Web Chapter 25 Section 2

Web Chapter 25 Section 2 - Capital Budgeting and Managerial...

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Unformatted text preview: Capital Budgeting and Managerial Decisions Chapter 25 Decision Making Decision making involves five steps: Define the decision task. Identify alternative actions. Collect relevant information on alternatives. Select the course of action. Analyze and assess decisions made. Decision Making Relevant Costs Sunk Costs Outofpocket costs Opportunity costs Managerial Decision Tasks Accepting Additional Business Make or Buy Decisions Scrap or Rework Sell or Process Sales Mix Selection Segment Elimination Accepting Additional Business FasTrac is approached by an overseas company that offers to purchase 10,000 units at $8.50 per unit. If FasTrac accepts the offer, total factory overhead will increase by $5,000; total selling expenses will increase by $2,000; and total administrative expenses will increase by $1,000. Should FasTrac accept the offer? Accepting Additional Business Sales Direct materials Direct labor Factory overhead Selling expenses Admin. expenses Total expenses Operating income Current Business $ 1,000,000 $ 350,000 220,000 110,000 140,000 80,000 $ 900,000 $ 100,000 Additional Business $ 85,000 $ 35,000 22,000 5,000 2,000 1,000 $ 65,000 $ 20,000 Combined $ 1,085,000 $ 385,000 242,000 115,000 142,000 81,000 $ 965,000 $ 120,000 Make or Buy Decisions Make vs. Buy Analysis Direct materials Direct labor Factory overhead Purchase price Total incremental costs Make $ 0.45 0.50 ? ---? Buy ---------$ 1.20 $ 1.20 Make or Buy Decisions Make vs. Buy Analysis Direct materials Direct labor Factory overhead Purchase price Total incremental costs Make $ 0.45 0.50 0.25 ---1.20 Buy ---------$ 1.20 $ 1.20 Scrap or Rework FasTrac has 10,000 defective units that cost $1.00 each to make. The units can be scrapped now for $.40 each or reworked at an additional cost of $.80 per unit. If reworked, the units can be sold for the normal selling price of $1.50 each. Reworking the defective units will prevent the production of 10,000 new units that would also sell for $1.50. Should FasTrac scrap or rework? Scrap or Rework Defects Scrap Now $ 4,000 $ 4,000 Sale of Defects Less rework costs Less opportunity cost Net return Rework $ 15,000 (8,000) (5,000) 2,000 Example Sales (150,000 units) Costs and expenses Direct materials Direct labor Overhead Selling expenses Administrative expenses Total costs and expenses Net income $2,250,000 300,000 600,000 150,000 225,000 385,500 1,660,500 $589,500 The company has an opportunity to sell 15,000 additional units at $12 per unit. The additional volume would create the following incremental costs: (1) total overhead would increase by 15% and (2) administrative expenses would increase by $64,500. Example Example Roland Inc. has been manufacturing its own shades for its table lamps. The company is currently operating at 100% of capacity, and variable manufacturing overhead is charged to production at a rate of 50% of direct labor cost. The direct materials and direct labor cost per unit to make the lamp shades are $4 and $6, respectively. Normal production is 40,000 table lamps per year. A supplier offers to make the lamp shades at a price of $13.50 per unit. If Roland Inc. accepts the supplier's offer the $40,000 of fixed manufacturing overhead will have to be absorbed by other products. Should Roland buy the lamp shades from the supplier? Example Consider the following data for two products made and sold by FasTrac. Per unit amounts Selling price Variable costs Contribution margin Machine hours required to produce one unit Contribution per machine hour Product A $ 5.00 3.50 $ 1.50 1.0 1.50 Product B $ 7.50 5.50 $ 2.00 2.0 1.00 Sales Mix Selection $ $ Qualitative Factors in Decisions Quality Delivery schedule Supplier reputation Employee morale Customer opinions ...
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