Chapter 12 Differential Analysis Flashcards
Differential revenue?
A difference in revenue between any two alternatives
Differential cost?
A difference in cost between any two alternatives
Avoidable cost?
Can be eliminated by choosing one alternative over another
Sunk cost?
Cost that has already been incurred and cannot be avoided regardless of what a manager decides to do
Opportunity cost?
The potential benefit given up when one alternative is selected over another
Are opportunity costs found in accounting records?
No but must be considered
Value chain?
All activities from development to production to after-sales service
Vertical integration?
When a company is involved in more than one activity in the entire value chain
Make or buy decision?
Decision to carry out one of the activities in the value chain internally, rather than buy externally from a supplier
Benefits of vertical integration? (3)
Less dependent on suppliers.
Control quality better by producing their own parts and materials.
Realize profits from the parts and materials that it’s making rather than buying as well as profits from its regular operations.
Advantages of using external suppliers? (1)
Supplier with economies of scale can result in higher quality and lower costs
Special order?
One-time order that’s not considered part of the company’s normal ongoing business
Constraint?
Anything that prevents you from getting more of what you want
How is the constraint/bottleneck determined?
By the step that limits total output because it has the smallest capacity.
What is the key to increased profits?
Managing constraints!
