Benefits, Costs, and Decisions

Question 1

A good decision

Answer 1

considers all costs, including any losses.

Question 2

Average costs are

Answer 2

a lousy indicator of performance.

Question 3

Problem arise when

Answer 3

incentives of the business are not aligned with goals

Question 4

Total costs increase

Answer 4

as you produce more, but factory capital costs are fixed.

Question 5

Capital costs

Answer 5

are fixed.

Question 6

Labor or ingredients (Variable) costs

Answer 6

vary with output.

Question 7

Costs that change with output level are

Answer 7

variable costs

Question 8

Factory costs (Fixed)

Answer 8

do not vary with the amount of output.

Question 9

Variable costs

Answer 9

change as output changes.

Question 10

Economic Value Added (EVA)

Answer 10

is a financial performance metric that charges each division within a firm for the amount of capital it uses.

Question 11

The main difference between ordinary accounting profit and EVA i

Answer 11

s a 15% capital charge.

Question 12

Accounting costs do not include

Answer 12

capital costs where as economic costs do.

Question 13

Economists are interested in

Answer 13

all relevant costs for decision making, including implicit costs.

Question 14

Interest

Answer 14

is the charge creditors charge for use of their capital.

Question 15

Economic profit tells investors

Answer 15

if they should keep investing.

Question 16

Economic profit recognizes

Answer 16

explicit and implicit costs of capital.

Question 17

Negative economic profit means

Answer 17

that the firm is earning less than equity holders expect to make from their investment.

Question 18

Opportunity costs is

Answer 18

of one alternative as the forgone opportunity to earn profit from the other.

Question 19

Relevant costs and benefits

Answer 19

of a decision consider all costs and benefits that vary with the consequence of a decision but only costs and benefits that vary with the consequence of the decision.

Question 20

Fixed or sunk cost fallacy

Answer 20

considers costs and benefits that do not vary with the consequences of your decision. You make decisions using irrelevant costs and benefits.

Question 21

One of the most frequent causes of sunk-cost fallacy in business is

Answer 21

overhead allocated to various activities within a company.

Question 22

Depreciation is another common cause

Answer 22

of sunk-cost fallacy.

Question 23

Straight-line depreciation

Answer 23

is when the asset depreciates each year based on usage charges.

Question 24

Accounting profit does not necessarily correspond

Answer 24

to economic profit.

Question 25

Hidden-cost fallacy

Answer 25

occurs when you ignore relevant costs-those that vary with the consequences of your decision.

Question 26

When trying to make a hard decision:

Answer 26

first recognize the relevant benefits and costs; second, remember to consider the consequences of the decision from your company’s point of view.

Question 27

If you begin with the costs, you will get confused.

Answer 27

If you begin with the decision, you won’t get confused.

Question 28

Costs are associated

Answer 28

with decisions.