ch 13 Flashcards
(28 cards)
what is volume trade-off decisions?
what is a constraint?
what is a bottleneck?
the machine or process that is limiting overall output
how can you increase the capacity of bottlenecks?
relevant costs and benefits should be _________ and irrelevant costs and benefits should be ________.
considered; ignored
differential cost
a future cost that differs between any two alternatives
differential revenue
future revenue that differs between any two alternatives
incremental cost
increase in cost between two alternatives
ex; the costs of upgrades in a deluxe model car vs the standard model
avoidable cost
eliminated by choosing one alternative over another
ex: choosing between going to a movie theater or renting a movie. cost of movie ticket is an avoidable cost if the movie is rented and vice versa
avoidable and incremental costs are _________ costs.
relevant
why are sunk costs irrelevant?
because these are costs that have already been incurred and cannot be changed. they have no impact on future cash flows and remain the same no matter what alternatives are being considered. depreciation expense is also irrelevant as it is a no cash expense that has no effect on future cash flows
should opportunity costs be considered?
yes because opportunity cost is the potential benefit given up when one alternative is selected over another
T/F Past costs are never relevant for making predictions.
False; past costs may be helpful as a basis for making predictions. However, past costs themselves are never relevant when making decisions as you can no longer change those decisions.
Total cost approach vs differential cost approach. Why is one better?
total cost approach involves finding the difference in NOI while the differential cost approach eliminates the irrelevant items that remain the same regardless and isolate the relevant costs to find the financial advantage/disadvantage; the latter is better because it is difficult to include all costs and
including relevant and irrelevant costs can be confusing.
Adam switches from a gas-guzzler of 12 mpg to a slightly less
voracious guzzler that runs at 14 mpg.
The environmentally virtuous Beth switches from a 30 mpg car
to one that runs at 40 mpg.
Suppose both drivers travel equal distances over a year. Who
will save more gas by switching?
Adam
What is sunk-cost fallacy?
occurs when costs that cannot be recovered are still factored into a
business decision making process
how must you decide to add or drop product lines and other segments
does adding or discontinuing add operating income?
yes? add/keep it
no? don’t add/drop it
T/F The decision of whether to drop or add is based on revenue.
False; it is based on profitability.
When deciding whether to discontinue a segment of a business,
relevant costs include ________.
A) auditing expenses for the whole company
B) fees paid to a management consultant to study the
feasibility of the business segment
C) annual insurance costs of the company
D) future administrative costs that can be eliminated
D because (1) auditing expenses for the entire company will still need to paid for other segments, (b) fees paid to a management consultant to study the feasibility of the business segment or considered sunk and already incurred, and (c) insurance costs of the entire company paid annually will also still be paid regardless if the segment is dicontinued. Administrative costs that can be eliminated indicates that there are costs directly related to this segment that can be avoided, which make them relevant.
How do you know if overall profit increases?
Compare the contribution margin that would be
lost if the product line is dropped to the fixed
expenses that would be avoided if the line is
discontinued.
CM lost + Avoidable FC
Why should a segment be kept if it has a negative operating income?
The answer lies in the way common fixed
costs are allocated to products.
Including unavoidable common fixed
costs makes the product line appear to
be unprofitable, when in fact dropping
the product line would decrease the
company’s overall net operating income.
Beware of Allocated Fixed Costs
what is a value chain?
all activities involved within a company; from development through production, distribution, sales, and after-sales-service
what is vertical integration? what are the advantages/disadvantages?
when a company is involved in more than one activity in the entire value chain. Such an integrated company is less dependent on its suppliers and may ensure a (1) smoother flow of parts and materials for production, (2) better quality control, (3) realize profits from the parts it makes rather than buys. A disadvantage is that companies may fail to take advantage of suppliers who can create economies of scale advantage by pooling demand from numerous companies. While the economics of scale factor can be appealing, a company must be careful to retain control over activities that are essential to maintaining its competitive position.
sourcing decision
a decision to carry out one of the activities in the value chain internally, or buying from an external supplier (outsource)
