Chapter 12: Differential Analysis: The Key to Decision Making

A cost that can be avoided by choosing one alternative over another is relevant for decision purposes.

Sunk costs are never relevant in decision making.

Future costs that do not differ between the alternatives in a decision are avoidable costs.

It may be a good decision to replace an asset before its original cost has been fully recovered through increased revenues or decreased costs.

Consistency demands that a cost that is relevant in one decision be regarded as relevant in other decisions as well.

Sunk costs and future costs that do not differ between the alternatives may or may not be relevant in a decision.

Fixed costs are sunk costs.

A cost that is traceable to a segment through activity-based costing is always an avoidable cost for decision making.

Variable costs are always relevant costs in decisions.

A cost that is assigned to a product using activity-based costing may or may not be a relevant cost in a decision involving that product.

Opportunity costs represent costs that can be reduced by effective management of operations.

Future costs that do differ among the alternatives are not relevant in a decision.

Sunk costs are costs that have proven to be unproductive.

Fixed costs may be relevant in a decision.

Avoidable costs are irrelevant costs in decisions.

The book value of an old machine is always considered an opportunity cost in a decision.

A cost that will be incurred regardless of which alternative is selected is not relevant when choosing between the alternatives.

A complete income statement need not be prepared as part of a differential cost analysis.

An avoidable cost is a sunk cost that can be eliminated (in whole or in part) as a result of choosing one alternative over another.

The variable costs of a product are relevant in a decision concerning whether to eliminate the product.

Fixed costs are irrelevant in decisions about whether a product should be dropped.

A product whose revenues do not cover its variable costs and its traceable fixed costs should usually be dropped.

In a decision to drop a product, the product should be charged for rent in proportion to the space it occupies even if the space has no alternative use and the rental payment is unavoidable.

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

A vertically integrated company is less dependent on its suppliers than a company that is not vertically integrated.

A disadvantage of vertical integration is that by pooling demand for parts from a number of companies, a supplier may be able to enjoy economies of scale that result in higher quality and lower cost than if every company makes its own parts.

In a special order situation that involves using capacity that is not idle, opportunity costs are zero.

In a special order situation, any fixed cost associated with the order would be irrelevant.

When a company has a production constraint, total contribution margin will be maximized by emphasizing the products with the highest contribution margin per unit of the constrained resource.

When a company has a production constraint, the product with the lowest contribution margin per unit of the constrained resource should usually be given highest priority.

In a factory operating at capacity, every machine and person should be working at the maximum possible rate.

One way to increase the effective utilization of a bottleneck is to reduce the number of defective units.

Eliminating nonproductive processing time is particularly important in a bottleneck operation.

Payment of overtime to a worker in order to relax a production constraint could increase the profits of a company.

The term joint cost is used to describe the costs incurred up to the split-off point in a process involving joint products.

The split-off point in a process that produces joint products is the point in the manufacturing process at which the joint products can be recognized as separate products.

An avoidable fixed production cost incurred before the split-off point in a joint process is relevant in a sell or process further decision.

Two or more products that are produced from a common input are known as joint products.

It is profitable to continue processing joint products after the split-off point if their total revenues exceed the joint costs.

Which of the following would be relevant in the decision to sell or throw out obsolete inventory? (1st) Direct material cost assigned to the inventory & (2nd) Fixed overhead cost assigned to the inventory A) Yes Yes B) Yes No C) No Yes D) No No

The opportunity cost of making a component part in a factory with excess capacity for which there is no alternative use is: A) the variable manufacturing cost of the component. B) the total manufacturing cost of the component. C) the fixed manufacturing cost of the component. D) zero.

Which of the following costs are always irrelevant in decision making? A) avoidable costs B) sunk costs C) opportunity costs D) fixed costs

Costs that can be eliminated in whole or in part if a particular business segment is discontinued are called: A) sunk costs. B) opportunity costs. C) avoidable costs. D) irrelevant costs.

The Jabba Corporation manufactures the "Snack Buster" which consists of a wooden snack chip bowl with an attached porcelain dip bowl. Which of the following would be relevant in Jabba's decision to make the dip bowls or buy them from an outside supplier? (1st) Fixed overhead cost that can be eliminated if the bowls are purchased from the outside supplier (2nd) The variable selling cost of the Snack Buster A) Yes Yes B) Yes No C) No Yes D) No No

Accepting a special order will improve overall net operating income if the revenue from the special order exceeds: A) the contribution margin on the order. B) the incremental costs associated with the order. C) the variable costs associated with the order. D) the sunk costs associated with the order.

Kinsi Corporation manufactures five different products. All five of these products must pass through a stamping machine in its fabrication department. This machine is Kinsi's constrained resource. Kinsi would make the most profit if it produces the product that: A) uses the least amount of stamping time. B) generates the highest contribution margin per unit. C) generates the highest contribution margin ratio. D) generates the highest contribution margin per stamping machine hour.

United Industries manufactures a number of products at its highly automated factory. The products are very popular, with demand far exceeding the factory's capacity. To maximize profit, management should rank products based on their: A) gross margin B) contribution margin C) selling price D) contribution margin per unit of the constrained resource

A joint product is: A) any product which consists of several parts. B) any product produced by a company with more than one product line. C) any product involved in a make or buy decision. D) one of several products produced from a common input.

In a sell or process further decision, consider the following costs: I. A variable production cost incurred prior to split-off. II. A variable production cost incurred after split-off. III. An avoidable fixed production cost incurred after split-off. Which of the above costs is (are) not relevant in a decision regarding whether the product should be processed further? A) Only I B) Only III C) Only I and II D) Only I and III

Product X-547 is one of the joint products in a joint manufacturing process. Management is considering whether to sell X-547 at the split-off point or to process X-547 further into Xylene. The following data have been gathered: I. Selling price of X-547 II. Variable cost of processing X-547 into Xylene. III. The avoidable fixed costs of processing X-547 into Xylene. IV. The selling price of Xylene. V. The joint cost of the process from which X-547 is produced. Which of the above items are relevant in a decision of whether to sell the X-547 as is or process it further into Xylene? A) I, II, and IV. B) I, II, III, and IV. C) II, III, and V. D) I, II, III, and V.