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Chapter 7
Differential Analysis: The Key to Decision
Making
Solutions to Questions
7-1 A relevant cost is a cost that differs in
change in cost (or benefit) that will result from
some proposed action. An opportunity cost is
the benefit that is lost or sacrificed when
7-3 No. Variable costs are relevant costs
only if they differ in total between the
those for which the cost has already been
irrevocably incurred. A variable cost can be a
sunk cost if it has already been incurred.
in the level of activity. A differential cost is the
difference in cost between two alternatives. If
7-6 No. Only those future costs that differ
between the alternatives are relevant.
affected by the decision are irrelevant.
7-8 Not necessarily. An apparent loss may
only if the contribution margin that will be lost
as a result of dropping the product is less than
7-9 Allocations of common fixed costs can
make a product (or other segment) appear to be
7-10 If a company decides to make a part
internally rather than to buy it from an outside
supplier, then a portion of the company’s
alternative use of the facilities.
7-11 Any resource that is required to make
raw materials, investment capital, supervisory
time, and storage space. While not covered in
furthering its goals.
7-12 Assuming that fixed costs are not
affected, profits are maximized when the total
amount of contribution margin per unit of the
constrained resource.
split-off point. The split-off point is the point in
the manufacturing process where joint products
can be recognized as individual products.
are avoidable costs of the end products.
However, the joint costs will continue to be
incurred as long as the process is run regardless
of what is done with one of the end products.
Thus, when making decisions about the end
7-15 If the incremental revenue from further
processing exceeds the incremental costs of
number of passengers on the flight.
Depreciation of the aircraft, salaries of personnel
on the ground and in the air, and fuel costs, for
example, are the same whether the flight is full
or almost empty. Therefore, adding more
