C7: Differential Cost Analysis Flashcards
True or False Questions
Incremental analysis identifies the probable effects of management decisions on future earnings
TRUE
In making decisions, management considers only financial information because accounting is presented in financial context
FALSE
In incremental analysis, total fixed costs will always remain constant under alternative courses of action
FALSE
Decisions made using incremental analysis focus on the amounts which differ among the alternatives
TRUE
A special one-time order is acceptable if the unit sales price is greater than the unit variable cost
TRUE
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
FALSE
A company should accept an order for its product at less than its regular price if the incremental revenue exceeds incremental costs
TRUE
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
FALSE
An opportunity cost is the potential benefit given up by using resources in an alternative course of action
TRUE
An incremental make or buy decision depends solely on which alternative is the lowest cost alternative
FALSE
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.
TRUE
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
FALSE
In a decision to retain or replace old equipment, the salvage value of the old equipment is a sunk cost in incremental analysis
FALSE
A company should eliminate any segment in which the contribution margin is less than the fixed costs that are unavoidable
FALSE
The elimination of an unprofitable product line will always increase the total profits of a company
FALSE
When a company has limited resources to manufacture products, it should manufacture those products which have the highest contribution margin per unit
FALSE
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
TRUE
The process used to identify the financial data that change under alternative courses of action is called incremental analysis
TRUE
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.
TRUE
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
TRUE
If an unprofitable product is eliminated, fixed expenses allocated to the limited segment will likely be eliminated
FALSE
Incremental costs are always relevant
TRUE
A disadvantage of using an outside supplier is the associated loss of control over the production processs
TRUE
The book value of old equipment is an opportunity cost
FALSE
Variable costs are relevent costs in decision-making, whereas fixed costs are not relevant
FALSE
Depreciation is a relevant cost if it relates to equipment that has not yet been purchased
TRUE
Future costs are always relevant in decision making
FALSE
Costs which are relevant in one decision situation are not necessarily relevant in another decision situation
TRUE
One way to define relevant costs is to say that they are costs which are avoidable
TRUE
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
TRUE
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
FALSE
If a product line has a negative segment margin, it is conlusive evidence that the product line should be discountedF
FALSE
Opportunity cost is a key factor in a make or buy decision
TRUE
A company should always promote that product which has the highest contribution margin per unit sold
FALSE
The purpose of linear programming is to help management make decisions in those situations where constraining or limiting factors are present
TRUE
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
TRUE
Opportunity costs is the potential benefit that is sacrificed when one alternative is given up in favor of another
TRUE
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
FALSE
Shut down or continue issue is applicable only to a temporary decline in demand and never to a permanet decline in demand
TRUE
Qualitative considerations or factors should be ignored in a shut down or continue decision-making
FALSE
