Chapter 6

Question 1

What is relevant information?

Answer 1

Differs among the alternatives under consideration
Future-oriented
AKA avoidable costs

Question 2

What are sunk costs?

Answer 2

Costs incurred in the past, cannot be changed and is not relevant for making current decisions

Question 3

What is an opportunity cost?

Answer 3

The sacrifice that is incurred in order to obtain an alternative opportunity

Question 4

What is the relationship between relevance and accuracy?

Answer 4

Information does not need to be exact to be relevant

Question 5

What is the quantitative focus of decision making?

Answer 5

Cost
Increase in profits

Question 6

What is the qualitative focus of decision making?

Answer 6

Impact on people
Attractiveness of the product

Question 7

What are the relevant (avoidable) costs?

Answer 7

Unit level - avoided by eliminating 1 unit of product
Batch level - avoided when a batch is eliminated
Product level - Avoided if a product line is eliminated
Facility level - Some costs may be avoided if a business segment is eliminated

Question 8

What are special decisions?

Answer 8

When a company receives an offer to sell its products at a lower price than selling price
Need to make a special order decision

Question 9

What is outsourcing?

Answer 9

Buying g/s from other companies rather than producing them internally

Question 10

What are qualitative features of outsourcing?

Answer 10

Vertical integration controls activities from raw materials to distribution
A supplier may lure a manufacturer into outsourcing decisions using low-ball pricing
To protect manufacturers from incompetent suppliers, many companies establish a list of reliable certified suppliers

Question 11

What is segment elimination decision?

Answer 11

Business are organized into segments, so it is looking at eliminating one of the segments

Question 12

How does a business do the segment elimination decision process?

Answer 12

1. Determine the amount of relevant revenue
2. Determine the amount of cost that can be avoided if the segment is eliminated
3. If the relevant revenue is less than avoidable cost, eliminate the segment

Question 13

What are qualitative considerations of segment elimination decision process?

Answer 13

Employees lives are disrupted
Sales of different product lines are frequently interdependent
Volume changes can affect elimination decisions

Question 14

What are the equipment replacement decisions?

Answer 14

Should be based on profitability rather than physical deterioration