Ch 12 - LEARNING OBJECTIVE 1 Prepare differential analysis...

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1 LEARNING OBJECTIVE 1 Prepare differential analysis report for 6 special decisions.
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2 DIFFERENTIAL ANALYSIS Differential analysis looks at effects of different courses of action Uses estimated (projected) Focuses only on relevant revenues, costs Sunk costs are past costs that are not relevant LO 1
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3 DIFFERENTIAL ANALYSIS Focuses on effect of alternative courses of action on relevant revenues and costs LO 1
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4 DIFFERENTIAL REVENUE Increase or decrease in revenue derived from a particular course of action compared to an alternative LO 1
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5 DIFFERENTIAL COSTS Increase or decrease in costs derived from a particular course of action compared to an alternative LO 1
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6 6 SPECIAL DECISIONS LO 1 Lease or sell Discontinue product, segment Make or buy Replace equipment Process or sell Accept business at special price
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7 LO 1 Marcus has excess equipment to dispose of. Cost = $200,000 Accumulated depreciation = $120,000 Should Marcus lease ($160,000 less $35,000 repairs, Taxes, etc.) Or sell ($100,000 less 6% commission) the equipment ? LEASE OR SELL: Problem Statement
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8 Book value of equipment ($200,000 - $120,000 = $80,000) is a sunk cost and not considered. Analysis focuses on differential revenues and differential costs LEASE OR SELL: Analysis LO 1
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9 EXHIBIT EXHIBIT 1 1 Decision : Lease alternative provides $31,000 more income. LO 1
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10 LO 1 Battle Creek Cereals produces & sells 3 cereals. Because Bran Flakes exhibits an operating loss, Battle Creek is considering discontinuing production, sale of the product. If fixed costs remain unchanged , Is this the right decision ? TO DISCONTINUE: Problem Statement
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11 EXHIBIT EXHIBIT 3 3 LO 1
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