CHAPTER 7 Incremental Analysis ASSIGNMENT CLASSIFICATION TABLE Learning Objectives Questions Exercises Do It Exercises Problems Problems Brief A B 1 2 3 4 5 6 7 Identify the steps in management s decision making process Describe the concept of incremental analysis Identify the relevant costs in accepting an order at a special price Identify the relevant costs in a make or buy decision Identify the relevant costs in determining whether to sell or process materials further Identify the relevant costs to be considered in repairing retaining or replacing equipment Identify the relevant costs in deciding whether to eliminate an unprofitable segment 1 2 3 4 5 6 7 11 12 1 2 3 4 7 8 1 1 17 2 3 4 18 1A 5 6 7 8 18 9 10 11 12 18 2A 3A 13 14 18 4A 15 16 17 18 5A 1 2 3 4 1B 2B 3B 4B 5B 8 9 10 5 6 Copyright 2012 John Wiley Sons Inc Weygandt Managerial Accounting 6 e Solutions Manual For Instructor Use Only 7 1 ASSIGNMENT CHARACTERISTICS TABLE Problem Number Description Use incremental analysis for special order and identify nonfinancial factors in the decision Use incremental analysis related to make or buy consider opportunity cost and identify nonfinancial factors Difficulty Level Time Allotted min Simple 20 30 Moderate 30 40 Determine if product should be sold or processed further Moderate Compute gain or loss and determine if equipment should be replaced Moderate 30 40 30 40 Prepare incremental analysis concerning elimination of divisions Moderate 30 40 Use incremental analysis for special order and identify nonfinancial factors in the decision Simple 20 30 Use incremental analysis related to make or buy consider opportunity cost and identify nonfinancial factors Moderate 30 40 Determine if product should be sold or processed further Moderate Compute gain or loss and determine if equipment should be replaced Moderate 30 40 30 40 Prepare incremental analysis concerning elimination of divisions Moderate 20 30 1A 2A 3A 4A 5A 1B 2B 3B 4B 5B 7 2 Copyright 2012 John Wiley Sons Inc Weygandt Managerial Accounting 6 e Solutions Manual For Instructor Use Only B L O O M S T A X O N O M Y T A B L E Correlation Chart between Bloom s Taxonomy Learning Objectives and End of Chapter Exercises and Problems Application Analysis Synthesis Evaluation Knowledge Comprehension BE7 1 E7 1 E7 1 Learning Objective Identify the steps in management s decision making process Describe the concept of incremental analysis Identify the relevant costs in accepting an order at a special price Identify the relevant costs in a make or buy decision 1 2 3 4 5 Identify the relevant costs in determining whether to sell or process materials further Q7 8 Q7 9 Q7 10 6 Identify the relevant costs to be considered in repairing retaining or replacing equipment Identify the relevant costs in deciding whether to eliminate an unprofitable segment Broadening Your Perspective 7 Q7 1 Q7 2 Q7 3 Q7 4 Q7 5 Q7 6 Q7 7 Q7 11 Q7 12 BE7 2 BE7 3 DI7 1 BE7 4 DI7 2 BE7 5 BE7 6 DI7 3 BE7 7 BE7 8 DI7 4 BYP7 2 E7 17 E7 2 E7 3 E7 4 E7 5 E7 6 E7 7 E7 8 E7 9 E7 10 E7 11 E7 12 E7 13 E7 14 E7 18 E7 15 E7 16 E7 17 BYP7 3 BYP7 6 BYP7 7 E7 18 P7 1A P7 1B E7 18 P7 2A P7 2B E7 18 P7 3A P7 3B P7 4A P7 4B E7 18 P7 5A P7 5B BYP7 1 BYP7 4 BYP7 5 BYP7 8 BYP7 9 C o p y r i g h t 2 0 1 2 i l J o h n W e y S o n s I n c W e y g a n d t M a n a g e r i a l A c c o u n t i n g 6 e S o u l t i o n s M a n u a l F o r I n s t r u c t o r U s e O n y l 7 3 ANSWERS TO QUESTIONS 1 Identify the problem and assign responsibility The following steps are frequently involved in management s decision making process 1 2 Determine and evaluate possible courses of action 3 Make a decision 4 Review results of the decision 2 My roommate is incorrect Accounting contributes to the decision making process at Steps 2 and 4 Prior to the decision accounting provides relevant revenue and cost data for each course of action Following the decision internal reports are prepared to show the actual impact of the decision 3 Disagree Incremental analysis involves the identification of financial data that change under alternative courses of action 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 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 The manufacturing costs that are relevant in the make or buy decision are those that will change if the parts are purchased 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 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 Joint products are 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 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 A sunk cost is a 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 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 4 5 6 8 9 10 11 7 4 Copyright 2012 John Wiley Sons Inc Weygandt Managerial Accounting 6 e Solutions Manual For Instructor Use Only SOLUTIONS TO BRIEF EXERCISES BRIEF EXERCISE 7 1 The correct order is BRIEF EXERCISE 7 2 Revenues Costs Net income BRIEF EXERCISE 7 3 Identify the …