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Mizzou ACCTCY 2037 - Short Term Decision Making (continued)

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1. Special Order2. Dropping Unprofitable Product3. Make or Buy Decision4. Sell or Process Further Decision5. Product Mix DecisionSpecial OrderDetermine the incremental revenuesDetermine the incremental costsAccept of the incremental revenues are greater that costs.Dropping Unprofitable ProductCompare avoidable costs to lost revenuesDrop product only if total avoidable costs are greater than lost revenue from dropping productMake or Buy decisionDetermine relevant variable and fixed costs of making or buyingConsider supplier reliability and quality; consider our reliability and qualityIf reliability and quality are about the same, select alternative with lowest cost per unitSell or Process FurtherDetermine relevant revenues from selling or processing furtherDetermine relevant variable and fixed costs (including opportunity costs) from selling or from processing furtherSelect alternative with “higher” incremental profitProduct Mix DecisionAdvertising—compare incremental total contribution margin to incremental fixed advertising costsProduction—for each product, determine contribution margin per unit of scarce resource. Allocate scarce resource in sequential order (starting with product with highest cm/unit of scarce resource) until resource is “used up”Accy 2037 1st Edition Lecture 4 Outline of Last Lecture I. Short Term Decisionsa. Things to consider with Short Term Decisions Outline of Current Lecture II. Types of Decision MakingCurrent LectureChapter 14 (continued)Types of Decisions1. Special Order2. Dropping Unprofitable Product3. Make or Buy Decision4. Sell or Process Further Decision5. Product Mix Decision Special Order- Determine the incremental revenues- Determine the incremental costso Accept of the incremental revenues are greater that costs. Dropping Unprofitable Product- Compare avoidable costs to lost revenueso Drop product only if total avoidable costs are greater than lost revenue from dropping productThese notes represent a detailed interpretation of the professor’s lecture. GradeBuddy is best used as a supplement to your own notes, not as a substitute. Make or Buy decision- Determine relevant variable and fixed costs of making or buying- Consider supplier reliability and quality; consider our reliability and qualityo If reliability and quality are about the same, select alternative with lowest cost per unit Sell or Process Further- Determine relevant revenues from selling or processing further- Determine relevant variable and fixed costs (including opportunity costs) from sellingor from processing furthero Select alternative with “higher” incremental profit Product Mix Decision- Advertising—compare incremental total contribution margin to incremental fixed advertising costs- Production—for each product, determine contribution margin per unit of scarce resource. Allocate scarce resource in sequential order (starting with product with highest cm/unit of scarce resource) until resource is “used


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