Exam 9: Short Run Decision Analysis

Irrelevant costs are costs that are

Opportunity costs are irrelevant costs.

California Chemical Co. produces several chemical compounds. Each compound can be sold at the split-off point or processed further. The following results apply to May: Compound Sales Value at Split-off Point Costs of Additional Processing Sales Value After Additional Processing Chem I \ 59,600 \ 7,300 \ 74,400 Chem II 70,700 17,500 82,600 Chem III 46,700 6,200 55,500 After determining which products should be sold at the split-off point and which should be processed further, the total revenue provided by these three products would be

Special order decisions are the decisions about whether to accept or reject special orders at prices above the normal market prices.

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

Taylor manufactures 12,000 units of a part used in its production to manufacture guitars. The annual production activities related to this part are as follows: Direct materials, $24,000 Direct labor, $60,000 Variable overhead, $54,000 Fixed overhead, $84,000 Best Guitars, Inc., has offered to sell 12,000 units of the same part to Taylor for $22 per unit. If Taylor were to accept the offer, some of the facilities presently used to manufacture the part could be rented to a third party at an annual rental of $18,000. Moreover, $4 per unit of the fixed overhead applied to the part would be totally eliminated. - In the decision to make or buy the part, what is the relevant fixed overhead?

Managers rely strictly on financial information when faced with decisions.

Avoidable costs are important for

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

The objective of a sales mix decision is to select the alternative that maximizes the contribution margin per constrained resource.

Opportunity costs arise when the choice of one course of action eliminates the possibility of another course of action.

The purpose of incremental analysis is to find the alternative

A special order should be accepted only if it maximizes operating income.

Which of the following techniques is most useful for a special order decision?

Joint costs are relevant costs in a sell or process-further decisions and they do change if further processing occurs.

Which of the following could not be a relevant cost in deciding whether or not to eliminate a producing department?

The normal selling price of our product is $42 per unit. The costs of production are direct materials, $8; direct labor, $6; variable overhead, $7; and fixed overhead, $4 (based on normal capacity). The company has received a special order for 10,600 units at a unit sales price of $23. There is ample unused capacity to fill the order and $1 per unit will be incurred for additional freight costs. If the order is accepted, operating income will

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

Outsourcing production or operating activities will help in improving the cash flow by reducing investment in physical assets.

The costs incurred beyond the split-off point are called