Chapter 11: Differential Analysis - The Key to Decision Making

which of the following may be an advantage of making a part rather than buying it?

- a smoother flow of parts and materials for production - less dependence on outside suppliers

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

which of the follow should not be included in the analysis when making a decision?

- non-differential future costs - sunk 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 - alternatives used for the equipment

which of the following can make a product line look less profitable that it really is?

allocated common fixed costs

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

constraint

anything that prevents you form getting more of what want is a(n) ___.

constraint

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: 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

continue to make the part — $60,000 advantage

when a constraint exists, companies need to focus on maximizing ___.

contribution margin per unit of constraint

The first step in decision making is to ___.

define the alternatives

a future cost that is not the same between any two alternatives is known as a(n) ___, incremental, or avoidable cost.

differential

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

false

true or false: the accounting depreciation of an existing asset is relevant to decisions.

false

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

fixed

when making a product line decision, a company may focus on lost contribution margin and voidable fixed costs or prepare comparative ___.

income statements

when there is a constrained resource, the best way to increase profits is to ___.

increase the capacity of the bottleneck

an increase in cost between two alternatives is a(n) ___ cost.

incremental

when a product is past the split-off point, but is not yet a finished product, it is called a(n) ___ product.

intermediate

as it applied to sell or process further decisions, which term refers to a product that is in the process of being made?

intermediate product

two or more products that are produced from a common input are known as ___ products.

joint

two or more products produced from a common input are called ___.

joint products

a decision to carry out one of the activities in the value chain internally rather than to purchase externally from a supplier is a ___ decision.

make or buy

determining whether to carry out an activity in the value chain internally or use a supplier is a ___ decision.

make or buy

if a cost is traced to a segment using activity-based costing, it ___ an avoidable cost of the segment.

may or may not be

the potential benefit given up when selected one alternative over another is a(n) ___ cost.

opportunity

when planning a road trip, the ___ is a sunk cost and should be ignored.

original cost of the car

When making a decision, only ___ costs and benefits should be included in the analysis.

relevant

the one-time sale that is not considered part of the company's normal ongoing business is referred to as a(n) ___ ___ decision.

special order

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

total cost

true or false: Mingling irrelevant and relevant costs may cause confusion and distract attention from critical information.

true

less dependance on suppliers is an advantage of ___.

vertical integration

when demand for products exceeds the production capacity, a(n) ___ ___ - ___ decision must be made.

volume trade-off

isolating relevant costs is desirable because ___.

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

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

when making a volume trade-off decision, managers should ignore ___.

fixed costs

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

irrelevant

the costs provided by a well-designed activity-based costing system are ___ relevant to a decision.

potentially

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

sunk

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

total

in the context of decision making, every decision involves choosing from among at least two alternatives.

true

being less dependent on suppliers and realizing profits from the parts and materials that it is "making" rather than "buying," as well as profits from its regular operations, are advantages of ___ ___.

vertical integration

when a resources, such as space in the factory, has no alternative use, its opportunity cost is ___.

zero

a company must make a volume trade-ff decision when they ___.

- do not have enough capacity to satisfy all product demand - must trade off units of one product for units of another

effectively managing an organization's constraints is a key to increased ___.

profits

when making a product line decision, a company may focus on lost contribution margin and voidable fixed costs or prepared comparative ___ ___ showing the effects of either keeping or dropping the product line.

income statements

costs and benefits that should be ignored when making decisions are called ___ costs and benefits.

irrelevant