MODULE 6

INCREMENTAL ANALYSIS

THEORIES: 16-31
16. Relevant costs are
A. all fixed and variable costs
B. all costs that would be incurred within the relevant range of production
C. past costs that are expected to be different in the future
D. anticipated future costs that will differ among various alternatives
17. Which of the following is (are) a true statement(s) about cost behaviors in
incremental analysis?
I. Fixed costs will not change between alternatives.
II. Fixed costs may change between alternatives.
III. Variable costs will always change between alternatives.
A. I
B. II
C. Ill
D. II and III
18. The potential benefit that may be obtained from following an alternative course
of action is called
A. Opportunity benefit
B. Opportunity cost
C. Relevant cost
D. sunk cost
19. Which one of the following is not a common mistake in a decision-making
process?
A. Considering sunk costs as relevant.
B. Considering opportunity cost, an imputed cost, being relevant.
C. Considering fixed costs as avoidable fixed costs.
D. Unitizing fixed costs.
20. Sensitivity analysis is useful in decision making when:
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INCREMENTAL ANALYSIS

A. there is a degree of uncertainty about the relevant data.

B. there is an opportunity cost included in the analysis.
C. sunk cost is included in the analysis,
D. the analysis is subject to a review by the management.
21. To determine the possible outcome in a decision analysis if a key prediction or
assumption proves to be wrong, managers will use:
A. sensitivity analysis.
B. total analysis.
C. incremental analysis.
D. regression analysis.
22. Unit costs can mislead decision makers. Which of the following situations
dealing with unit costs are not expected to result in a faulty analysis?
A. Unit costs used in make-or-buy decisions might include costs such as
avoidable fixed costs.
B. Variable unit cost directly varies with the changes in production units.
C. Total fixed costs increase as more units are produced within the relevant
range.
D. Contribution margin on products that can be manufactured in using the
freed capacity is irrelevant in the decision.
23. Which of the following is a cost that requires a future-outlay of cash that is
relevant for future decision-making?
A. Opportunity cost
B. Relevant benefits
C. Out-of-pocket cost
D. Incremental revenue
24. One of the behavioral problems with relevant cost analysis is the overemphasis
on short-term goals, which can lead to neglect of:
A. sales promotion
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INCREMENTAL ANALYSIS

B. expense control
C. quarterly net income results
D. long-term strategic goals
25. Incremental analysis is the process of identifying the financial data that:
A. do not change under alternative courses of action
B. are mixed under alternative courses of action
C. change under alternative courses of action
D. no correct answer is given
26. Opportunity cost is the
A. cash outlay required to implement an alternative.
B. difference in total costs between the alternatives.
C. maximum available contribution to profit that is given up when using
limited resources for another purpose.
D. fixed cost avoided when a product, department, or business unit is
abandoned.
27. Using opportunity cost to analyze the income effects of a given alternative is
referred to as
A. engineering analysis
B. mixed-cost analysis
C. account analysis
D. differential analysis
28. Opportunity costs are
A. Costs that increase due to a higher volume of activity or the performance of
an additional activity
B. Costs that a company must incur to perform an activity at a given level,
but will not be incurred if a company reduces or discontinues the activity
C. The profits that a company forgoes by following a particular course of
action
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INCREMENTAL ANALYSIS

D. Costs that were incurred prior to making a decision

29. Avoidable costs are
A. Costs that increase due to a higher volume of activity or the performance of
an additional activity
B. Costs that a company must incur to perform an activity at a given level, but
will not be incurred if a company reduces or discontinues the activity
C. The profits that a company forgoes by following a particular course of
action
D. Costs that were incurred prior to making a decision
30. Sunk costs are
A. Costs that increase due to a higher volume of activity or the performance of
an additional activity
B. Costs that a company must incur to perform an activity at a given level, but
will not be incurred if a company reduces or discontinues the activity
C. The profits that a company forgoes by following a particular course of
action
D. Costs that were incurred prior to making a decision
31. The difference in cost between or among various alternative courses of action
appropriately describes a (an):
A. differential cost
B. ad hoc discount
C. constraint
D. scarce resource