Management Accounting: Questions and Problems on Incremental Analysis

1. An important step in management’s decision-making process is to determine and evaluate possible courses of action.
2. In making decisions, management ordinarily considers both financial and nonfinancial information.
3. In incremental analysis, total variable costs will always change under alternative courses of action, and total fixed costs will always remain constant.

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4. Accountants are mainly involved in developing nonfinancial information for management’s consideration in choosing among alternatives.

5. Decision-making involves choosing among alternative courses of action. 6. Financial data are developed for a course of action under an incremental basis and then it is compared to data developed under a differential basis before a decision is made. 7. A special one-time order should never be accepted if the unit sales price is less than the unit variable cost.

8. If a company has excess capacity and present markets will not be affected, it would be profitable to accept an order at a special unit price even though the price is less than the unit variable cost to manufacture the item.

9. A company should never accept an order for its product at less than its regular sales price.
10. A decision whether to continue to make a product or buy it externally, depends on the external price and the amount of variable and fixed costs that can be eliminated assuming no alternative uses of resources.

11. An opportunity cost is the potential benefit obtained by using resources in an alternative course of action.
12. If an incremental make or buy analysis indicates that it is cheaper to buy rather than make an item, management should always make the decision to choose the lowest cost alternative.
13. In a sell or process further decision, management should process further as long as the incremental revenues from additional processing exceed the incremental variable costs. 14. It is always better to sell now rather than
process further because of the time value of money.

15. In a decision concerning replacing old equipment with new equipment, the book value of the old equipment can be considered a sunk cost. Test Bank for Managerial Accounting, Second Edition
16. In a decision to retain or replace old equipment, the salvage value of the old equipment is relevant in incremental analysis.
17. It is better not to replace old equipment if it is not fully depreciated. 18. From a quantitative standpoint, a segment should be eliminated if its contribution margin is less than the fixed costs that can be eliminated.

19. The elimination of an unprofitable product line may adversely affect the remaining product lines.
20. Sales mix is the relative combination in which a company’s products are sold. 21. Break-even sales can be computed for a mix of two or more products by determining the total contribution margin of all the products.

22. Net income will be greater if more high contribution margin units are sold than low contribution margin units at any given level of units sold.
23. When a company has limited resources to manufacture products, it should manufacture those products which have the highest contribution margin per unit of limited resource. 24. If a company has only a certain number of machine hours available for production, it is generally more profitable to produce and sell the product with the highest unit contribution margin.

25. Contribution margin per unit of limited resource is usually the same as contribution margin per unit.

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