Chapter 12: Differential Analysis

The capacity of a bottleneck can be effectively increased in a number of ways, including:

* Working overtime on the bottleneck. * Subcontracting some of the processing that would be done at the bottleneck. * Investing in additional machines at the bottleneck. * Shifting workers from processes that are not bottlenecks to the process that is the bottleneck. * Focusing business process improvement efforts on the bottleneck. * Reducing defective units. Each defective unit that is processed through the bottleneck and subsequently scrapped takes the place of a good unit that could have been sold.

True or false: If some products must be cut back because of a constraint, the key to maximizing the total contribution margin is to favor the products that provide the highest contribution margin per unit of the constrained resource.

True

True or false: Joint costs are irrelevant in decisions regarding what to do with a product from the split-off point forward. Once the split-off point is reached, the joint costs have already been incurred and nothing can be done to avoid them.

True

True or false: Relevant cost analysis, combined with the contribution approach to the income statement, provides a powerful tool for making decisions.

True

True or false: Vertical integration provides certain advantages. An integrated company is less dependent on its suppliers and may be able to ensure a smoother flow of parts and materials for production than a nonintegrated company. In addition, an integrated company realizes profits from the parts and materials that it is "making" rather than "buying," as well as profits from its regular operations.

True

A _____ is anything that prevents you from getting more of what you want.

constraint

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

Suppose you plan to order a pizza after you go to the movie theater or you rent a DVD. If you are going to buy the same pizza regardless of your choice of entertainment, the cost of the pizza is irrelevant to the choice of whether you go to the movie theater or rent a DVD. The cost of pizza is an example of _____ _____.

future cost

When deciding whether to fly or take the train on a trip, the cost of putting your pet in a boarding facility while you are away is a(n) _____ cost.

irrelevant

The term _____ _____ is used to describe the costs incurred up to the split-off point.

joint cost

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

joint products

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, buy

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(n) _____ or _____ decision.

make, buy

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

special order *Managers must often evaluate whether a special order should be accepted, and if the order is accepted, the price that should be charged.

The _____-_____ _____ is the point in the manufacturing process at which the joint products can be reorganized as separate products.

split-off point

A _____ _____ is a cost that has already been incurred and cannot be avoided regardless of what a manager decides to do.

sunk cost Example: Suppose a company purchased a five-year old truck for $12,000. The amount paid for the truck is a sunk cost because it has already been incurred and the transaction cannot be undone.

Two broad categories of costs are never relevant in decisions--_____ _____ and _____ _____ that do not differ between the alternatives.

sunk costs, future costs

An _____ _____ is a cost that can be eliminated by choosing one alternative over another.

avoidable cost Example: By choosing the alternative of renting the DVD, the cost of the movie ticket can be avoided. Therefore, the cost of the movie ticket and the cost of renting the DVD are both avoidable costs.

A business segment should only be dropped if a company can avoid more in fixed costs than it gives up in: a) segment sales b) contribution margin c) variable costs d) net income

b) contribution margin

If a company is using a resource that could be used for some other purpose, the opportunity cost of that resource is: a) zero b) the profit from the best alternative use of the resource c) the profit from the current use of the resource

b) the profit from the best alternative use of the resource

The constraint, or _____, in the system is determined by the step that limits total output because it has the smallest capacity.

bottleneck

A(n) _____ resource requires a manager to decide which products or services should be cut back.

constrained

Less dependence on suppliers is an advantage of: a) outsourcing b) special orders c) horizontal integration d) vertical integration

d) vertical integration

Every decision involves choosing from among at least two alternatives. In making a decision, the costs and benefits of one alternative must be compared to the cost and benefits of other alternatives. The key to making such comparisons is _____ _____-- focusing on the costs and benefits that differ between the alternatives.

differential analysis

A difference in cost between any two alternatives is known as a _____ _____.

differential cost

A difference in revenue between any two alternatives is known as _____ _____.

differential revenue

An _____ _____ is the potential benefit that is given up.

opportunity cost

When planning a trip and making a decision to drive or take the train, the cost of maintenance and repairs for your vehicle is a(n) _____ cost.

relevant

Because differential costs and differential revenues are the only inputs that are relevant to decision making, they are also often referred to as _____ _____ and _____ _____.

relevant costs, relevant benefits

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

Deciding what to do with a joint product at the split-off point is a(n) _____ or _____ _____ decision.

sell, process further

When a company is involved in more than one activity in the entire value chain, it is _____ _____.

vertically integrated

True or false: Idle space that has no alternative use has an opportunity cost of zero.

True