C7: Differential Cost Analysis

Question 1

Incremental analysis identifies the probable effects of management decisions on future earnings

Answer 1

TRUE

Question 2

In making decisions, management considers only financial information because accounting is presented in financial context

Answer 2

FALSE

Question 3

In incremental analysis, total fixed costs will always remain constant under alternative courses of action

Answer 3

FALSE

Question 4

Decisions made using incremental analysis focus on the amounts which differ among the alternatives

Answer 4

TRUE

Question 5

A special one-time order is acceptable if the unit sales price is greater than the unit variable cost

Answer 5

TRUE

Question 6

A company has excess capacity. A customer proposes to buy 400 widgets at a special unit price even though the price is less than the unit variable cost to manufacture the item. The company should accept the special order if demand on other product is unaffected

Answer 6

FALSE

Question 7

A company should accept an order for its product at less than its regular price if the incremental revenue exceeds incremental costs

Answer 7

TRUE

Question 8

A decision whether to continue to buy a product instead of producing it externally depends specifically on the incremental cost and incremental revenues of making the change

Answer 8

FALSE

Question 9

An opportunity cost is the potential benefit given up by using resources in an alternative course of action

Answer 9

TRUE

Question 10

An incremental make or buy decision depends solely on which alternative is the lowest cost alternative

Answer 10

FALSE

Question 11

In a sell as is or process further decision, management should process further as long as the incremental revenues from additional processing are greater than the incremental costs.

Answer 11

TRUE

Question 12

In a decision concerning replacing an old equipment with a new equipment, the book value of the old equipment can be considered an opportunity cost

Answer 12

FALSE

Question 13

In a decision to retain or replace old equipment, the salvage value of the old equipment is a sunk cost in incremental analysis

Answer 13

FALSE

Question 14

A company should eliminate any segment in which the contribution margin is less than the fixed costs that are unavoidable

Answer 14

FALSE

Question 15

The elimination of an unprofitable product line will always increase the total profits of a company

Answer 15

FALSE

Question 16

When a company has limited resources to manufacture products, it should manufacture those products which have the highest contribution margin per unit

Answer 16

FALSE

Question 17

If a company has limited machine hours available for production, it is generally more profitable to produce and sell the product with highest contribution margin per machine

Answer 17

TRUE

Question 18

The process used to identify the financial data that change under alternative courses of action is called incremental analysis

Answer 18

TRUE

Question 19

If a company is operating at less than capacity, the incremental costs of a special order will likely include variable manufacturing costs, but not fixed costs.

Answer 19

TRUE

Question 20

The basic decision rule to sell as is or process further decision is: process further if the incremental revenue from processing exceeds the incremental processing costs

Answer 20

TRUE

Question 21

If an unprofitable product is eliminated, fixed expenses allocated to the limited segment will likely be eliminated

Answer 21

FALSE

Question 22

Incremental costs are always relevant

Answer 22

TRUE

Question 23

A disadvantage of using an outside supplier is the associated loss of control over the production processs

Answer 23

TRUE

Question 24

The book value of old equipment is an opportunity cost

Answer 24

FALSE

Question 25

Variable costs are relevent costs in decision-making, whereas fixed costs are not relevant

Answer 25

FALSE

Question 26

Depreciation is a relevant cost if it relates to equipment that has not yet been purchased

Answer 26

TRUE

Question 27

Future costs are always relevant in decision making

Answer 27

FALSE

Question 28

Costs which are relevant in one decision situation are not necessarily relevant in another decision situation

Answer 28

TRUE

Question 29

One way to define relevant costs is to say that they are costs which are avoidable

Answer 29

TRUE

Question 30

If by dropping a product line, a company is able to avoid more in fixed costs than it loses in contribution margin, then it will be better off if the line is eliminated

Answer 30

TRUE

Question 31

Allocation of common fixed costs to product lines and to other segments of a company helps the manager to see if the product line or segment is profitable

Answer 31

FALSE

Question 32

If a product line has a negative segment margin, it is conlusive evidence that the product line should be discountedF

Answer 32

FALSE

Question 33

Opportunity cost is a key factor in a make or buy decision

Answer 33

TRUE

Question 34

A company should always promote that product which has the highest contribution margin per unit sold

Answer 34

FALSE

Question 35

The purpose of linear programming is to help management make decisions in those situations where constraining or limiting factors are present

Answer 35

TRUE

Question 36

When production level is limited by the commited capacity of a constrained resource, the products should be rank-ordered by their contribution margin per unit of constrained products resource to select the profit maximizing mix

Answer 36

TRUE

Question 37

Opportunity costs is the potential benefit that is sacrificed when one alternative is given up in favor of another

Answer 37

TRUE

Question 38

Dropping a product will help improve profitability even if managers cannot eliminate the activity resources not required any longer to support the discounted product, or use these resources for products that are continued

Answer 38

FALSE

Question 39

Shut down or continue issue is applicable only to a temporary decline in demand and never to a permanet decline in demand

Answer 39

TRUE

Question 40

Qualitative considerations or factors should be ignored in a shut down or continue decision-making

Answer 40

FALSE