Chapter 13: Differential Analysis

Question 1

What is the second step in decision making

Answer 1

identify the criteria
- relevant costs and relevant benefits should be considered
- irrelevant costs and irrelevant benefits should be ignored

Question 1

What is the first step in decision making

Answer 1

define the alternatives being considered

Question 2

What is differential analysis

Answer 2

focusing on the future costs and benefits that differ between the alternatives

Question 3

what is a differential cost

Answer 3

A future cost that differs between any two alternatives

Question 4

What is differential revenue

Answer 4

future revenue that differs between two alternatives

Question 5

What is an incremental cost

Answer 5

An increase in cost between two alternatives

Question 6

What is an avoidable cost

Answer 6

A cost that can be eliminated by choosing one alternative over another

Question 7

What are sunk costs and how should they affect differential analysis

Answer 7

A cost that has already been incurred and cannot be changed.
They should be ignored

Question 8

What is an opportunity cost and should it be considered in decision making

Answer 8

It is the potential benefit that is given up when one alternative is selected over another.
Should be considered

Question 9

Why is differential analysis approach desirable

Answer 9

1. rarely will enough information be available to prepare detailed income statements for both alternatives
2. Mingling irrelevant costs with relevant costs may cause confusion and distraction from critical information

Question 10

What is the make or buy decision

Answer 10

It is the decision to carry out one of the activities in the value chain internally (make) or externally (buy) from a supplier

Question 11

What does it mean for a company to be vertically integrated

Answer 11

It means a company is involved in more than one activity in the entire value chain

Question 12

Vertical integration advantages

Answer 12

1. Smoother flow of parts and materials
2. Better quality control
3. Realize profits

Question 13

Vertical integration disadvantages

Answer 13

Companies may fail to take advantage of suppliers who can create economies of scale advantage

Question 14

What are volume trade-off decisions and why do they happen

Answer 14

Companies must choose to sacrifice the production of some products in favor of others to maximize profits.

They happen when companies do not have the capacity to produce all of their demand

Question 15

What is a constraint

Answer 15

A limited resource that restricts the company’s ability to satisfy demand

Question 16

What is a bottleneck

Answer 16

A machine or process that is limiting overall output (it is a constraint)

Question 17

What are joint products

Answer 17

two or more products produced from a single raw material input

Question 18

What is the split off point

Answer 18

The point in the manufacturing process where joint products can be recognized as separate products

Question 19

What is a sell or process decision

Answer 19

A decision to sell a joint product at the split-off point (Sell) or process further (process)

Question 20

What are the pitfalls of allocation regarding joint costs

Answer 20

Allocation of joint costs is necessary for some things but should be disregarded for decision making

Question 21

When is it profitable to process a joint product after the split off point

Answer 21

When the incremental revenue from processing exceeds the incremental processing costs

Question 22

When deciding to drop or retain a segment or good what is generally relevant and irrelevant

Answer 22

Irrelevant:
- depreciation
- allocated fixed costs

Relevant:
- Contribution margin
- Traceable expenses

Question 23

What is the factor of internal rate of return

Answer 23

investment required / annual cash flow

Question 24

How do you calculate a profitability index

Answer 24

PV of cash inflows / Investment required