Ch 4 Questions- Julio Cabrales

explain the concept of sunk cost. are sunk costs ever relevant in short term operating decisions why or why not

A sunk cost is a past cost. Since the past cannot be changed , Sunk costs are irrelevant.

explain the term incremental, how are incremental revenues,costs and profits used in short term operating decisions?

Incremental means additional. Incremental revenues, costs , and profits are relevant, if and only if, they differ among alternatives.

How is activity defined in cost volume profit analysis?

in cvp analysis activity is measured as units produced and sold

How are opportunity costs incorporated into make or buy decisions?

opportunity costs arise if the company can use space released for another activity if the primary activity is outsourced.

What factors other then relevant costs and revenues must be considered when making a special order decision?

qualitative factors such as customers must be considered

What factors other then cost must be considered before making a make or buy decision

qualitative factors such as quality timeliness of delivery must be considered.

Describe the five basic assumptions of cost volume profit analysis

the five assumptions of cvp are selling price is constant per unit sold, variable cost is constant per unit, fixed cost is constant in total, the number of units produced equals the number of units sold and the sales mix is constant

what are the two attributes of a relevant variable

A relevant variable must occur in the future and differ among alternatives

explain the concept of opportunity cost. are opportunity costs ever relevant in short term operating decisions? why or why not

An opportunity cost is a benefit forgone. Since we give up something to have something else, an opportunity cost is irrelevant.

explain how to calculate before-tax profit by using after tax profit

Before-tax profit is calculated as the after tax profit divided by 1 minus the tax rate

what are the steps in a relevant variable analysis?

Identify the alternatives, determine the relevant revenues, costs and profits and chose the best alternative.

what is a keep or drop decision? what are the relevant variables in a keep or drop decision?

In a keep or drop decision the company must decided weather a product line should be disconnected. In these decisions all variables are relevant except facility sustaining costs.

what factors other then costs and revenues must be considered when making a keep or drop decision?

Qualitative factors such as related sales must be considered

Explain how short term operating decisions differ from other decisions made by managers?

Short term decisions differ in three primary ways. first we assume that capacity is fixed. second these decisions are ad hoc and cannot be planed in advance. last these decisions are unique to the circumstance at the time

explain each of the following: contribution margin per unit and contribution margin ratio

The contribution margin per unit is the selling price per unit minus the variable costs per unit while the contribution margin ratio is the contribution margin per unit divided by the selling price per unit

explain the difference among unit related, batch related product sustaining and facility sustaining cost and give an example of each

Unit related costs are costs that vary with the number of units. an example of unit related costs would be direct materials and shipping. Batch related costs are costs that vary with the number batches regardless of how many units are in the batch. An example would be setup costs and ordering costs. Product sustaining costs are costs that vary with the number of product lines. an example would be advertising .Facility sustaining costs are costs to maintain the company such as insurance on office equipment. So, the difference is that unit related, batch related and product sustaining all involve the product while facility sustain involves the building.

What is a make or buy decision? What are the relevant variables in a make or buy decision ?

a make or buy decision is an outsourcing decision where the company must decide on weather to do something internally or pay someone externally to do it. typically revenues are irrelevant in these decisions. the unit related costs the batch related costs and number of units are relevant. product sustaining costs may also be relevant.

explain the differences between product and non product costs

a product cost is incurred to manufacture a product while non product cost is incurred to sell the product or administrator the company

What is a special order decision? What variables are relevant in a special order decisions?

a special order decision occurs when a customer wants a reduced price, usually for buying in large volume. The selling price, the number of units descried, the unit related costs, and batch related costs are relevant and the product sustaining costs might be relevant.

explain the break even point in units. How is it related to the break even point in dollars?

the break even point in units is the number of units that must be sold in order to cover both the fixed and variable costs. at break even the company's profits are zero. the break even point in dollars is the dollar amount of sales that must be generated to cover both fixed and variable costs. if we take the break even point in units and multiple it by the selling price we can determine the break even point in dollars.

explain the three types of product costs and give an example of each

the three product costs are direct materials direct labor and manufacturing over head. direct materials are traced to the product, direct labor is involved in making the product and manufacturing overhead is all the remaining product costs other then direct materials and direct labor.

how can cost volume profit analysis determine the number of units that must be sold to achieve a certain profit after taxes

we can use cvp to determine the number of units that must be sold to achieve a certain profit after taxes by using the following formula: (sp*q-vc*q) -fc = p (1-tax rate)