Marginal Analysis

Question 1

Marginal Analysis Rule

Answer 1

Only Consider Relevant Revenues & Costs

Question 2

Relevant if:

Answer 2

Only If they CHANGE as a result of selecting different alternatives.

Question 3

Direct Costs

Answer 3

Usually Variable Costs - ex. Dir. Materials & Dir. Labor They are generally relevant.

Question 4

Prime Costs (already know)

Answer 4

Direct Materials & Direct Labor. They are generally relevant.

Question 5

Discretionary Costs
(ex.-cost to maintain landscaping a Corp.'s headquarters are generally viewed as "discretionary")

Answer 5

Costs arising from periodic (usually annual) budgeting decisions by mgmt. to spend in areas not directly related
to mfg. They are generally relevant.

Question 6

Incremental Costs (aka-marginal costs, differential costs or out-of-pocket costs)

Answer 6

The cost to produce an additional Unit. They are relevant.

Question 7

Opportunity Cost

Answer 7

The cost of foregoing the next best alternative when making a decision. They are relevant.

ex-Alternative use for excess plant space is to rent it out. The amount of rent would be the opportunity cost if they decided to use the excess capacity to produce more.

Question 8

Irrelevant Costs

Answer 8

Don’t differ with either decision. NOT Relevant

Question 9

Sunk Costs

Answer 9

Unavoidable costs because they were incurred in the PAST and cannot be recovered as a result of a decision.
NOT Relevant Cost.

Question 10

Controllable Costs

Answer 10

Controllable costs are those that are authorized by the unit manger. They are relevant IF they will change as a result of selecting different alternatives.

The materials and supplies used in a dept. are considered controllable costs.

Question 11

Uncontrollable Costs

Answer 11

Ex.- the fixed asset depreciation allocated to the department is a uncontrollable cost.

Question 12

Avoidable Costs and Revenues

Answer 12

Results from choosing one course of action over another. As a result - the Co. avoids the cost and revenue associated w. the course of action not taken.
They are relevant.

Question 13

Unavoidable Costs

Answer 13

Costs that will be the same regardless of the chosen course. These costs will continue regardless of the action taken. They are NOT Relevant.

Question 14

Special Order DECISION RULE

Answer 14

Accept if Price > relevant costs

Question 15

Special Order Rule if Have Excess Capacity

Answer 15

Accept if Price/Unit > Variable Costs/Unit

Question 16

Special Order Rule if Do NOT have Excess Capacity

Answer 16

Accept if Price/Unit > VC/Unit + Opp. Cost/Unit OF SPECIAL ORDER

Here the Opportunity Cost is the Contribution Margin had they used the capacity to produce the Spec. Order.

Question 17

Opportunity Cost / Unit =

Answer 17

$ Cont. Marg. given up / Units of Special Order

Question 18

Make vs. Buy DECISION RULE

Answer 18

Make if relevant costs < outside purchase price

Question 19

Make vs. Buy Rule if Have Excess Capacity

Answer 19

Relevant Costs=Avoidable Costs (Var. Costs and any UNAVOIDABLE fixed costs)

Question 20

Make vs. Buy Rule if Have NO EXCESS Capacity

Answer 20

Relevant Costs=Avoidable Costs + Opp. Costs

Question 21

Sell or Process Further DECISION RULE:

Answer 21

Process further IF Incremental Revenue > Incremental Costs (Be Sure you are looking at INCREMENTAL)

Question 22

Keep or Drop a Segment DECISION RULE

                       Keep Portion

Answer 22

Keep if Cost to Give Up > Benefit
in other words
Keep if Lost Cont. Marg. > Fixed Costs Avoided

Question 23

Keep or Drop a Segment DECISION RULE

                       Drop Portion

Answer 23

Drop if Cost to Give Up < Benefit
in other words
Drop if Lost Cont. Marg. < Fixed Costs Avoided