Week 4 Chapter 3 - Short-Term Managerial Decisions

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Week 4 Chapter 3 - Short-Term Managerial Decisions
2014-09-23 11:45:03
Short-Term Managerial Decisions
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  1. What is the definition for Relevant Quantitative Financial Information?
    Future revenues/costs that differ between/among decision alternatives.
  2. What are different specifications for Relevant Costs?
    • Differential costs
    • Avoidable costs
    • Out-of-pocket costs + Opportunity costs
  3. Why are Sunk Costs irrelevant to decision making?
    • They cannot be changed by any current action.
    • Costs of resources already committed.
  4. When considering the purchase of a new grinding machine, what costs could be considered Sunk Costs?
    • Original cost of old grinding machine
    • Accumulated depreciation of old grinding machine
  5. What are examples of relevant costs when purchasing a new machine?
    • Acquisition cost of the new machine
    • Current salvage value of the old machine.
    • Annual operating costs of the new machine
    • Estimated salvage value at the end of five years.
  6. What are examples of relevant costs when considering overhauling an old machine?
    • Cost of overhauling the machine.
    • Annual operating costs.
    • Estimated salvage value after 5 years.
  7. When replacing an old machine with a new one, how do you calculate Net acquisition cost(NAC)?
    NAC = Cost of new machine - Current salvage value of old machine
  8. How might you calculate Total Relevant Costs for the replacement of an old machine?
    NAC = Net acqusition cost
    s = Estimated salvage value
    oc = 5-year total operating cost
    RC = Total relevant costs
    RC = NAC - s + oc
  9. What costs are typically unavoidable by outsourcing?
    • Fixed overhead costs
    • i.e. facility-sustaining or capacity-related costs
  10. What are relevant factors when making an outsourcing decision?
    • Supplier's ability to live up to expected quality and delivery standards
    • Increasing prices of the supplier
    • Need to maintain proprietary secrets
    • Opportunity costs associated with existing capacity
    • Transaction costs associated with outside supplier
  11. What are Special "one-shot" Sales Orders?
    A rare opportunity to sell a product to a different customer, at a different price, or in a different quantity.
  12. What are Asset-Replacement Decisions?
    • Decisions to replace assets.
    • i.e. purchasing a new machine to replace an old one.
  13. What are some common Short-Term decisions?
    • Make-or-Buy (i.e., Sourcing) Decisions
    • Special ("one-shot") Sales Orders
    • Short-term Product-Mix Decisions
    • Asset-Replacement Decisions
    • Dropping a Product Line/Segment
  14. Why is it unhelpful to display costs in terms of behavior for Short-Term Decision Making?
    Because organizing costs by behavior tells us nothing about whether the costs are avoidable or unavoidable.
  15. How do you calculate Incremental Costs for the purpose of Short-Term Decision Making?
    Incremental costs = "out-of-pocket costs" + "opportunity costs"