smartbook chapter 6

Anything that prevents you from getting more of what you want is a

constraint

Which of the following should not be included in the analysis when making a decision

non-differential future costs, sunk costs

When making a decision only ______ costs and benefits should to be included in the analysis

relevant

When making a decision whether to keep an existing piece of equipment or replace it, which of the following is (are) considered a sunk cost?

Both the original purchase price and annual depreciation expense

Which term refers to a company that is involved in more than one activity in the value chain

Vertical integration

Synonyms for differential costs include

incremental and avoidable costs

Costs and benefits that always differ between alternatives are ______ costs and benefits.

relevant

When a resource, such as space in the factory, has no alternative use, its opportunity cost is

zero

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: 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 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

If some products must be cut back because of a constraint, produce the products with the highest

contribution margin per unit of constrained resource

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

Focusing on future costs and benefits that are not the same between the choices is

differential analysis

The key to effective decision making is

differential analysis

When considering decision alternatives, only relevant costs are included when using the

differential cost approach

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

false

When a company is involved in more than one activity in the entire value chain, it is horizontally integrated

false

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

fixed

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 potential benefit given up when selecting one alternative over another is an

opportunity cost

Determining whether to carry out an activity in the value chain internally or use a supplier is a

sourcing decision

What type of cost is never relevant and should be disregarded when making decisions?

sunk

Irrelevant costs include

sunk costs, future costs that do not differ between alternatives

When a constraint exists, companies need to focus on maximizing

total contribution margin

When demand for products exceeds the production capacity, a ______ decision must be made

volume trade-off

The first step in decision making is to

define the alternatives

When considering decision alternatives, both relevant and irrelevant costs are included when using the

total cost approach

Every decision has at least ______ alternatives

two

A cost that can be eliminated in whole or in part by choosing one alternative over another is an

avoidable cost

When making a volume-trade off decision, managers should ignore

fixed costs

When making a decision, qualitative differences between alternatives

should not be ignored

If a company is using a resource that could be used for some other purpose, the opportunity cost of that resource is

the profit from the best alternative use of the resource

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

alternative uses for the equipment; salvage value

A company must make a volume trade-off decision when they

must trade off units of one product for units of another due to limited production capacity; do not have enough capacity to satisfy the demand for all of its products

When considering accepting a special order

normal sales must not be affected; there must be idle capacity

When making a decision to either buy a movie ticket or rent a DVD, the cost of the movie ticket is an example of a(n) ______ cost

avoidable, incremental

To maximize total contribution margin when a constrained resource exists, produce the products with the

highest contribution margin per unit of the constrained resource

When planning a trip and making a decision to drive or take the train, the cost of car repairs and maintenance is a

relevant cost

When making a decision, only relevant items are included in the analysis of the alternatives when using

the differential cost approach only

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

irrelevent

In order to prevent confusion and keep attention focused on critical information, it is desirable to

isolate relevant costs from irrelevant costs

Differential costs and benefits that should be considered in a decision

may be qualitative or quantitative

Differential revenue is an example of a

relevant benefit

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 an

value chain

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

Abba, Inc. is considering dropping a product line. During the prior year, the line had sales of $207,000 and a contribution margin of $124,000. Fixed expenses consist of: Salaries $60,000 Rent 50,000 Advertising 20,000 Administrative 35,000 Total fixed expenses $165,000 The product line manager's $60,000 salary is avoidable as is the $20,000 of advertising. Of the administrative expenses, $10,000 is avoidable. The rest are general allocated expenses that will not change if the product is dropped. The rent expense is allocated to product lines based on sales and represents a share of the total cost for the building. If this product line is dropped overall net operating income will

decrease by $34,000

A future cost that is not the same between any two alternatives is known as a _________ incremental, or avoidable cost

differential

Whether to perform various organization activities such as payroll and accounting internally or use an external provider is a

sourcing decision

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

special order

A special order should be accepted

when the incremental revenue from the special order exceeds the incremental costs of the order