MODULE 6

INCREMENTAL ANALYSIS

THEORIES: 16-31
1. Incremental revenue is:
A. a difference in costs between two decisions.
B. a concession based on competitive influences.
C. additional revenue across decision choices from potential sales.
D. the difference between selling price and variable costs.
2. A sunk cost is:
A. a cost incurred in the past and not relevant to any future course of action.
B. an opportunity cost.
C. useful in analysis of alternative courses of action.
D. relevant to current decision making.
3. Manufacturing parts internally by a company causes:
A. the company to be dependent upon suppliers for timely delivery of parts
B. the quality of the parts to be under the control of the company
C. lower parts costs to be assured
D. a company's operations to be more efficient than when the parts are
purchased from suppliers
4. In any make or buy decision confronting a company, which of the following
factors should be considered?
A. Can the supplier provide a sufficient quantity to meet the company's
current and future needs?
B. Do the supplier's items meet product and quality specifications?
C. Is the supplier reliable?
D. All of the above should be considered.
5. Within the context of the make or buy decision, when are fixed costs relevant?
A. Fixed costs are always relevant
B. Fixed costs are never relevant
C. Fixed costs are relevant when they differ among alternatives

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D. It cannot be determined without closely examining each particular situation

6. In a make or buy decision:
A. Only variable costs are relevant.
B. Fixed costs that can be avoided in the future are relevant.
C. Fixed costs that will continue regardless of the decision are relevant.
D. Only conversion costs are relevant.
7. Which of the following elements of the value chain should be considered when
deciding whether to make or buy a component needed for production?
A. Marketing
B. Distribution
C. Manufacturing
D. all of these choices
8. In a make-or-buy decision, which of the following is true?
A. Variable costs are the only relevant costs.
B. Allocated fixed costs are relevant.
C. Alternative uses of space and machinery are relevant.
D. Making the product is the correct decision when there is idle capacity.
9. The opportunity cost of making a component part in a factory with excess
capacity for which there is no alternative use is
A. the total manufacturing cost of the component.
B. the total variable cost of the component.
C. the fixed manufacturing cost of the component.
10. Which of the following qualitative factors favors the buy choice in a make or buy
decision for a part?
A. maintaining a long-term relationship with suppliers
B. quality control is critical
C. utilization of idle capacity
D. part is critical to product

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11. Haribon Company is faced with a make-or-buy decision. Haribon should agree to
buy the part from a supplier provided the price is less than Haribon's
A. total costs
B. variable production costs plus avoidable fixed production costs
C. total manufacturing costs
D. variable costs
12. The concept of target pricing is employed when:
A. a company wishes to set price in order to capture a predetermined market
share.
B. a price is pre-set by market conditions.
C. a company wishes to meet marketing goals.
D. All of the above.
13. A company should decide to make, rather than buy, a part required for their
product, if
A. The company's production facility is at full capacity
B. The relevant cost per-unit of making the part exceeds the per-unit relevant
costs of purchasing the part
C. The supplier of the part can produce a higher-quality part
D. The supplier of the part has questionable reliability
14. A product life cycle includes the phases of
A. research and development and design
B. purchasing and production
C. marketing and distribution
D. all of the above
15. The cost of not receiving rent from a space because you decide to make the part
rather than buying it from an outside supplier is considered a (an)
A. sunk cost
B. future cost

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C. opportunity cost
D. fixed cost
16. In a make-or-buy decision, an opportunity cost that should be considered is the:
A. income that could be generated from idle production space,
B. total costs to produce the item
C. variable costs to produce the item
D. fixed costs to produce the item
17. Incremental analysis is most useful
A. in evaluating the master budget.
B. in choosing between the net present value method and the internal rate of
return method.
C. in developing relevant information for management decisions,
D. as a replacement technique for variance analysis.
18. In making a special order decision, management should:
A. compute a reasonable sales price for items not normally produced.
B. consider additional overhead cost.
C. consider normal and relevant costs,
D. All of the above.
19. An opportunity cost commonly associated with a special order is
A. the contribution margin on lost sales
B. the variable costs of the order
C. additional fixed cost that is related to the increased output
D. any of the above
20. If the firm is operating under capacity, the minimum special order price should
be high enough to cover:
A. all variable costs and incremental fixed costs associated with the special
order minus foregone contribution margin on regular units not produced.
B. variable and incremental fixed costs associated with the special order and a

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profit margin.
C. limited variable costs associated with the special order.
D. neither variable nor fixed costs associated with the special order.

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