Relevant Cost
CHAPTER 13
SHORT-RUN DECISION MAKING:
RELEVaNT COSTING
1 DISCUSSION QUESTIONS
1. Tactical decisions are short run in nature; they involve choosing among alternatives with an immediate or limited end in view. Strategic decisions involve selecting strategies that yield a long-term competitive advantage.
2. Depreciation is an allocation of a sunk cost. This cost is a past cost and will never differ across alternatives.
3. The salary of the supervisor of an assembly line with excess capacity is an example of an irrelevant future cost for an accept-or-reject decision.
4. Past costs can be used to help predict future costs.
5. Yes. Suppose, for example, that sufficient materials are on hand for producing a part for two years. After two years, the part will be replaced by a newly engineered part. If there is no alternative use for the materials, then the cost of the materials is a sunk cost and not relevant in a make-or-buy decision.
6. A complementary effect is the loss of revenue on a secondary product when the primary product is dropped. Thus, complementary effects may make it more expensive to drop a product.
7. A manager can identify alternatives by using his or her own knowledge and experience and by obtaining input from others who are familiar with the problem.
8. No. Joint costs are irrelevant. They occur regardless of whether the product is sold at the split-off point or processed further.
9. Yes. The incremental revenue is $1,400, and the incremental cost is only $1,000, creating a net benefit of $400.
10. No. If a scarce resource is used in producing the two products, then the product providing the greatest contribution per unit of scarce resource should be selected. For more than one scarce resource, linear programming may be used to select the optimal mix.
11. If a firm is operating below capacity, then a price that is above variable costs will increase profits.
2 MULTIPLE-CHOICE EXERCISES
13–1 e
13–2 d
SHORT-RUN DECISION MAKING:
RELEVaNT COSTING
1 DISCUSSION QUESTIONS
1. Tactical decisions are short run in nature; they involve choosing among alternatives with an immediate or limited end in view. Strategic decisions involve selecting strategies that yield a long-term competitive advantage.
2. Depreciation is an allocation of a sunk cost. This cost is a past cost and will never differ across alternatives.
3. The salary of the supervisor of an assembly line with excess capacity is an example of an irrelevant future cost for an accept-or-reject decision.
4. Past costs can be used to help predict future costs.
5. Yes. Suppose, for example, that sufficient materials are on hand for producing a part for two years. After two years, the part will be replaced by a newly engineered part. If there is no alternative use for the materials, then the cost of the materials is a sunk cost and not relevant in a make-or-buy decision.
6. A complementary effect is the loss of revenue on a secondary product when the primary product is dropped. Thus, complementary effects may make it more expensive to drop a product.
7. A manager can identify alternatives by using his or her own knowledge and experience and by obtaining input from others who are familiar with the problem.
8. No. Joint costs are irrelevant. They occur regardless of whether the product is sold at the split-off point or processed further.
9. Yes. The incremental revenue is $1,400, and the incremental cost is only $1,000, creating a net benefit of $400.
10. No. If a scarce resource is used in producing the two products, then the product providing the greatest contribution per unit of scarce resource should be selected. For more than one scarce resource, linear programming may be used to select the optimal mix.
11. If a firm is operating below capacity, then a price that is above variable costs will increase profits.
2 MULTIPLE-CHOICE EXERCISES
13–1 e
13–2 d