1.

Differential analysis involves the comparison of one or more alternative courses of action with the
status quo.
2. If there is only one alternative course of action and the status quo is unacceptable, then there
really is no decision to make.
3. A decision must involve at least two alternative courses of action.
4. Differential analysis cannot be used for long-run decisions because it cannot incorporate the
timing of revenues and costs (i.e., the time-value of money).
5. Short-run decisions often have long-run implications.
6. Only variable costs can be differential costs.
7. Fixed costs are always classified as sunk costs in differential cost analysis.
8. The full cost fallacy occurs when a decision-maker fails to include fixed manufacturing overhead
in the product's cost.
9. When deciding whether or not to accept a special order, a decision-maker should focus on
differential costs instead of full costs.
10. The differential analysis approach to pricing for special orders could lead to under-pricing in the
long-run because fixed costs are not included in the analysis.
11. Target costs equal the difference between the target selling price and the desired profit margin.
12. Dumping occurs when a company exports its product to consumers in another country at an
export price that is below the domestic price.
13. Price discrimination is the practice of selling identical goods or services to different customers at
different prices.
14. Peak load pricing is the practice of setting prices lowest when the quantity demanded for the
product approaches the physical capacity to produce it.
15. The alternative courses of action in a make-or-buy decision are (a) manufacture needed items
internally or (b) purchase needed items externally.
16. The reason opportunity costs are not included in the accounting system is because they involve
estimates.
17. Financial statements prepared in accordance with generally accepted accounting principles
(GAAP) provide differential cost information.
18. In the short-run, plant capacity is fixed and product choices have to be made that optimize the
use of available capacity.
19. With constrained resources, the important measure of profitability is the contribution margin per
unit of scarce resource.
20. The theory of constraints focuses on determining the optimal product mix when one or more
resources restrict the attainment of a goal or objective.