Chapter 6 SB

A limited resource of some type that restricts the company's ability to satisfy demand is a(n) Blank______.

constraint

Anything that prevents you from getting more of what you want is a(n)

constraint

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

highest contribution margin per unit of the constrained resource

Synonyms for differential costs include Blank______ cost.

incremental avoidable

Future costs and benefits that do not differ between alternatives are Blank______ costs to the decision-making process.

irrelevant

When deciding whether to drive your car or take a train to a destination, the costs for your car insurance and driver's license are Blank______ costs.

irrelevant

Differential costs and benefits that should be considered in a decision

may be qualitative or quantitative

The potential benefit given up when selecting one alternative over another is a(n) Blank______cost.

opportunity

Costs and benefits that always differ between alternatives are Blank______ costs and benefits

relevant

Differential revenue is an example of a(n) Blank______ benefit.

relevant

When making a decision only Blank______ costs and benefits should to be included in the analysis.

relevant

When making a decision, only relevant items are included in the analysis of the alternatives when using

the differential cost approach only

If a company is using a resource that could be used for some other purpose, the opportunity cost of that resource is Blank______.

the profit from the best alternative use of the resource

A set of activities ranging from development to production to after-sales service is called Blank______.

the value chain

When considering accepting a special order, Blank______.

there must be idle capacity normal sales must not be affected

When considering decision alternatives, both relevant and irrelevant costs are included when using the ________ cost approach

total

When a constraint exists, companies need to focus on maximizing

total contribution margin

Every decision has at least Blank______ alternative(s).

two

Activities ranging from development to production to after-sales service are called a(n)

value chain

Which term refers to a company that is involved in more than one activity in the value chain?

vertical integration

Select all that apply A company must make a volume trade-off decision when they

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

When making a decision to either buy a movie ticket or rent a DVD, the cost of the movie ticket is an example of a(n) Blank______ cost.

incremental avoidable

In order to prevent confusion and keep attention focused on critical information, it is desirable to

isolate relevant costs from irrelevant costs

When making a decision, qualitative differences between alternatives Blank______ be ignored.

should not

Determining whether to carry out an activity in the value chain internally or use a supplier is a Blank______decision.

sourcing

Whether to perform various organization activities such as payroll and accounting internally or use an external provider is a Blank______ decision.

sourcing

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

special

When demand for products exceeds the production capacity, a Blank______ decision must be made.

volume trade-off

A special order should be accepted

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

When a resource, such as space in the factory, has no alternative use, its opportunity cost is Blank______.

zero

A cost that can be eliminated in whole or in part by choosing one alternative over another is a(n) Blank______ cost.

avoidable

Potential advantages of dropping a product line or other segment include

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

A business segment should only be dropped if a company can save more in Blank______ costs than it loses in contribution margin.

fixed

When making a volume-trade off decision, managers should ignore

fixed costs

A company is considering buying a component part that they currently make. Items related to the equipment being used to make the component that are relevant to this decision include

salvage value alternative uses for the equipment

When making a decision whether to keep an existing piece of equipment or replace it, which of the following is (are) considered a sunk cost?

Both the original purchase price and annual depreciation expense.

Andrews Co. can purchase 20,000 units of Part XYZ from a supplier for $18 per part. Andrews' per unit manufacturing costs for 20,000 units is as follows: Cost: Variable manufacturing cost Per Unit $12 Total $240,000 Cost: Supervisor salary Per Unit $3 Total $60,000 Cost: Depreciation Per Unit $1 Total $20,000 Cost: Allocated fixed overhead Per Unit $7 Total $140,000 If the part is purchased, the supervisor position will be eliminated. The special equipment has no other use and no salvage value. Total allocated fixed overhead would be unaffected by the decision. The company should Blank______.

Continue to make the part - $60,000 advantage Reason: Depreciation is not a relevant cost. The avoidable costs of making the product are the variable costs plus the supervisor salary or $15 per unit. The total savings is $60,000 ($18 buy price - $12 variable cost - $3 supervisor salary = $3 advantage to make × 20,000 units).

Opportunity costs are not found in accounting records because they are not relevant to decisions.

False

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

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) Blank______ cost.

Irrelevant

What type of cost is never relevant and should be disregarded when making decisions?

Sunk Costs

A business segment should only be dropped if a company can avoid more in fixed costs than it gives up in

contribution margin

If some products must be cut back because of a constraint, produce the products with the highest

contribution margin per unit of constrained resource

Isolating relevant costs is desirable because

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

Abba, Inc. is considering dropping a product line. During the prior year, the line had sales of $207,000 and a contribution margin of $124,000. Fixed expenses consist of: Salaries $60,000 Rent 50,000 Advertising 20,000 Administrative 35,000 Total fixed expenses $165,000 The product line manager's $60,000 salary is avoidable as is the $20,000 of advertising. Of the administrative expenses, $10,000 is avoidable. The rest are general allocated expenses that will not change if the product is dropped. The rent expense is allocated to product lines based on sales and represents a share of the total cost for the building. If this product line is dropped overall net operating income will Blank______.

decrease by $34,000

The first step in decision making:

define the alternatives being considered

The key to effective decision making is

differential analysis

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

False

Abba, Inc. is considering dropping a product line. During the prior year, the line had sales of $207,000 and a contribution margin of $124,000. Fixed expenses consist of: Salaries $60,000 Rent 50,000 Advertising 20,000 Administrative 35,000 Total fixed expenses $165,000 The product line manager's $60,000 salary is avoidable as is the $20,000 of advertising. Of the administrative expenses, $10,000 is avoidable. The rest are general allocated expenses that will not change if the product is dropped. The rent expense is allocated to product lines based on sales and represents a share of the total cost for the building. If this product line is dropped overall net operating income will Blank______.

decrease by $34,000 Reason: The company will lose the $124,000 contribution margin. Only $90,000 of the fixed costs are avoidable, so net income will decrease by $34,000.

Focusing on future costs and benefits that are not the same between the choices is

differential analysis

The key to effective decision making is Blank______.

differential analysis

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 Blank______.

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

Which of the following should not be included in the analysis when making a decision?

Sunk costs Non-differential future costs

When making a decision, irrelevant items are included in the analysis of both alternatives when using Blank

Total cost approach only