chapter 11. differential analysis: the key to decision making

product abc has a contribution margin per unit of $10. 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 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 __________ per minute

$15 / 5 = $3

a company must make a volume trade-off decision when they __________

must trade off units of one product for units of another due to limited production capacity; do not have enough capacity to satisfy the demand for all of its products

which of the following should not be included in the analysis when making a decision: - avoidable costs - non-differential future costs - sunk costs - opportunity costs

non-differential future costs; sunk costs

the potential benefit given up when selecting one alternative over another is an __________ 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

the costs provided by a well-designed activity-based system are __________ relevant to a decision

potentially

when selecting one alternative over another, opportunity costs __________

represent forgone economic benefits; are sometimes zero

it is profitable to continue processing a joint product after the split-off point, so long as the incremental __________ from such processing exceeds the incremental processing cost incurred after the split-off point

revenue

a company is considering buying a component part that they currently make. which of the following items related to the equipment currently being used to make the component are relevant to the decision: - original cost - salvage value - annual depreciation charges - alternative uses for the equipment

salvage value; alternative uses for the equipment

deciding what to do with a joint product at the split-off point is a __________

sell or process further decision

when making decision, qualitative differences between alternatives _________ be ignored

should not

a one-time sale that is not considered part of the company's normal ongoing business is referred to as a __________ __________ decision

special order

a one-time sale that is not considered part of the company's normal ongoing business is referred to as an __________ __________ decision

special order

the capacity of a bottleneck can be effectively increased by __________

subcontracting some of the processing that would be done in that area; focusing business process improvement efforts on the bottleneck

costs that have no impact on future cash flows and are irrelevant to decisions are __________ costs

sunk

when a resource, such as space in the factory, has no alternative use, its opportunity cost is __________

zero

average costs __________

contain sunk costs; are often misleading

when a constraint exists, companies need to focus on maximizing __________

contribution margin per unit of constraint

the benefit from relaxing the constraint equals __________

contribution margin per unit of the constrained resource

isolating relevant costs is desirable because __________

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

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

income statements

allocated common costs are __________

only relevant to decisions if they are avoidable

a decision to carry out one of the activities in the value chain internally, rather than to buy externally from a supplier, is called a __________ or __________ decision

make or buy

the machine or process that is limiting overall output is called a __________

bottleneck

product dgh has a monthly demand of 5,000 units. its contribution margin is $18 per unit and $36 per direct labor hour. product rbg has a monthly demand of 4,000 units. its contribution margin is $15 per unit and $60 per direct labor hour. if the company only has 1,500 direct labor hours available, the company should produce __________ units of product dgh and __________ units of product rbg

rbg has the highest cm per hour and requires 1,000 hours to meet demand. the remaining 500 hours can be used to make 1,000 units of dgh ($36 / $18 = 2 units per hour); the company should produce all units of rbg demanded because it has the highest cm per hour. $60 / $15 = 4 units per hour or 1,000 hours needed for 4,000 units

the reduction in resale value of an asset through use or over time is called __________ or __________ depreciation

real; economic

which of the following involves increasing the capacity of a bottleneck: - increasing the contribution margin per unit - elevating the value chain - relaxing the constraint - decreasing the opportunity costs

relaxing the constraint

costs and benefits that always differ between alternatives are __________ costs and benefits

relevant

potential advantages of dropping a product line or other segment include __________

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

joint costs incurred prior to the split-off point __________ relevant in decisions regarding what to do from the split-off point forward

are not

a cost that can be eliminated by choosing one alternative over another is an __________ cost

avoidable

andrews co. can purchase 20,000 units of part xyz from a supplier for $18 per part. the relevant manufacturing costs for the part is $15 per unit. the the company decides to purchase the part, the space now being used can be used to produce another product that will generate a segment margin of $80,000 per year. should andrews continue to make or should they buy the part

buy - $20,000 advantage the total buy price = 20k x $18 or $360k. the cost to make equals (20k x $15) + $80k forgone opportunity or $380k

a limited resource of some type that restricts the company's ability to satisfy demand is a __________

constraint

the first step in decision making is to __________

define the alternatives

a future cost that is not the same between any two alternatives is known as a __________, incremental, or avoidable cost

differential

the key to effective decision making is __________

differential analysis

when considering decision alternatives, only relevant costs are included when using the ___________ __________ approach

differential cost

which of the following is an advantage of buying a part instead of making it

economies of scale can result in higher quality and lower costs from suppliers

to effectively deal with a constraint ___________

efforts should be focused on the weakest link; improvements should focus on the constraint

which of the following techniques describe how a bottleneck should be managed: - ensure there is minimal lost time at the bottleneck due to breakdowns and set-ups - reduce the costs of the least profitable products - find ways to increase the capacity of the bottleneck - focus business process improvement efforts on the bottleneck

ensure there is minimal lost time at the bottleneck due to breakdowns and set-ups; find ways to increase the capacity of the bottleneck; focus business process improvement efforts on the bottleneck

one of the great dangers in allocating common __________ costs is the 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

managers may choose to retain unprofitable product line because it __________

helps sell other products; attracts customers

to maximize total contribution margin when a constrained resource exists, produce the products with the __________

highest contribution margin per unit of the constrained resource

stephens, inc. is considering dropping a product line. during the prior year, the line had sales of $170,000, variable costs of $86,000 and total fixed expenses of $110,000. of the fixed expenses, $95,000 are avoidable. if stephens drops the product line, net operating income will __________

increase by $11,000 the company will lose $84,000 in contribution margin ($170k - $86k). if $95k of the fixed costs are avoidable, net income will increase by $11,000

an increase in cost between two alternatives is an ___________ cost

incremental

when a product is past the split-off point, but is not yet a finished product, it is called an __________ product

intermediate

when deciding whether to fly or take the train on a trip, the cost of putting your pet in a boarding facility is an __________ cost

irrelevant

in deciding whether to drive to a location or take the train, the relaxation factor that comes from not having to drive __________ relevant to the decision

is

costs incurred up to the plot-off point in a process in which two or more products are produced from a common input are called __________ costs

joint

the split-off is the point in the manufacturing process at which the __________ products can be recognized as separate products

joint

two or more products that are produced from a common input are known as __________ products

joint

which of the following are ways in which to calculate the benefit of selecting one alternative over another: - the difference between the net operating income for the two alternatives - an analysis that looks at just the sunk costs of each of the two alternatives - an analysis that looks at all costs and benefits and identifies those that are differential - an analysis that just looks at the relevant costs and benefits

the difference between the net operating income for the two alternatives; an analysis that looks at all costs and benefits and identifies those that are differential; an analysis that just looks at the relevant costs and benefits

a set of activities ranging from development to production to after-sales service is called ___________

the value chain

when considering accepting a special order __________

there must be idle capacity; normal sales must not be affected

when considering decision alternative, both relevant and irrelevant costs are included when using the __________ __________ approach

total cost

true or false: effectively managing an organization's constraints is a key to increased profits

true

activities ranging from development to production to after-sales service are called a __________ __________

value chain

being less dependent on suppliers and making profits on both parts and the final product are advantages of __________ ___________

vertical integration

which term refers to a company that is involved in more than one activity in the value chain: - non-integrated value chain - vertical integration - integrated value chain - horizontal integration

vertical integration

when should a special order be accepted

when the incremental revenue from the special order exceeds the incremental costs of the order