SB 6

When considering decision alternatives, both relevant and irrelevant costs are included when using the __ __ approach.

total cost

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

value chain

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

weakest link

When should a special order be accepted?

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

As it applies 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 produced from a common input are:

joint products

Managers may choose to retain an unprofitable product line because it:

-helps sell other products -attracts customers

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.

1,000; 4,000

Product ABC has a contribution margin per unit of $10.00. Each unit of ABC requires 5 minutes of machine time and 10 minutes of labor time. Product XYZ has a contribution margin per unit of $15.00 and each unit requires 10 minutes of machine time and 5 minutes of labor time. If the company's constraint is labor hours, the contribution margin per unit of constraint for Product XYZ is $

3

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

Allocated common fixed costs

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

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

Miracle Clean's variable costs are $3.00 per bottle and Fixed Expenses are $350,000 per year. The company currently sells 150,000 bottles for $6.50 which results in profit of $175,000. The company is considering raising the selling price to $7.00 per bottle which is expected to decrease sales by 20%. If the price is raised profits are expected to __ (increase/decrease) by $__ per year.

Decrease; 45,000

When considering decision alternatives, only relevant costs are included when using the __ approach.

Differential cost

Opportunity costs are found in accounting records because they are cash outlays.

False

In deciding whether to drive to a location or take the train, the relaxation factor that comes from not having to drive ___ relevant to the decision.

Is

It is profitable to continue processing a joint product after the split-off point, so long as the incremental from such processing exceeds the incremental ___ processing cost incurred after the split-off point.

Revenue

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

Sell; process further

Which of the following should not be included in the analysis when making a decision?

Sunk costs Non-differential future costs

When demand for products exceeds the production capacity, a __ __- __decision must be made.

Volume trade-off

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

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

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

avoidable

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

bottleneck

Average costs:

contain sunk costs are often misleading

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

contribution margin

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

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

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

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

income statements

Stephens, Inc. is considering dropping a product line. During the prior year, the line had sales of $170,000, variable costs of $86,000 and total fixed expenses of $110,000. Of the fixed expenses, $95,000 are avoidable. If Stephens drops the product line, net operating income will:

increase by $11,000

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

A joint product should be processed after split-off if the ______.

incremental revenue after split-off exceeds the incremental processing cost after split-off

Joint costs are:

irrelevant in decisions regarding what to do with a product after split-off

In order to prevent confusion and keep attention focused on critical information, it is desirable to:

isolate relevant costs from irrelevant costs

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.

joint

The costs incurred up to the split-off point in a process in which two or more products are produced from a common input are known as ______ costs.

joint

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

make, buy

Differential costs and benefits that should be considered in a decision:

may be qualitative or quantitative

If a cost is traced to a segment using activity-based costing, it:

may or may not be an avoidable cost of the segment

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

opportunity

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

Effectively managing an organization's constraints is a key to increased:

profits

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

real, economic

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 one-time order that is not considered part of the company's normal ongoing business is a _______ order.

special

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

special order

What is the point in the manufacturing process at which joint products can be recognized as separate products?

split-off point

The capacity of a bottleneck can be effectively increased by:

subcontracting some of the processing that would be done in that area; focusing business process improvement efforts on the bottleneck

Costs that have already been incurred and cannot be avoided regardless of what a manager decides to do are ______ costs.

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

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

the highest contribution margin per unit of the constrained resource

When a constraint exists, companies need to focus on maximizing

total contribution margin

When dealing with a constrained resource, managers should focus their attention on managing the:

bottleneck

Anything that prevents you from getting more of what you want is a(n) .

constraint

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

constraint

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

irrelevant

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

Allocated common costs are:

only relevant to decisions if they are avoidable

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

should not

When making a decision, irrelevant items are included in the analysis of both alternatives when using:

the total cost approach only

The total cost approach and the differential approach methods of decision analysis ______ provide the same correct answer.

will always

When a resource, such as space in the factory, has no alternative use, its opportunity cost is:

zero

Two or more products that are produced from a common input are known as __ products.

joint

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

The first step in decision making is to:

define the alternatives

Determining whether to carry out an activity in the value chain internally or use a supplier is a ________ decision.

make or buy

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 company must make a volume trade-off decision when they

- do not have enough capacity to satisfy the demand for all of its products - must trade off units of one product for units of another due to limited production capacity

To effectively deal with a constraint:

- improvements should focus on the constraint - efforts should be focused on the weakest link

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

vertical integration

When a company is involved in more than one activity in the entire value chain, it is __ __.

vertically integrated

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

False

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

value chain

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

vertical integration

When a product is past the split-off point, but is not yet a finished product, it is called a(n) __ product.

intermediate

The costs provided by a well-designed activity-based costing system are _____ relevant to a decision.

potentially

The split-off point is the point in the manufacturing process at which the __ products can be recognized as separate products.

joint

When considering accepting a special order:

normal sales must not be affected there must be idle capacity

Deciding what to do with a joint product at the split-off point is a:

sell or process further decision

Goodstone Tire Corporation sells tires for $100 each. Per unit costs associated with producing and selling the tires are: Direct materials $35 Direct labor 10 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?

$70000 increase

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.

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

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

ABC Lumber spent $1,000 cutting down a tree. The result was 40 pieces of unfinished lumber that sell for $20.00 each and 100 bags of sawdust that sell for $1.00 each. If the unfinished pieces of lumber are processed into finished lumber at a cost of $8.00 each, they will sell for $35.00. A bag of sawdust can be processed into Presto Logs that sell for $1.25 at a cost of $0.75 per bag. Which of the following statements are true concerning whether the unfinished pieces of lumber should be processed into finished lumber and whether the sawdust should be processed into Presto Logs?

The pieces of unfinished lumber should be processed. The sawdust should be sold as is without being processed into Presto Logs.

Every decision involves choosing from among at least two alternatives.

True

True or false: Mingling irrelevant and relevant costs may cause confusion and distract attention from critical information.

True

Joint costs incurred prior to the split-off point _____ relevant in decisions regarding what to do from the split-off point forward.

are not

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

avoidable

When a manager increases the capacity of constraint or __, it is called relaxing the constraint.

bottleneck

If some products must be cut back because of a constraint, produce the products with the highest:

contribution margin per unit of the constrained resource

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 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.)

Which of the following involves increasing the capacity of a bottleneck?

relaxing the constraint

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

relevant

Differential revenue is an example of a(n) ______ benefit.

relevant

The present trend appears to be towards ______ vertical integration.

less

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?

- salvage value - alternative uses for the equipment