Chapter 11

Question 1

What is the primary focus of a decision model in managerial decision-making?

Answer 1

A formal method of making choices involving both quantitative and qualitative analysis.

Question 2

What is the difference between uncertainty and risk in decision-making?

Answer 2

Uncertainty: Outcomes that are not anticipated during the decision-making process.

Risk: Outcomes that are anticipated and quantified as possible outcomes

Question 3

Which types of costs are irrelevant in decision-making?

Answer 3

Costs that are expected to occur in the future and differ among alternative courses of action.

Question 4

What are incremental costs?

Answer 4

The difference in costs when changing from one alternative to another.

Question 5

In a product mix decision, what is the decision rule?

Answer 5

Choose the product with the higher contribution margin per unit of the limiting (critical) resource.

Question 6

What is the key factor in managing bottleneck operations under the Theory of Constraints (TOC)?

Answer 6

Focus on maximizing throughput contribution and manage the bottleneck to improve overall system efficiency.

Question 7

What should be considered when making an equipment replacement decision?

Answer 7

Sunk costs (like historical cost, accumulated depreciation) are irrelevant.
Focus on current disposal proceeds of the old equipment and the cost of the new equipment.

Question 8

How can managerial bias affect decision-making?

Answer 8

Managers may choose alternatives that enhance personal performance metrics (such as profitability quotas for bonuses), even if it harms the firm’s long-term interests.

Question 9

What is a common mistake in relevant-cost analysis?

Answer 9

Incorrectly assuming that all variable costs are relevant and all fixed costs are irrelevant.

Question 10

What is the key question to ask when analyzing a decision?

Answer 10

“What difference will an action make?” Focus on what will change as a result of the decision.

Question 11

How do qualitative factors like employee morale or customer satisfaction impact decision-making?

Answer 11

They should be given proper weight, as they may be as important as quantitative factors but harder to measure.

Question 12

What is the decision rule for accepting or rejecting a one-time only special order?

Answer 12

Accept the special order if it generates additional operating income; reject if it does not

Question 13

In the Theory of Constraints, what is the primary goal?

Answer 13

To maximize operating income by efficiently managing bottleneck operations and focusing on throughput contribution.

Question 14

How should irrelevant costs be handled in decision analysis?

Answer 14

Exclude irrelevant costs (like sunk costs) to focus only on data that will impact the decision, making the analysis more efficient.

Question 15

What is the purpose of using relevant-cost analysis in decision-making

Answer 15

To focus on costs that will differ between alternatives, excluding irrelevant or sunk costs, to make efficient and informed decisions

Question 16

What is differential cost in decision-making?

Answer 16

The total cost change between two alternatives, comparing the difference in costs for each option.

Question 17

What is the impact of sunk costs on decision-making?

Answer 17

Sunk costs should be ignored in decision-making since they cannot be changed by future actions and are irrelevant.

Question 18

In a product mix decision, what is the significance of contribution margin per unit (CMU)?

Answer 18

The higher the contribution margin per unit, the more profitable the product is, making it the better choice when resources are limited.

Question 19

How do fixed costs behave in relation to relevant-cost analysis?

Answer 19

Fixed costs can change per unit with output levels, and they are often irrelevant unless they differ between alternatives.

Question 20

In the Theory of Constraints, why is it important to identify and focus on bottleneck operations?

Answer 20

Bottleneck operations limit the overall system’s capacity, so managing them effectively ensures that throughput is maximized, improving overall profitability.

Question 21

What should managers avoid when evaluating alternative actions for special orders?

Answer 21

Managers should avoid including fixed costs that cannot be recovered in the analysis, as these are sunk and irrelevant to the decision

Question 22

When considering an equipment replacement decision, what is the role of disposal proceeds?

Answer 22

Disposal proceeds from the sale of old equipment are relevant, as they impact the overall cash flow of the replacement decision.

Question 23

How can self-serving behavior affect a manager’s decision-making process?

Answer 23

Managers may delay necessary actions, such as equipment maintenance, to meet profitability targets and qualify for performance bonuses, even if this harms the company’s long-term well-being.

Question 24

Why is focusing on incremental revenues important in decision analysis?

Answer 24

Incremental revenues help determine the additional income generated by a decision, which is essential for evaluating the profitability of different alternatives.

Question 25

How does qualitative decision-making differ from quantitative decision-making?

Answer 25

Qualitative decision-making involves factors like customer satisfaction and employee morale, which are harder to measure but just as critical to long-term success, while quantitative decision-making involves financial data and measurable outcomes.

Question 26

What is the relationship between incremental costs and incremental revenues in decision-making?

Answer 26

Incremental costs and incremental revenues are the differences between the current and alternative options, helping to assess the profitability and feasibility of a decision.

Question 27

How does the relevant-cost analysis assist in making insourcing vs. outsourcing decisions?

Answer 27

Relevant-cost analysis helps compare the costs of performing a function internally (insourcing) versus contracting it out (outsourcing), considering only the costs that will differ between the two options.

Question 28

When evaluating product discontinuation decisions, what costs should be considered?

Answer 28

Only the relevant costs (such as variable costs and direct revenues) should be considered, while fixed costs are typically excluded since they don’t change with the decision.

Question 29

In a branch or segment decision, what is the key consideration when deciding whether to add or discontinue?

Answer 29

Consider the marginal contribution margin and whether the branch or segment is generating enough contribution to cover its relevant costs and make a positive impact on overall profitability.

Question 30

What role does performance evaluation play in decision-making?

Answer 30

Performance evaluation can influence managers to favor decisions that improve their personal performance outcomes (e.g., bonus eligibility), which may not always align with the firm’s best interests.

Question 31

What is the primary goal of the Theory of Constraints (TOC)?

Answer 31

The primary goal is to maximize throughput by focusing on bottleneck operations and optimizing the use of limited resources.

Question 32

How do incremental costs and differential costs relate to decision-making?

Answer 32

Both incremental and differential costs help managers assess the cost differences between alternatives, ensuring that decisions are based on future changes rather than sunk or irrelevant costs.

Question 33

What is a common pitfall in relevant-cost analysis that can lead to inaccurate decision-making?

Answer 33

A common pitfall is mistakenly including irrelevant variable costs or assuming that all fixed costs are irrelevant, which can distort the analysis and lead to suboptimal decisions.