5 Managerial Decision Making Free Online FlashCards

What makes information relevant to a short-term decision?

Relevant information is future-oriented and differs between alternatives; amounts that remain the same do not affect the choice.

How should a special order be evaluated when capacity is idle?

With idle capacity, compare the order’s additional revenue with its additional costs; exclude existing fixed costs that will not change.

What is the core make-or-buy comparison?

Compare the avoidable cost of making the component with its purchase price, adjusting for other costs, benefits, and opportunity costs. Exclude fixed costs that continue either way.

How should a keep-or-drop decision be evaluated?

Compare the contribution margin that would be lost with the avoidable fixed costs that would be saved. Dropping improves income only if savings and other benefits exceed what is lost.

What qualitative factors can affect a managerial decision?

Consider quality, supplier reliability, customer relationships, employee effects, legal obligations, reputation, and fit with longer-term strategy.

What are the main steps in a practical decision process?

Identify alternatives and the decision period; compare future differences, exclude sunk and unchanged amounts, add opportunity costs, assess financial and qualitative effects, and test key assumptions.

What are differential costs and revenues?

Differential costs and revenues are amounts that change between alternatives.

When is a fixed cost relevant to a decision?

An avoidable cost can be eliminated by choosing an alternative. A fixed cost may still be relevant if it can be avoided.

What is an opportunity cost?

An opportunity cost is the benefit given up by choosing one option instead of the next-best alternative. It may not appear in accounting records.

Why are sunk costs excluded from a current decision?

A sunk cost has already been incurred and cannot be changed by the current decision, so it is irrelevant to that decision.

What is the income effect of the 1,000-unit special order?

Incremental revenue is $1{,}000 \times \$18 = \$18{,}000$; incremental costs are $1{,}000 \times (\$12 + \$1) + \$2{,}000 = \$15{,}000$. Accepting increases operating income by $\$3{,}000$.

What must be included if a special order uses full capacity?

Include the contribution margin lost from displaced regular sales, as well as any extra costs needed to fulfill the order.