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Log in through your institution journal article The Present-Value Method and the Replacement DecisionThe Accounting Review Vol. 39, No. 1 (Jan., 1964) , pp. 94-102 (9 pages) Published By: American Accounting Association https://www.jstor.org/stable/243172 Read and download Log in through your school or library Subscribe to JPASS Unlimited reading + 10 downloads Journal Information The Accounting Review is the premier journal for publishing articles reporting the results of accounting research and explaining and illustrating related research methodology. The scope of acceptable articles embraces any research methodology and any accounting-related subject. The primary criterion for publication in The Accounting Review is the significance of the contribution an article makes to the literature. Publisher Information The American Accounting Association is the world's largest association of accounting and business educators, researchers, and interested practitioners. A worldwide organization, the AAA promotes education, research, service, and interaction between education and practice. Formed in 1916 as the American Association of University Instructors in Accounting, the association began publishing the first of its ten journals, The Accounting Review, in 1925. Ten years later, in 1935, the association changed its name to become the American Accounting Association. The AAA now extends far beyond accounting, with 14 Sections addressing such issues as Information Systems, Artificial Intelligence/Expert Systems, Public Interest, Auditing, taxation (the American Taxation Association is a Section of the AAA), International Accounting, and Teaching and Curriculum. About 30% of AAA members live and work outside the United States. Rights & Usage This item is part of a JSTOR Collection. An opportunity cost is the potential benefit given up by using resources in an alternative course of action True False Direct materials, direct labour, and allocated fixed and variable manufacturing overhead are all relevant in a make-or-buy decision True False Plant capacity is not relevant in decision making True False Eliminating an unprofitable segment is always a good management decision True False Sunk costs are considered relevant when choosing among alternatives because they are differential True False Max Company has excess capacity. A customer proposes to buy 400 widgets at a special unit price even though the price is less than the unit variable cost to manufacture the item. Max should accept the special order if demand on other products is unaffected True False One incremental analysis decision is the allocation of limited resources True False Which one of the following stages of the management decision-making process is properly sequenced? a) Evaluate possible courses of action; make decision. b) Review the actual impact of the decision; determine possible courses of action. c) Assign responsibility for the decision; identify the problem. d) Make a decision; assign responsibility. a) Evaluate possible courses of action; make decision. Which of the following statements about making decisions is correct? a) Only relevant financial information should be considered. b) All information should be considered in the final decision. c) Management should consider both relevant financial and non-financial information. d) Management accountants should provide the information, but they should not make recommendations. It is up to the managers to make decisions. c) Management should consider both relevant financial and non-financial information. Which one of the following is non-financial information that management might evaluate in making a decision? a) opportunity costs of a decision b) contribution margin c) the effect on profit of a decision d) the corporate profile in the community d) the corporate profile in the community Which of the following statements about incremental analysis is true? a) It cannot be used if more than two alternatives are available. b) It considers only cost factors, not revenue. c) Its focus is on the past activities. d) It only considers factors that are different for each alternative, and only those factors that will occur in the future. d) It only considers factors that are different for each alternative, and only those factors that will occur in the future. For which of the following decisions is incremental analysis not appropriate? a) elimination of an unprofitable segment b) determining cost behaviour c) a make or buy decision an allocation of limited d) resource decision b) determining cost behaviour For which of the following is incremental analysis appropriate? a) Acceptance of a special order and a make or buy decision. b) A retain or replace equipment decision and CVP analysis. c) A sell or process further decision and allocation of indirect costs. d) Elimination of an unprofitable segment and allocation of indirect costs. a) Acceptance of a special order and a make or buy decision. M&H Ltd. has sufficient capacity to fill an order at a special price below its usual price. The special price exceeds its variable costs. What non-financial factors should also be considered in the decision? a) Is there the potential for additional sales to the customer in the future? b) How will existing customers respond if they find out about the special price? c) If there is the potential for additional sales to the customer in the future, can a higher price be charged? d) All of the above. When a company does not have sufficient capacity to fill an order for less than the current selling price, what additional factor must be taken into consideration? a) The decision process is the same whether there is sufficient capacity or not. b) How will the lack of capacity affect the quality of the product? c) Can resources be transferred from producing product to sell at the current price to producing product at the special price? d) Opportunity costs. When making a decision to accept a special order, management must consider a) the impact that additional manufacturing time will have on unit costs of its current products. b) whether the purchaser will accept additional high costs of a special order. c) whether a lower price will convince the purchaser to become a regular customer. d) whether capacity exists to meet the demand of the order. d) whether capacity exists to meet the demand of the order. When management has excess capacity available to it in the short run, which of the following would be the best path to follow? a) Consider ways to reduce its fixed costs. b) Consider accepting special orders. c) Consider outsourcing certain products. d) Consider mixing its product offerings in a new way. b) Consider accepting special orders. Which one of the following does not affect a make-or-buy decision? a) variable manufacturing costs b) opportunity cost c) incremental revenue d) direct labour Meow Cat Toys utilizes Lincoln Fabrics by purchasing the fabric to cover toy mice for its mouse toy division. As it pertains to Lincoln Fabrics, what decision situation does this create? a) make or buy b) sell or process further c) relevant costing d) budgeting In a sell or process further decision, a) management should process further as long as the incremental revenues from additional processing are greater than the incremental costs. b) the basic decision rule is: process further if the total processing costs exceeds the incremental revenue. c) it is better to process further rather than sell now if the sales price increases. d) the allocation of joint product costs is important and relevant. a) management should process further as long as the incremental revenues from additional processing are greater than the incremental costs. In a decision concerning replacing equipment a) with new equipment, the book value of the old equipment can be considered an opportunity cost. b) or keeping it, the salvage value of the old equipment is a sunk cost in incremental analysis. c) with new equipment, old equipment which is not fully depreciated should always be replaced. d) any trade-in allowance or cash disposal value of existing assets is relevant to the decision to retain or replace equipment. d) any trade-in allowance or cash disposal value of existing assets is relevant to the decision to retain or replace equipment. What is the salvage value of old equipment considered to be? a) a relevant cost b) a non-incremental cost c) an opportunity cost d) a cost that is not differential What role does a trade-in allowance on old equipment play in a decision to retain or replace equipment? a) It is relevant since it increases the cost of the new equipment. b) It is not relevant since it reduces the cost of the old equipment. c) It is not relevant to the decision since it does not impact the cost of the new equipment. d) It is relevant since it reduces the cost of the new equipment. d) It is relevant since it reduces the cost of the new equipment. A company should a) eliminate any segment in which the contribution margin is less than the fixed costs that are unavoidable. b) eliminate an unprofitable product line as it will always increase the total profits of a company. c) eliminate an unprofitable product as fixed expenses allocated to the eliminated segment will likely be eliminated. d) identify the relevant costs in deciding whether to eliminate an unprofitable segment d) identify the relevant costs in deciding whether to eliminate an unprofitable segment How should that portion of fixed costs that are unavoidable be handled when making a decision on whether to eliminate an unprofitable segment? a) They should be subtracted from the contribution margin and if that results in a net loss, the segment should be eliminated. b) They should not be considered as they are not relevant. c) They should be allocated to other segments. If that causes a loss in another segment, that segment should be eliminated as well. d) Fixed costs are never relevant. b) They should not be considered as they are not relevant. Is a tradeWhat role does a trade-in allowance on old equipment play in a decision to retain or replace equipment? a. It is relevant because it increases the cost of the new equipment.
Is tradeTrade-in allowance is always relevant. The analysis may be made on a per year basis or a total year's basis. If made on a per year basis, then the cost of the new asset must be divided by its useful life.
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In a retain or replace equipment decision trade-in allowance available on old equipment
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