Chapter8StudentFall2018.docx - Chapter 8 \u2013 Short-Term Business Decisions 8.1 Decision-Making Part of planning directing and controlling functions

Chapter8StudentFall2018.docx - Chapter 8 – Short-Term...

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Chapter 8 – Short-Term Business Decisions 8.1 Decision-Making Part of planning , directing and controlling functions: Relevant and Irrelevant Information Relevant Expected future (cost and revenue) data Differs among alternative courses of action Is both quantitative and qualitative Irrelevant Costs that do not differ between alternatives Sunk costs (incurred in past and cannot be changed) Qualitative Factors (Nonfinancial) Some examples: Impact on employee morale Quality of products made or purchased Impact on existing customers Incremental Analysis Approach to Decision-Making Instead of looking at the company’s entire income statement under each decision alternative, we will: 1) Focus on relevant revenues, costs, and profits; ignore irrelevant data Choose best alternative Define goals Identify alternative courses of action Gather and analyze RELEVANT data Follow-up: Compare actual with anticipated results Implement decision
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2) Use contribution margin approach that separates variable costs from fixed costs Swenson’s Meats is considering whether it should replace a meat grinder patty shaper machine. The new machine will produce 25% more hamburger patties than the old machine in the same amount of time. The purchase of the new machine will cause fixed selling costs to increase, but variable selling cost per unit will not be affected. The new machine will require installation by a specialty engineering firm. If the new machine is purchased, the old machine can be sold to an overseas meat processing company. The old machine requires frequent (quarterly) repairs and maintenance to keep it running. The new machine will require maintenance only once per year. The new machine will be paid for by signing a note payable with the bank that will cover the cost of the machine and its installation. Swenson’s will have to pay interest monthly on the note payable for the new machine. The note payable that was used to purchase the old machine was fully paid off two years ago. In the following chart, indicate whether each of the costs described would be relevant or not to Swenson’s Meats’ decision about whether to purchase the new machine or to keep using the old machine. Item Relevant Not Relevant a. Cost of new machine X b. Cost of old machine X c. Added profits from increase in production from new machine X d. Fixed selling costs X e. Variable selling costs X f. Sales value of old machine X g. Interest expense on new machine X h. Interest expense on old machine X i. Book value of old machine X j. Maintenance cost of new machine X k. Repairs and maintenance costs of old machine X l. Installation costs of new machine x m. Accumulated depreciation on old machine X n. Cost per pound of hamburger X o. Installation cost of old machine X 8.2 Special Order Decisions
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A special order occurs when a customer requests a one-time order at a reduced sales price, often for large quantities.
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