Chapter 11: Differential Analysis - The Key to Decision Making
which of the following may be an advantage of making a part rather than buying it?
- a smoother flow of parts and materials for production - less dependence on outside suppliers
potential advantages of dropping a product line or other segment include ___.
- avoiding more fixed costs than the company loses in contribution margin - an overall increase in net operating income
which of the follow should not be included in the analysis when making a decision?
- non-differential future costs - sunk costs
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 - alternatives used for the equipment
which of the following can make a product line look less profitable that 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
anything that prevents you form getting more of what want is a(n) ___.
constraint
Andrews Co. can purchase 20,000 units of Part XYZ from a supplier for $18 per part. Andrews' per unit manufacturing costs for 20,000 units is as follows: If the part is purchased, the supervisor position will be eliminated. The special equipment has no other use and no salvage value. Total allocated fixed overhead would be unaffected by the decision. The company should
continue to make the part — $60,000 advantage
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
a future cost that is not the same between any two alternatives is known as a(n) ___, incremental, or avoidable cost.
differential
opportunity costs are not found in accounting records because they are not relevant to decisions.
false
true or false: the accounting depreciation of an existing asset is relevant to decisions.
false
a business segment should only be dropped if a company can save more in ___ costs than it loses in contribution margin.
fixed
when making a product line decision, a company may focus on lost contribution margin and voidable fixed costs or prepare comparative ___.
income statements
when there is a constrained resource, the best way to increase profits is to ___.
increase the capacity of the bottleneck
an increase in cost between two alternatives is a(n) ___ cost.
incremental
when a product is past the split-off point, but is not yet a finished product, it is called a(n) ___ product.
intermediate
as it applied to sell or process further decisions, which term refers to a product that is in the process of being made?
intermediate product
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 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 cost is traced to a segment using activity-based costing, it ___ an avoidable cost of the segment.
may or may not be
the potential benefit given up when selected one alternative over another is a(n) ___ cost.
opportunity
when planning a road trip, the ___ is a sunk cost and should be ignored.
original cost of the car
When making a decision, only ___ costs and benefits should be included in the analysis.
relevant
the one-time sale that is not considered part of the company's normal ongoing business is referred to as a(n) ___ ___ decision.
special order
when making a decision, irrelevant items are included in the analysis of both alternatives when using ___.
total cost
true or false: Mingling irrelevant and relevant costs may cause confusion and distract attention from critical information.
true
less dependance on suppliers is an advantage of ___.
vertical integration
when demand for products exceeds the production capacity, a(n) ___ ___ - ___ decision must be made.
volume trade-off
isolating relevant costs is desirable because ___.
- critical information may be overlooked with the total cost approach - all information needed for the total cost approach is rarely available - irrelevant costs may be used incorrectly in the analysis
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
future costs and benefits that do not differ between alternatives are ___ costs to the decision -making process.
irrelevant
the costs provided by a well-designed activity-based costing system are ___ relevant to a decision.
potentially
Costs that have already been incurred and cannot be avoided regardless of what a manager decided to do are ___ costs.
sunk
when considering decision alternatives, both relevant and irrelevant costs are included when using the ___ cost approach.
total
in the context of decision making, every decision involves choosing from among at least two alternatives.
true
being less dependent on suppliers and realizing profits from the parts and materials that it is "making" rather than "buying," as well as profits from its regular operations, are advantages of ___ ___.
vertical integration
when a resources, such as space in the factory, has no alternative use, its opportunity cost is ___.
zero
a company must make a volume trade-ff decision when they ___.
- do not have enough capacity to satisfy all product demand - must trade off units of one product for units of another
effectively managing an organization's constraints is a key to increased ___.
profits
when making a product line decision, a company may focus on lost contribution margin and voidable fixed costs or prepared comparative ___ ___ showing the effects of either keeping or dropping the product line.
income statements
costs and benefits that should be ignored when making decisions are called ___ costs and benefits.
irrelevant