CH. 11

The decision to keep or replace a piece of equipment:

- should consider relevant financial and nonfinancial information - may be may using either a differential or total cost analysis

Which of the following statements are true?

- sunk costs are never relevant for decision-making purposes - fixed costs are generally not relevant for managerial decision making - a relevant cost can be either fixed or variable

Costs incurred prior to the split-off point ___________ traceable to individual products

Are not

An iso-profit line, for a two-product firm, represents:

alternative combinations of the two products that would result in a given amount of operating profit

When considering whether to repair or replace a machine, costs that do not differ between these two decision alternatives are:

always irrelevant

"Shadow price" refers to the:

amount a decision maker would pay for each additional unit of the constraint (e.g., machine hours)

The optimum solution, for a short-term product-mix problem, generated by running Excel's Solver routine indicated the:

maximum contribution margin attainable under the given constraints

A potential problem associated with the use of relevant cost analysis to evaluate managers is that the managers may:

try to substitute controllable variable costs with fixed costs

Relevant costs for a special order generally include:

unit-level and some batch-level costs

When using lean accounting, special orders are evaluated within the context of the ______________ in which they are located

value stream

A relevant cost analysis:

- is focused on individual decisions - may not be linked to firm's strategy - has a product-cost focus

Relevant costs and revenues in a decision to replace or refurnish (repair) a machine used in the manufacturing process include:

- repair cost of the old machine - cost of building modification needed to accommodate the new (larger) machine - estimated salvage (disposal) value of the new machine at the end of its useful life - electoral power (assuming the replacement machine is more efficient)

In a joint product process, costs incurred after the split-off point are ___________ costs

- separable processing - traceable processing

If a special sales order (consisting of 20 units of a product) is accepted, sales of 10 units of a different product (that sells for $15 per unit, with variable cost of $10 per unit) will be lost (because of capacity constraints). For purposes of pricing the special sales order, the opportunity cost per unit of accepting the special order is:

$2.50

Relevant short-run financial considerations of a decision to drop (or keep) a product (or service) include:

- avoidable short-term fixed costs - the contribution margin that would be lost if the product were dropped - variable costs associated with the product, both production and sales-related

In terms of assessing service offerings of Not-for-Profit (NFP) organizations, relevant cost analysis:

- can be applied because the focus of analysis is on incremental costs and incremental revenues for these offerings - can be used, for example, to determine the desirability of new service offerings - can be used to determine resource needs for proposed new programs - can be used to identify projected deficits (funding shortfalls) for new service offerings

The relevant cost decision rule for pricing of special orders:

- can erode normal pricing policing - focuses on the short-term

In deciding whether to process a given product beyond the split-off point:

- compare incremental revenues for the product to the product's separable processing costs - ignore allocated joint-manufacturing costs

Performing a relevant cost and strategic analysis includes:

- considering strategic issues associated with the decision - identifying and collecting relevant information - predicting future values of relevant costs and revenues

In a keep-or-drop-a-product decision the product's ________________ is(are) always relevant to the decision

- contribution margin - avoidable fixed production (or marketing costs) - variable production costs

Cost relevant to the make-vs-buy decision include:

- direct materials needed to produce the item internally - external purchase price of the part, sub-assembly, or product in question

A strategic cost analysis:

- has a customer focus - is integrative in nature

Evaluating performance of implemented decision is:

- helpful for informing future managerial decisions - the final step in the five-step decision-making process - a continual process

Strategic/qualitative considerations associated with the decision to drop or to keep an existing product (or service) line include:

- impact on employee morale - product (service) demand inter-dependencies

In terms of a decision such as whether to keep (repair) or replace an existing piece of machinery, batch-level costs are:

- irrelevant if the amount of the cost is the same under each decision alternative - relevant if they change in total as result of the decision

Information constrained in the optimal "Sensitivity Report" produced by running Solver in Excel includes:

- the "allowable range" for coefficient values for the decision variables (here, contribution margins per unit) - final (i.e., optimum) values for the decision variables (here, # of units of each product that should be produced/sold) - "shadow price" information - the indicated contribution margin per unit for each product

Which of the following statements are true?

- the tax impacts(s) of depreciation expenses are relevant to decisions - depreciation expense is included in a total cost analysis - depreciation expense per se (i.e., in an itself) is not relevant for decision making

Basic results (i.e. not associated with any available supplementary reports) from running the Solver routine in Excel, in conjunction with determining optimum short-term product mix include:

- the values of the decision variables that optimize the decision, subjects to the indicated constraints - the optimum value of the dependent variable in the model (in the product mis decisions, this is contribution margin) - information as to total resource consumption (use) at the optimum solution

Costs that are typically relevant for assessing a special order decision include:

- the variable portion of batch-level costs - unit-level costs

Strategic/qualitative questions associated with a make-vs.-buy decision include:

- will the quality of the item purchased externally meet the specifications/expectations of the firm? - are there alternative uses of the capacity (resource) used to produce the item in question? - can the supplied deliver the items when needed?

Opportunity costs:

- would likely exist if a manufacturing plant were operating at capacity and a decision to product a special sales order was being evaluated - would be zero for a resource (e.g. factory machine hours) was excess capacity - are always relevant for decision-making - represent the benefit foregone of choosing a particular decision alternative

Edison Corp. is considering either purchasing or leasing a new copy machine. The cost to lease is $60,000 per year plus $0.025 per copy. The machine may be purchased for $200,000. If the machine is purchased, a $20,000 annual service contract is required and Edison has the option to sell the copier back for 20% of the purchase price at the end of the first year. How many copies must be made per year for Edison to be indifferent about the lease or purchase decision?

4,800,000 $60,000 / ($0.025 x Q) = ($200,000 - $40,000) / $20,000 Q = 4,800,000

Which of the following factor(s) are important to decision making when cash flows will be received or paid over an extended period of time?

Both time value of money and qualitative factors

Relevant costs are:

Future costs that differ between and among decision alternatives

Calculating the indifference point (i.e. the level of volume or output that would make a rational decision maker indifferent between two calculations) is a critical calculation is a ___________ decision

Lease-vs-buy

A mathematical technique that can be used to solve constrained optimization problems including short-term product mix is ___________.

Linear programming

Larson Enterprise is considering dropping one of its products. The item sells for $20,00 per unit. Variable production costs are $11.00 and variable selling costs are $2.00 per unit. Total fixed costs are $9.00 per unit. Of the fixed cost, $6.00 of the Toal is allocated and $3.00 us avoidable. Larson sells 1,000 of these units each month. If Larson discontinues this product:

Operating profit will decrease by $4,000 per month - the product's contribution margin per unit is $7 ($20 -$11 -$2) and the avoidable fixed cost are $3, so if the item discontinued, profits will decrease by $4 per unit x 1,000 units/month = $4,000 per month

A company engages in _________________ when it sets prices below average variable cost and plans to raise prices later to recover the losses from the low prices

Predatory pricing

Joint production costs are incurred:

Prior to the split-off point

JVL Bakeware sells a number of colorful items. Mixing bowl sets cost $6.50 to produce and sell for $12.00. Due to a manufacturing defect, a batch 100 of mixing bowl sets came out of processing with an unacceptable color. JVL can sell the bowls to an outlet store for $6.00 per set or can redo the coloring process at a cost of $4.50 per set and then sell the bowls at regular price, JVL should:

Reprocess the bowls at a net benefit of $150 - The original manufacturing cost is sunk, $1200 - $450 = $750 contribution margin after reprocessing vs. $600 to sell as is. Thus, JVL has a net benefit of $150 from reprocessing the bowls

In what principal way can relevant cost analysis be distinguished from strategic analysis?

Strategic analysis has more of a long-term focus whereas relevant cost analysis has more of a short-term focus

TRUE OR FALSE: When there is excess capacity opportunity costs are zero

TRUE - this implies that there is sufficient capacity to cover each decision alternative (whatever the alternative may be). As such, there is no cost incurred by choosing a particular decision alternatives

Strategic consideration for a special order decision include all of the following EXCEPT:

The avoidable (i.e., incremental) cost of the special sales order

When costs are classified by the behavior, ___________ costs are generally relevant for decision because they differ while __________ cost are often irrelevant because they do not change.

Variable, fixed

A company produced only two products and demand for each product exceeds the company's current output capacity. The company has a single resource constraint (machine hours). In this context, an iso-production line can be created which provides:

a set of possible production combinations of the two products that would fully utilize the available resource

When deciding whether or not to undertake a joint production process, joint production costs:

are relevant to the decision

Details regarding a manufactured product's components, including product sub-assembles, is contained in a:

bill of material

When specifying critter for making a decision:

both quantitative and qualitative criteria should be considered

The optimum short-term product mis for a two-product firm when there is only a single resource constraint (and no demand constraints) is determined:

by estimating the total contribution margin associated with each of the two end points of the iso-production line associated with the resource

Assume that a firm producing two products and subject to multiple resource (production) constraints prepares a graphical analysis of feasible production possibilities. From this set of production possibilities, the optimum short-term product mix solution can be determined using a(n) _____________ analysis

corner point

When a relevant cost analysis for a proposed new program by a not-for-profit organization shows a deficit for year 1 of the program, the organization should:

decide if steps should be taken to make up the deficit

The first step in the five-step decision-making process outlined in the chapter is:

determine the organization's business environment and competitive strategy

Common managerial mistakes in relevant costs analysis include:

improperly treating fixed costs as relevant for short-term decision making

In the decision to keep or replace your automobile, the original purchase price of your current car is a(n) ______________ cost

irrelevant

The term used to describe the set of output possibilities (combinations) for each resource constraint in a short-term product-mix problem in a(n) ______________ line

iso-production

When multiple outputs arise naturally from a common resource input, a(n) _____________ process occurs

joint production

Calculating the indifference point (i.e., the level of volume or output that would make a rational decision maker indifferent between two calculations) is a critical calculation is a _____________ decision

lease-vs-buy

A primary reason why managers may neglect long-term (strategic) goals in their decision-making process is:

linkage of managerial compensation to short-term profit objectives

The danger of reporting fixed costs on a per-unit basis is that this practice:

makes them appear relevant

To achieve the optimal short-run product mix when there are no resource constraints:

manufacture what is needed to meet estimated product demand for the firm's product

From a purely short-term financial perspective a special sales order should be accepted if:

the special sales price on the order exceeds the relevant costs of the order

The optimal sales max can include more than one product:

only when there are two or more production constraints

The optimal short-term product mix will include just a single product (output):

only when there is one production constraint

In a special order, contribution margin lost on regular sales because of acceptance of a special order is a(n):

opportunity cost

In a special order, contributions margin lost on regular sales because of acceptance of a special order in a(n):

opportunity cost

Total relevant cost for a special order decision equals:

out-of-pocket costs + opportunity costs

Choosing to have an outside firm provide a basic service function is called _____________

outsourcing

The third step in the five-step decision-making process outlined in the chapter is:

perform relevant cost and strategic analysis

Management accountants can facilitate managerial decision making by:

providing decision makers with both relevant cost information and strategic considerations regarding decision options

For a two-product firm that is subject to multiple resource constraints, "feasible area" represents the:

range of possible output contributions that are possible given the combined resource constraints the firm facing

Costs incurred after the split-off point that can be traced to individual products are known as ___________________________ costs

separable processing

The term used to describe a firm's not-time opportunity to sell a specified quantity of its product or service is _________________ decision.

special-order

The second step in the five-step decision-making process outlined in the chapter is:

specify the criteria and identify alternative actions

The point in the production process where products with separate identities arise is the ______________ point

split-off

The decision to drop Product X would have no effect on the sales or costs associated with the remaining two products in a company's product line, Product Y and Z. The short-term financial impact of Product X can be determined by:

the contribution margin currently generated by Product X less avoidable fixed costs associated with Product X

Selecting and implementing the best decision alternative is:

the fourth step in the five step decision process

When used within the context of the pricing decision, dumping refers to:

the practice of selling goods in foreign countries at anti-competitive prices

For decision-making purposes (e.g., deciding whether to repair or replace an asset used in the business) a total cost analysis:

will always result in the same decision as a differential cost analysis