Decision Making Flashcards
Define “sunk costs”.
These are costs that are historical/in the past and are irrelevant for decision making going forward since they cannot be changed.
Define “avoidable costs”.
Costs that can be eliminated by choosing one alternative over the other.
Define “irrelevant costs”.
Future costs which do not differ between alternatives.
When deciding whether to process a product further, what costs are relevant?
The only relevant costs are the differential future costs and benefits.
What items should be considered relevant for a special order decision, if there is adequate excess capacity to fill the order?
If the special order can be completed using existing capacity, only sales revenues and the (avoidable) variable costs of producing the order need be considered.
What items should be considered relevant for a special order decision, if there is no excess capacity to fill the order?
Sales revenues, avoidable/variable costs of producing the order, and the opportunity cost of not providing the special order need to be considered.
What items should be considered relevant for a make-or-buy decision?
Only avoidable costs (i.e., costs that go away when accepting the decision to buy) and any new revenues are relevant to the make or buy decision.
Define “opportunity cost”.
The benefit that is forgone as a result of making one choice instead of an alternative (in transfer pricing, usually of selling internally rather than selling externally).
Define “negotiated price”.
A price that is mutually agreeable to both the selling and purchasing unit.
Define “transfer price”.
In intra-company sales, the product price charged by the selling division to the buying division.
What is the primary focus of international transfer price setting, other than goal congruence?
Minimizing income incidence to reduce tax liability.
In the context of transfer pricing, what is “dual pricing”?
Dual pricing is where the price for the buying and selling divisions are different as established by top management to achieve specific goals that differ between the buyer and seller.
What should the transfer price be when the selling division has excess production capacity?
The transfer price should be equal to the additional costs incurred to produce each unit.
What is the general transfer pricing rule?
Transfer price per unit = additional outlay cost per unit + opportunity cost per unit.
What is usually the most important criterion used by top management in establishing transfer pricing mechanisms?
Achieving goal congruence.
