MBA 617 chapters 9 and 10

revenues, costs

two major ways to generate more profits: increase _________ and control _________

revenue

companies can't always easily increase

costs

companies _______ are likely more controllable

fixed costs

costs that do not change in total when a related volume changes

fixed

a company renting a building for $20,000 per month is an example of a ________ cost

variable costs

costs that vary in direct proportion to changes in a related volume

variable

a company uses $2 of materials on each unit of product it produces is an example of a ________ cost

relevant range

a business's normal operating range, and the range of volume where total fixed costs and the variable cost per unit remain constant

mixed costs

costs that have both variable and fixed components

mixed

sales employees are offered an annual salary of $10,000 + 5% commission on all sales is an example of a __________ cost

step-wise costs

costs that behave as fixed costs within a relevant range, but step up or down to a different fixed level when operating outside the relevant range

step-wise

within the relevant range, one manager has a fixed salary, outside of the relevant range, another manager must be higher is an example of a __________ cost

investment costs

one time cost when making strategic decisions

ongoing costs

fixed, variable, mixed, and step-wise costs are

cost volume profit analysis CVP

a planning tool used to predict how changes in costs and sales levels affect profit

profit

CVP analysis considers how __________ is affected by: sales price per unit, variable costs per unit, volume, total fixed costs

sales, variable

contribution margin is the difference between ______ and ______ costs

contribution margin

the amount left over to cover fixed costs, anything extra is profit

contribution margin per unit

selling price per unit - variable costs per unit

contribution margin ratio

contribution margin per unit/ selling price per unit

sales mix

the amount of each product the company expects to sell

breakeven point

the sales level at which sales equals total costs (the company does not earn a profit or incur loss)

zero

what is the target profit at the breakeven point?

target profit

the sales level at which the company will achieve its target amount of profit

margin of safety

the amount by which a company can miss a sales target without causing the company to incur a loss

relevant costs and benefits

future costs and benefits that should affect a decision

incremental revenue

additional revenues from selecting one alternative over another

incremental cost

additional costs from selecting one alternative over another

incremental income

difference between incremental revenue and cost

out-of-pocket cost

cost that requires spending cash in the future

opportunity cost

potential benefit lost when one alternative is chosen over another

avoidable cost

cost that can be eliminated when one alternative is chosen over another

irrelevant cost

costs that should not affect a decision because they cannot be changed and do not differ among alternatives

maximizing profit

Generally, we'll be looking for the alternative with the highest incremental income... the focus is always on

direct materials DM

cost of raw materials that are converted into the finished product and are easily traced to the product

direct labor DL

cost of wages and salaries of employees who convert the raw materials into the finished product

factory overhead FOH

indirect manufacturing costs that cannot be easily traced to finished goods (all manufacturing costs not classified as DM or DL)

sunk cost

a cost from a past decision that cannot be avoided or changed

direct materials

example of _____________________:In a bike factory: seats, tires, chains, steel/aluminum, pedals

direct labor

example of _____________________: in a bike factory: wages paid to welders, painters, assembly workers

indirect materials

materials used in production that are difficult or not cost-effective to trace directly to finished goods

indirect labor

labor used in manufacturing that is difficult or not cost-effective to trace directly to finished goods

indirect materials, indirect labor, and manufacturing facility costs

the three types of factory overhead costs cost are:

other factory overhead costs

all other costs related to the manufacturing facility

indirect materials

example of _____________________: in a bike factory: screws, staples, glue, lubricants

indirect labor

example of _____________________: In a bike factory: wages/salaries paid to equipment maintenance workers or production supervisors

other FOH

example of _____________________: factory utilities, factory rent / taxes / insurance, factory maintenance and depreciation, manufacturing equipment maintenance and depreciation

actual overhead costs

(above) are incurred throughout the period

applied

Overhead is ___________ to products or jobs as work is completed

applied overhead

is an estimate. At the end of the period, an adjustment is made through Cost of Goods Sold for the difference between actual and applied FOH

control costs and appropriately set prices

why track manufacturing costs so closely? to:

make or buy

decision: Should the company make a component for its product, or should it buy the component from a third party?

lowest cost

make or buy decision rule: choose the alternative with the

sell or process further

Decision: Should the company sell its product in its current state or process it further into a different product that can be sold for a higher price?

most profit

sell or process further decision rule: choose the alternative that generates the

scrap or rework

Decision: The company manufactured products that are defective or obsolete...should it sell the products as-is for scrap, or rework the products to sell for a higher price?

most profit

scrap or rework decision rule: choose the alternative that generates the most profit

segment elimination

Decision: The company has a division or product line that is not profitable...should the division or product line be eliminated?

profit

segment elimination decision rule: eliminate only if doing so increases profit

keep or replace

Decision: Should the company keep its current plant asset or replace it with a new plant asset that is likely more efficient and cost-effective?

increases profit

keep or replace decision rule: replace the asset if doing so

sales mix

Decision: Given limited resources (i.e., MHs or DLHs), how should the company use those resources in producing its various product offerings?

highest, resource

sales mix decision rule: produce as much of the product with the _________ contribution margin per unit of limited __________ as possible

special pricing

Decision: Should the company accept and fill a special order from a customer requesting a large volume of units at a reduced price?

increases profit

special pricing decision rule: accept the special offer if it