Ch. 12 Questions

What is a relevant cost?

A relevant cost is a cost that should be considered when making decisions.

What is the danger in allocating common fixed costs among products or other segments of an organization?

This can cause profitable segments to look unprofitable if common fixed costs are allocated among products or other segments of an organization.

What guideline should be used in determining whether a joint product should be sold at the split-off point or processed further?

If the incremental revenue earned from further processing exceeds the incremental costs earned from further processing, the product should be processed further.

"If a product is generating a loss, then it should be discontinued." Do you agree? Explain.

It would depend on the product and situation. But a product should be discontinued only if the CM that will go away after dropping the product is less than the fixed costs associated with keeping the product.

"Variable costs and differential costs mean the same thing." Do you agree? Explain.

No, a variable cost is a cost that varies in total amount in direct proportion to changes in the level of activity. A differential cost however is the difference in cost between two alternatives.

"Sunk costs are easy to spot—they're the fixed costs associated with a decision." Do you agree? Explain.

No, not all fixed costs are sunk. Only those for which cost has already been irrevocably incurred. A variable cost is considered a sunk cost if its already been incurred.

"All future costs are relevant in decision making." Do you agree? Explain.

No, the only future costs that are relevant are those that differ between the alternatives.

How will relating product contribution margins to the amount of the constrained resource they consume help a company maximize its profits?

Profits are maximized when the contribution margin is maximized, assuming that fixed costs are not affected. Company's can maximize their total contribution margin by focusing on the products with the greatest amount of contribution margin per unit of the constrained resource.

Airlines sometimes offer reduced rates during certain times of the week to members of a businessperson's family if they accompany him or her on trips. How does the concept of relevant costs enter into the decision by the airline to offer reduced rates of this type?

Airlines have a lot of sunk costs and costs that don't fluctuate due to the number of passengers on the flight therefore they can offer reduced rates on seats that would otherwise be empty thus increasing CM and profit.

From a decision-making point of view, should joint costs be allocated among joint products?

From a decision-making point of view, joint costs should not be allocated among joint products.

Define the following terms: incremental cost, opportunity cost, sunk cost.

Incremental cost: an increase in cost between two alternatives. Opportunity cost: the potential benefit that is given up when one alternative is selected over another. Sunk cost: a cost that has already been incurred and that cannot be changed by any decision made now or in the future.

Define the following terms: joint products, joint costs, and split off point.

Joint products: two or more products that are produced from a common point. Joint costs: costs that are incurred up to the split-off point in a process that produces joint products. Split off point: the point in the manufacturing process where some or all of the joint products can be recognized as individual products.

Are variable costs always relevant costs? Explain.

No not always. Variable costs are relevant costs only if they differ in total between the alternatives under consideration.

Prentice Company is considering dropping one of its product lines. What costs of the product line would be relevant to this decision? What costs would be irrelevant?

Only costs that would be avoided as a result of dropping the product line are relevant. Costs that won't be affected by the decision are irrelevant.

How does opportunity cost enter into a make or buy decision?

Opportunity cost is the potential benefit that is given up when one alternative is selected over another. In this case companies must compare the benefits of either making a product in-house or outsourcing it and then choose the best decision.

Give at least four examples of possible constraints.

• Little Italy's only has 1 table open. Available tables is the constraint. • The Mellow mushroom is understaffed Friday night. Available employees is the constraint. • I want to drive home but my car is low on gas. Gas is the constraint. • I don't have enough time to study for both my exams over the weekend and go downtown with my friends. Time is the constraint.