ACCT3030 CHAPTER 13

When making a product line decision, a company may focus on lost contribution margin and avoidable fixed costs or prepare comparative

income statements

The costs provided by a well-designed activity-based costing system are ______ relevant to a decision.

potentially

Two or more products that are produced from a common input are known as __products

joint

A decision to carry out one of the activities in the value chain internally rather than to purchase externally from a supplier is a ______ decision.

make or buy

A limited resource of some type that restricts the company's ability to satisfy demand is a(n) ______.

constraint

When a shortage or limited resource of some type restricts a company's ability to satisfy demand, the company has a(n

constraint

A future cost that is not the same between any two alternatives is known as a(n)__, incremental, or avoidable cost.

differential

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

A business segment should only be dropped if a company can save more in ______ costs than it loses in contribution margin.

fixed

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

A cost that has already been incurred and cannot be avoided regardless of what a manager decides to do is referred to as a(n) __cost

sunk

Costs that have already been incurred and cannot be avoided regardless of what a manager decides to do are ______ costs.

sunk

When considering decision alternatives, both relevant and irrelevant costs are included when using the____approach.

total cost

Andrews Co. can purchase 20,000 units of Part XYZ from a supplier for $18 per part. Andrews' per unit manufacturing costs for 20,000 units is as follows: Cost Per Unit Total Variable manufacturing cost $12 $240,000 Supervisor salary $3 $60,000 Depreciation $1 $20,000 Allocated fixed overhead $7 $140,000 If the part is purchased, the supervisor position will be eliminated. The special equipment has no other use and no salvage value. Total allocated fixed overhead would be unaffected by the decision. The company should ______.

The avoidable costs of making the product are the variable costs plus the supervisor salary or $15 per unit. The total savings is $60,000 ($18 buy price - $12 variable cost - $3 supervisor salary = $3 advantage to make X 20,000 units).

Product ABC has a contribution margin per unit of $10.00. Each unit of ABC requires 5 minutes of machine time and 10 minutes of labor time. Product XYZ has a contribution margin per unit of $15.00 and each unit requires 10 minutes of machine time and 5 minutes of labor time. If the company's constraint is labor hours, the contribution margin per unit of constraint for Product XYZ is $

3/minute

When demand for products exceeds the production capacity, a(n) ___ decision has to be made

volume trade off

Irrelevant costs include ______.

future costs that do not differ between alternatives sunk costs

Costs and benefits that should be ignored when making decisions are called ______ costs and benefits.

irrelevant

Determining whether to carry out an activity in the value chain internally or use a supplier is a ______ decision.

make or buy

Space being used that would otherwise be idle has a(n)_cost of zero

opportunity

Differential revenue is an example of a(n) ______ benefit.

relevant

Deciding what to do with a joint product at the split-off point is a ______ decision.

sell or process further

Deciding what to do with a joint product at the split-off point is a(n

sell or process further decision

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

special

When making a decision, irrelevant items are included in the analysis of both alternatives when using ______.

the total cost approach only

Less dependence on suppliers is an advantage of ______.

vertical integration

When a resource, such as space in the factory, has no alternative use, its opportunity cost is ______.

zero

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 machine hours, to maximize profit, they should first fill the demand for Product ______.

ABC The company should fill the demand for the product with the highest CM per unit of the constrained resource. ABC's is $2 per minute of machine time (CM of $10 ÷ 5 minutes) while XYZ's is only $1.50 per minute of machine time (CM of $15 ÷ 10 minutes).

Which of the following can make a product line look less profitable than it really is?

Allocated common fixed costs

True or false: Depreciation of existing assets is relevant to decisions.

False

True or false: Opportunity costs are not found in accounting records because they are not relevant to decisions.

False

True or false: Some decisions only have one alternative.

False

As it applies to sell or process further decisions, which term refers to a product that is in the process of being made?

Intermediate product

Which of the following should not be included in the analysis when making a decision?

Sunk costs Non-differential future costs

Isolating relevant costs is desirable because ______.

all information needed for the total cost approach is rarely available critical information may be overlooked with the total cost approach irrelevant costs may be used incorrectly in the analysis

A company is considering buying a component part that they currently make. Items related to the equipment being used to make the component that are relevant to this decision include ______.

alternative uses for the equipment salvage value

Potential advantages of dropping a product line or other segment include ______.

an overall increase in net operating income avoiding more fixed costs than the company loses in contribution margin

When a constraint exists, companies need to focus on maximizing ______.

contribution margin per unit of constraint

The first step in decision making is to ______.

define the alternatives

Effectively managing an organization's constraints is a key to increased ______.

profits

Costs and benefits that always differ between alternatives are ______ costs and benefits.

relevant

When making a product line decision, a company may focus on lost contribution margin and avoidable fixed costs or prepare comparative ______.

Income statements

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

True or false: Mingling irrelevant and relevant costs may cause confusion and distract attention from critical information.

True

The potential benefit given up when selecting one alternative over another is a(n) ______ cost.

opportunity

When planning a trip and deciding whether to drive or fly, the ______ is a sunk cost and should be ignored.

original cost of the car