D101 - Unit 8

Sunk cost

A cost that has already been incurred or a future cost that cannot be avoided Regardless of what a manager decides to do; these costs are always the same, no matter what alternatives are being considered and are, therefore, always irrelevant to a decision.

In the context of considering whether to drop a product line, what is a common cost?

A cost that is not directly related to any specific product line Common costs are costs that are common across the company and are not directly related to any specific unit or product line.

What is a critical resource factor?

A resource that limits operating capacity by its availability A critical resource factor is the resource that limits operating capacity by its availability.

Which of the following statements is correct with regards to performing this type of differential cost analysis between these two alternatives?

Any costs that can be avoided by purchasing are differential costs. Unavoidable fixed manufacturing costs are sunk costs and are irrelevant to the differential cost analysis in this situation. All other costs, such as the direct materials, the direct labor, and the variable manufacturing overhead costs are relevant and part of the differential cost analysis in this situation.

When you are deciding whether to expand your business, what is the amount that you must pay to hire a new assistant manager called?

Differential cost You must carefully consider the new costs that will be incurred, such as the cost of hiring a new assistant manager.

What is a sunk cost?

Past costs that cannot be changed A sunk cost is a cost that has already been incurred or a future cost that cannot be avoided, regardless of what a manager decides to do.

In making a decision to exit a market, which considerations are important?

Qualitative factors that have a bearing on the decision, all differential costs relevant to the decision, and the effect that this decision will have on other divisions All three factors identified in this answer are important—the differential costs must be considered. Qualitative factors are always important. If making this decision will have an effect on other regions or divisions, those effects must be considered.

What are opportunity costs?

Revenue lost from selecting a different alternative. Opportunity costs are the benefits lost or forfeited as a result of selecting one alternative course of action over another.

When you are deciding whether to accept someone's offer to buy your car, what is the amount that you paid to buy your car called?

Sunk cost The only thing that is relevant is what the car is worth now. The amount that was paid for the car in the past is an irrelevant sunk cost.

In deciding which product to produce, put on shelves, or emphasize, what is the right metric to consider?

The contribution margin for each constrained unit

Opportunity cost

The maximum available contribution to profit foregone (or passed up) by using limited resources for a particular purpose. For example, part of the cost of choosing to sell a particular product is the profit you could have made using the same resources to sell a different product. Opportunity costs are always relevant for decision-making.

Under what circumstances is it appropriate to accept a special order at a price below the normal price?

When there is excess capacity A special order is an order that may be priced below the normal price to utilize excess capacity.

Which factors are irrelevant when making additional processing decisions?

Joint costs that have been incurred up to the point of split-off Joint costs that have been incurred up to the point of split-off are always irrelevant to the additional processing decision

Outsourcing is associated with which application of differential analysis?

Making or buying a product or service The term "outsourcing" means paying another company to provide a product or service that you could make yourself.

When you decide to invest in a stock mutual fund instead of a money market fund, what are the costs that you could have earned in the money market fund called?

Opportunity costs If you invest in the stock mutual fund, you are giving up the opportunity to earn the return on the money market fund.

Differential costs detail

The future costs that change as a result of a decision. Only differential costs and revenues are relevant to decisions. Some future costs may not be differential because they do not change as a result of a decision. Both variable and fixed costs may be differential. Sunk costs are never relevant because they are either past costs or future costs that cannot be changed. Once the quantitative analysis has been completed, qualitative factors must be considered.

Differential cost

The future costs that change as a result of a decision. expenditure that must be made as a result of the decision to accept the order. A cost that differs between alternatives; these costs are sometimes referred to as avoidable or incremental costs. Because differential costs differ between alternatives, they are always relevant for decision-making. Differential costs can be eliminated in whole or in part by choosing one alternative over another.

When should a company process a joint product further?

When incremental revenues are greater than incremental costs In choosing the best time to stop processing a product, management compares the additional costs that would be incurred from further processing with the additional revenues. If the incremental revenues are greater than the incremental costs, net income is increased and additional processing is worthwhile.

The differential costs are

variable costs direct fixed costs opportunity cost of alternative uses of the facilities