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ch10 - Chapter 10 Relevant Information for Decision Making...

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Chapter 10 Relevant Information for Decision Making Questions 1. Relevance means that a factor should be considered in making a decision. A relevant cost is a cost that is applicable, pertinent, or logically related to making a decision. In business, managers use the concept of relevant costs in the allocation of resources. 2. Time is correlated with relevance. For costs to be relevant they must reside in the future; historical costs are never relevant. Further, the more distant in the future a cost resides, the more likely it is to be relevant. For example, in the long run, certain fixed costs are likely to be relevant; however, in the short run, most fixed costs are not relevant. 3. Opportunity costs are benefits that are sacrificed to pursue one decision alternative over another. These costs are difficult to identify because they do not appear as “costs” in accounting records. For example, in allocating scarce resources, managers may decide to produce Product A rather than Product B. An opportunity cost of this decision is the lost contribution margin on Product B. The lost contribution margin does not appear in the accounting records as an expense. 4. Sunk costs are costs that have already been incurred; i.e., they are historical costs. Sunk costs are never relevant to decisions because once a cost has been incurred, it cannot be “unincurred.” 5. Outsourcing occurs when a firm chooses to acquire necessary service functions or materials from a supplier rather than produce them in-house. The movement favoring outsourcing is controversial because it often involves loss of jobs to the organization electing to outsource. In the U.S., the outsourcing controversy is even tenser because vendors selected in outsourcing decisions often are foreign companies. Thus, it can be argued that outsourcing leads to the movement of jobs from the U.S. to other countries. 6. A scarce resource is any input that constrains production capacity. In the short run, any constraint can be binding and the tightest constraint changes over time. For example, in a labor strike, direct labor may be the most constrained resource. If a machine breaks down, the conversion operation performed by that machine may be the most binding constraint on capacity, and if a supplier becomes bankrupt, certain materials may become the most binding constraint. 7. The object of managing the sales mix is to increase the contribution margin (or total profit) realized on the sale of a portfolio of products. The major factors that can be manipulated to change product mix are product prices, focus of advertising and promotion, and the manner in which sales personnel are compensated. 8. A special order decision involves the analysis of a nonrecurring sale of products. The 1
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Chapter 10 typical circumstance involves the opportunity to sell products outside of the normal marketing area or to a one-time customer. The usual analysis involves a consideration of incremental costs and incremental revenues as well as the effect of the proposed sale on existing business.
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