Chapter 10 - relevant costs + benefits Flashcards
define an incremental revenue
additional revenue one alternative generates over the other - a relevant benefit
define revenue lost
represents the decrease in revenue of 1 alternative compared to the other - it’s considered a relevant cost or an opportunity cost
what happens if two alternatives generate the same revenue?
the revenue is not considered relevant to teh analysis
define an incremental cost
the additional cost 1 alternative incurs over the other - it’s a relevant cost
define cost saving
the reduction inn cost of 1 alternative compared to the others - it’s a relevant benefit or an avoidable cost
what are unavoidabel costs
if 2 alternatives incur the same costs, then those costs are not considered relevant to the analysis
define differential revenue
the difference in revenues between the 2 alternatives
define differential cost
difference in maintenance costs between the 2 alternatives
define sunk costs
costs hat have already been incurred and would be unaffected by the ultimate decision now or in the future
what are the steps to identify what is relevant and how to make the final decision
- eliminate irrelevant costs including unavoidable + sunk costs, and those costs and benefits that are the same across all alternatives
- make the decision based on an analysis of the relevant costs and benefits remaining
what are some common relevant costs or benefits when deciding to continue or stop selling a product/service
costs: contribution margin lost on a discontinued product or segment - lost revenue but also savings of variable costs related to the discontinued product or segment
benefits: fixed costs avoided if a product is discontinued or a store is closed, contribution margin gained on other products or segments, as a result of repurposing the space previously used for the discontinued product/segment
how to make a decision on whether to continue or discontinue a product/segment
CM lost - (fixed costs avoided + CM gained elsewhere) = continue or discontinue
if it’s a positive, the product/segment should be kept
if it’s a negative the product/segment should be dropped
what are the relevant costs + benefits of changing locations?
costs: incremental costs - variable + fixed costs, based on each location
opportunity costs - includes any potential forgone sales as a result of location
benefits: incremental revenue from new sales in the geographical territory of the new location, variable = fixed costs avoided if status quo location is closed/lease terminated
decision comes down to choosing the option with the lowest cost
define a special order
an order that is not within the parameters of what the company would consider normal business operations and is not recurring
what are the relevant costs + benefits to accepting a special order?
costs: incremental costs - variable + fixed costs, of accepting the order
opportunity costs of accepting the order - including potential forgone sales of other products to accommodate the special order
benefits: incremental revenue from the order
decision is ultimately on incremental revenue - total relevant costs = accept or reject the special order
if it’s positive, the special order should be accepted
if it’s negative the special order should be rejected
