Chapter 7 & 8: Management’s Decision-Making Process
Use PPT to answer the questions.
Chapter 7
1. What steps are frequently involved in management’s decision-making process?
5. What data are relevant in deciding whether to accept an order at a special price?
7. Define the term “opportunity cost.” How may this cost be relevant in a make-or-buy decision?
10. How are allocated joint costs treated when making a sell-or-process-further decision?
Chapter 8
1. What are the two types of pricing environments for sales to external parties?
3. What is the basic equation to determine the target selling price in cost-plus pricing?
5. What is the basic equation for the markup percentage?
9. What is the material loading charge? How is it expressed?
10. What is a transfer price? Why is determining a fair transfer price important to division managers?
11. When setting a transfer price, what objective(s) should the company have in mind?
12. What are the three approaches for determining transfer prices?
13. Describe the cost-based approach to transfer pricing. What is the strength of this approach? What
are the weaknesses of this approach?
14. What is the general equation for determining the minimum transfer price that the selling division should be willing to accept
15. When determining the minimum transfer price, what is meant by the “opportunity cost”?
16. In what circumstances will a negotiated transfer price be used instead of a market-based price?
1 What steps are frequently involved in management’s decision-making process?
These steps are as follows
* Identification of the problem and assigning responsibilities.
* Determining and evaluating plausible courses of action.
* Making a decision.
* Reviewing results of the decision.
5. What data are relevant in deciding whether to accept an order at a special price?
The incremental revenues which are supposed to be obtained compared to incremental costs of filling the special order.
7. Define the term “opportunity cost.” How may this cost be relevant in a make-or-buy decision?
The opportunity cost is the foregone cost. The potential benefit of an opportunity cost is gotten by following an alternative course of action. It is important in making decisions on what a person is supposed to buy.
10. How are allocated joint costs treated when making a sell-or-process-further decision?
Joint costs are not relevant to a sell-or-process further decision because they are sunk costs and cannot adjust whether the decision is to sell the existing product or process it further. These joint costs are ignored when such a decision is taken.
Chapter 8
1. What are the two types of pricing environments for sales to external parties?
The first type of pricing environment is where the company is the price taker whereby the company does not set the price but the price is set by a competitive market. The second type of environment is where the company sets the price.
3. What is the basic equation to determine the target selling price in cost-plus pricing?
Target selling price = Cost + (Markup percentage X Cost)
5. What is the basic equation for the markup percentage?
Markup percentage = Desired ROI per unit / Total unit cost
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