SB Ch 7 EC Connect
When is it profitable to continue processing a product instead of selling it as is?
It is profitable when the incremental revenue exceeds the incremental manufacturing cost.
True or false: Incremental analysis is a decision-making approach that compares the relevant costs and benefits of decision alternatives.
True
In deciding whether to sell a product or continue to process it, costs incurred to get the product into its current condition ______ relevant to the decision.
are not
A cost that can be eliminated in whole or in part by choosing one alternative over another is a(n) ______ cost.
avoidable
A cost that can be eliminated by choosing one alternative over another is called a(n)
avoidable or relevant
A(n) ______ limits a system's overall output.
bottleneck
A measure of the limit placed on a specific resource is known as its
capacity
The number of customers who can be seated in an auditorium is a measure of the facility's ______.
capacity
Managers must prioritize how products are produced when faced with a(n)
constrained resource
When a constraint exists, companies need to focus on maximizing ______.
contribution margin per unit of constraint
Once you have identified a problem, the next step is to determine the possible solutions, which are called
decision alternatives
Costs that differ between alternatives are called
differential costs
Which of the following is another term for relevant costs?
differential costs incremental costs avoidable costs
A fixed cost that can be traced to a specific business segment is called a(n)
direct fixed cost
When the total amount of the cost will be the same regardless of the alternatives selected in a decision, the cost should be ______ when doing decision analysis.
excluded
When there is excess capacity, an analysis of a special order ______.
excludes fixed costs
The ______ step in the decision-making process is to identify the decision problem.
first
Opportunity costs become relevant when a company is operating at
full capacity
Irrelevant costs include ______.
future costs that do not differ between alternatives sunk costs
Managers may choose to retain an unprofitable product line because it ______.
helps sell other products
To maximize total contribution margin when a constrained resource exists, produce the products with the ______.
highest contribution margin per unit of the constrained resource
When a company has more than enough resources to satisfy demand it is operating with
idle capacity
Segment margin ______.
includes both variable and direct fixed costs
When a company is operating at full capacity, a special-order analysis ______.
includes the opportunity cost of lost sales
Comparing the relevant costs and benefits of alternative decision choices is called
incremental analysis
Bad decisions can easily result from erroneously including ______ costs and benefits when analyzing alternatives.
irrelevant
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
Determining decision alternatives ______.
is a critical step in the decision-making process
The process of making a decision ______.
is basically the same for all decisions
Continue-or-discontinue decisions are commonly known as
keep or drop decisions
Incremental analysis ______.
may be referred to as relevant costing is also called differential analysis
Relevant costs ______.
occur in the future differ between alternatives
Opportunity costs are ______.
only relevant when capacity is limited
If a company has a resource that could be used for something else, the ___________ cost is the profit that could be derived from the best alternative use of the resource.
opportunity
Make-or-buy decisions are also referred to as
outsourcing decisions
Costs and benefits that always differ between alternatives are called ______ costs and benefits.
relevant
When making a decision to drive or take the train on a trip, the cost of the train ticket is a(n) ______ cost.
relevant
When planning a trip and deciding to drive your car or take the train, gasoline is a(n) ______ cost.
relevant
Sales revenue minus all fixed and variable costs attributable to a particular division is called ______.
segment margin
Deciding what to do with a product that is salable or could be enhanced is a ______ decision.
sell-or-process further
A one-time order that is not considered part of the company's normal ongoing business is called a ______ order.
special
Products that can be used in place of one another are called ______ products.
substitute
Goodstone Tire Corporation sells tires for $90 each. Per-unit costs associated with producing and selling the tires are: Direct materials $35 Direct labor 10 Factory overhead 20 The variable portion of the factory overhead is $8 per unit. A foreign company wants to purchase 1,000 tires for $65 each. Assuming that Goodstone has excess capacity, ______.
the incremental profit from the special order will be $12,000 The revenue per tire is $65 and the cost is $53 (direct materials, direct labor, variable overhead), so each tire will generate $12 in incremental profit or $12,000 total.
Goodstone Tire Corporation sells tires for $90 each. Per-unit costs associated with producing and selling the tires are: Direct materials $35 Direct labor 10 Factory overhead 20 The variable portion of the factory overhead is $8 per unit. A foreign company wants to purchase 1,000 tires for $65 each. Assuming that Goodstone has no excess capacity, ______.
the loss from excepting the special order will be $25,000 The total revenue of the special order is $65,000 and the cost is $53,000 (direct materials, direct labor, variable overhead). The opportunity cost of lost sales is $37,000 (($90 regular cost - $53 of variable cost) × 1,000) for an overall loss of $25,000
True or false: A sunk cost may be used to evaluate the outcome of previous decisions.
true
True or false: Qualitative factors should be considered in special-order decisions.
true
Common fixed costs ______.
will be incurred even if a segment is eliminated
