Managerial Accounting - Ch 7: Incremental Analysis for short term decision making
Managers must prioritize how products are produced when faced with a(n) ___________________resource. (Enter only one word per blank.)
Blank 1: constrained or limited
True or false: Incremental analysis is a decision-making approach that compares the relevant costs and benefits of decision alternatives. True false question. True False
True Reason: With incremental analysis you isolate the information that is relevant to the decision.
Comparing the relevant costs and benefits of alternative decision choices is called ______________- analysis. (Enter only one word per blank.)
incremental analysis
The process that limits overall output is called a(n) ____________ . (Enter only one word per blank.)
Blank 1: bottleneck or constraint
In the long term, companies can manage constrained resources by ______. Multiple select question. - hiring more workers - prioritizing products based on contribution margin - increasing capacity - eliminating value-added activities
Correct: - hiring more workers - increasing capacity Incorrect: - prioritizing products based on contribution margin Reason: This is a short-term solution, not a long-term one. - eliminating value-added activities Reason: Companies need to eliminate non-value-added activities.
Product ABC has a contribution margin per unit 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 ______. Multiple choice question. - XYZ - ABC
ABC Reason: 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).
Which of the following statements are true? Multiple select question. - Eliminating non-value-added activities can help companies manage constrained resources. - Hiring more workers or leasing additional machines are long-term strategies for managing constrained resources. - Strategies to manage constrained resources in the long term will always save costs. - Increasing the capacity of the constraint is the best way to manage constrained resources in the short run.
Correct: - Eliminating non-value-added activities can help companies manage constrained resources. - Hiring more workers or leasing additional machines are long-term strategies for managing constrained resources Incorrect: - Strategies to manage constrained resources in the long term will always save costs. Reason: Not only do the strategies take time, but they may result in higher costs. - Increasing the capacity of the constraint is the best way to manage constrained resources in the short run. Reason: This is a long-run strategy.
If some products must be cut back because of a constraint, produce the products with the highest ______. Multiple choice question. - contribution margin per unit of constrained resource - contribution margin per unit of product - net operating income per unit
Correct: - contribution margin per unit of constrained resource Incorrect: - contribution margin per unit of product Reason: The key is to focus on the constraint. - net operating income per unit Reason: Fixed costs are generally irrelevant to these decision.
A(n) ______ limits a system's overall output. Multiple choice question. - opportunity cost - contribution margin per unit of the constrained resource - irrelevant cost - bottleneck
Correct: - bottleneck Incorrect: - opportunity cost Reason: Opportunity costs do not represent actual dollar outlays; rather, they represent economic benefits that are forgone as a result of pursuing some course of action. - contribution margin per unit of the constrained resource Reason: A company would want the highest contribution margin per unit of the constrained resource. - irrelevant cost Reason: This is a cost that is not important to managers when making a decision.
Which of the following is a limitation of some type that restricts a company's ability to satisfy demand? Multiple choice question. - Special order - Constrained resource - Opportunity cost
The correct Answer is: Constrained Resource The following are definitions of Special Order and Opportunity Cost Special order Reason: A special order is a one-time order that is not considered part of the company's normal ongoing business. Opportunity cost Reason: Opportunity costs do not represent actual dollar outlays; rather, they represent economic benefits that are forgone as a result of pursuing some course of action.
