Chapter 6 SB

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 Blank______.

$11,000. The company will lose $84,000 in contribution margin ($170,000 - $86,000). If $95,000 of the fixed costs are avoidable, net income will increase by $11,000.

Product DGH has a monthly demand of 7,000 units. Its contribution margin is $18 per unit and $36 per direct labor hour. Product _____ RBG has a monthly demand of 5,000 units. Its contribution margin is $15 per unit and $60 per direct labor hour. If the company only has 2,000 direct labor hours available, the company should produce units of Product DGH_____ and units of Product RBG

1500, 5000

What type of cost is never relevant and should be disregarded when making decisions?

Sunk

Opportunity costs should Blank______ be included in a sourcing decision.

always

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

avoidable

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

differential

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) Blank______ cost.

irrelevant

Joint costs are Blank______.

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

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

never

Allocated common costs are Blank______.

only relevant to decisions if they are avoidable

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

real, economic

Allocated common costs are Blank______ avoidable and/or relevant to a decision.

sometimes

When making a decision, only relevant items are included in the analysis of the alternatives when using Blank______.

the differential cost approach only

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

the total cost approach only

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

the weakest link

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

total

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

volume trade-off

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

will always

Which of the following techniques describe how a bottleneck should be managed?

- Ensure there is minimal lost time at the bottleneck due to breakdowns and set-ups. - Focus business process improvement efforts on the bottleneck. - Find ways to increase the capacity of the bottleneck.

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

- 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. - An analysis that just looks at the relevant costs and benefits.

When making a decision to either buy a movie ticket or rent a DVD, the cost of the movie ticket is an example of a(n) Blank______ cost.

- avoidable - incremental

A company must make a volume trade-off decision when they Blank______.

- do not have enough capacity to satisfy all product demand - must trade off units of one product for units of another

To effectively deal with a constraint Blank______.

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

ABC Lumber spent $500 cutting down a tree which resulted in 40 pieces of unfinished lumber that sell for $20.00 each and 100 bags of sawdust that sell for $1.00 each. For $8.00, an unfinished piece of lumber can be processed into a piece of finished lumber that sells for $35.00. For $0.75, a bag of sawdust can be processed into a Presto Log that sell for $1.25. Based on this information, Blank______.

- the pieces of unfinished lumber should be processed into finished lumber - the bags of sawdust should be sold without additional processing

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 Blank______.

ABC

Which of the following attempts to match the sunk cost of an asset with the periods that benefit from that cost?

Accounting depreciation only

A special order should be accepted Blank______.

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