Chapter 10

Question 1

what is incremental revenue

Answer 1

represents the additional revenue one alternative generates over the other

Question 2

what is a relevant benefit

Answer 2

incremental revenue
cost saving

Question 3

what is revenue lost

Answer 3

the decrease in revenue of one alternative compared to the other.

Question 4

what is a relevant cost / opportunity cost

Answer 4

revenue lost
incremental cost

Question 5

what is an incremental cost

Answer 5

the additional cost one alternative incurs over the other.

Question 6

what is cost saving

Answer 6

represents the reduction in cost of one alternative compared to the other

relevant benefit / avoidable cost

Question 7

what are unavoidable costs

Answer 7

If two alternatives incur the same costs, then those costs are not considered relevant to the analysis

Question 8

what is differential revenue

Answer 8

he difference in revenues between the two alternatives

Question 9

what is a differential cost

Answer 9

the difference in maintenance costs between the two alternatives

Question 10

what are sunk costs

Answer 10

represent costs that have already been incurred and would be unaffected by the ultimate decision

• irrelevant

Question 11

how to make a decision based on relevant costs and benefits

Answer 11

1. Eliminate irrelevant costs including unavoidable and sunk costs, and those costs and benefits that are the same across all alternatives.
2. Make the decision based on an analysis of the relevant costs and benefits remaining.

Question 12

possible scenarios:

Answer 12

• keep or drop business segment
• move business location
• accept or reject special order

Question 13

what are the relevant costs when deciding to keep or drop a segment

Answer 13

• CM lost on discontinued segment = loss on revenue - savings for variable costs

Question 14

what are the relevant benefits when deciding to keep or drop a business segment

Answer 14

• fixed costs avoided when discontinued
• contribution margin gained on other segments for repurposing resources

Question 15

what are the relevant costs when deciding on a new building

Answer 15

• incremental costs = variable and fixed costs of each location
• opportunity costs = forgone sales from relocation

Question 16

what are the relevant benefits when deciding on a new location

Answer 16

• incremental revenues = new sales in a new place
• variable and fixed costs avoided when the lease is terminated

Question 17

what is a special order

Answer 17

refers to one that is not within the parameters of what the company would consider normal business operations and is not recurring

Question 18

what are the relevant costs when considering a special order

Answer 18

• Incremental costs, including variable and fixed costs, of accepting the order.
• Opportunity costs of accepting the order, including potentially foregone sales of other products to accommodate the special order.

Question 19

what are the relevant benefits when considering a special order

Answer 19

Incremental revenue from the order.