to buy the components.000 if the components were acquired externally.000 Ruth Company could avoid $3.000. AACSB: Analytic. AICPA PC: Problem Solving. Min: 5. AACSB: Analytic. the company is indifferent between making or buying the part. $44. If cost minimization is the major consideration and the company would prefer to buy the components.000 units of a necessary component with the following costs: Direct Materials $72. AICPA PC: Problem Solving.000 b. IMA: Cost Management 73.000 units externally? a. What are the fixed overhead costs of making the component? a.000 Variable Overhead 9. what is the maximum external price that Ruth Company would accept to acquire the 1.000 Fixed Overhead ? The company can purchase the 1.000 units of a necessary component with the following costs: Direct Materials $24.000 .000 Direct Labor 18.000 Ans: B. $18. Ruth Company produces 1.000 d. AICPA FN: Decision Modeling.000 d.000 Fixed Overhead 7.

17 Ans: D. Difficulty: Medium. Min: 5. Incremental Analysis and Capital Budgeting 26 . AICPA FN: Decision Modeling. SO: 4. AACSB: Analytic. AICPA BB: Resource Management. IMA: Cost Management . AICPA PC: Problem Solving. Bloom: AN.

000 Fixed Overhead 22.18 Test Bank for Accounting Principles. A decrease of $22.000 c. IMA: Cost Management 76. An increase of $80. what is the maximum external price that Crigui would expect to pay for the units? a.000 and only $8.000 Direct Labor 13. AICPA BB: Resource Management. AACSB: Analytic.000 b. Difficulty: Medium. by what amount will its total costs change? a.000 Variable Overhead 32. Ninth Edition 74. AICPA FN: Decision Modeling. SO: 4. Make and save $1. If cost minimization is the major consideration and the company would prefer to buy the 60. Inc. Buy and save $1. IMA: Cost Management 75.000.26 . $33. can produce 100 units of a component part with the following costs: Direct Materials $30.000 d. Inc. Fornelli.000 b. AICPA FN: Decision Modeling.000 Direct Labor 13. Fornelli. SO: 4. Buy and save $13. $29. AICPA BB: Resource Management.000 Fixed Overhead 7. $36. AICPA PC: Problem Solving. Inc. Inc. $32.000 CDs on which to record music. AICPA PC: Problem Solving.000 of the fixed costs can be avoided. The CDs have the following costs: Direct Materials $11. An increase of $5. Difficulty: Medium. can produce 100 units of a component part with the following costs: Direct Materials $30.000 If Fornelli. Bloom: AN. Min: 3. Min: 5. An increase of $17. AACSB: Analytic.000 c.000 d. IMA: Cost Management . Difficulty: Medium. can purchase the component part externally for $88.000 Fixed Overhead 22. can purchase the units externally for $80.000 Crigui could avoid $4.000 d. Crigui Music produces 60.000 Ans: D. AICPA FN: Decision Modeling.000 in fixed overhead costs if it acquires the CDs externally.000 If Fornelli.000 Ans: C. AICPA BB: Resource Management.000 b. Bloom: AN.000 Ans: B.000 Variable Overhead 32. Bloom: AN. Make and save $5.000 c.000 Direct Labor 15.000 units externally. Min: 5. what is the correct make-or-buy decision? a. AACSB: Analytic.000 Variable Overhead 3. AICPA PC: Problem Solving. SO: 4.

AICPA BB: Resource Management.00 An outside supplier has offered to produce the corn chips for $25 per batch. Moreland Clean Company spent $4. Sell before assembly. Difficulty: Medium. Which amounts are relevant to the decision about Product 89? a. $4. AICPA FN: Decision Modeling. $6. $1.000 c. $1. $31. SO: 4.000 Ans: B. AICPA PC: Problem Solving. $33.000. Process further.00 Fixed overhead 14.000 b. AICPA BB: Resource Management.00 Variable overhead 11.000 d. b.00 per batch c. and $7. NF Toy Company is unsure of whether to sell its product assembled or unassembled.000 Direct Labor 15.000 None of Crigui’s fixed overhead costs can be reduced.000 c. Tasty Bites produces corn chips. and $7. which can be sold as is for $5.000.00 per batch Ans: B. AICPA FN: Decision Modeling. SO: 4. The unit cost of the unassembled product is $30 and NF Toy would sell it for $65. the company will be better off by $29 per unit. Sell before assembly. AICPA BB: Resource Management. IMA: Cost Management 79. Difficulty: Medium.000.00 per batch b.000 Fixed Overhead 7. $2. The cost of one batch is below: Direct materials $18.000 units externally? a. Ans: A.19 77. Incremental Analysis and Capital Budgeting 26 .000 CDs on which to record music. IMA: Cost Management 78. AACSB: Analytic.500 and then be sold for $7. Bloom: AN.000 Variable Overhead 3. $5.500.000. c. Min: 5. Process further.000 b.000 if the CDs were acquired externally. Bloom: AP. What decision should NF Toy make? a. Bloom: AN.000 . Min: 5. $17.000 to produce Product 89. The CDs have the following costs: Direct Materials $11. Min: 5. How much will Tasty Bites save if it accepts the offer? a. the company will be better off by $14 per unit. the company will be better off by $1 per unit. but another product could be made that would increase profit contribution by $4. Crigui Music produces 60. AICPA PC: Problem Solving. Difficulty: Medium. d. $36. $4. what is the maximum external price that Crigui would be willing to accept to acquire the 60. AICPA FN: Decision Modeling. IMA: Cost Management 80. $5.000. $32. The cost to assemble the product is estimated at $21 per unit and the company believes the market would support a price of $85 on the assembled unit.00 per batch d. AICPA PC: Problem Solving. the company will be better off by $20 per unit. SO: 5. or processed further incurring additional costs of $1. AACSB: Analytic. and $7. $40.000. AACSB: Analytic. If cost minimization is the major consideration and the company would prefer to buy the CDs.500.00 Direct labor 13.

Bloom: AN. $4.000. AICPA BB: Resource Management.20 Test Bank for Accounting Principles.000. Min: 5. IMA: Cost Management . Ninth Edition d. Difficulty: Medium.000 Ans: C.500 and $7. SO: 5. $1. AICPA PC: Problem Solving. $5.26 . AICPA FN: Decision Modeling. AACSB: Analytic.

000. Bloom: AN. New Age Makeup could sell the sunscreen bottles for $23 each. Ans: B. Ans: B. IMA: Cost Management 85. AICPA FN: Decision Modeling. the company will be better off by $10. SO: 5. Difficulty: Easy. c.000. Bloom: AN. Hold the inventory at its $12.000. The inventory could be sold for $60. c. AICPA FN: Decision Modeling.000. Its scrap value is $16. Bloom: AP. Process further. Difficulty: Medium. SO: 5. Its scrap value is $24. AICPA PC: Problem Solving. AICPA PC: Problem Solving.000. the company will be better off by $100. Min: 5. AICPA BB: Resource Management. IMA: Cost Management 83. Difficulty: Medium. Sell the inventory for $16. Bloom: C.000 if manufactured further at an additional cost of $12.000 Ans: D. is process further if incremental revenue from such processing exceeds the incremental processing costs. Dispose of the inventory to avoid any further decline in value c. Incremental Analysis and Capital Budgeting 26 . AACSB: Analytic. AACSB: Analytic. The inventory could be sold for $40. Min: 5.000 pounds of Product A that can be sold for $8 per pound.000. Difficulty: Medium. Min: 1. Pratt Company has old inventory on hand that cost $12. Dispose of the inventory to avoid any further decline in value c. AACSB: Analytic.000 scrap value b. d. AICPA PC: Problem Solving. AACSB: None. SO: 5. SO: 5. Ans: D. Sell the inventory for $24. Face cream must not be processed further because costs increase more than revenue. is process further if incremental revenue from such processing exceeds incremental fixed costs. AICPA FN: Decision Modeling. AICPA BB: Resource Management. AICPA BB: Resource Management. What should Janssen do? a. a. or processed further into sunscreen at a cost of $14 each. Manufacture further and sell it for $60.000 cost d. Face cream must be processed further because its profit is $9 each. the company will be better off by $10. Sell now. Min: 5. The decision rule on whether to sell or process further a. AICPA FN: Decision Modeling. What should Pratt do? a. Min: 5. b. Janssen Company has old inventory on hand that cost $18. the company will be better off by $90.000.000. IMA: Cost Management 84.000 cost d. is process further as long as total revenue exceeds present revenues. b. A company has a process that results in 15.000 if manufactured further at an additional cost of $18. Should management sell Product A now or should Product A be processed further and then sold? What is the effect of the action? a. Face cream must not be processed further because it decreases profit by $1 each.000 scrap value b. IMA: Cost Management . AACSB: Analytic. AICPA BB: Resource Management. d.000. Process further. varies from situation to situation. AICPA PC: Problem Solving. Hold the inventory at its $18.000. d. The bottles can be sold as is. Each bottle of face cream costs $10 to produce and can be sold for $13. Difficulty: Hard. c. New Age Makeup produces face cream. AICPA BB: Strategic/Critical Thinking. AICPA FN: Decision Modeling. SO: 5.000 and then sell it for $14 per pound. Face cream must be processed further because it increases profit by $3 each. Bloom: AN. Ans: D. An alternative would be to process Product A further at a cost of $100.21 81. AICPA PC: Problem Solving.000. Manufacture further and sell it for $40. IMA: Cost Management 82. Sell now. b.

Ans: D. Difficulty: Hard. Bloom: AN. Difficulty: Hard. Ans: C. AACSB: None.000 incremental cost Ans: B. AICPA BB: Resource Management. AICPA PC: Problem Solving. Bloom: AP. the company will be better off by $52 per unit.000 for 100. Bowden Company has approached Mallory with a proposal to sell the company widgets at a price of $80.000 Which of the products should not be processed further? a. IMA: Business Economics 89. Mallory Company manufactures widgets.000 $21. From Mallory's point of view.000 incremental savings d. incremental revenue. b. Sell before assembly. Process further. the company will be better off by $36 per unit. Product A b. The unit cost of the unassembled product is $80 and Eddy Company would sell it for $180. Difficulty: Easy. $4.000 Manufacturing overhead 40. AICPA FN: Decision Modeling. Bloom: C. AICPA FN: Decision Modeling. AICPA PC: Problem Solving. Eddy Company is starting business and is unsure of whether to sell its product assembled or unassembled. b.000 The manufacturing overhead consists of $16. What is the correct decision using the sell or process further decision rule? a. Min: 1. Sell before assembly. d.000 B 14. AICPA PC: Problem Solving. c. SO: 5.000 $8.000 Direct labor 29. IMA: Cost Management 88. the company will be better off by $52 per unit. The focus of a sell or process further decision is a. $20. AACSB: Analytic. 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. The following costs are associated with this part of the process when 100. the company will be better off by $16 per unit. Product B c. d.000 18.000 units. IMA: Cost Management 87. AICPA BB: Resource Management. $20.000 Total $100. how much is the incremental cost or savings if the widgets are bought instead of made? a. SO: 5. AACSB: Analytic. AICPA BB: Strategic/Critical Thinking.000 C 11. incremental cost.22 Test Bank for Accounting Principles.000 16. AICPA FN: Decision Modeling.000 3. Min: 5.000 5. c.000 incremental savings b.000 of costs that will be eliminated if the components are no longer produced by Mallory. Process further.000 incremental cost c. $4. Products A and C . Ninth Edition 86. Marcus Company gathered the following data about the three products that it produces: Present Estimated Additional Estimated Sales Product Sales Value Processing Costs if Processed Further A $12. SO: 5.26 . Min: 5.000 units are produced: Direct material $ 31. Mallory is currently making these components in its own factory. neither incremental revenue nor incremental cost. both incremental revenue and incremental cost. Product C d.

Difficulty: Medium. AICPA FN: Decision Modeling. SO: 5. AICPA PC: Problem Solving. AACSB: Analytic. IMA: Cost Management . Incremental Analysis and Capital Budgeting 26 .23 Ans: B. Min: 5. AICPA BB: Resource Management. Bloom: AN.

AICPA BB: Strategic/Critical Thinking. Book value of the old equipment c. IMA: Business Economics 92. AICPA FN: Decision Modeling. Which of the following is considered a relevant cost? a. IMA: Business Economics 93. In a retain or replace equipment decision. IMA: Business Economics . AICPA PC: Problem Solving. reduces the cost of the old equipment. sunk cost. Difficulty: Easy. AACSB: None. d. The loss on the disposal of the old equipment d. The cash price of the new equipment b. c. A company decided to replace an old machine with a new machine. The book value of the old equipment d. Min: 1. Bloom: C. Which of the following is a relevant cost for incremental analysis? a. Difficulty: Easy. Which of the following is not a relevant cost for incremental analysis? a. Difficulty: Easy. Annual depreciation charge on the old equipment b. AICPA PC: Problem Solving. Cost of the new equipment Ans: D. Difficulty: Easy. Min: 1. Bloom: C. IMA: Business Economics 94. AICPA PC: Problem Solving. Min: 1. Bloom: C. is relevant because it will not be realized if the old equipment is retained. SO: 6. Bloom: C. c.20 Test Bank for Accounting Principles. A company is considering replacing old equipment with new equipment. semi-relevant cost. AICPA PC: Problem Solving. cost that can be changed by a present or future decision. Annual operating cost of the old equipment c. Net cost of the new equipment d. AICPA BB: Strategic/Critical Thinking. AICPA BB: Strategic/Critical Thinking. The cost savings if the new equipment is purchased Ans: C. b. AACSB: None. Min: 1. trade-in allowance available on old equipment a. IMA: Business Economics 95. SO: 6. 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 salvage value of the old equipment c. AACSB: None. Min: 1. b.26 . AICPA FN: Decision Modeling. AICPA FN: Decision Modeling. AACSB: None. Difficulty: Easy. Estimated annual depreciation of the new equipment d. AICPA BB: Strategic/Critical Thinking. The book value of the old equipment b. AICPA FN: Decision Modeling. Ans: C. Book value of old equipment is considered to be a a. Bloom: C. AICPA FN: Decision Modeling. Ninth Edition 90. AICPA BB: Strategic/Critical Thinking. SO: 6. AICPA FN: Decision Modeling. SO: 6. Min: 1. Bloom: C. Accumulated depreciation on the old equipment Ans: D. Annual operating cost of the new equipment b. increases the cost of the new equipment. A company is deciding on whether to replace some old equipment with new equipment. AACSB: None. Difficulty: Easy. Ans: B. IMA: Business Economics 91. AICPA PC: Problem Solving. Depreciation expense on the old equipment c. AICPA BB: Strategic/Critical Thinking. SO: 6. SO: 6. d. AACSB: None. The current disposal price of the old equipment Ans: D. is not relevant to the decision. relevant cost. AICPA PC: Problem Solving.

it can be sold for $20. Which of the following amounts is a sunk cost? a. AICPA BB: Resource Management. $250.000 Ans: D.000 c.000 $500. IMA: Cost Management 97.000 $150.500 If the old machine is replaced. AICPA FN: Decision Modeling. is contemplating the replacement of an old machine with a new one. $0 Ans: C. AICPA FN: Decision Modeling. Which of the following amounts is relevant to the replacement decision? a. Bloom: AP.000 d.500 c.000 -0- Remaining useful life 10 years -0- Useful life -0.000 -0- Remaining useful life 10 years -0- Useful life -0. $49.000. Bloom: C. it can be sold for $20. $150. AACSB: Analytic.000.000 b. SO: 6.000 $150. $500. SO: 6. Sala Co. $175. AICPA PC: Problem Solving.000 b.500 If the old machine is replaced.000 Accumulated Depreciation 75. Difficulty: Medium. 10 years Annual operating costs $200. IMA: Cost Management . is contemplating the replacement of an old machine with a new one.21 96. AACSB: Analytic. AICPA BB: Resource Management. Sala Co. Incremental Analysis and Capital Budgeting 26 . 10 years Annual operating costs $200. Min: 3. $175.000 Accumulated Depreciation 75. $200.000 $500. AICPA PC: Problem Solving. Difficulty: Medium. The following information has been gathered: Old Machine New Machine Price $250. Min: 3. The following information has been gathered: Old Machine New Machine Price $250.500 d.

AICPA FN: Decision Modeling. AICPA BB: Resource Management.000 Net income (loss) $100.000 $150.000 d.000 Ans: B.000) d. $(50.000 58.000 Assume none of the fixed expenses for the hard rubber line are avoidable.000 Accumulated Depreciation 75.000 $765. The net advantage (disadvantage) of replacing the old machine is a. and hard rubber. AACSB: Analytic. SO: 7.000 Variable expenses 325. AICPA PC: Problem Solving. $20.500 If the old machine is replaced.000 7. IMA: Cost Management 99. $105. $140. IMA: Cost Management . A condensed segmented income statement for a recent period follows: Wood Aluminum Hard Rubber Total Sales $500. $15.000) $110.000 140.000 b.000 $200. Difficulty: Medium. it can be sold for $20. $(5. Difficulty: Medium.000 -0- Remaining useful life 10 years -0- Useful life -0.000 $(15.26 .000 $ 25.000 $65. SO: 6. AACSB: Analytic.000 523. Sala Co. Min: 5.000 $500.000 c. Ninth Edition 98.000. aluminum. Min: 5.000 242. 10 years Annual operating costs $200. The following information has been gathered: Old Machine New Machine Price $250.000 c.000 132.000 Contribution margin 175. AICPA PC: Problem Solving. AICPA FN: Decision Modeling. AICPA BB: Resource Management.000 60. Bloom: AP. $125. $103. Abel Company produces three versions of baseball bats: wood. What will be total net income if the line is dropped? a.22 Test Bank for Accounting Principles.000 22. is contemplating the replacement of an old machine with a new one.000 35.000 b. Bloom: AN.000 Fixed expenses 75.000) Ans: A.

b. AICPA BB: Resource Management.000 Contribution margin 90.000) If this product line is eliminated.000 58.000 Variable expenses 325.000 $65. AICPA PC: Problem Solving.000 Fixed expenses 75. one of which reflects the following results: Sales $215. 60% of the fixed expenses can be eliminated and the other 40% will be allocated to other product lines. d. the company's net income will a.000. AICPA BB: Resource Management. $105.000 35.000 $(15. Difficulty: Easy. What will be total net income if the line is dropped? a. c. increase by $6.000 c. Difficulty: Medium. b. Net income will increase. AICPA PC: Problem Solving.000 Assume all of the fixed expenses for the hard rubber line are avoidable.000) $110.000 $765. Incremental Analysis and Capital Budgeting 26 .000 $ 25. All expenses of the eliminated segment will be eliminated. SO: 7. AICPA FN: Decision Modeling. Ans: B. SO: 7. A company has three product lines. The company's variable costs will increase.000 132. SO: 7.000 7.000. IMA: Cost Management 101.000 Net loss $ (50. decrease by $6.000 242.23 100.000 60. If management decides to eliminate this product line.000 22. decrease by $90. AICPA BB: Resource Management. AACSB: Analytic.000 $200. A condensed segmented income statement for a recent period follows: Wood Aluminum Hard Rubber Total Sales $500. Bloom: C. Min: 5. $103.000 b.000 Net income (loss) $100. Abel Company produces three versions of baseball bats: wood.000 Contribution margin 175. Min: 5.000 140.000 d. AACSB: None.000 Fixed expenses 140. Min: 1. d. c. IMA: Cost Management . AICPA FN: Decision Modeling.000 Ans: A.000 523. AACSB: Analytic. Net income will decrease. increase by $50. AICPA PC: Problem Solving. $125. Difficulty: Medium. $140. AICPA FN: Decision Modeling. Ans: C. and hard rubber. Bloom: AN. IMA: Cost Management 102. Bloom: AN.000. What will most likely occur if a company eliminates an unprofitable segment when a portion of fixed costs are unavoidable? a. aluminum.000.000 Variable expenses 125.

Min: 3. SO: 8. Ninth Edition 103. Cannot be determined from the data provided. Difficulty: Medium. $275.000 machine hours available to manufacture a product. c. $200. Ans: C. The fixed costs currently allocated to the product line will be allocated to other product lines upon discontinuance. Difficulty: Medium. Bloom: AN. a.000 increase b. AICPA FN: Decision Modeling. IMA: Cost Management 105. AICPA BB: Resource Management. b. Difficulty: Easy. total net income will increase by the amount of the product line's fixed costs. AICPA FN: Reporting. limited resources required. The calculation of the accounting rate of return is .000 Fixed expenses 275. contribution margin. b. Ans: B. income will be a.000 more if Product A is made. Talbot expects to earn 16% of $2. 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. IMA: Reporting 107. AACSB: None. Bloom: AN.000 less if Product A is made. $200. the contribution margin of the product line will indicate the net income increase or decrease. Min: 1. AACSB: Analytic.000 What will be the incremental effect on net income if this segment is eliminated. c. If the product line is discontinued. b. $2.26 . $2. c. If a company has limited resources. assuming the fixed expenses will be allocated to profitable segments? a. The rate of return indicates that a. A company can sell all the units it can produce of either Product A or Product B but not both. SO: 7. Talbot expects the asset will earn 16 times as much profit as its cost. d.000 less if Product B is made. IMA: Cost Management 106. AICPA BB: Resource Management. none of these. SO: 8. Ans: C. Difficulty: Easy.000 decrease d. SO: 7. Bloom: C. A company is considering eliminating a product line. AICPA PC: Problem Solving. . the company's total fixed costs will decrease. SO: 8. Ans: C. the same if either product is made.000 decrease c.000.000 Variable expenses 150. Bloom: C.000 per year over the life of an investment that will cost $25.16. Talbot expects to earn 16% of its cash outlay back over the life of the asset.000 as profit each year the asset is used. If there are 1.24 Test Bank for Accounting Principles. AICPA PC: Problem Solving. Talbot expects to earn 16% of its investment annually. Ans: B. $2. Min: 3. Min: 1. contribution margin per unit of limited resource. AACSB: Analytic. AICPA BB: Resource Management. IMA: Cost Management 104. AICPA FN: Decision Modeling. b. AICPA BB: Resource Management. Min: 5. AICPA PC: Problem Solving. d. the key factor in performing incremental analysis is a. d. Bloom: AN. AICPA FN: Decision Modeling. AACSB: None. AACSB: Analytic. AICPA PC: Problem Solving. Talbot Company expects income of $2. A segment has the following data: Sales $350. Difficulty: Medium. AICPA BB: Resource Management. d. total net income will decrease by the amount of the product line's fixed costs. c.

AICPA PC: Problem Solving.25 AICPA FN: Decision Modeling. IMA: Cost Management . Incremental Analysis and Capital Budgeting 26 .

3. 16. $4. AICPA PC: Problem Solving. How much is the contribution margin per unit of limited resource for each product? A B a.000 and is estimated to have no salvage value at the end of its 8-year useful life.1 years. $1. c. SO: 8.000 Ans: C.000. A company is considering purchasing factory equipment that costs $320.000 b. AACSB: Analytic. d.000 and annual operating expenses exclusive of depreciation expense are expected to be $38. AICPA PC: Problem Solving.000 c. annual revenues are expected to be $90. b. AICPA BB: Resource Management.000 and annual operating expenses exclusive of depreciation expense are expected to be $38. The cash payback period on the equipment is a. 13. If the equipment is purchased. AICPA FN: Decision Modeling. $24.000. Min: 5. IMA: Cost Management 109. 32. Difficulty: Medium.00 $5. 7.25 $2. If the equipment is purchased. IMA: Cost Management 111. d.5%. AICPA BB: Resource Management. Min: 3. AICPA FN: Decision Modeling. $2.3 years.000 hours.2 years.5%. The straight-line method of depreciation would be used. what is the total contribution margin of the product it should produce to maximize net income? a. the annual rate of return expected on this equipment is a. Difficulty: Medium. If the equipment is purchased. The straight-line method of depreciation would be used.000 and is estimated to have no salvage value at the end of its 8-year useful life. 6. AICPA PC: Problem Solving.50 $1. $16.25 c. A company can produce and sell only one of the following two products: Machine Contribution Hours Required Margin Per Unit Product 1 3 $30 Product 2 2 $25 If the company has machine capacity of 2. annual revenues are expected to be $90. $2. Bloom: AP.00 Ans: B.26 Test Bank for Accounting Principles.00 $1. Ruiz Company’s contribution margin is $4 per unit for Product A and $5 for Product B. IMA: Cost Management 110. $25. AICPA FN: Decision Modeling.00 b. AICPA BB: Resource Management. Difficulty: Medium. Bloom: AN.3%. c. AACSB: Analytic. . SO: 8.00 d. 3.26 .8%. b.0 years. Min: 5. 8. Ans: C. Bloom: AN. A company is considering purchasing factory equipment that costs $320.000 d. Product A requires 2 machine hours and Product B requires 4 machine hours. SO: 9. Ninth Edition 108. $20. AACSB: Analytic.

27 Ans: C. AACSB: Analytic. Bloom: AP. Min: 5. Incremental Analysis and Capital Budgeting 26 . AICPA BB: Resource Management. SO: 9. AICPA FN: Decision Modeling. IMA: Investment Decisions . Difficulty: Medium. AICPA PC: Problem Solving.

AICPA FN: Decision Modeling. Ninth Edition 112. 7 years. Min: 5. c. Difficulty: Easy. d. Depreciation is added back to net income because it is not an outflow of cash. b. Depreciation is added back to net income because it is an inflow of cash. Ans: B. 5 years. the a. Min: 1. SO: 9. d. the cash payback period is a. Depreciation is subtracted from net income because it is an outflow of cash. Min: 1. Bloom: AP.000 each year. SO: 9.26 . Bloom: C. Bloom: K. A company's cost of capital refers to the a. d. b. Ans: B. Ans: C. If an asset cost $210. entire initial investment will never be recovered. project's return will always exceed the company's cost of capital. AICPA PC: Problem Solving. Difficulty: Medium. AICPA BB: Resource Management. c. d. cost-volume-profit technique. b. is considering purchasing a new machine which will cost $200.000 salvage value at the end of its ten-year life. cost of printing and registering common stock shares.000. AICPA PC: Problem Solving. c. SO: 9. AICPA FN: Decision Modeling. . IMA: Cost Management 116. AICPA PC: Problem Solving. Aaron Co. AACSB: None.0 years. The following are all quantitative capital budgeting techniques except a. Difficulty: Medium. Min: 1. AICPA PC: Problem Solving. Ans: A. IMA: Budget Preparation 114. AICPA FN: Decision Modeling. rate of return earned on total assets. Difficulty: Easy. Ans: B. Depreciation is subtracted from net income because it is an expense. AICPA FN: Decision Modeling.000. c. but which will decrease costs each year by $40. b. AACSB: Analytic. project will always be profitable.0 years. 6 years. annual rate of return technique. AICPA BB: Resource Management. Difficulty: Easy. and generates annual net cash inflows of $30.28 Test Bank for Accounting Principles. SO: 8. total cost of a capital project. d.000 and is expected to have a $30. 4. 8 years. AACSB: None. 10. AACSB: Analytic. The machine would be depreciated straight-line with no residual value over its useful life at the rate of $20.5 years. The cash payback period is a. Bloom: K. How is annual cash inflow determined? a. AICPA FN: Decision Modeling.000/year. IMA: Investment Decisions 117. 4. AICPA BB: Resource Management. cash payback technique. project would only be acceptable if the company's cost of capital was low. b. Min: 5. IMA: Investment Decisions 113. If the payback period for a project is greater than its economic life. c. AICPA PC: Problem Solving. b. 5. rate management expects to pay on all borrowed and equity funds. d. c. Bloom: AP. AACSB: None. AICPA BB: Resource Management. The useful life of the machine is 10 years. IMA: Cost Management 115. SO: 9. discounted cash flow technique. AICPA BB: Resource Management.0 years.

Incremental Analysis and Capital Budgeting 26 - 29
Ans: B, SO: 9, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management,
AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Investment Decisions

26 - 30 Test Bank for Accounting Principles, Ninth Edition

118. A company is considering purchasing factory equipment which costs $480,000 and is estimated to
have no salvage value at the end of its 8-year useful life. If the equipment is purchased, annual
revenues are expected to be $225,000 and annual operating expenses exclusive of depreciation
expense are expected to be $95,000. The straight-line method of depreciation would be used. If the
equipment is purchased, the annual rate of return expected on this project is
a. 54.2%.
b. 14.6%.
c. 29.2%.
d. 27.1%.
Ans: C, SO: 9, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource
Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Investment
Decisions

119. Capital budgeting is the process
a. used in sell or process further decisions.
b. of determining how much capital stock to issue.
c. of making capital expenditure decisions.
d. of eliminating unprofitable product lines.
Ans: C, SO: 9, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management,
AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Budget Preparation

120. Which of the following is not a common method of capital budgeting?
a. Gross profit method
b. Payback method
c. Discounted cash flow method
d. Annual rate of return method
Ans: A, SO: 9, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management,
AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Budget Preparation

121. The rate that management expects to pay on borrowed or equity funds is known as
a. the hurdle rate.
b. the cost of capital.
c. the cutoff rate.
d. all of these.
Ans: B, SO: 9, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management,
AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Investment Decisions

122. The higher the rate of return for a given risk, the
a. more attractive the investment.
b. less attractive the investment.
c. higher the cost of capital.
d. higher the hurdle rate.
Ans: A, SO: 9, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management,
AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Investment Decisions

123. The annual rate of return method is based on
a. accounting data.
b. time value of money data.
c. market values.
d. replacement values.
Ans: A, SO: 9, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management,

Incremental Analysis and Capital Budgeting 26 - 31
AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Investment Decisions

26 - 32 Test Bank for Accounting Principles, Ninth Edition

124. A company projects an increase in net income of $225,000 each year for the next five years if it
invests $900,000 in new equipment. The equipment has a five-year life and an estimated salvage
value of $300,000. What is the annual rate of return on this investment?
a. 25.0%
b. 37.5%
c. 50.0%
d. 57.5%
Ans: B, SO: 9, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource
Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Investment
Decisions

125. When using the payback method, payback is expressed in terms of
a. a percent.
b. dollars.
c. time.
d. a discount factor.
Ans: C, SO: 9, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management,
AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Investment Decisions

126. The payback method is criticized on the grounds that it
a. ignores obsolescence factors.
b. ignores the cost of an investment.
c. is complicated to use.
d. ignores the time value of money.
Ans: D, SO: 9, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management,
AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Investment Decisions

127. Nance Company is considering buying a machine for $90,000 with an estimated life of ten years
and no salvage value. The straight-line method of depreciation will be used. The machine is
expected to generate net income of $6,000 each year. The cash payback on this investment is
a. 15 years.
b. 10 years.
c. 6 years.
d. 3 years.
Ans: C, SO: 9, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Resource
Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Investment
Decisions

128. Garza Company is considering buying equipment for $240,000 with a useful life of five years and
an estimated salvage value of $12,000. If annual expected income is $21,000, the denominator in
computing the annual rate of return is
a. $240,000. b.
$120,000. c.
$126,000. d.
$252,000.
Ans: C, SO: 9, Bloom: C, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Resource
Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Investment
Decisions

5%. AICPA BB: Resource Management. AICPA BB: Resource Management. Ans: A. $10.000 for year 3. Difficulty: Easy. SO: 9. 15%. $4. Bloom: K. b.690 3 . AICPA PC: Problem Solving. the annual rate of return is: a. AICPA FN: Decision Modeling. A capital budgeting technique which takes into consideration the time value of money is the a. the cash payback period is: a.402 a.712 2. IMA: Investment Decisions 130. AICPA FN: Decision Modeling.893 . 30 years.058. Bloom: AP. AACSB: None. IMA: Investment Decisions 132. 9. return on stockholders' equity approach. Ans: D. Min: 3. c. AICPA BB: Resource Management.000 a year. Incremental Analysis and Capital Budgeting 26 .000 a year. Annual cost savings were: $5. SO: 10. AICPA BB: Resource Management. b. If depreciation expense is $3. and $3. AICPA PC: Problem Solving.000.000 for year 1.5 years. Min: 3. Mussina Company had an investment which cost $260.239. IMA: Investment Decisions .797 1. AACSB: Analytic. but with the use of the new computer. AACSB: None.000. and the net present value of the project was $(450). payback approach. d.339.8%. 12 years. $9. net income will increase by $5.000 and had a salvage value at the end of its useful life of zero. d. Ans: D. Min: 1.33 129. AICPA PC: Problem Solving. The company's required rate of return is 12%. Difficulty: Medium. c. purchased some equipment 3 years ago. SO: 9. net present value method.158. $10. Bloom: AP. annual rate of return approach. If Mussina's expected annual net income is $15. AICPA PC: Problem Solving. c. SO: 9.8%. c. 20 years. Ans: C. d. Difficulty: Hard. b. AICPA FN: Decision Modeling. Giraldi Company has identified that the cost of a new computer will be $60. Min: 5. 7. d. $9. Bloom: AP. Benaflek Co. Difficulty: Medium. 5.000 for year 2. AICPA FN: Decision Modeling. AACSB: None. The amount of the initial investment was Present Value PV of an Annuity Year of 1 at 12% of 1 at 12% 1 . b. IMA: Investment Decisions 131.893 2 . 11.

Difficulty: Hard.355 4.000 Estimated useful life 5 years 6 years Salvage value 0 0 The company requires a 10% rate of return on all new investments. 5%. 10%.791 3. AICPA PC: Problem Solving. SO: 9.111 The cash payback period for Project Blue is a. c. Present Value of an Annuity of 1 Periods 9% 10% 11% 12% 5 3. Ans: B. AICPA FN: Decision Modeling. 20 years. Ninth Edition 133.000 142. 10 years.355 4.000 42.890 3. c.000 142. AICPA BB: Resource Management. AICPA BB: Resource Management. Present Value of an Annuity of 1 Periods 9% 10% 11% 12% 5 3. IMA: Investment Decisions 134.000 42. AACSB: None. d.486 4.890 3.111 The annual rate of return for Project Blue is a. Difficulty: Hard.696 3. AICPA FN: Decision Modeling.605 6 4.000 $600.000 Annual net income 20. Estimates regarding each project are provided below: Project Blue Project Gray Initial investment $400. 50%. Ans: D.486 4. Fehr Company is considering two capital investment proposals.605 6 4. AICPA PC: Problem Solving.000 Net annual cash inflow 100.231 4.000 $600. AACSB: None. Min: 7. d. 5 years. Fehr Company is considering two capital investment proposals.696 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. Min: 7. Bloom: AP.26 . 4 years.30 Test Bank for Accounting Principles. SO: 9. Bloom: AP. Estimates regarding each project are provided below: Project Blue Project Gray Initial investment $400.000 Net annual cash inflow 100. b.000 Annual net income 20. b.791 3.231 4. 25%. IMA: Investment Decisions .

000 Estimated useful life 5 years 6 years Salvage value 0 0 The company requires a 10% rate of return on all new investments. Estimates regarding each project are provided below: Project Blue Project Gray Initial investment $400.696 3. c.410.890 3. AICPA PC: Problem Solving. 10%. Incremental Analysis and Capital Budgeting 26 . Present Value of an Annuity of 1 Periods 9% 10% 11% 12% 5 3. b. AICPA PC: Problem Solving.355 4.231 4. Ans: D.791 3. Fehr Company is considering two capital investment proposals.605 6 4. SO: 10.000 42.000 Estimated useful life 5 years 6 years Salvage value 0 0 The company requires a 10% rate of return on all new investments. Bloom: AP. Ans: B.000 $600.000 42.355 4. $618.111 The net present value for Project Gray is a.912.000 Net annual cash inflow 100.000 Annual net income 20. AICPA FN: Decision Modeling. Bloom: AP.111 The internal rate of return for Project Gray is approximately a.000 142. 9%. IMA: Investment Decisions . $182. IMA: Investment Decisions 136. Min: 7.696 3.000 $600.605 6 4. Difficulty: Hard. $18. AICPA BB: Resource Management. Difficulty: Hard. AACSB: None. 12%. 11%. AICPA FN: Decision Modeling.231 4. AACSB: None.000. c.486 4. Estimates regarding each project are provided below: Project Blue Project Gray Initial investment $400.000 142. AICPA BB: Resource Management. SO: 10.890 3.791 3. Present Value of an Annuity of 1 Periods 9% 10% 11% 12% 5 3.486 4. b.000 Net annual cash inflow 100.410. Fehr Company is considering two capital investment proposals. $100. d.31 135.000 Annual net income 20. d. Min: 7.

IMA: Investment Decisions 138. SO: 10. Present Value of an Annuity of 1 Period 8% 9% 10% 1 .783 1.736 3 2.759 1.736 3 2. Difficulty: Hard.531 2. b. AACSB: None. 8%. c.000 at the end of each year for three years.926 .759 1. SO: 10. SO: 10.454. Min: 5. $114. 9%.531 2. d. AICPA PC: Problem Solving. AICPA BB: Resource Management.898. Ans: D.577 2.909 2 1.487 A company has a minimum required rate of return of 10% and is considering investing in a project that requires an investment of $98. c. Use the following table. IMA: Investment Decisions 139. $17.170. $35. b. AICPA FN: Decision Modeling.32 Test Bank for Accounting Principles. Ans: B.000.000 at the end of each year for three years. The net present value of this project is a. Bloom: AP. AACSB: None. Bloom: AP.487 A company has a minimum required rate of return of 9% and is considering investing in a project that costs $175.736 3 2.000 and is expected to generate cash inflows of $70.337 and is expected to generate cash inflows of $27.926 .487 A company has a minimum required rate of return of 8% and is considering investing in a project that costs $68. Use the following table. AICPA FN: Decision Modeling.783 1. Bloom: AP. Present Value of an Annuity of 1 Period 8% 9% 10% 1 . AICPA BB: Resource Management.759 1.917 . Difficulty: Hard. Ans: B. 10%. Difficulty: Hard. Use the following table. Min: 5.577 2.718. $6.783 1.000. $98.170. Ninth Edition 137.454. $2.577 2.917 .000 and is expected to generate cash inflows of $42.531 2.26 . d. $177. IMA: Investment Decisions . d. less than the required 8%. c. The approximate internal rate of return on this project is a. Present Value of an Annuity of 1 Period 8% 9% 10% 1 . AICPA PC: Problem Solving. The present value of future cash inflows for this project is a. b.909 2 1. AICPA PC: Problem Solving. AACSB: None.926 .909 2 1.917 . $104. AICPA BB: Resource Management.000 each year for three years. AICPA FN: Decision Modeling. Min: 5.

784 What is the approximate net present value of this investment? a. AICPA PC: Problem Solving. and $10. Humphrey.792 c. AICPA BB: Resource Management.000 with a 6-year useful life. Difficulty: Hard. AACSB: None. Bloom: AP. Min: 5. Present Value of an Annuity of 1 Period 8% 9% 10% 11% 12% 15% 6 4.355 4. $13. Inc. The equipment will provide cost savings of $7. $30.77 3 . 10% c. AACSB: None. SO: 10. AICPA BB: Resource Management.623 4. AICPA FN: Decision Modeling. is considering purchasing equipment costing $30.750 Ans: C.67 a. Woods has a 14% cost of capital. IMA: Investment Decisions . 11% d.231 4. Difficulty: Hard. What is the present value of these future cash flows? Present Value of 1 Period 14% 1 . $886 d.748 Ans: B.355 4.300 and will be depreciated straight-line over its useful life with no salvage value. AICPA FN: Decision Modeling. Difficulty: Hard. AICPA PC: Problem Solving. SO: 10. The equipment will provide cost savings of $7. Bloom: AP. which is expected to produce cash inflows of $15. Humphrey. and uses the following factors.800 b. IMA: Investment Decisions 141. Humphrey.000 each year for two years. Inc.784 What is the approximate internal rate of return for this investment? a. $2. $29.33 140.000 with a 6-year useful life.231 4.300 and will be depreciated straight-line over its useful life with no salvage value. Min: 5. Min: 5. requires a 10% rate of return. AICPA FN: Decision Modeling. SO: 10. Incremental Analysis and Capital Budgeting 26 . $31. AACSB: None. Bloom: AP. Humphrey. Inc. Inc. $1.88 2 . Present Value of an Annuity of 1 Period 8% 9% 10% 11% 12% 15% 6 4.486 4.111 3.000 in year 3. 12% Ans: D.450 d.800 b. is considering purchasing equipment costing $30.111 3. requires a 10% rate of return. 9% b. IMA: Investment Decisions 142. AICPA BB: Resource Management. $34.400 c.623 4.486 4. AICPA PC: Problem Solving. Woods Company wants to purchase an asset with a 3-year useful life.

Bloom: AN. Ans: C. d. IMA: Investment Decisions . In using the internal rate of return method. $10. the total present value of cash inflows for Project A is $30. Accrual income is used to calculate the net present value. The initial investment in the project must have been a. Using the net present value method. Difficulty: Medium. IMA: Investment Decisions 144. Min: 3. AACSB: None. Project A. Bloom: C. AICPA BB: Resource Management. AACSB: Analytic. Accrual income is used to calculate the payback period. AICPA BB: Resource Management.0 and the equal annual cash inflows were $40. Cash flows are used to calculate the internal rate of return. Bloom: AN. c. IMA: Investment Decisions 145. Hale Plumbing used the net present value method and determined that project 34 had a zero net present value. b. project's rate of return is less than the minimum rate required. Difficulty: Medium. c. c.26 . Cash flows are used to calculate the annual rate of return. Ans: B. Ninth Edition 143. an amount which cannot be determined. d. The return from this project is equal to the cost of capital.000. Which one of the following is correct? a. Difficulty: Easy. AICPA BB: Resource Management. not capable of being calculated. SO: 10. The project guarantees company profitability. d. a project's net present value is zero. AICPA BB: Resource Management. Difficulty: Easy. Min: 1. b. What does this tell management about the project? a. and in using the net present value method. d. Min: 3. AICPA BB: Resource Management.000. Difficulty: Medium. AICPA FN: Decision Modeling. b. AICPA PC: Problem Solving. the project that should be accepted is a. Bloom: AP. AICPA PC: Problem Solving. The project earns the company's desired minimum rate of return. AICPA PC: Problem Solving. IMA: Investment Decisions 146. AICPA FN: Decision Modeling. Bloom: K. AICPA FN: Decision Modeling. AICPA PC: Problem Solving. b. Min: 1. If a company's required minimum rate of return is 10%. c. project earns a rate of return of 0%. AACSB: Analytic. SO: 10. this indicates that the a. project's rate of return exceeds 10%. IMA: Investment Decisions 147. project earns a rate of return of 10%. AACSB: None. The project's cash inflows will equal its cash outflows. Min: 2. the internal rate of return factor was 4.34 Test Bank for Accounting Principles. Ans: C.000 and have the same economic life. $40. b.000.000.000. If Project A and Project B both require an initial investment of $30. d. SO: 10. Ans: A. SO: 10. AICPA FN: Decision Modeling. AICPA FN: Decision Modeling. $160. Ans: D. Project B. they are both the same. AICPA PC: Problem Solving.000 and the total present value of cash inflows of Project B is $36. SO: 10. neither. c. AACSB: None.

Difficulty: Medium. Use the following table.531 2. Ans: B. Present value of an Annuity of 1 Period 8% 9% 10% 1 .487 A company has a minimum required rate of return of 9%. Use the following table.487 A company has a minimum required rate of return of 10%.917 .759 1. c. AICPA FN: Decision Modeling.917 . AACSB: Analytic.783 1. AICPA PC: Problem Solving.000 at the end of each year for three years.577 2. c. AACSB: Analytic. $223.000. Present value of an Annuity of 1 Period 8% 9% 10% 1 . The present value of future cash inflows for this project is a.909 2 1. b.830.909 2 1. AACSB: Analytic.909 2 1. It is considering investing in a project that costs $227. Incremental Analysis and Capital Budgeting 26 .35 148. $13.736 3 2.531 2. SO: 10.783 1.790 and is expected to generate cash inflows of $90.783 1. Min: 5.736 3 2. IMA: Investment Decisions 149. AICPA BB: Resource Management. c. It is considering investing in a project that requires an investment of $210. $252. SO: 10.000 at the end of each year for three years. The IRR on this project cannot be approximated.000 each year for three years.208.000 and is expected to generate cash inflows of $90. Difficulty: Medium.577 2. $246.736 3 2. $42.210. $425. Use the following table. Bloom: AP.917 . 10%.487 A company has a minimum required rate of return of 8%. Min: 5. d. b. 8%. AICPA PC: Problem Solving.926 .208.516. Present value of an Annuity of 1 Period 8% 9% 10% 1 . Bloom: AP. AICPA FN: Decision Modeling.926 . Difficulty: Medium. Min: 5. Ans: D.926 .759 1. d.000. $5. 9%. AICPA PC: Problem Solving. IMA: Investment Decisions 150.000 and is expected to generate cash inflows of $168. $210. d. AICPA FN: Decision Modeling. IMA: Investment Decisions . It is considering investing in a project which costs $420. b.830. SO: 10. AICPA BB: Resource Management. The net present value of this project is a. AICPA BB: Resource Management. Bloom: AP.531 2.759 1. Ans: B.577 2. The approximate internal rate of return on this project is a.

Bloom: C. Min: 1. Bloom: AN. present value of 1 table. SO: 1. the annual rate of return method. Ninth Edition 151. Bloom: C. AACSB: None. review results of the decision. Difficulty: Easy. identify the problem and assign responsibility. AICPA PC: Problem Solving. SO: 4. AICPA PC: Problem Solving. The appropriate table to use when an investment promises to return unequal cash flows is the a. determine possible courses of action. future value of annuity table. IMA: Investment Decisions 156. Min: 1. IMA: Investment Decisions 152. future value of 1 table. If the special order is accepted. none of these. Bloom: K. Which of the following would generally not affect a make-or-buy decision? a. Variable manufacturing costs d. Opportunity cost . ignored. make a decision. AACSB: None. Bloom: K.26 . b. Selling expenses b. AICPA PC: Problem Solving.000 units. added to the make total cost. a discounted cash flow method. SO: 10. AICPA BB: Resource Management. Dryer has sufficient unused capacity to produce the 3. c. IMA: Investment Decisions 153. It costs Dryer Company $26 per unit ($18 variable and $8 fixed) to produce its product.000 units at $21 each. present value of annuity table. In a make-or-buy decision. SO: 10. Dryer would incur special shipping costs of $2 per unit if the order were accepted. $3.36 Test Bank for Accounting Principles. Direct labor c. IMA: Investment Decisions 155. which normally sells for $38 per unit. AICPA BB: Resource Management. $54. $9. SO: 3. d. AICPA FN: Decision Modeling. AICPA PC: Problem Solving. Accounting's contribution to the decision-making process occurs in all of the following steps except to a. opportunity costs are a. Difficulty: Medium. added to the buy total cost. b. AICPA FN: Decision Modeling. $3. b. c. d. AACSB: Analytic. AICPA FN: Decision Modeling.000 increase c. what will be the effect on net income? a. b. Ans: A.000 decrease b.000 increase Ans: B. c. AICPA BB: Resource Management. Ans: A. AICPA FN: Decision Modeling. Min: 5. deducted from the make total cost. A foreign wholesaler offers to purchase 3. Ans: A. the payback method. AICPA BB: Resource Management. d. Difficulty: Easy. Min: 1. AICPA BB: Resource Management. Min: 1. AACSB: None. IMA: Investment Decisions 154. Difficulty: Easy. The conceptually superior approach to capital budgeting is a. AICPA FN: Decision Modeling. d. Difficulty: Easy. c. AICPA PC: Problem Solving. AACSB: None. Ans: C.000 increase d.

Min: 1. Incremental Analysis and Capital Budgeting 26 . Difficulty: Easy. AICPA FN: Decision Modeling. Bloom: C. AICPA PC: Problem Solving. SO: 4.37 Ans: A. AICPA BB: Resource Management. IMA: Investment Decisions . AACSB: None.

Difficulty: Easy. Min: 1. AICPA BB: Resource Management. Difficulty: Easy. AICPA BB: Resource Management. AICPA FN: Decision Modeling. hurdle rate. Bloom: AP. AICPA PC: Problem Solving. variable cost. Ans: C. All of the following are relevant in deciding whether to eliminate an unprofitable segment except the segment's a. Min: 3. c. Min: 1. b. Difficulty: Easy. IMA: Business Economics 161. AACSB: None. cutoff rate. Difficulty: Easy. Ans: B.50 d. incremental cost. IMA: Business Economics 160. cost of capital. What is the contribution margin per unit of limited resource for each product? X Y a. c. $3. contribution margin. Min: 1. SO: 9. sunk cost. $5.38 Test Bank for Accounting Principles. Product X requires 4 machine hours and Product Y requires 8 machine hours. AICPA . variable expenses. Difficulty: Medium.00 $2.00 $1. AACSB: None. b. SO: 6.00 $3. AICPA PC: Problem Solving. AACSB: None. Bloom: C. IMA: Investment Decisions 162. $5. it is impossible for net income to decrease. Min: 1. SO: 8. Cost of capital investment Annual cash inflow. d. Average investment Annual cash inflow. Ans: A. c.00 c. d.50 Ans: A. Bloom: K. minimum rate. SO: 7. A cost that cannot be changed by any present or future decision is a(n) a. Ninth Edition 157. Ans: D. AICPA FN: Decision Modeling. In the Rossetto Company. SO: 9. Bloom: K. contribution margin per unit is $12 for Product X and $20 for Product Y.50 $1. AICPA FN: Decision Modeling. SO: 7. fixed expenses. AICPA PC: Problem Solving. AICPA FN: Decision Modeling. b. AICPA BB: Resource Management. AICPA PC: Problem Solving. d. it is impossible for net income to increase. AACSB: None.50 b. c. Bloom: K. b. c. $2. If an unprofitable segment is eliminated a. Cost of capital investment Net income. sales. Min: 1. AICPA BB: Resource Management. d. Average investment Net income. AICPA FN: Decision Modeling. AACSB: None. IMA: Business Economics 159. fixed expenses allocated to the eliminated segment will be eliminated. d. Ans: C. AICPA BB: Resource Management. variable expenses of the eliminated segment will be eliminated. AICPA BB: Resource Management. Difficulty: Easy. AICPA PC: Problem Solving. b opportunity cost. AACSB: Analytic. Bloom: K. The cash payback formula is a. IMA: Business Economics 158. The rate of return that management expects to pay on all borrowed and equity funds is the a. 26 .

39 FN: Decision Modeling. IMA: Investment Decisions . Incremental Analysis and Capital Budgeting 26 . AICPA PC: Problem Solving.

d 95. Ninth Edition 163. d 50. present value of future cash inflows and the capital investment. a 98. a 141. Bloom: K. Item Ans. c 110. AICPA FN: Decision Modeling. AACSB: None.40 Test Bank for Accounting Principles. Item Ans. b 156. b 164. d 75. d 92. b 91. d 154. d 152. d 54. Ans: C. b 136. b 158. d 145. Difficulty: Easy. d 104. d 157. a 139. Item Ans. b 67. d 112. b 57. a 142. c 138. b 56. c 94. AICPA FN: Decision Modeling. d. c 87. b 135. c 88. b 114. d 76. b 49. a 119. Min: 1. c 59. d 102. added back to net income because it is not an outflow of cash. c 130. c 125. c 144. IMA: Investment Decisions Answers to Multiple Choice Questions Item Ans. added back to net income because it is an inflow of cash. b 78. d 161. c 137. b 74. AICPA BB: Resource Management. b. a 133. c 146. d 46. project's rate of return equals the required rate of return. d 113. b 143. c 107. SO: 10. b 70. b 101. c 129. a 90. Bloom: K. c 61. b 103. c 127. project's rate of return exceeds the required rate of return. c. Min: 1. b 93. c 159. Net present value is the difference between the a. c 126. b 62. To determine annual cash inflow. c 44. d 100. Bloom: K. d 115. Min: 1. b 97. b 108. Difficulty: Easy. b 118. a 82. AICPA BB: Resource Management. d 69. b 106. subtracted from net income because it is an expense. b 41. AACSB: None. b 153. Item Ans. Difficulty: Easy. c 45. a 47. d 148. future cash inflows and the present value of the capital investment. depreciation is a. b 123. Item Ans. b 63. c 147. b 55. a 72. d 68. d. subtracted from net income because it is an outflow of cash. AICPA BB: Resource Management. d 105. d 84. d 109. c 51. b. a 42. Ans: B. a 162. c. project is acceptable. b 140. AICPA PC: Problem Solving. c 111. b 128. a 151. IMA: Investment Decisions 165. b 58. b 85. c 99. present value of future net income and the capital investment. c 64. Ans: D.26 . b. a . d 73. c 116. b 52. c 131. SO: 10. b 132. b 160. a 65. project's rate of return is less than the required rate of return. c 53. c 163. AICPA PC: Problem Solving. IMA: Investment Decisions 164. b 80. d 150. SO: 9. a 79. a 117. AICPA FN: Decision Modeling. d 77. 38. d 81. c 121. b 124. b 155. Item Ans. a 71. c 39. a 89. c 122. AACSB: None. b 134. AICPA PC: Problem Solving. c 83. future cash inflows and the capital investment. a 40. a 43. b 86. d 66. d 165. A negative net present value means that the a. c 149. c. b 96. b 60. b 120. a 48. d.

An outside supplier has offered to produce the commercial clocks for Notson for $420 each. AICPA PC: Problem Solving. Instructions Compare plans using incremental analysis.000) (96. Inc. Min: 3. AICPA FN: Decision Modeling. Ans: N/A. Each bear consists of $12 of variable costs and $9 of fixed costs and sells for $45. Notson needs 1. SO: 3. AICPA FN: Decision Modeling. Difficulty: Medium. is considering Plan 1 which is estimated to have sales of $40.000 BE 167 Pederson Enterprises produces giant stuffed bears. AICPA BB: Resource Management. AICPA PC: Problem Solving. AICPA BB: Resource Management.000 BE 168 Notson. AACSB: Analytic.000 × $14) $112.25 per bear.) Incremental revenue (8. Bloom: AP. A wholesaler offers to buy 8.000 – $38.000) $2. Incremental Analysis and Capital Budgeting 26 . Ans: N/A.000 units at $14 each. AICPA PC: Problem Solving.25 × 8. AICPA BB: Resource Management. AICPA FN: Decision Modeling.41 BRIEF EXERCISES BE 166 Sedgwick Inc. Ans: N/A. Min: 5.000. AACSB: Analytic. Difficulty: Medium. produces several models of clocks.000) Incremental increase in profit if Plan 1 is selected $1.000) Incremental shipping costs ($1. IMA: Business Economics .000 Incremental variable costs ($12 × 8. The company currently has sales of $38.200 clocks annually. Pederson will incur extra shipping costs of $1.000) (1.000 and costs of $14. of which Pederson has the capacity to produce. Instructions Determine the incremental income or loss that Pederson Enterprises would realize by accepting the special order. SO: 2.000) (10. AACSB: Analytic.000 Incremental costs ($15.000 – $14. IMA: Investment Decisions Solution 167 (5 min. Notson has provided the following unit costs for its commercial clocks: Direct materials $100 Direct labor 120 Variable overhead 80 Fixed overhead (40% avoidable) 150 Instructions Prepare an incremental analysis which shows the effect of the make-or-buy decision.000 and costs of $15. Bloom: AP. SO: 4. Min: 5.000) Incremental profit if special order accepted $ 6. IMA: Investment Decisions Solution 166 (3 min. Difficulty: Medium. Bloom: AP.000.) Incremental revenue ($40.

000. Difficulty: Medium.200 = $120.000 Incremental savings on fixed MOH + 6.25 each. Difficulty: Medium.000 Savings of FOH 40% × $150 × 1. AACSB: Analytic. Bloom: AN. determine how much incremental profit or loss it would report. The production generates 60.40 Test Bank for Accounting Principles. Bloom: AP. or the chickens can be slaughtered in house and then sold for $2. Min: 4. The costs per stapler are as follows: Direct materials $ 3. Instructions If Paola Farms slaughters the chickens.000 Savings of DL $120 × 1.00 Gallup Company has contacted Parks with an offer to sell it 3. IMA: Business Economics Solution 169 (5 min.000) BE 170 Paola Farms. Min: 5. AICPA PC: Problem Solving.200 = 72. What should Paola Farms do? Ans: N/A.00 Variable overhead 4.200 = 96. It costs $55. AICPA BB: Resource Management. produces a crop of chickens at a total cost of $66.000 more to turn the annual chicken crop into chicken meat.000) Incremental savings on direct materials + 9.000 Savings of VOH $80 × 1.00 Total $22. Inc. Ans: N/A.00 Fixed overhead 7.200 = 144.00 Direct labor 8. SO: 5.000 Total cost savings + 432.000 Incremental net cost to buy $ (3.) Incremental cost to buy $(54. Instructions Prepare an incremental analysis for the make-or-buy decision. AICPA PC: Problem Solving. IMA: Business Economics . Ninth Edition Solution 168 (5 min. AICPA FN: Decision Modeling. AICPA FN: Decision Modeling. AICPA BB: Resource Management.000 staplers annually for its main product.200 × $420) $(504.000) Cost savings: Savings of DM $100 × 1.) Incremental Analysis Incremental Effect Cost to buy (1.000 chickens which can be sold for $1 each to a slaughtering company.000) BE 169 Parks Corporation currently manufactures 3.00 each. SO: 4.26 .000 Incremental savings on variable MOH + 12. AACSB: Analytic.000 Incremental savings on direct labor + 24.000 staplers for $18.000 Incremental net cost to buy $ (72. $5 of the fixed overhead per unit is unavoidable.

Instructions Prepare an analysis showing whether the old machine should be retained or replaced. Demand of individual products is not affected by changes in other product lines.40) + 2. Results of June follow: Sour Cream Ice Cream Yogurt Butter Total Units sold 2.000 chickens = $75. Min: 4.000 Fixed costs 5.000 and a remaining useful life of 3 years and no salvage value. AACSB: Analytic. more efficient machine is available at a cost of $225.) Retain Equipment Replace Equipment Net Income Change Variable manufacturing costs $1.000 $60.000) Incremental variable cost savings + 6. AACSB: Analytic.200 $15.) Incremental revenue $(10.200 4. AICPA PC: Problem Solving.000 $20.000 7. BE 171 Elmdale Company has a machine that affixes labels to bottles. ice cream.000) .000 Incremental fixed cost savings ($5.41 Solution 170 (4 min.000 $ 2.000) $ 5.000 Incremental costs: given as $55. Bloom: AP.000 $20.000 $10. Incremental Analysis and Capital Budgeting 26 .000 *For 3 years of remaining life BE 172 Keith Inc.800 $ 8. The allocated fixed costs are based on units sold and are unavoidable. Difficulty: Medium.000* New machine cost (225. Bloom: AN.000 that will have a 5-year useful life with no salvage value.000 profit Paola Farms should slaughter.100 Revenue $10.000 Instructions Prepare an incremental analysis of the effect of dropping the sour cream product line. AICPA BB: Resource Management. SO: 6. SO: 7. AICPA FN: Decision Modeling.800 28.000 3.000 to $310.000 – $55.000 4. IMA: Investment Decisions Solution 171 (4 min.000 = $20. IMA: Business Economics Solution 172 (4 min.000 x . The new machine will lower annual variable production costs from $400.000 $270.25 – $1.000) Net savings over 3 years $ 45. Difficulty: Medium.000 Incremental profits: $75. has 4 product lines: sour cream.000 $930.000 Incremental decrease in profits if dropped $ (2.000 13. The machine has a book value of $60. AICPA BB: Resource Management. Ans: N/A. Min: 4.000 17.000 2.000 Variable departmental costs 6.00) × 60. AICPA FN: Decision Modeling. yogurt. and the other 60% are allocated.200.) Incremental revenues: ($2. AICPA PC: Problem Solving. Ans: N/A.000 Net income (loss) $ (1. and butter.000 500 400 200 3. A new.000. 40% of the fixed costs are direct.

BE 174 Lightle Co. is considering investing in new equipment that will cost $900. Difficulty: Medium. The facility will increase revenues by $240. Depreciation expense. Min: 3. Difficulty: Medium.000.5 hours = $10 Therefore.000 with a 10-year useful life.20 Product 43: $15 ÷ 1. AICPA PC: Problem Solving. AICPA FN: Decision Modeling. Ans: N/A.) Product 12: $23 ÷ 2. Bloom: AP. Instructions Compute the cash payback period.000 salvage value at the end of its 20-year useful life.5 hours = $9. Which product should Meierhoff tell its sales personnel to ‘push’ to customers? Ans: N/A. Ninth Edition BE 173 Meierhoff Company provided the following information concerning two products: Contribution margin per unit—Product 12 $23 Contribution margin per unit—Product 43 $15 Machine hours required for one unit—Product 12 2. AACSB: Analytic.5 years BE 175 Holt Co. Bloom: AP. SO: 8.000) = 7.42 Test Bank for Accounting Principles. is considering investing in a new facility to extract and produce salt. Min: 4.000 over its useful life. AICPA PC: Problem Solving. SO: 9.000 per year. Difficulty: Medium. but will also increase annual expenses by $160. but will have a $20. Ans: N/A.) $900. IMA: Investment Decisions Solution 174 (3 min. AICPA BB: Resource Management.5 hours Machine hours required for one unit—Product 43 1. AICPA PC: Problem Solving. Bloom: AN. IMA: Business Economics Solution 173 (4 min.000 ÷ ($30. Instructions Calculate the annual rate of return on this facility. AICPA BB: Resource Management. IMA: Investment Decisions . AICPA BB: Resource Management. The facility will cost $980.26 . is $90. SO: 9. AICPA FN: Decision Modeling. The new equipment is expected to produce annual net income of $30.000 to build. AICPA FN: Decision Modeling.000.000 + $90. AACSB: Analytic. Min: 4.5 hours Instructions Compute the contribution margin per unit of limited resource for each product. sales personnel should push Product 43. AACSB: Analytic. using the straight-line rate.

000) Net present value $ 1.000 ————————— = $500.000 ÷ $16.) When net annual cash inflows are expected to be equal. its annual rate of return is: $80. BE 177 An investment costing $90. AICPA FN: Decision Modeling. AACSB: Analytic.000 – $160. the internal rate of return can be approximated by dividing the capital investment by the net annual cash inflows to determine the discount factor.000 = 16% BE 176 Puckett Company is proposing to spend $140.00 (140. Incremental Analysis and Capital Budgeting 26 .000 = $80. Min: 4.33 By tracing across on the 8-year row. Instructions Compute the approximate internal rate of return for this investment.870 = 5.000 ÷ $500.000 + $20. $90. Bloom: AP. Min: 3. (Table C-2 is needed) Ans: N/A. AICPA FN: Decision Modeling. AICPA PC: Problem Solving. SO: 10. Difficulty: Medium.250 The investment should be made because the net present value is positive.000 2 Therefore. AACSB: Analytic. The appropriate present value factor for 10 periods is 5.65. the internal .000. Thus.) The annual rate of return is calculated by dividing expected annual income by the average investment. Ans: N/A.000 × 1. AICPA PC: Problem Solving. IMA: Investment Decisions Solution 176 (4 min. IMA: Investment Decisions Solution 177 (3 min.) Present Value Cash inflows—$25.000 Its average investment is: $980.65 $141.870. Bloom: AP.33493.43 Solution 175 (4 min. SO: 10. The investment will have a life of 8 years with no salvage value and will produce annual cash flows of $16. Instructions Compute the proposed investment’s net present value. AICPA BB: Resource Management.000 × 5. and indicate whether the investment should be made by Puckett Company. we see that the discount factor for 10% is 5. AICPA BB: Resource Management. Difficulty: Medium.000 is being contemplated by Linn Co. The company’s expected annual income is: $240.250 Cash outflow—investment $140.000 to purchase a machine that will provide annual cash flows of $25. and then locating this discount factor on the present value of an annuity table.

.26 .44 Test Bank for Accounting Principles. Ninth Edition rate of return on this project is approximately 10%.

000 $750.000.000 Gross profit 36. . AACSB: Analytic.000 units of product and capacity.000 units at $50 Net Income Reject Order Accept Order Increase (Decrease) Revenues (15.000) 10 55 Profit per unit $15 The company received a proposal from a foreign company to buy 15. This is a one-time only order and acceptance of this proposal will not affect the company's regular sales.000 Net income $12. 178 Felter Company produced and sold 50. For the first eight months of 2010. Incremental Analysis and Capital Budgeting 26 .000 Felter Company would increase its income by $75. Difficulty: Hard. AICPA PC: Problem Solving. (675. AICPA FN: Decision Modeling.) FELTER COMPANY Incremental Analysis Proposal to buy 15.000 × $45) -0.000 $ 75. AICPA BB: Resource Management.000.000.000 units of Felter Company's product for $50 per unit.000 Costs (15.000) Net Income $ -0.000.000 units) $90. is operating at 70% of plant Unit information about its product is as follows: Sales Price $70 Variable manufacturing cost $45 Fixed manufacturing cost ($500.000. IMA: Business Economics Solution 178 (9–13 min. SO: 3.000 Cost of goods sold 54.000 Operating expenses 24. Instructions Prepare a schedule reflecting an incremental analysis of this proposal and indicate the effect the acceptance of this order might have on the company's income.000 × $50) $ -0. 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 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. Ans: N/A.45 EXERCISES Ex. Min: 9.000 in accepting the special order. the company reported the following operating results while operating at 80% of plant capacity: Sales (500.000) (675.000 ÷ 50. 179 Carney Company manufactures cappuccino makers. Bloom: AN. $750. $ 75.

Bloom: E. Instructions (a) Prepare an incremental analysis for the special order. the company reported the following operating results while operating at 80% capacity: Sales (100. (b) The incremental analysis shows Carney Company should accept the special order because incremental revenues exceed incremental costs. Ans: N/A.000 Gross profit 2.200 of shipping costs. **Variable operating expenses = 30.000 + $10.000 units) $7. AICPA PC: Problem Solving.000 machines at $135 each from a major coffee shop franchise.000.000.000) Net Income $ -0. Difficulty: Medium.000 of shipping costs but no increase in fixed expenses.000 Cost of goods sold 4.000 Cost of goods sold was 70% variable and 30% fixed.000 = $1.000** (1. (b) Should Carney Company accept the special order? Justify your answer. 180 Gregg Company supplies schools with floor mattresses to use in physical education classes.000.) In September.000 Cost of Goods Sold -0. AACSB: Analytic. Instructions (a) Prepare an incremental analysis for the special order.800. Bloom: AN.000 $ 140. For the first 6 months of 2010.000 × $95 = $2. Gregg has received a special order from a large school district to buy 600 mats at $45 each. SO: 3. AICPA BB: Resource Management.) Net Income (a) Reject Order Accept Order Increase (Decrease) Revenues $ -0. This recommendation assumes that acceptance of the special order will not affect relations with existing customers. 179 (Cont.200.060. AICPA PC: Problem Solving.000 Net income $ 800. IMA: Business Economics Solution 179 (12–17 min. AICPA FN: Decision Modeling.850. Acceptance of the order would result in $10.050. IMA: Business Economics . Ans: N/A.050.850. AICPA FN: Decision Modeling. Min: 13. Ninth Edition Ex.000 $4.26 .000. (b) Should Gregg Company accept the special order? Justify your answer. $ 140. AACSB: Analytic.000* (2.000 Operating expenses 2. Difficulty: Medium.000) Operating Expense -0.050.060.46 Test Bank for Accounting Principles.000 *Variable cost of goods sold = 30. SO: 3. AICPA BB: Resource Management. $4. Carney Company receives a special order for 30. operating expenses were 75% variable and 25% fixed. Acceptance of the special order will not affect fixed costs but will result in $1. Min: 12. Ex.850. 2.060. 1.000 × $35 = $1.

AICPA BB: Resource Management.000 + $1.000 Innova also incurs 5% sales commission ($0.25 per disc for 5.000) Fixed overhead -0.000.940. (6. IMA: Business Economics Solution 181 (12 min. Instructions (a) Prepare an incremental analysis for the special order.000 golf discs is: Materials $ 10.000 $27. its fixed overhead will increase from $50.40 = $17.000 × 75% = $1.000) .640 (17.000 = $29.250 $21. If Larkin accepts the offer. Variable cost of goods sold per unit = $2. (5.000) (6. SO: 3.000 Variable overhead 20. Min: 12.000 Total $100. Bloom: E.940. Ex.200 (b) The incremental analysis shows Gregg Company should not accept the special order because incremental costs exceed incremental revenues.000 due to the purchase of a new imprinting machine.200) Net Income $ -0. (b) Should Innova accept the special order? Why or why not? Ans: N/A.30) on each disc sold.640.000 × 70% = $2.000 ÷ 100.640) Operating Expense -0.000) (2.20) -0.250 Materials ($0.000 ÷ 100. Difficulty: Hard.000 discs. The cost of manufacturing 25.000 Labor 30. Rudd would sell the discs under its own brand name in foreign markets not yet served by Larkin.40. Incremental Analysis and Capital Budgeting 26 .47 Solution 180 (13–18 min. Variable operating expenses = $2. $27. 181 Larkin Company produces golf discs which it normally sells to retailers for $6 each. AACSB: Analytic.500. $ (840) $ (840) Variable cost of goods sold = $4.) (a) Net Income Reject Order Accept Order Increase (Decrease) Revenues $ -0.000) (4. Variable cost of goods sold for the special order = 600 × $29.000) Variable overhead ($0. 17.200 = $10. Rudd Corporation offers Innova $4.000 Fixed overhead 40. No sales commission will result from the special order.000 to $55.40) -0. $21.000 Variable operating expenses per unit = $1.000) Labor ($1. (2.000.200.200 (10.) (a) Reject Accept Order Order Net Income Effect Revenues $ -0. (4.000 = $15 Variable operating expenses for the special order = 600 × $15 = $9. AICPA PC: Problem Solving.500.80) -0. AICPA FN: Decision Modeling.000) (5.000 Cost of Goods Sold -0. 10.

250 . Ninth Edition Sales commissions -0. -0- Net income $ -0. $ 4.26 .250 $ 4. -0.48 Test Bank for Accounting Principles.

Kasten can make an extra $3. SO: 3.250. AICPA BB: Resource Management. Min: 10. 181 (Cont. Kasten received an offer from another company to manufacture the same quality widgets for $39. The following estimated costs provided: Direct material ($7/unit) $ 70. Kasten has capacity to produce 12.000 widgets and focus only on distribution? Ans: N/A.000 if it buys instead of makes.000.000 2. Difficulty: Medium. Kasten received an order for 1. This customer has offered $43 per widget. Cost to buy per widget $39 Cost to make per widget: $7 + ($15 × 2) + $3 = 40 Incremental savings per widget if purchased $ 1 Total incremental savings if purchased = $1 × 10.000 = $3. Ex. 182 Kasten. AICPA FN: Decision Modeling. AICPA PC: Problem Solving. Kasten will save $10.) (b) As shown in the incremental analysis.000 units. Larkin should accept the special order because incremental revenue exceeds incremental expenses by $4.000 units from a new customer in a country in which Kasten has never done business.) 1. budgeted 10. Incremental revenue per widget $43 Incremental cost per widget: $7 + ($15 × 2) + $3 = 40 Incremental profit per unit $ 3 Total incremental profit = $3 × 1. Should Kasten let someone else manufacture all 10. Should Kasten accept the order? 2.000 Fixed factory overhead costs ($5/unit) 50. AACSB: Analytic.000 = $10./unit) 300. IMA: Business Economics Solution 182 (10–12 min.49 Ex. Fixed factory overhead is allocated were to production. Inc.000 Variable manufacturing overhead ($3/unit) 30. Incremental Analysis and Capital Budgeting 26 . × 2 hrs.000 Total $450. Yes.4.000 Cost per unit = $45 Instructions Answer each of the following independent questions: 1. Yes.000 .000 widgets for production during 2010. Bloom: AP.000 Direct labor ($15/hr.

183 Coyle Company manufactured 6.000.000 -0.000 if the component part is purchased from the outside firm and the new product is manufactured.000 (12.) Make Buy Increase (Decrease) Direct materials $35.000 -0. If the component part is purchased from the outside firm.000 Variable manufacturing overhead 10.000 $92. Ninth Edition Ex.000 -0.26 . $3 of the fixed overhead per unit will be allocated to other products.000) Total annual cost 80. AICPA BB: Resource Management.000 × $12) -0. SO: 4. Difficulty: Medium. Instructions Prepare an incremental analysis report for Coyle Company which can serve as informational input into this make or buy decision.000) Opportunity cost 14.50 Test Bank for Accounting Principles. Coyle Company has the opportunity to use the factory equipment to produce another product which is estimated to have a contribution margin of $14. AICPA PC: Problem Solving. 15.000 20. 10. If Agler makes the subassemblies.000 Another company has offered to sell the same component part to the company for $12 per unit.000 -0- Purchase price (6.000 of the subassemblies for $18 each.000 $80.000 units of a component part that is used in its product and incurred the following costs: Direct materials $35. 72. 14. 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. Bloom: E. 184 Agler Corporation currently manufactures a subassembly for its main product.000 Total cost $94.000 Direct labor 15. .000 Direct labor 15.000 92.000 Fixed manufacturing overhead 20.000 Income is expected to increase by $2.000 Variable manufacturing overhead 10. $ 35.000 $ -0. AICPA FN: Decision Modeling. Ex.000 (72. IMA: Business Economics Solution 183 (13–18 min. AACSB: Analytic.000 Fixed manufacturing overhead 20.000 $ 2. The costs per unit are as follows: Direct materials $ 1 Direct labor 10 Variable overhead 5 Fixed overhead 8 Total $24 Funkhouser Company has contacted Agler with an offer to sell it 5. Min: 13. Ans: N/A.

Incremental Analysis and Capital Budgeting 26 .cost to buy = incremental cost ($24 – $5) – $18 = $1 Incremental cost to make = $1 × 5.000. AACSB: Analytic. respectively. AICPA FN: Decision Modeling. Instructions (a) Prepare the incremental analysis for the decision to make or buy the bicycle seats. (b) Should Kuhn Bicycle Company buy the seats from the outside supplier? Justify your answer. Ans: N/A.000 × $20) -0. AICPA PC: Problem Solving.00. Bloom: AN.000 by purchasing the seats.000 $1. SO: 4. The direct materials and direct labor cost per unit to make the bicycle seats are $8. AICPA BB: Resource Management. Min: 6.) Cost to make . 185 Kuhn Bicycle Company has been manufacturing its own seats for its bicycles.000 Fixed Manufacturing Costs 30.000 30. The company is currently operating at 100% capacity.000 × $8) $ 400.000 units = $5.000 (b) The seats should be purchased from the outside supplier.) Instructions Should Agler make or buy the subassemblies? Explain your answer. the company's net income would increase $120. Ans: N/A.000) Total annual cost $1. Difficulty: Medium. 1.) Net Income (a) Make Buy Increase (Decrease) Direct Materials (50.000 -0. AICPA PC: Problem Solving.000 -0. IMA: Cost Management Solution 184 (6 min. SO: 4.000. 184 (Cont. Min: 15. .000 Variable Manufacturing Costs ($450.000 Dryer should buy to save $1 per unit. AICPA BB: Resource Management. If the bicycle company accepts this offer. $ 400.000 × $9) 450. but the $30.000 × 60%) 270. AICPA FN: Decision Modeling.000 bicycles per year. Difficulty: Medium.150. Normal production is 50.000 $ 120. all variable manufacturing costs will be eliminated. AACSB: Analytic.000 (1.030.00 and $9. 450. and variable manufacturing overhead is charged to production at the rate of 60% of direct labor cost. A supplier offers to make the bicycle seats at a price of $20 each. As indicated. 270. IMA: Cost Management Solution 185 (15–20 min.000 -0- Purchase Price (50.000 of fixed manufacturing overhead currently being charged to the bicycle seats will have to be absorbed by other products.000 Direct Labor (50. Ex.000 $ -0.51 Ex. Bloom: AP.

26 .60 (C) $.60 11. The production generates 60. SO: 5.50.00 7.60 The company is considering manufacturing the paint itself. Bloom: E.000 gallons of the chemical. Ans: N/A.) Net Income Sell Chemical Process Further Increase (Decrease) Sales price per unit $11. Ex.00 Direct labor 1.000 of costs to produce 40.60 Total manufacturing costs $8. IMA: Business Economics Solution 186 (15–20 min. Inc.70 (1. The company can sell the paint at $15. produces milk at a total cost of $66.20 Variable manufacturing overhead . Min: 15. Difficulty: Medium.80 1. . AICPA FN: Decision Modeling.80 + $. the company incurred $344. In 2010. or the milk can be processed further into ice cream and then sold for $2.000 gallons that it produces. Instructions Determine the incremental per gallon increase in net income and the total increase in net income if the company manufactures the paint. The selling price of the chemical is $11.50) Fixed manufacturing overhead .20 + $.70 (B) $1.20 (A) $6.20). AACSB: Analytic.60 — Total 8.00 per gallon.00 Cost per unit: Direct materials (A) 6.000 gallons × $1. The costs per unit to manufacture a gallon of the chemical are presented below: Direct materials $6.80) Net income per unit $ 2. AICPA PC: Problem Solving.00 + $1.50 Test Bank for Accounting Principles.70.50 Assuming the company sells all 40.60 . No increase in fixed manufacturing overhead is expected.000.80 (. the incremental net income would be $48.40 (2.00 $4.50 per gallon. Direct labor $.20 1.00 $15. Variable manufacturing overhead $. AICPA BB: Resource Management.70) Direct labor (B) 1.000 more to turn the annual milk supply into ice cream. the following additional costs per gallon will be incurred: Direct materials $1.000 gallons of milk which can be sold for $1 per gallon to a pasteurization company. Ninth Edition Ex.00 per gallon.60.000 (40. 187 Ecker.40 $ 3.60) Variable manufacturing overhead (C) . It costs $75.30 (. If the company processes the chemical further and manufactures the paint itself. 186 Spencer Chemical Corporation produces an oil-based chemical product which it sells to paint manufacturers.60 $1.80 Fixed manufacturing overhead .

) Incremental revenues: ($2.50 – $1. Speedy currently has unused productive capacity that is expected to continue indefinitely. AICPA FN: Decision Modeling. IMA: Business Economics Solution 187 (6 min. The cost of an unassembled bike is as follows. AICPA PC: Problem Solving. AACSB: Analytic. Difficulty: Medium. AICPA BB: Resource Management. 187 (Cont. SO: 5. management has concluded that some of this capacity can be used to assemble the bikes and sell them at $440 each. Bloom: AP.000 – $75.000 Incremental profits: $90. Min: 6. Bloom: E.) (a) Net Income Process Increase Sell Further (Decrease) Sales per unit $400 $440 $ 40 Costs per unit Materials 150 155 (5) Labor 70 80 (10) Variable overhead (70%) 49 56 (7) Fixed overhead 21 21 -0- Total $290 312 (22) Net income per unit $110 $128 $ 18 . AICPA FN: Decision Modeling. Direct materials $150 Direct labor 70 Variable overhead (70% of direct labor) 49 Fixed overhead (30% of direct labor) 21 Manufacturing cost per unit $290 The unassembled bikes are sold to retailers at $400 each. Additional variable overhead will be incurred at the normal rates. 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. Incremental Analysis and Capital Budgeting 26 .000 gallons = $90. SO: 5. Difficulty: Medium. Ex.) Instructions If Ecker processes the milk into ice cream. AICPA BB: Resource Management.00) × 60.000 Incremental costs: given as $75.000 = $15. AACSB: Analytic. IMA: Business Economics Solution 188 (12 min. but there will be no additional fixed overhead as a result of assembling the bikes. Assembling the bikes will increase direct materials by $5 per bike. 188 Speedy Bikes could sell its bicycles to retailers either assembled or unassembled.000 profit Ecker should process into ice cream. and direct labor by $10 per bike. (b) Should Speedy sell or process further? Why or why not? Ans: N/A. Min: 12.51 Ex. Instructions (a) Prepare an incremental analysis for the sell-or-process-further decision.

000 $ 53. The machine is unreliable and results in a significant amount of downtime and excessive labor costs. Recently the copy clerk has not been able to process all the necessary copies within the regular work week.000) (430.26 .200 Useful life 5 years 5 years If sold now. Min: 11.000.000.000 — Estimated operating costs (annual) 9. 8.000 — Estimated life 5 years 5 years It is estimated that the new machine will produce annual cost savings of $95. Current Copier New Model Original purchase cost $10.000 $430. (430.000) Proceeds from sale of old machine $ -0.000 $20.000 Net incremental net income $ -0.000 (A) $95.000.000 Accumulated depreciation 230. the current copier would have a salvage value of $1. $475. AICPA BB: Resource Management. $ 53.000 (A) $475. Data are presented below for the two machines: Old Machine New Machine Original purchase cost $340. Bloom: AN. 189 Harris Timber Corporation uses a machine that removes the bark from cut timber.000 Accumulated depreciation 8.000 × 5 = $475.) Retain Replace Net Income Equipment Equipment Increase/(Decrease) Cost savings $ -0. Management is considering updating the copier machine with a faster model. If operated for the remainder of its useful life. AICPA FN: Decision Modeling. Ex. The new machine is expected to have zero salvage value after five years. IMA: Investment Decisions Solution 189 (11–16 min. Instructions Determine whether the company should purchase the new machine.) (b) As shown in the incremental analysis. The management is considering replacing the machine with a more efficient one which will minimize downtime and excessive labor costs. .000. AICPA PC: Problem Solving. the current machine would have zero salvage value. Ex.000. SO: 6. Ninth Edition Ex. The old machine can be sold to a scrap dealer for $8. Both machines will have a salvage value of zero if operated for the remainder of their useful lives. The company should purchase the new machine because there will be an increase in net income of $53.000 8. Ans: N/A. AACSB: Analytic. 190 Kinder Enterprises relies heavily on a copier machine to process its paperwork. Speedy Bikes should process further (rather than sell unassembled) because incremental revenue exceeds incremental expenses by $18 per unit. 188 (Cont.52 Test Bank for Accounting Principles. Difficulty: Medium.000 New machine cost -0.000 4.

Bud Wise Er Total Units sold 3. Bloom: E.000 New machine cost -0.53 Ex.000 $50. Difficulty: Medium. that sales at the Bud division will increase by 10%.000 20. Ans: N/A. Milwaukee allocates indirect fixed costs based on the number of units to be sold. 20. AICPA BB: Resource Management. IMA: Investment Decisions Solution 191 (10–12 min. SO: 6.200 16.) Net Income Retain Machine Replace Machine Increase (Decrease) Operating costs $45.000 higher by replacing the current copier.000 12. The incremental analysis shows that net income for the five-year period will be $5.000 (20.000 $ 21.000 Less direct fixed costs 14.000 All of the allocated costs will continue even if a division is discontinued.000 $160.200 Less direct fixed costs 14.000 The current copier should be replaced. AACSB: Analytic. (b) Should Milwaukee close the Wise division? Briefly indicate why or why not.000 Revenue $70.000 2.000 Less allocated fixed costs 12. Difficulty: Medium.000 10.000 Less allocated fixed costs 6. 2010 are presented below. (1. Ex.000 $40.000 51. IMA: Investment Decisions Solution 190 (12–16 min.) (a) Bud Er Total Revenue $77.000) $ 8. Milwaukee feels if the division is closed. Since the Wise division has a net loss. AICPA PC: Problem Solving.000 Totals $45.000 Net income $18.000 45. and Er. Inc. has three divisions: Bud.000 $ 5. Milwaukee feels that it should be discontinued. Ans: N/A. Min: 10.000 Less variable costs 32.000 5.) Instructions Prepare an analysis to show whether the company should retain or replace the machine.000 Net income $15. 190 (Cont.000 $ (5.000 $24.000 4. and that sales at the Er division will stay the same.453 7.000) 1. AICPA FN: Decision Modeling. Min: 12.000 16. SO: 7. AACSB: Analytic.000 $21.000 26. Incremental Analysis and Capital Budgeting 26 .347 $ 4. The results of May.000 10. Wise.000 Less variable costs 35. AICPA BB: Resource Management. 191 Milwaukee.000 12. AICPA FN: Decision Modeling.800 . AICPA PC: Problem Solving. Bloom: AP.000 $40.547 20.000 $40.000 $117.000 74.000 19. Instructions (a) Prepare an analysis showing the effect of discontinuing the Wise division.453 $ 19.000 26.000) Salvage value -0.

250.000 of fixed selling expenses if it discontinues operation of the Consumer Division. AICPA PC: Problem Solving.000 Net income $ 350.000 × 110% = $35. Ninth Edition Solution 191 (Cont. AICPA BB: Resource Management. 192 Trump Forest Corporation operates two divisions.000)] × $20.000 $500. 2010 are presented below: Timber Division Consumer Division Total Sales $1. Ex.) Calculations: Revenue = $70.000) $ 320.000.300 + 2. (b) If the company had discontinued the division for 2010.000 430. AACSB: Analytic.000 750.000 In the Consumer Division. The profit decreases by $1.000 × 110% = $77.000 Variable costs = $32. The income statements for the two divisions for the year ended December 31.200 Allocation of total allocated fixed costs of $20. Ans: N/A. The company is considering disposing of the Consumer Division since it has been consistently unprofitable for a number of years. Bloom: E. 70% of the cost of goods sold are variable costs and 25% of selling and administrative expenses are variable costs.000 180. The management of the company feels it can save $45.000 ÷ (3.000 – $19.547 (b) No.000 1.000 Gross profit 600.000 350. Min: 20. SO: 7.54 Test Bank for Accounting Principles.000)] × $20. the Timber Division and the Consumer Division.000 = $12. The Consumer Division operates retail lumber mills which sell a variety of products in the do-it. AICPA FN: Decision Modeling.000 $ (30. Difficulty: Medium. The Timber Division manufactures and sells logs to paper manufacturers.300 + 2.000 = $7.300 ÷ (3.000 of fixed cost of goods sold and $60. IMA: Investment Decisions .800) when the division is eliminated.500.200 ($21.000 $2. Instructions (a) Determine whether the company should discontinue operating the Consumer Division.000 Cost of goods sold 900.453 To Er: [2. The increase in sales by 10% of the Bud division was not enough to offset the loss of the Wise division. determine what net income would have been.000 150.000 Selling & administrative expenses 250.yourself homeowner market.26 .000: To Bud: [3.

000 Revenue $22.000 (C) 60. Incremental Analysis and Capital Budgeting 26 .000) Fixed expenses: Cost of goods sold 105.000) $ 8. 135.000. Instructions What will happen to profits if Mercer discontinues the Books product line? Ans: N/A.000) Incremental costs: Variable costs savings + 17.000 (B) -0.000) = $245.000: Timber Division + Decrease in Net Income $350.000) Variable expenses: Cost of goods sold 245.000 (D) $180.000 Selling and admin.000 + $(105.000 Net income (loss) $ (3. Min: 6.000 7. AACSB: Analytic.000 $23. (b) Net income for the total company would have been $245.000) $(105. 193 Mercer has three product lines in its retail stores: books.000 (A) -0.000 The allocated fixed costs are unavoidable.000 Direct fixed costs savings + 1.000 $85.000 21.000 3.000 (B) $180. AICPA PC: Problem Solving.000 45. SO: 7.000 22.000 Allocated fixed costs 7.000 – $45. and music.000 5. Demand of individual products are not affected by changes in other product lines.000 2.000 2. videos. $(500.000 $ -0.000 = $105.000 $ 2. exp.000 Decrease in profits if discontinued $ (4. 45. 245. $210.000 Contribution margin 210.000) $(135.000 = $135.55 Solution 192 (20–25 min.000. exp.000 7.000 Variable departmental costs 17.000 Ex.000 The company should continue the Consumer Division because contribution margin.000 60. is greater than the avoidable fixed costs. AICPA FN: Decision Modeling.) Incremental revenue $(22.000 (C) $350.000) (A) $350.000 6. (210.000 -0. Bloom: AP. 45. AICPA BB: Resource Management.000 Selling and admin.000 $ 7.000 $40.000 2.000 Net income $ (30.000 12.000 Direct fixed costs 1.000 (D) 75.000 × 25% = $45. Difficulty: Medium. Results of the fourth quarter are presented below: Books Music Videos Total Units sold 1.) (a) CONSUMER DIVISION Net Income Continue Eliminate Increase (Decrease) Sales $500.000 – $245. $105.000 × 70% = $245.000 51.000) . IMA: Investment Decisions Solution 193 (6 min.

050. If the division is eliminated. (See analysis below.000 less. The following presentation was made to Fanning's Board of Directors.000 greater.000 140.000) $(235.000 Gross Profit 1. not $60.000 For the other divisions.000. Bloom: E. AICPA FN: Decision Modeling.000 Contribution Margin 185. The cost of goods sold for the Southern Division is 35% fixed. AACSB: Analytic. If the Southern Division is eliminated. only $10.000 Net Income (Loss) $ (60. Instructions Do you concur with the new accountant's recommendation? Present a schedule to support your answer. 295.000) $ 190.000 -0.000 $ -0.) Net Income Continue Eliminate Increase (Decrease) Sales $480.000 Cost of Goods Sold 950.000 1.000 Operating expenses 35.000. During the presentation. The reduction in income is the result of the loss of the contribution margin less the avoidable fixed costs of $10.000 80.000 1. AICPA BB: Resource Management.000 Net Income $ 250.) Other Three Divisions Southern Division Total Sales $2.000 -0.480.000 of the fixed operating costs will be eliminated. 260. $(480.000 95. Difficulty: Medium. Ninth Edition Ex. 194 A recent accounting graduate from Marvel State University evaluated the operating perform-ance of Fanning Company's four divisions.000 10. . cost of goods sold is 80% variable and operating expenses are 70% variable.000 $480.000 $ (60.000 400.000) Variable Expenses Cost of goods sold 260.000 -0.350. AICPA PC: Problem Solving. the net income will be $175. Min: 20. (185.000 -0. 35.000 Total Variable 295. the accountant made the recommendation to eliminate the Southern Division stating that total net income would increase by $60.000. Ans: N/A. IMA: Investment Decisions Solution 194 (20–25 min.130.26 .000) Fixed Expenses Cost of goods sold 140. SO: 7.000 $2.000) The accountant is not correct.000 -0- Operating expenses 105.000 940.000 Operating Expenses 800.56 Test Bank for Accounting Principles.000) $(175. and its operating expenses are 75% fixed.000 140.

000 The company should produce and sell Product A. 1. 195 Ridley Company has 8.6 hrs. AACSB: Analytic. Ex.000 $160. Incremental Analysis and Capital Budgeting 26 . Difficulty: Medium.000 machine hours available to use to produce either Product A or Product B.2) Machine hours available 8. AICPA BB: Resource Management.6) $ 25 $ 20 ($24 ÷ 1. Bloom: E. prepare a report to show which product should be produced and sold.000 8.6 1.57 Ex. The cost accounting department developed the following unit information for each of the products: Product A Product B Sales price $57 $71 Direct materials 19 21 Direct labor 15 14 Variable manufacturing overhead 8 12 Fixed manufacturing overhead 3 6 Machine hours required . IMA: Business Economics Solution 195 (20–25 min. Min: 20.000 Contribution margin $200. 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 . Contribution margin per unit of limited resource ($15 ÷ .2 hrs.) RIDLEY COMPANY Contribution Margin per Unit Limited Resource Contribution margin per unit: Product A Product B Sales price $57 $71 Variable costs Direct material $19 $21 Direct labor 15 14 Variable overhead 8 42 12 47 Contribution margin $15 $24 Machine hours required: .2 Management desires to make a decision regarding which product to produce in order to maximize the company's income. SO: 8. 196 Hughes Company manufactures and sells two products. AICPA PC: Problem Solving. Ans: N/A. AICPA FN: Decision Modeling. Instructions Taking into consideration the constraint under which the company operates.

000 60. IMA: Business Economics Solution 196 (25–30 min. AICPA BB: Resource Management.000 Operating expenses Salary expense $32. 197 Finney Company estimates the following cash flows and depreciation on a project that will cost $200.000 Miscellaneous expenses 8. 196 (Cont.50 $4. Difficulty: Medium.500 Ex. Bloom: AP.000 ÷ 2 (a) 500 500 Machine hours per unit (b) 4 5 Units produced (a) ÷ (b) 125 100 Contribution margin per unit $18 $20 Total contribution margin $2.) Instructions (a) Compute the contribution margin per unit of the limited resource for each product. SO: 8. 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. (b) If 1. AACSB: Analytic. Ans: N/A.000 additional machine hours are available.) (a) Product Standard Deluxe Contribution margin per unit (a) $18 $20 Machine hours required (b) 4 5 Contribution margin per unit of limited resource (a) ÷ (b) $4.000 Machine hours per unit (b) 4 Units produced (a) ÷ (b) 250 Contribution margin per unit $18 Total contribution margin $4. (2) Allocated entirely to the product identified in (b) above.00 (b) The Standard product should be manufactured because it results in the highest contribution margin per machine hour. AICPA FN: Decision Modeling. AICPA PC: Problem Solving. Ninth Edition Ex. (c) (1) Product Standard Deluxe Machine hours 1.58 Test Bank for Accounting Principles. Min: 25.000 .000 and will last 10 years with no salvage value: Revenues Sales $70.000 (2) Product Standard Machine hours (a) 1.000 Depreciation expense 20.000 Net Income $10.250 $2.26 .

respectively.135. Min: 16. Ans: N/A.135. AICPA BB: Resource Management. 197 (Cont.000 Average investment = ———— = $100.000 Annual rate of return = ———— = 10% $100. There are $10 in medical supplies and $40 of technician costs for each procedure performed using the machine. Difficulty: Medium. 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. IMA: Investment Decisions Solution 197 (9–14 min.) Instructions (a) Calculate the expected annual rate of return on this project showing calculations to support your answer.200 and $800.) (a) Annual rate of return is 10%. Bloom: AP.000 = 6.67 years. AICPA FN: Decision Modeling. Incremental Analysis and Capital Budgeting 26 . Min: 9. SO: 9.000. The machine has a 10- year life and an estimated salvage value of $40.160. Ans: N/A.000 + $20. AACSB: Analytic.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. Investment $200.) (a) Cost of the ultrasound machine: $1. SO: 9. Difficulty: Medium.59 Ex.200 + $800 = $1.000 ÷ $30.000 Cash payback = $200. $200.67 years Ex. Installation costs and freight charges will be $24. The Center uses straight-line depreci-ation.000) $30.000 2 $10. IMA: Investment Decisions Solution 198 (16–22 min.000 + $24.000 (b) Cash payback period is 6. Instructions (a) Compute the payback period for the new ultrasound machine.000 . Bloom: AP. AACSB: Analytic.000 Annual cash inflow ($10.000. (b) Calculate the cash payback on this project showing calculations to support your answer. 198 Wesley Medical Center is considering purchasing an ultrasound machine for $1. AICPA FN: Decision Modeling. (b) Compute the annual rate of return for the new machine. AICPA PC: Problem Solving. AICPA PC: Problem Solving.

160.900.26 .000 + $2.528 = $632.4% (rounded).) (a) Cost of hoist: $13. Instructions (a) Compute the payback period for the new hoist. Each muffler sells for $65 installed.900 + $740 = $18. (b) Average investment: ($18.000 $96.000 – $112.160 = 4. .6 years $208.60 Test Bank for Accounting Principles. Net annual cash flow: Number of extra mufflers: 4 × 52 weeks (a) 208 Contribution margin per muffler ($65 – $35 – $10) (b) $ 20 Total net annual cash flow: (a) × (b) $4.000 Average Annual Rate of Return: ———— = 16% $600. Laramie uses straight-line depreciation. Average annual rate of return = $632 ÷ $9.000 (b) $1.720 – $960) ÷ 5 = $3.160.160 Cash payback = $18.720 + $960) ÷ 2 = $9.160 – $3.000 Ex.528. Laramie estimates that the new hoist will enable his mechanics to replace four extra mufflers per week.000 + $40. (b) Compute the annual rate of return for the new hoist.160.000 Annual Depreciation: —————————— = $112. The new hoist will be used to replace mufflers and tires on automobiles.) $1. and the labor cost to install a muffler is $10.000. (Round to one decimal.000 10 years Annual Net Income: $208.000 – $40.900. Annual depreciation: ($18.720.000 Cash payback: ————— = 5. Ninth Edition Solition 198 (Cont.000 2 $1. The cost of a muffler is $35. Installation costs were $2.900 = 6. and freight charges were $740.5 years.000 Average Investment: —————————— = $600. 199 Laramie Service Center just purchased an automobile hoist for $13.000 = $96.) Solution 199 (10 min.720 ÷ $4. The hoist has a 5-year life and an estimated salvage value of $960. Annual net income: $4.

9 years $20. each requiring an equipment investment of $20.000 ÷ $10.9 .500 9.000 16.500 10. 200 Cepeda Manufacturing Company is considering three new projects. Cepeda uses straight-line depreciation.500 ÷ 3) = 2. Cepeda's minimum required rate of return is 12%.000 – 11. Cepeda will not accept any project with a payback period over 2 years.000 = .000 ÷ $15.11 years CC Year 1 $11.27 BB 20.) (b) Compute the net present value of each project.000 3 15.000 2 9. Each project will last for 3 years and produce the following cash inflows.000 9. indicating the most desirable project and the least desirable project using this method.500 $30. Does your evaluation change? (Round to nearest dollar.000 3 15.000 $ 9. Incremental Analysis and Capital Budgeting 26 .) Solution 200 (25 min.000 = $4.000 – $16.000 2 10.) (a) AA Annual Net Cumulative Net Year Cash Flow Cash Flow 1 $ 7.000 3 9.000 21.500 $11.000 $9.000 30.27 years $20.000 $28.000 2 9.000 Cash payback 1.000 The equipment's salvage value is zero.61 Ex.000 ÷ (28.000 31.000 = $9. Year AA BB CC 1 $ 7.000 $4.000 = .000.000 $ 7.000 Cash payback = 2. Instructions (a) Compute each project's payback period.000 $11. (Round to two decimals.000 Total $31.000 9.

71178 15. (b) AA BB CC Net Net Annual Annual Discount Cash Present Cash Present Net Cash Present Year Factor Flow Value Flow Value Flow Value 1 .762 9. only CC is acceptable because its cash payback is 1.000.500 6.817. The new machinery is expected to have a useful life of 5 years with no salvage value.) The most desirable project is CC because it has the shortest payback period.000 and $58.500 2.175 9.000 6. Also.000 + $0) ÷ 2] = 18% (2) Cash payback: $200.817(1) 24.406 Total present value 24.000 Net present value $ 4.000 7.) (a) Compute (1) the annual rate of return and (2) the cash payback period on the proposed capital expenditure. The least desirable project is AA because it has the longest payback period.000 $ 6. on the basis of net present values.077 Capital investment $200.000 in additional productive facilities.199 (1) This total may also be obtained from Table 2: $9. Ex.000 20.00000 200.79719 9.482 $11. 201 Gantner Company is considering a capital investment of $200.9 years. During the life of the investment.26 .677 9.500 $ 8.000 Now 1.000 10. Ninth Edition Solution 200 (Cont. Solution 201 (16 min.13 years. Instructions (Round to two decimals.821 2 .000 20.000 $ 9.573 10.60478 $209. respectively.40183 = $22.077 .000 ÷ [(200.000 ÷ $58.000 = 3. annual net income and cash inflows are expected to be $18.500 7.89286 $ 7.102 $ 2. As indicated. Project BB is the least desirable.62 Test Bank for Accounting Principles.250 $9. Depreciation is by the straight-line method. (b) Item Amount Years PV Factor Present Value Net annual cash flows $ 58.972 3 .000 7.102 22. compute the net present value.000 1-5 3.199 Investment 20. all of the projects are acceptable. Project CC is still the most desirable project. (b) Using the discounted cash flow technique.) (a) (1) Annual rate of return: $18.817 $ 4. which is the minimum acceptable rate of return on the investment. Gantner has a 12% cost of capital rate.000 Positive net present value $ 9.

Each project will last for three years and produce the following annual net income. The new machine is expected to have zero salvage value at the end of the five-year period. Present value data are as follows: Present Value of 1 Present Value of an Annuity of 1 Period 12% Period 12% 1 . SO: 10. AACSB: Analytic. AACSB: Analytic. Difficulty: Medium. Difficulty: Medium.000 2 9.000 ÷ $250.790 2 33. Bloom: E. Year TIP TOP 1 $ 6. AICPA FN: Decision Modeling.000 3 14.000 $80. IMA: Investment Decisions Solution 203 (22–27 min. (b) Which project should be selected? Why? Ans: N/A. Sargent requires a minimum rate of return of 12%.) (a) Project TIP Annual Present Value Year Cash Inflows* Present Value of 1 1 $ 30.000 .000 $27.) Ans: N/A.000 = 3.000 .000 9.797 26.63 Ex.36.893 1 . AICPA PC: Problem Solving. Bloom: AP. Min: 22. Sargent Company uses straight- line depreciation.893 2 . AICPA FN: Decision Modeling.000 $29.301 3 38. The required rate of return is 12%.000 9. SO: 10. The investment is expected to generate $250.147 *Net income plus annual depreciation of $24. AICPA PC: Problem Solving. Min: 4.797 2 1.000 The equipment will have no salvage value at the end of its three-year life. AICPA BB: Resource Management.056 $101.690 3 . IRR = 15% Ex. Instructions Calculate the internal rate of return. 202 Ace Corporation recently purchased a new machine for its factory operations at a cost of $840.000 . each requiring an equipment investment of $72. Incremental Analysis and Capital Budgeting 26 . This factor is found in the PVA table at n = 5 periods.000. 203 Sargent Company is considering two new projects.000 in annual cash flows for a period of five years.000 $ 9.402 Instructions (a) Compute the net present value of each project.000. IMA: Investment Decisions Solution 202 (4 min.712 3 2. AICPA BB: Resource Management.893 $26. (Table 2 from Appendix C is needed.) IRR = Capital investment ÷ Annual cash inflows = Factor $840. .000.712 27.

Ninth Edition Solution 203 (Cont. 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 6% 8% 10% 12% 15% 5 4.605 for five periods and 12% interest. Bloom: E. AACSB: Analytic. Ex.000 and have no salvage value at the end of its 5-year life. = 3.000 Positive net present value $ 7. IMA: Investment Decisions Solution 204 (6–11 min.000 Positive net present value $ 8.000 Since the calculated internal rate of return factor of 3.) Capital Investment ————————— = Internal Rate of Return Factor Annual Cash Inflows $162.212 3.000 each year. AICPA FN: Decision Modeling. AICPA BB: Resource Management. Each project has a useful life of 3 years and no salvage value.60 $45.266 Capital investment 72. this project has an approximate interest yield of 12%. Ex. SO: 10. Project TIP is the preferred project because its positive net present value is greater than project TOP's net present value.266 (b) Both projects are acceptable because both show a positive net present value.26 . It is estimated that the project will generate annual cash inflows of $45.000 × 2.000 Year 3 52. Min: 6.352 Instructions Using the internal rate of return method.64 Test Bank for Accounting Principles. 205 Martinez Company has money available for investment and is considering two projects each costing $70. Difficulty: Medium.000 .147 Capital investment 72.147 Project TOP Present value of future cash inflows ($33.) Present value of future cash inflows $80.791 3.605 3. Ans: N/A. determine if this project is acceptable by calculating an approximate interest yield for the project. The investment cash flows follow: Project A Project B Year 1 $ 8.993 3.402) $79.000 ————. and is therefore acceptable because it is greater than the company's cutoff rate of 8%.000 28. 204 Yanik Company is considering investing in a project that will cost $162.60 is very near the factor 3.000 28.000 $28.000 Year 2 24.000. AICPA PC: Problem Solving.

156 COMPLETION STATEMENTS 206. This indicates that project B provides a return greater than the company's minimum expected return of 8%.232 Present value of cash inflows 72. Bloom: K. AICPA BB: Resource Management.857 = 20.) Ans: N/A.000) Net present value of project A $ (736) Project B $25. AICPA FN: Decision Modeling.996 Year 3 $28. 205 (Cont. Bloom: AP.000 × . Min: 1. An important purpose of management accounting is to provide for decision making. which project should be selected? Justify your response. In a decision on whether an order should be accepted at a special price when there is plant capacity available. AICPA PC: Problem Solving. AACSB: None. AICPA FN: Decision Modeling. SO: 3.000 × . IMA: Investment Decisions Solution 205 (12 min.264 Cash purchase price (70. Ans: N/A. IMA: Business Economics . SO: 10. Project A Year 1 $8. AICPA BB: Resource Management. AICPA BB: Resource Management. SO: 1. Bloom: K.000) Net present value of project B $ 2. Ans: N/A. Difficulty: Easy.794 = 22.857 = 23. a major consideration is whether the special price exceeds . AICPA BB: Industry/Sector Perspective. (Table 1 from Appendix C is needed.000 × .65 Ex. AICPA PC: Interaction. SO: 4. Ans: N/A. Min: 1.926 = Year 2 $28. AICPA PC: Problem Solving.794 = 41. Min: 1. AACSB: None. Ans: N/A.) Project B is acceptable since its net present value is positive. Bloom: K.000 × . The process used to identify the financial data that change under alternative courses of action is called analysis.000 × .568 Year 3 $52.928 Year 1 $28.000 × . Difficulty: Easy. IMA: Business Economics 207.156 Cash purchase price (70. Difficulty: Easy. IMA: Business Economics 209. AICPA FN: Measurement. Incremental Analysis and Capital Budgeting 26 . SO: 2.926 = $ 7. The potential benefit that may be obtained by following an alternative course of action is called an cost. IMA: Business Economics 208. Min: 1. AICPA PC: Problem Solving. Min: 12. AACSB: Analytic. AICPA FN: Decision Modeling.408 Year 2 $24. AACSB: None. Project A earns less than an 8% return. Bloom: K. Difficulty: Medium. AICPA PC: Problem Solving.) Instructions If 8% is an acceptable earnings rate.288 Present value of cash inflows 69. Difficulty: Easy. AICPA BB: Industry/Sector Perspective. AICPA FN: Measurement. AACSB: None.

Bloom: K. SO: 9.26 . Min: 1. Bloom: K. AICPA PC: Problem Solving. IMA: Investment Decisions 218. Ans: N/A. Min: 1.66 Test Bank for Accounting Principles. AICPA BB: Industry/Sector Perspective. AICPA FN: Decision Modeling. Bloom: K. Difficulty: Easy. AICPA FN: Decision Modeling. AICPA FN: Decision Modeling. AACSB: None. Three quantitative techniques which are frequently used in capital budgeting decisions are (1) . Min: 1. The two discounted cash flow techniques used in capital budgeting are (1) the method and (2) the method. Ninth Edition 210. AICPA PC: Problem Solving. Difficulty: Easy. AICPA PC: Problem Solving. the products with the highest contribution per unit of should identify the products to be produced. AICPA FN: Decision Modeling. AICPA FN: Decision Modeling. Difficulty: Easy. Bloom: K. Bloom: K. Bloom: K. In an environment where there are limited resources. SO: 10. AACSB: None. Ans: N/A. AICPA BB: Resource Management. Difficulty: Easy. Min: 1. AICPA BB: Resource Management. The process of making capital expenditure decisions in business is called . Min: 1. AICPA FN: Decision Modeling. SO: 10. SO: 9. AICPA PC: Problem Solving. Difficulty: Easy. Ans: N/A. SO: 5. Ans: N/A. AICPA PC: Problem Solving. The value of old equipment is irrelevant in a decision to replace that equipment and is often referred to as a cost. AACSB: None. IMA: Business Economics 211. Bloom: K. Ans: N/A. Knowledge of the is necessary when discounting future cash flows under the net present value approach. IMA: Business Economics 212. Difficulty: Easy. AICPA PC: Problem Solving. IMA: Investment Decisions 215. Bloom: K. SO: 9. AACSB: None. AACSB: None. . SO: 9. A decision whether to sell a product now or to process it further. IMA: Investment Decisions 217. IMA: Investment Decisions 216. Difficulty: Easy. Min: 1. AICPA BB: Industry/Sector Perspective. In using the net present value approach. AICPA BB: Resource Management. AICPA FN: Decision Modeling. Ans: N/A. Min: 1. AACSB: None. depends on whether the incremental from processing further are greater than the incremental processing . AICPA PC: Problem Solving. Ans: N/A. AICPA FN: Measurement. IMA: Investment Decisions 219. Ans: N/A. AICPA BB: Resource Management. and (3) . AICPA PC: Problem Solving. The technique which identifies the time period required to recover the cost of the investment is called the method. AACSB: None. A major limitation of the annual rate of return approach is that it does not consider the of money. AICPA BB: Resource Management. Min: 1. AACSB: None. IMA: Business Economics 213. AICPA BB: Resource Management. Ans: N/A. SO: 6. (2) . Difficulty: Easy. IMA: Investment Decisions 214. SO: 8. Difficulty: Easy. AACSB: None. a project is acceptable if the project's net present value is or . AICPA PC: Problem Solving. AICPA BB: Resource Management. AICPA FN: Decision Modeling. Min: 1. Bloom: K.

Ans: N/A. IMA: Investment Decisions . SO: 10. SO: 10. Difficulty: Easy. AICPA PC: Problem Solving. Min: 1. AACSB: None. AICPA BB: Resource Management. AICPA BB: Resource Management.67 Ans: N/A. The internal rate of return method differs from the net present value method in that it results in finding the of the potential investment. Bloom: K. IMA: Investment Decisions 220. Min: 1. AACSB: None. Incremental Analysis and Capital Budgeting 26 . AICPA PC: Problem Solving. Difficulty: Easy. AICPA FN: Decision Modeling. Bloom: K. AICPA FN: Decision Modeling.

A method used in capital budgeting that results in finding the interest yield of the potential investment. book. Internal rate of return method 1. Match the items below by entering the appropriate code letter in the space provided. AICPA BB: Industry/Sector Perspective. cash payback 210. limited resource 219. A cost that cannot be changed by any present or future decision. 3. capital budgeting 220. 6. variable costs (incremental costs) 215. opportunity 216. zero. 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. Min: 5. 5. Hurdle or cutoff rate C. A capital budgeting technique that considers both the estimated total cash inflows from the investment and the time value of money. AICPA PC: Problem Solving. SO: 6. sunk 218. AACSB: None. The minimum rate of return management requires on an investment. 7.68 Test Bank for Accounting Principles. 2. 8. Cash payback technique B. required rate of return 212. 207. incremental (differential) discounted cash flow 208. AICPA FN: Decision Modeling. Capital budgeting I. The process of identifying the financial data that change under alternative courses of action. IMA: Investment Decisions . revenues. Opportunity cost G. Bloom: K. Discounted cash flow technique H. internal rate of return 211. 4. positive 213. Annual rate of return technique J. Ans: N/A. net present value. Difficulty: Easy. 9. A. The determination of the profitability of a capital expenditure by dividing expected annual net income by the average investment. time value 209. Net present value method D. relevant information 214. Sunk cost E. The potential benefit that may be lost from following an alternative course of action. costs 217. interest yield MATCHING 221. 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. annual rate of return.26 . 10. Ninth Edition Answers to Completion Statements 206. The process of making capital expenditure decisions in business. Incremental analysis F. cash payback.

Min: 5. B 4. the incremental costs of buying the product. J 10. are relevant because many fixed costs will be incurred regardless of whether the decision is to make or buy. AICPA FN: Decision Modeling. but only some fixed costs. or going to an external source and purchasing the product or component. Generally. Bloom: K. E 3. Ans: N/A. Identify those approaches that are more desirable from a conceptual standpoint. AICPA BB: Resource Management. Difficulty: Easy. I 6. Difficulty: Easy. D 5. Are there any qualitative factors that should also be considered? Ans: N/A. or no fixed costs.69 Answers to Matching 1. AICPA BB: Resource Management. Min: 5. AICPA FN: Decision Modeling. AICPA PC: Problem Solving. AACSB: None. S-A E 223 Management uses several capital budgeting approaches in evaluating projects for possible investment. In gathering relevant information for these two alternatives. C 7. A 9. Capital budgeting approaches which do not consider the time value of money include annual rate of return and cash payback. The cash payback method is the least desirable because it also ignores the expected profitability of the project. 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. SO: 10. Bloom: K. briefly identify the quantitative factors that should be considered. G 2. IMA: Investment Decisions Solution 223 From a conceptual standpoint. 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. 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. Incremental Analysis and Capital Budgeting 26 . all variable production costs are relevant in a make or buy decision. H 8. . AICPA PC: Problem Solving. The time value of money is critical because of the long-term impact of capital budgeting decisions. and briefly explain what features these approaches have that make them more desirable than other approaches. AACSB: None. Qualitative factors include the possible adverse effect on employees and the stability of the supplier's price and quality. SO: 4. Also identify the least desirable approach and explain its major weaknesses. and the opportunity cost (potential benefit foregone) if the product is made.

the rank and file don't get to come to those sessions. If you figure. and not have the guy who submitted it mad at you for not turning it in. Ken Scales is an engineer for the firm. Ans: N/A. AICPA BB: Resource Management. SO: 9. 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. I haven't sent it on yet." How may this cost be relevant in a make-or-buy decision? Ans: N/A. then double it. AACSB: Ethics. "The technology used in this is pie in the sky kind of stuff. S-A E 226 (Ethics) Tom Mullins is on the capital budgeting committee for his company. 3. There are a hundred things that could go wrong. IMA: Investment Decisions Solution 225 Cost of capital is the rate of return that management expects to pay on all borrowed and equity funds. AICPA PC: Problem Solving. We do it all the time. Best of all. SO: 4." Required: 1. Difficulty: Easy. Bloom: K. Ans: N/A. Your engineering genius need never know. Ninth Edition S-A E 224 Define the term "opportunity cost." Define the term. Is it ethical to change the proposal before submitting it? Explain. 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. SO: 9. AICPA FN: Decision Modeling. Just fix the numbers. He'll just think someone else's project was even better than his. AICPA BB: Resource Management. Min: 5. though I probably should. AICPA BB: Resource Management." he tells his friend." assures Tom. and indicate its relevance to the decision rule under the annual rate of return technique. you can probably get it shot out of the water pretty easily. Difficulty: Easy. The stakeholders include: Ken Scales Colgan Tile the engineer who submitted the proposal. AICPA FN: Decision Modeling. AACSB: Communications. for instance. But the figures are very convincing.70 Test Bank for Accounting Principles. informally. and the project is unacceptable when the rate of return is less than the minimum rate of return. Min: 5. Ken expresses his disappointment to Tom that a project that was given to him to review before submission looks extremely good on paper. Difficulty: Easy. Is it ethical to adjust the figures to compensate for risk? Explain.26 . Colgan Tile. AACSB: None. AICPA PC: Problem Solving. . S-A E 225 Manny Perez is trying to understand the term "cost of capital. Bloom: K. IMA: Business Economics Solution 226 1. Who are the stakeholders in this situation? 2. 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). Bloom: K. "Anyway." "You can keep it if it's really that bad. AICPA FN: Decision Modeling. that a cost is only 50% likely to be that low. Min: 5. "I really hoped that the cost projections wouldn't pan out. AICPA PC: Problem Solving.

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the company will have less money invested in the project. and should have the right to review those changes. Two options have emerged. S-A E 227 (Communication) You are the general accountant for Word Systems. and the software does not connect well with well-known software. a typing service based in Los Angeles. AICPA PC: Problem Solving. The software for this system is extremely impressive. the changes will be easier to implement because the equipment is similar to that which we already use. It is ethical. Inc. AICPA FN: Decision Modeling. California. AACSB: Communications. . It is probably not ethical to modify a proposal at all.000 Net Present Value 0 0 Required: Prepare a brief report for management in which you make a recommendation for one system or the other.000 Year 2 30.) 2. and a larger.000 90. it should be clearly stated that the projections have been adjusted for risk. to purchase upgrades to our present system and to buy a more efficient printer. SO: 6. to adjust projections to compensate for risk. IMA: Investment Decisions Solution 227 I recommend that the company accept Option #1. Ninth Edition Solution 226 (Cont.000 90.000) $(270. Otherwise. Option #2 appears to be too risky.000) Returns Year 1 55. AICPA BB: Resource Management.26 . Option #2 would be for the company to invest in an entirely different computer system. and upgrade its word processing program. certainly not in the way described. It currently has a widely used version of a word processing program. The net present value information for these options follows: Option #1 Option #2 Initial Investment $(95. Better telecommunications equipment would allow for the electronic transmission of some documents as well. Difficulty: Easy. However. However. and it comes with individual laser printers. Ans: N/A. the entire selection process is undermined. which decreases our risk of loss should the project fail. using the information given. and the method used should be available for review. Min: 5. Secondly.000 90.. The memory of each individual work station would be enhanced. Option #1 is for the company to keep its existing computer system. In the first place.000 Year 3 10. in general. and it becomes entirely subjective. more efficient printer would be used. Bloom: K. the company is not well known.70 Test Bank for Accounting Principles. The company wishes to invest in more up-to-date software and to improve its printing capabilities. The company has decided to upgrade its equipment. 3. The engineer submitting the proposal should have the right to know about any changes that were made.