Incremental Analysis Decision Making

CHAPTER 7
INCREMENTAL ANALYSIS
CHAPTER STUDY OBJECTIVES

1. Identify the steps in management's decision-making process. Management's decision-making process consists of (a)
identifying the problem or opportunity, (b) assigning responsibility for the decision, (c) determining possible courses of action,
(d) developing data relevant to each course of action, (e) making the decision, and (f) reviewing the results of the decision.
2. Describe the concept of incremental analysis. Incremental analysis identifies financial data that change under alternative
courses of action. These data are relevant to the decision because they will vary in the future among the possible alternatives.
3. Identify the relevant costs in accepting an order at a special price. The relevant information in accepting an order at a
special price is the difference between the variable manufacturing costs to produce the special order and expected revenues.
4. Identify the relevant costs in a make-or-buy decision. In a make-or-buy decision, the relevant costs are (a) the variable
manufacturing costs that will be saved, (b) the purchase price, and (c) opportunity costs.
5. Give the decision rule for whether to sell or process materials further. The decision rule for whether to sell or process
materials further is: Process further as long as the incremental revenue from processing exceeds the incremental processing costs.
6. Identify the factors to consider in retaining or replacing equipment. The factors to consider in determining whether
equipment should be retained or replaced are the effects on variable costs and the cost of the new equipment. Also, any disposal
value of the existing asset must be considered.
7. Explain the relevant factors in whether to eliminate an unprofitable segment. In deciding whether to eliminate an
unprofitable segment, determine the contribution margin, if any, produced by the segment and the disposition of the segment's
fixed expenses.
MULTIPLE CHOICE QUESTIONS
31. A major accounting contribution to the managerial decision-making process in evaluating possible courses of action is to
a. assign responsibility for the decision.
b. provide relevant revenue and cost data about each course of action.
c. determine the amount of money that should be spent on a project.
d. decide which actions that management should consider.
Ans: B, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Decision
Modeling, AICPA PC: Problem Solving, IMA: Decision Analysis
32. Which of the following stages of the management decision-making process is improperly sequenced?
a. Evaluate possible courses of action Make decision.
b. Assign responsibility for the decision Identify the problem.
c. Identify the problem Determine possible courses of action.
d. Assign responsibility for decision Determine possible courses of action.
Ans: B, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Strategic/Critical Thinking, AICPA FN: Decision
33. Internal reports that review the actual impact of decisions are prepared by
a. department heads.
b. the controller.
c. management accountants.
d. factory workers.
Ans: C, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting,
AICPA PC: Problem Solving, IMA: Performance Measurement
34. Which of the following steps in the management decision-making process does not generally involve the managerial
accountant?
a. Determine possible courses of action
b. Make the appropriate decision based on relevant data
c. Prepare internal reports that review the impact of decisions
d. None of these
35. Which is the first step in the management decision-making process?

a. Determine and evaluate possible courses of action.
b. Review results of the decision.
c. Identify the problem and assign responsibility.
d. Make a decision.
Ans: C, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Decision
36. Which of the following will always be a relevant cost?

a. Sunk cost
b. Fixed cost
c. Variable cost
d. Opportunity cost
Ans: D, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Decision
37. Costs that will differ between alternatives and influence the outcome of a decision are
a. sunk costs.
b. unavoidable costs.
c. relevant costs.
d. product costs.
38. A revenue that differs between alternatives and makes a difference in decision-making is called a(n)
a. sales revenue.
b. incremental revenue.
c. unavoidable revenue.
d. irrelevant revenue.
39. Alvarez Company is considering the following alternatives:

Alternative A Alternative B
Revenues $50,000 $60,000
Variable costs 30,000 30,000
Fixed costs 10,000 16,000
What is the incremental profit?
a. $10,000
b. $0
c. $6,000
d. $4,000
Ans: D, SO: 2, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Decision
40. Which of the following is an irrelevant cost?

a. An avoidable cost
b. An incremental cost
c. A sunk cost
d. An opportunity cost
41. Relevant costs are always

a. fixed costs.
b. variable costs.
c. avoidable costs.
d. sunk costs.
42. The process of evaluating financial data that change under alternative courses of action is called
a. double entry analysis.
b. contribution margin analysis.
c. incremental analysis.
d. cost-benefit analysis.
Ans: C, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Risk
Analysis, AICPA PC: Problem Solving, IMA: Decision Analysis
43. Nonfinancial information that management might evaluate in making a decision would not include
a. employee turnover.
b. contribution margin.
c. the environment.
d. the corporate profile in the community.
Ans: B, SO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Decision
Modeling, AICPA PC: Problem Solving, IMA: Business Economics
44. Incremental analysis is synonymous with

a. difficult analysis.
b. differential analysis.
c. gross profit analysis.
d. derivative analysis.
Ans: B, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Decision
45. In incremental analysis,

a. only costs are analyzed.
b. only revenues are analyzed.
c. both costs and revenues may be analyzed.
d. both costs and revenues that stay the same between alternate courses of action will be analyzed.
Ans: C, SO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Decision
46. Incremental analysis is most useful

a. in developing relevant information for management decisions.
b. in choosing between capital budgeting methods.
c. in evaluating the master budget.
d. as a replacement technique for variance analysis.
Ans: A, SO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Decision
47. The source of data to serve as inputs in incremental analysis is generated by

a. market analysts.
b. engineers.
c. accountants.
d. all of these.
Ans: D, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Decision
Modeling, AICPA PC: Problem Solving, IMA: Information Management
48. Which of the following is not a true statement?

a. Incremental analysis might also be referred to as differential analysis.
b. Incremental analysis is the same as CVP analysis.
c. Incremental analysis is useful in making decisions.
d. Incremental analysis focuses on decisions that involve a choice among alternative courses of action.
Ans: B, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Decision
49. Incremental analysis would not be appropriate for
a. a make or buy decision.
b. an allocation of limited resource decision.
c. elimination of an unprofitable segment.
d. analysis of manufacturing variances.
Ans: D, SO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Decision
50. Incremental analysis would be appropriate for

a. acceptance of an order at a special price.
b. a retain or replace equipment decision.
c. a sell or process further decision.
d. all of these.
51. Which of the following is a true statement about cost behaviors in incremental analysis?
1. Fixed costs will not change between alternatives.
2. Fixed costs may change between alternatives.
3. Variable costs will always change between alternatives.
a. 1
b. 2
c. 3
d. 2 and 3
Ans: B, SO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Decision
52. A company is considering the following alternatives:

Alternative 1 Alternative 2
Revenues $120,000 $120,000
Variable costs 60,000 70,000
Fixed costs 35,000 35,000
Which of the following are relevant in choosing between the alternatives?
a. Variable costs
b. Revenues
c. Fixed costs
d. Variable costs and fixed costs
53. It costs Garner Company $12 of variable and $5 of fixed costs to produce one bathroom scale which normally sells for
$35. A foreign wholesaler offers to purchase 2,000 scales at $15 each. Garner would incur special shipping costs of $1 per
scale if the order were accepted. Garner has sufficient unused capacity to produce the 2,000 scales. If the special order is
accepted, what will be the effect on net income?
a. $4,000 increase
b. $4,000 decrease
c. $6,000 decrease
d. $30,000 increase
Ans: A, SO: 3, Bloom: AN, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision
54. Baden Company manufactures a product with a unit variable cost of $50 and a unit sales price of $88. Fixed
manufacturing costs were $240,000 when 10,000 units were produced and sold. The company has a one-time opportunity to
sell an additional 1,000 units at $70 each in a foreign market which would not affect its present sales. If the company has
sufficient capacity to produce the additional units, acceptance of the special order would affect net income as follows:
a. Income would decrease by $4,000.
b. Income would increase by $4,000.
c. Income would increase by $70,000.
d. Income would increase by $20,000.
Ans: D, SO: 3, Bloom: AN, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision
55. In incremental analysis,

a. costs are not relevant if they change between alternatives.
b. all costs are relevant if they change between alternatives.
c. only fixed costs are relevant.
d. only variable costs are relevant.
56. If a plant is operating at full capacity and receives a one-time opportunity to accept an order at a special price below its
usual price, then
a. only variable costs are relevant.
b. fixed costs are not relevant.
c. the order will likely be accepted.
d. the order will likely be rejected.
57. Miley, Inc. has excess capacity. Under what situations should the company accept a special order for less than the current
selling price?
a. Never
b. When additional fixed costs must be incurred to accommodate the order
c. When the company thinks it can use the cheaper materials without the customer's knowledge
d. When incremental revenues exceed incremental costs
58. If a company must expand capacity to accept a special order, it is likely that there will be
a. an increase in unit variable costs.
b. no increase in fixed costs.
c. an increase in variable and fixed costs per unit.
d. an increase in fixed costs.
59. Which of the following is true if a company can accept a special order without affecting its regular sales and is within
plant capacity?
a. Net income will not be affected.
b. Net income will increase if the special sales price per unit exceeds the unit variable costs.
c. Net income will decrease.
d. Additional fixed costs will probably be incurred.
60. If a company anticipates that other sales will be affected by the acceptance of a special order, then
a. lost sales should be considered in the incremental analysis.
b. lost sales should not be considered in the incremental analysis.
c. the order should not be accepted.
d. the order will only be accepted if the plant is below capacity.
61. Martin Company incurred the following costs for 50,000 units:
Variable costs $180,000
Fixed costs 240,000
Martin has received a special order from a foreign company for 5,000 units. There is sufficient capacity to fill the order
without jeopardizing regular sales. Filling the order will require spending an additional $8,500 for shipping.
If Martin wants to break even on the order, what should the unit sales price be?
a. $10.10
b. $5.30
c. $3.60
d. $8.40
Ans: B, SO: 3, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision
62. Martin Company incurred the following costs for 50,000 units:
Fixed costs 240,000
Martin has received a special order from a foreign company for 5,000 units. There is sufficient capacity to fill the order
without jeopardizing regular sales. Filling the order will require spending an additional $8,500 for shipping.
If Martin wants to earn $8,000 on the order, what should the unit price be?
a. $3.30
b. $11.70
c. $5.20
d. $6.90
Ans: D, SO: 3, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision
63. Canosta, Inc. determined that it must expand its capacity to accept a special order. Which situation is likely?
a. Unit variable costs will increase.
b. Fixed costs will not be relevant.
c. Both variable and fixed costs will be relevant.
d. The company should accept the order.
Ans: C, SO: 3, Bloom: C, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision
64. A company is within plant capacity. It is contemplating whether a special order should be accepted. The order will not
impact regular sales. If the company accepts the special order, what will occur?
a. Incremental costs will not be affected.
b. Net income will increase if the special sales price per unit exceeds the unit variable costs.
c. There are no incremental revenues.
d. Both fixed and variable costs will increase.
Ans: B, SO: 3, Bloom: C, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision
65. Argus Company anticipates that other sales will be affected by the acceptance of a special order. What should the
company do?
a. Reject the order.
b. Consider the opportunity cost of lost sales in the incremental analysis.
c. Accept the order.
d. Accept the order if the plant is below capacity.
Ans: B, SO: 3, Bloom: C, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision
66. It costs Lannon Fields $21 of variable costs and $9 of allocated fixed costs to produce an industrial trash can that sells
for $45. A buyer in Mexico offers to purchase 3,000 units at $27 each. Lannon Fields has excess capacity and can handle the
additional production. What effect will acceptance of the offer have on net income?
a. Decrease $9,000
b. Increase $9,000
c. Increase $81,000
d. Increase $18,000
67. A factory is operating at less than 100% capacity. Potential additional business will not use up the remainder of the plant
capacity. Given the following list of costs, which one should be ignored in a decision to produce additional units of product?
a. Variable selling expenses
b. Fixed factory overhead
c. Direct labor
d. Contribution margin of additional units
Ans: B, SO: 3, Bloom: K, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision
68. A company is contemplating the acceptance of a special order. The order would not affect regular sales and could be
filled without exceeding plant capacity. However, a new stamping machine would have to be purchased in order to stamp the
customers name on the product. Which of the following is likely?
a. Total variable costs will be irrelevant.
b. Only variable costs will be relevant.
c. Only fixed costs will be relevant.
d. Both variable and fixed costs will be relevant.
Ans: D, SO: 3, Bloom: C, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision
69. A company contemplating the acceptance of a special order has the following unit cost behavior, based on 10,000
units:
Direct materials $ 4
Direct labor 10
Variable overhead 8
Fixed overhead 6
A foreign company wants to purchase 1,000 units at a special unit price of $25. The normal price per unit is $40. In addition,
a special stamping machine will have to be purchased for $2,000 in order to stamp the foreign companys name on the
product. The incremental income (loss) from accepting the order is
a. $3,000.
b. $1,000.
c. $(3,000).
d. $(1,000).
Use the following information for questions 70 and 71.
A companys unit costs based on 100,000 units are:

Variable costs $25
Fixed costs 10
The normal unit sales price per unit is $55. A special order from a foreign company has been received for 5,000 units at $45 a unit. In
order to fulfill the order, 3,000 units of regular sales would have to be foregone.
70. The opportunity cost associated with this order is

a. $75,000.
b. $165,000.
c. $90,000.
d. $135,000.
Ans: C, SO: 3, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision
71. The incremental profit (loss) from accepting the order would be
a. $10,000.
b. $(50,000).
c. $60,000.
d. $(30,000).
Ans: A, SO: 3, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision
72. Able Companys unit manufacturing cost is:
Variable Costs $50
Fixed Costs 25
A special order for 1,000 units has been received from a foreign company. The unit price requested is $55. The normal unit
price is $80. If the order is accepted, unit variable costs will increase by $2 for additional freight costs. If the order is
accepted, incremental profit (loss) will be
a. $(23,000).
b. $3,000.
c. $(20,000).
d. $5,000.
73. In the analysis concerning the acceptance or rejection of a special order, which items are relevant?
a. Variable costs only
b. Fixed costs only
c. Variable costs and fixed costs
d. Variable costs and unavoidable costs
74. What of the following would not be relevant in a make-or-buy decision?

a. Unavoidable variable costs
b. Incremental fixed costs
c. Opportunity costs
d. Avoidable fixed cost
Ans: A, SO: 4, Bloom: K, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision
75. Which of the following is not a qualitative factor to be considered in a make-or-buy decision?
a. Possible lost jobs from buying outside
b. Suppliers ability to satisfy quality standards
c. Incremental benefit from buying outside
d. Suppliers ability to meet production schedule
Use the following information for questions 7678.
Clemente Inc. incurs the following costs to produce 10,000 units of a subcomponent:
Direct materials $14,000
Direct labor 18,750
Variable overhead 21,000
Fixed overhead 27,000
An outside supplier has offered to sell Clemente the subcomponent for $4.75 a unit.
76. If Clemente accepts the offer, by how much will net income increase (decrease)?
a. $6,250
b. $33,250
c. $(14,750)
d. $(4,750)
77. If Clemente could avoid $5,000 of fixed overhead by accepting the offer, net income would increase (decrease) by
a. $1,250.
b. $(9,750).
c. $(5,250).
d. $11,250.
78. If Clemente accepts the offer, it could use the production capacity to produce another product that would generate
additional income of $6,000. The increase (decrease) in net income from accepting the offer would be
a. $250.
b. $12,250.
c. $(250).
d. $(6,000).
Ortiz Co. produces 5,000 units of part A12E. The following costs were incurred for that level of production:
Direct materials $ 45,000
Direct labor 160,000
Variable overhead 75,000
Fixed overhead 175,000
If Ortiz buys the part from an outside supplier, $40,000 of the fixed overhead is avoidable.
79. What is the relevant cost per unit of part A12E?

a. $56
b. $83
c. $91
d. $64
80. If the outside supplier offers a unit price of $65, net income will increase (decrease) by
a. $(5,000).
b. $130,000.
c. $(45,000).
d. $90,000.
81. In a make-or-buy decision, which costs can be considered relevant?

a. Unavoidable variable costs, incremental fixed costs, and sunk costs
b. Incremental variable costs, unavoidable fixed costs, and opportunity costs
c. Incremental variable costs, incremental fixed costs, and sunk costs
d. Incremental variable costs, incremental fixed costs, and opportunity costs
Ans: D, SO: 4, Bloom: K, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision
82. Billings Company has the following costs when producing 100,000 units:
Fixed costs 1,200,000
An outside supplier has offered to make the item at $6 a unit. If the decision is made to purchase the item outside, current
production facilities could be leased to another company for $220,000. The net increase (decrease) in the net income of
accepting the suppliers offer is
a. $380,000.
b. $420,000.
c. $(20,000).
d. $1,120,000.
Ans: B, SO: 4, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Decision
83. Sandusky Inc. has the following costs when producing 100,000 units:
Fixed costs 1,200,000
An outside supplier is interested in producing the item for Sandusky. If the item is produced outside, Sandusky could use the
released production facilities to make another item that would generate $200,000 of net income. At what unit price would
Sandusky accept the outside suppliers offer if Sandusky wanted to increase net income by $160,000?
a. $11.60
b. $8.40
c. $10.00
d. $7.60
Ans: B, SO: 4, Bloom: AN, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Decision
84. Which statement is true concerning the decision rule on whether to make or buy?
a. The company should buy if the cost of buying is less than the cost of producing.
b. The company should buy if the incremental revenue exceeds the incremental costs.
c. The company should buy as long as total revenue exceeds present revenues.
d. The company should buy assuming no additional fixed costs are incurred.
85. Which one of the following does not affect a make-or-buy decision?
a. Variable manufacturing costs
b. Opportunity costs
c. Incremental revenue
d. Direct labor
86. During 2010, it cost Westa, Inc. $18 per unit to produce part T5. During 2011, it has increased to $21 per unit. In 2011,
Southside Company has offered to provide Part T5 for $14 per unit to Westa. As it pertains to the make-or-buy decision,
which statement is true?
a. Differential costs are $7 per unit.
b. Incremental costs are $4 per unit.
c. Net relevant costs are $4 per unit.
d. Incremental revenues are $3 per unit.
Ans: A, SO: 4, Bloom: AN, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Decision
87. Chapman Company manufactures widgets. Embree Company has approached Chapman with a proposal to sell the
company widgets at a price of $120,000 for 100,000 units. Chapman is currently making these components in its own factory.
The following costs are associated with this part of the process when 100,000 units are produced:
Direct materials $ 46,500
Direct labor 43,500
Manufacturing overhead 60,000
Total $150,000
The manufacturing overhead consists of $24,000 of costs that will be eliminated if the components are no longer produced by
Chapman. From Chapmans point of view, how much is the incremental cost or savings if the widgets are bought instead of
made?
a. $30,000 incremental savings
b. $6,000 incremental cost
c. $6,000 incremental savings
d. $30,000 incremental cost
88. The cost to produce Part A was $20 per unit in 2010. During 2011, it has increased to $22 per unit. In 2011, Supplier
Company has offered to supply Part A for $18 per unit. For the make-or-buy decision,
a. incremental revenues are $4 per unit.
b. incremental costs are $2 per unit.
c. net relevant costs are $2 per unit.
d. differential costs are $4 per unit.
Ans: D, SO: 4, Bloom: AN, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Decision
89. Max Company uses 15,000 units of Part A in producing its products. A supplier offers to make Part A for $7. Max
Company has relevant costs of $8 a unit to manufacture Part A. If there is excess capacity, the opportunity cost of buying Part
A from the supplier is
a. $0.
b. $15,000.
c. $105,000.
d. $120,000.
Truckel, Inc. currently manufactures a wicket as its main product. The costs per unit are as follows:
Direct materials and direct labor $33
Variable overhead 15
Fixed overhead 24
Total $72
90. The fixed overhead is an allocated common cost. How much is the relevant cost of the wicket?
a. $72
b. $48
c. $33
d. $57
91. Saran Company has contacted Truckel with an offer to sell it 5,000 of the wickets for $54 each. If Truckel makes the
wickets, variable costs are $48 per unit. Fixed costs are $24 per unit; however, $15 per unit is unavoidable. Should Truckel
make or buy the wickets?
a. Buy; savings = $45,000
b. Buy; savings = $15,000
c. Make; savings = $30,000
d. Make; savings = $15,000
92. Galley Industries can produce 100 units of a necessary component part with the following costs:
Direct Materials $40,000
Direct Labor 18,000
Variable Overhead 42,000
Fixed Overhead 16,000
If Galley Industries purchases the component externally, $4,000 of the fixed costs can be avoided. Below what external price
for the 100 units would Galley choose to buy instead of make?
a. $100,000
b. $112,000
c. $88,000
d. $104,000
Ans: D, SO: 4, Bloom: AN, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Decision
93. Which decision will involve no incremental revenues?

a. Make or buy decision
b. Drop a product line
c. Accept a special order
d. Additional processing decision
Ans: A, SO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Decision
94. An opportunity cost

a. should be initially recorded as an asset.
b. is the cost of a new product proposal.
c. is the potential benefit that may be obtained by following an alternative course of action.
d. is classified as manufacturing overhead.
Ans: C, SO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Decision
95. Opportunity cost must be considered in decisions involving

a. budgeting.
b. financial accounting.
c. CVP analysis.
d. resources that have alternative uses.
96. The opportunity cost of an alternate course of action that is relevant to a make-or-buy decision is
a. subtracted from the "Make" costs.
b. added to the "Make" costs.
c. added to the "Buy" costs.
d. none of these.
97. Opportunity cost is usually

a. a standard cost.
b. a potential benefit.
c. a sunk cost.
d. included as part of cost of goods sold.
98. Each of the following is a disadvantage of buying rather than making a component of a company's product except that
a. quality control specifications may not be met.
b. the outside supplier could increase prices significantly in the future.
c. profitable product lines may be dropped.
d. the supplier may not deliver on time.
99. Tex's Manufacturing Company can make 100 units of a necessary component part with the following costs:
Direct Labor 10,000
If Tex's Manufacturing Company purchases the component externally, $15,000 of the fixed costs can be avoided. At what
external price for the 100 units is the company indifferent between making or buying?
a. $120,000
b. $85,000
c. $115,000
d. $100,000
Ans: C, SO: 4, Bloom: AN, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision
Modeling, AICPA PC: Problem Solving, IMA: Cost Management
100. Tex's Manufacturing Company can make 100 units of a necessary component part with the following costs:
Direct Labor 10,000
If Tex's Manufacturing Company can purchase the component externally for $110,000 and only $5,000 of the fixed costs can
be avoided, what is the correct make-or-buy decision?
a. Make and save $5,000
b. Buy and save $5,000
c. Make and save $15,000
d. Buy and save $15,000
101.Bell's Shop can make 1,000 units of a necessary component with the following costs:
Direct Labor 18,000
Fixed Overhead ?
The company can purchase the 1,000 units externally for $117,000. The unavoidable fixed costs are $6,000 if the units are
purchased externally. An analysis shows that at this external price, the company is indifferent between making or buying the
part. What are the fixed overhead costs of making the component?
a. $24,000
b. $18,000
c. $12,000
d. Cannot be determined.
102.Ruth Company produces 1,000 units of a necessary component with the following costs:
Direct Labor 16,000
Ruth Company could avoid $3,000 in fixed overhead costs if it acquires the components externally. If cost minimization is
the major consideration and the company would prefer to buy the components, what is the maximum external price that Ruth
Company would accept to acquire the 1,000 units externally?
a. $51,000
b. $47,000
c. $48,000
d. $44,000
Ans: B, SO: 4, Bloom: AN, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision
103. Ruth Company produces 1,000 units of a necessary component with the following costs:
Direct Labor 16,000
None of Ruth Company's fixed overhead costs can be reduced, but another product could be made that would increase profit
contribution by $8,000 if the components were acquired externally. If cost minimization is the major consideration and the
company would prefer to buy the components, what is the maximum external price that Ruth Company would be willing to
accept to acquire the 1,000 units externally?
a. $43,000
b. $55,000
c. $48,000
d. $52,000
104.Fornelli, Inc. can produce 100 units of a component part with the following costs:

Direct Labor 13,000
If Fornelli, Inc. can purchase the units externally for $80,000, by what amount will its total costs change?
a. An increase of $80,000
b. An increase of $5,000
c. An increase of $17,000
d. A decrease of $22,000
105.Fornelli, Inc. can produce 100 units of a component part with the following costs:

Direct Labor 13,000
If Fornelli, Inc. can purchase the component part externally for $88,000 and only $8,000 of the fixed costs can be avoided,
what is the correct make-or-buy decision?
a. Make and save $1,000
b. Buy and save $1,000
c. Make and save $5,000
d. Buy and save $13,000
106. Crigui Music produces 60,000 CDs on which to record music. The CDs have the following costs:
Direct Labor 15,000
Crigui could avoid $4,000 in fixed overhead costs if it acquires the CDs externally. If cost minimization is the major
consideration and the company would prefer to buy the 60,000 units externally, what is the maximum external price that
Crigui would expect to pay for the units?
a. $32,000
b. $29,000
c. $36,000
d. $33,000
107. Crigui Music produces 60,000 CDs on which to record music. The CDs have the following costs:
Direct Labor 15,000
None of Criguis fixed overhead costs can be reduced, but another product could be made that would increase profit
contribution by $4,000 if the CDs were acquired externally. If cost minimization is the major consideration and the company
would prefer to buy the CDs, what is the maximum external price that Crigui would be willing to accept to acquire the 60,000
units externally?
a. $36,000
b. $32,000
c. $33,000
d. $40,000
108. Tasty Bites produces corn chips. The cost of one batch is below:
Direct materials $18.00
Direct labor 13.00
Variable overhead 11.00
Fixed overhead 14.00
An outside supplier has offered to produce the corn chips for $25 per batch. How much will Tasty Bites save if it accepts the
offer?
a. $2.00 per batch
b. $17.00 per batch
c. $31.00 per batch
d. $6.00 per batch
109.NF Toy Company is unsure of whether to sell its product assembled or unassembled. The unit cost of the unassembled
product is $30 and NF Toy would sell it for $65. The cost to assemble the product is estimated at $21 per unit and the
company believes the market would support a price of $85 on the assembled unit. What decision should NF Toy make?
a. Sell before assembly, the company will be better off by $1 per unit.
b. Sell before assembly, the company will be better off by $20 per unit.
c. Process further, the company will be better off by $29 per unit.
d. Process further, the company will be better off by $14 per unit.
110. Moreland Clean Company spent $4,000 to produce Product 89, which can be sold as is for $5,000, or processed
further incurring additional costs of $1,500 and then be sold for $7,000. Which amounts are relevant to the decision about
Product 89?
a. $4,000, $5,000, and $7,000
b. $4,000, $1,500, and $7,000
c. $5,000, $1,500, and $7,000
d. $4,000, $5,000, $1,500 and $7,000
111. Pratt Company has old inventory on hand that cost $12,000. Its scrap value is $16,000. The inventory could be sold
for $40,000 if manufactured further at an additional cost of $12,000. What should Pratt do?
a. Sell the inventory for $16,000 scrap value
b. Dispose of the inventory to avoid any further decline in value
c. Hold the inventory at its $12,000 cost
d. Manufacture further and sell it for $40,000
112. New Age Makeup produces face cream. Each bottle of face cream costs $10 to produce and can be sold for $13. The
bottles can be sold as is, or processed further into sunscreen at a cost of $14 each. New Age Makeup could sell the sunscreen
bottles for $23 each.
a. Face cream must be processed further because its profit is $9 each.
b. Face cream must not be processed further because costs increase more than revenue.
c. Face cream must not be processed further because it decreases profit by $1 each.
d. Face cream must be processed further because it increases profit by $3 each.
113.Janssen Company has old inventory on hand that cost $18,000. Its scrap value is $24,000. The inventory could be sold
for $60,000 if manufactured further at an additional cost of $18,000. What should Janssen do?
a. Sell the inventory for $24,000 scrap value
b. Dispose of the inventory to avoid any further decline in value
c. Hold the inventory at its $18,000 cost
d. Manufacture further and sell it for $60,000.
114.A company has a process that results in 15,000 pounds of Product A that can be sold for $8 per pound. An alternative
would be to process Product A further at a cost of $100,000 and then sell it for $14 per pound. Should management sell
Product A now or should Product A be processed further and then sold? What is the effect of the action?
a. Process further, the company will be better off by $10,000.
b. Sell now, the company will be better off by $10,000.
c. Process further, the company will be better off by $90,000.
d. Sell now, the company will be better off by $100,000.
Ans: B, SO: 5, Bloom: AN, Difficulty: Hard, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision
115.The decision rule on whether to sell or process further

a. varies from situation to situation.
b. is process further as long as total revenue exceeds present revenues.
c. is process further if incremental revenue from such processing exceeds incremental fixed costs.
d. is process further if incremental revenue from such processing exceeds the incremental processing costs.
Ans: D, SO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Strategic/Critical Thinking, AICPA FN: Decision
116.Eddy Company is starting business and is unsure of whether to sell its product assembled or unassembled. The unit cost
of the unassembled product is $80 and Eddy Company would sell it for $180. The cost to assemble the product is estimated at
$36 per unit and Eddy Company believes the market would support a price of $232 on the assembled unit. What is the correct
decision using the sell or process further decision rule?
a. Sell before assembly, the company will be better off by $36 per unit.
b. Sell before assembly, the company will be better off by $52 per unit.
c. Process further, the company will be better off by $52 per unit.
d. Process further, the company will be better off by $16 per unit.
Ans: D, SO: 5, Bloom: AN, Difficulty: Hard, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision
117.Mallory Company manufactures widgets. Bowden Company has approached Mallory with a proposal to sell the
company widgets at a price of $80,000 for 100,000 units. Mallory is currently making these components in its own factory.
The following costs are associated with this part of the process when 100,000 units are produced:
Direct material $ 31,000
Direct labor 29,000
Manufacturing overhead 40,000
Total $100,000
The manufacturing overhead consists of $16,000 of costs that will be eliminated if the components are no longer produced by
Mallory. From Mallory's point of view, how much is the incremental cost or savings if the widgets are bought instead of
made?
a. $20,000 incremental savings
b. $4,000 incremental cost
c. $4,000 incremental savings
d. $20,000 incremental cost
Ans: B, SO: 5, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision
118.The focus of a sell or process further decision is
a. incremental revenue.
b. incremental cost.
c. both incremental revenue and incremental cost.
d. neither incremental revenue nor incremental cost.
Ans: C, SO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Strategic/Critical Thinking, AICPA FN: Decision
119.Marcus Company gathered the following data about the three products that it produces:
Present Estimated Additional Estimated Sales
Product Sales Value Processing Costs if Processed Further
A $12,000 $8,000 $21,000
B 14,000 5,000 18,000
C 11,000 3,000 16,000
Which of the products should not be processed further?
a. Product A
b. Product B
c. Product C
d. Products A and C
120.Serene Dairy has four product lines: sour cream, ice cream, yogurt, and butter. The total cost of producing the milk base
for the products is $45,000, which has been allocated based on the gallons of milk base used by each product. Results for July
follow:
Sour Cream Ice Cream Yogurt Butter Total
Units sold 2,000 500 400 2,000 4,900
Revenue $10,000 $20,000 $10,000 $20,000 $60,000
Variable departmental costs 6,000 13,000 4,200 4,800 28,000
Fixed costs 5,000 2,000 3,000 7,000 17,000
Net income (loss) $ (1,000) $ 5,000 $ 2,800 $ 8,200 $15,000
How much are total joint costs of the products?
a. $28,000
b. $17,000
c. $45,000
d. $15,000
121. Which of the following is not involved in the sell or process further decision?
a. Revenues
b. Variable costs
c. Opportunity costs
d. Fixed costs
122. All of the following are relevant to the sell or process further decision except
a. costs incurred beyond the split-off point.
b. revenues at the split-off point.
c. costs incurred before the split-off point.
d. revenues beyond the split-off point.
Ans: C, SO: 5, Bloom: K, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision
123. Costs incurred before the split-off point are
a. sunk costs.
b. incremental costs.
c. relevant costs.
d. opportunity costs.
Ans: A, SO: 5, Bloom: K, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision
124. Which of the following terms are synonymous?

a. Avoidable costs and irrelevant costs
b. Unavoidable costs and incremental costs
c. Sunk costs and relevant costs
d. Joint costs and sunk costs
Paul Bunyon Lumber Co. produces several products that can be sold at the split-off point or processed further and then sold. The
following results are from a recent period:
Sales Value Additional Sales Value after
Product at Split-off _ Variable Costs Further Processing
Green lumber $159,600 $24,000 $178,000
Rough lumber 124,000 28,200 173,600
Sawdust 102,000 19,600 130,000
125. The additional profit that would result from processing rough lumber further is
a. $21,400.
b. $49,600.
c. $145,400.
d. $95,800.
126. Which products should be processed further?

a. Green lumber and rough lumber
b. Green lumber and sawdust
c. Rough lumber and sawdust
d. All three products
Ans: C, SO: 5, Bloom: K, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision
127. What is the increase in profit if the appropriate products are processed further?
a. $24,200
b. $29,800
c. $96,000
d. $255,800
128. The point in the production process when joint products are readily identifiable is the
a. separation point.
b. split-off point.
c. common point.
d. break-even point.
Ans: B, SO: 5, Bloom: K, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision
129. The costs incurred prior to the split-off point are referred to as
a. separable costs.
b. split-off costs.
c. joint product costs.
d. joint costs.
Hi-Tech Inc. has several outdated computers that cost a total of $8,900 and could be sold as scrap for $2,300. They could be updated
for an additional $1,200 and sold. If Hi-Tech updates the computers and sells them, net income will increase by $4,500.
130. At what price were the updated versions sold?

a. $13,400
b. $6,600
c. $6,800
d. $8,000
131. What amount would be considered sunk costs?

a. $1,200
b. $4,500
c. $8,900
d. $10,100
132. When deciding whether or not to replace old equipment with new equipment, the overriding consideration is the
a. book value of the old equipment.
b. cost of replacing the old equipment.
c. salvage value of the old equipment.
d. difference between future cost savings and the new equipments costs.
133. In an equipment replacement decision, the cost of the old equipment is a(n)
a. incremental cost.
b. sunk cost.
c. relevant cost.
d. opportunity cost.
Ans: B, SO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Strategic/Critical Thinking, AICPA FN: Decision
Chung Inc. is considering the replacement of a piece of equipment with a newer model. The following data has been collected:
Old Equipment New Equipment
Purchase price $150,000 $250,000
Accumulated depreciation 60,000 -0-
Annual operating costs 200,000 160,000
If the old equipment is replaced now, it can be sold for $40,000. Both the old equipments remaining useful life and the new
equipments useful life is 5 years.
134. Which of the following amounts is irrelevant to the replacement decision?
a. $250,000
b. $90,000
c. $210,000
d. $40,000
Ans: B, SO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Strategic/Critical Thinking, AICPA FN: Decision
135. What is the net cost of the new equipment?

a. $250,000
b. $210,000
c. $100,000
d. $50,000
Ans: B, SO: 6, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Strategic/Critical Thinking, AICPA FN: Decision
136. The net advantage (disadvantage) of replacing the old equipment with the new equipment is
a. $40,000
b. $(10,000)
c. $(50,000)
d. $60,000
Ans: B, SO: 6, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Strategic/Critical Thinking, AICPA FN: Decision
137.Which of the following is relevant information in a decision whether old equipment presently being used should be
replaced by new equipment?
a. The cost of the old equipment
b. The salvage value of the old equipment
c. The book value of the old equipment
d. The accumulated depreciation of the old equipment
138. A company is deciding whether or not to replace some old equipment with new equipment. Which of the following is not
considered in the incremental analysis?
a. Annual operating cost of the new equipment
b. Annual operating cost of the old equipment
c. Net cost of the new equipment
d. Book value of the old equipment
139. What role does a trade-in allowance on old equipment play in a decision to retain or replace equipment?
a. It is relevant since it increases the cost of the new equipment.
b. It is not relevant since it reduces the cost of the old equipment.
c. It is not relevant to the decision since it does not impact the cost of the new equipment.
d. It is relevant since it reduces the cost of the new equipment.
140. A company decided to replace an old machine with a new machine. Which of the following is considered a relevant cost?
a. The book value of the old equipment
b. Depreciation expense of the old equipment
c. The loss on disposal of the old equipment
d. The current disposal price of the old equipment
141.A company decided to replace an old machine with a new machine. Which of the following is considered a relevant cost?
a. The book value of the old equipment
b. Depreciation expense on the old equipment
c. The loss on the disposal of the old equipment
d. The current disposal price of the old equipment
142.Which of the following is not relevant information in a decision whether old equipment presently being used should be
replaced by new equipment?
a. The cash price of the new equipment
b. The salvage value of the old equipment
c. The book value of the old equipment
d. The cost savings if the new equipment is purchased
143.Book value of old equipment is considered to be a

a. relevant cost.
b. semi-relevant cost.
c. sunk cost.
d. cost that can be changed by a present or future decision.
144.A company is deciding on whether to replace some old equipment with new equipment. Which of the following is not a
relevant cost for incremental analysis?
a. Annual operating cost of the new equipment
b. Annual operating cost of the old equipment
c. Net cost of the new equipment
d. Accumulated depreciation on the old equipment
145.A company is considering replacing old equipment with new equipment. Which of the following is a relevant cost for
incremental analysis?
a. Annual depreciation charge on the old equipment
b. Book value of the old equipment
c. Estimated annual depreciation of the new equipment
d. Cost of the new equipment
146. In a retain or replace equipment decision, trade-in allowance available on old equipment
a. increases the cost of the new equipment.
b. is relevant because it will not be realized if the old equipment is retained.
c. is not relevant to the decision.
d. reduces the cost of the old equipment.
147.Sala Co. is contemplating the replacement of an old machine with a new one. The following information has been
gathered:
Old Machine New Machine

Price $250,000 $500,000
Accumulated Depreciation 75,000 -0-
Remaining useful life 10 years -0-
Useful life -0- 10 years
Annual operating costs $200,000 $150,500
If the old machine is replaced, it can be sold for $20,000.
Which of the following amounts is a sunk cost?

a. $200,000
b. $150,500
c. $500,000
d. $175,000
gathered:

Price $250,000 $500,000
Which of the following amounts is relevant to the replacement decision?

a. $175,000
b. $250,000
c. $49,500
d. $75,000
gathered:

Price $250,000 $500,000
The net advantage (disadvantage) of replacing the old machine is

a. $15,000
b. $20,000
c. $(5,000)
d. $(50,000)
150.Abel Company produces three versions of baseball bats: wood, aluminum, and hard rubber. A condensed segmented
income statement for a recent period follows:
Wood _ Aluminum Hard Rubber Total _
Sales $500,000 $200,000 $65,000 $765,000
Variable expenses 325,000 140,000 58,000 523,000
Contribution margin 175,000 60,000 7,000 242,000
Fixed expenses 75,000 35,000 22,000 132,000
Net income (loss) $100,000 $ 25,000 $(15,000) $110,000
Assume none of the fixed expenses for the hard rubber line are avoidable. What will be total net income if the line is
dropped?
a. $125,000
b. $103,000
c. $105,000
d. $140,000
151.Abel Company produces three versions of baseball bats: wood, aluminum, and hard rubber. A condensed segmented
income statement for a recent period follows:
Wood _ Aluminum Hard Rubber Total _
Sales $500,000 $200,000 $65,000 $765,000
Variable expenses 325,000 140,000 58,000 523,000
Contribution margin 175,000 60,000 7,000 242,000
Fixed expenses 75,000 35,000 22,000 132,000
Net income (loss) $100,000 $ 25,000 $(15,000) $110,000
Assume all of the fixed expenses for the hard rubber line are avoidable. What will be total net income if the line is dropped?
a. $125,000
b. $103,000
c. $105,000
d. $140,000
152.What will most likely occur if a company eliminates an unprofitable segment when a portion of fixed costs are
unavoidable?
a. All expenses of the eliminated segment will be eliminated.
b. Net income will decrease.
c. Net income will increase.
d. The company's variable costs will increase.
153.A company has three product lines, one of which reflects the following results:
Sales $215,000
Variable expenses 125,000
Contribution margin 90,000
Fixed expenses 140,000
Net loss $ (50,000)
If this product line is eliminated, 60% of the fixed expenses can be eliminated and the other 40% will be allocated to other
product lines. If management decides to eliminate this product line, the company's net income will
a. increase by $50,000.
b. decrease by $90,000.
c. decrease by $6,000.
d. increase by $6,000.
154.A company is considering eliminating a product line. The fixed costs currently allocated to the product line will be
allocated to other product lines upon discontinuance. If the product line is discontinued,
a. total net income will increase by the amount of the product line's fixed costs.
b. total net income will decrease by the amount of the product line's fixed costs.
c. the contribution margin of the product line will indicate the net income increase or decrease.
d. the company's total fixed costs will decrease.
155.A segment has the following data:

Sales $350,000
What will be the incremental effect on net income if this segment is eliminated, assuming the fixed expenses will be allocated
to profitable segments?
a. $200,000 increase
b. $200,000 decrease
c. $275,000 decrease
d. Cannot be determined from the data provided.
156.Corn Crunchers has three product lines. Its only unprofitable line is Corn Nuts, the results of which appear below for
2011:
Sales $1,050,000
Net loss $ (90,000)
If this product line is eliminated, 30% of the fixed expenses can be eliminated. How much are the relevant costs in the
decision to eliminate this product line?
a. $135,000
b. $1,140,000
c. $1,005,000
d. $825,000
157. North Division has the following information:

Sales $900,000
If this division is eliminated, the fixed expenses will be allocated to the companys other divisions. What is the incremental
effect on net income if the division is dropped?
a. $45,000 increase
b. $465,000 decrease
c. $420,000 decrease
d. $435,000 increase
158. A product line should be eliminated whenever
a. the product line generates a net loss.
b. the unavoidable fixed costs exceed the product lines contribution margin.
c. the product line generates a negative contribution margin.
d. the avoidable costs are less than the product lines contribution margin.
159. When will the elimination of a product line have no effect on the companys overall profit?
a. When the avoidable fixed costs equal the product lines contribution margin
b. When the unavoidable fixed costs equal the product lines contribution margin
c. When there are no fixed costs incurred by the product line
d. When the product line contribution margin is negative
Ans: A, SO: 7, Bloom: C, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Resource Management, AICPA FN: Decision
160.Accounting's contribution to the decision-making process occurs in all of the following steps except to
a. identify the problem and assign responsibility.
b. determine possible courses of action.
c. review results of the decision.
d. make a decision.
Modeling, AICPA PC: Problem Solving, IMA: Investment Decisions
161.It costs Dryer Company $26 per unit ($18 variable and $8 fixed) to produce its product, which normally sells for $38 per
unit. A foreign wholesaler offers to purchase 3,000 units at $21 each. Dryer would incur special shipping costs of $2 per unit
if the order were accepted. Dryer has sufficient unused capacity to produce the 3,000 units. If the special order is accepted,
what will be the effect on net income?
a. $3,000 decrease
b. $3,000 increase
c. $9,000 increase
d. $54,000 increase
162. In a make-or-buy decision, opportunity costs are

a. added to the make total cost.
b. deducted from the make total cost.
c. added to the buy total cost.
d. ignored.
163. Which of the following would generally not affect a make-or-buy decision?
a. Selling expenses
b. Direct labor
c. Variable manufacturing costs
d. Opportunity cost
164. A cost that cannot be changed by any present or future decision is a(n)
a. incremental cost.
b opportunity cost.
c. sunk cost.
d. variable cost.
Ans: C, SO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Decision
165. If an unprofitable segment is eliminated

a. it is impossible for net income to decrease.
b. fixed expenses allocated to the eliminated segment will be eliminated.
c. variable expenses of the eliminated segment will be eliminated.
d. it is impossible for net income to increase.
166. All of the following are relevant in deciding whether to eliminate an unprofitable segment except the segment's
a. sales.
b. variable expenses.
c. contribution margin.
d. fixed expenses.
Ans: D, SO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management, AICPA FN: Decision
Answers to Multiple Choice Questions

Item Ans. Item Ans. Item Ans. Item Ans. Item Ans. Item Ans. Item Ans.
31. b 51. b 71. a 91. b 111. d 131. c 151. a
32. b 52. a 72. b 92. d 112. b 132. d 152. b
33. c 53. a 73. d 93. a 113. d 133. b 153. c
34. b 54. d 74. a 94. c 114. b 134. b 154. c
35. c 55. b 75. c 95. d 115. d 135. b 155. b
36. d 56. d 76. a 96. b 116. d 136. b 156. d
37. c 57. d 77. d 97. b 117. b 137. b 157. c
38. b 58. d 78. b 98. c 118. c 138. d 158. c
39. d 59. b 79. d 99. c 119. b 139. d 159. a
40. c 60. a 80. a 100. a 120. c 140. d 160. a
41. c 61. b 81. d 101. a 121. d 141. d 161. b
42. c 62. d 82. b 102. b 122. c 142. c 162. a
43. b 63. c 83. b 103. d 123. a 143. c 163. a
44. b 64. b 84. a 104. b 124. d 144. d 164. c
45. c 65. b 85. c 105. c 125. a 145. d 165. c
46. a 66. d 86. a 106. d 126. c 146. b 166. d
47. d 67. b 87. b 107. c 127. b 147. d
48. b 68. d 88. d 108. b 128. b 148. c
49. d 69. b 89. b 109. a 129. d 149. a
50. d 70. c 90. b 110. c 130. d 150. b
CHAPTER 8
PRICING
1. Compute a target cost when the market determines a product price. To compute a target cost, the
company determines its target selling price. Once the target selling price is set, it determines its target
cost by setting a desired profit. The difference between the target price and desired profit is the target cost
of the product.
2. Compute a target selling price using cost-plus pricing. Cost-plus pricing involves establishing a
cost base and adding to this cost base a markup to determine a target selling price. The cost-plus pricing
formula is expressed as follows: Target selling price = Cost + (Markup percentage Cost).
3. Use time-and-material pricing to determine the cost of services provided. Under time-and-material
pricing, two pricing rates are setone for labor used on a job and another for the material. The labor rate
includes direct labor time and other employee costs. The material charge is based on the cost of direct
parts and materials used and a material loading charge for related overhead cost.
4. Determine a transfer price using the negotiated, cost-based, and market-based approaches. The
negotiated price is determined through agreement of division managers. Under a cost-based approach,
the transfer price may be based on variable cost alone or on variable cost plus fixed costs. Companies
may add a markup to these numbers. The cost-based approach often leads to poor performance
evaluations and purchasing decisions. A market-based transfer price is based on existing competing
market prices and services. A market-based system is often considered the best approach because it is
objective and generally provides the proper economic incentives.
5. Explain issues involved in transferring goods between divisions in different countries.

Companies must pay income tax in the country where they generate the income. In order to maximize
income and minimize income tax, many companies prefer to report more income in countries with low tax
rates, and less income in countries with high tax rates. This is accomplished by adjusting the transfer
prices they use on internal transfers between divisions located in different countries.
*6.Determine prices using absorption-cost pricing and variable-cost pricing. Absorption-cost pricing
uses total manufacturing cost as the cost base and provides for selling and administrative costs plus the
target ROI through the markup. The target selling price is computed as: Manufacturing cost per unit +
(Markup percentage Manufacturing cost per unit). Variable-cost pricing uses all of the variable costs,
including selling and administrative costs, as the cost base and provides for fixed costs and target ROI
through the markup. The target selling price is computed as: Variable cost per unit + (Markup percentage
Variable cost per unit).
26. Factors that can affect pricing decisions include all of the following except
a. cost considerations.
b. environment.
c. pricing objectives.
d. all of these are factors.
Ans: d, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Marketing/Client Focus, AICPA FN: Decision Modeling, AICPA PC: Project
Management, IMA: Business Economics
27. In most cases, prices are set by the
a. customers.
b. competitive market.
c. largest competitor.
d. selling company.
Ans: b, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Marketing/Client Focus, AICPA FN: Decision Modeling, AICPA PC: Project
28. A company must price its product to cover its costs and earn a reasonable profit in
a. all cases.
b. its early years.
c. the long run.
d. the short run.
Ans: c, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Marketing/Client Focus, AICPA FN: Decision Modeling, AICPA PC: Project
29. Prices are set by the competitive market when

a. the product is specially made for a customer.
b. there are no other producers capable of manufacturing a similar item.
c. a company can effectively differentiate its product from others.
d. a product is not easily distinguished from competing products.
Ans: d, SO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Marketing/Client Focus, AICPA FN: Decision Modeling, AICPA PC: Project
30. All of the following are correct statements about the target price except it
a. is the price the company believes would place it in the optimal position for its target audience.
b. is used to determine a product's target cost.
c. is determined after the company has identified its market and does market research.
d. is determined after the company sets its desired profit amount.
31. Companies that sell products whose prices are set by market forces are called
a. price givers.
b. price leaders.
c. price takers.
d. price setters.
32. In which of the following situations would a company not set the prices of its products?
a. When the product is not easily differentiated from competing products
b. When the product is specially made for a customer

c. When there are few or no other producers capable of making a similar product
d. When the product can be effectively differentiated from others
Ans: a, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Marketing/Client Focus, AICPA FN: Decision Modeling, AICPA PC: Project
33. The calculation to determine target cost is
a. variable manufacturing costs + fixed manufacturing costs.
b. sales price (variable manufacturing costs + fixed manufacturing costs).
c. variable manufacturing costs + selling and administrative variable costs.
d. sales price desired profit.
Ans: d, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Marketing/Client Focus, AICPA FN: Measurement, AICPA PC: Project Management, IMA: Cost
Management
34. Target cost is comprised of
a. variable and fixed manufacturing costs only.
b. variable manufacturing and selling and administrative costs only.
c. total manufacturing and selling and administrative costs.
d. fixed manufacturing and selling and administrative costs only.
Ans: c, SO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Marketing/Client Focus, AICPA FN: Measurement, AICPA PC: Project Management,
IMA: Cost Management
35. A company that is a price taker would most likely use which of the following methods?
a. Time-and-material pricing
b. Target costing
c. Cost plus pricing, contribution approach
d. Cost plus pricing, absorption approach

Ans: b, SO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Marketing/Client Focus, AICPA FN: Decision Modeling, AICPA PC: Project
36. Bond Co. is using the target cost approach on a new product. Information gathered so far reveals:
Expected annual sales 400,000 units
Desired profit per unit $0.25
Target cost $168,000
What is the target selling price per unit?
a. $0.42
b. $0.50
c. $0.25
d. $0.67
Ans: d, SO: 1, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Marketing/Client Focus, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision
Making, IMA: Business Economics
37. Well Water Inc. wants to produce and sell a new flavored water. In order to penetrate the
market, the product will have to sell at $2.00 per 12 oz. bottle. The following data has been collected:
Annual sales 50,000 bottles
Projected selling and administrative costs $8,000
Desired profit $80,000
The target cost per bottle is
a. $0.24.
b. $0.40.
c. $0.16.
d. $0.60.
Ans: b, SO: 1, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Marketing/Client Focus, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision
38. Larry Cable Inc. plans to introduce a new product and is using the target cost approach.
Projected sales revenue is $810,000 ($4.50 per unit) and target costs are $729,000. What is the
desired profit per unit?
a. $0.45
b. $2.25
c. $4.05
d. None of the above
Ans: a, SO: 1, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Marketing/Client Focus, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision
39. Wasson Widget Company is contemplating the production and sale of a new widget. Projected
sales are $225,000 (or 75,000 units) and desired profit is $27,000. What is the target cost per unit?
a. $3.00
b. $2.64
c. $3.36
d. $3.60
Making, IMA: Cost Management
40. Boomer Boombox Inc. wants to produce and sell a new lightweight radio. Desired profit per unit
is $2.76. The expected unit sales price is $33 based on 10,000 units. What is the total target cost?
a. $302,400
b. $330,000
c. $27,600
d. $357,600
41. In cost-plus pricing, the markup consists of

a. manufacturing costs.
b. desired ROI.
c. selling and administrative costs.
d. total cost and desired ROI.
Ans: b, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Marketing/Client Focus, AICPA FN: Measurement, AICPA PC: Project Management,
IMA: Business Economics
42. The desired ROI per unit is calculated by

a. multiplying the ROI times the investment and dividing by the estimated volume.
b. multiplying the unit selling price by the ROI.
c. dividing the total cost by the estimated volume and multiplying by the ROI.
d. dividing the ROI by the estimated volume and subtracting the result from the unit cost.
Ans: a, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Marketing/Client Focus, AICPA FN: Measurement, AICPA PC: Project Management,
IMA: Performance Measurement
43. Bellingham Suit Co. has received a shipment of suits that cost $150 each. If the company uses
cost-plus pricing and applies a markup percentage of 60%, what is the sales price per suit?
a. $250
b. $240
c. $210
d. $375
Custom Shoes Co. has gathered the following information concerning one model of shoe:
Variable manufacturing costs $30,000
Variable selling and administrative costs $15,000
Fixed manufacturing costs $120,000
Fixed selling and administrative costs $90,000
Investment $1,275,000
ROI 30%
Planned production and sales 5,000 pairs
44. What is the total cost per pair of shoes?

a. $30
b. $51
c. $126
d. $72
45. What is the desired ROI per pair of shoes?

a. $51.00
b. $126.00
c. $76.50
d. $127.50
Ans: c, SO: 2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Marketing/Client Focus, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision
Making, IMA: Performance Measurement
46. What is the target selling price per pair of shoes?

a. $106.50
b. $127.50
c. $85.50
d. $118.50
47. What is the markup percentage?

a. 150%
b. 255%
c. 850%
d. 182%
Lock Inc. has collected the following data concerning one of its products:
Unit sales price $145
Total sales 10,000 units
Unit cost $115
Total investment $1,200,000
48. The ROI percentage is
a. 20%.
b. 30%.
c. 35%.
d. 25%.
49. The markup percentage is

a. 26.09%.
b. 20.69%.
c. 25%.
d. 22.59%.
50. A company using cost-plus pricing has an ROI of 24%, total sales of 16,000 units and a desired
ROI per unit of $30. What was the amount of investment?
a. $115,200
b. $2,000,000
c. $364,800
d. $631,580
Brislin Products has a new product going on the market next year. The following data are projections for
production and sales:
Fixed costs $450,000
ROI 15%
Investment $1,400,000
Sales 200,000 units
51. What is the target selling price per unit?

a. $4.55
b. $3.50
c. $2.30
d. $3.30
52. What is the markup percentage?

a. 84%
b. 15%
c. 40%
d. 30%
53. What would the markup percentage be if only 150,000 units were sold and Brislin still wanted to
earn the desired ROI?
a. 24.71%
b. 40.0%
c. 26.25%
d. 32.94%
54. When using cost-plus pricing, which amount per unit does not change when the expected
volume differs from the budgeted volume?
a. Variable cost
b. Fixed cost
c. Desired ROI
d. Target selling price
Ans: a, SO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Marketing/Client Focus, AICPA FN: Measurement, AICPA PC: Project Management,
55. Why does the unit selling price increase when expected volume is lower than budgeted volume?
a. Variable costs and fixed costs have to be spread over fewer units.
b. Fixed costs and desired ROI have to be spread over fewer units.
c. Variable costs and desired ROI have to be spread over fewer units.
d. Fixed costs only have to be spread over fewer units.
Ans: b, SO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Marketing/Client Focus, AICPA FN: Measurement, AICPA PC: Project Management,
56. In cost-plus pricing, the target selling price is computed as

a. variable cost per unit + desired ROI per unit.
b. fixed cost per unit + desired ROI per unit.
c. total unit cost + desired ROI per unit.
d. variable cost per unit + fixed manufacturing cost per unit + desired ROI per unit.
57. In cost-plus pricing, the markup percentage is computed by dividing the desired ROI per unit by the
a. fixed cost per unit.
b. total cost per unit.
c. total manufacturing cost per unit.
d. variable cost per unit.
IMA: Performance Measurement
58. The cost-plus pricing approach's major advantage is

a. it considers customer demand.
b. that sales volume has no effect on per unit costs.
c. it is simple to compute.
d. it can be used to determine a products target cost.
Ans: c, SO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Marketing/Client Focus, AICPA FN: Measurement, AICPA PC: Project Management,
59. The following per unit information is available for a new product of Red Ribbon Company:
Desired ROI $ 24
Fixed cost 40
Variable cost 60
Total cost 100
Selling price 124
Red Ribbon Company's markup percentage would be
a. 19%.
b. 24%.
c. 40%.
d. 60%.
60. Bryson Company has just developed a new product. The following data is available for this
product:
Desired ROI per unit $ 18
Fixed cost per unit 30
Variable cost per unit 45
Total cost per unit 75
The target selling price for this product is
a. $93.
b. $75.
c. $63.
d. $48.
61. All of the following are correct statements about the cost-plus pricing approach except that it
a. is simple to compute.
b. considers customer demand.
c. includes only variable costs in the cost base.
d. will only work when the company sells the quantity it budgeted.
Ans: c, SO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Marketing/Client Focus, AICPA FN: Decision Modeling, AICPA PC: Project
62. In the cost-plus pricing approach, the desired ROI per unit is computed by multiplying the ROI
percentage by
a. fixed costs.
b. total assets.
c. total costs.
d. variable costs.
Ans: b, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Marketing/Client Focus, AICPA FN: Measurement, AICPA PC: Problem
Solving/Decision Making, IMA: Business Economics
Red Grass Company produces high definition television sets. The following information is available for this
product:
Fixed cost per unit $200
Variable cost per unit 600
Total cost per unit 800
Desired ROI per unit 240
63. Red Grass Company's markup percentage would be
a. 120%.
b. 60%.
c. 40%.
d. 30%.
64. The target selling price for this television is

a. $440.
b. $800.
c. $840.
d. $1,040.
65. In time-and-material pricing, a material loading charge covers all of the following except
a. purchasing costs.
b. related overhead.
c. desired profit margin.
d. All of these are covered.
Ans: d, SO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Marketing/Client Focus, AICPA FN: Measurement, AICPA PC: Project Management,
66. The first step for time-and-material pricing is to calculate the

a. charge for obtaining materials.
b. charge for holding materials.
c. labor charge per hour.
d. charges for a particular job.
67. The labor charge per hour in time-and-material pricing includes all of the following except
a. an allowance for a desired profit.
b. charges for labor loading.
c. selling and administrative costs.
d. overhead costs.
Ans: b, SO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Marketing/Client Focus, AICPA FN: Measurement, AICPA PC: Project Management,
68. The last step in determining the material loading charge percentage is to
a. estimate annual costs for purchasing, receiving, and storing materials.
b. estimate the total cost of parts and materials.
c. divide material charges by the total estimated costs of parts and materials.
d. add a desired profit margin on the materials themselves.
Ans: d, SO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Marketing/Client Focus, AICPA FN: Measurement, AICPA PC: Project Management,
69. In time-and-material pricing, the charge for a particular job is the sum of the labor charge and the
a. materials charge.
b. material loading charge.
c. materials charge + desired profit.
d. materials charge + the material loading charge.
Use the following information for questions 70-72.
The following data is available for Wheels N Spokes Repair Shop for 2011:
Repair technicians wages $180,000
Fringe benefits 40,000
Overhead 30,000
Total $250,000
The desired profit margin is $20 per labor hour. The material loading charge is 40% of invoice cost. It is
estimated that 5,000 labor hours will be worked in 2011.
70. Wheels N Spokes labor charge in 2011 would be

a. $50.
b. $56.
c. $64.
d. $70.
71. In January 2011, Wheels N Spokes repairs a bicycle that uses parts of $160. Its material loading
charge on this repair would be
a. $64.
b. $96.
c. $160.
d. $224.
72. In March 2011, Wheels N Spokes repairs a bicycle that takes two hours to repair and uses parts of
$120. The bill for this repair would be
a. $260.
b. $280.
c. $296.
d. $308.
73. Which of the following organizations would most likely not use time-and-material pricing?
a. Automobile repair company
b. Engineering firm
c. Custom furniture manufacturer
d. Public accounting firm
Carlos Consulting Inc. provides financial consulting and has collected the following data for the next years
budgeted activity for a lead consultant.
Consultants wages $90,000
Fringe benefits $22,500
Related overhead $17,500
Supply clerks wages $18,000
Fringe benefits $4,000
Related overhead $20,000
Profit margin per hour $15
Profit margin on materials 15%
Total estimated consulting hours 5,000
Total estimated supply costs $168,000
74. The labor rate per hour is

a. $37.50.
b. $26.00.
c. $36.50.
d. $41.00.
75. The material loading charge is

a. 25%.
b. 40%.
c. 55%.
d. 15%.
76. A consulting job takes 20 hours of consulting time and $180 of supplies. The clients bill would
be
a. $1,072.
b. $772.
c. $952.
d. $1,000.
Lonely Guy Repair Service recently performed repair services for a customer that totaled $400. Somehow the
bill was lost and the company accountant was trying to recreate the bill from memory. This is what was
remembered:
Total bill $400
Labor profit margin $10
Materials profit margin 20%
Total labor charges $260
Cost of materials used $100
Total hourly cost $22.50
77. What was the material loading charge?

a. 20%
b. 25%
c. 35%
d. 40%
78. How many hours were billed on the job?

a. 13.0
b. 12.3
c. 11.5
d. 8.0
79. Lawrence Legal Services recently billed a customer $720. Labor hours were 6 and the cost of
the materials used was $150. If the companys hourly labor rate was $75, what material loading charge
was used?
a. 40%
b. 50%
c. 80%
d. 100%
Ans: c, SO: 3, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Marketing/Client Focus, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision
80. Dudly Drafting Services uses a 45% material loading charge and a labor rate of $30 per hour.
How much will be charged on a job that requires 3.5 hours of work and $60 of materials?
a. $192
b. $165
c. $132
d. $200
81. The time component under time-and-material pricing includes a
a. loading charge.
b. charge for receiving, handling, and storing materials.
c. portion of the materials clerks wages.
d. profit margin.
82. Using time-and-material pricing involves how many steps?

a. 4
b. 3
c. 2
d. 1
83. The last step in calculating the hourly rate to be charged in time-and-material pricing is to
a. estimate the total labor costs plus fringe benefits.
b. estimate the total labor hours.
c. add a profit margin.
d. add a charge for overhead costs.
Jaycee Auto Repair has the following budgeted costs for the next year:
Time Charges Material Charges
Shop employees wages and benefits $120,000 $ -
Parts managers salary and benefits - 45,000
Office employees salary and benefits 30,000 15,000
Other overhead 15,000 40,000
Invoice cost of parts and materials - 400,000
Total budgeted costs $165,000 $500,000
84. The labor rate to be used next year assuming 7,500 hours of repair time and a profit margin of
$20 per labor hour is
a. $22.
b. $36.
c. $38.
d. $42.
Ans: d, SO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Marketing/Client Focus, AICPA FN: Reporting, AICPA PC: Problem Solving/Decision Making,
IMA: Reporting
85. The material loading charge to be used next year assuming a 40% markup on material cost is
a. 65%.
b. 40%.
c. 80%.
d. 20%.
86. Jaycee estimates that the repairs to a Cadillac Escalade damaged in a rollover will take 45
hours of labor and $3,500 in parts and materials. The total cost of the repairs is
a. $5,800.
b. $7,665.
c. $5,775.
d. $6,790.
87. The price used to record a sale between divisions within the same vertically integrated company
is called the
a. sales price.
b. integrated price.
c. transfer price.
d. bargain price.
Ans: c, SO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Decision Modeling, AICPA PC: Project
88. The overall objective in the determination of a transfer price is to

a. maximize the return of the selling division.
b. minimize the cost to the purchasing division.
c. minimize the return of the selling division.
d. maximize the return to the whole company.
Ans: d, SO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Decision Modeling, AICPA PC: Project
89. Which two methods are used most often when establishing a transfer price?
a. Negotiated transfer pricing and cost-based transfer pricing
b. Cost-based transfer pricing and market-based transfer pricing
c. Negotiated transfer pricing and market-based transfer pricing
d. Cost-based transfer pricing and standard-based pricing
Ans: b, SO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Decision Modeling, AICPA PC: Project
The Selling Divisions unit sales price is $20 and its unit variable cost is $12. Its capacity is 10,000 units. Fixed
costs per unit are $5. Current outside sales are 8,000 units.
90. What is the Selling Divisions opportunity cost per unit from selling 2,000 units to the Purchasing
Division?
a. $8
b. $20
c. $3
d. $0
Ans: d, SO: 4, Bloom: C, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision
91. What is the Selling Divisions opportunity cost per unit from selling 3,000 units to the Purchasing
Division?
a. $8
b. $20
c. $3
d. $0
Ans: a, SO: 4, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision
92. In the minimum transfer price formula, variable cost is defined as the variable cost of
a. all units sold, both internally and externally.
b. units sold externally.
c. units not sold.
d. units sold internally.
93. Under the negotiated transfer pricing approach, the minimum transfer price is established by the
a. purchasing division.
b. corporate headquarters management.
c. selling division.
d. corporate negotiator.
94. Under the negotiated transfer pricing approach, the maximum transfer price is established by
the
a. purchasing division.
b. corporate headquarters management.
c. selling division.
d. corporate negotiator.
95. Assume the Thread Division has excess capacity. The Garment Division wants the Thread
Division to furnish them additional spools of thread that could be made using the excess capacity. In a
negotiated transfer price, the Thread Division should accept as a minimum any transfer price that
exceeds the
a. total cost of producing spools for outside sales.
b. variable costs of producing the additional spools for the Garment Division.
c. contribution margin and outside spool sales.
d. foregone contribution margin on outside spool sales.
Ans: b, SO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Marketing/Client Focus, AICPA FN: Decision Modeling, AICPA PC: Project
96. The most common method used to establish transfer prices is

a. negotiated transfer pricing.
b. market-based transfer pricing.
c. cost-plus transfer pricing.
d. cost-based transfer pricing.
97. When a sale occurs between divisions of the same company, which transfer pricing approach
may lead to the buying division overpricing its product?
a. Cost based transfer pricing
b. Market-based transfer pricing
c. Negotiated transfer pricing
d. Cost-plus transfer pricing
Ans: b, SO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Marketing/Client Focus, AICPA FN: Decision Modeling, AICPA PC: Project
The Lumber Division of Paul Bunyon Homes Inc. produces and sells lumber that can be sold to outside
customers or within the company to the Construction Division. The following data have been gathered for the
coming period:
Lumber Division:
Capacity 200,000 board feet
Price per board foot $3.00
Variable production cost per bd. ft. $1.50
Variable selling cost per bd. ft. $0.60
Construction Division:
Board feet needed 60,000
Outside price paid per bd. ft. $2.40
If the Lumber Division sells to the Construction Division, $0.45 per board foot can be saved in shipping costs.
98. If current outside sales are 130,000 board feet, what is the minimum transfer price that the
Lumber Division could accept?
a. $1.50
b. $1.65
c. $2.10
d. $3.00
Ans: b, SO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision
99. If current outside sales are 150,000 board feet, what is the minimum transfer price that the
Lumber Division could accept?
a. $2.40
b. $1.95
c. $1.65
d. $2.55
Ans: d, SO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision
100. If the Lumber Division has sufficient excess capacity to fulfill the Construction Divisions needs,
what will be the effect on the companys overall contribution margin?
a. Decrease by $36,000
b. Decrease by $27,000
c. Increase by $45,000
d. Increase by $40,500
Ans: c, SO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving/Decision

Tuttle Motorcycles Inc. manufactures and sells high-priced motorcycles. The Engine Division produces and
sells engines to other motorcycle companies and internally to the Production Division. It has been decided that
the Engine Division will sell 20,000 units to the Production Division at $1,400 a unit. The Engine Division,
currently operating at capacity, has a unit sales price of $3,400 and unit variable costs and fixed costs of
$1,400 and $1,000, respectively. The Production Division is currently paying $3,200 per unit to an outside
supplier. $120 per unit can be saved on internal sales from reduced selling expenses.
101. What is the minimum transfer price that the Engine Division should accept?
a. $3,280
b. $3,400
c. $3,200
d. $2,000
control
102. What is the increase/decrease in overall company profits if this transfer takes place?
a. Decrease $1,600,000
b. Increase $3,360,000
c. Decrease $4,000,000
d. Increase $36,000,000
Ans: a, SO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving/Decision
The Can Division of Fruit Products Inc. manufactures and sells tin cans externally for $0.30 per can. Its unit
variable costs and unit fixed costs are $0.12 and $0.04, respectively. The Packaging Division wants to
purchase 50,000 cans at $0.16 a can. Selling internally will save $0.01 a can.
103. Assuming the Can Division has sufficient capacity, what is the minimum transfer price it should
accept?
a. $0.12
b. $0.16
c. $0.11
d. $0.15
104. Assuming the Can Division is already operating at full capacity, what is the minimum transfer price it
should accept?
a. $0.29
b. $0.33
c. $0.14
d. $0.17
The Dairy Division of Famous Foods, Inc. produces and sells milk to outside customers. The operation has the
capacity to produce 250,000 gallons of milk a year. Last years operating results were as follows:
Sales (200,000) gallons $500,000
Variable costs 312,000
Contribution margin 188,000
Fixed costs 100,000
Net Income $ 88,000
105. Assume the Yogurt Division wants to purchase 30,000 gallons of milk from the Dairy Division. The
minimum price that will increase the Dairy Divisions profit is
a. $2.50 per gallon.
b. $0.94 per gallon.
c. $1.56 per gallon.
d. $0.44 per gallon.
106. Assume the Dairy Division is operating at capacity. If the Yogurt Division wants to purchase 30,000
gallons of milk from the Dairy Division, what is the minimum price that will allow the Dairy Division to
maintain its current net income?
a. $2.50 per gallon
b. $0.94 per gallon
c. $1.56 per gallon
d. $0.44 per gallon
107. Negotiated transfer pricing is not always used because of each of the following reasons except
that
a. market price information is sometimes not easily obtainable.
b. a lack of trust between the negotiating divisions may lead to a breakdown in the negotiations.
c. negotiations often lead to different pricing strategies from division to division.
d. opportunity cost is sometimes not determinable.
108. All of the following are approaches for determining a transfer price except the
a. cost-based approach.
b. market-based approach.
c. negotiated approach.
d. time-and-material approach.
109. When a cost-based transfer price is used, the transfer price may be based on any of the
following except
a. fixed cost alone.
b. full cost.
c. variable cost alone.
d. All of these may be used.
110. All of the following are correct statements about the cost-based transfer price approach except
that it
a. can understate the actual contribution to profit by the selling division.
b. can reduce a division manager's control over the division's performance.
c. bases the transfer price on standard cost instead of actual cost.
d. provides incentive for the selling division to control costs.
111. The general formula for the minimum transfer price is: minimum transfer price equals
a. fixed cost + opportunity cost.
b. external purchase price.
c. total cost + opportunity cost.
d. variable cost + opportunity cost.
Ans: d, SO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Project
112. Variable costs of units sold internally will always be

a. lower than the variable costs of units sold externally.
b. higher than the variable costs of units sold externally.
c. the same as the variable costs of units sold externally.
d. Variable costs of units sold internally may be either higher or lower than for units sold externally.
Ans: d, SO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Project
113. In the formula for the minimum transfer price, opportunity cost is the __________ of the goods
sold externally.
a. variable cost
b. total cost
c. selling price
d. contribution margin
Ans: d, SO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Project
114. The transfer price approach that conceptually should work the best is the
c. negotiated price approach.
d. time-and-material pricing approach.
Ans: c, SO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Project
115. The transfer price approach that is often considered the best approach because it generally
provides the proper economic incentives is the
Ans: b, SO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Project
116. All of the following are correct statements about the market-based approach except that it
a. assumes that the transfer price should be based on the most objective inputs possible.
b. provides a fairer allocation of the company's contribution margin to each division.
c. produces a higher company contribution margin than the cost-based approach.
d. ensures that each division manager is properly motivated and rewarded.
Ans: c, SO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Project
117. The negotiated transfer price approach should be used when

a. the selling division has available capacity and is willing to accept less than the market price.
b. an outside market for the goods does not exist.
c. no market price is available.
d. any of these situations exist.
Ans: d, SO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Decision Modeling, AICPA PC: Project
118. Assuming the selling division has available capacity, a negotiated transfer price should be within
the range of
a. fixed cost per unit and the external purchase price.
b. total cost per unit and the external purchase price.
c. variable cost per unit and the external purchase price.
d. variable cost per unit and the opportunity cost.
119. The transfer price approach that will result in the largest contribution margin to the buying
division is the
Ans: a, SO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Reflective Thinking, AICPA BB: Industry/Sector Perspective, AICPA FN: Decision Modeling, AICPA PC: Project
120. The maximum transfer price from the buying division's standpoint is the
a. total cost + opportunity cost.
b. variable cost + opportunity cost.
c. external purchase price.
d. external purchase price + opportunity cost.
The Wood Division of Fir Products, Inc. manufactures rubber moldings and sells them externally for $165. Its
variable cost is $75 per unit, and its fixed cost per unit is $21. Fir's president wants the Wood Division to
transfer 5,000 units to another company division at a price of $96.
121. Assuming the Wood Division has available capacity of 5,000 units, the minimum transfer price it
should accept is
a. $21.
b. $75.
c. $96.
d. $165.
122. Assuming the Wood Division does not have any available capacity, the minimum transfer price it
should accept is
a. $21.
b. $75.
c. $96.
d. $165.
Management of the Catering Company would like the Food Division to transfer 10,000 cans of its final product
to the Restaurant Division for $120. The Food Division sells the product to customers for $210 per unit. The
Food Divisions variable cost per unit is $105 and its fixed cost per unit is $30.
123. If the Food Division is currently operating at full capacity, what is the minimum transfer price the
Food Division should accept?
a. $30
b. $105
c. $135
d. $210
124. If the Food Division has 10,000 units available capacity, what is the minimum transfer price the
Food Division should accept?
a. $30
b. $105
c. $135
d. $210
CHAPTER 9
BUDGETARY PLANNING
1. Identify the benefits of budgeting. The primary advantages of budgeting are that it (a) requires
management to plan ahead, (b) provides definite objectives for evaluating performance, (c) creates an
early warning system for potential problems, (d) facilitates coordination of activities, (e) results in greater
management awareness, and (f) motivates personnel to meet planned objectives.
2. State the essentials of effective budgeting. The essentials of effective budgeting are (a) sound
organizational structure, (b) research and analysis, and (c) acceptance by all levels of management.
3. Identify the budgets that comprise the master budget. The master budget consists of the following
budgets: (a) sales, (b) production, (c) direct materials, (d) direct labor, (e) manu-facturing overhead, (f)
selling and administrative expense, (g) budgeted income statement, (h) capital expenditure budget, (i) cash
budget, and (j) budgeted balance sheet.
4. Describe the sources for preparing the budgeted income statement. The budgeted income statement
is prepared from (a) the sales budget, (b) the budgets for direct materials, direct labor, and manufacturing
overhead, and (c) the selling and administrative expense budget.
5. Explain the principal sections of a cash budget. The cash budget has three sections (receipts,
disbursements, and financing) and the beginning and ending cash balances.
6. Indicate the applicability of budgeting in nonmanufacturing companies. Budgeting may be used by

merchandisers for development of a master budget. In service enterprises budgeting is a critical factor in
coordinating staff needs with anticipated services. In not-for-profit organizations, the starting point in
budgeting is usually expenditures, not receipts.

37. Why are budgets useful in the planning process?
a. They provide management with information about the company's past performance.
b. They help communicate goals and provide a basis for evaluation.
c. They guarantee the company will be profitable if it meets its objectives.
d. They enable the budget committee to earn their paycheck.
38. A budget
a. is a substitute for management.
b. is an aid to management.
c. can operate or enforce itself.
d. is the responsibility of the accounting department.
39. Accounting generally has the responsibility for

a. setting company goals.
b. expressing the budget in financial terms.
c. enforcing the budget.
d. administration of the budget.
40. Which one of the following is not a benefit of budgeting?

a. It facilitates the coordination of activities.
b. It provides definite objectives for evaluating performance.
c. It provides assurance that the company will achieve its objectives.
d. It requires all levels of management to plan ahead on a recurring basis.
41. Budgeting is usually most closely associated with which management function?
a. Planning
b. Directing
c. Motivating
d. Controlling
42. Which of the following items does not follow from the adoption of a budget?
a. Promote efficiency
b. Deterrent to waste
c. Basis for performance evaluation
d. Guarantee of accomplishing the profit objective
43. Which is true of budgets?

a. They are voted on and approved by stockholders.
b. They are used in the planning, but not in the control, process.
c. There is a standard form and structure for budgets.
d. They are used in performance evaluation.
44. A common starting point in the budgeting process is

a. expected future net income.
b. past performance.
c. to motivate the sales force.
d. a clean slate, with no expectations.
45. If budgets are to be effective, all of the following must be present except
a. acceptance at all levels of management.
b. research and analysis in setting realistic goals.
c. stockholders' approval of the budget.
d. sound organizational structure.
46. If budgets are to be effective, there must be

a. a history of successful operations.
b. independent verification of budget goals.
c. an organizational structure with clearly defined lines of authority and responsibility.
d. excess plant capacity.
47. It is important that budgets be accepted by

a. division managers.
b. department heads.
c. supervisors.
d. all of these.
48. Which of the following statements about budget acceptance in an organization is true?
a. The most widely accepted budget by the organization is the one prepared by top management.
b. The most widely accepted budget by the organization is the one prepared by the department heads.
c. Budgets are hardly ever accepted by anyone except top management.
d. Budgets have a greater chance of acceptance if all levels of management have provided input into
the budgeting process.
49. Top management notices a variation from budget and an investigation of the difference reveals that
the department manager could not be expected to have controlled the variation. Which of the following
statements is applicable?
a. Department managers should be held accountable for all variances from budgets for their
departments.
b. Department managers should only be held accountable for controllable variances for their
departments.
c. Department managers should be credited for favorable variances even if they are beyond their
control.
d. Department managers' performances should not be evaluated based on actual results to budgeted
results.
50. An unrealistic budget is more likely to result when it

a. has been developed in a top down fashion.
b. has been developed in a bottom up fashion.
c. has been developed by all levels of management.
d. is developed with performance appraisal usages in mind.
51. A budget is most likely to be effective if

a. it is used to assess blame when things do not occur according to plans.
b. it is not used to evaluate a manager's performance.
c. employees and managers at the lower levels do not get involved in the budgeting process.
d. it has top management support.
52. In many companies, responsibility for coordinating the preparation of the budget is assigned to
a. the company's independent certified public accountants.
b. the company's internal auditors.
c. the company's board of directors.
d. a budget committee.
53. A budget period should be
a. monthly.
b. for a year or more.
c. long-term.
d. long enough to provide an obtainable goal under normal business conditions.
54. If a company has adopted continuous budgeting, the budget will show plans for
a. every day.
b. a full year ahead.
c. the current year and the next year.
d. at least five years.
55. The most common budget period is

a. one month.
b. three months.
c. six months.
d. one year.
56. Budget development for the coming year usually starts

a. a year in advance.
b. the first month of the year to be budgeted.
c. several months before the end of the current year.
d. the last month of the previous year.
57. The budget committee would not normally include the

a. research director.
b. treasurer.
c. sales manager.
d. external auditor.
58. The budget committee in a company is often headed by the

a. president.
b. controller.
c. treasurer.
d. budget director.
59. Long-range planning

a. generally presents more detailed information than an annual budget.
b. generally encompasses a longer period of time than an annual budget.
c. is usually more accurate than an annual budget.
d. is prepared on a quarterly basis if the budget is prepared on a quarterly basis.
60. Long-range planning usually encompasses a period of at least
a. six months.
b. 1 year.
c. 5 years.
d. 10 years.
61. Which of the following is not a proper match-up?

a. Long range planning Strategies
b. Budgeting Short-term goals
c. Long-range planning 5 years
d. Budgeting Long-term goals
62. Which is the last step in developing the master budget?

a. Preparing the budgeted balance sheet
b. Preparing the cost of goods manufactured budget
c. Preparing the budgeted income statement
d. Preparing the cash budget
63. If there were 70,000 pounds of raw materials on hand on January 1, 140,000 pounds are desired
for inventory at January 31, and 420,000 pounds are required for January production, how many
pounds of raw materials should be purchased in January?
a. 350,000 pounds
b. 560,000 pounds
c. 280,000 pounds
d. 490,000 pounds
64. The total direct labor hours required in preparing a direct labor budget are calculated using the
a. sales forecast.
b. production budget.
c. direct materials budget.
d. sales budget.
65. The direct materials and direct labor budgets provide information for preparing the
a. sales budget.
c. manufacturing overhead budget.
d. cash budget.
66. A sales forecast

a. shows a forecast for the firm only.
b. shows a forecast for the industry only.
c. shows forecasts for the industry and for the firm.
d. plays a minor role in the development of the master budget.
67. Which of the following is not an operating budget?

a. Direct labor budget
b. Sales budget
c. Production budget
d. Cash budget
68. Which of the following is not a financial budget?

a. Capital expenditure budget
b. Cash budget
c. Manufacturing overhead budget
d. Budgeted balance sheet
69. Which of the following is done to improve the reliability of the sales forecast?
a. Employ financial planning models
b. Lengthen the planning horizon to more than a year
c. Rely solely on outside consultants
d. Use the sales forecasts from the previous year
70. The financial budgets include the

a. cash budget and the selling and administrative expense budget.
b. cash budget and the budgeted balance sheet.
c. budgeted balance sheet and the budgeted income statement.
d. cash budget and the production budget.
71. The culmination of preparing operating budgets is the

a. budgeted balance sheet.
c. cash budget.
d. budgeted income statement.
72. The following information is taken from the production budget for the first quarter:
Beginning inventory in units 900
Sales budgeted for the quarter 342,000
Capacity in units of production facility 354,000
How many finished goods units should be produced during the quarter if the company desires 2,400
units available to start the next quarter?
a. 343,500
b. 340,500
c. 355,500
d. 344,400
73. An overly optimistic sales budget may result in

a. increases in selling prices late in the year.
b. insufficient inventories.
c. increased sales during the year.
d. excessive inventories.
74. In a production budget, total required units are the budgeted sales units plus
a. beginning finished goods units.
b. desired ending finished goods units.
c. desired ending finished goods units plus beginning finished goods units.
d. desired ending finished goods units minus beginning finished goods units.
75. The direct materials budget details
1. the quantity of direct materials to be purchased.
2. the cost of direct materials to be purchased.
a. 1
b. 2
c. both 1 and 2
d. neither 1 nor 2
76. The production budget shows expected unit sales of 32,000. Beginning finished goods units are
5,600. Required production units are 33,600. What are the desired ending finished goods units?
a. 4,000
b. 5,600
c. 6,400
d. 7,200
77. The production budget shows expected unit sales are 50,000. The required production units are
52,000. What are the beginning and desired ending finished goods units, respectively?
Beginning Units Ending Units
a. 5,000 3,000
b. 3,000 5,000
c. 2,000 5,000
d. 5,000 2,000
78. The production budget shows that expected unit sales are 40,000. The total required units are
45,000. What are the required production units?
a. 5,000
b. 7,500
c. 10,000
79. The direct materials budget shows:

Units to be produced 3,000
Total pounds needed for production 12,000
Total materials required 13,200
What are the direct materials per unit?
a. .44 pounds
b. 4.0 pounds
c. 4.4 pounds
80. The direct materials budget shows:

Desired ending direct materials 36,000 pounds
Total materials required 54,000 pounds
Direct materials purchases 47,400 pounds
The total direct materials needed for production is
a. 18,000 pounds.
b. 6,600 pounds.
c. 11,400 pounds.
d. 101,400 pounds.
81. If the required direct materials purchases are 18,000 pounds, the direct materials required for
production is three times the direct materials purchases, and the beginning direct materials are three
and a half times the direct materials purchases, what are the desired ending direct materials in pounds?
a. 45,000
b. 9,000
c. 27,000
d. 18,000
82. Razmataz Company makes and sells umbrellas. The company is in the process of preparing its
Selling and Administrative Expense Budget for the last half of the year. The following budget data are
available:
Variable Cost Per Unit Sold Monthly Fixed Cost
Sales commissions $0.60 $ 3,000
Shipping 1.20
Advertising 0.30
Executive salaries 20,000
Depreciation on office equipment 4,000
Other 0.35 14,000
Expenses are paid in the month incurred. If the company has budgeted to sell 4,000 umbrellas in
October, how much is the total budgeted variable selling and administrative expenses for October?
a. $8,400
b. $9,200
c. $50,800
d. $9,800
83. Which of the following expenses would not appear on a selling and administrative expense budget?
a. Sales commissions
b. Depreciation
c. Property taxes
d. Indirect labor
84. Which of the following would not appear as a fixed expense on a selling and admini-strative
expense budget?
a. Freight-out
b. Office salaries
c. Property taxes
d. Depreciation
85. A master budget consists of

a. an interrelated long-term plan and operating budgets.
b. financial budgets and a long-term plan.
c. interrelated financial budgets and operating budgets.
d. all the accounting journals and ledgers used by a company.
86. The starting point in preparing a master budget is the preparation of the
a. production budget.
b. sales budget.
c. purchasing budget.
d. personnel budget.
87. Which one of the following is not needed in preparing a production budget?
a. Budgeted unit sales
b. Budgeted raw materials
c. Beginning finished goods units
d. Ending finished goods units
88. A company budgeted unit sales of 102,000 units for January, 2008 and 120,000 units for February,
2008. The company has a policy of having an inventory of units on hand at the end of each month
equal to 30% of next month's budgeted unit sales. If there were 30,600 units of inventory on hand on
December 31, 2007, how many units should be produced in January, 2008 in order for the company to
meet its goals?
a. 107,400 units
b. 102,000 units
c. 96,600 units
d. 138,000 units
89. At January 1, 2008, Ceatric, Inc. has beginning inventory of 2,000 surfboards. Ceatric estimates
it will sell 5,000 units during the first quarter of 2008 with a 12% increase in sales each quarter. Ceatrics
policy is to maintain an ending inventory equal to 25% of the next quarters sales. Each surfboard costs
$100 and is sold for $150. How much is budgeted sales revenue for the third quarter of 2008?
a. $225,000
b. $975,000
c. $940,800
d. $6,272
90. Sargent.Com plans to sell 2,000 purple lawn chairs during May, 1,900 in June, and 2,000 during
July. The company keeps 15% of the next months sales as ending inventory. How many units should
Sargent.Com produce during June?
a. 1,915
b. 2,200
c. 1,885
d. Not enough information to determine.
91. Secret Prizes, Inc. is planning to sell 200 buckets and produce 190 buckets during March. Each
bucket requires 500 grams of plastic and one-half hour of direct labor. Plastic costs $10 per 500 grams
and employees of the company are paid $15.00 per hour. Manufacturing overhead is applied at a rate
of 110% of direct labor costs. Secret Prizes has 300 kilos of plastic in beginning inventory and wants to
have 200 kilos in ending inventory. How much is the total amount of budgeted direct labor for March?
a. $1,500
b. $3,000
c. $1,425
d. $2,850
Sudler Production is planning to sell 600 boxes of ceramic tile, with production estimated at 580 boxes during
May. Each box of tile requires 44 pounds of clay mix and a quarter hour of direct labor. Clay mix costs $0.50
per pound and employees of the company are paid $15.00 per hour. Manufacturing overhead is applied at a
rate of 110% of direct labor costs. Sudler has 2,600 pounds of clay mix in beginning inventory and wants to
have 3,000 pounds in ending inventory.
92. What is the total amount to be budgeted for manufacturing overhead for the month?
a. $2,392.50
b. $2,475
c. $9,570
d. $9,900
93. What is the total amount to be budgeted for direct labor for the month?
a. $2,175
b. $8,700
c. $2,250
d. $34,800
94. What is the total amount to be budgeted in pounds for direct materials to be purchased for the
month?
a. 25,520
b. 25,120
c. 25,920
d. 26,800
95. Green Plants plans to sell 160 potted plants during April and 120 units in May. Green Plants
keeps 15% of the next months sales as ending inventory. How many units should Green Plants
produce during April?
a. 154
b. 166
c. 160
d. 178
96. Swingers Company makes and sells widgets. The company is in the process of preparing its
Selling and Administrative Expense Budget for the month. The following budget data are available:
Item Variable Cost Per Unit Sold Monthly Fixed Cost
Sales commissions $1 $5,000
Shipping $3
Advertising $4
Executive salaries $60,000
Depreciation on office equipment $2,000
Other $2 $3,000
Expenses are paid in the month incurred. If the company has budgeted to sell 40,000 widgets in
October, how much is the total budgeted selling and administrative expenses for October?
a. $470,000
b. $70,000
c. $465,000
d. $400,000
97. Tripod Exports, Inc. budgets on an annual basis for its fiscal year. The following beginning and
ending inventory levels are planned for the fiscal year of July 1, 2008 to June 30, 2009:
June 30, 2009 June 30, 2008
Raw Materials 3,000 kilos 2,000 kilos
Three kilos of raw materials are needed to produce each unit of finished product. If Tripod Exports
plans to produce 280,000 units during the 2008-2009 fiscal year, how many kilos of materials will the
company need to purchase for its production during the year?
a. 841,000
b. 843,000
c. 840,000
d. 839,000
98. The following information is taken from the production budget for the first quarter:
Beginning inventory in units 600
Sales budgeted for the quarter 228,000
Production capacity in units 236,000
How many finished goods units should be produced during the quarter if the company desires 1,600
units available to start the next quarter?
a. 229,000
b. 227,000
c. 237,000
d. 229,600
99. A company determined that the budgeted cost of producing a product is $30 per unit. On June 1,
there were 40,000 units on hand, the sales department budgeted sales of 150,000 units in June, and
the company desires to have 60,000 units on hand on June 30. The budgeted cost of goods
manufactured for June would be
a. $3,900,000.
b. $5,700,000.
c. $4,500,000.
d. $5,100,000.
100. Of the following items, which one is not obtained from an individual operating budget?
a. Selling and administrative expenses
b. Accounts receivable
c. Cost of goods sold
d. Sales
101. Which of the following statements about a budgeted income statement is not true?
a. The budgeted income statement is prepared after the financial budgets are prepared.
b. The budgeted income statement is prepared on the accrual basis of accounting.
c. The budgeted income statement can be prepared in a multiple-step format.
d. The budgeted income statement is prepared using the individual operating budgets.
102. What is the proper preparation sequencing of the following budgets?

1. Budgeted Balance Sheet
2. Sales Budget
3. Selling and Administrative Budget
4. Budgeted Income Statement
a. 1, 2, 3, 4
b. 2, 3, 1, 4
c. 2, 3, 4, 1
d. 2, 4, 1, 3
103. The single most important output in preparing financial budgets is the
a. sales forecast.
b. determination of the unit cost of the product.
c. cash budget.
104. Which of the following does not appear as a separate section on the cash budget?
a. Cash receipts
b. Cash disbursements
c. Capital expenditures
d. Financing
105. The financing section of a cash budget is needed if there is a cash deficiency or if the ending
cash balance is less than
a. the prior years.
b. management's minimum required balance.
c. the amount needed to avoid a service charge at the bank.
d. the industry average.
106. Beginning cash balance plus total receipts

a. equals ending cash balance.
b. must equal total disbursements.
c. equals total available cash.
d. is the excess of available cash over disbursements.
107. The projection of financial position at the end of the budget period is found on the
a. budgeted income statement.
b. cash budget.
c. budgeted balance sheet.
d. sales budget.
108. Reed Merchandising Company expects to purchase $90,000 of materials in July and $105,000 of
materials in August. Three-quarters of all purchases are paid for in the month of purchase, and the
other one-fourth are paid for in the month following the month of purchase. How much will August's
cash disbursements for materials purchases be?
a. $67,500
b. $78,750
c. $101,250
d. $105,000
109. Faucet Company reported the following information for 2008:

October November December
Budgeted sales $620,000 $580,000 $720,000
All sales are on credit.
Customer amounts on account are collected 50% in the month of sale and 50%
in the following month.
How much cash will Faucet receive in November?
a. $290,000
b. $650,000
c. $600,000
d. $580,000
110. The following information was taken from Sloan Companys cash budget for the month of July:
Beginning cash balance $240,000
Cash receipts 152,000
Cash disbursements 272,000
If the company has a policy of maintaining a minimum end of the month cash balance of $200,000, the
amount the company would have to borrow is
a. $80,000.
b. $40,000.
c. $120,000.
d. $48,000.
111. The cash budget reflects

a. all revenues and all expenses for a period.
b. expected cash receipts and cash disbursements from all sources.
c. all the items that appear on a budgeted income statement.
d. all the items that appear on a budgeted balance sheet.
112. The following credit sales are budgeted by Roswell Company:

January $102,000
February 150,000
March 210,000
April 180,000
The company's past experience indicates that 70% of the accounts receivable are collected in the
month of sale, 20% in the month following the sale, and 8% in the second month following the sale. The
anticipated cash inflow for the month of April is
a. $185,160.
b. $168,000.
c. $180,000.
d. $176,400.
113. Macoo Company's cash budget showed total available cash less cash disbursements. What
does this amount equal?
a. Ending cash balance
b. Total cash receipts
c. The excess of available cash over cash disbursements
d. The amount of financing required
114. Which one of the following sections would not appear on a cash budget?
a. Cash receipts
b. Financing
c. Investing
d. Cash disbursements
115. A company's past experience indicates that 60% of its credit sales are collected in the month of
sale, 30% in the next month, and 5% in the second month after the sale; the remainder is never
collected. Budgeted credit sales were:
January $180,000
February 108,000
March 270,000
The cash inflow in the month of March is expected to be
a. $203,400.
b. $153,900.
c. $162,000.
d. $194,400.
116. Which one of the following items would never appear on a cash budget?
a. Office salaries expense
b. Interest expense
c. Depreciation expense
d. Travel expense
117. Farley Company reported the following information for 2008:

Budgeted sales $230,000 $220,000 $270,000
Budgeted purchases $120,000 $128,000 $144,000
Customer amounts on account are collected 50% in the month of sale and 50% in the following month.
Cost of goods sold is 35% of sales.
Farley purchases and pays for merchandise 60% in the month of acquisition and 40% in the following month.
Accounts payable is used only for inventory acquisitions.
How much cash will Farley receive during November?
a. $110,000
b. $245,000
c. $225,000
d. $220,000

Budgeted sales $230,000 $220,000 $270,000
Cost of goods sold is 35% of sales.
Farley purchases and pays for merchandise 60% in the month of acquisition and 40% in the following month.
How much is the budgeted balance for Accounts Payable at October 31, 2008?
a. $48,000
b. $72,000
c. $102,000
d. $51,200

Budgeted sales $310,000 $290,000 $360,000
Customer amounts on account are collected 50% in the month of sale and 50% in the following month.
How much is the November 30, 2008 budgeted Accounts Receivable?
a. $300,000
b. $180,000
c. $155,000
d. $145,000

Operating expenses are: Salaries, $50,000; Depreciation, $20,000; Rent, $10,000; Utilities, $14,000
Operating expenses are paid during the month incurred.
How much is the budgeted amount of cash to be paid for operating expenses in November?
a. $202,000
b. $74,000
c. $94,000
d. $222,000
121. During September, the capital expenditure budget indicates a $140,000 purchase of equipment. The
ending September cash balance from operations is budgeted to be $20,000. The company wants to
maintain a minimum cash balance of $10,000. What is the minimum cash loan that must be planned to
be borrowed from the bank during September?
a. $110,000
b. $120,000
c. $130,000
d. $150,000
122. Lowe Ridge has budgeted its activity for December according to the following information:
1. Sales at $400,000, all for cash.
2. Budgeted depreciation for December is $10,000.
4. The cash balance at December 1 was $10,000.
5. Selling and administrative expenses are budgeted at $40,000 for December and are paid for in
cash.
6. The planned merchandise inventory on December 31 and December 1 is $12,000.
7. The invoice cost for merchandise purchases represents 75% of the sales price. All purchases
are paid in cash.
How much are the budgeted cash disbursements for December?
a. $230,000
b. $340,000
c. $350,000
d. $328,000
123. Streak Merchandising Company expects to purchase $60,000 of materials in March and
$70,000 of materials in April. Three-quarters of all purchases are paid for in the month of purchase, and
the other one-fourth are paid for in the month following the month of purchase. In addition, a 2%
discount is received for payments made in the month of purchase. How much will April's cash
disbursements for materials purchases be?
a. $44,100
b. $54,100
c. $66,450
d. $60,000
124. On January 1, Dooley Company has a beginning cash balance of $63,000. During the year, the
company expects cash disbursements of $510,000 and cash receipts of $435,000. If Dooley requires
an ending cash balance of $60,000, Dooley Company must borrow
a. $48,000.
b. $60,000.
c. $72,000.
d. $138,000.
125. Stanbrough Company has the following budgeted sales: July $100,000, August $150,000, and
September $125,000. 40% of the sales are for cash and 60% are on credit. For the credit sales, 50%
are collected in the month of sale, and 50% the next month. The total expected cash receipts during
September are
a. $140,000.
b. $132,500.
c. $131,250.
d. $125,000.
126. Kemper Company's direct materials budget shows total cost of direct materials purchases for April
$200,000, May $240,000 and June $280,000. Cash payments are 60% in the month of purchase and
40% in the following month. The budgeted cash payments for June are
a. $264,000.
b. $256,000.
c. $240,000.
d. $208,000.
127. Which one of the following budgets would be prepared for a manufacturer but not for a
merchandiser?
a. Direct labor budget
b. Cash budget
c. Sales budget
d. Budgeted income statement
128. The formula for determining budgeted merchandise purchases is budgeted
a. production + desired ending inventory beginning inventory.
b. sales + beginning inventory desired ending inventory.
c. cost of goods sold + desired ending inventory beginning inventory.
d. cost of goods sold + beginning inventory desired ending inventory.
129. Which one of the following is a problem resulting from a service company being overstaffed?
a. Labor costs will be disproportionately low.
b. Profits will be higher because of the additional salaries.
c. Staff turnover may increase.
d. Revenue may be lost.
130. The master budget for a service enterprise

a. will have the same types of budgets as a merchandiser.
b. may include a sales budget for sales revenue.
c. will not include a budgeted income statement.
d. includes a service revenue budget based on expected client billings.
131. Budgeting in not-for-profit organizations

a. is not important because they are not profit-oriented.
b. usually starts with budgeting expenditures, rather than receipts.
c. is necessary only if some product is produced and sold.
d. consists entirely of budgeted contributions.
132. For a merchandiser, the starting point in the development of the master budget is the
a. cash budget.
b. sales budget.
c. selling and administrative expenses budget.
133. Instead of a production budget, a merchandiser will prepare a

a. pseudo-production budget.
b. merchandise purchases budget.
c. master time sheet.
d. sales forecast.
134. Company A is a manufacturer and Company B is a merchandiser. What is the difference in the
budgets the two entities will prepare?
a. Company A will prepare a production budget, and Company B will prepare a merchandise
purchases budget.
b. Company A will prepare a sales forecast, and Company B will prepare a sales budget.
c. Company B will prepare a production budget, and Company A will prepare a merchandise
purchases budget.
d. Both companies will prepare the same types of budgets.
135. An appropriate activity index for a college or university for budgeting faculty positions would be the
a. faculty hours worked.
b. number of administrators.
c. credit hours taught by a department.
d. number of days in the school term.
136. A critical factor in budgeting for a service firm is to
a. hire professional staff to perform the budgeting work.
b. coordinate professional staff needs with anticipated services.
c. classify all personnel as either variable or fixed.
d. budget expenditures before anticipated receipts.
Additional Multiple Choice Questions
137. The primary benefits of budgeting include all of the following except it
a. requires only top management to plan ahead and formalize their future goals.
b. provides definite objectives for evaluating performance.
c. creates an early warning system for potential problems.
d. motivates personnel throughout the organization.
138. The responsibility for expressing management's budgeting goals in financial terms is performed by the
a. accounting department.
b. top management.
c. lower level of management.
d. budget committee.
139. Coordinating the preparation of the budget is the responsibility of the

a. treasurer.
b. president.
c. chief accountant.
140. For better management acceptance, the flow of input data for budgeting should begin with the
a. accounting department.
b. top management.
c. lower levels of management.
141. In the direct materials budget, the quantity of direct materials to be purchased is computed by adding
direct materials required for production to
a. desired ending direct materials.
b. beginning direct materials.
c. desired ending direct materials less beginning direct materials.
d. beginning direct materials less desired ending direct materials.
142. Unger Company has 12,000 units in beginning finished goods. If sales are expected to be 60,000 units
for the year and Unger desires ending finished goods of 15,000 units, how many units must the
company produce?
a. 57,000
b. 60,000
c. 63,000
d. 75,000
143. The important end-product of the operating budgets is the
a. budgeted income statement.
b. cash budget.
c. production budget.
d. budgeted balance sheet.
144. On January 1, Hogan Company has a beginning cash balance of $21,000. During the year, the
company expects cash disbursements of $170,000 and cash receipts of $145,000. If Hogan requires an
ending cash balance of $20,000, the company must borrow
a. $16,000.
b. $20,000.
c. $24,000.
d. $46,000.
145. The budget that is often considered to be the most important financial budget is the
a. cash budget.
b. capital expenditure budget.
c. budgeted income statement.
d. budgeted balance sheet.
146. Auermann Company's direct materials budget shows total cost of direct materials purchases for
January $125,000, February $150,000 and March $175,000. Cash payments are 60% in the month of
purchase and 40% in the following month. The budgeted cash payments for March are
a. $165,000.
b. $160,000.
c. $150,000.
d. $130,000.
147. A purchases budget is used instead of a production budget by

a. merchandising companies.
b. service enterprises.
c. not-for-profit organizations.
d. manufacturing companies.
148. Which of the following statements is incorrect?

a. A continuous twelve-month budget results from dropping the month just ended and adding a future
month.
b. The production budget is derived from the direct materials and direct labor budgets.
c. The cash budget shows anticipated cash flows.
d. In the budget process for not-for-profit organizations, the emphasis is on cash flow rather than on
revenue and expenses.

Incremental Analysis Decision Making

Uploaded by

Document Information

Original Description:

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Incremental Analysis Decision Making

Uploaded by

Copyright:

Available Formats

CHAPTER 7

CHAPTER STUDY OBJECTIVES

35. Which is the first step in the management decision-making process?

36. Which of the following will always be a relevant cost?

39. Alvarez Company is considering the following alternatives:

40. Which of the following is an irrelevant cost?

41. Relevant costs are always

44. Incremental analysis is synonymous with

45. In incremental analysis,

46. Incremental analysis is most useful

47. The source of data to serve as inputs in incremental analysis is generated by

48. Which of the following is not a true statement?

50. Incremental analysis would be appropriate for

52. A company is considering the following alternatives:

55. In incremental analysis,

Use the following information for questions 70 and 71.

A companys unit costs based on 100,000 units are:

70. The opportunity cost associated with this order is

74. What of the following would not be relevant in a make-or-buy decision?

Use the following information for questions 7678.

Use the following information for questions 79 and 80.

79. What is the relevant cost per unit of part A12E?

81. In a make-or-buy decision, which costs can be considered relevant?

Use the following information for questions 90 and 91.

93. Which decision will involve no incremental revenues?

94. An opportunity cost

95. Opportunity cost must be considered in decisions involving

97. Opportunity cost is usually

Direct Materials $30,000

Direct Materials $30,000

115.The decision rule on whether to sell or process further

124. Which of the following terms are synonymous?

Use the following information for questions 125127.

126. Which products should be processed further?

Use the following information for questions 130131.

130. At what price were the updated versions sold?

131. What amount would be considered sunk costs?

Use the following information for questions 134136.

135. What is the net cost of the new equipment?

143.Book value of old equipment is considered to be a

Old Machine New Machine

If the old machine is replaced, it can be sold for $20,000.

Which of the following amounts is a sunk cost?

Old Machine New Machine

If the old machine is replaced, it can be sold for $20,000.

Which of the following amounts is relevant to the replacement decision?

Old Machine New Machine

If the old machine is replaced, it can be sold for $20,000.

The net advantage (disadvantage) of replacing the old machine is

155.A segment has the following data:

157. North Division has the following information:

162. In a make-or-buy decision, opportunity costs are

165. If an unprofitable segment is eliminated

Answers to Multiple Choice Questions

CHAPTER STUDY OBJECTIVES

5. Explain issues involved in transferring goods between divisions in different countries.

d. all of these are factors.

27. In most cases, prices are set by the

b. its early years.

c. the long run.

d. the short run.

29. Prices are set by the competitive market when