1 | P a g e ACG 2071 - Exam 2 Chapter 8 :: 10 questions, 2 are conceptual Relevant vs. irrelevant information for decision making - Avoidable: Costs that are incurred under one alternative but are not incurred (they’re avoided) under the other alternative - Unavoidable costs: Costs that are incurred under all alternatives - Sunk costs: Costs that have already been incurred in the past - Opportunity costs: The contribution margin foregone by not selecting the next-best alternative - Incremental revenues: Calculation that shows the additional revenue of one alternative over another - Incremental costs: Calculation that shows the additional costs of one alternative over the other Special orders: a customer offers to purchase a large quantity of the company’s product but wants to pay a lower amount than normal, so the company decides whether or not to accept the order Unless otherwise specified, Variable Costs are RELEVANT and Fixed Costs are NOT - What are the additional revenues generated, and what are the additional costs incurred? o If operating at full capacity, you must factor in the loss of contribution margin that you have to sacrifice for the special order CE – 1) The Beach Company makes beach towels. The following info is provided for the production of 10,000 beach towels. Selling price per unit $ 8 Direct materials used 12,500 Direct Labor 17,300 Variable factory overhead 11,000 Fixed Factory overhead 7,500 Variable admin expenses 14,000 Fixed admin expenses 16,250 Assuming there’s plenty of excess capacity, what would be the effect of accepting a special order for 2,000 towels at a price of $6 per towel? If Accept: Add’l sales: $6 per towel x 2000 towels = $12,000 - Add’l costs: DL $1.73 V. OH $1.10 DM $1.25 V. Admin + $1.40 $5.48 per towel x 2000 towels = $10,960 Answer: D $1,040 increase in income Outsourcing: when a company decides if it is more efficient to ‘make or buy’ a product or service Make Buy DM $45,000 $0.35 DL $15,000 x 300,000 V.OH $30,000 $105,000 Total Relevant Costs $90,000 It would be $15,000 better to make It would be a $1,040 increase to income to accept offer Relevant Irrelevant Relevant2 | P a g e Allocating constrained resources: delegating the most efficient way to use limited resources. - You must first find the contribution margin for each activity, and divide them each individually by the number of the constrained resource they will require (in this case, it’s the captain hours that is the constrained resource). o This provides you with the contribution margin per constrained resource (captain hours), a more accurate way to get you the most bang for your buck, essentially. - Using the CM per Constrained Resource, you start with what makes the most, and use as many of the total hours you can to reach full demand of that activity. Then with the next most profitable activity you do the same, and so on until you run out of your constrained resource (you definitely will run out at some point, that is what makes the resource constrained). o You use every amount of the constrained resource that you can. In this case, we don’t have enough hours to fulfill all of the scuba demand, so we only use what we have left over – we cannot provide extra hours that do not exist. Fishing Scuba Diving Island Hopping CM per Excursion $70 $30 $40 Required Captain Hrs 8 6 4 = CM per Captain Hrs $8.75 $5.00 $10.00 1 Island Hopping: 65 Trips x 4 hours = 260 captain hours 2 Fishing: 95 Trips x 8 hours = 760 captain hours 1,020 captain hours 3 Scuba 1,200 captain hours available - 1,020 captain hours used 180 hours remaining 6 hours per scuba trip 30 trips Keeping vs. eliminating operations: finding the impact on operating income if an aspect of the business is eliminated, and using that information to determine if it is more valuable to keep or eliminate that operation Remember: Direct Fixed Costs are AVOIDABLE; Common Fixed Costs are UNAVOIDABLE Sell “as is” vs. process further: when a company decides if it is more financially efficient (profitable) to sell a current product as it is, or if it would be better to process it further Remember: Processing further will provide for higher revenue, but will also have to endure additional costs that need to be accounted for If the Sunset Cruise is turned into a Dinner Cruise: Add’l sales revenue ($75 - $50) (Dinner sale price – Sunset sale price) $25 - Add’l costs ($55 - $33) (Dinner unit costs – Sunset unit costs) $22 Add’l Profit $ 3 x 35,000 customers Total Additional Profit $105,000 If the Island Spa & Health Club is eliminated Impact on Op. Income Lost sales revenues $(255,000) Variable cost savings $195,000 Fixed cost savings (direct fixed expenses) $40,000 Impact on operating income ($20,000) If the spa is eliminated, they will be $20,000 worse off3 | P a g e Chapter 5 :: 14 questions, 5 are conceptual Budgeting in general: an operating plan that is expressed primarily in financial terms Each component of the master budget :: Sales Budget: the starting point of the master budget because often other components of the master budget are based on the estimated volume of sales January February March Quarter Budgeted # of Goods 1,500 1,600 1,900 5,000 x Budgeted Average Sales Price x $25.00 x $25.00 x $25.00 x $25.00 Budgeted Sales Revenue $37,500 $40,000 $47,500 $125,000 Selling & Administrative Expense Budget: includes expenses required for selling the product and managing the business, such as advertising, insurance, accounting, legal services, etc. - Total all of the Selling & Administrative expenses together for each period or quarter, and that total flows to the Budgeted Income Statement Sales Budget S & A Expense Budget Production Budget DM Purchases Budget Direct Labor Budget Manufacturing OH Budget
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