ACIS 2116 Chapter 8 ClassPresentationJacksonSawyers

ACIS 2116 Chapter 8 ClassPresentationJacksonSawyers -...

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Relevant Costs and Product Planning Decisions ACIS 2116 - Chapter Eight
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How does a manager decide… The selling price of a product? Whether to accept a special order? Whether to add or drop a product? Which products to put on the shelves? Whether to hire an employee or outsource? Whether to make or buy a product?
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Special Order One time order Short-run pricing decision Must have excess capacity Must consider: Relevant incremental costs and benefits Qualitative factors
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Special Orders Hokie Corp. makes a single product that has a normal selling price of $20 per unit. A foreign company offers to purchase 3,000 units for $10 per unit. This is a one-time order that would not affect the company’s regular business. Annual capacity is 10,000 units, but Hokie Corp. is currently producing and selling only 5,000 units. Should Hokie Corp. accept the Should Hokie Corp. accept the offer? offer?
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Special Orders $40,000 $40,000 ÷ 5,000 = ÷ 5,000 = units $8 per unit units $8 per unit
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Special Orders If Hokie accepts the offer, net operating income will increase by $6,000. Increase in revenue (3,000 × $10) 30,000 $ Increase in costs (3,000 × $8 variable cost) 24,000 Increase in net income 6,000 $ Note: This answer assumes that fixed costs are unaffected by the order and that variable marketing costs must be incurred on the special order.
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Test Your Knowledge VT Optical, Inc. ordinarily sells the T-lens for $50. Direct materials cost per unit is $6 and direct labor cost per unit is $4. Fixed manufacturing cost is $18 per unit and variable selling cost is $1 per unit. A customer has requested a special order for 10,000 units of the T-lens to be imprinted with the customer’s logo. This special order would not involve any selling costs, but VT Optical would have to purchase a special imprinting machine for $50,000.
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Test Your Knowledge What is the minimum price which VT Optical should accept for the T-lens if VT Optical wishes to earn a profit of $100,000? Assume there is sufficient idle capacity to fulfill the order and the imprinting machine has no further use after this order. a. $10 b. $15 c. $25 d. $50
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Test Your Knowledge What is the minimum price which VT Optical should accept for the T-lens if VT Optical wishes to earn a profit of $100,000? Assume there is sufficient idle capacity to fulfill the order and the imprinting machine has no further use after this order. a. $10 b. $15 c. $25 d. $50 Direct materials cost Direct materials cost $ 60,000 $ 60,000 Direct labor cost Direct labor cost 40,000 40,000 Additional fixed cost Additional fixed cost 50,000 50,000 Profit Profit 100,000 100,000 Total relevant costs & benefits $250,000 Total relevant costs & benefits $250,000 Number of units Number of units 10,000 10,000 Minimum selling price per unit $25 Minimum selling price per unit $25
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Outsourcing and Other Make or Buy Decisions Vertical Integration - when a company is involved in more than one activity in the entire value chain.
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This note was uploaded on 09/25/2009 for the course ACIS 2116 taught by Professor Cmeasterwood during the Spring '08 term at Virginia Tech.

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ACIS 2116 Chapter 8 ClassPresentationJacksonSawyers -...

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