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ECU ACCT 2521 - Exam 3 Study Guide
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ACCT 2521 1st Edition Exam #3 Study Guide Chapter 8Special Order Decisions- Do we have enough excess capacity available to fulfill this order?- Will the reduced sales price be high enough to cover the incremental costs of filling the order (variable costs of filling the order and any additional fixed costs)?- Will the special order affect regular sales in the long run?Ex: ACDelco sells oil filters for $3.20 A mail-order company has offered ACDelco $35,000 for 20,000 oil filters or $1.75 per filterCurrent Volume of 250,000 UnitsPer Unit TotalSales revenue 3.20 800,000- Variable expenses: Variable MOH 1.20 300,000 Variable Op. Expenses .30 75,000Contribution margin 1.70 425,000- Fixed expenses: Fixed MOH 200,000 Fixed Op. Expenses 125,000Operating income 100,000Incremental Analysis of Special Sales OrderPer Unit TotalRevenue from special order 1.75 35,000- Variable expenses associated with the order- - Variable MOH 1.20 24,000Contribution margin .55 11,000- Additional fixed expenses associated with the order0Increase in operating income from the special order11,000Regular Pricing Decisions- What is our target profit?- How much will customers pay?- Are we a price-taker or a price-setter for this product?Price-takers- Lacks uniqueness-Heavy competition- Target costingTarget Costing Revenue at market price - Desired ProfitTarget total costPrice-setters- Product is more unique- Less competition- Cost-plus pricing Total cost+ Desired profit Cost-plus price4 Special Business Decisions1. Discontinue Products, Department, or StoresConsiderations for Discontinuing1. Does the product provide a positive contribution margin?2. Are there any fixed costs that can be avoided if we discontinue the product?3. Will discontinuing the product affect sales of the company’s other products?4. What could we do with the freed capacity?- If the contribution margin is positive, it shows that the product is generating enough revenue to cover its own variable costs, plus providing extra that can be used to cover some of the company’s fixed costs. If the contribution margin is negative, the company would either need to raise the price of the product, cut variable costs, or discontinue the line.- Managers would only keep a product line with a negative contribution margin if they expected the sales of a companion product to decline as a result of discontinuing the product- Avoidable fixed costs: any fixed costs that can eliminated as a result of discontinuing the product; relevant- Unavoidable fixed costs: fixed costs that will continue to be incurred even if the product line is discontinued; irrelevant2. Product Mix When Resources are ConstrainedConstraints: restrict production or sale of a product that vary from company to companyManufacturer- the number of available machine hoursMerchandiser- cubic feet of display spaceConsiderations for Product Mix1. What constraint stops us from making (or displaying) all the units we can sell?2. Which products offer the highest CM per unit of the constraint?3. Would emphasizing one product over another affect fixed costs?3. Outsourcing DecisionsOutsourcing: contracting an outside company to product a product or perform a serviceOffshoring: having work performed overseas1. Operating their own manufacturing plants and call centers overseas2. Outsourcing the overseas work to another company Outsourcing Considerations1. How do our variable costs compare to the outsourcing cost?2. Are any fixed costs avoidable if we outsource?3. What could we do with the freed capacity?Finding an Acceptable Outsourcing PriceCost of Making Earbuds = Cost of Outsourcing Earbuds V.C + F.C = V.C + F.C(2,000,000 units x $4,000,000) = (2,000,000 units x V.C/unit) + $3,500,000$16,000,000 = (2,000,000 units x V.C/unit) +$3,500,000$12,500,000 = (2,000,000 units x V.C / unit)Variable cost per unit = $6.25- The fewer units a company needs, the more it will be willing to pay another company to make their product4. Sell As Is or Process FurtherConsiderations1. How much revenue will we receive if we sell the product as is?2. How much revenue will we receive is we sell the product after processing it further?3. How much will it cost to process the product further?Chapter 9Budgets are used for planning, directing, and controlling operationsStrategic planning: long-term goals that may extend 5 to 10 years into the futureRolling budget: a budget that is continuously updated so that the next 12 months of operation are always budgetedParticipative budgeting: involves the participation of many levels of managementAdvantages- Lower-level managers are closer to the actions, and should have a more detailed knowledge for creating realistic budgets- Managers are more likely to accept, and be motivated by budgets they helped to createDisadvantages- The budget process can become much more complex and time consuming as morepeople participate in the process- Managers may intentionally build slack into the budget for their areas of operations by overbudgeting expenses or underbudgeting expensesBudget committee: reviews the submitted budgets, remove unwarranted slack, and revise and approve the final budget- Upper management (CEO, CFO), managers from every area of the value chain Zero-based budgeting: all managers begin with a budget of zero and must justify every dollar they put in the budget- Very time consuming and labor intensive- Companies use it from time to time in order to keep their expenses in checkBenefits of BudgetingBudgeting forces managers to plan, promotes coordination and communication, and provides a benchmark for motivating employees and evaluating actual performance1. Planning- managers are busy with day to day operations so budgets force them to spend time planning for the future2. Coordination and Communication- the budget coordinates a company’s activities so it forces managers to consider relations among operations across the entire value chain 3. Benchmarking- budgets provide a benchmark that motivates employees and helps managers evaluate performanceMaster budget: the comprehensive planning document for the entire organizationOperating budgets: needed to run daily operations of the company SalesProductionDirect materialsDirect laborMOHOperating Ex.Financial budget: include the capital expenditures budget and cash budgetsCash expenditure budget: shows the company’s plan for purchasing property,


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ECU ACCT 2521 - Exam 3 Study Guide

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