chapter 11. differential analysis: the key to decision making
a limited resource of some type that restricts the company's ability to satisfy demand is a __________
constraint
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
the potential benefit given up when selecting one alternative over another is an __________ cost
opportunity
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
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
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
when making a product line decision, a company may focus on lost contribution margin and avoidable fixed costs or prepare comparative __________ _________
income statements
two or more products that are produced from a common input are known as __________ products
joint
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
to maximize total contribution margin when a constrained resource exists, produce the products with the __________
highest contribution margin per unit of the constrained resource
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
costs that have no impact on future cash flows and are irrelevant to decisions are __________ costs
sunk
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
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
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
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
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
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
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
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
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