ACCT 310 Chapter 4

Which of the following statements are true?

- Differential costs change in response to alternative courses of action. - Sunk costs are never differential

Which of the following statements are true?

- Some opportunity costs are not readily quantified - Determining opportunity costs involves subjectively

Which of the following statements are correct?

- the differential approach indicates the minimum acceptable price for a product. - fixed costs are generally irrelevant in short-term pricing decisions - following the differential approach in the short run may lead to under pricing in the long run

When considering the differential costs versus total costs approach:

- the differential format can be derived from the total format - the total cost approach provides information regarding total resources required.

Which of the following statements are true?

- the theory of constraints focuses on bottlenecks. - cost minimization is an important aspect of the theory of constraints. - the theory of constraints assumes few variable costs

Given variable manufacturing costs of $1.25 per unit, direct fixed overhead of $3,000 and a cost to outsource of $1.50 per unit, the company will be indifferent to make or buy (in terms of cost) at a volume of ____________ units.

12,000 ($3,000 + $1.25x = $1.50x) ($3,000 = $.25x) (x=12,000 units)

Larson, Inc. makes two products. Due to a limited number of available machine hours, demand for the products exceeds production capability. When allocating resources, Larson's measure of profitability should be:

Cm per machine hour

Which of the following statements are true?

In some companies, dropping a product line is equivalent to closing a business unit

Which of the following statements is true?

Informal or unspoken agreements to fix prices may be considered illegal.

Which of the following statements is true?

Price discrimination enables companies to sell products to customers who may not otherwise purchase them.

Which of the following is NOT a short-run pricing decision?

Pricing a main product in a large market

Which of the following statements is true?

Some factors in a make-or-buy decision are not easily quantified

Given the following, determine if a buy price for 2,000 units @ $5.00 per unit should be accepted or if the company should continue to make the 2,000 units. Direct materials ($1.25 per unit) = $2,500 Labor ($2.00 per unit) = $4,000 Variable overhead ($1.00 per unit) = $2,000 Fixed overhead =$1,000 Common costs = $500 If the company buys the units, all of the variable costs are differential. None of the fixed overhead or common costs are differential. None of the fixed overhead or common costs will be eliminated if the units are purchased. However, if the units are purchased the facilities that are no longer used will be used for another purpose which will provide a differential contribution of $2,500.

The company should buy the component because they will save $1,000 (Variable costs ($2,500 + $4,000 +$2,000) = $8,500 + $2,500 opportunity cost = $11,000 vs. $10,000 to buy (2,000 units x $5.00)

When a company engages in predatory pricing, the ultimate goal is to:

act like a monopolist

the cost - plus approach:

adds mark-up to full cost to determine target prices

A(n) ____________ is a constraining resource in which the work to be performed limits production.

bottleneck

Jacki's Jewels has a limited number of skilled direct labor hours to make necklaces and bracelets. Each necklace has a contribution margin of $175 and requires 1 hours of labor. Each bracelet has a cm of $100 and requires 1/2 hour of labor. In order to maximize cm, Jacki should first use labor hours to make _______________

bracelets

given the following, determine if a buy price for 3,000 units @ $4.00 per unit should be accepted or if the company should continue to make the 3,000 units. Direct materials ($1.00 per unit) = $3,000 Labor ($1.60 per unit) = $4,800 Variable overhead ($1.10 per unit) = $3,300 Fixed Overhead = $1,500 Common costs = $2,000 If the company buys the component, all of the variable costs and fixed overhead costs are differential. None of the common costs will be eliminated if the component is purchased. Based on price, the company should (make/buy) _________ the component at a net total advantage of $________.

buy; $600

When a company has a limited number of machine hours available each month, the limitation is known as a(n) ______________.

constraint

Sanders, Inc. makes two products. Due to a limited availability of skilled labor hours, demand for the products exceeds production capability. In deciding how to allocation resources, Sanders' measure of profitability should be:

contribution margin per direct labor hour

In order to use Goal Seek for a make-or-buy analysis:

costs must be separated into fixed and variable components

The process of estimating revenues and costs of alternative actions and comparing them to the status quo is called ____________ ___________.

differential analysis

True or False: the time value of money is a significant factor in short run decisions

false

Microsoft Excel's Solver function may be used to:

find the optimal product mix when there are constraining resources

Microsoft Excel's Solver function may to used to:

find the optimal product mix when there are constraining resources

When considering a special order:

fixed costs may be irrelevant

Long-run pricing decision usually rely on:

full cost information

Environmental regulations that require firms to "take back" and dispose of products have increased the importance of:

life-cycle costing

A diner is deciding whether to use its own ingredients to prepare meals or purchase frozen prepared items form a supplier. This is an example of a:

make-or-buy decision

differential costs:

may be approximated by full costs in the long run

A company is considering whether to continue to make a component or buy it from an outside supplier. Because the company has no alternative use of the manufacturing facilities that are currently used to make the product, the ____________ __________ associated with the decision is zero.

opportunity cost

Utility companies often engage in ___________-___________ ___________ in providing services at high demand levels.

peak - load pricing

the intent of ___________ ___________ is to drive competitors out of the market by setting prices low.

predatory pricing

Selling identical goods or services to different customers at different prices is:

price discrimination

When airlines sell tickets to customers who stay over Saturday night for less than tickets to customers who fly on Saturday, they are engaging in ___________ ___________

price discrimination

The agreement among business competitors to set prices as a particular level is:

price fixing

the _________ _________ __________ covers the time from initial research and development to the time when customer support is withdrawn.

product life cycle

Given the following, a special order for 100 units @ $5 each will result in a (profit/loss) _____________ of $______ from the special order. Sales (2,000 units @ $9 each) = $18,000 Variable costs (2,000 units @ $4 each) = $8,000 Total Contribution margin = $18,000 - $8,000 = $10,000 Allocated fixed costs = $4,000 Operating profit = $10,000-$4,000 = $6,000

profit; $100

the period of time over which capacity will be unchanged (normally one year) is known as the ___________ ___________

short run

If a company is not operating at full capacity, accepting a(n) _________ ___________ from a customer will not affect other sales and is usually a short-run occurrence.

special order

Using "price-based costing" instead of "cost-based pricing" is the concept of __________ ___________.

target cost

the __________ of ___________ focuses on revenue and cost management when faced with bottlenecks.

theory of constraints

The full-cost fallacy occurs when decision makers:

think that fixed costs are variable

sales dollars minus direct materials costs and other variable costs such as energy and piecework labor equals ______________ contribution.

throughput

True or false: Ultimately dumping can cause the same harm to consumers that is caused by predatory pricing.

true

A company is considering whether to continue to make a component or buy it from an outside supplier. If they buy the component the manufacturing facility currently being used will be idle. If the company has no alternative use of the facility, the opportunity cost associated with this decision is:

zero