CH13- Relevant information for special decisions

Relevant information

Information that differs among alternatives and is future-oriented

Sunk cost

A cost incurred in a past transaction that cannot be changed; also called historical cost; never relevant

Historical cost

Another name for sunk cost; still tracked to help predict the future and analyze past performance

Opportunity cost

The benefit forgone when one alternative is selected instead of another

Context-sensitive

Describes relevance: a cost may be relevant in one decision but not in another

Quantitative focus

Considers numbers, such as cost and increase in profit

Qualitative focus

Considers non-numerical factors, such as impact on people and attractiveness

Special decisions

Decisions such as special orders, outsourcing, segment elimination, asset replacement, and scarce resource allocation

Differential revenue

Revenue that differs among alternatives

Avoidable costs

Costs managers can eliminate by making specific choices

Special order

An offer to buy a product at a price significantly below its normal selling price

Excess capacity

Having enough unused capacity to fill a special order without displacing regular sales

Constrained capacity

Having no unused capacity, so a special order requires giving up regular sales

Outsourcing

Buying goods and services from other companies rather than producing them internally

Vertical integration

Controlling multiple stages of the supply chain, from acquiring raw materials to distributing goods and services

Unit cost

Total cost divided by number of units

Managers should make decisions based on ______ information.

relevant

Relevant information ______ among alternatives.

differs

Relevant information is ______-oriented.

future

A ______ cost has been incurred in the past and cannot be changed.

sunk

Sunk costs are also called ______ costs.

historical

The benefit forgone when choosing one alternative over another is the ______ cost.

opportunity

The concept of relevance is ______ of cost behavior.

independent

Relevant costs could be either fixed or ______.

variable

Relevance is ______-sensitive.

context

Information does ______ need to be exact to be relevant.

not

A quantitative focus considers ______ such as cost and profit.

numbers

A ______ focus considers non-numerical factors such as impact on people.

qualitative

______ revenue is revenue that differs among alternatives.

Differential

______ costs are costs managers can eliminate by making specific choices.

Avoidable

A special order offers a price significantly ______ the normal selling price.

below

Accept a special order if relevant revenue ______ relevant cost.

exceeds

When ______ capacity exists, a special order generally does not displace regular sales.

excess

When capacity is constrained, forgone contribution margin is included as an ______ cost.

opportunity

Outsourcing means buying goods and services from ______ companies.

other

In an outsourcing decision, compare avoidable production costs with the cost of ______.

buying

______ integration controls multiple stages of the supply chain.

Vertical

Vertical integration generally offers more ______.

control

Outsourcing ______ the level of vertical integration.

reduces

Better Bakery is choosing between cakes and pies. Each requires a $50,000 supervisor. The supervisor's salary is:

Not relevant and fixed

Cake ingredients cost $2.50 each and pie ingredients cost $3.00 each. This cost is:

Relevant and variable

Direct labor is $3.00 per cake and $3.00 per pie. This cost is:

Not relevant and variable

Cakes require a $40,000 licensing fee; pies require $30,000 in advertising. These fees are:

Relevant and fixed

Onyx Coffee paid a consultant $1,000 several months ago to analyze two locations. This cost is:

Not relevant, because it is a sunk cost

Employee wages are expected to be $15,000 per month at both possible locations. This is:

Not relevant, because it does not differ

Which is an example of qualitative information?

Effect on employee morale

Which is an example of quantitative information?

Expected number of customers served

The supervisor's salary would be relevant if Better Bakery were deciding whether to open a second location. This shows relevance is:

Context-sensitive

In a special order with excess capacity, which costs are usually avoidable?

Variable production costs

When capacity is constrained, a special order analysis should also include:

Contribution margin forgone on lost regular sales

Which special decisions are covered in this course?

Special orders and outsourcing

A drawback of outsourcing is that it:

Reduces control and may increase risk to product availability and quality

Better Bakery buys local ingredients at a slightly higher price to support local businesses. This reflects a:

Qualitative focus

Sales - Variable costs - Fixed costs =

profit

Total costs / units =

unit cost

Taco Town is choosing between adding tacos or burritos and expects to sell 10,000 of either at the same price. Tacos cost $3.00 in ingredients and burritos $3.50; labor is $2.00 for both. Tacos require a $20,000 annual fee and burritos $12,000 in advertising. Looking only at relevant costs, which is cheaper and by how much?

Burritos, by $3,000

Sunny Skates sells 8,000 skateboards at $50 each. Variable cost is $22 per board. Fixed costs are $60,000 for a supervisor and $30,000 for equipment leases. What is profit?

$134,000

Using the Sunny Skates data, what is the unit cost per skateboard?

$33.25

Sunny Skates has excess capacity and receives a special order for 500 boards at $30 each. Fixed costs won't change. How does accepting affect profit?

Increases by $4,000

If Sunny Skates accepts that order, what is its new total profit?

$138,000

Now assume Sunny Skates has no excess capacity and must give up 500 regular sales at $50 to fill the $30 order. How does accepting affect profit?

Decreases by $10,000

With excess capacity, what is the lowest special order price per board Sunny Skates could accept without lowering profit?

$22.00

With no excess capacity (each special order board replaces a regular $50 sale), what is the lowest price per board Sunny Skates could accept without lowering profit?

$50.00

With excess capacity, a customer offers $20 per board for 400 boards. How does accepting affect profit?

Decreases by $800

Peak Bottles makes 20,000 water bottles a year. Variable production cost is $4 per bottle. A $25,000 production supervisor would be eliminated if production were outsourced, but $15,000 of factory rent would continue. What are the avoidable costs of outsourcing?

$105,000

A supplier offers to make Peak's 20,000 bottles for $5.50 each. What should Peak do?

Keep making them; it's $5,000 cheaper

What is the most Peak could pay the supplier per bottle and still break even versus making them?

$5.25

If the supplier instead offers $5.00 per bottle, what should Peak do?

Outsource; it saves $5,000

Peak's production drops to 10,000 bottles. Variable cost is still $4 per bottle and the $25,000 supervisor is still avoidable. If the supplier charges $5.50 per bottle, what should Peak do?

Outsource; it saves $10,000

Back at 20,000 bottles and a $5.50 supplier price, Peak could rent out the freed factory space for $8,000 a year if it outsources. What should Peak do?

Outsource; it saves $3,000