Unit 5 Flashcards

1
Q

relevant costs

A

Costs that differ between alternatives

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2
Q

avoidable cost

A

a cost that can be eliminated in whole or in part by choosing one alternative over another
these are relevant costs

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3
Q

irrelevant costs

A

1 Sunk costs
2 Future costs that do not differ between the alternatives

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4
Q

Special pricing decisions

A
  1. one-time only orders and/or
  2. orders below the prevailing market price.
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5
Q

special order

A

a one-time order that is not considered part of the company’s
normal ongoing business.

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6
Q

Steps to the decision-making process

A

Step 1: Identify the decision.
Step 2: Gather relevant information.
Step 3: Identify the alternatives.
Step 4: Weigh the evidence.
Step 5: Choose among alternatives.
Step 6: Take action.
Step 7: Review your decision & its consequences.

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7
Q

Importance of special order

A

It is an additional opportunity to generate revenue above sales goals.
Special orders typically request a lower price than normally offered and/or might include additional costs.

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8
Q

Making a special order decision

A
  1. compare the incremental change in revenue for the seller, against which is offset the incremental change in
    costs.
  2. consider whether there is a sufficient amount of incremental production capacity available that can be used to process the additional order
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9
Q

Considerations when deciding to accept a special order

A
  1. The capacity required to fulfill the special order.
  2. Whether the price offered by the buyer will cover the cost of producing the products.
  3. The role of fixed costs in the analysis.
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10
Q

Quantitative measure

A

The first stage in examining the value and impact of a special order
the contribution (which is the difference between revenue per unit and variable cost per unit).

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11
Q

Qualitative factors

A
  1. The effect on regular customers if their demands are not met and if they are aware that the company accepted a lower price for the same product
  2. Impact on the morale of employees if the company implements overtime or hire temporary workers to fulfill the special order
  3. Possibility of acquiring a big customer through the acceptance of special order
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12
Q

capacity constraints

A

Step 1: Determine if restricted/scarce capacity is a limiting factor
Step 2: Calculate contribution per unit
Step 3: Calculate contribution per unit of a limiting factor(s) (CULF)
Step 4: Allocate rankings for every limiting factor
Step 5: Consistent rankings-Profits are maximized by allocating scarce capacity according to ranking per unit of a limiting factor

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13
Q

Imperfect information exhibits what

A

an element of risk or uncertainty

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14
Q

The maximin criteria

A

seeks to maximize the minimum possible return

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15
Q

Maximax criteria

A

The best possible outcome will always occur and the decision-maker should select the option with the highest possible outcome.

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16
Q

The maximum amount that is worth paying to obtain additional information consists of what

A

the difference between the expected value if the information is acquired compared with the expected value with the absence of the information.

17
Q

When resources are constrained

A

managers should prioritise products in order to maximize contribution per unit of the constrained resource