Chapter 13: Differential Analysis - The Key to Decision Making
Which of the following can make a product line look less profitable than it really is?
Allocated common fixed costs
Target Cost =
Anticipated Selling Price - Desired Profit
total cost approach
includes all costs and benefits, relevant or not
To calculate the optimal selling price using Microsoft Excel's Solver requires ______.
percentage change in selling price current selling price current unit sales
Value based pricing
selling prices based on the economic value of the benefits that their products and services provide to customers
Under absorption costing approach it is assumed
that customers are required to buy a product at whatever price the seller deems appropriate
split-off point
that point in the manufacturing process where some or all of the joint products can be recognized as individual products
differential revenue
the difference in revenue between two alternatives
The target costing approach was developed because
the market really determines prices most of a product's cost is determined in the design stage
joint products
two or more products that are produced from a common input
volume trade-off decisions
when they do not have enough capacity to produce all of the product and sales volumes demanded by their customers they must trade-off ignore fixed costs
When a resource, such as space in the factory, has no alternative use, its opportunity cost is
zero
sell or process further decision
A decision as to whether a joint product should be sold at the split-off point or sold after further processing.
Depreciation of existing assets is relevant to decisions.
False
True or false: In the absorption approach to cost-plus pricing, the cost base is the variable costing unit product cost.
False
When there is a constrained resource, the best way to increase profits is to
increase the capacity of the bottleneck
To calculate the optimal selling price using Microsoft Excel's Solver requires
percentage change in selling price current unit sales current selling price
Relevant costs and relevant benefits
should be considered when making decisions, only those
One of the great dangers in allocating common fixed costs
such allocations can make a product line look less profitable than it really is.
Profit =
(P - V) * Q - Fixed Expenses P - selling price per unit V - variable expense per unit
Markup Percentage on absorption cost
(Req. ROI * Investment) + SG&A ---------------------------------------- Unit Product Cost * Unit Sales
Economic value to the customer =
Reference Value + Differentiation value that customers are required to buy a product at whatever price the seller deems appropriate
that customers are required to buy a product at whatever price the seller deems appropriate
Reference value =< Value-based price =< EVC
target costing
The process of determining the maximum allowable cost for a product and developing a profitable prototype
intermediate products
When a product is past the split-off point, but is not yet a finished product
avoidable cost
a cost that can be eliminated by choosing one alternative over another
Sunk cost
a cost that has already been committed and cannot be recovered. Irrelevant when shocisng among aleternatics
make or buy decision
a decision to carry out one of the activities in the value chain internally, rather than to buy externally from a supplier
differential cost
a difference in cost between two alternatives
differential approach
a method of understanding behavior by focusing solely on individual differences and abilities
Special Order
a one-time order that is not considered part of the company's normal ongoing business
Factors in determining the markup percentage using the absorption costing approach to cost-plus pricing include:
absorption costing unit product cost selling, general, and administrative expenses adequate return on investment
Isolating relevant costs is desirable for 2 reasons
all information needed for the total cost approach is rarely available critical information may be overlooked with the total cost approach irrelevant costs may be used incorrectly in the analysis
incremental cost
an increase in cost between two alternatives
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
constraint
anything that prevents you from getting more of what you want
The absorption costing approach to cost-plus pricing ______.
assumes that customers will pay whatever price the company decides to charge relies on forecasted unit sales
When a constraint exists, companies need to focus on maximizing
contribution margin per unit of constraint
joint costs
costs that are incurred up to the split-off point in a process that produces joint products
The first step in decision making is to
define the alternatives being considered