Questions For Critical Thinking 4
Questions for Critical Thinking 4
Salvatore’s Chapter 8:
a. Discussion Questions: 2 and 10.
2. (a) What is the distinction between marginal cost and incremental cost? (b) How are sunk costs treated in managerial decision making? Why?
(a) Maringal cost is the change in total costs or in total variable costs per unit change in output (Salvatore, 2012, pg. 718). The main reason to determine marginal cost is to gain understanding and knowledge of when a company reaches economics of scale. However, incremental cost is the total increase in costs from implementing a particular managerial decision (Salvatore, 2012, pg. 716). These costs are a broader concept and they ultimately refer to the change in total costs from implementing a particular management decision, such as introducing a new product line or the production of a previously purchased component. Incremental cost can potentially result in no increase in output or a large increase in out put.
(b) Sunk costs are defined as the costs that are not affected by managerial decision making of incremental costs. These costs are completely irrelevant in the company making managerial decisions. An example to consider is if a company was to produce any output when a loss is incurred, then as long as the loss that incurred is smaller than the sunk costs, it will actually end up benefiting the company. This is because if the company made a decision to not produce any output, then it would actually lead to a larger loss which would be equivalent to its sunk costs.
10. What are the aim, usefulness, and shortcomings of (a) cost-volume-profit analysis and (b) the concept of operative leverage? Cost-volume-profit analysis is a method of determining the ouput at which a firms breaks even or earns a target profit from the total revenue and total cost functions of the firm (Salvatore, 2012, pg. 713). It is often utilized by business executives to determine the sales volume that is required for the firm to break
Salvatore’s Chapter 8:
a. Discussion Questions: 2 and 10.
2. (a) What is the distinction between marginal cost and incremental cost? (b) How are sunk costs treated in managerial decision making? Why?
(a) Maringal cost is the change in total costs or in total variable costs per unit change in output (Salvatore, 2012, pg. 718). The main reason to determine marginal cost is to gain understanding and knowledge of when a company reaches economics of scale. However, incremental cost is the total increase in costs from implementing a particular managerial decision (Salvatore, 2012, pg. 716). These costs are a broader concept and they ultimately refer to the change in total costs from implementing a particular management decision, such as introducing a new product line or the production of a previously purchased component. Incremental cost can potentially result in no increase in output or a large increase in out put.
(b) Sunk costs are defined as the costs that are not affected by managerial decision making of incremental costs. These costs are completely irrelevant in the company making managerial decisions. An example to consider is if a company was to produce any output when a loss is incurred, then as long as the loss that incurred is smaller than the sunk costs, it will actually end up benefiting the company. This is because if the company made a decision to not produce any output, then it would actually lead to a larger loss which would be equivalent to its sunk costs.
10. What are the aim, usefulness, and shortcomings of (a) cost-volume-profit analysis and (b) the concept of operative leverage? Cost-volume-profit analysis is a method of determining the ouput at which a firms breaks even or earns a target profit from the total revenue and total cost functions of the firm (Salvatore, 2012, pg. 713). It is often utilized by business executives to determine the sales volume that is required for the firm to break