1. An important step in management’s decision-making process is to determine and evaluate
possible courses of action.
2. In making decisions, management ordinarily considers both financial and nonfinancial
3. In incremental analysis, total variable costs will always change under alternative courses
of action, and total fixed costs will always remain constant.
4. Accountants are mainly involved in developing nonfinancial information for management’s
consideration in choosing among alternatives.
5. Decision-making involves choosing among alternative courses of action.
6. Financial data are developed for a course of action under an incremental basis and then it
is compared to data developed under a differential basis before a decision is made.
7. A special one-time order should never be accepted if the unit sales price is less than the
unit variable cost.
8. If a company has excess capacity and present markets will not be affected, it would be
profitable to accept an order at a special unit price even though the price is less than the
unit variable cost to manufacture the item.
9. A company should never accept an order for its product at less than its regular sales
10. A decision whether to continue to make a product or buy it externally, depends on the
external price and the amount of variable and fixed costs that can be eliminated assuming
no alternative uses of resources.
11. An opportunity cost is the potential benefit obtained by using resources in an alternative
course of action.
12. If an incremental make or buy analysis indicates that it is cheaper to buy rather than make
an item, management should always make the decision to choose the lowest cost
13. In a sell or process further decision, management should process further as long as the
incremental revenues from additional processing exceed the incremental variable costs.
14. It is always better to sell now rather than process further because of the time value of
15. In a decision concerning replacing old equipment with new equipment, the book value of
the old equipment can be considered a sunk cost.
16. In a decision to retain or replace old equipment, the salvage value of the old equipment is
relevant in incremental analysis.
It is better not to replace old equipment if it is not fully depreciated.
18. From a quantitative standpoint, a segment should be eliminated if its contribution margin
is less than the fixed costs that can be eliminated.
19. The elimination of an unprofitable product line may adversely affect the remaining product
20. When a company has limited resources to manufacture products, it should manufacture
those products which have the highest contribution margin per unit of limited resource.
21. If a company has only a certain number of machine hours available for production, it is
generally more profitable to produce and sell the product with the highest unit contribution
22. Capital budgeting decisions usually involve large investments and can have a significant
impact on a company’s future profitability.
23. The annual rate of return technique requires dividing a project’s annual cash inflows by
the economic life of the project.
24. A hurdle rate is the rate of return set by applying ideal standards.
25. A major advantage of the annual rate of return technique is that it considers the time value
26. The cash payback capital budgeting technique is a quick way to calculate a project’s net
27. The cash payback method is frequently used as a screening tool but it does not take into
consideration the profitability of a project.
28. Using the net present value method, a net present value of zero indicates that the project
would be acceptable.
29. The net present value method can only be used in capital budgeting if the expected cash
flows from a project are an equal amount each year.
30. The interest rate yielded by a project is a rate that will cause the present value of the
proposed capital expenditure to equal the present value of the expected annual cash
Additional True-False Questions
31. Accounting contributes to management’s decision-making process through internal
reports that review the actual impact of the decision.
32. The process used to identify the financial data that change under alternative courses of
action is called allocation of limited resources.
33. If a company is operating at full capacity, the incremental costs of a special order will likely
include fixed manufacturing costs.
34. The basic decision rule in a sell or process further decision is: sell without further
processing as long as the incremental revenue from processing exceeds the incremental
35. In deciding on the future status of an unprofitable segment, management should
recognize that net income could decrease by eliminating the unprofitable segment.
36. The annual rate of return is computed by dividing expected annual net income by average
37. The discounted cash flow technique considers estimated total cash inflows from the
investment but not the time value of money