A306 Ch 06 questions
Potential advantages of dropping a product line or other segment include
- Avoiding more fixed costs than the company loses in CM - An overall increase in NOI
When considering a special order
- Normal sales must not be affected - There must be idle capacity
What should not be included in the analysis when making a decision?
Non-differential future costs and sunk costs
When a resource, such as space in the factory, has no alternative use, its opportunity cost is
zero
When making a decision, qualitative decisions between alternatives ____________ ____ be ignored.
should not
Determining whether to carry out an activity in the value chain internally or use a supplier is a _______ decision.
sourcing
When making a decision, only relevant items are included in the analysis of the alternatives when using
the differential cost approach only
A special order should be accepted when
the incremental revenue from the special order exceeds the incremental costs of the order
If a company is using a resource that could be used for some other purpose, the opportunity cost of that resource is
the profit from the best alternative use of the resource
A set of activities ranging from development to production to after-sales service is called
the value chain
When considering decision alternatives, both relevant and irrelevant costs are included when using the _______ cost approach.
total
When a constraint exists, companies need to focus on maximizing the
total contribution margin
When making decisions, at least ______ alternatives are involved.
two
Activities ranging from development to production to after-sales service are called a
value chain
When a company is involved in more than one activity in the entire value chain, it is
vertically integrated
What type of cost is never relevant and should be disregarded when making decisions?
Sunk costs
_________________ _________________ refers to a company that is involved in more than one activity in the value chain.
Vertical integration
A limited resource of some type that restricts the company's ability to satisfy demand is a
constraint
Anything that prevents you from getting more of what you want is a
constraint
A business segment should not only be dropped if a company can avoid more fixed costs than it gives up in _____________ _____________
contribution margin
The first step in decision making is to
define the alternatives
A future cost that is not the same between any two alternatives is known as a __________, incremental, or avoidable cost.
differential
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
If some products must be cut back because of a constraint, produce the products with the
highest contribution margin per unit of constrained resource
To maximize total contribution margin when a constrained resource exists, produce the products with the
highest contribution margin per unit of the constrained resource
Isolating relevant costs is desirable because
- All information needed for the total cost approach is rarely available - Irrelevant costs may be used incorrectly in the analysis - Critical information may be overlooked with the total cost approach
A company must make a volume trade-off decision when they
- Must trade off units of one product for units of another due to limited production capacity - Do not have enough capacity to satisfy the demand for all of its products
A company is considering buying a component part that they currently make. Items related to the equipment being used to make the component that are relevant to this decision include
- Salvage value - Alternative uses for the equipment
A cost that can be eliminated in whole or in part by choosing one alternative over another is an _________ cost.
avoidable
When making a decision to either buy a movie ticket or rent a DVD, the cost of the movie ticket is an example of an _____________ , __________ cost.
avoidable, incremental
A business segment should only be dropped if a company can save more in ________ costs than it loses in CM.
fixed
When making a volume trade-off decision, managers should ignore
fixed costs
Future costs and benefits that do not differ between alternatives are ________ costs to the decision making process.
irrelevant
The potential benefit given up when selecting one alternative over another is an
opportunity cost
Differential costs and benefits that should be considered in a decision may be ______________ or ______________
qualitative or quantitative.
Differential revenue is an example of a __________ benefit.
relevant
When making a decision to keep or replace a piece of equipment, sunk costs would be the
original purchase price and annual depreciation expense
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 an _________ cost.
irrelevant
In order to prevent confusion and keep attention focused on critical information, it is desirable to
isolate relevant costs from irrelevant ones.
Costs and benefits that always differ between alternatives are _______ costs and benefits.
relevant
When making a decision only _________ costs and benefits should be included in the analysis.
relevant
When planning a trip and deciding to drive your car or take the train, gasoline is a ____________ cost.
relevant
When planning a trip and making a decision to drive or take the train, the cost of car repairs and maintenance is a __________ cost.
relevant
Whether to perform various organization activities such as payroll and accounting internally or use an external provider is a ______________ decision.
sourcing
A one-time order that is not considered part of the company's normal ongoing business is called a _________ order.
special
When making a decision, irrelevant items are included in the analysis of both alternatives when using the
total cost approach only.
When demand for products exceeds the production capacity, a __________ __________ decision must be made.
volume trade-off
