Chapter 11 Differential Analysis: The Key to Decision Making

sell or process further decision

A decision as to whether a joint product should be sold at the split-off point or sold after further processing.

Differential Cost

A future cost that differs between any two alternatives.

Constraint

A limitation under which a company must operate, such as limited available machine time or raw materials, that restricts the company's ability to satisfy demand.

Relaxing (or elevating) the constraint

An action that increases the amount of a constrained resource. Equivalently, an action that increases the capacity of the bottleneck.

When a shortage or limited resource of some type restricts a company's ability to satisfy demand, the company has a ____

Constraint

When making a volume-trade off decision, managers should ignore ____.

Fixed costs

Incremental cost

an increase in cost between two alternatives

Joint Costs

costs that are incurred up to the split-off point in a process that produces joint products

Differential Revenue

future revenue that differs between any 2 alternatives

Determining whether to carry out an activity in the value chain internally or use a supplier is a ___ decision.

make or buy

split-off point

that point in the manufacturing process where some or all of the joint products can be recognized as individual products

opportunity cost

the potential benefit that is given up when one alternative is selected over another

Joint products

two or more products that are produced from a common input

Relevant benefit

A benefit that should be considered when making decisions

sunk cost

A cost that has already been incurred and that cannot be changed by any decision made now or in the future.

Which of the following may be an advantage of making a part rather than buying it?

-A smoother flow of parts and materials for protection -Less dependence on outside suppliers

Potential advantages of dropping a product line or segment include:

-An overall increase in net operating income -Avoiding more fixed costs than the company loses in contribution margin

Isolating relevant costs is desirable because _______.

-Critical information may be overlooked with the total cost approach. -Irrelevant costs may be used incorrectly in the analysis -All information needed for the total cost approach is rarely available

The capacity of a bottleneck can be effectively increased by ___.

-Focusing business process improvement efforts on the bottleneck -Subcontracting some of the processing that would be done in that area

Costs and benefits that always differ between alternatives are ____ costs and benefits.

Relevant

a one-time order that is not considered part of the company's normal ongoing business is called a ____ order.

Special

Vertical Integration

The involvement by a company in more than one of the activities in the entire value chain from development through production, distribution, sales, and after-sales service.

Avoidable Cost

a cost that can be eliminated by choosing one alternative over another

Relevant cost

a cost that should be considered when making decisions

Make or buy decision

a decision concerning whether an item should be produced internally or purchased from an outside supplier

Bottleneck

a machine or some other part of a process that limits the total output of the entire system

Special order

a one-time order that is not considered part of the company's normal ongoing business