Chapter 13: key to decision making differential analysis

Created by

Anna Ramirez

Cards (28)

first concept of decision-making
Every decision involves choosing from among at least two alternatives.
second concept of decision-making
Must distinguish between relevant and irrelevant costs and benefits
third concept of decision-making
must use different analysis and focus on future costs and benefits that differ among alternatives
Differential revenue and differential costs are revenue and costs that differ between two alternatives
Avoidable cost is a cost that can be eliminated by choosing one alternative over the other
fourth concept of decision-making
a sunk cost - it is a cost that has already been incurred and cannot be changed
always irrelevant when choosing among alternatives
fifth concept of decision-making
Future costs and benefits that do not differ among alternatives are irrelevant to the decision-making process
sixth concept of decision-making
an opportunity cost is the potential benefit that is given up when one alternative is selected over another and should be considered when making decisions.
Trade-in value of the old laptop
relevant
Cost of the new software
relevant
The price of the new laptop
relevant
The price you paid for the old laptop
irrelevant
because it's a sunk cost
Cost of the new hardware installed in the old laptop, two months ago
irrelevant
because happen in the past
dropping product lines
( discontinue products, departments, or stores)
Decisions related to whether product lines or other segments of a company should be dropped and new ones added are among the most difficult that a manager has to make.
Must prepare comparative income statements showing the effects of keeping or dropping the product line
must beware of allocated fixed costs
what Is the financial advantage ( or disadvantage) of discontinuing the department? Should the men’s department be dropped?
Financial disadvantage of $2000
do not discontinue
Make or Buy
deciding whether to buy a particular part or make it internally
How do variable costs compare to the outsourcing cost?
Are any fixed costs avoidable if outsourced?
What can be done with the freed capacity?
outsource means to hire someone else to fulfill the task
Overhead Lighting is deciding whether to outsource production of its light bulbs. Currently the production costs are: DM: $1,500; Direct Labor: $3,000; and Variable OH: $3,500. If outsourced, fixed costs of $20,000 would decrease by $10,000. The light bulbs would be purchased at a total price of $21,000.
What is the financial advantage (or disadvantage) of buying the light bulbs from an outside supplier? Should it make or buy the light bulbs?
financial disadvantage of $3,000
Make
Overhead Lighting is deciding whether to outsource production of its light bulbs. Currently the production costs are: DM: $1,500; Direct Labor: $3,000; and Variable OH: $3,500. If outsourced, fixed costs of $20,000 would decrease by $10,000. The light bulbs would be purchased at a total price of $21,000
if outsourced, the idle capacity would allow the company to produce another product that is expected to earn $5,000 in additional income. What is the financial advantage (or disadvantage) of buying the light bulbs from an outside supplier, make or buy?
financial advantage of $2000
buy
Special Orders 
Occurs when a customer requests a one-time order that is not considered part of the company’s ongoing business
Is there excess capacity to fill the order?
Is the reduced sales price high enough to cover incremental costs of filling the order?
Should company accept the order? Financial advantage or disadvantage of accepting the order?
Financial disadvantage of $50
Reject
What is the effect on worsting income if the customer requires 300 t-shirts. Financial advantage or disadvantage of accepting the order?
Financial advantage of $350
accept
Constrained Resources
A constraint is anything that prevents you from getting more of what you want. Constraints (machine or labor hours, demand) can restrict construction or sale of products. Management must decide which products to emphasize in order to maximize profits.
What constraint(s) stop the company from making all of the units it can sell?
Which product offers the highest contribution margin per unit of the constraint? (this is what your looking for)
What is the contribution margin per unit of constraint? Which model should be emphasize?
Deluxe = $85.20/MH
Regular = $95/MH
Emphasize regular
Sell or Process Further
The split-off point is when joint products can be recognized as separate products. Joint products can be sold at the split-off point or they can be processed further and sold for a higher price
How much revenue will the company receive if product is sold as is?
How much revenue will be received if the company sells the product after processing it further?
How much will it cost to process it further?
What’s the financial advantage or disadvantage of further processing the tourist into individual cups? Would you process the yogurt further? Why?
Financial advantage of $.55/unit
Yea process further
What is the financial advantage or disadvantage of making the part rather than buying them from an outside supplier?
financial disadvantage of $880,000
Buy
Financial advantage or dis advantage of discounting department 1?
what is the financial advantage or disadvantage if all fixed manufacturing OH cost, and $12.00 of the marketing and admin costs could be avoided?
Financial disadvantage of $23000 -> do not discontinue
financial advantage of $1000 -> continue
What is the financial advantage or disadvantage of accepting the special order?
Financial advantage of $159000
accept
Rank the products in order of which should be emphasize
1-product B $18/min
2-product C $14/min
3-product A $12/min
What so the financial advantage or disadvantage of processing the product further
financial advantage of $6600
process further