Podcast
Questions and Answers
Which department has the highest segment margin?
Which department has the highest segment margin?
What is the total amount of unavoidable fixed costs?
What is the total amount of unavoidable fixed costs?
What is the annual income effect when choosing to remain an employee?
What is the annual income effect when choosing to remain an employee?
What is the total relevant cost per unit when deciding to make the part?
What is the total relevant cost per unit when deciding to make the part?
Signup and view all the answers
Which cost will be eliminated if the parts are bought instead of made?
Which cost will be eliminated if the parts are bought instead of made?
Signup and view all the answers
What contributes to a company's decision to always make parts internally?
What contributes to a company's decision to always make parts internally?
Signup and view all the answers
When a company opts to buy instead of make, which of the following is a likely reason?
When a company opts to buy instead of make, which of the following is a likely reason?
Signup and view all the answers
Which quantity represents the total difference in favor of making the parts?
Which quantity represents the total difference in favor of making the parts?
Signup and view all the answers
What additional factor does a company need to assess in make-or-buy decisions?
What additional factor does a company need to assess in make-or-buy decisions?
Signup and view all the answers
What area does the decision to make or buy significantly impact?
What area does the decision to make or buy significantly impact?
Signup and view all the answers
What are the total relevant costs if the Block Company decides to buy the plastic housings?
What are the total relevant costs if the Block Company decides to buy the plastic housings?
Signup and view all the answers
If the Block Company decides to buy the plastic housings, how would this impact their operating income?
If the Block Company decides to buy the plastic housings, how would this impact their operating income?
Signup and view all the answers
What is the contribution margin from manufacturing the additional 20,000 units?
What is the contribution margin from manufacturing the additional 20,000 units?
Signup and view all the answers
What is the excess cost of purchasing the housings compared to making them?
What is the excess cost of purchasing the housings compared to making them?
Signup and view all the answers
What are unavoidable costs?
What are unavoidable costs?
Signup and view all the answers
What is the variable cost associated with buying 120,000 housings?
What is the variable cost associated with buying 120,000 housings?
Signup and view all the answers
If the contribution from other products is considered, what is the total net relevant cost for using the facilities for other products?
If the contribution from other products is considered, what is the total net relevant cost for using the facilities for other products?
Signup and view all the answers
What would be the impact on operating income if the order of L.E. 82,000 for 1,000 drills was accepted?
What would be the impact on operating income if the order of L.E. 82,000 for 1,000 drills was accepted?
Signup and view all the answers
What happens to the fixed costs if the Block Company chooses to buy instead of make the housings?
What happens to the fixed costs if the Block Company chooses to buy instead of make the housings?
Signup and view all the answers
Why is segment margin important in decision-making?
Why is segment margin important in decision-making?
Signup and view all the answers
Which expenses are considered when calculating segment margin?
Which expenses are considered when calculating segment margin?
Signup and view all the answers
Which statement is true regarding avoidable costs in relation to the product line?
Which statement is true regarding avoidable costs in relation to the product line?
Signup and view all the answers
What is the total fixed cost for manufacturing electrical components?
What is the total fixed cost for manufacturing electrical components?
Signup and view all the answers
What would be the impact of making the housings on the operating income of the Block Company?
What would be the impact of making the housings on the operating income of the Block Company?
Signup and view all the answers
What would the cost per unit be if a supplier offered to manufacture plastic housings for L.E. 13.50 each?
What would the cost per unit be if a supplier offered to manufacture plastic housings for L.E. 13.50 each?
Signup and view all the answers
Which of the following is a characteristic of avoidable costs?
Which of the following is a characteristic of avoidable costs?
Signup and view all the answers
What does segment margin represent?
What does segment margin represent?
Signup and view all the answers
What is the contribution margin calculated for the electrical components?
What is the contribution margin calculated for the electrical components?
Signup and view all the answers
What is the primary focus when making decisions to delete a department?
What is the primary focus when making decisions to delete a department?
Signup and view all the answers
What total variable costs are incurred for the plastic housing production?
What total variable costs are incurred for the plastic housing production?
Signup and view all the answers
What was the president's reason for rejecting the order for additional drills?
What was the president's reason for rejecting the order for additional drills?
Signup and view all the answers
Which costs are included in many common costs shared by users?
Which costs are included in many common costs shared by users?
Signup and view all the answers
What should be considered irrelevant in continuation or elimination decisions?
What should be considered irrelevant in continuation or elimination decisions?
Signup and view all the answers
What is the per unit contribution margin for product B?
What is the per unit contribution margin for product B?
Signup and view all the answers
Which product has the highest contribution margin per hour?
Which product has the highest contribution margin per hour?
Signup and view all the answers
How many total hours are needed to produce the optimal mix of products?
How many total hours are needed to produce the optimal mix of products?
Signup and view all the answers
Which allocation results in the highest total contribution margin?
Which allocation results in the highest total contribution margin?
Signup and view all the answers
If 100,000 hours are available, what is the status of resource utilization after optimal allocation?
If 100,000 hours are available, what is the status of resource utilization after optimal allocation?
Signup and view all the answers
Why might managing a product's contribution margin lead to challenges in resource allocation?
Why might managing a product's contribution margin lead to challenges in resource allocation?
Signup and view all the answers
What is the consequence of allocating resources based only on per unit contribution margin?
What is the consequence of allocating resources based only on per unit contribution margin?
Signup and view all the answers
Which of the following scenarios could complicate the use of the contribution approach?
Which of the following scenarios could complicate the use of the contribution approach?
Signup and view all the answers
Study Notes
Relevant Information and Decision-Making
- Chapter 6 focuses on relevant information and decision-making, particularly regarding operational decisions.
- Objective 1: Defining and using opportunity cost to analyze income effects of alternatives.
- Opportunity cost: The maximum potential contribution to profit that is forgone by using limited resources for a particular purpose. It is not the usual recorded outlay cost but the contribution of the best alternative that is excluded.
- Outlay cost: A cost requiring a cash disbursement; the typical cost recorded by accounts.
- Differential cost (or incremental cost): The difference in total costs between two alternatives.
Opportunity Cost
- The contribution to profit of the rejected alternative is the opportunity cost. This alternative is excluded from consideration
- Example: Salary forgone by a person who quits a job to start a business.
Alternatives under Consideration
-
A comparison of potential alternatives (e.g., remaining as an employee vs. opening a new business).
-
Data is provided in a table format to determine revenue, outlay costs, and income effect for each alternative.
-
The opportunity cost from the forgone salary is illustrated by one table showing the new business versus remaining as an employee.
Make or Buy Decisions
- Companies often decide whether to produce their parts internally or acquire them externally.
- Qualitative (like quality control) and quantitative (cost) factors influence the decision.
- Relevant costs in make-or-buy: Additional variable costs and fixed costs avoided if a part is bought instead of being manufactured.
- Tables show a comparison between 'Make' and 'Buy' options, including purchase cost, direct material, direct labor, variable factory overhead, fixed factory overhead (avoidable) and total relevant cost for both options.
Make or Buy: Use of Facilities
- Make-or-buy decisions depend on optimal utilization of available facilities.
- The choice includes whether to make or buy, how to use resources best.
- Resources can be used for other manufacturing or rented.
Alternatives
- Tables present various alternatives for the decision to 'make or buy'. Alternatives and the accompanying data show implications like rent revenues, contributions from other products or obtaining of parts.
Example
- Tables demonstrate revenue, variable costs, and the computation of contribution margin and operating income for different product lines (like electrical and mechanical components).
Required Analysis
- Examples of required analyses for prospective or alternative decisions, like special orders, impact of the company buying parts instead of making them, and producing alternative versions of a product.
Solution
- Demonstrates the calculations for special orders, highlighting the criticality of recognizing opportunity costs
- Detailed breakdown of costs to support decisions, highlighting relevant costs
Segment Margin (or Product Line Margin)
- Excess of revenue over both direct variable costs and avoidable fixed costs. Represents the amount left to cover unavoidable fixed costs plus generate profit.
- This figure forms the basis for making decisions on continuing or discontinuing product lines or specific segments.
Cost Categories (Avoidable & Unavoidable Costs)
- Avoidable Costs: These costs can be eliminated if a specific segment is discontinued.
- Unavoidable Costs: These costs will continue despite the segment's shutdown. Common costs are a key example of unavoidable costs.
- The focus in decision making is usually on avoidable costs
Deletion or Addition of Products/Departments
- The same principles for evaluating special orders apply to decisions on adding or deleting product lines/departments. Avoidable and unavoidable costs are critical factors.
- Avoidable costs are relevant
- Unavoidable costs are not relevant
Segment Margin Income Statement
- Provides a structure for analyzing cost structure (like avoidable and unavoidable costs) to inform product or segment decisions.
- Shows Sales, Variable costs, Contribution Margin, Avoidable fixed expenses, Segment margin, Unavoidable Fixed Costs and operating income
- Tables include categories with values, or examples of values to calculate a margin
Store as a Whole
- Tables showcase the impact of dropping certain segments on the store's performance (like in the case of the grocery department, and the effect of the store's overall performance) - This section analyzes the store's performance before and after a change.
Assumptions
- Clarifying assumptions that underlie a decision (e.g., no alternative use for assets released by dropping a segment).
Optimal Use of Limited Resources
- The contribution approach is used to identify the best product mix to maximize profit when limited resources (scarce resources).
- This involves ranking products based on contribution margin per unit of the limiting factor.
- Limiting factors (or constraints) are the factors that hold back production (like labor hours, machine hours or square footage).
Difficulties in Procedure
- Applying the procedure if more than one scarce resource exists requires more complex methods (e.g., linear programming).
Studying That Suits You
Use AI to generate personalized quizzes and flashcards to suit your learning preferences.
Related Documents
Description
This quiz covers Chapter 6 on relevant information and decision-making, focusing on operational decisions and opportunity cost. Understand the concepts of outlay cost, differential cost, and how to analyze the income effects of different alternatives effectively.