Chapter 13 SB

Which of the following can make a product line look less profitable than it really is?

Allocated common fixed costs

Potential advantages of dropping a product line or other segment include

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

Average costs

Contain sunk costs Are often misleading

T/F: Depreciation of existing assets is relevant to decisions.

False

T/F: Opportunity costs are not found in accounting records because they are not relevant to decisions.

False

Irrelevant costs include

Future costs that do not differ between alternatives Sunk costs

Costs and benefits that should be ignored when making decisions are called ______ costs and benefits.

Irrelevant

Future costs and benefits that do not differ between alternatives are _________ costs to the decision-making process.

Irrelevant

If, by dropping a product line, a company cannot avoid as much in fixed costs as it loses in contribution margin, the company should ______ the product line.

Keep

A company must make a volume trade-off decision when they

Must trade off units of one product for units of another Do not have enough capacity to satisfy all product demand

Opportunity costs should ______ be included in a make or buy analysis.

always

Anything that prevents you from getting more of what you want is a(n)

constraint

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

constraint

A business segment should only be dropped if a company can avoid more in fixed costs than it gives up in

contribution margin

When a constraint exists, companies need to focus on maximizing

contribution margin per unit of constraint

The first step in decision making is to

define the alternatives

Focusing on future costs and benefits that are not the same between the choices is

differential analysis

The key to effective decision making is

differential analysis

A business segment should only be dropped if a company can save more in _______ costs than it loses in contribution margin.

fixed

One of the great dangers in allocating common _____ costs is that such allocations can make a product line look less profitable than it really is.

fixed

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

fixed costs

When there is a constrained resource, the best way to increase profits is to

increase the capacity of the bottleneck

A joint product should be processed after split-off if the

incremental revenue after split-off exceeds the incremental processing cost after split-off

Joint costs are

irrelevant in decisions regarding what to do with a product after split-off

In order to prevent confusion and keep attention focused on critical information, it is desirable to

isolate relevant costs from irrelevant costs

The split-off point is the point in the manufacturing process at which the _______ products can be recognized as separate products.

joint

A decision to carry out one of the activities in the value chain internally rather than to purchase externally from a supplier is a ______ decision.

make or buy

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

make or buy

If a company has a resource that could be used for something else, the _______ cost is the profit that could be derived from the best alternative use of the resource.

opportunity

Space being used that would otherwise be idle has a(n) _____ cost of zero.

opportunity

The potential benefit given up when selecting one alternative over another is a(n)

opportunity cost

When planning a trip and deciding whether to drive or fly, the _________ is a sunk cost and should be ignored.

original cost of the car

Effectively managing an organization's constraints is a key to increased

profits

When planning a trip and making a decision to drive or take the train, the cost of car repairs and maintenance is a(n)

relevant cost

It is profitable to continue processing a joint product after the split-off point, so long as the incremental ______ from such processing exceeds the incremental processing cost incurred after the split-off point.

revenue

A cost that has already been incurred and cannot be avoided regardless of what a manager decides to do is referred to as a(n)

sunk cost

When demand for products exceeds the production capacity, a(n) ______ _________-________

volume trade off

A special order should be accepted

when the incremental revenue from the special order exceeds the incremental costs of the order

When making a decision to either buy a movie ticket or rent a DVD, the cost of the movie ticket is an example of a(n) _________ cost.

Avoidable or Incremental

T/F: When estimating the cost of taking a 300 mile trip, the average cost per mile × 300 is the best way to evaluate the total cost.

False

When deciding whether to fly or take the train on a trip, the cost of putting your pet in a boarding facility while you are away is a(n) ________ cost.

Irrrelevant

When is it profitable to continue processing a joint product after the split-off point?

It is profitable when the incremental revenue exceeds the incremental processing cost.

Costs that have no impact on future cash flows and are irrelevant to decisions are __________ costs.

Sunk

When considering accepting a special order,

There must be idle capacity Normal sales must not be affected

A cost that can be eliminated by choosing one alternative over another is a(n)

avoidable cost

Two or more products that are produced from a common input are known as _______ products

joint

Two or more products produced from a common input are called

joint products

A set of activities ranging from development to production to after-sales service is called

the value chain

When making a decision ________ costs and benefits should to be included in the analysis.

Only relevant

A company is considering buying a component part that they currently make using some existing equipment. Relevant costs to this sourcing decision include

Outside purchase price Variable overhead

When considering decision alternatives, only relevant costs are included when using the ______ cost approach

differential

The point in the manufacturing process at which joint products can be recognized as separate products is called the ________ point.

split-off

A cost that has already been incurred and cannot be avoided regardless of what a manager decides to do is referred to as a(n) _____ cost

sunk

When making a product line decision, a company may focus on lost contribution margin and avoidable fixed costs or prepare comparative

income statement

When making a decision, only relevant items are included in the analysis of the alternatives when using

the differential cost approach only

T/F: Mingling irrelevant and relevant costs may cause confusion and distract attention from critical information.

true

Activities ranging from development to production to after-sales service are called a(n)

value chain