Professional Documents
Culture Documents
Making
Sunk costs.
Future costs that do not differ between the
alternatives.
1
2
3
4
5
6
Annual Cost
of Fixed Items
$
2,800
1,380
360
Cost per
Mile
$
0.280
0.050
0.138
0.065
0.036
$
0.569
1
2
3
4
5
6
Annual Cost
of Fixed Items
$
2,800
1,380
360
Cost per
Mile
$
0.280
0.050
0.138
0.065
0.036
$
0.569
$ 23.00
29.90
11.96
50.00
$ 114.86
Adding/Dropping Segments
One of the most important decisions
managers make is whether to add
or drop a business segment such as
a product or a store.
Adding/Dropping Segments
Discount Drug Company has three
major product lines: drugs,
cosmetics and housewares. The last
one has not reported a profit for the
last two years. An income
statement for last year is shown on
the next screen.
Adding/Dropping Segments
Adding/Dropping Segments
Salaries expense represent direct labor, all employees
would be discharged if the product line is dropped.
The advertising expense is product-specific.
Utilities expense is firm-level, allocated based on
space used, it is not avoidable if the segment is
dropped.
The equipment that is being depreciating has no resale
value.
Rent is for the entire building housing the company,
allocated to products based on dollar sales. It is fixed,
under a long-term lease.
Insurance is product-specific.
General administrative expense would be unaffected
by the discontinuation of any segment.
Lets
Lets look
look at
at this
this solution.
solution.
The
The sunk
sunk costs.
costs.
The
The future
future costs
costs that
that will
will not
not differ
differ
between
between making
making or
or buying
buying the
the parts.
parts.
Opportunity Cost
The benefits that are foregone as a
result of pursuing some course of
action.
Opportunity costs are not actual dollar
outlays and are not recorded in the
formal accounts of an organization.
Quick Check
Which of the following are opportunity costs of
attending the university?
a. Tuition.
b. Books.
c. Lost wages.
d. Not enough time for other interests.
Special Orders
Special Orders
$8 variable cost
Special Orders
If Jet accepts the offer, net operating
income will increase by $6,000.
Increase
Increase
Increase
$ 30,000
24,000
$ 6,000
Quick Check
Northern Optical ordinarily sells the X-lens for
$50. The variable production cost is $10, the
fixed production cost is $18 per unit, and the
variable selling cost is $1. A customer has
requested a special order for 10,000 units of
the X-lens to be imprinted with the customers
logo. This special order would not involve any
selling costs, but Northern Optical would have
to purchase an imprinting machine for
$50,000.
(see the next page)
Quick Check
What is the rock bottom minimum price
below which Northern Optical should not
go in its negotiations with the customer?
In other words, below what price would
Northern Optical actually be losing
money on the sale? There is ample idle
capacity to fulfill the order.
a. $50
b. $10
c. $15
d. $29
Quick Check
Colonial Heritage makes reproduction
colonial furniture from select hardwoods.
Chairs
Selling price per unit
$80
Variable cost per unit
$30
Board feet per unit
2
Monthly demand
600
Tables
$400
$200
10
100
Quick Check
Chairs
Selling price per unit
$80
Variable cost per unit
$30
Board feet per unit
2
Monthly demand
600
Tables
$400
$200
10
100
Quick Check
As before, Colonial Heritages supplier of
hardwood will only be able to supply 2,000
board feet this month. Assume the
company follows the plan we have
proposed. Up to how much should Colonial
Heritage be willing to pay above the usual
price to obtain more hardwood?
a. $40 per board foot
b. $25 per board foot
c. $20 per board foot
d. Zero