Unit 10: Marginal Analysis Flashcards
What is marginal revenue?
Marginal revenue is the additional (incremental) revenue produced by generating one more unit of output. It is the difference in total revenue at each level of output.
What is marginal cost?
Marginal cost is the additional (also called incremental) cost incurred by generating one additional unit of output. Mathematically, it is the difference in total cost at each level of output.
Considering marginal revenue and marginal cost, when are profits maximized?
Profit is maximized at the output level where marginal revenue equals marginal cost.
What is the difference between explicit and implicit costs?
Explicit costs are those requiring actual cash disbursements. Implicit costs are opportunity costs, i.e., the maximum benefit forgone by using a scarce resource for a given purpose and not for the next-best alternative.
What is the difference between accounting profits and economic profits?
Accounting profits are earned when the (book) income of an organization exceeds the (book) expenses.
Economic profits are a significantly higher hurdle. They are not earned until the organization’s income exceeds not only costs as recorded in the accounting records, but the firm’s implicit costs as well.
Is a sunk cost considered relevant for decision making purposes?
No, sunk costs are not considered relevant. Sunk costs are those that have already been incurred or to which the organization is committed, and they have no bearing on any future decisions.
Are avoidable costs relevant for decision making purposes?
Yes, avoidable costs are considered relevant. An avoidable cost may be saved by not adopting a particular option.
Are fixed costs relevant when there is available capacity for a special order?
When capacity is available, fixed costs are irrelevant.
When a manufacturer lacks available production capacity for a special order, which costs should be considered?
When a manufacturer lacks available production capacity, the differential costs of accepting the order must be considered. The variable costs of the production run and the opportunity cost of redirecting resources must also be considered.
Considering relevant costs, when should an item be made in-house and when should it be bought?
If the total relevant costs of production are less than the cost to buy the item, it should be made in-house.
If the total relevant costs of production are more than the costs to buy the item, it should be bought (outsourced).
What is the relevant cost associated with making a component?
The relevant cost of making a component is the total of all avoidable costs. Avoidable costs include the variable manufacturing costs and relevant fixed costs that would be eliminated if the component were purchased from an outside supplier.
Is joint cost relevant in determining whether to sell a product at the split-off point or process it further?
In determining whether to sell a product at the split-off point or process the item further at additional cost, the joint cost of the product is irrelevant because it is a sunk cost.
Define joint costs.
Joint (common) costs are those costs incurred up to the point where the products become separately identifiable, called the split-off point. Joint costs include direct materials, direct labor, and manufacturing overhead.
Describe the incremental approach for the sell-as-is or process-further decision.
Using marginal analysis, the sell-as-is or process-further decision can be made using an incremental approach. Under this approach, the incremental revenue is compared to incremental cost.
Incremental revenue > Incremental cost = Process further
Incremental revenue < Incremental cost = Sell as is
What are separable costs?
Separable costs are costs that can be identified with a particular joint product and are allocated to a specific unit of output.
