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) revenues & costs 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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12 Fixed costs do not relate to a particular product. We analyze the revenue and costs related to Bran Flakes alone to determine whether Bran Flakes contributes to covering fixed costs in making a discontinue decision.
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