Chapter 11 - Decision Making and Relevant Information

What is a sunk cost?

A sunk cost is a cost that has already happened and taken place thus it plays no role in contributing to the decision making process. They cannot be changed by future actions.

What is the decision rule for make or buy decisions?

Lowest cost to have maximum profits.

What are incremental costs?

the additional total costs for the activity.

Do managers tend to analyse pricing by totals or relevant costs?

Doesn't matter the difference in differential costs will be the same either way.

What are relevant costs/revenue?

Projected, future costs/revenues

Incremental revenue?

the additional total revenue from an activity

Differential costs?

the difference in total cost between the two alternatives

What is an opportunity cost?

A sacrificed cost

What are product mix solutions?

They are ratio of product production.

What is a make or buy decision?

The decision between insourcing or outsourcing.

Differential revenue?

the difference in total revenue between the two alternatives.

What is the decision rule for product mix decisions?

Choose the product that produces the highest contribution margin per unit of the constraining resource (not the highest contribution margin per unit of the product).

What are the two criteria for relevant costs/revenues

Occur in the future Differ among the alternative courses of action (they change with a decision being made)

How do we display relevant costs?

Revenues - costs (direct, direct, indirect). Either using all costs and revenues or only relevant costs and revenues

What is a decision model?

a formal method of making a choice that often involves both quantitative and qualitative analyses.

What are the two problems with relevant cost analysis?

unit fixed price and thinking all relevant costs are variable and all fixed costs are irrelevant