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UGA ACCT 2102 - Relevant Costs for Short-Term Decisions (Chapter 8)
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ACCT 2102 1st Edition Lecture 23 Outline of Last LectureI. Comprehension Quiz (In Class)Outline of Current Lecture:II. Special Order DecisionsIII. Special Order ExampleCurrent Lecture: Relevant Costs for Short-Term Decisions (Chapter 8)Here are a few “rules of thumb” to keep in mind whenever you make a business decision:• Identify and focus on relevant information.• Consider qualitative factors.• Analyze variable costs and fixed costs separately using a contribution margin approach.o Be careful about using unit cost data, unless it is purely a variable cost per unit.II. Special Order DecisionsDo we have excess capacity available to fill this order? Excess Capacity = Full Capacity – Current ProductionWill the reduced sales price be high enough to cover the incremental costs of filling the order (the variable costs of filling the order and any additional fixed costs)? VC is any change in DM, DL, Variable MOH, and variable SG&A Expenses Special Units Sales Price – Special Units Variable Cost FC is any change in total FC. Usually increases. It also includes the cost of equipment thatwill only be used in the special order.Will the special order affect regular sales in the long run? Be careful when cutting long-term sales for a short-term profit!III. Special Order Example: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.Jif makes brand name peanut butter, which sells for $2.50 per jar. Plant capacity is 100,000 jars per month. The company is currently operating at 80% of capacity, resulting in the following production cost per jar:Direct material $1.00Direct labor 0.05Variable MOH 0.25Fixed MOH 0.60Total product cost per unit $1.90A company that sells generic foods would like Jif to supply them with a special order of 18,000 jars of generic peanut butter this month at a special price of $1.75 per jar. Jif will use the same recipe, ingredients, jars, and manufacturing process for this order as it does for its regular product, so the only thing that will change is the label. The new customer will supply the artwork to be used on the jar labels. Should Jif accept this special order? How would the decision to accept the order affect Jif’s operating income? Total Fixed MOH: $.60 * 18,000 = $10,800Excess Capacity: 100,000 – (100,000*80%) = 20,000Regular Special OrderSales Price (SP) $2.50 $1.75<Unit VC> <$1.30> <$1.30>Unit Contribution Margin $1.20 $0.45Amount Given Up= Special Order – Excess CapacityAmount Given Up: 18,000 – 20,000 = -2,000Get Give Up18,000*$0.45 -2,000*$1.20$8,100 $0*The differential is a gain of $8,100 since you get more than you give up.*If the special order falls within the excess capacity, you do not have to give anything up.Say the special order customer wanted 25,000 jars, and it was an “all or nothing” deal. Should Jif accept the order? How would it affect operating income? What qualitative factors should Jif consider? Total Fixed MOH: $.60 * 25,000 = $15,000Excess Capacity: 100,000 – (100,000*80%) = 20,000Regular Special OrderSales Price (SP) $2.50 $1.75<Unit VC> <$1.30> <$1.30>Unit Contribution Margin $1.20 $0.45Amount Given Up= Special Order – Excess CapacityAmount Given Up: 25,000 – 20,000 = 5,000Get Give Up25,000*$0.45 5,000*$1.20$11,250 $6,000The differential is a gain of $5,250 since you get more than you give up.Let’s once again assume a special order volume of 18,000 units. This time, let’s assume the contract allows Jif to use lower-quality ingredients and slightly smaller containers for this specialorder. In turn, the special order company would only pay $1.60 per jar of peanut butter. Jif’s variable cost savings should run $0.25 per jar of peanut butter. However, Jif will have to incur $2,000 of legal fees to draft new contracts with its suppliers of peanuts and containers. What affect would this special order have on Jif’s operating income?DL has not been changed. FC always remain the same (unless otherwise noted.) VC remain at $.25/jar; therefore, DM will need to be altered so that all costs = $1.60.Direct material $0.70Direct labor 0.05Variable MOH 0.25Fixed MOH 0.60Total product cost per unit $1.60Total Fixed MOH: $.60 * 18,000 = $10,800Excess Capacity: 100,000 – (100,000*80%) = 20,000Regular Special OrderSales Price (SP) $2.50 $1.60<Unit VC> <$1.00> <$1.00>Unit Contribution Margin $1.50 $0.60Amount Given Up= Special Order – Excess CapacityAmount Given Up: 18,000 – 20,000 = -2,000Get Give Up18,000*$0.60 -2,000*$1.50$10,800 $0<2,000> $2,000$8,800 $2,000The differential is a gain of $6,800 since you get more than you give


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UGA ACCT 2102 - Relevant Costs for Short-Term Decisions (Chapter 8)

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