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Flashcards in Business 2: Marginal Analysis Deck (28)
1

True or false.

Marginal analysis is used when analyzing business decisions such as the intro of a new product or changes in output levels of existing products, acceptance or rejection of special orders, making or buying a product or service, selling or processing further, and adding or dropping a segment.

True

2

What does marginal analysis focus on?

Relevant revenues and costs that are associated w/ a decision

3

Revenues and costs related to decisions that will affect future periods are relevant only if what?

- only if they change as a result of selecting different alternatives

4

Can relevant costs be either fixed or variable?

YES

5

Are direct costs relevant costs?

- Usually YES
- Costs that can be identified w/ or traced to a given cost object (DM and DL)

6

Are prime costs relevant costs?

- Generally YES
- Include DM and DL costs

7

Are discretionary costs relevant costs?

- Generally YES
- Costs arising from periodic budgeting decisions by management

8

Are costs to maintain landscaping at a corporation's headquarters relevant costs?

- Generally YES
- Viewed as discretionary costs

9

Are incremental costs relevant costs?

- YES
- Additional costs incurred to produce an additional amount of the unit over the present output

10

What are incremental costs also known as?

- Marginal costs
- Differential costs
- Out-of-pocket costs

11

Are opportunity costs relevant costs?

- YES
- Cost of foregoing the next best alternative when making a decision

12

Are costs associated with alternative uses of plant space relevant costs?

- YES (opportunity cost)

13

Are sunk costs relevant costs?

- NO
- Unavoidable b/c incurred in past and cannot be recovered as a result of a decision

14

Is the cost of old equipment a relevant cost to a replacement decision?

- NO (sunk cost)

15

Are controllable costs relevant costs?

- YES, if they will change a a result of selecting different alternatives

16

Are avoidable costs and revenues relevant?

- YES
- Result from choosing one course of action instead of another

17

When there is excess capacity, a special order should be accepted if what?

SP per unit > VC per unit

18

If a company is operating at full capacity, what should be included in the analysis to determine whether or not to accept a special order?

Opportunity cost of producing the special order

19

A sell or process further decision is made by comparing what?

Incremental cost and the incremental revenue generated after the split-off point

20

In a sell or process further decision, what should the co. do if incremental revenue exceeds incremental cost?

Process further

21

In a sell or process further decision, what should the co. do if the incremental cost exceeds the incremental revenue?

Sell at split off point

22

When deciding whether to keep or drop a segment, a firm should compare what?

The FC that can be avoided if the segment is dropped to the CM that will be lost if segment is dropped

23

In a keep or drop a segment decision, what should the firm do if the lost CM exceeds the avoided FC?

Keep segment

24

In a keep or drop a segment decision, what should the firm do if the lost CM is less than the avoided FC?

Drop segment

25

How do you calculate opportunity cost per unit?

= CM given up / size of special order

26

What is the decision rule in make vs. buy?

Make if relevant costs < outside purchase price

27

What are the relevant costs to consider in make vs. buy if there is excess capacity?

Relevant costs = avoidable costs

28

What are the relevant costs to consider in make vs. buy if there is no excess capacity?

Relevant costs = avoidable costs + opportunity costs