Exam 27: Short Run Decision Analysis

Special orders should only be considered if unused capacity exists.

Make-or-buy decisions, such as whether to make a part internally or buy it from an external supplier, may lead to outsourcing.

There are products or services that can be either sold in a basic form or be processed further.

A cost that does not change between the alternatives is known as a differential cost.

Why is the book value of equipment irrelevant when considering the replacement of equipment?

The idea behind incremental analysis is to review decision data that differ between alternatives; information that is the same for all alternatives is considered irrelevant to the decision process.

The first step in the incremental analysis is to eliminate any irrelevant revenues and costs.

Anderson Co. makes and uses 5,000 components each year in its manufacturing operations. An outside supplier has offered to supply the components to Anderson at $66 per unit. Anderson's production costs are as follows: If Anderson accepts the order, $8 of fixed overhead per unit will be eliminated. What is the relevant cost to produce one unit?

Products Uno, Dos, Tres, and Quatro have contribution margins of $2, $3, $4, and $5, respectively, and require 1.5, 2, 2.5, and 3 machine hours per unit, respectively. Assuming that all units produced could be sold and that total machine hours per month are limited, on which product should the company concentrate its efforts?

While performing an incremental analysis for outsourcing decision, information such as depreciation and other fixed costs are not relevant. A special order decision is not considered a capital expenditure decision.