Chapter 13: Differential Analysis: The Key to Decision Making
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.
$70,000 increase
The potential benefit given up when selecting one alternative over another is a(n) ______ cost.
opportunity
Average costs ______.
-contain sunk costs -are often misleading
Which of the following attempts to match the sunk cost of an asset with the periods that benefit from that cost?
Accounting depreciation only
Which of the following can make a product line look less profitable than it really is?
Allocated common fixed costs
True or false: Some decisions only have one alternative.
False
When should a special order be accepted?
When the incremental revenue from the special order exceeds the incremental costs of the order
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 ______.
continue to make — $60,000 advantage.
The first step in decision making is to ______.
define the alternatives
Focusing on future costs and benefits that are not the same between alternatives is ______.
differential analysis
True or false: Some decisions only have one alternative.
false
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
An increase in cost between two alternatives is a(n) cost.
incremental
If, by dropping a product line, a company cannot avoid as much in fixed costs as it loses in contribution margin, the company should ______ the product line.
keep
Determining whether to carry out an activity in the value chain internally or use a supplier is a ______ decision.
make or buy
Which of the following should not be included in the analysis when making a decision?
non-differential future costs, sunk costs
When planning a trip and deciding whether to drive or fly, the ______ is a sunk cost and should be ignored.
original cost of the car
The reduction in resale value of an asset through use or over time is called ____________or ____________depreciation
real economic
A cost that can be eliminated by choosing one alternative over another is a(n) cost
relevant
When making a decision only ______ costs and benefits should to be included in the analysis.
relevant
Costs and benefits that always differ between alternatives are ______ costs and benefits.
revelant
When making a decision, qualitative differences between alternatives ______ be ignored.
should not
Which term refers to a company that is involved in more than one activity in the value chain?
vertical integration
Being less dependent on suppliers and making profits on both parts and the final product are advantages of
vertical intergrations
When a company is involved in more than one activity in the entire value chain, it is
vertically integrated
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
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
A company is considering buying a component part that they currently make. Which of the following items related to the equipment currently being used to make the component are relevant to the decision?
-alternative uses for the equipment -salvage value
Andrews Co. can purchase 20,000 units of Part XYZ from a supplier for $18 per part. The relevant manufacturing costs for the part is $15 per unit. If the company decides to purchase the part, the space now being used can be used to produce another product that will generate a segment margin of $80,000 per year. Should Andrews continue to make or should they buy the part?
Buy — $20,000 advantage.
Which of the following is an advantage of buying a part instead of making it?
Economies of scale can result in higher quality and lower costs from suppliers.
When considering decision alternatives, only relevant costs are included when using the approach.
differential cost
When considering decision alternatives, only relevant costs are included when using the________ _____ approach
differential cost
True or false: Depreciation of existing assets is relevant to decisions.
false
True or false: Opportunity costs are not found in accounting records because they are not relevant to decisions.
false
When making a product line decision, a company may focus on lost contribution margin and avoidable fixed costs or prepare comparative
income statement
The key to effective decision making is ______.
relevant
Allocated common costs are ______ avoidable and/or relevant to a decision.
sometimes
A one-time order that is not considered part of the company's normal ongoing business is called a ______ order.
special
Costs that have already been incurred and cannot be avoided regardless of what a manager decides to do are ______ costs.
sunk
When making a decision, irrelevant items are included in the analysis of both alternatives when using ______.
the total cost approach only
A set of activities ranging from development to production to after-sales service is called ______.
the value chain
Activities ranging from development to production to after-sales service are called a(n)
value chain
Goodstone Tire Corporation sells tires for $100 each. Per unit costs associated with producing and selling the tires are: Direct materials $35 Direct labor 10 Factory overhead 20 Selling and administrative 15 The variable portion of the factory overhead is $8 per unit. A foreign company wants to purchase 10,000 tires for $70 each. The order would not require any selling or administrative costs. The purchaser will pay the shipping costs, but Goodstone will have to pay a $100,000 inspection fee in order to be able to make the foreign sale. Accepting the special order will not affect current sales or production. What effect would accepting the special order have on Goodstone's net operating income?
$70,000 increase
Managers may choose to retain an unprofitable product line because it ______.
-helps sell other products -attracts customers
Opportunity costs should ______ be included in a make or buy analysis.
always
A business segment should only be dropped if a company can avoid more in fixed costs than it gives up in ______.
contribution margin
Goodstone Tire Corporation sells tires for $100 each. Per unit costs associated with producing and selling the tires are: Direct materials $35 Direct labor 10 Factory overhead 20 Selling and administrative 15 The variable portion of the factory overhead is $8 per unit. A foreign company wants to purchase 5,000 tires for $70 each. The order would not require any selling or administrative costs. The purchaser will pay the shipping costs, but Goodstone will have to pay a $100,000 inspection fee in order to be able to make the foreign sale. Accepting the special order will not affect current sales or production. If Goodstone accepts this order, net income will (increase/decrease) by a total of $
decrease, 15000
When making a product line decision, a company may focus on lost contribution margin and avoidable fixed costs or prepare comparative ______.
income statements
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
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) ______ cost.
irrelevant
In order to prevent confusion and keep attention focused on critical information, it is desirable to ______.
isolate relevant costs from irrelevant costs
Allocated common costs are ______.
only relevant to decisions if they are avoidable
The reduction in resale value of an asset through use or over time is called or depreciation.
real, economic
A one-time sale that is not considered part of the company's normal ongoing business is referred to as 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 referred to as a(n) cost.
sunk
When making a decision, only relevant items are included in the analysis of the alternatives when using ______.
the differential cost approach only
A cost that can be eliminated in whole or in part by choosing one alternative over another is a(n) ______ cost.
define the alternatives
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
Future costs and benefits that do not differ between alternatives are ______ costs to the decision-making process.
irrelevant
The present trend appears to be towards ______ vertical integration.
less
Differential costs and benefits that should be considered in a decision ______.
may be qualitative or quantitative
Which of the following are ways in which to calculate the benefit of selecting one alternative over another?
-An analysis that looks at all costs and benefits and identifies those that are differential. -An analysis that just looks at the relevant costs and benefits. -The difference between the net operating income for the two alternatives.
True or false: There is never a justifiable reason to keep an unprofitable product line.
false
Differential revenue is an example of a(n) ______ benefit.
relevant
When considering decision alternatives, both relevant and irrelevant costs are included when using the approach.
total cost
True or false: When estimating the cost of taking a 300 mile trip, the average cost per mile × 300 is the best way to evaluate the total cost.
false
The total cost approach and the differential approach methods of decision analysis ______ provide the same correct answer.
will always
