Chapter 11: Differential Analysis

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

the weakest link

An increase in cost between two alternatives is a(n) _____ cost.

incremental

True or false: Depreciation of existing assets is relevant to decisions.

false

True or false: 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

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 deciding whether to drive your car or take a train to a destination, the costs for your car insurance and driver's license are ______ costs.

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

The present trend appears to be towards ______ vertical integration.

less

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

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

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

relevant

When planning a trip and deciding to drive your car or take the train, gasoline is a(n) ______ cost.

relevant

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

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

sunk

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

the differential cost approach only

True or false: There is never a justifiable reason to keep an unprofitable product line.

False

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

make; buy

Differential costs and benefits that should be considered in a decision ______.

may be qualitative or quantitative

Average costs ______.

-contain sunk costs -are often misleading

Which of the following attempts to match the sunk cost of an asset with the periods that benefit from that cost?

Accounting depreciation only

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

always

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

avoidable

Irrelevant costs include ______.

future costs that do not differ between alternatives sunk costs

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

income statements

Allocated common costs are ______.

only relevant to decisions if they are avoidable

When making a decision, qualitative differences between alternatives ______ be ignored.

should not

Allocated common costs are ______ avoidable and/or relevant to a decision.

sometimes

Goodstone Tire Corporation sells tires for $100 each. Per unit costs associated with producing and selling the tires are: Direct materials and labor $45; Factory overhead $20; Selling and administrative $15. The variable portion of the factory overhead is $8 per unit. A foreign company wants to purchase 10,000 tires for $70 each. The order would not require any selling or administrative costs. The purchaser will pay the shipping costs, but Goodstone will have to pay a $100,000 inspection fee in order to be able to make the foreign sale. Accepting the special order will not affect current sales or production. What effect would accepting the special order have on Goodstone's net operating income?

$70,000 increase

Which of the following are ways in which to calculate the benefit of selecting one alternative over another?

-An analysis that looks at all costs and benefits and identifies those that are differential. -The difference between the net operating income for the two alternatives. -An analysis that just looks at the relevant costs and benefits.

Managers may choose to retain an unprofitable product line because it ______.

-attracts customers -helps sell other products

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

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

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

When considering accepting a special order, ______.

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

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

Allocated common fixed costs

A limited resource of some type that restricts the company's ability to satisfy demand is a(n) ______.

constraint

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

contribution margin per unit of constraint

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.

irrelevant

The reduction in resale value of an asset through use or over time is called _____ or _____ depreciation.

real; economic

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

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

bottleneck

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

irrelevant

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

relevant

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

value chain

A special order should be accepted ______.

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

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 ______.

-alternative uses for the equipment -salvage value

The first step in decision making is to ______.

Define the alternative

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

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

True or false: Opportunity costs are not found in accounting records because they are not relevant to decisions.

False

True or false: Some decisions only have one alternative.

False

A cost that can be eliminated in whole or in part by choosing one alternative over another is a(n) ______ cost.

avoidable

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

differential

Focusing on future costs and benefits that are not the same between alternatives is ______.

differential analysis

The key to effective decision making is ______.

differential analysis

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?

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.]

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

Opportunity

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

Vertical integration

Fill in the blank question. When considering decision alternatives, both relevant and irrelevant costs are included when using the _____ _____ approach.

total; cost

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

irrelevant