Ch.16- Costs for Decision Making

The payback period attempts to measure:

a) how soon an investment is recovered.

Chuck's investment proposal would be inferior to Edna's proposal if it was expected to have a:

a) longer payback period.

A sunk cost is a cost that:

o Is never relevant in decision making o has been incurred, & cannot be recovered in the future.

An Opportunity Cost:

o relates to income forgone because an opportunity to pursue income was not pursued. o Should be recognized in the decision-making process.

In considering whether to accept a special order at a price that is less than the normal selling price of the product when the additional sales will use present idle capacity, which costs will be relevant & which will not?

Relevant Costs: o Direct materials o Variable overhead o Direct Labor o Fixed manufacturing overhead (and other FC) that can be avoided Irrelevant Costs that can be ignored: o Depreciation of the manufacturing plant o Fixed manufacturing overhead (and other FC) that can not be avoided

In the make or buy decision, management should consider all of the following except

a) opportunity costs of making internally b) costs that are avoidable by buying outside the company c) costs common to making internally or buying outside the company d) other qualitative factors