accy chap 12


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SHORT-RUN DECISION MAKING: RELEVANT COSTING AND INVENTORY MANAGEMENT DISCUSSION QUESTIONS 1. A tactical decision is short run in nature; it involves choosing among alternatives with an immediate or limited end in view. A stra- tegic decision involves selecting strategies that yield a long-term competitive advant- age. 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 re- ject 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. 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 re- gardless 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, cre- ating 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 in- crease profits. 12. No, the purchase price is not part of the fun- damental EOQ formula. However, the poten- tial for quantity discounts may be considered by management in deciding whether or not to order the EOQ amount. For example, the company may order more than the EOQ amount if the quantity discount is larger than the additional carrying cost. 13. Ordering costs are the costs of placing and receiving an order. Examples include clerical costs, documents, insurance, and unloading. Carrying costs are the costs of carrying in- ventory. Examples include insurance, taxes, handling costs, and the opportunity cost of capital tied up in inventory. 14. Stockout costs are the costs of insufficient inventory (e.g., lost sales and interrupted production). 15. Reasons for carrying inventory include the following: (a) to balance setup and carrying costs, (b) to satisfy customer demand, (c) to avoid shutting down manufacturing facilities, (d) to take advantage of discounts, and (e) to hedge against future price increases. 51
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This note was uploaded on 02/24/2009 for the course ACCY 202 taught by Professor Mccaffrey during the Spring '08 term at Ole Miss.

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