ACCT333 CH11

6 key components of making decisions

1. Define the alternatives 2. Identify relevant and irrelevant costs and benefits 3. Differential analysis; ignore irrelevant costs and benefits 4. Sunk costs are always ignored 5. Future costs and benefits do not differ between alternatives are irrelevant 6. Opportunities costs need to be considered

Limits total output because it has the smallest capacity

Bottleneck

Utilizing a constrained resource to maximize profits

provide the highest contribution margin per unit of the constrained reosurce

When a manager increases the capacity of the bottleneck, it is called:

relaxing (or elevating) the constraint

The advantages of vertical integration include all of the following except:

avoiding excess capacity at different levels of integration

Differential approach

focuses solely on the relevant costs and benefits

When a company is involved in more than one activity in the entire value chain

vertically integrated

Special order

a one-time order that is not considered part of the company's normal ongoing business

After-sales service are called:

a value chain

The capacity of a bottleneck can be effectively increased in:

-Working overtime on the bottleneck -Subcontracting some of the processing that would ordinarily be done at the bottleneck -Investing in additional machines at the bottleneck Particularly attractive: -Shifting workers from processes that are not bottlenecks to the process that is the bottleneck -Focusing business process improvement efforts on the bottleneck -Reducing defective units

Make or Buy decision

-a decision concerning whether an item should be produced internally or purchased from an outside supplier -also involves decisions concerning whether to outsource development tasks, after-sales service, or other activities

advantages of vertical integration

-smoother flow of parts and materials, -better quality control, -realize profits

It is profitable to continue processing a joint product after the split-off point so long as: A. the incremental revenue from such processing exceeds the incremental processing costs incurred after the split-off point. B. the incremental revenue from such processing exceeds the incremental processing cost incurred before the split-off point. C. the incremental revenue from such processing exceeds the allocated joint costs attributable to the product. D. the incremental revenue from such processing exceeds the sum of the allocated joint costs attributable to the product and the incremental processing costs incurred after the split-off point.

A

A company has received a special order from a customer to make 5,000 units of a customized product. The direct materials cost per unit of the customized product is $15, the direct labor cost per unit is $5, and the manufacturing overhead per unit is $18, including $6 of variable manufacturing overhead. If the company has sufficient available manufacturing capacity, what is the minimum price that can be accepted for the special order? A. $24 B. $26 C. $32 D. $38

B 15 + 5 + 6 = 26

When a company has a constraint and wishes to maximize profits, it should favor the products that have the highest A. Gross margin per unit. B. Gross margin per unit of the constraining resource. C. Contribution margin per unit. D. Contribution margin per unit of the constraining resource.

D Gross margin includes fixed costs that are not relevant to this situation. The contribution margin per unit overlooks the constraining resource.

A decision as to whether a joint product should be sold at the split-off point or processed further

Sell or Process further decision

Avoidable cost

a cost that can be eliminated by choosing one alternative over another

Incremental cost

an increase in cost between two alternatives

Total cost approach

evaluating each possible physical distribution system and identifying all of the costs of each alternative

4 steps to help determine the most profitable use of a constrained resource:

1. Calculate each product's contribution margin per unit. 2. Identify the constraining resource and the quantity of that resource that is consumed to make one unit of each product. 3. Calculate each product's contribution margin per unit of the constraining resources. 4. Rank the products from the highest contribution margin per unit of the constraining resource to the lowest

3 steps to calculate the financial advantage (disadvantage) associated with sell or process further decisions:

1. Calculate the sales value if processed further minus the sales value at the split-off point. 2. Determine the cost of further processing beyond the split-off point 3. Step 1 - Step 2. If the result is positive = process further If the result is negative = choose to sell at the split-off point

3 steps to quantify the financial advantage of accepting a special order:

1. Calculate the total revenue generated by the special order. 2. Calculate the total incremental costs that will be incurred to produce the special order. 3. Take the amount in step 1 and subtract from it the amount in step 2. If the result is positive = accept If the result is negative = reject

3 steps of volume trade-off decisions

1. Define the meaning of a constraint 2. Determine the most profitable use of a constrained resource 3. Determine the value of obtaining more of a constrained resource and manage constraints to increase profits

3 steps of making Sell or Process further decisions:

1. Ignore all joint costs 2. Determine the incremental revenue that is earned by further processing the joint product 3. Take the amount from step 2 and subtract the incremental costs associated with processing the joint product beyond the split-off point. If the answer is positive = process further and sold for a higher price. If the answer is negative = should be sold at the split-off point without any further processing.

Assume that in October you bought a $450 nonrefundable airline ticket to Telluride, Colorado, for a 5-day/4-night winter ski vacation. You now have an opportunity to buy an airline ticket for a 5-day/4-night winter ski vacation in Stowe, Vermont for $400 that includes a free ski lift ticket. The price of your lift ticket for the Telluride vacation would be $300. The price of a hotel room in Telluride is $180 per night. The price of hotel room in Stowe is $150 per night. Which of the following costs is not relevant in a decision of whether to proceed with the planned trip to Telluride or to change to a trip to Stowe? A. The $450 airline ticket to Telluride B. The $400 airline ticket to Stowe C. The $300 lift ticket for the Telluride vacation D. The $180 per night hotel room in Telluride

A Because the cost of the airline ticket to Telluride is a sunk cost

Sunk cost

A cost that has already been incurred and that cannot be changed by any decision made now or in the future. EX. depreciation

Which of the following statements is false? (may select more than one) A. Under some circumstances, a sunk cost may be relevant const. B. Future costs that do not differ between alternatives are irrelevant. C. The same cost may be relevant or irrelevant depending on the decision context. D. Only variable costs are relevant costs. Fixed costs cannot be relevant costs.

A, D Sunk costs are always irrelevant. Fixed costs can be relevant costs.

Based on the facts in question above, does a differential cost analysis favor Telluride or Stowe, and by how much? A. Stowe by $470 B. Stowe by $20 C. Telluride by $70 D. Telluride by $20

B The cost of going to Stowe would be $1,000 ($400 + ($150 per night x 4 nights) whereas the incremental cost of going to Telluride would be $1,020 ($300 + ($180 per night x 4 nights) So the analysis favors Stowe by 1,020 - 1,000 = $20. *Cost of flying to Telluride is irrelevant.

Refer to the facts from above; however, in answering this question assume that the company is operating at 100% of its capacity without the special order. If the company normally manufactures only one product that has a contribution margin of $20 per unit and that consumes 2 minutes of the constrained resource per unit, what is the opportunity cost (stated in terms of forgone contribution margin) of accepting the special order? Assume the special order would require 1.5 minutes of the constrained resource per unit? A. $25,000 B. $50,000 C. $75,000 D. $100,000

C The special order requires 7,500 minutes (5000 units x 1.5 minutes per unit). Accepting the special order would require sacrificing 3750 units (7500 mins / 2 mins per unit) of the regular product. The forgone contribution margin would be 3750 units x $20 = $75,000

Which of the following statements is true? (may select more than one) A. Common fixed costs should be allocated to business segments when making decisions because all of a company's costs need to be covered to be profitable. B. When making decisions, common fixed costs should be allocated to business segments based on each segment's sales revenue because this reflects each segment's "ability to bear" additional costs. C. Common fixed costs should not be allocated to business segments for decision-making purposes. D. When making decisions, allocating common fixed costs to segments may understate the true profitability of those segments.

C, D Common fixed costs should not be allocated to segments when making decisions. Doing so will understate the true profitability of each segment.

Anything that prevents you from getting more of what you want

Constraints

In a make-or-buy decision, relevant costs are: A. Manufacturing costs that will be saved. B. The purchase price of the units. C. Opportunity costs. D. All of the above.

D

2 or more products produced from a single raw material input are called

Joint products

The point in a manufacturing process where joint products can be recognized as separate products

Split-off point

Volume trade-off decisions

When they do not have enough capacity to produce all of the products and sales volumes demanded by their customers. In this case, companies must trade off or sacrifice production of some products in favor of others in an effort to maximize profits.