CHAPTER 7
Incremental Analysis
Homework Solutions
ANSWERS TO QUESTIONS (5, 7, 8, 12)
5.
The relevant data in deciding whether to accept an order at a special price are the incremental
revenues to be obtained compared to the incremental costs of filling the special order.
7.
Opportunity cost may be defined as 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.
8.
The decision rule in a decision to sell a product or to process it further is: Process further as
long as the incremental revenue from the additional processing exceeds the incremental
processing costs.
12.
Net income will be lower if an unprofitable product line is eliminated when the product line is
producing a positive contribution margin and its fixed costs cannot be avoided or reduced.
SOLUTIONS TO DO IT! REVIEW EXERCISES (1, 2, 3, 4)
DO IT! 7-1
Reject
Accept
Net Income
Increase (Decrease)
Revenues
$ –0–
$186,000
$186,000
Costs
$
–0–
132,000
*
(132,000
)
Net income
$
–0–
$
54,000
$
54,000
*(6,000 X $20) + (6,000 X $2)
Given the results of the above analysis, Corn Company should accept the special
order.
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DO IT! 7-2
(a)
Make
Buy
Net Income
Increase (Decrease)
Direct materials
$
30,000
$
–0–
$
30,000
Direct labor
42,000
–0–
42,000
Variable manufacturing
costs
45,000
–0–
45,000
Fixed manufacturing
costs
60,000
40,000
20,000

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- Spring '08
- PIKE
- Financial Accounting, Revenue, Net Income, Barney Company
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