CH. 7 Learnsmart

Which of the following statements are true?

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

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

Common

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

First

Opportunity costs become relevant when a company is operating at ___________ ______________.

Full capacity

Which of the following statements are true?

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

Comparing the costs and benefits of decision alternatives is done using _______________ analysis because it focuses on the factors that will change between the decision alternatives.

Incremental

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

Incremental

Continue-or-discontinue decisions are commonly known as __________-or-________ decisions.

Keep Drop

If a company has a resource that could be used for something else, the _________ cost is the profit that could be derived from the best alternative use of the resource.

Opportunity

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

Opportunity cost

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

Special

Which of the following is NOT another term for relevant costs?

Sunk costs

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

sell-or-process-further

Common fixed costs ___________.

will be incurred even if a segment is eliminated

An analysis of a special order _________.

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

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.

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

True

A(n) ______ limits a system's overall output.

bottleneck

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

excludes fixed costs

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

fixed

Irrelevant costs include ______.

future costs that do not differ between alternatives sunk costs

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

Incremental analysis _________.

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

Relevant costs _________.

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

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

When making decisions, managers should ignore ________ costs.

irrelevant

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

Segment margin

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

all variable production costs opportunity costs qualitative factors

When deciding whether to sell a product as is or continue to process it, costs incurred to get the product to its current condition ______ relevant to the decision.

are not

Costs that differ between alternatives are called _________ costs.

relevant

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

Constrained

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

Constrained resource

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

Decision alternatives

One of the benefits of dropping a product line is that a company can eliminate the product line's _________ fixed costs.

Direct

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

Excess

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

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

make-or-buy

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 $ _________.

Buy $600

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

Direct

Determining decision alternatives _________.

is a critical step in the decision-making process

The process of making a decision __________.

is basically the same for all decisions

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: Cost Per Unit Total Variable manufacturing cost $12 $240,000 Supervisor salary $3 $60,000 Depreciation $1 $20,000 Allocated fixed overhead $7 $140,000 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.

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

True

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?

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 $ ________.

Increase $40,000

When considering a keep-or-drop decision, it is important to consider _______ _________, such as whether the elimination of the segment will free resources that could be used in another way.

Opportunity costs

Deciding to accept a sales request that is outside the scope of normal sales is called a(n) ________-_________ decision.

Special-order

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

Sunk