Accounting: Chapter 7

In a make or buy decision, relevant costs are

manufacturing costs that will be saved, the purchase price of the units, opportunity costs

If an unprofitable segment is eliminated

Fixed costs allocated to the eliminated segment will have to be absorbed by other segments

Explain the meaning of sunk costs and their relevance to a decision to retain or replace equipment.

Cost that cannot be changed by any present or future decision. Sunk costs, such as the book value of an old piece of equipment, therefore, are not relevant in a decision to retain or replace equipment.

It costs a company $14 of variable costs and $6 of fixed costs to produce Z200 that sells for $30. A buyer offers to purchase 3,000 units at $18 each. The seller will incur special shipping costs of $5 per unit. If the special offer is accepted and produced with unused capacity, net income will

Decrease $3,000

"Incremental analysis involves the accumulation of information concerning a single course of action." Do you agree?

Disagree. Incremental analysis involves the identification of financial data that change under alternative courses of action.

Derek is performing incremental analysis in a make-or-buy decision for Item X. If Derek buys Item X, he can use its released productive capacity to produce Item Z. Derek will sell Item Z for $12,000 and incur production costs of $8,000. Derek's incremental analysis should include an opportunity cost of

$4,000

A segment of Hazard Inc. has the following data. Sales $200,000 VE $140,000 FE $100,000 If this segment is eliminated, what will be the effect on the remaining company? Assume that 50% of the fixed expenses will be eliminated and the rest will be allocated to the segments of the remaining company.

$10,000 decrease

What steps are frequently involved in management's decision-making process?

(1) Identify the problem and assign responsibility (2) Determine and evaluate possible courses of action. (3) Make a decision. (4) Review results of the decision.

Three of the steps in management's decision-making process are (1) review results of decision (2) determine and evaluate possible courses of action (3) make the decision. The steps are prepared in the following order:

(2) determine and evaluate possible courses of action (3) make the decision (1) review results of decision

Jobart Company is currently operating at full capacity. It is considering buying a part from an outside supplier rather than making it in house. If Jobart purchases the part, it can use the released productive capacity to generate additional income of $30,000 from producing a different product. When conducting incremental analysis in this make or buy decision, the company should

Add $30,000 to other costs in the "Make" column

In making business decisions, management ordinary considers

Both financial and nonfinancial information

Incremental analysis is the process of identifying the financial data that

Change under alternative courses of action

A company is considering the following alternatives: Alternative A Revenues $50,000 VC $24,000 FC $12,000 Alternative B Revenues $50,000 VC $24,000 FC $15,000 Which of the following are relevant in choosing between these alternatives?

Fixed costs only

Walton, Inc. makes an unassembled product that it currently sells for $55. Production costs are $20. Walton is considering assembling the product and selling it for $68. The cost to assemble the product is estimated at $12. What decision should Walton make?

Process further, net income per unit will be $1 greater

Sydney Greene asks for your help concerning the relevance of variable and fixed costs in incremental analysis.

In incremental analysis, the important point to consider is whether costs will differ (change) between the two alternatives. As a result, sometimes (1) variable costs do not change under the alternative courses of action and (2) fixed costs do change.

It costs a company $14 of variable costs and $6 of fixed costs to produce Z200 that sells for $30. A foreign buyer offers to purchase 3,000 units at $18 with unused capacity, net income will

Increase $12,000

The decision rule in a sell-or-process-further decision is: process further as long as the incremental revenue from processing exceeds

Incremental processing costs

How are allocated joint costs treated when making a sell or process further decision?

Joint costs are irrelevant to a sell-or-process-further decision because they are sunk costs and will not change whether the decision is to sell the existing product or process it further. Therefore, joint costs are ignored in this decision.

What is the decision rule in deciding whether to sell a product or process it further?

Process further as long as the incremental revenue from the additional processing exceeds the incremental processing costs.

What are joint products? What accounting issue results from the production process that creates joint products?

Products that are produced from a single raw material and a common production process. An accounting issue related to joint products is how to allocate the joint costs incurred during the production process that creates the joint products.

In a decision to retain or replace equipment, the book value of the old equipment is a

Sunk Cost

What data are relevant in deciding whether to accept an order at a special price?

The incremental revenues to be obtained compared to the incremental costs of filling the special order.

Define the term "opportunity cost". How may this cost be relevant in a make or buy decision?

The potential benefit that may be obtained by following an alternative course of action. Opportunity cost is relevant in a make-or-buy decision when the facilities used to make the part can be used to generate additional income.