Business 2: Marginal Analysis Flashcards
True or false.
Marginal analysis is used when analyzing business decisions such as the intro of a new product or changes in output levels of existing products, acceptance or rejection of special orders, making or buying a product or service, selling or processing further, and adding or dropping a segment.
True
What does marginal analysis focus on?
Relevant revenues and costs that are associated w/ a decision
Revenues and costs related to decisions that will affect future periods are relevant only if what?
- only if they change as a result of selecting different alternatives
Can relevant costs be either fixed or variable?
YES
Are direct costs relevant costs?
- Usually YES
- Costs that can be identified w/ or traced to a given cost object (DM and DL)
Are prime costs relevant costs?
- Generally YES
- Include DM and DL costs
Are discretionary costs relevant costs?
- Generally YES
- Costs arising from periodic budgeting decisions by management
Are costs to maintain landscaping at a corporation’s headquarters relevant costs?
- Generally YES
- Viewed as discretionary costs
Are incremental costs relevant costs?
- YES
- Additional costs incurred to produce an additional amount of the unit over the present output
What are incremental costs also known as?
- Marginal costs
- Differential costs
- Out-of-pocket costs
Are opportunity costs relevant costs?
- YES
- Cost of foregoing the next best alternative when making a decision
Are costs associated with alternative uses of plant space relevant costs?
- YES (opportunity cost)
Are sunk costs relevant costs?
- NO
- Unavoidable b/c incurred in past and cannot be recovered as a result of a decision
Is the cost of old equipment a relevant cost to a replacement decision?
- NO (sunk cost)
Are controllable costs relevant costs?
- YES, if they will change a a result of selecting different alternatives
Are avoidable costs and revenues relevant?
- YES
- Result from choosing one course of action instead of another
When there is excess capacity, a special order should be accepted if what?
SP per unit > VC per unit
If a company is operating at full capacity, what should be included in the analysis to determine whether or not to accept a special order?
Opportunity cost of producing the special order
A sell or process further decision is made by comparing what?
Incremental cost and the incremental revenue generated after the split-off point
In a sell or process further decision, what should the co. do if incremental revenue exceeds incremental cost?
Process further
In a sell or process further decision, what should the co. do if the incremental cost exceeds the incremental revenue?
Sell at split off point
When deciding whether to keep or drop a segment, a firm should compare what?
The FC that can be avoided if the segment is dropped to the CM that will be lost if segment is dropped
In a keep or drop a segment decision, what should the firm do if the lost CM exceeds the avoided FC?
Keep segment
In a keep or drop a segment decision, what should the firm do if the lost CM is less than the avoided FC?
Drop segment
How do you calculate opportunity cost per unit?
= CM given up / size of special order
What is the decision rule in make vs. buy?
Make if relevant costs < outside purchase price
What are the relevant costs to consider in make vs. buy if there is excess capacity?
Relevant costs = avoidable costs
What are the relevant costs to consider in make vs. buy if there is no excess capacity?
Relevant costs = avoidable costs + opportunity costs
