Unit 5

Question 1

relevant costs

Answer 1

Costs that differ between alternatives

Question 2

avoidable cost

Answer 2

a cost that can be eliminated in whole or in part by choosing one alternative over another
these are relevant costs

Question 3

irrelevant costs

Answer 3

1 Sunk costs
2 Future costs that do not differ between the alternatives

Question 4

Special pricing decisions

Answer 4

1. one-time only orders and/or
2. orders below the prevailing market price.

Question 5

special order

Answer 5

a one-time order that is not considered part of the company’s
normal ongoing business.

Question 6

Steps to the decision-making process

Answer 6

Step 1: Identify the decision.
Step 2: Gather relevant information.
Step 3: Identify the alternatives.
Step 4: Weigh the evidence.
Step 5: Choose among alternatives.
Step 6: Take action.
Step 7: Review your decision & its consequences.

Question 7

Importance of special order

Answer 7

It is an additional opportunity to generate revenue above sales goals.
Special orders typically request a lower price than normally offered and/or might include additional costs.

Question 8

Making a special order decision

Answer 8

1. compare the incremental change in revenue for the seller, against which is offset the incremental change in
   costs.
2. consider whether there is a sufficient amount of incremental production capacity available that can be used to process the additional order

Question 9

Considerations when deciding to accept a special order

Answer 9

1. The capacity required to fulfill the special order.
2. Whether the price offered by the buyer will cover the cost of producing the products.
3. The role of fixed costs in the analysis.

Question 10

Quantitative measure

Answer 10

The first stage in examining the value and impact of a special order
the contribution (which is the difference between revenue per unit and variable cost per unit).

Question 11

Qualitative factors

Answer 11

1. The effect on regular customers if their demands are not met and if they are aware that the company accepted a lower price for the same product
2. Impact on the morale of employees if the company implements overtime or hire temporary workers to fulfill the special order
3. Possibility of acquiring a big customer through the acceptance of special order

Question 12

capacity constraints

Answer 12

Step 1: Determine if restricted/scarce capacity is a limiting factor
Step 2: Calculate contribution per unit
Step 3: Calculate contribution per unit of a limiting factor(s) (CULF)
Step 4: Allocate rankings for every limiting factor
Step 5: Consistent rankings-Profits are maximized by allocating scarce capacity according to ranking per unit of a limiting factor

Question 13

Imperfect information exhibits what

Answer 13

an element of risk or uncertainty

Question 14

The maximin criteria

Answer 14

seeks to maximize the minimum possible return

Question 15

Maximax criteria

Answer 15

The best possible outcome will always occur and the decision-maker should select the option with the highest possible outcome.

Question 16

The maximum amount that is worth paying to obtain additional information consists of what

Answer 16

the difference between the expected value if the information is acquired compared with the expected value with the absence of the information.

Question 17

When resources are constrained

Answer 17

managers should prioritise products in order to maximize contribution per unit of the constrained resource