chapter%20131-1 - CHAPTER 13 SHORT-RUN DECISION MAKING:...

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Unformatted text preview: CHAPTER 13 SHORT-RUN DECISION MAKING: RELEVANT COSTING 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-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. A complementary effect is the loss of reven- ue 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 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. 13-1 MULTIPLE-CHOICE EXERCISES 131 e 132 d 133 e 134 c 135 a 136 c 137 c 138 c 139 c 1310 c 1311 a 1312 d 13-2 CORNERSTONE EXERCISES Cornerstone Exercise 1313 1. There are two alternatives: make the ingredient in-house or purchase it extern- ally. 2. Relevant costs of making the ingredient in-house include direct materials, direct labor, and variable overhead (both manufacturing and marketing in nature). Relevant costs of purchasing the ingredient externally include the purchase price. 3. Alternatives Differential Make Buy Cost to Make Direct materials $25,000 $25,000 Direct labor 15,000 15,000 Variable manufacturing overhead 7,500 7,500 Variable marketing overhead 10,000 10,000 Purchase cost $60,000 (60,000 ) Total relevant cost $57,500 $60,000 $ (2,500 ) It is cheaper to make the ingredient in-house. This alternative is cheaper by $2,500....
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This note was uploaded on 09/07/2011 for the course ACCT 2102 taught by Professor Farmer during the Spring '08 term at University of Georgia Athens.

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chapter%20131-1 - CHAPTER 13 SHORT-RUN DECISION MAKING:...

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