Ch. 11 Differential Analysis: The Key to Decision Making

fixed costs

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

- are sometimes zero - represent forgone economic benefits

When selecting one alternative over another, opportunity costs:

differential

A future cost that is not the same between any two alternatives is known as a(n) _____, incremental, or avoidable cost.

special order

A one-time sale that is not considered part of the company's normal ongoing business is referred to as a(n) _____ _____ decision.

the value chain

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

value chain

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

Buy -- $20,000 advantage. The total buy price = 20,000 x $18 or $360,000. The cost to make equals (20,000 x $15) / 80,000 forgone opportunity or $380,000. Thus, there is a $20,000 advantage to buying the part.

Andrews Co. can purchase 20,000 units of Part XYZ from a supplier for $18 per part. The relevant manufacturing costs for the part is $15 per unit. If the company decides to purchase the part, the space now being used can be used to produce another product that will generate a segment margin of $80,000 per year. Should Andrews continue to make or should they buy the part?

bottleneck

The machine or process that is limiting overall output is called a(n) _____.

the weakest link

To increase the strength of a chain, efforts should be concentrated on strengthening _____.

highest contribution margin per unit of the constrained resource

To maximize total contribution margin when a constrained resource exists, produce the products with the _____.

- economies of scale can result in higher quality and lower costs from suppliers.

Which of the following is an advantage of buying a part instead of making it?

- less dependence on outside suppliers - a smoother flow of parts and materials for production

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

Vertical Integration

Which term refers to a company that is involved in more than one activity in the value chain?

vertical integration

Being less dependent on suppliers and making profits on both parts and the final product are advantages of _____ _____.

joint

Costs incurred up to the split-off point in a process in which two or more products are produced from a common input are called _____ costs.

False

Opportunity costs are NOT found in accounting records because they are not relevant to decisions.

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

Potential advantages of dropping a product line or other segment include:

ABC (The company should fill the demand for the product with the highest CM per unit of the constrained resource. ABC's is $2 per minute of machine time (CM of $10 / 5 minutes) while XYZ's is only $1.50 per minute of machine time (CM of $15 / 10 minutes).

Product ABC has a contribution margin per units of $10.00. Each unit of ABC requires 5 minutes of machine time. Product XYZ has a contribution margin per unit of $15.00 and each unit requires 10 minutes of machine time. If the company's constraint is machine hours, to maximize profit, they should first fill the demand for Product _____.

contribution margin per unit of the constrained resource

The benefit from relaxing the constraint equals:

only relevant to decisions if they are avoidable

Allocated common costs are _____.

contribution margin per unit of constraint

When a constraint exists, companies need to focus on maximizing _____.

bottleneck

When a manger increases the capacity of constraint or _____, it is called relaxing the constraint.

constraint

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

- there must be idle capacity - normal sales must not be affected

When considering accepting a special order, _____.

relevant

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

- incremental - 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 a(n) _____ cost.

When the incremental revenue from the special order exceeds the incremental costs of the order.

When should a special order be accepted?

increase the capacity of the bottleneck

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

- Investing in additional machines at the bottleneck - Shifting workers from processes that are not bottlenecks to the process that is the bottleneck

Which of the following are ways to increase the capacity of a bottleneck?

Contribution Margin

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

- salvage value - alternative uses for the equipment

A company is considering buying a component part that they currently make. Which of the following items related to the equipment currently being used to make the component are relevant to the decision?

- do not have enough capacity to satisfy the demand for all of its products. (Limited production capacity required a company to made a volume trade-off decision.) - must trade off units of one product for units of another due to limited production capacity (Limited production capacity requires a company to made a volume trade-off decision)

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

make or buy decision

A decision to carry out one of the activities in the value chain internally, rather than to buy externally from a supplier, is called a(n) _____ or _____ decision.

sunk

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

sell OR process further decision

Deciding what to do with a joint product at the split-off point is a(n) _____ or _____ _____ decision.

Opportunity

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.

- future costs that do not differ between alternatives - sunk costs

Irrelevant costs include _____.

1,000 RBG has the highest CM per hour and requires 1,000 hours to meet demand. The remaining 500 hours can be used to make 1,000 units of DGH ($36 / $18 = 2 units per hour). 4000 The company should produce all units of RBG demanded because it has the highest CM per hour. $60 / $15 = 4 units per hour or 1,000 hours needed for 4,000 units.

Product DGH has a monthly demand of 5,000 units. Its contribution margin is $18 per unit and $36 per direct labor hour. Product RBG has a monthly demand of 4,000 units. It's contribution margin is $15 per unit and $60 per direct labor hour. If the company only has 1,500 direct labor hours available, the company should produce _____ units of Product DGH and _____ units of Product RBG.