Ch 10 - Mgrl Decision Making

Question 1

what are the five steps in managerial decision making?

Answer 1

1. define the decision task
2. identify alternative courses of action
3. collect relevant information and evaluate each alternative
4. select preferred course of action
5. analyze and assess decisions made

Question 2

what three types of costs are pertinent to the discussion of relevant costs?

Answer 2

1. sunk costs
2. out-of-pocket costs
3. opportunity costs

Question 3

what is an out-of-pocket cost

Answer 3

future outlay of cash and is relevant for current and future decision making

Question 4

what is an opportunity cost

Answer 4

potential benefit lost by taking specific action when two or more alternative choices are available

Question 5

what are relevant benefits

Answer 5

additional or incremental revenue generated by selecting a particular course of action over another

Question 6

What is the relevant information to deciding the net income on a potential opportunity, such as large new sale at lower retail price to merchandiser?

Answer 6

additional costs

aka incremental costs, differential costs

Question 7

define incremental cost

Answer 7

additional cost incurred only if a company pursues a specific course of action

Question 8

what info must mgmt identify to find the best sales mix for its product lines?

Answer 8

1. contribution margin of each product
2. facilities required to produce each product
3. any constraints on these facilities
4. its markets

Question 9

What are the three separate cases considered in making a determination of the best sales mix?

Answer 9

1. demand is unlimited and products use same inputs
2. demand is unlimited and products use different inputs
3. demand is limited

Question 10

what two areas must be looked at when considering segment elimination?

Answer 10

1. avoidable expenses

2. unavoidable expenses

Question 11

define avoidable expenses or escapable expenses

Answer 11

• expense (or cost) that is relevant for decision making
• expense that is not incurred if a dept, product or service is eliminated
• costs to generate a segment’s revenues

Question 12

define unavoidable expenses or inescapable expenses

Answer 12

expense or cost that is not relevant for business decisions

-expenses that would continue even if a dept, product or service is eliminated

Question 13

theory of constraints

Answer 13

strategy designed to reduce the impact of constraints or bottlenecks on production

Question 14

what is the decision rule for if a segment is a candidate for elimination

Answer 14

if the segment’s revenues are less than its avoidable expenses

Question 15

how can insurance be classified as either avoidable or unavoidable?

Answer 15

depends on whether assets insured can be removed and premiums canceled

Question 16

what must mangers decide when deciding whether or not to replace equipment

Answer 16

whether the reduction in variable manufacturing costs with new equipment over its useful life is greater than the net purchase price of the equipment

Question 17

What qualitative factors should be considered when making managerial decisions?

Answer 17

-quality, delivery, 
reputation of proposed supplier
-potential layoffs
-impaired worker morale
-effects on company's image