Podcast
Questions and Answers
In the decision-making process, which step involves comparing the advantages and disadvantages of different courses of action?
In the decision-making process, which step involves comparing the advantages and disadvantages of different courses of action?
- Making the decision
- Determining decision alternatives
- Identifying the decision problem
- Evaluating the costs and benefits of alternatives (correct)
What are costs called that have the potential to influence a decision?
What are costs called that have the potential to influence a decision?
- Opportunity costs
- Relevant costs (correct)
- Sunk costs
- Irrelevant costs
Which of the following costs is LEAST likely to be considered relevant when making a short-term decision?
Which of the following costs is LEAST likely to be considered relevant when making a short-term decision?
- A cost that differs between two alternatives being considered.
- A sunk cost that was incurred in the past and cannot be recovered. (correct)
- A future repair cost that will only be incurred if a particular option is chosen.
- An opportunity cost representing the potential benefit forgone by choosing one option over another.
What are costs that have already been incurred and cannot be recovered?
What are costs that have already been incurred and cannot be recovered?
A company is operating at full capacity. What does an opportunity cost represent in this situation?
A company is operating at full capacity. What does an opportunity cost represent in this situation?
A business accepts a special order at a lower price than its normal selling price. What is a key consideration when analyzing this decision?
A business accepts a special order at a lower price than its normal selling price. What is a key consideration when analyzing this decision?
When evaluating a special order, what costs and benefits should be considered?
When evaluating a special order, what costs and benefits should be considered?
In a make-or-buy decision, what factors should a company consider besides costs?
In a make-or-buy decision, what factors should a company consider besides costs?
A company is deciding whether to outsource production of a component. Which of the following is a critical qualitative factor to consider?
A company is deciding whether to outsource production of a component. Which of the following is a critical qualitative factor to consider?
When making 'keep-or-drop' decisions, what is the primary financial consideration?
When making 'keep-or-drop' decisions, what is the primary financial consideration?
What should managers consider when deciding whether to eliminate a business segment?
What should managers consider when deciding whether to eliminate a business segment?
What general rule should be followed in sell-or-process-further decisions?
What general rule should be followed in sell-or-process-further decisions?
In a sell-or-process-further decision, what type of costs are considered sunk and therefore irrelevant?
In a sell-or-process-further decision, what type of costs are considered sunk and therefore irrelevant?
When faced with a constrained resource, how should a company prioritize its products to maximize profits?
When faced with a constrained resource, how should a company prioritize its products to maximize profits?
What type of costs are typically NOT relevant when prioritizing products with constrained resources?
What type of costs are typically NOT relevant when prioritizing products with constrained resources?
Which of the following is the first step in the decision-making process?
Which of the following is the first step in the decision-making process?
Besides relevant revenues, what else should be considered in a make-or-buy decision?
Besides relevant revenues, what else should be considered in a make-or-buy decision?
In a keep-or-drop decision, what should be done with unavoidable fixed costs when a segment is dropped?
In a keep-or-drop decision, what should be done with unavoidable fixed costs when a segment is dropped?
What is the primary objective when prioritizing production with a constrained resource?
What is the primary objective when prioritizing production with a constrained resource?
Which of the following is an example of a 'special order'?
Which of the following is an example of a 'special order'?
Flashcards
Relevant Costs
Relevant Costs
Costs that have the potential to influence a decision; also known as differential, incremental, or avoidable costs.
Irrelevant Costs
Irrelevant Costs
Costs that do not have the potential to influence a decision.
Sunk Costs
Sunk Costs
Costs that have already been incurred and cannot be recovered.
Opportunity Cost
Opportunity Cost
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Special Order
Special Order
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Make-or-Buy Decisions
Make-or-Buy Decisions
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Keep-or-Drop Decisions
Keep-or-Drop Decisions
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Sell-or-Process-Further Decisions
Sell-or-Process-Further Decisions
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Constrained Resource
Constrained Resource
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Prioritizing Products
Prioritizing Products
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Study Notes
Steps in the Decision-Making Process
- Step 1: Identify the decision problem
- Step 2: Determine the decision alternatives
- Step 3: Evaluate the costs and benefits of the alternatives
- Step 4: Make the decision
- Step 5: Review the results of the decision
Relevant vs. Irrelevant Costs
- Relevant costs, also known as differential, incremental, or avoidable costs, have the potential to influence a decision
- Relevant costs must occur in the future
- Relevant costs must differ between decision alternatives
- Irrelevant costs are those that do not have the potential to influence a decision
- Irrelevant costs include costs that have been incurred in the past, i.e., sunk costs
- Irrelevant cost are the same, regardless of what alternative is chosen
Opportunity and Capacity Considerations
- Opportunity cost is the foregone benefit that is given up when one alternative is selected over another
- Adding additional work at full capacity requires giving up a portion of the existing work, and the benefit of the existing work given up is an opportunity cost
- With idle capacity, additional work may be added without sacrificing existing work, so there is no opportunity cost to the additional work
Special Order Decisions
- A special order is a one-time order that is outside the scope of a company’s normal business
- Special orders are often completed at a price lower than normal
- When analyzing a special order, only the incremental costs and benefits are relevant
- Sales of other products via regular channels should not be affected by the special order
Make-or-Buy Decisions
- Make-or-buy decisions occur when a company has the option to buy a product component from an outside supplier or produce it internally
- These decisions could also be called insourcing vs. outsourcing decisions -When making a make-or-buy decision, It is important to consider how much revenues and costs will change
- When making a make-or-buy decision, it is important to consider any qualitative "soft" factors
- When making a make-or-buy decision, it is important to consider if there are any opportunity costs associated with either alternative
Keep-or-Drop Decisions
- Keep-or-drop decisions arise when managers must decide whether to eliminate a division or a segment
- Important factors to consider include how much costs and revenue will change if the segment is eliminated
- Important factors to consider include if other segments or product lines will be affected
- Important factors to consider include any qualitative factors
Sell-or-Process-Further Decisions
- Sell-or-process-further decisions arise when managers are faced with the decision to sell a product "as is" or continue adding features so it can be sold at a higher price
- As a general rule, products should be processed further only if incremental revenues exceed incremental costs
- Costs of manufacturing the product up to the sell-or-process point are classified as sunk and therefore irrelevant
Prioritizing Products with Constrained Resources
- When a limited resource restricts a company’s ability to satisfy demand, the company is said to have a constrained resource or a bottleneck
- To maximize profits, the company must prioritize its products so as to maximize the contribution margin per unit of the constrained resource
- Fixed costs are not relevant because they do not change in the short run
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