1. True or False : Future costs that do not differ between the alternatives in a

Question

1. True or False : Future costs that do not differ between the alternatives in a decision are avoidable costs.

5. True or False : Fixed costs may or may not be relevant in decisions about whether a product should be dropped

7. True or False : A disadvantage of vertical integration is that by pooling demand for parts from a number of companies, a supplier will face diseconomies of scale that result in lower quality and higher cost than if every company makes its own parts.

9. True or False : One way to increase the effective utilization of a bottleneck is to put less emphasis on preventing defects and simply discard defective units at final inspection before sending them to customers.

Explanation / Answer

1). TRUE : A relevant cost or benefit is a cost or benefit that differs between alternatives. Differential costs are relevant costs. Any cost or benefit that does not differ between alternatives is irrelevant and can be ignored in a decision. This is a tremendously powerful concept that allows us to ignore mounds of data when making decisions since most things are not affected by any given decision. So future costs that do not differ between the alternatives in a decision are avoidable costs.

5). TRUE, fixed costs are indirect costs or overheads are business expenses that are not dependent on the level of goods or services produced by the business. They tend to be time-related, such as salaries or rents being paid per month, and are often referred to as overhead costs. This is in contrast to variable costs, which are volume-related.

But Fixed costs are not permanently fixed; they will change over time, but are fixed in relation to the quantity of production for the relevant period. so fixed costs are relevant when it affects the decision or it changed to any level , otherwise it is relevant. For example, a company may have unexpected and unpredictable expenses unrelated to production; and warehouse costs and the like are fixed only over the time period of the lease.

So Fixed costs may or may not be relevant in decisions about whether a product should be dropped or not.

7). TRUE ,When a company acquires its input supplier it is called backward integration. When it acquires companies in its distribution chain it is called forward integration. For example, a vertically integrated oil company may end up owning oilfields, refineries, tankers, trucks, and gas (petrol) filling stations. Also called vertical merger. See also horizontal integration.

So if each company do vertical integration they will procure raw materials & services at a cheap rate & they don't need supplier companies to fullfill there requirements & it results that supplier companies will face diseconomies of scale that result in lower quality and higher cost than if every company makes its own parts.

9). FALSE, If company put less emphasis on preventing defects than defects will occur more frequently , by this approach defects will occur in more numbers & value. simply discard defective units at final inspection before sending them to customers.is a good approach is a good policy because if defected goods is sent to customer will result in bad reputation for a company & also increase after sales expenses such as warranty service.

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