Incremental Analysis in Managerial Accounting
14 Questions
2 Views

Choose a study mode

Play Quiz
Study Flashcards
Spaced Repetition
Chat to lesson

Podcast

Play an AI-generated podcast conversation about this lesson

Questions and Answers

When should a company consider replacing equipment?

  • If the new equipment's purchase cost exceeds savings
  • If savings from new equipment exceed its purchase cost (correct)
  • If operational costs remain the same
  • If the current equipment requires constant repairs

    • What is the contribution margin of the unprofitable product line Champ?

  • $30,000
  • $15,000
  • $10,000 (correct)
  • $5,000

    • What is the total cost to replace the old machine?

  • $615,000 (correct)
  • $600,000
  • $640,000
  • $620,000

    • What decision should be made regarding the unprofitable segment Champ if fixed costs are unavoidable?

    <p>Continue operating Champ</p> Signup and view all the answers

    What nonfinancial factor should be considered in incremental analysis?

    <p>Employee morale</p> Signup and view all the answers

    What rule applies when deciding whether to process a product further to enhance its value?

    <p>Process further if incremental revenue exceeds incremental costs</p> Signup and view all the answers

    What is the definition of relevant costs in incremental analysis?

    <p>Costs that will change depending on the decision made.</p> Signup and view all the answers

    In which scenario should a manager typically accept a special price order?

    <p>If incremental revenues exceed incremental costs.</p> Signup and view all the answers

    Which of the following best describes sunk costs?

    <p>Costs already incurred and cannot be recovered.</p> Signup and view all the answers

    What is the correct approach for making a make-or-buy decision?

    <p>Choose the alternative with the lower cost, including opportunity costs.</p> Signup and view all the answers

    What is the incremental income in the Sunbelt Company example when selling 2,000 units at a special price of $11?

    <p>$6,000</p> Signup and view all the answers

    Which of the following costs is NOT considered in incremental analysis?

    <p>Fixed costs that do not change with the decision.</p> Signup and view all the answers

    What is the first step in the decision-making process for incremental analysis?

    <p>Identify the problem and assign responsibility.</p> Signup and view all the answers

    The income lost from using freed capacity for another product is an example of which type of cost?

    <p>Opportunity cost</p> Signup and view all the answers

    Study Notes

    Incremental Analysis in Managerial Accounting

    • Incremental analysis compares costs and revenues of different alternatives to aid decision-making.

    Key Concepts

    • Relevant Costs: Costs that change based on the decision. Examples include direct materials, variable costs, and opportunity costs.

    • Sunk Costs: Past costs that cannot be recovered and are irrelevant to future decisions. An example is a past equipment upgrade cost.

    • Opportunity Costs: Potential benefits lost from choosing one alternative over another. Example: revenue that could be earned by using freed-up capacity for another product.

    Steps in Decision-Making

    • Clearly define the problem and assign responsibility.
    • Identify all possible courses of action.
    • Analyze the relevant costs and benefits for each alternative.
    • Choose the best alternative.
    • Review and evaluate the results of the chosen action.

    Applications of Incremental Analysis

    Accepting a Special Order

    • Rule: Accept if incremental revenues exceed incremental costs.
    • Example (Sunbelt Company): A special order of 2,000 units at $11/unit. Regular price is $20/unit, variable cost $8/unit. Fixed costs ($400,000) are irrelevant.
      • Incremental revenue = 2,000 units * $11/unit = $22,000
      • Incremental cost = 2,000 units * $8/unit = $16,000
      • Incremental income = $22,000 - $16,000 = $6,000
      • Decision: Accept the order (because incremental income is positive).

    Make or Buy Decision

    • Rule: Choose the lowest-cost alternative, considering opportunity costs.
    • Example (Baron Company): Producing ignition switches internally vs. buying them externally.
      • Internal cost: $225,000
      • External cost: $250,000 (including unavoidable fixed costs)
      • Decision: Make the switches internally as external is more costly.

    Sell or Process Further

    • Rule: Process further if incremental revenue exceeds incremental processing costs.
    • Example (Woodmasters Inc.): Unfinished tables at $50/unit vs. finished tables at $60/unit. Incremental processing costs are $8.40/unit.
      • Incremental revenue = $60/unit - $50/unit = $10/unit.
      • Incremental cost = $8.40/unit
      • Incremental income = $10/unit - $8.40/unit = $1.60/unit
      • Decision: Process further as it increases profit per unit.

    Repair, Retain, or Replace Equipment

    • Rule: Replace if cost savings from the new equipment exceed its purchase cost.
    • Example (Machine Replacement): Current machine: $640,000 over 4 years. New machine: $120,000, reduced operating cost to $500,000 over 4 years.
      • Cost to retain: $640,000
      • Cost to replace: $615,000 (new machine cost + reduced operating cost - possible sale of old machine)
      • Savings: $25,000
      • Decision: Replace the machine due to lower operational costs.

    Eliminate an Unprofitable Segment or Product

    • Rule: Eliminate a segment only if fixed costs saved exceed contribution margin lost.
    • Example (Venus Company): Unprofitable "Champ" product line.
      • Sales: $100,000
      • Variable costs: $90,000
      • Contribution margin: $10,000
      • Fixed costs: $30,000
      • Decision: Do not eliminate the segment as total income drops by $10,000.

    Key Considerations in Incremental Analysis

    • Non-financial factors such as employee morale and environmental impact should be considered alongside financial data.
    • Accurate and reliable assumptions about incremental revenues and costs are vital.

    Graphical Analysis

    • Visual tools like bar charts and cost comparison tables can aid in comparing alternatives.
    • Tables showcasing revenues, costs, and net income for each alternative can simplify decision making.

    Studying That Suits You

    Use AI to generate personalized quizzes and flashcards to suit your learning preferences.

    Quiz Team

    Description

    This quiz covers the fundamental concepts of incremental analysis within managerial accounting. It includes relevant costs, sunk costs, and opportunity costs, providing a structured approach to decision-making. Participants will learn how to evaluate alternatives effectively for improved financial decisions.

    More Like This

    Use Quizgecko on...
    Browser
    Open
    Browser
    Browser