Smartbook 6

True or false: Some decisions only have one alternative.

False

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

avoidable

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

avoidable

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

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

incremental

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

irrelevant

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 company is using a resource that could be used for some other purpose, the opportunity cost of that resource is:

profit from best alternative

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

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

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

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

contribution margin per unit of constrained resource

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

differential analysis

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

Non-differential future costs Sunk costs

The first step in decision making is to:

define the alternatives

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 planning a trip and making a decision to drive or take the train, the cost of car repairs and maintenance is a(n) _________ cost.

relevant

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

constraint

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

irrelevant

A decision to carry out one of the activities in the value chain internally rather than to buy externally from a supplier is a ________ decision.

make or buy

Space being used that would otherwise be idle has a(n) ___ cost of zero.

relevant

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

relevant

When a constraint exists, companies need to focus on maximizing

total contribution margin

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

make or buy

Synonyms for differential costs include ______ cost.

incremental avoidable

When considering accepting a special order:

normal sales must not be affected there must be idle capacity

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, qualitative differences between alternatives _______ be ignored.

should not

When should a special order be accepted?

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

The key to effective decision making is:

differential analysis

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

differential

When demand for products exceeds the production capacity, a ___ ___ - ___ decision must be made.

Blank 1: volume Blank 2: trade Blank 3: off

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: Cost Per Unit Total Variable manufacturing cost $12 $240,000 Supervisor salary $3 $60,000 Depreciation $1 $20,000 Allocated fixed overhead $7 $140,000 If the part is purchased, the supervisor position would be eliminated. The special equipment has no other use and no salvage value. Total allocated fixed overhead would be unaffected by the decision. Should the company buy the part or continue to make it?

Continue to make — $60,000 advantage. The avoidable costs of making the product are the variable costs plus the supervisor salary or $15 per unit. The total savings is $60,000 ($18 buy price - $12 variable cost - $3 supervisor salary = $3 advantage to make X 20,000 units).

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

False

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