Chapter 11: Differential Analysis - Key to Decision Making

Question 1

Avoidable Cost

Answer 1

A cost that can be eliminated by choosing one alternative over another in a decision. This term is synonymous with differential cost and relevant cost.

Question 2

Differential Cost

Answer 2

A future cost that differs between any two alternatives.

Question 3

Relaxing (or Elevating) the Constraint

Answer 3

An action that increases the amount of a constrained resource. Equivalently, an action that increases the capacity of the bottleneck.

Question 4

Make or buy decision

Answer 4

A decision concerning whether an item should be produced internally or purchased from an outside supplier.

Question 5

Sell or Process further

Answer 5

A decision as to whether a joint product should be sold at the split-off point or sold after further processing.

Question 6

Vertical Integration

Answer 6

The involvement by a company in more than one of the activities in the entire value chain from development through production, distribution, sales, and after-sales service.

Question 7

Split-off point

Answer 7

That point in the manufacturing process where some or all of the joint products can be recognized as individual products.

Question 8

Making Decisions

Answer 8

is one of the basic functions of a manager.

Question 9

perform differential analysis; costs and benefits

Answer 9

To be successful in decision making, managers must be able to ___________________ which focuses on identifying the _____________ that differ between alternatives.

Question 10

Key Concept #1`

Answer 10

Every decision involves choosing from among at least two alternatives. Therefore, the first step in decision making is to define the alternatives being considered.

Question 11

Key Concept #4

Answer 11

Sunk costs are always irrelevant when choosing among alternatives.

Question 12

Key Concept #2

Answer 12

Once you have defined the alternatives, you need to identify
the criteria for choosing among them.

Question 13

Key Concept #5

Answer 13

Future costs and benefits that do not differ between alternatives are irrelevant to the decision-making process.

Question 14

Key Concept #3

Answer 14

The key to effective decision making is differential analysis— focusing on the future costs and benefits that differ between the alternatives. Everything else is irrelevant and should be ignored.

Question 15

Key Concept #6

Answer 15

Opportunity costs also need to be considered when making decisions.

Question 16

Bottleneck

Answer 16

A machine or some other part of a process that limits the total output of the entire system

Question 17

Differential revenue

Answer 17

Future revenue that differs between any two alternatives.

Question 18

Relevant Benefit

Answer 18

A benefit that should be considered when making decisions.

Question 19

Special Order

Answer 19

A one-time order that is not considered part of the company’s normal ongoing business

Question 20

Sunk Cost

Answer 20

A cost that has already been incurred and that cannot be changed by any decision made now or in the future.

Question 21

Opportunity Cost

Answer 21

The potential benefit that is given up when one alternative is selected over another.

Question 22

Constraint

Answer 22

A limitation under which a company must operate, such as limited available machine time or raw materials, that restricts the company’s ability to satisfy demand.

Question 23

Incremental Cost

Answer 23

An increase in cost between two alternatives.

Question 24

Joint Products

Answer 24

Two or more products that are produced from a common input.

Question 25

Relevant Cost

Answer 25

A cost that should be considered when making decisions

Question 26

Joint Costs

Answer 26

Costs that are incurred up to the split-off point in a process that produces joint products.