SB CH 7

When there is excess capacity, an analysis of a special order ______.

excludes fixed costs

Identifying the decision problem is the Blank______ step in the decision-making process.

first

In the long term, companies can manage constrained resources by ______.

hiring more workers increasing capacity

The calculation of segment margin ______.

includes both variable and direct fixed costs

In the long term, companies can manage constrained resources by ______.

increasing capacity hiring more workers

When deciding whether to sell a product as is or add additional features so it can be sold at a higher price, management needs to consider ______ revenues and costs related to the product.

incremental

Comparing the relevant costs and benefits of alternative decision choices is called _________________ analysis.

incremental or differential

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 ______ costs.

irrelevant; Whether one takes a train or drives, the annual auto insurance premium and the driver's license fee will remain the same.

When planning a 5-day trip and making a decision to drive or take the train, the cost of boarding your dog while you are away is a(n) ______ cost.

irrelevant; Boarding the dog is a relevant cost of deciding whether or not to take the trip, not deciding the mode of travel.

Deciding to carry out an activity internally or buy externally from a supplier is called a Blank______ decision.

make-or-buy

Incremental analysis ______.

may be referred to as relevant costing is also called differential analysis

Opportunity costs are ______.

only relevant at full capacity

When considering whether or not to take a trip, the ______ is irrelevant to the decision.

original cost of the car

Costs and benefits that differ between alternatives are called ______ costs and benefits.

relevant

When making a decision to drive or take the train on a trip, the cost of the train ticket is a(n) ______ cost.

relevant

When planning a trip and making a decision to drive or take the train, the cost of car repairs and maintenance is a(n) ______ cost.

relevant; Car repairs and maintenance are related to usage, so driving for a trip will impact the need for repairs and maintenance.

You are planning a trip and deciding whether to drive your car or take the train. The cost of gasoline is a(n) ______ cost.

relevant; Reason: Gasoline is relevant because you will only need to purchase it if you decide to drive.

Costs that have already been incurred and cannot be avoided regardless of what a manager decides to do are ______ costs.

sunk

Common fixed costs ______.

will be incurred even if a segment is eliminated

Which of the following is a limitation of some type that restricts a company's ability to satisfy demand?

Constrained resource

Stephens Co. can purchase 20,000 units of Part XYZ from a supplier for $18 per part. Stephens's per-unit manufacturing costs for 20,000 units are: If the part is purchased, the supervisor will be eliminated. The special equipment used to manufacture Part XYZ has no other use and no salvage value. Total allocated fixed overhead will be the same regardless of the decision. Should the company buy the part or continue to make it?

Continue to make—$60,000 advantage Reason: If the company stops making the part, $15 cost per unit will be eliminated (variable costs + supervisor's salary). Thus, they save $3 per unit ($18 - $15) or $60,000 in total by continuing to make the part.

When considering eliminating a product, opportunity costs should Blank______.

be considered if alternatives uses exist

Opportunity cost is the ______.

benefit you give up when you choose one thing over another

Determining decision alternatives ______.

is a critical step in the decision-making process

Incremental analysis ______.

is also called differential analysis may be referred to as relevant costing

The process of making a decision ______.

is basically the same for all decisions

Sales revenue minus all fixed and variable costs attributable to a particular division is called ______.

segment margin

Deciding what to do with a product that is salable or could be enhanced is a ______ decision.

sell-or-process-further

An analysis of a special order ______.

should consider if excess capacity exists should consider the impact on regular customers

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

special

Goodstone Tire Corporation sells tires for $90 each. Per-unit costs associated with producing and selling the tires are: Direct materials $35; Direct labor $10; Factory overhead $20. The variable portion of the factory overhead is $8 per unit. A foreign company wants to purchase 1,000 tires for $65 each. Assuming that Goodstone has excess capacity, ______.

the incremental profit from the special order will be $12,000

Goodstone Tire Corporation sells tires for $90 each. Per-unit costs associated with producing and selling the tires are: Direct materials $35; Direct labor $10; Factory overhead $20. The variable portion of the factory overhead is $8 per unit. A foreign company wants to purchase 1,000 tires for $65 each. Assuming that Goodstone has excess capacity, ______.

the incremental profit from the special order will be $12,000 Reason: The revenue per tire is $65 and the cost is $53 (direct materials, direct labor, variable overhead), so each tire will generate $12 in incremental profit or $12,000 total.

The most constrained resource in called the ________.

bottleneck

Given the following, determine if a buy price of $4.00 per unit for 3,000 units should be accepted. Total variable production costs of making the units equal $11,100, and total production fixed costs are $3,500. Of the fixed costs, $1,500 is avoidable if the units are purchased. Based on price, the company should (make/buy) ___________________ the units at a total net benefit of $_______________ .

Blank 1: buy Blank 2: 600

When performing a keep-or-drop decision analysis, ____________fixed costs should be excluded from the analysis

Blank 1: common or irrelevant

When a limited resource of some type restricts a company's ability to satisfy demand, the company has a(n) ____________resource.

Blank 1: constrained

Once you have identified a problem, the next step is to determine the possible solutions, which are ________________ _________________ called .

Blank 1: decision Blank 2: alternatives

A fixed cost that can be traced to a specific business segment is called a(n) __________ fixed cost.

Blank 1: direct or relevant

When a company has more than enough resources to satisfy demand it is operating with ____________capacity.

Blank 1: excess or idle

Jay's Furniture makes couches and love seats. Last year the total contribution margin was $900,000 for couches and $350,000 for love seats. Love seats had a segment margin of $50,000 and common fixed costs of $100,000, so the company is considering stopping love seat production. If that happens, sales of couches are expected to increase by 10%, The net impact of stopping production of love seats will (increase/decrease) ___________profits by $________________.

Blank 1: increase Blank 2: 40,000 or 40000

Continue-or-discontinue decisions are commonly known as _______ -or- ___________decisions.

Blank 1: keep Blank 2: drop

The forgone benefit of choosing one decision alternative over another is its ____________ ________________.

Blank 1: opportunity Blank 2: cost or costs

Make-or-buy decisions are also referred to as ____________ decisions.

Blank 1: outsourcing

Deciding to accept a sales request that is outside the scope of normal sales is called a(n)___________ - ____________decision.

Blank 1: special or specialty Blank 2: order

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

Blank 1: sunk or sunken

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

Blank 1: sunk or sunken

Stephens Co. can purchase 20,000 units of Part XYZ from a supplier for $18 per part. Stephens's per-unit manufacturing costs for 20,000 units are: If the part is purchased, the supervisor will be eliminated. The special equipment used to manufacture Part XYZ has no other use and no salvage value. Total allocated fixed overhead will be the same regardless of the decision. Should the company buy the part or continue to make it?

Continue to make—$60,000 advantage If the company stops making the part, $15 cost per unit will be eliminated (variable costs + supervisor's salary). Thus, they save $3 per unit ($18 - $15) or $60,000 in total by continuing to make the part.

Which of the following statements are true?

Direct fixed costs are avoidable if a segment is eliminated. Advertising for a specific product line is a direct fixed cost. Direct fixed costs can include fixed machinery costs.

Which of the following statements are true?

Eliminating non-value-added activities can help companies manage constrained resources. Hiring more workers or leasing additional machines are long-term strategies for managing constrained resources.

True or false: When making a decision, only quantitative factors should be considered.

False; Both quantitative and qualitative factors should be considered.

Which of the following is NOT a question managers need to consider when making a keep-or-drop decision?

How much is the salary of the company CEO?

In a make or buy decision, alternative use of resources can be considered a cost (negative) of insourcing or a benefit (positive) of outsourcing.

True

True or false: An important consideration in a keep-or-drop decision is the impact on the costs and revenues of other segments.

True

True or false: Incremental analysis is a decision-making approach that compares the relevant costs and benefits of decision alternatives.

True

True or false: Qualitative factors should be considered in special-order decisions.

True Reason: Both opportunity costs (lost sales) and unhappy customers (qualitative) factors should be considered.

True or false: A sunk cost may be used to evaluate the outcome of previous decisions. True false question. True

True: Sunk costs are not relevant to future decisions, but they may be used to evaluate previous decisions.

True or false: A sunk cost may be used to evaluate the outcome of previous decisions.

True; Sunk costs are not relevant to future decisions, but they may be used to evaluate previous decisions.

True or false: An important consideration in a keep-or-drop decision is the impact on the costs and revenues of other segments.

True; The elimination of a segment may impact sales of other segments.

True or false: Incremental analysis is a decision-making approach that compares the relevant costs and benefits of decision alternatives.

True; With incremental analysis you isolate the information that is relevant to the decision.

When making a decision, ______ should be considered.

both quantitative and qualitative data

When evaluating a make-or-buy decision, managers should consider Blank______.

all variable production costs opportunity costs

Relevant costs ______.

are also called differential costs occur in the future differ between alternatives

When a constraint exists, companies need to focus on maximizing ______.

contribution margin per unit of constraint

Abba, Inc., is considering dropping a segment. During the prior year, the segment had sales of $207,000 and a contribution margin of $124,000. Fixed expenses consist of: The manager's salary and advertising are direct fixed costs. Of the administrative expenses, $10,000 is a direct fixed cost and the rest is part of common fixed costs. The rent expense is allocated to segments based on sales and represents a share of the total cost for the building. If this segment is dropped, overall net income will ______.

decrease by $34,000 Reason: The company will lose the $124,000 contribution margin. Only $90,000 of the fixed costs (salary, advertising, and $10,000 of administrative) are direct fixed costs, so net income will decrease by $34,000.

When the total amount of the cost will be the same regardless of the alternatives selected in a decision, the cost should be ______ when doing decision analysis.

excluded