A company is considering the following alternatives:

Alternative 1
Alternative 2
Revenues
$120,000
$120,000
Variable costs
60,000
70,000
Fixed costs
35,000
35,000
Which of the following are relevant in choosing between the alternatives?
a. Variable costs
b. Revenues
c. Fixed costs
d. Variable costs and fixed costs
41.
Adler Company manufactures a product with a unit variable cost of $50 and a unit sales
price of $88. Fixed manufacturing costs were $240,000 when 10,000 units were produced
and sold. The company has a one-time opportunity to sell an additional 3,000 units at $70
each in a foreign market which would not affect its present sales. If the company has
sufficient capacity to produce the additional units, acceptance of the special order would
affect net income as follows:
a. Income would decrease by $12,000.
b. Income would increase by $12,000.
c. Income would increase by $210,000.
d. Income would increase by $60,000.
42.
In incremental analysis,
a. costs are not relevant if they change between alternatives.
b. all costs are relevant if they change between alternatives.
c. only fixed costs are relevant.
d. only variable costs are relevant.
43.
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, then
a. only variable costs are relevant.
b. fixed costs are not relevant.
c. the order will likely be accepted.
d. the order will likely be rejected.
44.
If a company must expand capacity to accept a special order, it is likely that there will be
a. an increase in unit variable costs.
b. no increase in fixed costs.
c. an increase in variable and fixed costs per unit.
d. an increase in fixed costs.
45.
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. Net income will not be affected.
b. Net income will increase if the special sales price per unit exceeds the unit variable
costs.
c. Net income will decrease.
d. Additional fixed costs will probably be incurred.Test Bank for Managerial Accounting,
Second Edition
46.
If a company anticipates that other sales will be affected by the acceptance of a special
order, then
a. lost sales should be considered in the incremental analysis.
b. lost sales should not be considered in the incremental analysis.
c. the order should not be accepted.
d. the order will only be accepted if the plant is below capacity.
47.
An opportunity cost
a. should be initially recorded as an asset.
b. is the cost of a new product proposal.
c. is the potential benefit that may be obtained by following an alternative course of
action.
d. is classified as manufacturing overhead.
48.
Opportunity cost must be considered in decisions involving
a. budgeting.
b. financial accounting.
c. CVP analysis.
d. resources that have alternative uses.
49.
The opportunity cost of an alternate course of action that is relevant to a make or buy
decision is
a. subtracted from the "Make" costs.
b. added to the "Make" costs.
c. added to the "Buy" costs.
d. none of these.
50.
Opportunity cost is usually
a. a standard cost.
b. a potential benefit.
c. a sunk cost.
d. included as part of cost of goods sold.
Use the following information for questions 51–52.
Sam's Manufacturing Company can make 100 units of a necessary component part with the
following costs:
Direct Materials
$80,000
Direct Labor
13,000
Variable Overhead
40,000
Fixed Overhead
27,000
51.
If Sam's Manufacturing Company purchases the component externally, $20,000 of the
fixed costs can be avoided. At what external price for the 100 units is the company
indifferent between making or buying?
a. $160,000.
b. $113,000.
c. $153,000.
d. $133,000.
9-6Incremental Analysis
9-7
52.
If Sam's Manufacturing Company can purchase the component externally for $145,000
and only $4,000 of the fixed costs can be avoided, what is the correct “make or buy”
decision?
a. Make and save $8,000
b. Buy and save $8,000
c. Make and save $20,000
d. Buy and save $20,000
53.
Cole's Shop can make 1,000 units of a necessary component with the following costs:
Direct Materials
$64,000
Direct Labor
16,000
Variable Overhead
8,000
Fixed Overhead
?
The company can purchase the 1,000 units externally for $104,000. The unavoidable
fixed costs are $5,000 if the units are purchased externally. An analysis shows that at this
external price, the company is indifferent between making or buying the part. What are the
fixed overhead costs of making the component?
a. $21,000.
b. $16,000.
c. $11,000.
d. Cannot be determined.
Use the following information for questions 54–55.
May Company produces 1,000 units of a necessary component with the following costs:
Direct Materials
$48,000
Direct Labor
32,000
Variable Overhead
8,000
Fixed Overhead
14,000
54.
May Company could avoid $6,000 in fixed overhead costs if it acquires the components
externally. If cost minimization is the major consideration and the company would prefer
to buy the components, what is the maximum external price that May Company would
accept to acquire the 1,000 units externally?
a. $102,000.
b. $94,000.
c. $96,000.
d. $88,000.
55.
None of May Company's fixed overhead costs can be reduced, but another product could
be made that would increase profit contribution by $16,000 if the components were
acquired externally. If cost minimization is the major consideration and the company would
prefer to buy the components, what is the maximum external price that May Company
would be willing to accept to acquire the 1,000 units externally?
a. $86,000.
b. $110,000.
c. $96,000.
d. $104,000.