CHAPTER 23 MA SB

the costs which are eliminated if a segment is eliminated are called_______costs.

avoidable

_____________costs, also called differential costs, are the additional costs from selecting a certain course of action.

incremental

when evaluating special offer decisions, management should consider:

incremental costs incremental revenues available capacity existing sales

a(n)_________cost is the potential benefit lost by taking an action instead of an alternative action.

opportunity

a student is deciding whether to take an additional class or work extra hours. which amounts are relevant to this decision?

opportunity costs out-of-pocket costs

a(n)_______cost requires a future outlay of cash and is relevant for decisions.

out-of-pocket

when making decisions, managers should consider all relevant benefits and relevant costs, which include:

out-of-pocket costs incremental costs opportunity costs

a company produces two products. product a sells for $25, has variable costs of $15, and requires 2 machine hours to produce. product b sells for $35, has variable costs of $20, and requires 5 machine hours to produce. 40,000 machine hours are available. the company can sell all it can make of either product. which statement is true?

product a should be produced because it will provide greater contribution margin per machine hour.

a company produces two products. product a sells for $25, has variable costs of $15, and requires 2 machine hours to produce. product b sells for $35, has variable costs of $20, and requires 2 machine hours to produce 40,000 machine hours are available. the company can sell all it can make of either product. which statement is true?

product b should be produced because it will create greater profits.

in a make or buy decision, management should consider:

product quality workload employee morale incremental costs

incremental or differential costs are ____________ costs in making decisions.

relevant or additional

a company purchased manufacturing equipment 5 years ago for $50,000. book value is currently $5,000 and the remaining useful life is 3 years. the equipment incurs variable manufacturing costs of $30,000. the company is considering replacing the equipment. the new equipment will cost $75,000, have a useful life of 3 years, and is more efficient and, therefore, only costs $10,000 in variable manufacturing costs to operate each year. the vendor is willing to accept the old equipment with a selling price of $20,000. the company should:

replace the old equipment because the total net increase in income will be $5,000.

when making sell or process decisions, management should consider:

revenue from selling after further processing incremental costs of processing further revenue from selling as is

a manufacturing company currently produces 1,000 units of a product at a cost of $5,000. the units sell for $7,000. alternatively, the company can process the units further to produce a refined product that will sell for $10,000. the additional processing will cost $4,000. the company should:

sell as is because the incremental income of selling as is versus processing further will increase income by $1,000.

a _________ cost arises from a past decision, cannot be avoided or changed, and is irrelevant to current and future decisions.

sunk

a student purchases a concert ticket for $50. before entering the concert, the student is offered $75 for the ticket. if the student decides to keep the ticket and attend the concert, the opportunity cost is:

$75

a student is considering adding a minor to her degree. the additional courses would cost $1,500 but would allow additional income upon graduation of $10,000. the incremental income related to this decision is:

$8,500

how many steps of the decision making process are there?

5

the decision rule for segment elimination is to eliminate a segment if income________from elimination.

increases

a company receives a special order of 10,000 units of product. the potential customer is wiling to pay $0.75 per unit. current sales are $90,000 and current costs are $75,000 for 90,000 units. if the order is accepted, costs will increase to $82,000. if the company has the capacity to accept the order without affecting current sales, the company should:

accept the order, because income will increase by $500.

the last step in the decison making process is

analyze and assess the decision

what are the steps of the decision making process?

define the decision identify alternatives collect relevant information select the course of action analyze and assess the decision

when resources are constrained and products use different inputs, the company should produce the product with the:

highest contribution margin per unit of constrained resource

when production facilities are limited, the company should produce the mix that will not exceed demand and maximize the production of the product with the:

highest contribution margin per unit of scarce resources

incremental ________ is incremental revenues minus incremental costs.

income

a company currently makes a component used in production. the per unit costs incurred to make the component include: -direct materials: 5.00 -direct labor: 2.00 -overhead: 4.00 -total costs: 11.00 twenty five percent of the overhead costs are considered incremental. the company can purchase the component from another source of 10.00. the company should do which of the following?

the company should make the components because incremental costs are $2 less than the purchase price.

a company produces two products. product a sells for $25, has variable costs of $15, requires 2 machine hours to produce, and the market is limited to 8,000 units. product b sells for $35, has variable costs of $20, requires 5 machine hours to produce, and the market is limited to 6,000 units. 40,000 machine hours are available. which statement is true?

the company should produce 8,000 units of product a and 4,800 units of product b.

when products use the same inputs, the company should produce the product with:

the highest contribution margin per constrained resource

a student purchased a used car for $5,000. three months later, the student discovers the car needs major repairs which will cost $2,000. the student must decide whether to repair the car or purchase another car. which statement is correct?

the relevant costs are $2,000

t or f: when considering the elimination of a segment, management should eliminate a segment if income increases from elimination.

true

a(n)___________cost is the amount that would remain if a segment is eliminated.

unavoidable or inescapable

when making keep or replace decisions, management should consider the:

variable manufacturing cost of the existing equipment sale of the existing equipment variable manufacturing cost of the new equipment