Ch Appendixs Flashcards
What is the opportunity cost?
Opportunity cost is the benefit forgone, or advantage lost, that results from choosing one action over the best-known alternative course of action. Suppose a firm has $100,000 to invest and then two alternatives of comparable risk present themselves, each requiring a $100,000 investment. Investment A will net $25,000; Investment B will net $23,000. Investment A is clearly the better choice, with a $25,000 net return. If the decision is made to invest in B instead of A, the opportunity cost of B is $2,000, which is the benefit forgone.
What is avoidable costs?
Avoidable costs include any expense that is not incurred if an investment is made but that must be incurred if the investment is not made. Suppose a company owns a metal lathe that is not in working condition but is needed for the firm’s operations. Because the lathe must be repaired or replaced, the repair costs are avoidable if a new lathe is purchased. Avoidable costs reduce the cost of a new investment because they are not incurred if the investment is made. Avoidable costs are an example of how it is possible to “save” money by spending money.
What is expected value?
Risk is inherent in any investment because the future can never be predicted with absolute certainty. To deal with this uncertainty, mathematical techniques such as expected value can help. Expected value is the expected outcome multiplied by the probability of its occurrence. Recall that in the preceding example the expected outcome of Alternative A was $25,000 and B, $23,000. Suppose the probability of A’s actual outcome is 80 percent while B’s probability is 90 percent.
InvestmentA:$25,000 × 0.80 = $20, 000 InvestmentB:$23,000 × 0.90 = $20, 700
Investment B is now seen to be the better choice, with a net advantage over A of $700.
What is depreciation?
Depreciation is a method for allocating costs of capital equipment. The value of any capital asset—buildings, machinery, and so forth—decreases as its useful life is expended. Amortization and depreciation are often used interchangeably. Through convention, however, depreciation refers to the allocation of cost due to the physical or functional deterioration of tangible (physical) assets such as buildings or equipment, whereas amortization refers to the allocation of cost over the useful life of intangible assets such as patents, leases, franchises, and goodwill.
What is economic life of a machine?
The economic life of a machine is the period over which it provides the best method for performing its task. When a superior method is developed, the machine has become obsolete. Thus, the stated book value of a machine can be a meaningless figure.
What is fixed costs?
A fixed cost is any expense that remains constant regardless of the level of output. Although no cost is truly fixed, many types of expense are virtually fixed over a wide range of output. Examples are rent, property taxes, most types of depreciation, insurance payments, and salaries of top management.
What is variable costs?
Variable costs are expenses that fluctuate directly with changes in the level of output. For example, each additional unit of sheet steel produced by USx requires a specific amount of material and labor. The incremental cost of this additional material and labor can be isolated and assigned to each unit of sheet steel produced. Many overhead expenses are also variable because utility bills, maintenance expense, and so forth, vary with the production level.
What is sunk costs?
Sunk costs are past expenses or investments that have no salvage value and therefore should not be taken into account in considering investment alternatives. Sunk costs also could be current costs that are essentially fixed such as rent on a building. For example, suppose an ice cream manufacturing firm occupies a rented building and is considering making sherbet in the same building. If the company enters sherbet production, its cost accountant will assign some of the rental expense to the sherbet operation. However, the building rent remains unchanged and therefore is not a relevant expense to be considered in making the decision. The rent is sunk; that is, it continues to exist and does not change in amount regardless of the decision.
Benefits of Technology Investments
- Cost Reduction (labor, material, inventory, quality, maintenance)
- Other benefits (Increased product variety, Improved product features, Shorter cycle time, Greater product output)
Although there may be many benefits in acquiring new technologies, several types of risk accompany the acquisition of new technologies. These risks have to be evaluated and traded off against the benefits before the technologies are adopted. Some of these risks are…?
- Technological Risks - An early adopter of a new technology has the benefit of being ahead of the competition, but he or she also runs the risk of acquiring an untested technology whose problems could disrupt the firm’s operations. Also, alternative technologies may become more cost-effective in the future, negating the benefits of a technology today.
- Operational Risks - There also could be risks in applying a new technology to a firm’s operations. Installation of a new technology generally results in significant disruptions, at least in the short run, in the form of plantwide reorganization, retraining, and so on
- Organizational Risks - Firms may lack the organizational culture and top management commitment required to absorb the short-term disruptions and uncertainties associated with adopting a new technology. In such organizations, there is a risk that the firm’s employees or managers may quickly abandon the technology .
- Environmental or Market Risks
- In many cases, a firm may invest in a particular technology only to discover a few years later that changes in some environmental or market factors make the investment worthless. For instance, in environmental issues, auto firms have been reluctant to invest in technology for making electric cars because they are uncertain about future emission standards of state and federal governments, the potential for decreasing emissions from gasoline-based cars, and the potential for significant improvements in battery technology. Typical examples of market risks are fluctuations in currency exchange rates and interest rates.
