Marginal Analysis

Question 1

What is a special order decision?

Answer 1

• opportunities that require a firm to decide whether a specially priced order should be accepted or rejected

Question 2

When should a special order be accepted presuming excess capacity?

Answer 2

• if the selling price per unit is greater than the variable cost per unit

Question 3

What is the cost if there is excess capacity in a make or buy decision?

Answer 3

• the cost of making the product internally is the cost that will be avoided or saved if the product is not made

Question 4

What is the cost if there is no excess capacity in a make or buy decision?

Answer 4

• the cost of making the product internally is the cost that will be avoided or saved if the product is not made plus the opportunity cost associated with the decision

Question 5

What are joint costs?

Answer 5

• costs of a single process that yields multiple products (ex: the processing of a pig to produce ham, bacon and pork chops)
• cannot be traced to an individual product
• sunk costs not relevant to decision of whether to sell or process further

Question 6

What are separable costs?

Answer 6

• costs incurred after the split-off point that can be traced to individual products and are relevant to decisions of whether to sell or process further

Question 7

What are the deciding factors to sell or process further?

Answer 7

• made by comparing the incremental cost and incremental revenue generated after the split off point
• if incremental revenue > incremental costs, the org should process further
• if incremental revenue < incremental costs, the org should sell at the split off point

Question 8

What are the deciding factors to keep or drop a segment?

Answer 8

• compare the FC that can be avoided if the segment is dropped to the CM that will be lost if the segment is dropped
• keep the segment if the lost CM > avoided FC
• drop the segment if the lost CM < avoided FC

Question 9

What are relevant costs?

Answer 9

• costs that will change under different alternatives
• should be considered for a discontinuation of a product line

Question 10

What are throughput costs?

Answer 10

• represents costs associated with conversion of resources into a finished product and do not represent costs that will change in the event of selecting between different alternatives associated with abandoning a segment