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
Modeling, AICPA PC: Problem Solving, IMA: Decision Analysis
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
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
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
Modeling, AICPA PC: Problem Solving, IMA: Decision Analysis
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
Modeling, AICPA PC: Problem Solving, IMA: Decision Analysis
, 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.
Ans: C, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Decision
Modeling, AICPA PC: Problem Solving, IMA: Decision Analysis
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.
Ans: B, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Decision
Modeling, AICPA PC: Problem Solving, IMA: Decision Analysis
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
Modeling, AICPA PC: Problem Solving, IMA: Decision Analysis
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
Ans: C, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Decision
Modeling, AICPA PC: Problem Solving, IMA: Decision Analysis
41. Relevant costs are always
a. fixed costs.
b. variable costs.
c. avoidable costs.
d. sunk costs.
Ans: C, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Decision
Modeling, AICPA PC: Problem Solving, IMA: Decision Analysis
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
Modeling, AICPA PC: Problem Solving, IMA: Decision Analysis
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
Modeling, AICPA PC: Problem Solving, IMA: Decision Analysis
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
Modeling, AICPA PC: Problem Solving, IMA: Decision Analysis
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
Modeling, AICPA PC: Problem Solving, IMA: Decision Analysis
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
Modeling, AICPA PC: Problem Solving, IMA: Decision Analysis
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
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
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
Modeling, AICPA PC: Problem Solving, IMA: Decision Analysis
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
Modeling, AICPA PC: Problem Solving, IMA: Decision Analysis
, 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.
Ans: C, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Decision
Modeling, AICPA PC: Problem Solving, IMA: Decision Analysis
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.
Ans: B, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Decision
Modeling, AICPA PC: Problem Solving, IMA: Decision Analysis
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
Modeling, AICPA PC: Problem Solving, IMA: Decision Analysis
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
Ans: C, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Decision
Modeling, AICPA PC: Problem Solving, IMA: Decision Analysis
41. Relevant costs are always
a. fixed costs.
b. variable costs.
c. avoidable costs.
d. sunk costs.
Ans: C, SO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Decision
Modeling, AICPA PC: Problem Solving, IMA: Decision Analysis
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
Modeling, AICPA PC: Problem Solving, IMA: Decision Analysis
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
Modeling, AICPA PC: Problem Solving, IMA: Decision Analysis
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
Modeling, AICPA PC: Problem Solving, IMA: Decision Analysis
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
Modeling, AICPA PC: Problem Solving, IMA: Decision Analysis
