Ch.11 Differential Analysis: The Key to Decision Making
Potential advantages of dropping a product line or other segment include:
Avoiding more fixed costs than the company loses in contribution margin An overall increase in net operating income
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.
To effectively deal with a constraint _____.
Efforts should focus on the weakest link Improvements should focus on the constraint
Which of the following techniques describe how a bottleneck should be managed
Find ways to increase the capacity of the bottleneck Focus business process improvement efforts on the bottleneck Ensure there is minimal lost time at the bottleneck due to breakdowns and set-ups
Isolating relevant costs is desirable because _____.
Irrelevant costs may be used incorrectly in the analysis Critical information may be overlooked with the total cost approach All information needed for the total cost approach is rarely available
Which of the following may be an advantage of making a part rather than buying it?
Less dependence on outside suppliers. A smoother flow of parts and materials for production.
A company is considering buying a component part that they currently make. Which of the following items related to the equipment currently being used to make the component are relevant to the decision?
Salvage value Alternative uses for the equipment
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
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 labor hours, the contribution margin per unit of constraint for Product XYZ is $_____ per minute.
$3 CM of $15 / 5 min of labor time = 3 per minute
When considering accepting a special order:
Normal sales must not be affected There must be idle capacity.
Which of the following are ways to increase the capacity of a bottleneck
Investing in additional machines at the bottleneck Shifting workers from processes that are not bottlenecks to the process that is the bottleneck
Deciding what to do with a join product at the split-off point is a _____ decision
sell or process further
A cost that can be eliminated in whole or in part by choosing one alternative over the other is a _____ cost.
avoidable
When considering decision alternatives, only relevant costs are included when using the _____ ______ approach.
differential cost
Costs that have already been incurred and cannot be avoided regardless of what the manager decides to do are _____ costs.
sunk
If a company is using a resource that could be used for some other purpose, the opportunity cost of that resource is _____.
the profit from the best alternative use of the resource
The machine or process that is limiting overall output is a(n) _____.
bottleneck
The first step in decision making is to _____.
define the alternatives
One of the great dangers in allocating common _____ costs is that such allocations can make a product line look less profitable than it really is.
fixed
When making a volume trade off decision, managers should ignore _____
fixed costs
Two or more products produced from a common input are known as _____.
joint product
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 _____ or _____ decision.
make or buy
The potential benefit given up when selecting one alternative over another is a(n) _____ cost.
opportunity
When a shortage or limited resource of some type restricts a company's ability to satisfy demand, the company has a _____.
constraint
If some products must be cut back because of a constraint, produce the products with the _____.
highest contribution margin per unit of constrained resources
When there is a constrained resource, the best way to increase profits is to ______
increase the capacity of the bottleneck
Which of the following should not be included in the analysis when making a decision?
non-differential future costs sunk costs
Cost and benefits that ALWAYS differ between alternatives are ___ costs and benefits
relevant
When considering decision alternatives, both relevant and irrelevant costs are included when using the _____ _____ approach
total cost
A set of activities ranging from development to production to after-sales service is called the ______
value chain
Costs incurred up to the split-off point in a process in which two or more products are produced from a common input are known as _____ costs
joint
The split off point is the point in the manufacturing process at which the ______ products can be recognized as separate products.
joint
When a manager increases the capacity of a(n) ______ , it is called relaxing the constraint.
bottleneck
The total cost approach and the differential approach methods of decision analysis _____ provide the same correct answer.
will always
When a company is involved in more than one activity in the entire value chain, it is ______ ______.
vertically integrated
A future cost that is not the same between any two alternatives is known as a(n) _____, incremental, or avoidable cost.
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) _____ cost.
irrelevant
When planning trip and deciding whether to drive or fly, the _____ is a sunk cost and should be ignored.
original cost of the car