Chapter 10

Question 1

When doina a ‘relevant cost and benefit analysis’ What do we ONLY CONSIDER

Answer 1

The changes of costs and revnue from one alternative over the other

Question 2

Concerning revenue, what is a ‘relevant benefit’?

Answer 2

It considers the additional/incremental ‘revenue’ one alternative generates over the other

Question 3

Concerning revenue, what is a ‘relevant cost’?

Answer 3

Its the ‘revenue lost’ when choosing one alternative over the other

Question 4

Whats another way to say relevant cost in respect to revenue

Answer 4

Opportunity cost

Question 5

What do we do if ‘both alternatives generate the same revenue

Answer 5

It is not considered in the analysis

Question 6

with respect to costs whats a relevant cost

Answer 6

Its the increase/incremental cost that when alternative brings over the other

Question 7

with respect to costs whats a relevant benefit

Answer 7

Its the decerase cost that one alternative brings over the other

Question 8

Whats another way to relvant benefit for costs?

Answer 8

Avoidable costs

Question 9

What if costs are incurred are the same for both periods

Answer 9

Its not considered in the analysis and its a unavoidable cost!

Question 10

What is differemtial revnue?

Answer 10

Its the differences in revenue between both alternatives

Question 11

What is differemtial cost?

Answer 11

Its the differences in cost between both alternatives

Question 12

What are sunk costs?

Answer 12

These are costs that are incurred previously and is irrelevant to our analysis

Question 13

What is the process of perfroming a relevant cost and benefit analysis?

Answer 13

1. Eliminate any irrelavnt costs
   (unavoidbale, sunken costs for both costs and benefits)
2. Make a decision based on the relevant costs and benefits remaining

Question 14

When doing an analysis what is positive and negative

Answer 14

+ = avoidable costs
- = unavoidable costs and incremental costs

Question 15

What are the three most common scenarios for doing a cost and benefit analysis?

Answer 15

1. Drop or keep a product or service segment
2. Choosing an office location
3. Accepting or rejecting a special order

Question 16

What is the analysis we do for a product or service segment?

Answer 16

1. Eliminate all irrelevant + sunk costs (benefit + cost)
2. Do your cost and benefit analysis from there

Question 17

For choosing a product or service segment what are some things we should know (relevant costs)?

Answer 17

+ A relevant cost is the lost CM on the discounted product or service segmented

Question 18

For choosing a product or service segment what are some things we should know (relevant benefits)?

Answer 18

+ 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

Question 19

What is he equation to do this analysis?

Answer 19

CM lost - (fixed costs avoided + CM gained from elsewhere ) = continue or (discountinue)

Question 20

How do we know if we should keep the product segment or drop?

Answer 20

If CM Lot excees the fixed costs avoided + CM gained from elsewhere we keep

Question 21

How do we know if we should keep the product segment or drop?

Answer 21

If CM Lot is less than the fixed costs avoided + CM gained from elsewhere we drop

Question 22

For choosing office locations what are the relevant costs we should look at?

Answer 22

1. The increase in costs (variable and fixed) based on each location
2. Incremental costs / Opportunity costs were losing out on in sales when relovating

Question 23

For choosing office locations what are the relevant benefit we should look at?

Answer 23

1. Increase in revenue from relocating
2. The variable and fixed costs we get to avoid when we relovate

Question 24

What is the process of doing a relevant cost and benefit analysis for ‘relocating’?

Answer 24

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

Question 25

What is a special order?

Answer 25

Its orders that come in that are not apart of normal operations?

Question 26

What are the relevant costs we look at for a special order?

Answer 26

+ Increase in costs, variable and fixed when we accept this order

+ Opportuntiy cost or the foregone sales to accommodate this ordre

Question 27

What are the relevant benefits we look at for a special order?

Answer 27

+ INCREASE IN REVENUE

Question 28

How do we do a cost and benefit analysis for a special order?

Answer 28

Incremental revenue - total relevant costs (loss in revenue + var/fixed costs) = accept/reject the order

Question 29

How do we know if we accept or reject this order?

Answer 29

If the incremental revnue is higher than the total relevant costs and vise versa