Chapter 12

Question 1

What Costs are Relevant?

Answer 1

Any cost that is avoidable (would differ among alternatives) is relevant

Question 2

All costs are avoidable EXCEPT

Answer 2

1. Sunk costs (costs that have already been incurred).

2. Future costs that do not differ.

Question 3

Fixed Costs are not always

Answer 3

unavoidable

Question 4

variable costs are not

Answer 4

always avoidable

Question 5

Avoidable costs (costs that differ among alternatives) are

Answer 5

relevant.

Question 6

Special orders

Answer 6

the price of a special order must be higher than the additional relevant costs. In most cases this will be variable costs plus opportunity costs.

Question 7

Outsourcing is

Answer 7

a make-buy decision

Question 8

Drop or keep a product

Answer 8

A product should be dropped when fixed cost avoided are greater than the contribution margin lost.

Question 9

Constrained resources

Answer 9

Select the item with the highest contribution margin per constrained resource

Question 10

Constrained Resources Formula

Answer 10

CM per unit = CM per limited resource

constrained resource per unit

Question 11

Joint Product

Answer 11

: Sell or process further. Process further if
additional revenue is greater than additional costs.
Joint costs are sunk (and thus not relevant).

Question 12

Constrained resource =

synonyms

Answer 12

scarce resource = limited resource

Question 13

When are special orders profitable?

Answer 13

if incremental revenue exceeds the incremental cost

Question 14

Special Order: What is important when considering taking on a special order?

Answer 14

• idle capacity

- should not cut into normal units or undercut normal prices

Question 15

Make Buy: if equipment can be sold whats relevant and so on?

Answer 15

• its salvage value would be relevant

- or if the machine could be used to make other products as well

Question 16

Make Buy: how is depreciation sometimes treated?

Answer 16

Because the equipment has already been purchased, this depreciation is a sunk cost and is therefore irrelevant

Question 17

Special order

Answer 17

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

Question 18

joint products.

Answer 18

Two or more products that are produced from a common input

Question 19

split-off point

Answer 19

is the point in the manufacturing process at which the joint products can be recognized as separate products

Question 20

joint costs are a

Answer 20

common cost of all of the intermediate and end products and should not be allocated to them for purposes of making decisions about the individual products.

Question 21

Once the split-off point is reached, the joint costs have already been

Answer 21

incurred and nothing can be done to avoid them

Question 22

Are joint cost irrelevant?

Answer 22

yes from the split point forward

Question 23

SO: Variable Costs

Answer 23

have already been incurred because the product has already been produced

Question 24

JC: Discuss joint costs?

Answer 24

Joint costs are irrelevant in decisions regarding what to do with a product from the split-off point forward. Once the split-off point is reached, the joint costs have already been incurred and nothing can be done to avoid them.

Question 25

Do equation for split off?

Answer 25

……….notes