chapter 7: incremental analysis PP

Question 1

why use the incremental analysis?

Answer 1

1. Accept an order at a special price.
2. Make or buy
3. Sell products or process them further.
4. Retain or replace equipment.
5. Eliminate or retain an unprofitable business segment.
6. Allocate limited resources.

Question 2

relevant costs

Answer 2

(1) those costs and revenues that are different for each alternative, and
(2) those costs and revenues that will occur in the future.

Question 3

opportunity cost

Answer 3

In choosing to take one action, the company must often give up the opportunity to benefit from some other action.

This lost benefit is called anopportunity cost.

Question 4

sunk cost

Answer 4

Costs that have already been incurred and will not be changed or avoided by any future decision are calledsunk costs.

ex: machine already purchased, depreciation already happened, any cost that has already occurred

Question 5

what to do when allocating limited resources?

Answer 5

First, identify what is the limited resource

Then find the contribution margin of one unit of each product per unit of limited resource.

Make sure you find it for one unit of each product

And for one unit of the limited resource