SB6

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

constraint

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

constraint

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)

incremental cost

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. (Enter only one word per blank.)

make buy, outsource, or outsourcing

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

relevant

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

Therefore, the first step in decision making is

to define the alternatives being considered.

When a constraint exists, companies need to focus on maximizing

total contribution margin

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

volume trade off

Every decision involves choosing from among at least ________ alternatives

2

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? Multiple choice question. Buy — $100,000 advantage. Reason: 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). Buy — $80,000 advantage. Reason: 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). Continue to make — $60,000 advantage. Reason: 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). Continue to make — $40,000 advantage. Reason: Depreciation is not a relevant cost. 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).

Continue to make — $60,000 advantage.

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

False

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

contribution margin per unit of constrained resource

The key to effective decision making is:

differential analysis

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