Professional Documents
Culture Documents
11-1
B. Content
1.
2.
Relevant Costs
Types of decisions that need to be made (slide 15):
One-time-only Special Orders
Insourcing vs Outsourcing (Make or Buy)
Product-Mix with Capacity Constraints
Customer Profitability and Relevant Costs
Branch / Segment: Adding or Discontinuing
Equipment Replacement
C. Learning Resources
1.
2.
D. Learning Activities
1.
2.
3.
E. Assessment
1.
2.
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1.
2.
3.
4.
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5.
6.
7.
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1.
2.
3.
4.
5.
6.
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Discussion / Result:
Decision Rule: Does the special order generate
additional operating income? If yes, then
accept the special order.
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Total Relevant
Costs
Relevant Items
Make
Buy
Outside purchase of parts ($64 * 250,000
$16,000,0
units)
00
$9,000,00
Direct materials
0
$2,500,00
Direct manufacturing labor
0
$1,500,00
Variable manufacturing overhead
0
Mixed (variable and fixed) materials $2,000,00
handling and setup overhead
0
$15,000,0 $16,000,0
Total relevant costs (a)
00
00
Difference in favor of making DVD players
$1,000,000
Relevant
Cost Per
Unit
Make Buy
$64
$36
$10
$6
$8
$60
$64
$4
Discussion / Result:
Decision rule: Select the option that will provide the firm
with lowest cost, and therefore the highest Profit.
1. We see an analysis of the relevant costs for this
decision ($15 million vs $16 million).
2. Since it costs _____ to make the item, therefore,
production should remain in-house.
3. As with special order decision, strategic and
qualitative factors cannot be ignored.
4. Also, regardless of this financial outcome, perhaps the
company prefers to retain in-house control over
quality issue.
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Background Information:
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Product A
Product B
Selling Price
$10.00
$30.00
$ 6.00
$15.00
$ 4.00
$15.00
40%
50%
0.5
3.0
$ 8.00
$ 5.00
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Discussion / Result:
Decision rule: Choose the product that produces the
highest contribution margin per unit of the
constraining resource.
1. Product A: CM per unit = $4
2.
3.
4.
5.
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Background Information:
The
Revenues
Cost of goods sold
Furniture-handling labor
Furniture-handling equipment
cost written-off as depreciation
Rent
Marketing support
Sales-order and delivery
processing
General administration
Allocated corporate-office costs
Total costs
Customer
A
B
C
Total
$300,0 $400,00 $1,200,0
$500,000
00
0
00
220,00
370,000
0
330,000 920,000
41,000 18,000 33,000 92,000
12,000
14,000
11,000
13,000
20,000
10,000
4,000
8,000
9,000
7,000
12,000
6,000
284,00
491,000
0
$16,00
9,000
14,000
10,000
12,000
16,000
8,000
25,000
36,000
30,000
32,000
48,000
24,000
1,207,00
432,000
0
($32,00
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(Incremental Loss
in Revenues) and
Incremental
Savings in Costs
from Dropping C
Account (1)
($400,000)
330,000
33,000
Incremental
Revenues and
(Incremental
Costs) from
Adding D
Account (2)
$400,000
(330,000)
(33,000)
0
0
10,000
12,000
0
0
385,000
(9,000)
0
(10,000)
(12,000)
0
0
(394,000)
($15,000)
$6,000
Revenues
Cost of goods sold
Furniture-handling labor
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Discussion / Result:
1. Looking at this relevant revenues / relevant cost
analysis, we see that dropping the C account
would
actually ____________ operating income by
$15,000.
2. Adding the D account will _______________
operating income $6,000.
3. Note that for D, Rental Cost, General Administration
Cost, and Corporate Office Cost are not relevant
because they dont change whether or not D is
added (background information, slide 30). On the
other hand, the additional ________________ cost
is relevant for D since the $9,000 will only occur if
that customer is added.
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Original cost
Useful life
Current age
Remaining useful life
Accumulated depreciation
Book value
Current disposal value (in cash)
Terminal disposal value (in cash, 2 years
from now)
Annual operating costs (maintenance,
energy, repairs, coolants, and so on)
$0
$800,000
$460,000
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Background Information:
The Company uses straight line
depreciation.
The Company will make a decision about
whether or not to replace equipment.
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Revenues
Operating costs
Cash operating costs ($800,000 / year *
2 years; $460,000 / year * 2 years)
1,600,000
Book value of old machine
Periodic write-off as depreciation or
400,000
Lump-sum write-off (a)
Current disposal value of old machine
(a)
New machine cost, written off
periodically as depreciation
Total operating costs
0
2,000,000
Operating income
$200,000
920,000
680,000
400,000
(400,000
)
400,000
(40,000)
40,000
(600,000
600,000
)
1,880,000 120,000
($120,00
$320,000
0)
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Journal Entry:
Discussion / Result:
Decision rule: Select the alternative that will
generate the highest operating income.
1. Replacing the machine will _______________
operating income by $120,000.
2. Now, lets take a look at the relevant cost only
(next slide) and see if it gives the same decision.
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TERMS TO LEARN
Book value
Page 448
Page 429
Constraint
Page 455
Decision model
Page 425
Differential cost
Page 433
Differential revenue
Page 434
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TERMS TO LEARN
Insourcing
Page 432
Make-or-buy decisions
Page 432
Page 428
Outsourcing
Page 432
Product-mix decisions
Page 440
Qualitative factors
Page 428
Quantitative factors
Page 427
Relevant costs
Page 426
Relevant revenues
Page 426
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