MBA 620 FINAL EXAM QUESTIONS & ANSWERS
Future costs that differ among competing decision alternatives (a.k.a., differential or
incremental costs) - Answers -relevant costs
Revenues that differ when one alternative is selected over another. For example, if a
company is deciding whether to keep all customers (Alternative 1) or drop certain less
profitable customers (Alternative 2), difference between total revenue for Alternative 1
and total revenue for Alternative 2. - Answers -differential revenues
Costs that differ when one alternative is selected over another. For example, if a
company is deciding whether to make a product internally (Alternative 1) or outsource
production (Alternative 2), difference between costs for Alternative 1 and Alternative 2 -
Answers -differential costs
Reviewing the differential revenues and costs for alternative courses of action; this is
used by management to evaluate different alternatives and to select the best course of
action - Answers -differential analysis
Means a company is deciding whether to make a product internally or buy the product
from an outside firm. Differential analysis helps managers focus solely on the costs that
are relevant to the make-or-buy decision. Variable production costs are typically
differential costs. Fixed production costs must be reviewed on a case-by-case basis to
determine which costs are differential and which are not. Managers typically select the
alternative with the lowest cost. - Answers -make-or-buy decision
A cost that can be avoided, or eliminated, if one alternative is chosen over another (also
differential costs) - Answers -avoidable cost
How is differential analysis used in deciding whether to keep or drop product lines?
A ____________ __________ _________ ___________ is prepared, which includes
information for each product line and a total column for all product limes. Another
_____________ _____________ is prepared in the same format, which excludes the
product line the company would like to drop. Decision makers select the alternative with
the highest ___________ - Answers -contribution margin income statement, income
statement, profit
Can be traced directly to a product line, and are typically avoidable if the product line is
eliminated - Answers -direct fixed costs
Cannot be traced directly to a product line, and are assigned to product lines using an
allocation process. These costs are typically not differential costs since they are
allocated to remaining products if a product line is dropped - Answers -allocated fixed
costs
, Managers often use ________ as a determining factor for deciding whether to keep or
drop customers and products - Answers -profit
For product line decisions, _______ and _______ are assigned to individual product
lines. For customer decisions, both are assigned to individual customers. - Answers -
revenues and costs
Is used for both product line and customer decisions to asses the profitability of various
alternatives - Answers -contribution margin income statement
What two assumptions must be considered when evaluating special order scenarios? -
Answers -capacity and pricing
Acquiring or maintaining fixed assets that will be used for more than a year such as
buildings and equipment - Answers -capital expenditures
Deciding which long-term investments to make - Answers -capital budgeting
Decisions involve using company funds to invest in long-term assets such as production
facilities and equipment; these decisions typically involve projects that affect cash flows
of the company for many years - Answers -capital budgeting decisions
Describes the value of future cash flows (both in and out) in today's dollars - Answers -
present value
Three steps required to evaluate investments using the net present value are:
1. Identify the amount and timing of the _________ _________ required over the life of
the investment
2. Establish an appropriate interest rate to be used for evaluating the investment, called
the _________ ___ _________
3. Calculate and evaluate the net present value of the investment. - Answers -cash
flows, rate of return
Is the weighted average costs associated with debt and equity used to fund long-term
investments - Answers -cost of capital
Is the rate required to get an NPV of zero for a series of cash flows; represents the time-
adjusted rate of return for the investment being considered - Answers -internal rate of
return (IRR)
States that if the IRR is greater than or equal to the company's required rate of return
(recall that this is often called the hurdle rate), the investment is accepted; otherwise the
investment is rejected - Answers -IRR decision rule
Future costs that differ among competing decision alternatives (a.k.a., differential or
incremental costs) - Answers -relevant costs
Revenues that differ when one alternative is selected over another. For example, if a
company is deciding whether to keep all customers (Alternative 1) or drop certain less
profitable customers (Alternative 2), difference between total revenue for Alternative 1
and total revenue for Alternative 2. - Answers -differential revenues
Costs that differ when one alternative is selected over another. For example, if a
company is deciding whether to make a product internally (Alternative 1) or outsource
production (Alternative 2), difference between costs for Alternative 1 and Alternative 2 -
Answers -differential costs
Reviewing the differential revenues and costs for alternative courses of action; this is
used by management to evaluate different alternatives and to select the best course of
action - Answers -differential analysis
Means a company is deciding whether to make a product internally or buy the product
from an outside firm. Differential analysis helps managers focus solely on the costs that
are relevant to the make-or-buy decision. Variable production costs are typically
differential costs. Fixed production costs must be reviewed on a case-by-case basis to
determine which costs are differential and which are not. Managers typically select the
alternative with the lowest cost. - Answers -make-or-buy decision
A cost that can be avoided, or eliminated, if one alternative is chosen over another (also
differential costs) - Answers -avoidable cost
How is differential analysis used in deciding whether to keep or drop product lines?
A ____________ __________ _________ ___________ is prepared, which includes
information for each product line and a total column for all product limes. Another
_____________ _____________ is prepared in the same format, which excludes the
product line the company would like to drop. Decision makers select the alternative with
the highest ___________ - Answers -contribution margin income statement, income
statement, profit
Can be traced directly to a product line, and are typically avoidable if the product line is
eliminated - Answers -direct fixed costs
Cannot be traced directly to a product line, and are assigned to product lines using an
allocation process. These costs are typically not differential costs since they are
allocated to remaining products if a product line is dropped - Answers -allocated fixed
costs
, Managers often use ________ as a determining factor for deciding whether to keep or
drop customers and products - Answers -profit
For product line decisions, _______ and _______ are assigned to individual product
lines. For customer decisions, both are assigned to individual customers. - Answers -
revenues and costs
Is used for both product line and customer decisions to asses the profitability of various
alternatives - Answers -contribution margin income statement
What two assumptions must be considered when evaluating special order scenarios? -
Answers -capacity and pricing
Acquiring or maintaining fixed assets that will be used for more than a year such as
buildings and equipment - Answers -capital expenditures
Deciding which long-term investments to make - Answers -capital budgeting
Decisions involve using company funds to invest in long-term assets such as production
facilities and equipment; these decisions typically involve projects that affect cash flows
of the company for many years - Answers -capital budgeting decisions
Describes the value of future cash flows (both in and out) in today's dollars - Answers -
present value
Three steps required to evaluate investments using the net present value are:
1. Identify the amount and timing of the _________ _________ required over the life of
the investment
2. Establish an appropriate interest rate to be used for evaluating the investment, called
the _________ ___ _________
3. Calculate and evaluate the net present value of the investment. - Answers -cash
flows, rate of return
Is the weighted average costs associated with debt and equity used to fund long-term
investments - Answers -cost of capital
Is the rate required to get an NPV of zero for a series of cash flows; represents the time-
adjusted rate of return for the investment being considered - Answers -internal rate of
return (IRR)
States that if the IRR is greater than or equal to the company's required rate of return
(recall that this is often called the hurdle rate), the investment is accepted; otherwise the
investment is rejected - Answers -IRR decision rule
