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UA ACCT 210 - Using Accounting Info To Make Managerial Decisions I

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ACCT 210 1st Edition Lecture 9Outline of Last Lecture I. Variable costingII. Absorption costingIII. P=SOutline of Current Lecture I. 8.1: Identifying relevant informationII. 8.2: Special order pricingIII. 8.3: Make or buy decisionsCurrent Lecture1. 8.1: Identifying relevant informationa. Relevant information:i. Information directly relevant to making decisionii. Information about what happens in the future1. Sunk costs are irrelevantiii. Information that differs between alternatives1. Example: looking for an apartment2. Apartment #1: $500/month, 2 bed 2 bath, 5 miles from campus3. Apartment #2: $500/month, 2 bed 2 bath, ½ mile from campus4. Only information that is relevant is how far it is from campus because everything else is the sameb. Relevant cost decision modeli. Identify the decisionii. Identify the alternativesiii. Identify the relevant revenues and costsiv. Identify the qualitative issues to considerv. Identify the alternative with the greatest benefit or least costc. Exercise 8-3 (from book)i. Jason McGregor manages an IT department for a large corporation. Kelly Preston, vice president for marketing, has asked him to help her evaluate two statistical packages for monitoring customer purchases. Stat Max ‐costs $912,000, requires 2 gigabytes of disk storage space and 80 programmer hours for customization, and has no annual license fee. The sofware vendor provides 150 hours of user training and offers 24 hour ‐technical support.Buy Tracker costs $500,000, requires 2 gigabytes of disk storage space and125 programmer hours for customization, and carries a $10,000 annual license fee. The sofware vendor provides 150 hours of user training and offers technical support from 8:00 A.M. to 5:00 P.M. Central Standard Time. What information is relevant to the decision to purchase one of these statistical packages?ii. Answer:1. Relevant: purchase price, programmer hours, annual license fee, tech support2. Irrelevant: disk storage space, hours of user training3. Note: there are no sunk costsd. Exercise 8-1i. Cherry, Inc., currently has a machine that costs $10,000 per year to operate. The machine can produce 50,000 units per year. In 2006 the company borrowed $200,000 to purchase the machine; it still owes $125,000 of that amount. Cherry could sell the machine for $70,000 and purchase a new, more efficient machine at a cost of $220,000. The new machine can produce 85,000 units per year; its annual operating costs would be $12,000. Identify each piece of information in this scenario and indicate whether it is relevant or irrelevant to the decision to purchase the new machine.ii. Answer:1. Relevant: Production of old machine, operating cost of old machine, market value of old machine, cost of new machine, production of new machine, operating cost of new machine2. Irrelevant purchase price of old machine, loan balance (because both are sunk costs)2. Special order pricinga. Special order prices: getting an order from a customer asking for a “special price”that is less than stated selling priceb. Exercise 8-5 i. Byways Production has an annual capacity of 80,000 units per year. Currently, the company is making and selling 78,000 units a year. The normal sales price is $100 per unit; variable costs are $65 per unit, and total fixed expenses are $2,000,000. An out of state distributor has ‐ ‐offered to buy 5,000 units at $75 per unit. Byways' cost structure should not change as a result of this special order. By how much will Byways' income change if the company accepts this order?ii. Answer:1. How much contribution margin do I get by fulfilling the order?CM = Sales – Variable costsCM/unit = $75 - $65 = $10Total CM = $10 x 5000 unitsGain $50,0002. How much CM do I lose by fulfilling the order?CM/unit = $100 - $65 = $35Available units = 80,000 – 78,000 = 2,000Units lost = 5,000 – 2,000 = 3,000Total CM = $35 x 3000 unitsLose $105,0003. Should not accept this offer; if they do the income change will be $50,000 - $105,000 = $-55,0004. Their income will decrease $55,000c. Exercise 8-6i. Lybrand Company is a leading manufacturer of sunglasses. One of Lybrand's products protects the eyes from ultraviolet rays. An upscale sporting goods store has contacted Lybrand about purchasing 15,000 pairs of these sunglasses. Lybrand's unit manufacturing cost, based on a full capacity of 100,000 units, is as follows:Direct materials $ 6Direct labor 4Manufacturing overhead (60% fixed) 15Total manufacturing costs $ 25Lybrand also incurs selling and administrative expenses of $75,000 plus $2per pair for sales commissions. The company has plenty of excess manufacturing capacity to use in manufacturing the sunglasses. Lybrand'snormal price for these sunglasses is $40 per pair. The sporting goods storehas offered to pay $35 per pair. Since the special order was initiated bythe sporting goods store, no sales commission will be paid. What would be the effect on Lybrand's income if the special order were accepted?ii. Answer1. Variable costs = $25 (do not count $2 sales because it has not been incurred yet)2. CM/unit = $35 - $25 = $103. Total CM = $10 x 100,000 units = $1,000,0004. Income increases by $1,000,0003. 8.3: Make or buy decisionsa. Outsourcingi. Moving production outside the organizationb. Off-shoringi. Actually moving production facility to another country/state/whereverii. May or may not be outsourcing as wellc. Relevant costsi. Price we have to pay to buy componentii. All avoidable costs we would incur to make componentiii. Watch out for fixed manufacturing overhead per unit; may or may not be


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