incremental

Question 1

relevant cost

Answer 1

costs that will change and occur in the future

Question 2

opportunity cost

Answer 2

the forgone or lost benefit

Question 3

sunk cost

Answer 3

past cost (already spent $) that cannot be changed aka NOT a relevant cost

Question 4

when making decisions

Answer 4

look @ future revenues and costs that differ

Question 5

types of incremental analysis

Answer 5

• accept an order @ special price
• make or buy (outsource) parts
• sell or process further
• retain and replace equipment
• eliminate a product line
• allocate limited resources

Question 6

when making a decision

Answer 6

check capacity

Question 7

no change in fixed costs if

Answer 7

within existing capacity so fixed costs are NOT relevant

Question 8

if total variable costs change

Answer 8

the variable costs are relevant

Question 9

example of opportunity cost

Answer 9

allows company to use unused capacity to generate additional income

Question 10

you want a

Answer 10

LOWER cost

Question 11

incremental revenue should EXCEED

Answer 11

incremental costs

Question 12

income should

Answer 12

increase

Question 13

retain or replace equipment

Answer 13

minus salvage value when replacing equipment

Question 14

eliminating a product

Answer 14

• consider the effect on related product lines
• fixed costs allocated to the unprofitable product must be absorbed by the other segments
• Net income may decrease when an unprofitable product is eliminated

Question 15

resources can be limited

Answer 15

• floor space for a company
• raw material
• direct labour hours
• machine hour capacity

Question 16

management must decide which products to sell to

Answer 16

maximize net income

Question 17

relevant costs only

Answer 17

compare revenue and costs that change between two alternatives

Question 18

if you are already at full capacity

Answer 18

there will be an increase in fixed costs

• bigger factory
• more machines

Question 19

qualitative issue

Answer 19

customer loyalty

• -> will customers still pay even if there is a cheaper alternative (b/c they like your specific product better)?
• -> future sales may be affected

Question 20

if you have extra capacity then special order should EXCEED

Answer 20

variable costs

Question 21

quick glance decision

Answer 21

if FIXED costs will NOT change then simply just compare NEW selling price (SP) with variable cost per unit (VC)

Question 22

if FIXED costs will still be there even without making more products because BELOW capacity

Answer 22

-depreciation
-insurance
will NOT be relevant

Question 23

qualitative issue

Answer 23

company expansion

–> will making your own parts hamper ability to expand (opportunity cost)

Question 24

qualitative issue

Answer 24

allocation of attention

–> main focus/purpose on the one main product now shifts attention to the other parts/items

Question 25

qualitative issue

Answer 25

is there market demand?

Question 26

never base decisions on

Answer 26

SUNK costs

• previous repair work
• asset Book Value
• recent purchase

Question 27

focus on

Answer 27

RELEVANT costs

• the future costs of continuing to use the equipment versus replacing it with a better product (which could have lower variable costs)
• does the new equipment make better quality products over time? (this could lead to more sales)

Question 28

is the tradeoff worth it?

Answer 28

-spending upfront $ for new equipment when you could use that same $ for something else (e.g. bills)

Question 29

will FIXED costs change a lot?

Answer 29

if lots of FIXED costs are eliminated (not re-allocated) if you get rid of that product then you should

Question 30

if FIXED costs will NOT change much you must look at

Answer 30

the contribution margin (CM)

Question 31

if FIXED costs don’t change then you

Answer 31

spread out the FIXED costs to the other products and then you lost the contribution margin that was from the product you eliminated

Question 32

if “unprofitable division” absorbs a lot of the fixed costs and the total fixed costs don’t change if you eliminated the division then you also

Answer 32

lose the contribution margin from that division