Chapter 10 Flashcards
When doina a ‘relevant cost and benefit analysis’ What do we ONLY CONSIDER
The changes of costs and revnue from one alternative over the other
Concerning revenue, what is a ‘relevant benefit’?
It considers the additional/incremental ‘revenue’ one alternative generates over the other
Concerning revenue, what is a ‘relevant cost’?
Its the ‘revenue lost’ when choosing one alternative over the other
Whats another way to say relevant cost in respect to revenue
Opportunity cost
What do we do if ‘both alternatives generate the same revenue
It is not considered in the analysis
with respect to costs whats a relevant cost
Its the increase/incremental cost that when alternative brings over the other
with respect to costs whats a relevant benefit
Its the decerase cost that one alternative brings over the other
Whats another way to relvant benefit for costs?
Avoidable costs
What if costs are incurred are the same for both periods
Its not considered in the analysis and its a unavoidable cost!
What is differemtial revnue?
Its the differences in revenue between both alternatives
What is differemtial cost?
Its the differences in cost between both alternatives
What are sunk costs?
These are costs that are incurred previously and is irrelevant to our analysis
What is the process of perfroming a relevant cost and benefit analysis?
- Eliminate any irrelavnt costs
(unavoidbale, sunken costs for both costs and benefits) - Make a decision based on the relevant costs and benefits remaining
When doing an analysis what is positive and negative
+ = avoidable costs
- = unavoidable costs and incremental costs
What are the three most common scenarios for doing a cost and benefit analysis?
- Drop or keep a product or service segment
- Choosing an office location
- Accepting or rejecting a special order
What is the analysis we do for a product or service segment?
- Eliminate all irrelevant + sunk costs (benefit + cost)
- Do your cost and benefit analysis from there
For choosing a product or service segment what are some things we should know (relevant costs)?
+ A relevant cost is the lost CM on the discounted product or service segmented
For choosing a product or service segment what are some things we should know (relevant benefits)?
+ fixed costs avoided dealing with product segmented when closed down
+ CM gained from other products or segments resulting from repurposing the space from the closed down thing beforehand
What is he equation to do this analysis?
CM lost - (fixed costs avoided + CM gained from elsewhere ) = continue or (discountinue)
How do we know if we should keep the product segment or drop?
If CM Lot excees the fixed costs avoided + CM gained from elsewhere we keep
How do we know if we should keep the product segment or drop?
If CM Lot is less than the fixed costs avoided + CM gained from elsewhere we drop
For choosing office locations what are the relevant costs we should look at?
- The increase in costs (variable and fixed) based on each location
- Incremental costs / Opportunity costs were losing out on in sales when relovating
For choosing office locations what are the relevant benefit we should look at?
- Increase in revenue from relocating
- The variable and fixed costs we get to avoid when we relovate
What is the process of doing a relevant cost and benefit analysis for ‘relocating’?
Incremental revenue +
Any costs we got to avoid (from this option over the other)
Less: Any total relevant costs (from one option over the other)
Increase in variable and fixed costs of operating =
Operating income
What is a special order?
Its orders that come in that are not apart of normal operations?
What are the relevant costs we look at for a special order?
+ Increase in costs, variable and fixed when we accept this order
+ Opportuntiy cost or the foregone sales to accommodate this ordre
What are the relevant benefits we look at for a special order?
+ INCREASE IN REVENUE
How do we do a cost and benefit analysis for a special order?
Incremental revenue - total relevant costs (loss in revenue + var/fixed costs) = accept/reject the order
How do we know if we accept or reject this order?
If the incremental revnue is higher than the total relevant costs and vise versa
